What Is an ASU in Accounting & What Is Its Purpose?

An Accounting Standards Update (ASU) modifies existing accounting guidance. These updates are a crucial component of financial reporting, ensuring financial information remains consistent, transparent, and relevant for users. By refining accounting rules, ASUs help maintain the integrity and comparability of financial statements across different entities and over time. They align accounting practices with evolving business environments and stakeholder needs.

Defining Accounting Standards Updates (ASUs)

An Accounting Standards Update, or ASU, is a publication issued by the Financial Accounting Standards Board (FASB) to communicate changes to the FASB Accounting Standards Codification (ASC). The FASB is the recognized body responsible for establishing financial accounting and reporting standards for public and private companies in the United States. ASUs serve as the mechanism through which new accounting principles are integrated into the authoritative literature.

The FASB Accounting Standards Codification is the sole source of authoritative Generally Accepted Accounting Principles (GAAP) for non-governmental entities. The ASC consolidated this literature into a single, comprehensive, and easily accessible database, organized by topic, subtopic, section, and paragraph.

While ASUs communicate changes, they are not authoritative standards. They describe how the FASB has amended the Codification and explain the rationale. This process ensures the ASC remains current and reflects the latest GAAP, providing a clear reference for accounting professionals.

The Purpose and Scope of ASUs

ASUs enhance the quality of financial reporting. One purpose is to improve existing financial accounting guidance, making it clearer and more robust. This can involve simplifying complex rules or providing additional specificity where previous guidance was ambiguous.

Another aim of ASUs is to address emerging accounting issues from new business practices, technologies, or economic conditions. For instance, as new financial instruments or contractual arrangements develop, ASUs provide guidance for their proper accounting treatment.

The scope of ASUs is broad, covering a wide array of accounting topics. Updates can affect areas such as revenue recognition, lease accounting, financial instruments, and income taxes. For example, an ASU might clarify how a company should recognize revenue from complex contracts, or how lease obligations should be presented on the balance sheet.

How ASUs Influence Financial Statements

ASUs directly influence how companies prepare and present financial statements. These updates often change the recognition of financial items, dictating when an economic event is recorded. For instance, a new ASU might require a company to recognize revenues earlier or later, impacting reported income.

ASUs frequently modify the measurement of items, referring to how an asset, liability, or equity component is valued. This could involve changing the valuation method for investments or altering how a company assesses and records potential credit losses on receivables. Such adjustments ensure financial statement amounts reflect a more accurate economic reality.

The presentation of financial information is also subject to change through ASUs, affecting how items are displayed on statements like the balance sheet or income statement. An update might require a company to reclassify expenses, or to present specific financial metrics in a new or more detailed manner. This improves clarity and comparability of financial reports for users.

Finally, ASUs impact disclosure requirements, mandating additional information companies must provide in footnotes. These disclosures offer context and detail beyond the face of the financial statements. For example, a recent ASU on income taxes enhances disclosure requirements for public companies, requiring more detailed breakdowns of effective tax rates and income taxes paid.