An overview of the FASB ASC (Accounting Standards Codification)
This blog will discuss the “accounting rules” found in the FASB Accounting Standards Codification (ASC), such as who establishes the content, how to locate and navigate, and how new rules are created.
FASB background
Who establishes the “accounting rules”?
The Financial Accounting Foundation (FAF) has two standard-setting boards: the Financial Accounting Standards Board (FASB) and the Governmental Accounting Standards Board (GASB). These boards work together to develop U.S. Generally Accepted Accounting Principles (U.S. GAAP).
State and local governments use GASB established standards, while public and private entities and non-profits use FASB established standards (we’ll focus on the FASB standards in this post). The U.S. Securities and Exchange Commission (SEC) has designated the FASB to be the standard setter for public companies and many other organizations have also recognized the FASB’s standards to be authoritative as well.
Why do these rules exist?
The goal of the FAF is to provide financial statements that investors and users can trust. By having consistently applied “accounting rules”, results and data can be compared across entities by users of the financial statements. The FAF states that “high quality financial accounting and reporting standards promote better information in the marketplace. Better information fosters greater transparency. Transparent, relevant information helps investors and lenders make better decisions about where to put their money with confidence.”
ASC: Access, organization and usage
How to access the ASC
The FASB standards are easy to find (and they are free)! Simply go to the FASB’s website, select “Standards” at the top of the site, and then “Accounting Standards Codification”. Or, you can select the direct link to the ASC near the top of the FASB’s homepage. Once you’ve found your way to the ASC, you must check that you are not a robot and then select “Access”.
Once you’ve entered the ASC (and accepted a licensing agreement), the guidance is ready for your research!
ASC organization
The organization of the guidance can be a bit overwhelming; however, once you understand the organizational system, it makes sense. We discuss the organization in more detail within this blog post, but here is a brief summary of how the ASC is organized:
Industry specific guidance
Some industries have unique transactions that require specific guidance, so the FASB created industry focused topics within the ASC. It’s important to note that the industry specific guidance is incremental, entities must also follow guidance in other Topics that do not conflict with the industry-specific guidance. There are currently 15 industry topics in the ASC, such as Agriculture, Airlines, Entertainment, Extractive Activities, Financial Services, Software, and U.S. Steamship Entities.
The relationship between the ASC and SEC guidance
We frequently get asked, “How is accounting guidance issued by the SEC incorporated into the ASC?”
Since the FASB is not responsible for issuing or maintaining SEC guidance, the SEC guidance is not the same as the other guidance found in the ASC. However, as a convenience to its users, the FASB acknowledged that this information is essential for the financial reporting of public companies and, as a result, has incorporated certain guidance from the SEC into the ASC. This guidance is in its own section – S99 SEC Materials Sections.
Be careful here! The information found within the Codification is not the authoritative source (the official SEC guidance is!), which means that it is the user’s responsibility to ensure the appropriate and most current SEC guidance is utilized.
The hierarchy of the ASC
U.S. GAAP is extensive; however, some transactions can occur where there is no guidance!
Within the ASC, the General Principles Topic (105) notes that if there is no guidance for a transaction or event, then a specific hierarchy should be followed. First, consider accounting principles for similar transactions or events within a source of authoritative GAAP by analogy, except when other guidance specifically prohibits the guidance to be applied by analogy. If that is not possible, then entities should consider non-authoritative guidance from other sources.
Examples of non-authoritative accounting guidance an entity may look to could include:
- Widely recognized industry practice
- FASB Concept Statements
- American Institute of Certified Public Accountants (AICPA) Issue papers,
- International Financial Reporting Standards (IFRS)
- Pronouncements by professional associations or regulatory agencies
Standard setting process
The accounting world is constantly changing, which means the “accounting rules” must change too! Typically, the FASB (Board) identifies a topic or issue via requests from users or other means. Research is conducted and conversations occur amongst the Board at public meetings regarding the issues identified and analyzed by the FASB staff.
Exposure drafts are then issued to obtain public input, and, in some cases, public meetings are conducted. The responses from the public are submitted through “Comment Letters.” The comment letters and public discussions are reviewed at a subsequent public meeting by the Board before an Accounting Standard Update (ASU) is drafted, voted upon by the Board, and issued. The ASUs issued describe what is changing and the logic behind the changes as well as the effective date of the changes.
ASUs are numbered based on the year issued and the update number in a sequential order (e.g., ASU 2021-01 would signify the first ASU issued in the year 2021). The ASU is the FASB’s way to inform the public of the change in guidance. If the change is effective immediately, the Codification is immediately updated upon issuance of the ASU. If the change is not yet effective, the new guidance is incorporated into the Codification and is shown as “pending content” alongside the current guidance until the new guidance is completely effective.
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Disclaimer
This post is for informational purposes only and should not be relied upon as official accounting guidance. While we’ve ensured accuracy as of the publishing date, standards evolve. Please consult a professional for specific advice.
