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The FASB, IASB, and who actually writes the rules

When a company files its financial statements with the SEC, it certifies that they were prepared in accordance with GAAP. But who wrote GAAP? Who decides that revenue should be recognized using the five-step model in ASC 606 or that goodwill should be tested annually for impairment? The answer is the Financial Accounting Standards Board (FASB)—a nonprofit, independent organization that writes the rules for US accounting. Similarly, the International Accounting Standards Board (IASB) writes IFRS for 140+ countries.

For most investors, the FASB and IASB are invisible. But they are crucial. Their decisions shape how billions of dollars of corporate earnings are reported. An investor who understands who these organizations are, how they work, and how they set standards will better understand accounting changes and be more skeptical of arguments like "GAAP allows it, so it must be okay."

Quick definition: The FASB (Financial Accounting Standards Board) is an independent nonprofit that writes GAAP standards in the US. The IASB (International Accounting Standards Board) is a similar organization that writes IFRS for 140+ countries. Both operate under due process, with public comment periods and deliberation. Neither is part of government, but both answer to regulators (the SEC oversees FASB; various national regulators oversee IASB).

Key takeaways​

  • The FASB is a private, nonprofit organization based in Norwalk, Connecticut, that writes GAAP standards. It operates under the governance of the Financial Accounting Foundation.
  • The IASB is an independent organization based in London that writes IFRS standards. It operates under the IFRS Foundation.
  • Both organizations follow a formal due process: an issue is identified, a discussion paper is published, comments are solicited, an exposure draft is issued, final deliberations occur, and a standard is finalized.
  • The SEC recognizes GAAP (written by FASB) as the appropriate standard for US public companies. The SEC does not write GAAP; it enforces it.
  • The FASB and IASB have been working toward convergence since 2002, though full convergence is unlikely.
  • Both organizations are funded by capital market participants (accounting firms, investors, preparers, companies) to ensure independence.
  • Standards take 3–5 years to develop, which sometimes means GAAP and IFRS lag real-world innovations.

1. The FASB: the guardian of GAAP​

The Financial Accounting Standards Board (FASB) was created in 1973, replacing an earlier standards-setting body (the APB, or Accounting Principles Board). The FASB is a 501(c)(3) nonprofit organization. It is independent, meaning it is not part of the SEC, the government, or any individual accounting firm.

The FASB operates under the governance of the Financial Accounting Foundation (FAF), a separate nonprofit that oversees the FASB's funding, governance, and due process. The FAF appoints the FASB board members and ensures the organization meets its public interest mission.

The FASB board: who sits on it?​

The FASB has nine voting members, appointed by the FAF for five-year, staggered terms. Board members come from diverse backgrounds:

  • Big Four accounting firm partners (e.g., Deloitte, EY, KPMG, PwC send representatives).
  • Preparers (CFOs or controllers from large corporations).
  • Academics (professors of accounting and finance).
  • Auditors (from smaller firms).
  • Investors and other users (investment professionals, bankers).

The mix is intentional. A standard must balance the needs of preparers (companies that prepare financial statements), auditors (firms that audit them), and users (investors, creditors, analysts). If the board were entirely made up of accountants from one firm, it would be biased. By including representatives from different constituencies, the FASB aims to achieve legitimacy and balance.

Board members serve part-time (though the chair is full-time). They earn modest compensation relative to their private-sector salaries, so serving is somewhat of a public service. This attracts thoughtful people but also means turnover is constant as members rotate off.

The FASB's standard-setting process​

When the FASB identifies an accounting issue that needs a standard or an update, it follows a rigorous process:

1. Agenda decision: The FASB decides whether to add the issue to its agenda. This involves research, outreach to stakeholders, and assessment of the issue's importance.

2. Planning and research phase: The staff and board gather evidence. What is current practice? What do preparers, auditors, and investors think? What are the pros and cons of alternative approaches? This phase can take many months or years.

3. Discussion paper (optional): For complex issues, the FASB publishes a discussion paper that outlines the problem and alternative solutions. It invites public comments (typically 60–120 days).

4. Exposure draft: The FASB proposes a draft standard. This is the critical step. The exposure draft includes the proposed guidance, an implementation guide, illustrative examples, and the board's rationale (the "basis for conclusions"). The public has 120 days (often extended) to comment. Comments are detailed. Preparers argue for flexibility. Auditors argue for clarity. Academics argue for conceptual consistency. Investors argue for comparability.

5. Board redeliberations: The FASB staff summarizes comments and identifies key themes. The board redeliberates the exposure draft, often revising it significantly. Major objections can cause the board to reconsider the approach entirely. This phase can take many months.

6. Final standard: The board votes on the final standard. A simple majority (5 of 9) is required. However, a robust consensus (7+ votes) is preferred for legitimacy. Once finalized, the standard is published with an effective date (typically 18–24 months after issuance, giving companies time to implement).

7. Implementation guidance and amendments: After the standard is issued, the staff and board issue implementation guidance, Q&As, and occasionally amendments if problems are identified. The FASB never "closes" a standard; it evolves.

This entire process typically takes 3–5 years from issue identification to final standard. Some standards have taken longer. For example, the lease standard (ASC 842) took nearly a decade from initial discussion to final issuance.

Key features of FASB governance​

The FASB's process is intentionally transparent and inclusive. Public documents—discussion papers, exposure drafts, comment letters, meeting minutes—are available for download. Anyone can attend FASB meetings (held publicly, usually in Norwalk or via video). Anyone can submit comments on an exposure draft.

This transparency is essential. It gives the FASB legitimacy (stakeholders see their voices were heard) and surfaces problems (if the proposed standard does not work in practice, someone will comment and the board will revise).

However, transparency also creates challenges. Popular constituencies (large preparers, major accounting firms) have more resources to influence the process. A small company or investor has to work harder to be heard. This is an inherent political economy of standard-setting.

2. The IASB: IFRS and global standards​

The International Accounting Standards Board (IASB) was founded in 2001, evolving from an earlier organization called the International Accounting Standards Committee (IASC), which was established in 1973. The IASB is based in London and operates independently.

Like the FASB, the IASB is a nonprofit. It answers to the IFRS Foundation, another nonprofit, which oversees its governance, funding, and due process.

The IASB board and stakeholder composition​

The IASB has 14 voting board members, appointed by the IFRS Foundation for three-year terms. Members come from a wide range of countries and backgrounds:

  • Audit partners from major firms (KPMG, EY, etc.).
  • Preparers (CFOs from multinational companies).
  • Academics and regulators (professors, SEC staff, national accounting regulators).
  • Users (investors, analysts, credit rating agencies).

The geographic and professional diversity is intentional. Because IFRS is global, the board must represent different countries' concerns, regulatory environments, and business practices. A board dominated by Anglo-American accountants would lack legitimacy in Asia, Europe, or other regions.

Board members serve part-time. The chair is full-time and coordinates with national regulators and the SEC.

The IASB's standard-setting process​

The IASB's process is similar to the FASB's but with some differences:

1. Initial research and agenda consultation: The IASB publishes a research agenda outlining issues under consideration. It seeks feedback from national standard-setters, regulators, and market participants.

2. Discussion paper: For all major projects, the IASB publishes a discussion paper outlining the issue and soliciting feedback (typically 120 days).

3. Exposure draft: After deliberation on discussion paper feedback, the IASB issues an exposure draft. Comments are sought (typically 120 days).

4. Board redeliberations: The staff summarizes comments and identifies themes. The board redeliberates and revises the standard.

5. Final standard: The board votes on the final standard. A simple majority (8 of 14) is required. For major changes, a supermajority (10+ votes) is preferred.

6. Implementation group: Unlike the FASB, the IASB typically establishes an implementation group (called the IFRS Interpretations Committee or similar) that monitors the standard's application and issues guidance as needed.

The overall timeline is similar to the FASB's: 3–5 years for a major standard.

Key differences between FASB and IASB processes​

Scope of applicability: The FASB's standards apply to US public companies (and many private companies and nonprofits). The IASB's standards apply globally—over 140 countries and territories.

Regulatory environment: The SEC recognizes FASB standards as appropriate for US companies. National regulators (the European Securities and Markets Authority, Japanese Financial Services Agency, etc.) recognize IASB standards for their jurisdictions. The IASB has less direct regulatory authority than the FASB in any single country.

Funding: The FASB is funded by accounting firms, companies, the SEC, and investors. The IASB is funded by companies, national regulators, accounting firms, and international organizations. Both are independent, but the IASB's funding is more diverse and potentially more subject to political pressure from different national governments.

Standard-setting philosophy: As discussed earlier, the FASB tends to be more rules-based; the IASB is more principles-based. This reflects different traditions (US capital markets prefer bright-line rules; European markets are more comfortable with principles).

3. Convergence: the FASB and IASB working together​

Since the early 2000s, the FASB and IASB have been working toward convergence—aligning their standards so that GAAP and IFRS are as similar as possible.

Convergence has several motivations:

  • Investor convenience: Investors comparing a US company (GAAP) to a European company (IFRS) want comparable financial statements.
  • Multinational company efficiency: A company reporting to both the US SEC and the EU prefers to prepare one set of statements rather than two.
  • Global capital markets: If GAAP and IFRS diverge, capital flows less efficiently; investors face translation risk.

Areas of convergence​

Revenue (ASC 606 and IFRS 15): The FASB and IASB jointly issued revenue standards that are substantially identical. Companies using either standard account for revenue similarly.

Leases (ASC 842 and IFRS 16): Again, jointly issued and substantially aligned.

Financial instruments (ASC 326 and IFRS 9): The standards are similar but not identical. They both recognize expected credit losses on receivables, but the models differ slightly (IFRS 9 uses a three-stage approach; ASC 326 uses a single-date lifetime expected loss model).

Business combinations and consolidation: The standards are very similar, with minor differences.

Areas of persistent divergence​

Inventory costing (LIFO): GAAP allows LIFO; IFRS prohibits it. This difference persists.

Asset revaluation: IFRS allows it; GAAP does not (except limited cases).

Impairment reversal: IFRS allows it; GAAP does not.

Development cost capitalization: IFRS allows it under certain conditions; GAAP generally requires expensing.

The FASB has been reluctant to ban LIFO (due to US tax complexity and industry pushback) and reluctant to allow revaluation (due to conservatism concerns). So these differences remain.

The future of convergence​

In 2022, the FASB and IASB issued a joint statement that convergence would continue but would not result in a single global standard. Instead, the two organizations will maintain separate standards while aligning them where possible and practical.

This reflects reality: full convergence is politically difficult. Different capital markets have different preferences (US prefers rules, Europe prefers principles). Different regulators have different requirements (the SEC has specific expectations; EU regulators have others). And, pragmatically, abandoning GAAP would be difficult for the US—too many systems and processes are built around it.

So convergence will be partial, ongoing, and pragmatic. ASC 606 and IFRS 15 show what convergence can achieve (nearly identical standards). But full alignment on every standard is unlikely.

4. The SEC's role: convergence and alternatives​

The SEC is the regulator of US securities markets. It is not the standards-setter (that is the FASB), but it has enormous influence.

The SEC can:

  • Recognize standards: The SEC formally recognizes GAAP as appropriate for US public companies. It could theoretically recognize IFRS (and has discussed it) but has not yet required US companies to use IFRS.
  • Interpret standards: Through Staff Accounting Bulletins and Compliance and Disclosure Interpretations, the SEC interprets GAAP. These interpretations carry the force of regulation.
  • Enforce standards: The SEC can bring an enforcement action if a company violates GAAP.

The SEC and FASB have a close working relationship. The SEC chair or chief accountant typically sits on the FASB's advisory council. But they are separate: the FASB is standard-setter; the SEC is regulator.

The SEC's path to IFRS (or not)​

In the mid-2000s to early 2010s, the SEC was seriously considering whether to allow or require US companies to use IFRS. The idea had supporters: multinational companies, international investors, and academics argued IFRS would improve comparability and efficiency.

However, the SEC decided not to mandate IFRS and instead to rely on convergence. The SEC's rationale:

  • The US capital market has invested heavily in GAAP infrastructure.
  • LIFO (allowed in GAAP, not IFRS) has significant tax implications; banning it would require congressional action.
  • Transitioning the entire US system would be enormously expensive.
  • Convergence (where practical) achieves most of the benefits without the disruption.

So the SEC's current path is: foreign private issuers can file using IFRS, but US public companies must use GAAP. This is likely to remain the case for the foreseeable future.

5. How FASB and IASB decisions affect investors​

For investors, FASB and IASB decisions matter because they change how companies report earnings and financial position.

Example 1: Revenue recognition (ASC 606): When the FASB and IASB issued ASC 606 in 2014, many companies had to change their revenue recognition practices. SaaS companies, long-contract firms (construction, engineering), and software companies all saw their revenue recognition shift. Some reported lower revenue in the year of adoption, some higher. Investors who did not understand the change might have panicked (mistaking an accounting change for operational deterioration) or misunderstood the impact.

Example 2: Lease accounting (ASC 842): When ASC 842 became effective (2019), companies had to capitalize leases on the balance sheet. Many airlines, retailers, and tech companies saw their total debt increase overnight—not because they took on new leases, but because existing leases moved from off-balance-sheet to on-balance-sheet. Analysts had to reframe debt ratios and leverage analysis.

Example 3: CECL (ASC 326): Banks had to adopt the CECL model for loan-loss provisions, requiring them to estimate lifetime expected losses instead of incurred losses. Many banks immediately increased loan-loss reserves, reducing reported earnings. Investors unfamiliar with CECL thought the banks had deteriorated, when in fact the accounting had become more forward-looking.

6. The influence game: lobbying the FASB and IASB​

Because FASB and IASB standards have enormous economic consequences, there is a robust "lobbying" industry around standard-setting. Companies and industry groups hire consultants and lawyers to argue for favorable accounting treatment.

This is not corruption—it is the normal political economy of regulation. When the FASB proposes a standard that would reduce reported earnings for an industry, that industry comments on the exposure draft and advocates for a revision.

Examples:

  • Oil & gas companies lobbied against stricter definitions of proven reserves in successful reserve accounting standards, arguing that the definition was too narrow.
  • Banks lobbied on CECL, arguing that lifetime expected loss models were too aggressive and would force premature loan-loss provisions. The FASB held firm, but the banks' feedback shaped the final standard's implementation guidance.
  • Airlines and retailers lobbied on lease accounting, arguing that the proposed ASC 842 definition of a lease was too broad and would force existing operating leases to be capitalized. The FASB revised the definition somewhat, but ultimately, most leases became capitalized.
  • Aerospace and defense companies lobbied on revenue recognition, arguing that long-term contracts with multiple performance obligations should be treated differently. The FASB issued guidance addressing this.

This lobbying is transparent (comments are published) and legitimate (everyone can participate). However, large companies and industry groups have more resources and access. A small company's concern might not be heard.

For investors, understanding that standards are influenced by stakeholders is important. A standard that seems arcane is often the result of intense negotiation. And sometimes, those negotiations result in compromises that benefit preparers over users (investors).

7. Who should be on the FASB and IASB? The independence question​

A perpetual question is: Should the FASB and IASB be independent, or should they be regulated more directly by the SEC (or national governments)?

Arguments for independence:

  • Independence ensures the standards reflect substance, not political pressure.
  • It attracts capable board members (if the board served at the government's pleasure, it would be political).
  • It provides legitimacy (both preparers and auditors see the board as balanced).

Arguments against independence:

  • Independence from whom? The FASB is funded by preparers and auditors, so it is not politically neutral; it depends on the goodwill of powerful economic actors.
  • The SEC and national regulators should directly control standards-setting since they are regulators and represent the public interest.
  • Independence can insulate standards-setters from political accountability.

The current system (independent FASB overseen by the SEC, independent IASB overseen by national regulators) represents a middle ground. The FASB has operational independence but is accountable to the SEC. This balance has worked, though it is imperfect.

8. The FASB and IASB staff: the invisible power​

While the board members get the attention, the FASB and IASB staff—research directors, senior managers, analysts—do much of the real work. Staff members research issues, draft standards, summarize comments, and prepare analyses for board deliberations.

A seasoned staff member can shape the standard-setting process by the way they frame an issue or summarize comments. If a staff director thinks a particular approach is right, they can subtly steer the board toward it.

For investors, this matters because it means the quality of standards depends partly on the quality and integrity of the staff. A competent, thoughtful staff produces better standards than a weak one.

Real-world example: the convergence journey on revenue​

One of the best illustrations of how FASB and IASB work together is revenue recognition. For decades, GAAP and IFRS had different revenue standards. GAAP had industry-specific guidance (different rules for software, real estate, long-term construction). IFRS had a single principle-based standard.

In 2006, the FASB and IASB began a joint project to converge. They published a discussion paper, solicited comments, and, after years of deliberation, issued an exposure draft in 2010. The exposure draft was contentious. Real estate developers, software companies, contractors, and others argued the proposed standard did not work in their industries. The boards received thousands of comment letters.

After more than four years of redeliberations, the boards issued ASC 606 and IFRS 15 in May 2014. The standards were 95% identical—a major convergence achievement. However, the final standards also included dozens of pages of implementation guidance and transition relief (companies could use either the retrospective or cumulative catch-up method to transition).

The project took eight years from initiation to final standard. Companies then spent 3–4 years implementing. The first revenue statements under the new standard were reported in 2018.

This journey shows how:

  1. Convergence is possible but time-consuming.
  2. Stakeholder input shapes standards (the final revenue standard was more flexible than the exposure draft).
  3. Implementation guidance is as important as the standard itself.
  4. Change happens slowly, which sometimes means standards lag business reality.

Common mistakes​

Mistake 1: Thinking GAAP changes are mistakes. When the FASB issues a new standard, it is not fixing a mistake; it is evolving the standard. Sometimes standards are simplified (new lease accounting). Sometimes they are complicated (new revenue recognition). But the change is intentional.

Mistake 2: Assuming the SEC writes GAAP. The SEC enforces GAAP, but the FASB writes it. This distinction matters when you are trying to influence standards (you lobby the FASB, not the SEC).

Mistake 3: Not understanding the transition period. When a new standard is issued, companies have 18–24 months to implement. During this period, there is confusion, different interpretations, and often implementation guidance from the FASB. Be patient and read the implementation guidance.

Mistake 4: Assuming convergence will solve GAAP/IFRS differences. The FASB and IASB have converged some standards, but significant differences remain (LIFO, revaluation, impairment reversal). These are unlikely to disappear because they reflect different regulatory and tax environments.

Mistake 5: Ignoring the political economy of standards. Standards are influenced by lobbying and negotiation. Understand that a standard's final form often reflects compromises favorable to large preparers.

FAQ​

Q: Can I appeal a FASB decision?
A: Not formally. However, the FASB is transparent and responsive to feedback. If you believe a standard is wrong, you can comment during the exposure draft process or engage with the board directly.

Q: Does the FASB make decisions quickly?
A: No, the FASB is slow. Standards take 3–5 years to develop. This is intentional (due process requires deliberation) but frustrating when business reality moves faster.

Q: Is the IASB more progressive than the FASB?
A: Not necessarily. The IASB is more principles-based, which some see as more progressive. But convergence has moved both boards toward middle ground. Revenue and leases standards are very similar.

Q: Can I get a seat on the FASB or IASB board?
A: Theoretically, yes. The FAF and IFRS Foundation appoint board members based on nominations and selection processes. Having significant experience, intellectual credibility, and stakeholder support helps.

Q: Does the FASB have conflicts of interest?
A: Potentially. Board members come from accounting firms, companies, and other organizations that benefit from certain standards. This is why diversity is important—to balance conflicts. However, members are expected to set aside their personal interests.

Q: Will the FASB ever ban LIFO?
A: Unlikely in the near term. The tax implications are too large, and congressional action would be required. However, if the FASB and IASB converge further, pressure might increase.

Summary​

The FASB (Financial Accounting Standards Board) and IASB (International Accounting Standards Board) are independent, nonprofit organizations that write GAAP and IFRS, respectively. Both follow rigorous due processes, with transparent public comment periods, and are answerable to regulators and stakeholders. The FASB tends toward rules-based standards; the IASB toward principles-based. Since 2002, they have been converging on major standards (revenue, leases, financial instruments), though significant differences remain due to regulatory, tax, and cultural differences. For investors, understanding how the FASB and IASB work—and how standards are influenced by stakeholder lobbying—provides context for accounting changes and helps you navigate the political economy of financial reporting.

Next​

Inventory accounting: GAAP allows LIFO, IFRS doesn't

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