What Is Authoritative Accounting Guidance?

Authoritative accounting guidance provides a consistent framework for preparing financial statements. This ensures that information reported by different companies is comparable, allowing investors, creditors, and other stakeholders to make informed economic decisions. The guidance dictates how economic events should be recognized, measured, and presented.

It specifies what qualifies as an asset or a liability, how items should be valued, and the detail required in disclosures. This uniformity allows users to analyze a company’s financial health over time or compare its performance against a competitor. This standardized approach separates professional financial reporting from misleading presentations of data.

Sources of Authoritative Guidance

In the United States, the primary source of authoritative accounting guidance for non-governmental entities is the Financial Accounting Standards Board (FASB). The FASB is an independent, private-sector organization responsible for setting the accounting and financial reporting standards known as Generally Accepted Accounting Principles (GAAP). Its mission is to improve financial reporting to provide decision-useful information to investors and other users.

For entities outside of the United States, the key standard-setting body is the International Accounting Standards Board (IASB). The IASB develops and promotes International Financial Reporting Standards (IFRS), which are used in over 140 jurisdictions. The FASB and IASB often collaborate to seek convergence between U.S. GAAP and IFRS, acknowledging the global nature of modern capital markets.

A distinct set of standards applies to state and local governments within the United States, established by the Governmental Accounting Standards Board (GASB). Created in 1984, the GASB’s mission is focused on the public sector. Its standards are designed to meet the information needs of taxpayers, public officials, and municipal bond investors. Both the FASB and the GASB are overseen by the Financial Accounting Foundation (FAF).

While these independent boards create the standards, the U.S. Securities and Exchange Commission (SEC) holds the ultimate legal authority to establish accounting principles for public companies under the Securities Exchange Act of 1934. The SEC has largely delegated this task to the private sector, officially recognizing the FASB as the designated standard-setter for public companies. The SEC focuses on enforcement and also issues its own interpretive guidance to clarify how it believes existing GAAP should be applied.

Key Accounting Frameworks

The work of these standard-setting bodies results in comprehensive accounting frameworks. In the United States, the predominant framework is Generally Accepted Accounting Principles (GAAP). It is the required framework for public companies in the U.S. and is widely used by private companies and not-for-profit organizations.

GAAP is often described as being both principles-based and rules-based. It is built on a conceptual foundation but also contains a significant amount of detailed, specific guidance for a wide array of transactions. This detailed nature is intended to increase consistency and comparability.

The primary framework used outside of the United States is International Financial Reporting Standards (IFRS). Developed by the IASB, IFRS is intended to provide a global framework for how public companies prepare and disclose their financial statements. The SEC permits foreign companies trading on U.S. exchanges to use IFRS without a reconciliation to U.S. GAAP.

While both frameworks share the objective of providing high-quality financial information, there are notable differences. IFRS is considered more principles-based than GAAP, offering broader guidelines and requiring more professional judgment. For example, U.S. GAAP permits the use of the Last-In, First-Out (LIFO) method for valuing inventory, which is prohibited under IFRS. Another difference involves development costs, as IFRS allows for capitalization at an earlier stage than GAAP.

Structure of US GAAP

The sole authoritative source of U.S. GAAP for nongovernmental entities is the FASB Accounting Standards Codification (ASC). Launched in 2009, the Codification organized thousands of previous pronouncements into a single, cohesive online structure, streamlining research.

The ASC is organized in a logical hierarchy to help users find relevant guidance:

• Areas: The broadest categories, such as Assets, Liabilities, and Equity.
• Topics: Specific accounting subjects within an Area, identified by a three-digit number (e.g., Topic 330, Inventory).
• Subtopics: More detailed guidance on specific aspects of a Topic.
• Sections: A uniform structure within every Subtopic (e.g., Scope, Recognition, Measurement, Disclosure).
• Paragraphs: The most granular level, containing the specific authoritative guidance with unique numbering for citation.

The Guidance Development Process

New accounting guidance evolves through a formal procedure known as due process. The FASB follows this process to ensure a wide range of stakeholder perspectives are considered before a new standard is issued. The process begins when an accounting issue is added to the FASB’s technical agenda, often based on suggestions from investors, companies, or in response to emerging business practices.

FASB staff then conducts research, and the Board holds public deliberations. This work culminates in an Exposure Draft, a public document detailing the proposed new standard and asking for feedback. During the subsequent public comment period, stakeholders submit letters with their views, and the FASB may hold public roundtables to discuss the practical implications.

After the comment period, the FASB enters a redeliberation phase, analyzing the feedback in public meetings and often making significant revisions to the proposal. The process concludes with the issuance of an Accounting Standards Update (ASU). The ASU is the document that communicates the changes—additions and amendments—to the FASB Accounting Standards Codification.

An ASU contains the text of the amendments, the rationale behind them, and the effective date. Once these changes are incorporated, the Codification remains the single, authoritative source of U.S. GAAP.

Accessing and Applying Guidance

The FASB provides free public access to the entire Accounting Standards Codification through its online platform. The website includes advanced search capabilities, cross-referencing tools, and access to historical guidance, making the authoritative rules accessible to all users.

Applying the guidance begins with a thorough understanding of the economic substance of a transaction. The next step is to identify the specific accounting questions that need to be answered, which guides the research process within the Codification’s structure. This involves navigating from a broad Area down to the specific Topics and Sections that address the issue.

Interpreting the technical language of the Codification requires professional judgment. A researcher must analyze the specific facts and circumstances of a transaction in light of the rules. It is standard practice to document the research and conclusion in a technical accounting memorandum, which outlines the facts, the guidance considered, the analysis, and the final accounting treatment.