What Is an APB Opinion?

An APB opinion is an authoritative pronouncement issued by the Accounting Principles Board (APB). The board gave official opinions on various accounting issues that required clarification or interpretation. The APB listed 31 separate opinions during its existence.

The American Institute of Certified Public Accountants (AICPA) created the APB in 1959 and replaced it with the Financial Accounting Standards Board (FASB) in 1973. The APB's mission was to develop an overall conceptual framework for generally accepted accounting principles (GAAP) in the United States. APB was the main organization that set up GAAP, and some of its opinions still influence GAAP.

Key Takeaways

  • An APB opinion is an authoritative pronouncement issued by the Accounting Principles Board (APB).
  • The American Institute of Certified Public Accountants (AICPA) created the APB in 1959 and replaced it with the Financial Accounting Standards Board (FASB) in 1973.
  • Some APB opinions are now obsolete, while others continued on as part of GAAP.
  • APB opinions clarified accounting issues and provided definitive guidance at a time when today's GAAP were only beginning to emerge.
  • Especially when they first began, APB opinions did not offer anything like a comprehensive framework for accounting.

Understanding APB Opinions

After the Financial Accounting Standards Board (FASB) replaced the Accounting Principles Board (APB), GAAP also superseded APB opinions. Some APB opinions are now obsolete, while others continued on as part of GAAP.

The AICPA disbanded the APB in the hope that the smaller and fully independent FASB could more effectively create accounting standards. The APB and the related Securities and Exchange Commission (SEC) were unable to operate entirely independently of the U.S. government.

According to John C. Burton, the SEC's opinion about the APB was that its overall record was a reasonably good one. However, he also observed that it seemed likely that a smaller full-time body with more control of research would ultimately have a greater promise for success.

Of the APB's 31 opinions, several were instrumental in improving the theory and practice of significant areas of accounting. Some of the more enduring opinions included APB Opinion No. 4, which described accounting for investment credit. Another was APB Opinion No. 14, which covered accounting for convertible debt and debt issued with stock warrants. On the other hand, APB Opinion No. 19 replaced APB Opinion No. 3 in 1971.

Advantages of APB Opinions

APB opinions clarified accounting issues and provided definitive guidance at a time when today's GAAP were only beginning to emerge. During the APB's existence between 1959 and 1973, it worked closely with the SEC to craft opinions that helped shape how corporations prepared their SEC forms. The APB included active accounting professionals who could incorporate the knowledge that they gain from their own practice into their opinions.

APB opinions were also a crucial part of the investment-oriented transformation of accounting in the mid-twentieth century. Before that period, accounting was somewhat more like bookkeeping. Its focus was on providing internal information for use within companies. However, increasing government regulation and investor demands for accurate information after the stock market crash of 1929 changed the nature of accounting. Investors wanted consistent information to compare across companies, and new regulations required companies to provide it. APB opinions were an eventual outgrowth of that demand for more consistent accounting standards.

APB opinions were part of the professionalization of accounting, which began in the 20th century and continues to this day.

Disadvantages of APB Opinions

Especially when they first began, APB opinions did not offer anything like a comprehensive framework for accounting. It is true that they provided definite opinions on specific issues, but they also left other matters unresolved.

Along with this incomplete framework, the fact that the APB consisted of part-time members with other obligations also contributed to less rigorous standards. In theory, there was more potential for conflicts of interest when creating rules. In actual practice, less specialization meant less clarity in rules and more room for different interpretations, resulting in less consistent information for investors than what we have in the 21st century.

Many of the disadvantages of APB opinions were overcome by newer generally accepted accounting principles (GAAP). Since GAAP rules were built on the foundations provided by APB opinions, they necessarily covered more topics and eliminated gray areas. Furthermore, the Financial Accounting Standards Board (FASB) that replaced the APB is a more independent and professional organization.

FASB members work on a full-time basis and must cut ties with outside organizations. That gives them the time to create more detailed rules and removes incentives to favor the existing practices of particular firms.