Skip to main content
diversification.com
← Back to A Definitions

Accounting standards update asu

What Is Accounting Standards Update (ASU)?

An Accounting Standards Update (ASU) is a document issued by the Financial Accounting Standards Board (FASB) that communicates changes to the FASB Accounting Standards Codification (ASC). The ASC is the single official source of authoritative, nongovernmental U.S. generally accepted accounting principles (GAAP), which govern financial reporting in the United States.37 ASUs are not authoritative standards themselves but serve to update the Codification, including changes to non-authoritative U.S. Securities and Exchange Commission (SEC) content within it.36

These updates fall under the broader financial category of Accounting Standards. An ASU explains how GAAP has been changed, the rationale behind the change, its effective date, and the required transition method.35 Each ASU aims to improve financial reporting by addressing emerging issues, clarifying existing guidance, or converging U.S. GAAP with International Financial Reporting Standards (IFRS).34

History and Origin

The framework for U.S. GAAP has evolved significantly, with the SEC playing a crucial oversight role. While the SEC has the authority to set accounting standards for public companies, it has historically deferred to the private sector for leadership in establishing and improving accounting methods.33 This responsibility was initially held by the American Institute of Certified Public Accountants' (AICPA) Accounting Principles Board (APB) before the FASB was established in 1973.32

The FASB, a private standard-setting body, was designated by the SEC to establish and improve GAAP in the public interest. From its inception, the FASB began issuing various pronouncements. In 2009, the FASB introduced the Accounting Standards Codification (ASC) to reorganize the thousands of existing GAAP pronouncements into a single, comprehensive source. Following this, the FASB began issuing Accounting Standards Updates (ASUs) to communicate changes and additions to the Codification, ensuring that GAAP remains current and relevant.31 This move streamlined how accounting professionals access and apply U.S. GAAP, making it more user-friendly.

Key Takeaways

  • An Accounting Standards Update (ASU) is a document issued by the FASB that communicates changes to the Accounting Standards Codification (ASC).
  • ASUs explain how U.S. GAAP has been amended, the reasoning for the change, and its effective date.
  • They are essential for keeping financial reporting practices aligned with evolving economic realities and market needs.
  • ASUs contribute to the transparency and consistency of financial statements, which is critical for investors and other stakeholders.
  • The FASB periodically issues ASUs as part of an ongoing process to refine and improve U.S. GAAP.30

Interpreting the ASU

Interpreting an Accounting Standards Update (ASU) requires understanding the specific amendments it makes to the FASB Accounting Standards Codification and the implications for financial reporting. Each ASU provides detailed information on the nature of the change, the reasons for it, and the effective date, including any transition provisions.29

For example, ASU 2014-09, which introduced ASC 606 on Revenue Recognition, significantly changed how companies account for income from contracts with customers.27, 28 This update replaced numerous industry-specific guidelines with a principles-based approach, requiring companies to analyze contracts more thoroughly to determine when performance obligations are satisfied and revenue can be recognized.25, 26 Similarly, ASU 2016-02, which resulted in ASC 842 on Leases, brought most operating leases onto the balance sheet, impacting financial ratios and potentially financial covenants.23, 24 Companies must carefully review the ASU's details to understand its impact on their Financial Statements, including the Balance Sheet and Income Statement.21, 22

Hypothetical Example

Consider a hypothetical ASU, "ASU 20XX-XX: Improvements to Expense Disclosures for Software Development Costs."

Before this ASU, a software company might have had broad categories for all its development expenses. The new ASU requires more granular disclosure, mandating that companies separate and specifically report costs related to developing new features for existing products versus entirely new product lines.

A company, "InnovateTech Inc.," previously reported its entire "Research and Development" expense as a single line item of $50 million. Following the issuance of ASU 20XX-XX, InnovateTech Inc. must now disclose:

  • Software Development Costs - Existing Products: $30 million
  • Software Development Costs - New Product Lines: $20 million

This hypothetical ASU would require InnovateTech Inc. to adjust its Accounting Policies and potentially its internal tracking systems to comply with the new disclosure requirements. This increased transparency allows investors and analysts to better understand how the company allocates its development resources and its strategy for growth.

Practical Applications

Accounting Standards Updates have broad practical applications across various financial sectors and are crucial for maintaining the integrity and comparability of financial information.

  • Corporate Financial Reporting: Publicly traded companies in the U.S. must adhere to U.S. GAAP, and therefore, must implement all applicable ASUs. This directly impacts how they prepare and present their Annual Reports and other regulatory filings with the SEC.20 For example, ASU 2016-02 (ASC 842) fundamentally changed how companies recognize Lease Liabilities, bringing most operating leases onto the balance sheet, which was a significant shift from prior practice.18, 19
  • Investment Analysis: Financial analysts rely on consistent and transparent financial statements to make informed investment decisions. ASUs, by refining accounting standards, enhance the comparability of financial data across companies and over time. For instance, the new guidance on Credit Losses in ASU 2022-02 (ASC 326), issued by the FASB, aims to improve how companies measure and report expected credit losses on financial instruments.15, 16, 17 This provides investors with a clearer picture of a company's financial health and risk exposure.
  • Auditing and Compliance: Independent auditors must ensure that a company's financial statements comply with the latest U.S. GAAP, including all recently issued ASUs. This necessitates that auditing firms and their professionals stay continuously updated on all new pronouncements. The consistent application of ASUs helps maintain the Integrity of Financial Markets.
  • Internal Control Systems: Companies often need to adjust their internal accounting systems and processes to capture the data required by new ASUs. This can involve significant changes to Enterprise Resource Planning (ERP) systems and other financial software.

Limitations and Criticisms

While Accounting Standards Updates (ASUs) are crucial for maintaining relevant and high-quality financial reporting, their implementation can present certain limitations and criticisms.

One primary criticism revolves around the Complexity of Accounting standards. Each ASU introduces new or modifies existing rules, adding layers of detail that can be challenging for preparers and users of financial statements to fully grasp and implement. This complexity can lead to increased Compliance Costs for businesses, particularly smaller entities that may lack the resources of larger corporations to adapt to frequent changes. For example, the adoption of ASC 606 on revenue recognition and ASC 842 on leases involved significant efforts for companies to revise their accounting policies, processes, and systems, leading to substantial costs for software upgrades, training, and professional fees.12, 13, 14

Another point of contention can be the judgment required in applying certain principles-based ASUs. While a principles-based approach aims for broader applicability, it can also lead to variations in interpretation among companies, potentially reducing Comparability of Financial Data despite the FASB's intentions. For instance, ASC 842, while bringing leases onto the balance sheet, still requires significant management judgment regarding lease term and discount rates, which can impact the reported lease liability and right-of-use asset.11

Furthermore, the timing of new ASUs can sometimes create challenges. Businesses need adequate time to implement changes, and rushed timelines or frequent updates can strain resources. The FASB does solicit public comment on proposed ASUs to mitigate these issues and gather feedback from stakeholders.10

Accounting Standards Update (ASU) vs. Generally Accepted Accounting Principles (GAAP)

An Accounting Standards Update (ASU) is a mechanism through which changes are made to Generally Accepted Accounting Principles (GAAP). GAAP refers to the entire set of accounting standards, rules, and procedures that companies in the U.S. must follow when preparing their financial statements. The Financial Accounting Standards Board (FASB) establishes and maintains GAAP, primarily through the FASB Accounting Standards Codification (ASC).9

ASUs are simply the documents that announce and detail specific amendments or additions to the Codification, thereby modifying GAAP.8 Think of GAAP as the comprehensive rulebook for financial reporting, and an ASU as an official addendum or revision page to that rulebook. An ASU is not a standalone accounting standard but rather the formal communication of a change to an existing standard or the introduction of a new one within the Codification. Therefore, while all ASUs ultimately impact GAAP, GAAP itself is the overarching framework. Companies must adhere to GAAP, and to do so, they must understand and implement the changes communicated through each Accounting Standards Update.

FAQs

What is the purpose of an Accounting Standards Update?

The purpose of an Accounting Standards Update (ASU) is to communicate changes, clarifications, or new guidance to the FASB Accounting Standards Codification (ASC), which represents the authoritative source of U.S. Generally Accepted Accounting Principles (GAAP).6, 7 This ensures that financial reporting remains relevant, transparent, and consistent.

Are Accounting Standards Updates mandatory?

Yes, once an Accounting Standards Update is issued and its effective date is reached, it becomes mandatory for entities that must comply with U.S. GAAP, particularly public companies and increasingly, private companies. The ASU modifies the authoritative guidance within the FASB Accounting Standards Codification.5

How often are Accounting Standards Updates issued?

The Financial Accounting Standards Board (FASB) issues Accounting Standards Updates periodically throughout the year as needed to address emerging accounting issues, clarify existing guidance, or converge U.S. GAAP with International Financial Reporting Standards (IFRS). There isn't a fixed schedule, as the issuance depends on the progress of various FASB projects and stakeholder feedback.4

What is the relationship between an ASU and the FASB Accounting Standards Codification?

An Accounting Standards Update (ASU) serves as the primary means by which the FASB amends or adds content to the FASB Accounting Standards Codification. The Codification is the sole source of authoritative U.S. GAAP for nongovernmental entities. Therefore, an ASU is the vehicle for updating the Codification, making the changes part of GAAP.2, 3

Where can I find Accounting Standards Updates?

Official Accounting Standards Updates are published and made available on the Financial Accounting Standards Board (FASB) website.1 The FASB website is the definitive source for these pronouncements, along with the full Accounting Standards Codification.