Obtaining the Investors' Perspectives

How the FASB Considers Investor Perspectives in Setting Accounting Standards

The FASB’s mission is to develop accounting standards that, when faithfully applied, result in financial information that investors and others find useful in deciding whether to provide resources to a company, for example, whether to buy, hold, or sell shares or to provide credit through loans, guarantees, or other means.

Accounting standards are the result of judgments made by the five-member FASB:
  • Judgments about the usefulness of the information to investors and the benefits that are expected to result from the information's use 
  • Judgments about the perceived costs that companies and others will incur to provide the information 
  • Judgments about the perceived costs of not providing the information (that is, the cost of providing financial information that is less complete, transparent, or understandable).
The FASB does not change and improve accounting standards unless, in its judgment, the expected benefits of the improved information outweigh the perceived costs of providing it. To make those judgments, Board members (supported by its staff) seek to learn about the perspectives of investors and other users in each aspect of standard setting, including:
  • How and why current financial reports are not meeting user information needs 
  • How standards might be changed to better meet those needs 
  • After companies have implemented new standards, whether financial reporting improved as expected.
Board members and staff develop their understanding of investor perspectives primarily in two ways: by drawing on their own investing experience and by actively engaging investors and other users in the standard setting process.

Investing Experience of FASB Members and Staff

Each member of the FASB and its staff brings their own investing experience (or investing advisory experience) to bear in making judgments about the usefulness of financial information. The FASB website includes a description of Board members—background and experience.

The Board’s staff includes two Senior Investor Liaisons—individuals with significant professional experience in financial analysis and investing that both provide their own perspectives and help the Board and staff engage investors in the standard-setting process (as described below).

Engaging Investors in the Standard Setting Process

Investors, creditors, and other users of financial information are a primary source for explaining what financial information is useful to them. It is critically important to engage a wide range of investors in the standard-setting process as a means of informing the Board and staff about their perspectives.

Recognizing that investors and other users can have differing opinions about the types of information that is useful, the Board strives for input from a broad spectrum of individuals and organizations including:
  • Portfolio managers (PMs) and analysts from long-only asset managers and long/short hedge funds, both large and small. Both PMs and analysts may have roles as either sector specialists or generalists.
  • Sellside analysts from large and small firms consisting primarily of sector-specific coverage.
  • Accounting analysts from both asset management firms and the sellside.
  • Credit rating agency analysts and managers.
  • Analysts that work with both equity and debt.
  • Industry groups, such as the CFA Institute.
  • Other users of financial information, such as regulators.
The FASB sets standards through a set of procedures called “due process” designed to encourage broad participation in the development of those standards. The Board has created many different channels of communication through which the broad spectrum of users (and others) can provide their views. Those include:
  • Standing advisory groups: The Board meets regularly with five different standing advisory groups it created to provide input on both strategic and technical issues. Each group includes investor representatives. One such group, the Investors Technical Advisory Committee (ITAC), solely comprises individuals from the investment profession whose primary career focus is on accounting and financial reporting matters. Other groups include the Financial Accounting Standards Advisory Council (FASAC), the Private Company Financial Reporting Committee (PCFRC), the Small Business Advisory Committee, and the Valuation Resource Group.
  • Project-specific working groups: The Board often will create a working group of people with specialized experience to advise it on project-specific standard-setting issues. Those groups, which always include investors and other users, meet periodically with the Board and staff and provide input through other less formal means. There are currently active working groups for leasing, reporting financial performance, and insurance contracts.
  • Project-specific investor outreach: Board members and staff often contact investors directly to solicit their views on financial reporting issues, including whether to add a project to the agenda and to get input on the relative usefulness of alternative approaches to solving particular reporting problems.
  • Exposure of proposals: A main feature of the Board’s due process is the exposure of proposals for public comment. The exposure process allows anyone interested in financial reporting, including investors, to provide their views on proposed standards.
  • General investor outreach: FASB members and staff hold periodic meetings to expand and enhance direct communication with investors. Through mid-2009, Board members and staff had met with several dozen investor representatives. The FASB also has plans to launch a web portal geared specifically to users. Through it, users can learn about potential upcoming issues and provide input on current standard-setting activities.

The Board strives to obtain a complete picture of investor perspectives by considering together the input it receives from these various sources. For example, the project to comprehensively reconsider the accounting for financial instruments has benefited from the input of users through a project-specific resource group, advisory groups such as ITAC, FASAC and PCFRC, as well as liaison group meetings, a roundtable on fair value, numerous roadshows and individual calls with about 100 investors. See a summary of investor outreach to date.

Communicating Investors’ Perspectives

Another critically important feature of the Board’s due process is communicating, both internally and externally, what it has learned about the perspectives of investors and other users.

Internally, we communicate what we have learned to all Board members and staff through meeting minutes and staff-prepared memoranda.

We communicate externally in a variety of ways:
  • Each time the Board meets in a public decision-making meeting, it provides observers with a handout that describes the issues being discussed and a summary of significant investor input received. Those meeting handouts are available on the FASB website.
  • Minutes or other summaries of public meetings of standing advisory groups and project-specific working groups are available on the FASB website.
  • The basis for conclusions section of each Exposure Draft and final Accounting Standards Update describes the various ways the Board obtained user views, what those views were, and how those views influenced its judgments.
  • A summary of comments received on an Exposure Draft, including views expressed by investors, is prepared and made available on the FASB website.

Governance and Oversight

The Financial Accounting Foundation is the independent, private-sector organization that created the FASB and is responsible for its oversight. In particular, the Foundation is responsible for financing the FASB, selecting FASB members, and overseeing the standard-setting process to ensure that the FASB achieves its mission. A 16-member Board of Trustees governs the Foundation.

Investors are represented in the governance and oversight of the FASB. Several individuals with a strong, active, investor perspective serve as members of the Board of Trustees and on important Trustee Committees, such as the appointments and evaluations committee (which makes FASB member appointment and reappointment recommendations) and the standard-setting process oversight committee (which is charged with evaluating the efficiency and effectiveness of the standard-setting process, including investor participation).