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May 11, 2022
As a founder, there are a myriad of positions you’ll be filling until you begin to staff your startup. One of those roles may be managing your finances and bookkeeping. Properly following accounting standards ensures that your startup won’t have any problems in the future.
As part of managing your finances, you may have come across and been wondering what is FASB? What do they do, and how does it relate to financial reports?
In this piece, we’ll break apart what FASB is and all the important components you should know. Continue reading to learn more about what they do, their effect on financial reporting and accounting in businesses, and more.
The Financial Accounting Standards Board, or FASB, is responsible for implementing and creating financial reporting and accounting standards. The FASB requires all U.S. companies to register and provide the board with transparent financial reports.
The SEC recognizes FASB as the sole organization liable for creating and regulating all accounting and financial standards for public companies and suggests that private companies follow these standards as well. However, only the SEC has the authority to enforce these rules set by the FASB.
When establishing and improving standards, the SEC may give recommendations, but the FASB is not required to implement them. Companies affected by any changes can submit suggestions and options to the FASB for consideration.
The Financial Accounting Standards Board focuses on financial transparency from publicly traded companies. Proper financial reporting from companies gives the public the ability to make educated decisions regarding investments based on a company’s revenue, financial status, or annual financial statement.
The accounting standards tied to GAAP (generally accepted accounting principles) also benefit company board members. Clear financial statements allow members of the board to make well-rounded financial and strategic business decisions to support company growth.
Companies must report the following to the FASB:
• inventory costs
• stockholder’s equity and taxation
Prior to 2010, companies reported revenue as it came in. The accounting standards advisory council now requires companies to submit revenue reports during set periods. The change furthers the FASB’s goal of keeping up-to-date financial information on a company’s total revenue truthful.
Under FASB regulations, companies must disclose their asset allocation method, but each company can choose its preferred method. This affects tax revenue at the end of the year, which the IRS monitors.
In response to the devastating stock market crash in 1929, the U.S. government created the Securities and Exchange Commission (SEC) in 1933. When the market took a nosedive, it created a domino effect leading to a decade-long struggle for the country.
Many experts believe fraudulent financial reporting among publicly traded companies aided in the crash. By establishing the Securities And Exchange Commission (SEC), the government could take over financial responsibilities once given to individual states.
The Accounting Principles Board (APB) existed as the predecessor to the FASB from 1959 to 1973. In 1974 the FASB replaced the APB and then created the ten principles of GAAP that still stand today. Seven full-time board members run the standard-setting entity responsible for transparent financial accounting and reporting for all U.S. companies.
Public companies must follow the ten GAAP accounting principles created by FASB. They are considered the gold standard of accounting rules. While the FASB does not require private companies to follow GAAP standards, at Zeni, we believe that all startups should implement these standards from day one to “future-proof” their company and stay transparent with investors — most of which require GAAP before fundraising.
The creation of GAAP ensures transparency and standards for financial reporting across industries, company size, and more. GAAP standards establish a level playing field for every publicly traded company across the board without prejudice.
Ten generally accepted accounting principles:
1. Regularity: Accountants must follow each principle and standard set by the GAAP.
2. Consistency: Execute bookkeeping, accounting, and reporting for all financial periods or quarters in the same manner.
3. Sincerity: All financial information and statements made by the accountant are truthful, accurate, and transparent.
4. Permanence Of Methods: The accountant will keep all procedures uniform to ensure financial compatibility is available.
5. Non-Compensation: Report revenue and revenue loss with full transparency.
6. Prudence: Back all financial data by facts without added conjecture of future revenue assumptions.
7. Continuity: The accountant will complete work assuming the company will continue operations indefinitely.
8. Periodicity: Deliver reports and financial statements within their sanctioned time period.
9. Materiality: Accountants should properly disclose financial information thoroughly and accurately.
10. Utmost Good Faith: Honesty in all transactions.
Most financial institutions require a GAAP-compliant report prior to extending a business loan to both public and private companies. Investors want to see where their money is going and how the company handles its finances. The FASB ensures companies develop trust between their investors and the institutions backing their companies.
A good accountant will follow all ten principles established by the FASB. Of course, there are accounting software programs that will uphold federally regulated finance standards, but they require continuous and manual updating to keep in order.
The FASB is part of an umbrella nonprofit that houses the Financial Accounting Foundation (FAF), the Financial Accounting Standards Advisory Council (FASAC), the Governmental Accounting Standards Board (GASB), and the Governmental Accounting Standards Advisory Council (GASAC).
Together these institutions preserve financial and accounting accuracy, provide educational information, improve financial standards, and create reporting standards for the government.
All FASB oversight, including budgets, is monitored and handled by the FAF. While the FASB has the authority to create and alter industry standards, the SEC watches over the FASB for any problems or technical issues. Members of the FAF are also responsible for appointing board members to the FASB. When appointed, members cut personal ties with all U.S. companies and serve a maximum of five years.
In tandem with the FASB, the FASAC is a board of advisees nominated by the FAF to help with the board’s plans. Members of the thirty-one-person board include CFOS, CEOS, long-time senior partners in top accounting firms, analysts or data communities, and finance experts. By compiling a varied group of professionals, the FASAC can give unbiased suggestions to preserve the integrity and goal of the FASB.
There are a lot of factors that go into proper accounting and finance operations. As we stated previously, having finance reports and accounting practices that follow FASB guidelines is a must regardless of your business’s size, stage, or revenue. The earlier you focus on FASB and GAAP compliance, the easier it will be to scale quickly and secure investors to support your endeavor.
Unsure if you’re up for the task alone? Zeni offers AI-backed bookkeeping and accounting for startups, backed by human touch. Our financial experts will work with you to find the best solution for your bookkeeping and accounting needs. Let us help.