ASU Regulations for Financial Accounting

An Accounting Standards Update (ASU) is the document issued by the Financial Accounting Standards Board (FASB) to communicate changes to the Accounting Standards Codification (ASC). The ASC is the primary source of authoritative U.S. Generally Accepted Accounting Principles (GAAP), the rules nongovernmental entities must follow for their financial reporting. An ASU is not a new standard, but serves as the official notification for how the existing ASC is being amended.

The FASB is the independent organization responsible for establishing these standards for public and private companies and not-for-profit organizations. Its mission is to provide information that helps investors and other users of financial reports make informed decisions. These updates ensure that financial reporting practices evolve to reflect changes in the economic environment. By continuously refining the ASC through ASUs, the FASB maintains the relevance of financial statements and promotes consistency across organizations.

The ASU Development and Issuance Process

The development of an ASU begins when the FASB identifies a need to improve an area of financial reporting, often driven by feedback from stakeholders like investors, companies, and auditors. They may raise concerns about existing guidance being complex, inconsistent, or insufficient for new types of transactions. Once the FASB acknowledges an issue, its board members vote on whether to add the topic to its technical agenda, officially commencing a project.

Following the project’s addition to the agenda, FASB staff undertakes research and outreach to understand the accounting issue. This phase involves analyzing existing GAAP, reviewing studies, and holding discussions with advisory groups and industry experts. This deliberation culminates in the drafting of an Exposure Draft, a public document outlining the proposed changes to the ASC.

The release of the Exposure Draft marks the public comment period, a formal invitation for all interested parties to review the proposed standard and provide written feedback. This input provides real-world perspectives on the operability, costs, and benefits of the suggested amendments. After the comment period closes, the FASB enters the redeliberation phase.

Board members and staff analyze all the comment letters and discuss the feedback in public board meetings, which often leads to revisions to the initial proposal. The board may decide to modify the scope, change the effective date, or refine transition requirements based on public input. Once all issues have been debated, the board holds a final vote, and upon a majority approval, the official ASU is issued.

Key Information within an ASU

An Accounting Standards Update is a structured document that provides all the necessary information for understanding and applying a change to U.S. GAAP. The document begins with a summary that explains the main objective of the update and the nature of the amendments. This section gives readers a high-level overview of why the FASB undertook the project and what problem the new guidance is intended to solve.

A component of any ASU is the definition of its scope, which clarifies exactly who is affected by the changes. The scope guidance specifies which entities, transactions, or industries must apply the new standard. For instance, an update might apply to all entities, only to public business entities, or be limited to organizations within a specific sector like financial services.

Every ASU specifies an effective date, which is the date by which companies must adopt the new standard. The FASB often sets different effective dates for different types of entities, requiring public companies to adopt a new standard earlier than private companies. This staggered approach acknowledges the additional time and resources smaller organizations may need for implementation.

The ASU also provides detailed transition guidance, which outlines the specific methods a company can use to adopt the new standard. A “full retrospective” application requires a company to recast all prior period financial statements as if the new rule had always been in effect. A “modified retrospective” approach involves applying the new rule as of the adoption date with a cumulative-effect adjustment to retained earnings, while a “prospective” application means the new rule is applied only to new transactions or events occurring after the effective date.

Finally, the core of the ASU contains the specific amendments to the ASC, showing the exact additions and deletions to the text. Accompanying these changes are the disclosure requirements, which detail the new information companies must include in the footnotes to their financial statements. These disclosures are meant to help investors and other stakeholders understand the financial impact of adopting the new standard.

Implementing a New Accounting Standard

The process of implementing a new ASU begins with an initial assessment to understand its potential impact on the organization. This step involves forming a cross-functional implementation team from departments like accounting, finance, information technology (IT), and legal. This team is tasked with performing a high-level analysis of the ASU to determine the breadth of its effects and identify which business units, systems, and processes are likely to be most affected.

Once the initial assessment is complete, the team moves into a phase of detailed analysis and data gathering. This involves a deep dive into specific contracts, such as sales agreements or leases, to see how they align with the new requirements. This stage is data-intensive and requires the team to gather the necessary information to apply the chosen transition method, which might involve accessing historical data that was not previously captured by existing systems.

With a clear understanding of the specific impacts, the organization proceeds to make necessary system and process adjustments. This may require significant changes to the company’s IT infrastructure and enterprise resource planning (ERP) systems to capture and report data in a new way. Beyond technology, internal controls over financial reporting must be updated and tested, and business processes may also need to be modified to align with the new accounting outcomes.

The final stage of implementation is execution and reporting. This is where the accounting team calculates the financial impact of the transition, which often results in recording a one-time journal entry to adjust account balances upon adoption. The team then prepares the new financial statement disclosures mandated by the ASU, ensuring they clearly communicate the effects of the accounting change to investors and other stakeholders.

Significant Accounting Standards Updates

ASU 2014-09 introduced Topic 606, Revenue from Contracts with Customers. Before this standard, revenue recognition rules were fragmented across numerous industry-specific guidelines, leading to inconsistencies in how different companies reported similar transactions. Topic 606 established a single, comprehensive framework centered on a five-step model:

• Identify the contract with a customer.
• Identify the performance obligations in the contract.
• Determine the transaction price.
• Allocate the transaction price to the performance obligations.
• Recognize revenue when or as the entity satisfies a performance obligation.

Another change came with ASU 2016-02, Leases (Topic 842). For decades, a form of financing known as operating leases was kept off the balance sheet, making it difficult for investors to see a company’s true financial obligations. Topic 842 changed this by requiring companies to recognize nearly all lease agreements on their balance sheets. Under the new rule, lessees must record a right-of-use asset, representing their right to use the leased item, and a corresponding lease liability, representing their obligation to make lease payments.

More recently, ASU 2016-13, Financial Instruments—Credit Losses (Topic 326), overhauled the way financial institutions and other entities account for credit losses. The previous “incurred loss” model delayed the recognition of a credit loss until it was considered probable. Topic 326 replaced this with the “Current Expected Credit Losses” (CECL) model. The CECL model is a forward-looking approach that requires entities to estimate and recognize expected losses over the entire contractual life of a financial asset from the moment of its origination.