Skip to main content
← Back to A Definitions

Accounting standards updates

What Is Accounting standards updates?

Accounting Standards Updates (ASUs) are pronouncements issued by the Financial Accounting Standards Board (FASB) that communicate changes to the FASB Accounting Standards Codification, which represents the authoritative source of U.S. Generally Accepted Accounting Principles (GAAP). These updates represent a crucial component of financial reporting, ensuring that the principles governing how economic transactions are recorded and presented in financial statements remain relevant, transparent, and reflective of evolving business practices and economic realities. ASUs integrate directly into the Codification, providing specific amendments and guidance on how companies should apply new or revised accounting treatments. Public companies and private entities alike must adhere to these updates to ensure their balance sheet, income statement, and cash flow statement provide a true and fair view of their financial position and performance.

History and Origin

The evolution of accounting standards in the United States has been a dynamic process, driven by the need for consistency and reliability in financial information. Before the formal establishment of a dedicated standard-setting body, accounting practices were less uniform, often influenced by individual professional judgment. Early efforts toward standardization included the Federal Reserve Board's endeavors in 1917 to promote uniform corporate accounting and auditing.16,15 However, the stock market crash of 1929 and the subsequent Great Depression highlighted a critical need for more robust and authoritative accounting rules.

In response, the U.S. Congress passed the Securities Act of 1933 and the Securities Exchange Act of 1934, establishing the Securities and Exchange Commission (SEC) with the authority to prescribe accounting standards for publicly traded companies.14 The SEC, however, delegated this authority to the private sector, initially to the Committee on Accounting Procedure (CAP) in 1939, then to the Accounting Principles Board (APB) in 1959, and finally to the Financial Accounting Standards Board (FASB) in 1973.13,12,11 The FASB, as an independent, private-sector organization, is now the primary body responsible for issuing accounting standards updates. Each ASU issued by the FASB communicates specific changes to the authoritative GAAP found in the FASB Accounting Standards Codification.10,9

Key Takeaways

  • Accounting Standards Updates (ASUs) are pronouncements issued by the FASB that modify the authoritative U.S. GAAP.
  • ASUs ensure that accounting practices remain current, transparent, and relevant to evolving business environments.
  • Compliance with ASUs is mandatory for entities preparing financial statements under U.S. GAAP, particularly for public companies.
  • These updates cover a wide range of topics, from revenue recognition to credit losses and fair value measurements.
  • ASUs contribute to the comparability and reliability of financial reports, aiding investors and other stakeholders in decision-making.

Interpreting the Accounting standards updates

Interpreting Accounting Standards Updates involves understanding their impact on a company's financial reporting and underlying business processes. Each ASU details how U.S. GAAP has been changed, the rationale behind the change, and its effective date and transition method.8 For companies, this means carefully analyzing the specific amendments and how they apply to their unique transactions and operations. For example, a new ASU might change how specific liabilities are measured or how revenue from complex contracts is recognized.

Financial professionals must assess the implications of these changes on their disclosure requirements and ensure their accounting systems and internal controls are updated to comply. Investors and analysts, in turn, must interpret how these updates affect a company's reported financial figures, potentially leading to shifts in key financial ratios or a reclassification of certain items on the financial statements. The objective of ASUs is to enhance the transparency and decision-usefulness of financial information, but their interpretation often requires a deep understanding of both accounting principles and the specific operations of the entity.

Hypothetical Example

Consider a hypothetical Accounting Standards Update, ASU 202X-0Y, which mandates a new approach to accounting for research and development (R&D) costs for specific industries. Previously, all R&D costs were expensed as incurred. Under ASU 202X-0Y, for certain types of development activities that meet strict criteria for technological feasibility and market readiness, a portion of these costs must now be capitalized and amortized over the estimated useful life of the resulting asset.

A software company, "InnovateTech Inc.," has traditionally expensed all its R&D. In the fiscal year ending December 31, 2025, InnovateTech incurs $10 million in R&D costs. Based on ASU 202X-0Y, $3 million of these costs qualify for capitalization, with an estimated useful life of three years.

Under the new ASU:

  • Instead of expensing the full $10 million, InnovateTech would expense $7 million ($10 million - $3 million).
  • The remaining $3 million would be capitalized as an intangible asset on the balance sheet.
  • In 2026, 2027, and 2028, InnovateTech would record amortization expense of $1 million annually ($3 million / 3 years).

This change would initially result in higher reported net income in 2025 (due to lower R&D expense) and a new intangible asset on the balance sheet. Over the next three years, the amortization expense would impact the income statement. This example illustrates how an Accounting Standards Update can directly alter a company's reported financial figures and the timing of expense recognition, affecting key metrics like profitability and asset valuation.

Practical Applications

Accounting Standards Updates have broad practical applications across various facets of the financial world. For companies, ASUs dictate how specific transactions are recorded, impacting everything from daily ledger entries to the preparation of annual financial statements and quarterly reports filed with the SEC. For instance, the FASB's issuance of ASC 606, "Revenue from Contracts with Customers," significantly changed how companies recognize revenue, replacing industry-specific guidelines with a uniform five-step model.7,6 This update required extensive changes to many companies' accounting systems and internal processes to ensure accurate revenue recognition.

Beyond corporate accounting departments, financial analysts and investors rely on ASUs to understand the basis of reported financial information. When a new ASU is implemented, it can affect year-over-year comparability of financial data, making it essential for users to understand the impact of the changes. Auditors also play a critical role, ensuring that companies properly adopt and comply with the latest Accounting Standards Updates, thus maintaining the credibility of financial reports. Furthermore, regulators, such as the SEC, monitor the implementation of ASUs to ensure market transparency and investor protection.5 The evolution of U.S. accounting standards and their setting process since the 1930s has aimed to enhance the reliability of financial reporting.4

Limitations and Criticisms

While Accounting Standards Updates are essential for maintaining the relevance and quality of financial reporting, they are not without limitations and criticisms. One common critique revolves around the complexity and significant implementation costs associated with major ASUs. Companies often need to invest substantial resources in updating their accounting software, processes, and training personnel to comply with new standards. For example, the adoption of ASC 606 on revenue recognition required material adjustments for approximately 30% of firms and led to reduced earnings predictability in the initial stages.3 This can be particularly burdensome for smaller entities or those with limited accounting resources.

Another criticism can arise from the principles-based nature of some ASUs, which, while offering flexibility, may also lead to varied interpretations and applications across companies. This can sometimes undermine the comparability that standards aim to achieve. Stakeholders may also express concerns about the timeliness of ASUs, arguing that standards sometimes lag behind rapidly evolving business models or financial instruments. The FASB actively seeks feedback from stakeholders to address these concerns and improve the standard-setting process.2 Despite these challenges, the continuous issuance of Accounting Standards Updates is vital for keeping financial reporting aligned with dynamic economic realities and preventing outdated practices.

Accounting standards updates vs. Generally Accepted Accounting Principles (GAAP)

The terms "Accounting Standards Updates" (ASUs) and "Generally Accepted Accounting Principles (GAAP)" are closely related but refer to distinct concepts in financial accounting. GAAP represents the comprehensive set of accounting principles, standards, and procedures that companies use to compile their financial statements in the United States. It is a broad framework designed to ensure consistency, comparability, and reliability in financial reporting. The FASB Accounting Standards Codification is the single official source of authoritative, nongovernmental U.S. GAAP.1

Accounting Standards Updates, on the other hand, are the specific mechanisms through which GAAP is modified or expanded. An ASU is a document issued by the FASB that communicates changes to the FASB Accounting Standards Codification. Think of GAAP as the entire rulebook, and ASUs as specific pages or sections added, removed, or revised within that rulebook. ASUs are not authoritative standards themselves; rather, they serve to update the existing Codification, making changes to how various transactions, such as business combinations, are to be accounted for. Without ASUs, GAAP would become static and quickly outdated, unable to address new financial instruments, business practices, or economic conditions.

FAQs

Who issues Accounting Standards Updates?

Accounting Standards Updates are issued by the Financial Accounting Standards Board (FASB). The FASB is an independent, private-sector organization responsible for establishing and improving U.S. Generally Accepted Accounting Principles (GAAP).

Why are Accounting Standards Updates necessary?

ASUs are necessary to keep U.S. GAAP relevant and responsive to changes in the economic environment, business practices, and financial instruments. They ensure that financial reporting provides accurate and useful information to investors and other stakeholders, promoting transparency and comparability.

How do Accounting Standards Updates affect financial statements?

Accounting Standards Updates can significantly impact how companies recognize, measure, and present various items on their financial statements, including assets, liabilities, revenues, and expenses. They may change the timing of when certain transactions are recorded or require new disclosure requirements in the footnotes to the financial statements.

Are Accounting Standards Updates mandatory?

Yes, compliance with Accounting Standards Updates is mandatory for all entities that prepare financial statements in accordance with U.S. Generally Accepted Accounting Principles (GAAP). Publicly traded companies are particularly scrutinized by the SEC for their adherence to these standards.

How often are Accounting Standards Updates issued?

The FASB issues Accounting Standards Updates periodically as needed, typically in response to emerging accounting issues, feedback from stakeholders, or as part of ongoing projects to improve existing standards. There isn't a fixed schedule; they are released when the FASB completes its due process for a particular change.