Accounting Pronouncements: What They Are & Why They Matter

Accounting pronouncements are the official directives that govern how businesses record and report their financial activities. These standards create a uniform language for financial reporting, ensuring that the information presented is consistent and can be compared across different companies. For investors, lenders, and other stakeholders who rely on financial statements to make informed decisions, this uniformity is important. It allows for a clearer understanding of a company’s performance and financial health, fostering trust and stability in the financial markets.

Defining Accounting Pronouncements

Accounting pronouncements are the formal documents that establish and amend the rules for financial accounting. They are the mechanism through which Generally Accepted Accounting Principles (GAAP) in the United States evolve to address new business practices and economic events. The primary purpose of these pronouncements is to ensure that the financial statements of an organization are relevant, reliable, and comparable. This standardization allows for meaningful comparisons between different companies and across various industries.

The most common form of a pronouncement today is the Accounting Standards Update (ASU) issued by the Financial Accounting Standards Board (FASB). ASUs are not new standards in themselves; rather, they serve to communicate changes to the FASB Accounting Standards Codification®, which is the single, authoritative source of U.S. GAAP. Each ASU details the specific amendments, explains the board’s reasoning for the changes, and provides the effective date for implementation.

Before the Codification was established in 2009, pronouncements took other forms, such as Statements of Financial Accounting Standards (SFAS) and FASB Interpretations. These historical documents addressed specific accounting issues as they arose. With the creation of the Codification, the guidance from these older pronouncements was integrated into a single, topically organized structure, simplifying research and application of accounting standards.

The Standard-Setting Bodies

The authority to issue accounting pronouncements in the United States is vested in specific independent organizations. These bodies are responsible for developing the principles that form the foundation of financial reporting for different types of entities.

Financial Accounting Standards Board (FASB)

The Financial Accounting Standards Board (FASB) is the primary standard-setting body for business entities and not-for-profit organizations in the U.S. Established in 1973, the FASB is an independent, private-sector organization designated by the Securities and Exchange Commission (SEC) to establish financial accounting and reporting standards for public companies. Its mission is to create and improve standards that provide decision-useful information to investors. The FASB operates under the oversight of the Financial Accounting Foundation (FAF), which ensures its independence from corporate and political influence.

Governmental Accounting Standards Board (GASB)

The Governmental Accounting Standards Board (GASB) is responsible for establishing accounting and financial reporting standards for U.S. state and local governments. Formed in 1984, the GASB operates similarly to the FASB and is also overseen by the Financial Accounting Foundation. Its mission is to set standards that result in useful information for taxpayers, public officials, and investors. The GASB’s pronouncements are the authoritative source of GAAP for all state and local governmental entities, addressing unique aspects like fund accounting.

International Accounting Standards Board (IASB)

The International Accounting Standards Board (IASB) is an independent body that develops and approves International Financial Reporting Standards (IFRS). Formed in 2001, the IASB’s role is to create a single set of global accounting standards used in over 140 countries. While the United States uses GAAP, the IASB works with national standard-setters, including the FASB, to achieve convergence between IFRS and local standards. For U.S. companies operating globally or for investors comparing U.S. and foreign companies, an understanding of the IASB and IFRS is important.

The Lifecycle of a New Standard

The Financial Accounting Standards Board (FASB) follows a structured, public process to develop and issue new guidance, which involves extensive research and stakeholder input.

• Topic Identification: The process begins with identifying a financial reporting issue. Topics are added to the FASB’s technical agenda based on feedback from stakeholders or through the observation of emerging business practices that current standards do not adequately cover.
• Research and Deliberation: Once an issue is on the agenda, FASB staff conducts research to understand the problem. This phase involves analyzing economic implications and reviewing existing literature, followed by public Board discussions to formulate a potential path forward.
• Public Comment via Exposure Draft: The FASB solicits public input through an Exposure Draft, a proposed standard released for a comment period. This document outlines the proposed changes to GAAP and the Board’s rationale, allowing for diverse perspectives on the proposal’s feasibility and clarity.
• Redeliberation: After the comment period closes, the Board analyzes the feedback from comment letters and public meetings. It then engages in redeliberation, carefully considering the input and deciding whether to modify the proposed standard to address stakeholder concerns.
• Issuance of a Final Standard: The final step is the issuance of an Accounting Standards Update (ASU). An ASU officially amends the FASB Accounting Standards Codification and contains the final guidance, the basis for the Board’s conclusions, and the effective date for adoption.

Implementing Pronouncements in a Business

Once a new accounting pronouncement is issued, businesses must undertake a structured process to adopt it, which requires careful planning and execution to ensure compliance.

• Understand the New Standard: The first step is to thoroughly read the Accounting Standards Update (ASU) to grasp the new requirements and the intent behind them. Personnel must identify the core changes to accounting policies, recognition, measurement, and disclosure.
• Conduct an Impact Assessment: The company must determine how the new rule will affect its financial statements, internal controls, IT systems, and business processes. This assessment identifies what must be modified to capture the data required by the new standard.
• Develop an Implementation Plan: A formal project plan is developed that outlines specific tasks, assigns responsibilities, sets timelines, and allocates resources. This stage includes deciding on a transition method if the pronouncement offers options, such as the prospective or retrospective method.
• Execute the Plan: This phase involves putting the plan into action. This can include configuring accounting software, training employees on new procedures, and modifying internal controls over financial reporting and data collection processes.
• Prepare Financial Disclosures: The final step is preparing the required financial statement disclosures. New pronouncements come with specific disclosure requirements that explain the adoption of the standard and its effect on the financial statements to provide transparency to investors.

Accessing and Monitoring Pronouncements

The authoritative sources for U.S. GAAP are available online to the public for free. The Financial Accounting Foundation (FAF) provides access to both the FASB Accounting Standards Codification® for non-governmental entities and the Governmental Accounting Research System™ for state and local governments. All users have access to the full features of both systems without charge.

For international standards, the IFRS Foundation is the primary source for International Financial Reporting Standards (IFRS). The IASB, through the IFRS Foundation website, provides information on its standards. Access to the full text of IFRS standards often requires a subscription.

To monitor upcoming changes, stakeholders can subscribe to newsletters and updates directly from the standard-setting bodies’ websites. Major accounting firms also provide resources, including summaries of new pronouncements and analysis of their impact. Reviewing the project pages on the FASB and GASB websites can provide insight into topics currently under deliberation.