The Financial Accounting Standard Board (FASB) is a body that is designated to establish and propose financial accounting standards that govern the preparation and reporting of financial statements by nongovernmental entities in the United States. FASB is charged with the responsibility of improving the standards of financial accounting and reporting to contribute useful information for the decision-making process to investors and other users.
This is done by encouraging participation from stakeholders and considering their views objectively. The standards are documented as authorized by the Securities and Exchange Commission (SEC). SEC has the constitutional right to institute financial reporting and book-keeping principles for companies held in public according to the Securities Exchange Act of 1934 (Financial Accounting Standards Board, n.d.; 2010).
There are some recommendations that have been proposed for the improvement of these standards, in order to improve the current situation. The advantages of the standards include providing uniform criteria for gauging firms and companies. In addition, the standards help companies in providing data and essential information to investors and they discourage “hiding” of information that has led to the failure of some mismanaged companies in the previous. The investors and the public are able to watch and observe the company’s potential since the performance is displayed openly. Companies providing their information according to the standards can benefit since the public can trust them more. In addition, the investors can determine which best options to take regarding investments since the performance of the organizations is reported.
FASB produced an exposure draft in May 2010 with accounting standard updates which communicates amendments being done to the accounting standard codification. Information about changes being done to the generally accepted accounting principles (GAAP) and when the changes are due to be affected is also provided. GAAP gives conventional rules that accountants should follow when writing their financial statements in the Unites States. It however has no specific format for the information required. The purpose of a comprehensive income report is to account for all changes in the equity of an entity resulting from transactions and financial proceedings carried out in the given period.
The proposed changes are a result of joint tasks carried out by FASB and the International Accounting Standard Board (IASB). IASB sets the international Financial Reporting Standards (IFRS) which are standards accepted by over 100 countries worldwide. The GAAP and (IFRS) have various alternatives on how and where the constituents of comprehensive income can be presented. These include the statement presentation, equity, and debt investments, extraordinary items, revenue recognition, and inventory accounting. But the IASB and FASB plan to have the options eliminated to have a standardized way of reporting the comprehensive income. This is advisable since it would enhance the comparability of comprehensive income prepared under GAAP and IFRS (Hodge, 2008).
GAAP is only used by companies in the United States, which necessitates the amendments to the use of IFRS. Many other countries have implemented the reporting standard already. U.S security markets are already receiving much competition due to competition posed by companies from other countries to the U.S. companies. Thus, for U.S companies to compete equally with other companies, adopting the IFRS would be a milestone. IFRS adoption would help U.S. companies to increase the opportunities to invest in the international sphere. In proposing the amendments, the use of IFRS encourages international investments in U.S. companies as their financial statements to become more understandable (Hodge, 2008).
The amendments provide a simplified way of how comprehensive income information is presented, instead of the alternative existing options. Financial reporting will improve since it requires an uninterrupted statement of comprehensive income thus boosting the importance of the items reported as other comprehensive income. The amendments would increase transparency, uniformity, and ease of comparison between net income and other comprehensive income reported under GAAP and IFRS.
It would also make it easy to understand the comprehensive income and the interaction between the variations in the statement of financial position, constituents of other comprehensive income and those of net income for each period. However, any change from a certain model to another may bring in some difficulties during the period of adjustment. Reclassifying these will also bring in inconsistencies.
IFRS provides a set of uniform standards to facilitate cross-border contribution. Member companies of the European Union have to use IFRS, which is principle-based as compared to the U.S GAAP which is rule-based. Thus convergence of U.S. GAAP and IFRS in key areas such as pension liability, taxes, financial instruments and business combinations would bridge the divergence in the financial reporting and accounting. The benefits of a standardized set of financial accounting models will manifest predominantly as globalization continues. This uniform standard also lowers the cost of capital for the securities market, increases trading volume and provides accounts that are easily understandable. But accountants think that it may undermine the accuracy of financial reporting, decrease trading volume for domestic securities markets and raise their cost of capital. These are however unexplored realities before the adoption of IFRS. (Allbusiness, 1998).
References
- Allbusiness. (1998). Would Uniform Accounting Rules Make Global EquitiesMarkets More Efficient? New Research Helps. Allbusiness. Web.
- Hodge, L. (2008). SEC to exchange accounting rules: Bridging the gap between GAAP and IFRS. Web.
- Financial Accounting Standards Board. (n.d.). Facts about FASB. Web.
- Financial Accounting Standards Board. (2010.). Financial accounting series: Proposed accounting standards update. Web.