How We're Funded
Funding the FAF, the FASB, and the GASBThe work of the Financial Accounting Foundation (FAF), the Financial Accounting Standards Board (FASB) and the Governmental Accounting Standards Board (GASB) is funded by a combination of accounting support fees, subscription and publication revenue, and investment income. The largest share of financial support for the standard-setting boards comes from accounting support fees. Those fees are paid by publicly traded companies (for the FASB) and municipal bond brokers and dealers (for the GASB). Neither the FAF nor the FASB or GASB receive any funds from the Federal, state, or local governments.
While our primary funding sources are stable and established by law, they are subject to factors both external and internal that change how that funding is allocated and assessed from year to year. As a result, the amount of accounting support fees needed to support the work of the FASB and GASB varies – sometimes significantly – from year to year.
Following is a brief overview of the how the FAF, the FASB, and the GASB are funded.
Main Funding SourcesThe FAF, FASB, and GASB presently obtain funding from three primary sources:
- FASB Accounting Support Fees are collected under Section 109 of the Sarbanes-Oxley Act of 2002 to fund the annual recoverable expenses of the FASB. Recoverable expenses are the total FASB operating expenses adjusted to 1) exclude non-cash expenses (mainly depreciation) and 2) include other cash requirements (mainly capital expenditures). Put another way, recoverable expenses are roughly equivalent to operating expenses. FASB accounting support fees are assessed on and collected from issuers of publicly-traded securities, as those issuers are defined in the Sarbanes-Oxley Act, and are allocated based on the average market capitalization of each issuer. In 2013, a total of 7,681 publicly traded companies paid a total of $25.5 million in accounting support fees for the FASB. The FASB accounting support fees are reviewed by the U.S. Securities and Exchange Commission (SEC) each year to ensure compliance with the statute.
- GASB Accounting Support Fees are collected under Section 978 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 to fund the annual recoverable expenses (again, roughly equivalent to operating expenses) of the GASB. These support fees were instituted in 2012 through an SEC order instructing the Financial Industry Regulatory Authority (FINRA) to establish, assess, and collect accounting support fees from its members. GASB accounting support fees collected in 2013 were $7.4 million, paid by a total of 526 broker dealers.
- Subscription and Publication revenue includes sales and licensing of copyrighted FASB- and GASB-related materials. The FAF licenses the content of the FASB Codification and GASB publications to commercial publishers and other licensees for inclusion in their proprietary online research systems. Both the FASB Codification and GASB materials also are available through various paid subscription plans and hard copy printed versions. In 2013, gross revenue from subscription and publication fees totaled $17.9 million.
Accounting Support FeesSarbanes-Oxley provides that the FAF may collect as accounting support fees the full amount of the FASB’s recoverable expenses, as described earlier. Similarly, Dodd-Frank provides that the FAF may collect as accounting support fees the full amount of GASB’s recoverable expenses.
The FAF voluntarily has chosen not to seek accounting support fees to fund the full amount of the FASB and GASB budget.
Instead, the FAF has chosen to fund a portion of FASB and GASB recoverable expenses with residual reserve funds. Residual reserves are those funds that are forecast to exceed a targeted reserve balance.
For the 2014 budget, the FAF will make available residual reserves totaling $18.7 million to fund both FASB and GASB recoverable expenses. The residual reserves are allocated to the FASB and the GASB based on the average of each Board’s (1) share of net publications revenues and (2) share of recoverable expenses.
The allocation of residual reserve funds to the FASB and the GASB also includes an adjustment to reflect International Financial Reporting Standards (IFRS) Foundation contributions and FASB accounting support fees sequestered that are allocated entirely to FASB in the 2014 budget.
Target Reserve FundThe FAF’s investment balances consist of a reserve fund and a separate short-term investment fund. The reserve fund, established early in the FAF’s history, is intended to provide sufficient reserves to operate the FAF, the FASB, and the GASB during any temporary or permanent funding transition or to provide for any other unforeseen circumstances.
Beginning in 2007, the FAF established the targeted year-end reserve fund balance equal to one year of budgeted expenses for the entire organization, plus a working capital reserve equal to three months of net operating expenses for the entire organization. In addition, the FAF each year aims to have a balance in its short-term investment accounts on January 1 equal to three months of budgeted net operating expenses.
Beginning with the 2014 budget, the FAF Trustees approved a change to the FAF’s cash management policy to cap the targeted year-end reserve fund at one year of budgeted operating expenses. This eliminates the amount equal to one quarter of net operating expenses. The change is expected to be phased in over a three-year period.
The target short-term investment account will remain equal to one calendar quarter of net operating expenses. The change in policy reflects, among other things, improved working capital cash flow from the quarterly billing of GASB accounting support fees.
Residual Reserve Funds (and how they affect volatility in FASB/GASB accounting support fees)In preparing the budget each year, the FAF calculates the amount of reserve funds that are available to offset accounting support fees by estimating the projected year-end reserve balances and subtracting the target year-end reserve balances. These residual reserve funds pay for a portion of operating expenses that otherwise would be funded by accounting support fees.
The amount of residual reserve funds available generally depends on the amount of revenue the FAF receives from subscriptions and publications. However, other factors can affect the level of residual reserve funds – and that creates some annual volatility in the amount that the FAF must raise in accounting support fees.
For example, the 2014 and 2013 projected reserve fund exceeds the target reserve fund by $18.7 and 16.9 million, both of which were unusually high amounts (compared to $9.3 million in 2012). The residual in 2014 is the result of: unanticipated receipt of a class action settlement related to 2007 investment loss, Board approved reduction in the target reserve fund balance, and favorable variances in expenses compared to the 2013 budget.
The 2012 residual benefited from concessions received from renewal of the FAF’s building lease in Norwalk, Connecticut that were not budgeted, and favorable variances in expenses compared to the 2012 budget earlier than anticipated implementation of the billing and collection of GASB accounting support fees.
The FAF currently projects that the 2015 residual reserve funds available will decrease from $18.7 million to a potential range of $12-$15 million. Therefore, fewer residual reserves are expected to be available to offset FASB recoverable expenses in the 2015 budget. This would result in an increase in FASB accounting support fees, even if FASB recoverable expenses are flat year to year.
The above chart shows the trend of FASB recoverable expenses, FASB accounting support fees, and residual reserve funds over the past several years, along with a preliminary estimate for 2015.
The chart demonstrates that the level of accounting support fees required to fund FASB operations is directly – and inversely – related to the level of residual reserve funds, even as FASB recoverable expenses remain relatively flat. In years such as 2013, when increased residual reserve funds are available to fund FASB operations, the level of accounting support fees decreases. In years when residual reserve funds decrease, accounting support fees rise.
The level of residual reserve funds, of course, depends on whether the FAF has incurred any extraordinary expenses, or receives any unanticipated revenue during the course of the year.