What are Statements of Financial Accounting Standards?

Statements of Financial Accounting Standards

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Statements of Financial Accounting Standards

The Statements of Financial Accounting Standards (SFAS) were documents published by the Financial Accounting Standards Board (FASB) to provide guidance on specific accounting topics and issues. Each SFAS outlined authoritative accounting and financial reporting standards for businesses and nonprofits in the United States. Essentially, they formed a major part of U.S. Generally Accepted Accounting Principles (GAAP) until they were codified.

Each SFAS:

  • Addressed a specific accounting issue: Whether it was about how to account for stock options, the correct way to report pension obligations, or the proper treatment of mergers and acquisitions, each statement tackled a particular topic in the realm of accounting.
  • Was a product of extensive deliberation: Before issuing a statement, FASB would typically release an exposure draft for public comment. Feedback from various stakeholders, including accountants, businesses, and investors, would then be incorporated into the final statement.
  • Served as authoritative guidance: Once issued, an SFAS needed to be adhered to by entities when preparing their financial statements in order to remain in compliance with GAAP.

In 2009, the FASB Accounting Standards Codification became the single, authoritative source of U.S. accounting and reporting standards for nongovernmental entities, effectively superseding the SFAS and many other accounting pronouncements. Instead of referencing individual SFAS numbers, accountants and auditors now refer to the Codification topics.

However, while the individual SFAS documents are technically superseded, their content still largely exists, just reorganized and integrated within the Codification system.

Example of Statements of Financial Accounting Standards

Let’s explore one of the key SFAS in detail, SFAS No. 13 “Accounting for Leases”, to give you a better grasp of how these standards operate.

SFAS No. 13 “Accounting for Leases”:

Objective: The main purpose of this standard was to establish criteria for classifying leases as either capital leases (which are essentially treated as asset purchases) or operating leases and to specify the appropriate accounting for each type.

Primary Provisions:

Example in Practice:

Imagine a company, ABC Corp, enters into a lease agreement for machinery. The lease term is for 5 years, the economic life of the machinery is 6 years, and the present value of the lease payments is 95% of the machinery’s fair value. Since the lease term is over 75% of the machinery’s economic life and the present value of the payments is over 90% of the fair value, this lease would be classified as a capital lease under SFAS No. 13.

As a result, ABC Corp would:

SFAS No. 13 was later superseded and updated by the FASB’s Accounting Standards Codification, and the lease accounting standards have undergone significant changes since then. But the principles laid out in SFAS No. 13 laid the groundwork for lease accounting for many years.

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