What Was the Accounting Principles Board?

From 1959 to 1973, the primary source for authoritative accounting standards in the United States was the Accounting Principles Board (APB). This entity was established by the American Institute of Certified Public Accountants (AICPA) to serve as the profession’s standard-setting body. It took over this responsibility from its predecessor, the Committee on Accounting Procedure (CAP), and was eventually succeeded by the Financial Accounting Standards Board (FASB).

Formation and Mandate of the Board

The creation of the APB was a direct response to the failings of its forerunner, the Committee on Accounting Procedure (CAP). The CAP was often criticized for its “piecemeal” approach, addressing accounting problems as they arose rather than developing a structured, comprehensive body of principles. The APB was established by the AICPA with a mandate to develop a broad conceptual framework to guide accounting practices.

The board was composed of 18 to 21 members who served on a part-time, volunteer basis. These members were primarily partners from large public accounting firms, but also included representatives from industry and academia. To issue a formal “Opinion,” a two-thirds majority vote was required.

Significant APB Opinions

The APB issued 31 official Opinions and 4 Statements that shaped financial reporting. Several of these pronouncements addressed complex and controversial issues, establishing foundational rules for how companies report their financial results.

An influential standard was APB Opinion No. 11, “Accounting for Income Taxes.” This opinion tackled the significant differences between the income a company reports to its shareholders and the income it reports to the IRS. It required companies to use the “deferred method” to account for these “timing differences,” ensuring that tax expenses matched the related income on financial statements.

Another was APB Opinion No. 15, “Earnings per Share.” This opinion standardized the calculation and reporting of a company’s earnings per share (EPS), a widely used metric for investors. It introduced the concepts of “primary EPS” and “fully diluted EPS” to show how earnings would be affected by potentially dilutive securities like convertible bonds and stock options.

The board also addressed mergers and acquisitions with APB Opinion No. 16, “Business Combinations,” and APB Opinion No. 17, “Intangible Assets.” Opinion No. 16 established specific criteria for when a merger could be accounted for as a “pooling of interests” versus a “purchase,” a contentious issue since the methods produced different results. Opinion No. 17 required companies to recognize and amortize intangible assets acquired in a business combination, such as goodwill, over a useful life not to exceed 40 years.

Criticisms and Dissolution

The APB faced persistent criticism that ultimately led to its dissolution. A primary source of contention was the board’s structure. Its members served on a part-time basis while maintaining their primary employment at accounting firms, corporations, or universities. This arrangement created conflicts of interest, as members were tasked with creating rules that could directly impact their own firms or clients.

This part-time structure also contributed to the board’s slow response to emerging accounting issues. The rapid economic growth and increasing complexity of business transactions during the 1960s created novel accounting problems that the APB struggled to address in a timely manner.

The APB was also perceived as lacking independence from the companies and CPA firms it was supposed to regulate. Because the largest accounting firms were always represented, there was a belief that standards issued were often the result of compromise and pressure from corporate interests.

Transition to the FASB and APB Legacy

The mounting criticisms led the AICPA to act. In 1971, it established a study group known as the Wheat Committee to evaluate the APB’s structure and process and recommend improvements for setting accounting standards. The Wheat Committee’s 1972 report recommended a dramatic overhaul, proposing the replacement of the APB with a new, independent, full-time standard-setting body.

This led directly to the creation of the Financial Accounting Standards Board (FASB) in 1973. The FASB was designed to correct the perceived flaws of the APB; its seven members were to be full-time employees, severing all ties with their previous employers to ensure independence and objectivity. The new structure also included the Financial Accounting Foundation (FAF) to oversee and fund the FASB.

The dissolution of the APB did not invalidate all of its work. The 31 Opinions and 4 Statements it issued were carried forward as part of U.S. Generally Accepted Accounting Principles (GAAP). Those that have not been specifically updated by the FASB remain authoritative and are integrated into the FASB’s Accounting Standards Codification.