What Is an Exposure Draft?
An exposure draft is a document published by the Financial Accounting Standards Board (FASB) to solicit public comment on a proposed new accounting standard. Interested parties are invited to read and discuss the document and express their opinions on its contents in order to minimize any unintended consequences before whatever is being recommended becomes law.
- An exposure draft is a document published by the FASB to solicit public comment on a proposed new accounting standard.
- Interested parties are invited to express their opinions to minimize any unintended consequences before whatever is being recommended becomes law.
- The FASB welcomes comments agreeing with the proposal and asks respondents in disagreement to indicate why and put forward any reasonable alternatives.
- Based on the feedback it receives, the FASB may revise the exposure draft before it becomes mandatory.
Understanding an Exposure Draft
The FASB is an independent, nonprofit organization tasked with establishing accounting and financial reporting standards for companies in the United States. The organization’s mission is to make sure the numbers companies record and report from their various transactions are accurate, easy for investors and other interested parties to comprehend, consistent, and comparable.
Setting principles, standards, and procedures that define the basis of financial accounting policies and practices is an extensive process. Potential new requirements are heavily researched and then often open to public discussion and comment before being issued as a new accounting standard and becoming part of generally accepted accounting principles (GAAP).
An exposure draft is a proposed standard, meaning it is not yet in its final form. The FASB makes a considered judgment on a specific accounting issue and then invites individuals and organizations to provide comments detailing any agreements or disagreements they might have with the recommendations put forward. The FASB welcomes comments agreeing with the proposal and asks respondents in disagreement to indicate why and present reasonable alternatives.
Based on the information it receives from comment letters, the FASB may revise the exposure draft before it becomes a Statement of Position and, eventually, a mandatory Financial Accounting Standard (FAS). Feedback is most likely to be provided by professional accounting firms and industry associations, with intimate knowledge of how the new standard would affect their clients.
Exposure Draft Layout
At the beginning of the exposure draft, the FASB will reveal a deadline for submitting feedback, as well as links and addresses of who to contact. Comments can generally be submitted either via the organization’s website or by sending the director a letter.
All comments received are made public and available to view on the FASB’s website.
The draft is then broken down into several sections. In most cases, it will start with an explanation clarifying why the FASB is considering issuing the standard. That will be followed by a summary of the main provisions, a list of who is likely to be affected, and an outline of when the new standard could become effective, together with any details about transitional periods and requirements.
When applicable, drafts will also include a description of how the FASB’s proposal differs from the current GAAP. Typically, the document will then present a list of questions for respondents to consider and use as a basis to provide feedback.
After the introduction, the document digs deeper, offering more comprehensive information on the matters already touched upon, complete with examples, illustrations, and implementation guidelines.