Is FASB Standards Setting Adding Value?

The Financial Accounting Standards Board has the authority to set accounting standards in the U.S.  FASB’s mission is to establish and improve financial accounting and reporting standards, with the goal of providing  valuable information to investors and other users of financial reports.  While improving financial reporting, the board weighs the cost of making accounting changes versus the benefit of those changes to investors. 

Researchers at the American Accounting Association’s annual meeting on Aug. 10, discussed whether FASB’s standard setting activities have completed its mission and added value to shareholders and investors.

Principle-based More Value Adding.

 “Standards that are principles-base standards are value-adding to shareholders,” researchers from Columbia University, Duke University, and the University of Texas at Dallas found in their research paper, Do the FASB’s Standards Add (Shareholder) Value?

Their study found that the stock market didn’t have major reaction to the majority of standards--107 out of 143 standards issued from 1973 to 2009. However, in the instances where there was a market impact, the study found that principles-based standards were more widely associated with more positive stock price reactions as compared to rules-based standards.

 In another words, after the issuance of principles-based standards stock prices rose and shareholders and investors benefited. The study found that principles-based standards also have fewer  exceptions and  less voluminous guidance. They also don’t have cut-offs and bright line rules.

Not More Principles-Based, After All.

However, another paper, conducted by researchers from the Pennsylvania State University, The Codification of Accounting Standards: Its Impact on Compliance and Comparability, and Its Usefulness in Tracing Changes Over Time in Accounting Attributes, found that the Accounting Standards Codification (ASC), issued by FASB, don’t reveal a move toward  principles-based accounting.

Moreover, FASB is not including more principles-based language in its ASC’s. The paper explained that in 2009, FASB reorganized thousands of U.S. generally accepted accounting principles into a single authoritative source—the ASC. FASB also is constantly amending the codification by issuing Accounting Standards Updates (ASU).

The paper examined the language deleted from and added to the ASC by the accounting updates, to see whether FASB is adding more language that is principles-based and deleting more that is rules-based, but found no evidence of that trend.

However, the good news is, “compared to the pre-codified material, the reorganized ASC is more principle-based.” Kai Du, one of the authors of the paper, said at the session.

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