[Federal Register Volume 68, Number 84 (Thursday, May 1, 2003)]
[Notices]
[Pages 23333-23335]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-10716]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release Nos. 33-8221; 34-47743; IC-26028; FR-70]


Commission Statement of Policy Reaffirming the Status of the FASB 
as a Designated Private-Sector Standard Setter

AGENCY: Securities and Exchange Commission.

ACTION: Policy statement.

-----------------------------------------------------------------------

SUMMARY: The Securities and Exchange Commission has determined that the 
Financial Accounting Standards Board (FASB or Board) and its parent 
organization, the Financial Accounting Foundation (FAF), satisfy the 
criteria in section 108 of the Sarbanes-Oxley Act of 2002 and, 
accordingly, FASB's financial accounting and reporting standards are 
recognized as ``generally accepted'' for purposes of the federal 
securities laws. As a result, registrants are required to continue to 
comply with those standards in preparing financial statements filed 
with the Commission, unless the Commission directs otherwise. Our 
determination is premised on an expectation that the FASB, and any 
organization affiliated with it, will address the issues set forth in 
this statement and any future amendments to this statement, and will 
continue to serve investors and protect the public interest. This 
policy statement updates Accounting Series Release No. 150, issued on 
December 20, 1973, which expressed the Commission's intent to continue 
to look to the private sector for leadership in establishing and 
improving accounting principles and standards through the FASB with the 
expectation that the body's conclusions will promote the interests of 
investors.

FOR FURTHER INFORMATION CONTACT: Scott A. Taub, John W. Albert, or 
Robert E. Burns, Office of the Chief Accountant, at (202) 942-4400, 
Securities and Exchange Commission, 450 Fifth Street, NW., Washington, 
DC 20549-1103.

SUPPLEMENTARY INFORMATION: 

I. Background

    The federal securities laws set forth the Commission's broad 
authority and responsibility to prescribe the methods to be followed in 
the preparation of accounts and the form and content of financial 
statements to be filed under those laws,\1\ as well as its 
responsibility to ensure that investors are furnished with other 
information necessary for investment decisions. To assist it in meeting 
this responsibility, the Commission historically has looked to private-
sector standard-setting bodies designated by the accounting profession 
to develop accounting principles and standards. At the time of the 
FASB's formation in 1973, the Commission reexamined its policy and 
formally recognized pronouncements of the FASB that establish and amend 
accounting principles and standards as ``authoritative'' in the absence 
of any contrary determination by the Commission. The Commission 
concluded at that time that the expertise and resources that the 
private sector could offer to the process of setting accounting 
standards would be beneficial to investors.\2\
---------------------------------------------------------------------------

    \1\ See e.g., sections 7, 19(a) and Schedule A, items (25) and 
(26) of the Securities Act of 1933, 15 U.S.C. 77g, 77s(a), 77aa(25) 
and (26); sections 3(b), 12(b) and 13(b) of the Securities Exchange 
Act of 1934, 15 U.S.C. 78c(b), 78l(b) and 78m(b); sections 5(b), 14, 
15 and 20 of the Public Utility Holding Company Act of 1935, 15 
U.S.C. 79e(b), 79n, 79o and 79t; sections 8, 30(e), 31 and 38(a) of 
the Investment Company Act of 1940, 15 U.S.C. 80a-8, 80a-29(e), 80a-
30 and 80a-37(a).
    \2\ Accounting Series Release No. 150 (December 20, 1973).
---------------------------------------------------------------------------

    On July 30, 2002, President Bush signed the Sarbanes-Oxley Act of 
2002. Section 108 of that Act amends section 19 of the Securities Act 
of 1933 \3\ to establish criteria that must be met in order for the 
work product of an accounting standard-setting body to be recognized as 
``generally accepted.'' A new subsection 19(b) indicates that in 
carrying out its authority under section 19 and under section 13(b) of 
the Securities Exchange Act of 1934 \4\ the Commission may recognize as 
``generally accepted'' for purposes of the federal securities laws any 
accounting principles established by a standard setting body that:
---------------------------------------------------------------------------

    \3\ 15 U.S.C. 77s.
    \4\ 15 U.S.C. 78m.
---------------------------------------------------------------------------

    [sbull] Is organized as a private entity;
    [sbull] Has, for administrative and operational purposes, a board 
of trustees serving in the public interest, the majority of whom are 
not, concurrent with their service on such board, and have not been 
during the two-year period preceding such service, associated persons 
of any registered public accounting firm;
    [sbull] Is funded as provided in section 109 of the Sarbanes-Oxley 
Act;
    [sbull] Has adopted procedures to ensure prompt consideration, by 
majority vote of its members, of changes to accounting principles 
necessary to reflect emerging accounting issues and changing business 
practices; and
    [sbull] Considers, in adopting accounting principles, the need to 
keep standards current in order to reflect changes in the business 
environment, the extent to which international convergence on high 
quality accounting standards is necessary or appropriate in the public 
interest and for the protection of investors.
    Representatives of the FASB and FAF have requested that ``[t]he 
FASB * * * `` continue to be the designated organization in the private 
sector for establishing standards of financial accounting and 
reporting.'' \5\
---------------------------------------------------------------------------

    \5\ Letter dated August 16, 2002 to SEC Chairman Harvey L. Pitt 
from Robert H. Herz, Chairman, FASB and Manuel H. Johnson, Chairman 
and President, FAF. The Act does not restrict the Commission's 
ability to develop accounting principles on its own, and does not 
limit the number of private-sector bodies the Commission may 
recognize.
---------------------------------------------------------------------------

II. Qualification and Recognition of the FASB

A. Structure of the FASB

    In assessing compliance with the provisions of section 108, the 
Commission has evaluated the organizational structure, operations, and 
procedures of both the FAF and the FASB.

[[Page 23334]]

    The FAF is comprised of independent trustees and is responsible for 
overseeing, funding,\6\ and appointing members of the Board, as well as 
selecting members of an advisory body.\7\ The Commission has been 
informed that the majority of the FAF trustees are not, and have not 
been during the two-year period preceding their service on the FAF, 
associated with a public accounting firm. Based on our past 
relationship with the FAF, we believe that the FAF serves the public 
interest. Accordingly, the FAF meets the applicable criteria in section 
108 of the Sarbanes-Oxley Act for the board of trustees of a recognized 
private sector accounting standard setter.
---------------------------------------------------------------------------

    \6\ The funding provisions under section 109 of the Sarbanes-
Oxley Act replace the FAF's funding responsibilities; the FAF will 
continue to be responsible for the fee requests, including 
establishing the FASB's budget for review by the Commission each 
year.
    \7\ The FASB receives input from, among other sources, a 
standing advisory body, the Financial Accounting Standards Advisory 
Council (FASAC), which is comprised of members from the accounting 
and business communities, academia, and professional organizations, 
all of whom share an interest in fostering quality financial 
reporting and disclosure. FASAC's primary mission is to advise the 
FASB on its projects and agenda. In addition, the FASB has 
established a User Advisory Council (UAC) to assist the FASB in 
raising awareness of how investors and investment professionals, 
equity and credit analysts, and rating agencies use financial 
information. The FASB has recruited more than 40 professionals, 
representing a variety of investment and analytical disciplines, to 
participate on the UAC.
---------------------------------------------------------------------------

    The Board is responsible for promulgating financial accounting and 
reporting standards. It currently has seven members who have expertise 
in accounting and financial reporting. Members generally are appointed 
for five-year terms and can be reappointed to one additional term. 
Board members are full time employees of the FAF.

B. Commission Oversight of FASB Activities

    While the Commission consistently has looked to the private sector 
in the past to set accounting standards, the securities laws, including 
the Sarbanes-Oxley Act, clearly provide the Commission with authority 
to set accounting standards for public companies and other entities 
that file financial statements with the Commission.\8\ In addition, 
recognition of standards set by a private sector standard-setting body 
as ``generally accepted'' is only appropriate under section 108 of the 
Sarbanes-Oxley Act if, among other things, the Commission determines 
that the private sector body ``has the capacity to assist the 
Commission in fulfilling the requirements of * * * the Securities 
Exchange Act * * * because, at a minimum, the standard setting body is 
capable of improving the accuracy and effectiveness of financial 
reporting and the protection of investors under the securities laws.'' 
\9\ As noted above, section 108 also emphasizes the Commission's 
responsibility to determine that the standard setting body:
---------------------------------------------------------------------------

    \8\ Section 108(c) of the Sarbanes-Oxley Act states, ``Nothing 
in this Act, including this section * * * shall be construed to 
impair or limit the authority of the Commission to establish 
accounting principles or standards for purposes of enforcement of 
the securities laws.''
    \9\ See Securities Act of 1933, section 19(b)(1)(B), as added by 
the Sarbanes-Oxley Act.
---------------------------------------------------------------------------

    [sbull] Has ``procedures to ensure prompt consideration * * * of 
changes to accounting principles necessary to reflect emerging 
accounting issues and changing business practices'';
    [sbull] Considers the need to amend standards ``to reflect changes 
in the business environment''; and
    [sbull] Considers, to the extent necessary or appropriate, 
international convergence of accounting standards.
    Given the Commission's responsibilities under the securities laws 
and our specific responsibilities under the Sarbanes-Oxley Act to make 
findings regarding the procedures, capabilities, activities, and 
results of any designated accounting standards-setting body, we believe 
that:
    [sbull] The FAF and FASB should give the Commission timely notice 
of, and discuss with the Commission, the FAF's intention to appoint a 
new member of the FAF or FASB.\10\ While the FAF makes the final 
determinations regarding the selection of FASB and FAF members, we 
believe that to fulfill our statutory responsibilities we should 
provide the FAF with our views and that the FAF should consider those 
views in making its final selection. The Commission, FAF, and FASB 
share the belief that the qualifications and appropriateness of each 
member of the FAF and the FASB are critical if the FASB is to continue 
to be a premier private-sector standards-setting body.
---------------------------------------------------------------------------

    \10\ Such consultations have occurred in the past. See, e.g., 
SEC Press Release No. 96-87, ``FAF and SEC Reach Agreement on 
Changes in Composition of Accounting Foundation: Appointing Three 
New Trustees to Serve,'' dated July 8, 1996, which states, ``The FAF 
selected the new At-Large Trustees in consultation with the SEC''; 
SEC Annual Report 1996, at 90-91, which states, ``The change in 
composition of the FAF's Board was made in consultation with the SEC 
to include a greater representation by those who do not have a 
special interest in the outcome of accounting standards setting,'' 
and FAF, 1996 Annual Report of the Financial Accounting 
Foundation,'' at 5, which states, ``In consultation with the 
chairman of the Securities and Exchange Commission, the FAF agreed 
in July to change the composition of the Foundation's Board.''
---------------------------------------------------------------------------

    [sbull] The FASB, in its role of ``assist(ing) the Commission in 
fulfilling the requirements of the Securities Exchange Act,'' \11\ 
should provide timely guidance to public companies, accounting firms, 
regulators and others on accounting issues that the Commission 
considers to be of immediate significance to investors. The Commission 
and its staff, however, do not prohibit the FASB from also addressing 
other topics, and do not dictate the direction or outcome of specific 
FASB projects so long as the conclusions reached by the FASB are in the 
interest of investor protection. We expect that the Commission staff 
\12\ will refer issues to the FASB or one of its affiliated 
organizations \13\ when those issues may warrant new, amendments to, or 
formal interpretations of, accounting standards. We also expect that 
the FASB will address such issues in a timely manner. On those 
occasions when the FASB may determine that consideration of the issue 
is not advisable or that the issue cannot be resolved within the time 
frame acceptable to the Commission,\14\ we expect that the FASB 
promptly will notify the Commission or its staff, provide us with its 
views regarding an appropriate resolution of the issue, and diligently 
work with us and our staff to ensure the protection of investors from 
misleading or inadequate accounting or disclosures.
---------------------------------------------------------------------------

    \11\ Section 19(b)(1)(B) of the Securities Act of 1933, as added 
by section 108 of the Sarbanes-Oxley Act of 2002.
    \12\ The Commission staff will continue to take such action on a 
day-to-day basis as may be appropriate to resolve specific 
accounting and reporting issues under the particular factual 
circumstances involved in filings and reports of individual 
registrants.
    \13\ For example, the issue may be referred to the FASB's 
Emerging Issues Task Force (EITF). The EITF is comprised of 
approximately 13 members who serve, generally without compensation, 
on a part-time basis. EITF members are partners in large, medium and 
small accounting firms, business executives, financial analysts and 
other users of financial statements, and academics. Upon 
ratification of an EITF consensus by the FASB, the consensus is 
published as part of the EITF's minutes and may be relied on by 
Commission registrants and others in the preparation of financial 
statements that purport to conform to generally accepted accounting 
principles.
    \14\ We expect such occasions will be infrequent because the 
Commission and the FASB share the goal of providing timely guidance 
to public companies and accounting firms on matters that are 
significant to investors.
---------------------------------------------------------------------------

    [sbull] Because the Commission and FASB share the common goal of 
providing investors with the disclosure of meaningful financial 
information, we anticipate continuation of our collegial working 
relationship with the FASB. To that end, we expect that, when

[[Page 23335]]

requested to do so, the FASB will make information and staff reasonably 
available to facilitate our, or our staff's, understanding and 
implementation of a FASB standard.
    The Commission and its staff intend to work with the FAF and the 
Board to ensure that proper oversight procedures and policies are in 
place to allow the Commission to assess whether the FASB continues to 
meet the characteristics of an accounting-standard setter that are 
discussed in the Sarbanes-Oxley Act.

C. Key FASB Initiatives

    As noted earlier, the Commission has treated FASB accounting 
standards as ``authoritative'' since 1973. In order for U.S. accounting 
standards to remain relevant and to continue to improve, however, the 
Commission expects the FASB to:
    [sbull] Consider, in adopting accounting principles, the extent to 
which international convergence on high quality accounting standards is 
necessary or appropriate in the public interest and for the protection 
of investors,\15\ including consideration of moving towards greater 
reliance on principles-based accounting standards whenever it is 
reasonable to do so;
---------------------------------------------------------------------------

    \15\ We expect that during its deliberations of an accounting 
issue the FASB will consider, among other things, international 
accounting standards addressing that issue.
---------------------------------------------------------------------------

    [sbull] Take reasonable steps to continue to improve the timeliness 
with which it completes its projects, while satisfying appropriate 
public notice and comment requirements; \16\ and
---------------------------------------------------------------------------

    \16\ These ideas, among others, are embodied in the FASB's 
current Rules of Procedure. To the extent that the FAF or FASB 
determines that inadequate staffing or resources hampers the 
timeliness of the FASB's processes, the Commission will review 
requests for increases in the FASB's budget in accordance with the 
procedures in section 109(e) of the Sarbanes-Oxley Act.
---------------------------------------------------------------------------

    [sbull] Continue to be objective in its decision-making and to 
weigh carefully the views of its constituents and the expected benefits 
and perceived costs of each standard.\17\
---------------------------------------------------------------------------

    \17\ Id.
---------------------------------------------------------------------------

D. FASB's Independence

    While effective oversight of the FASB's activities is necessary in 
order for the Commission to carry out its responsibilities under the 
securities laws, we recognize the importance of the FASB's 
independence. By virtue of today's Commission determination, the FASB 
will continue its role as the preeminent accounting standard setter in 
the private sector. In performing this role, the FASB must use 
independent judgment in setting standards and should not be constrained 
in its exploration and discussion of issues. This is necessary to 
ensure that the standards developed are free from bias and have the 
maximum credibility in the business and investing communities.\18\
---------------------------------------------------------------------------

    \18\ The occasions where the Commission has not accepted a 
particular FASB standard have been rare due, in part, to our 
recognition and support of FASB's independence. As noted elsewhere 
in this release, the Commission and its staff do not prohibit the 
FASB from addressing a particular topic and do not dictate the 
direction or outcome of specific FASB projects provided that the 
conclusions reached by the FASB are in the interest of investor 
protection.
---------------------------------------------------------------------------

E. Conclusion

    Based on available information, the organizational structure, 
operating activities, and procedures of the FAF and FASB meet the 
criteria in section 108 the Sarbanes-Oxley Act.\19\ In addition, the 
Commission has determined that the FASB has the capacity to assist the 
Commission in fulfilling the requirements of subsection 19(a) of the 
Securities Act of 1933 and section 13(b) of the Securities Exchange Act 
of 1934 and is capable of improving both the accuracy and effectiveness 
of financial reporting and the protection of investors under the 
securities laws.\20\ Accordingly, the standards set by the FASB are 
recognized as ``generally accepted'' under section 108 of the Sarbanes-
Oxley Act.
---------------------------------------------------------------------------

    \19\ As noted above, one of the statutory criteria is that the 
recognized accounting body is funded as provided in section 109 of 
the Sarbanes-Oxley Act. We are providing an endorsement of the FASB 
so that it may begin to work with the Public Company Accounting 
Oversight Board to implement the funding mechanisms in section 109. 
Our recognition of the FASB is in anticipation of and with the 
expectation that this funding will be forthcoming in the near term.
    \20\ See, section 108(a) of the Sarbanes-Oxley Act; section 
19(b)(1)(B) of the Securities Act of 1933, 15 U.S. 77s(b)(1)(B).
---------------------------------------------------------------------------

    As required under the securities laws, including the Sarbanes-Oxley 
Act, the Commission will monitor the FASB's procedures, qualifications, 
capabilities, activities, and results, as well as the FAF's and FASB's 
ongoing compliance with the expectations and views expressed in this 
policy statement. We will issue an appropriate revision of this policy 
statement if we determine that the FAF or FASB no longer meets the 
statutory criteria or expectations discussed in this policy statement, 
or if we consider it otherwise necessary or appropriate to do so.

III. Regulatory Requirements

    This policy statement is not an agency rule requiring notice of 
proposed rulemaking, opportunities for public participation, and prior 
publication under the provisions of the Administrative Procedure Act 
(APA). Similarly, the provisions of the Regulatory Flexibility Act, 
which apply only when notice and comment are required by the APA or 
another statute, are not applicable.

IV. Codification Update

    The ``Codification of Financial Reporting Policies'' announced in 
Financial Reporting Release No. 1 (April 15, 1982) [47 FR 21028] is 
updated as follows:
    1. By adding at the end of Section 101, under the Financial 
Reporting Number (FR-70) assigned to this policy statement, the text in 
the policy statement beginning with the second paragraph in Section I. 
and all of Section II. of this release.
    2. By renumbering the footnotes from this release that are included 
in the Codification to run consecutively from number one through number 
18.
    The Codification is a separate publication of the Commission. It 
will not be published in the Federal Register/Code of Federal 
Regulations.

    By the Commission.

    Dated: April 25, 2003.
J. Lynn Taylor,
Assistant Secretary.
[FR Doc. 03-10716 Filed 4-30-03; 8:45 am]
BILLING CODE 8010-01-P