What Is a Statement of Financial Accounting Standards (SFAS)?

A Statement of Financial Accounting Standards (SFAS) is a formal document that once provided specific rules for accounting in the United States. These statements were a primary component of U.S. Generally Accepted Accounting Principles (GAAP), the common set of standards for financial reporting. The purpose of an SFAS was to give detailed guidance on handling particular accounting issues, ensuring that financial reports were consistent and comparable across different companies.

Although SFAS are no longer issued, their influence is foundational to modern accounting. The principles established in the 168 statements issued over several decades have been carried forward into the current accounting framework.

The Issuing Body and Its Objective

The Financial Accounting Standards Board (FASB) developed and issued the Statements of Financial Accounting Standards. Established in 1973, the FASB is an independent, non-profit organization that sets accounting standards for public and private companies in the United States. The U.S. Securities and Exchange Commission (SEC) recognizes the FASB as the designated accounting standard-setter for public companies.

The objective of SFAS was to standardize U.S. GAAP to improve the consistency and comparability of financial information for investors, creditors, and other stakeholders. By creating a uniform set of rules, the FASB sought to narrow the range of acceptable accounting treatments for various transactions, enhancing the transparency and reliability of corporate financial reporting.

Before a new SFAS was issued, the FASB engaged in a comprehensive process. This included identifying a financial reporting issue, conducting research, holding public meetings, and issuing an “exposure draft” to solicit feedback from the public and industry stakeholders before a new standard was finalized.

Structure and Application of an SFAS

Each SFAS was a detailed document providing clear guidance on a specific accounting topic. A typical statement included an introduction outlining the standard’s scope, definitions of key terms, principles for recognition and measurement, and specific disclosure requirements for financial statement footnotes.

For instance, if a company entered into a lease agreement, an accountant would consult SFAS No. 13, “Accounting for Leases.” The statement defined different types of leases and provided explicit criteria for classifying them. Based on this classification, the standard dictated how the company should record the lease on its balance sheet and income statement and what specific details must be disclosed in the footnotes, such as future minimum lease payments.

This methodical approach gave accountants a clear roadmap for a wide array of topics, from broad issues like accounting for inventory to more narrow, industry-specific matters. By following the prescribed steps, companies could produce financial statements that were more consistent and comparable to those of other organizations.

The Shift to the FASB Accounting Standards Codification

For many years, U.S. GAAP was complex and fragmented. The rules were spread across a multitude of documents, including SFAS, FASB Interpretations, Technical Bulletins, and pronouncements from other accounting bodies. This system was difficult for accountants to navigate, making it challenging to identify all authoritative literature on a specific topic.

To resolve this complexity, the FASB launched the Accounting Standards Codification (ASC) in 2009. The ASC became the single, authoritative source for U.S. GAAP, superseding all previously existing standards, including every SFAS. The final standard, SFAS No. 168, confirmed the Codification would replace all prior standards for financial periods ending after September 15, 2009.

The Codification did not change the substance of GAAP; it restructured it by reorganizing the principles from SFAS and other documents into a topically arranged online database. Instead of referencing SFAS numbers, accountants now refer to ASC topic numbers, such as ASC 740 for income taxes or ASC 805 for business combinations. This structure makes it easier to research and apply accounting standards.

Legacy and Impact of Key SFAS

While individual SFAS documents are historical, the accounting principles they established remain integral to modern financial reporting. The core rules from these standards were absorbed into the FASB Accounting Standards Codification, where they continue to guide practice today.

One influential standard was SFAS No. 142, “Goodwill and Other Intangible Assets.” Before this rule, goodwill acquired in a business combination was amortized over a set period. SFAS 142 eliminated automatic amortization and instead required companies to test goodwill for impairment annually, a process that involves comparing the fair value of a reporting unit to its carrying amount. This principle is now a core part of ASC 350.

Another landmark standard, SFAS No. 123(R), “Share-Based Payment,” addressed accounting for employee stock options. Previously, companies could often avoid recognizing any expense for stock options. SFAS 123(R) required companies to measure the cost of stock awards based on their grant-date fair value and recognize that cost as an expense. This principle, which impacted the reported earnings of many technology companies, is now codified in ASC 718.