FASB vs. IASB and other standard-setting bodies

- Have you ever found yourself driving down the road and you're not sure of the speed limit? That happened to me recently. My daughter was driving and was sure the speed limit was 60 miles per hour and I was sure it was 55 miles per hour. She was right, and I backed off being critical of her for driving so fast. I didn't know the rules, she did. And that made her more equipped to make good decisions. It's always important to know when there's a rule book to follow, right? This is especially true for publicly-traded companies because their financial statements are so heavily relied upon by many different stakeholders, including current and prospective investors or creditors. Our goal is to talk through the various standard-setting bodies that govern the preparation and presentation of accounting information. I want to make sure that you are aware of who is making the rule books that your business is expected to follow. Publicly-traded companies have the most rule books to follow. In the United States, publicly-traded companies have to comply with the standards issued by the Financial Accounting Standards Board, FASB, the Securities and Exchange Commission, SEC, and the American Institute of Certified Public Accountants or AICPA. In addition, US publicly-traded companies must comply with the tax code issued by the Internal Revenue Service, the IRS. That's a lot of rule books, right? And this is one of the reasons why technically trained accountants are so critical to publishing compliant financial statements. It makes perfect sense that these publicly-traded companies would need to strictly adhere to accounting and auditing standards. If it wasn't required, how would we be able to trust the financial statements as being true and a fair representation of the financial position of the organization? And it would be very difficult to be able to compare the financial statements of two or more publicly-traded companies, which is something investors do before making their investment decisions every single day. In addition, if you listen to the same news sources as I do, you hear a lot about corporations paying their fair share in federal income taxes. Without getting into the politics of that, I think we can all agree that it is only fair that each corporation complies with the laws of the Internal Revenue Code in determining their tax liability. Again, this means accountants must prepare financial statements that comply with the rule books from FASB, the AICPA, the SEC, and the IRS. It's so much. Private companies, which are those that are not publicly-traded, haven't had the sort of rigorous feet to the fire that public companies have had, but private companies do have similar standard setting bodies which provide guidance. For example, the Private Company Council or PCC has created the alternative reporting framework within GAAP. And the AICPA has developed the Financial Reporting Framework for Small and Medium Sized Entities. And of course, private companies must also comply with tax rules by the IRS. Sometimes private companies are what we call pass-through entities, which simply means that the taxpayer is also the owner of the business, and the profit or loss of the business is taxable to the owner. In that case, the business isn't responsible for paying taxes, just the owner. For example, I have my own coaching and consulting company, which is legally formed as an LLC. And the financial performance of my business is subject to taxation. And that liability passes through to me as the owner. Finally, governmental entities like the city or state in which you live have accounting standards. These governmental standards are issued by the GASB or Governmental Accounting Standards Board. We won't be covering those standards. So far, we have assumed US businesses. If the entity is domiciled in another country, that entity must comply with the accounting standards of that country. Many countries have adopted the International Financial Reporting Standards often called IFRS, which are issued by the International Accounting Standards Board. This is the US GAAP equivalent. And in many cases, these international standards are the same as or similar to US GAAP. Knowing the standard setting bodies helps you better understand the financial reporting requirements of your entity. Complying with the rules and standards set forth by the appropriate standard setting body needs to become a process within your organization. It probably already is. And my hope is that this breakdown of standard setting bodies helps you become more aware of all of the rule books an entity must comply with. Most businesses have put processes in place to ensure compliance. I'm sure after this, you have a greater appreciation for these processes and for the accountants who have to execute on those rules daily. Knowing the rules always helps. It's a little like knowing the speed limit and passing a state patrol vehicle, looking down to ensure that you were driving within the speed limit. The peace of mind that you are in compliance with the laws is so very valuable.