What Is the Process for an Accounting Standard Update?

An Accounting Standard Update (ASU) is a document that communicates changes to U.S. Generally Accepted Accounting Principles (GAAP), the primary source of authoritative accounting rules in the United States. The Financial Accounting Standards Board (FASB) is the independent organization responsible for establishing these standards for public companies, private companies, and not-for-profit organizations. An ASU is not a new accounting standard itself; instead, it serves as the official release explaining amendments to the existing standards, which are organized in the FASB’s Accounting Standards Codification (ASC).

The purpose of issuing an ASU is to continuously improve financial reporting. These updates aim to make the information in financial statements more accurate, transparent, and useful for investors, lenders, and other stakeholders. Changes can range from narrow clarifications on specific transactions to broad overhauls of how entire categories of assets or liabilities are treated. Each update provides background on why the change was necessary, details the specific amendments to the ASC, and outlines when the changes become effective.

The ASU Creation and Issuance Process

The process begins when the FASB identifies a financial reporting issue, a step known as agenda setting. This is often initiated by feedback from stakeholders like investors, auditors, and companies who observe inconsistencies or areas needing more transparency. Once an issue is on the board’s technical agenda, the FASB staff researches the problem and explores potential solutions.

After the initial research, the board deliberates on various approaches to address the issue. This leads to the drafting of an Exposure Draft, a public document outlining the proposed changes. The Exposure Draft explains the reasoning for the amendment, presents the suggested new wording for the ASC, and asks for public feedback.

The Exposure Draft then enters a public comment period, lasting 30 to 90 days or more. During this time, the FASB encourages interested parties to submit comment letters with their views on the proposed update. This feedback provides the board with practical insights into the potential challenges, costs, and benefits of the proposed changes.

After the comment period, FASB staff analyzes the feedback and summarizes it for the board. The board then redeliberates, weighing the public’s input to decide whether to proceed with the proposal, modify it, or abandon the project. If the board proceeds, it votes on a final version, and upon a majority vote, the ASU is officially issued and incorporated into the ASC.

Identifying Applicable Updates

To manage accounting changes, a company must first determine which new updates apply to its circumstances. Companies can monitor communications from the FASB, which lists all issued ASUs on its website. Major accounting firms also publish summaries and analyses of new standards, offering resources for finance teams to understand an update’s potential impact.

Each ASU specifies an effective date by which companies must adopt the new guidance. The FASB often provides different effective dates for different types of entities, requiring public companies to adopt a new standard before private companies. This staggered approach acknowledges that public companies often have greater resources and provides smaller entities with additional time to learn from the implementation experiences of their public counterparts.

A company must also review an ASU’s scope and relevance. The summary section provides a high-level overview, allowing a quick assessment of its potential impact. For a definitive determination, the accounting team must examine the scope paragraphs, which state which transactions, events, and entities are subject to the new guidance.

This initial filtering allows accounting departments to focus only on updates that affect their financial reporting. If an ASU’s scope excludes the company’s transactions, no further action is needed. If the update is applicable, the company moves on to detailed preparation and implementation.

Preparing for Implementation

Once an ASU is deemed applicable, the company begins preparing long before the effective date. The first step is a comprehensive impact assessment to identify every account, financial statement line item, and disclosure affected by the new rules. This assessment also covers operational impacts, such as changes to internal controls, business processes, and IT systems.

A part of preparation involves selecting the appropriate transition method specified in the ASU. Common methods include retrospective, modified retrospective, or prospective application. A full retrospective application requires a company to adjust its financial statements for all prior periods presented, while a modified retrospective approach applies the new standard to the most recent period with a cumulative adjustment to retained earnings. A prospective application means the new rule is applied only to transactions occurring after the adoption date. The company must analyze the options and choose the one that is most feasible.

With a transition method selected, the focus shifts to gathering the information required to apply the new standard. This can be a time-consuming aspect of implementation. For example, when companies prepared for the new lease accounting standard (ASC 842), they had to undertake a data collection effort to identify all lease agreements and extract data points like lease terms, payment schedules, and discount rates. This step often requires collaboration across multiple departments, including legal, procurement, and operations.

Preparation also includes planning for the new financial statement disclosures mandated by the ASU. These updates often introduce new footnote requirements to give investors more insight into the changes. The company should create mock-ups of these disclosures and develop a plan to gather, validate, and draft the required information.

Executing the Implementation

After preparation, the company moves to the execution phase, where planned changes are put into action. A primary action is the update of systems and processes. This involves reconfiguring accounting software or enterprise resource planning (ERP) systems to accommodate new accounts, calculations, and reporting requirements. For companies that rely on spreadsheets, templates must be redesigned and formulas updated to align with the new guidance.

A central part of execution is calculating and recording the financial impact of the transition. Based on the chosen transition method, the accounting team calculates the cumulative adjustment needed to bring the financial statements into compliance. This calculation is then formalized through journal entries recorded in the general ledger. For instance, under a modified retrospective approach, a company would record an entry at the beginning of the adoption year to adjust the opening balances of affected assets, liabilities, and retained earnings.

Once financial adjustments are recorded, the team finalizes the required disclosures. Using information gathered during preparation, they write the new footnote disclosures, explaining the accounting change, transition method, and quantitative impact. These drafts are reviewed internally and by external auditors for accuracy and compliance.

The final action is establishing a process for post-implementation monitoring. The company must ensure new accounting policies are applied correctly in all subsequent periods. This often involves staff training and updating internal control documentation to formalize the new processes.

Notable Recent Accounting Standard Updates

To understand how Accounting Standard Updates impact businesses, it is helpful to look at significant examples from recent years. These updates affected many companies across various industries and required substantial effort to adopt. They illustrate the broad changes that ASUs can introduce to financial reporting.

One impactful update was ASU 2016-02, Leases (Topic 842). Before this standard, most operating leases were kept off the balance sheet, with payments recorded as an expense. ASC 842 changed this by requiring companies to recognize nearly all leases on the balance sheet by recording a right-of-use asset and a corresponding lease liability. This change increased the assets and liabilities reported by companies in sectors like retail, transportation, and telecommunications.

Another update was ASU 2016-13, Financial Instruments—Credit Losses (Topic 326), which introduced the current expected credit loss (CECL) model. This standard changed how entities account for potential credit losses on items like loans and trade receivables. The previous “incurred loss” model only allowed for the recognition of losses that had already occurred. CECL requires entities to forecast and recognize the full amount of expected credit losses over the life of the asset from the moment of origination, leading to earlier recognition of losses.