Sources of Law for Generally Accepted Accounting Principles (GAAP)

The accounting standards and rules under Generally Accepted Accounting Principles (GAAP) are derived from different sources. These sources are classified into Authoritative Sources and Non-Authoritative Sources.

Authoritative sources are legally recognized and must be followed, whereas non-authoritative sources provide guidance and support in the application of accounting principles.

1. Authoritative Sources of GAAP

Authoritative sources are the official and legally accepted sources of accounting standards. Organizations are required to follow these standards while preparing financial statements.

(a) Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC)

The Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) is the primary authoritative source of GAAP for non-governmental entities.

It contains the official accounting principles, standards, and guidance that organizations must follow while preparing financial statements.

(b) Securities and Exchange Commission (SEC)

For organizations registered with the Securities and Exchange Commission (SEC), the following are authoritative sources of GAAP:

  • Rules issued under federal securities laws.
  • Interpretive releases issued by the SEC.

These rules provide accounting and financial reporting requirements for companies registered with the SEC.

(c) SEC Staff Accounting Bulletins (SABs)

The SEC Staff Accounting Bulletins (SABs) represent the accounting practices followed by the SEC staff while administering disclosure requirements.

These bulletins provide guidance on the application of accounting principles and help organizations understand the SEC’s expectations regarding financial reporting.

(d) SEC Staff Announcements and Observer Comments

The SEC also communicates its views on important accounting issues through:

  • SEC Staff Announcements.
  • Observer comments made during Emerging Issues Task Force (EITF) meetings.

These announcements help SEC registrants understand the SEC’s position on specific accounting matters.

Other Organizations Involved in Accounting Standards

Apart from FASB and SEC, the following organizations also contribute to the development of accounting standards in the United States:

Governmental Accounting Standards Board (GASB)

The Governmental Accounting Standards Board (GASB) develops accounting standards for governmental entities.

Federal Accounting Standards Advisory Board (FASAB)

The Federal Accounting Standards Advisory Board (FASAB) develops accounting standards for federal government agencies.

2. Non-Authoritative Sources of GAAP

Non-authoritative sources are not legally binding. However, they provide valuable guidance, explanations, and best practices for applying accounting standards.

The major non-authoritative sources include:

Industry Practices

Accepted accounting practices followed within a particular industry.

FASB Concepts Statements

The FASB Concepts Statements explain the basic accounting concepts and objectives that support the development of accounting standards.

AICPA Issues Papers and Technical Practice Aids

The American Institute of Certified Public Accountants (AICPA) publishes Issues Papers and Technical Practice Aids that help accountants apply accounting standards in practice.

International Financial Reporting Standards (IFRS)

The International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB) serve as an important source of accounting guidance.

Professional and Academic Literature

Accounting knowledge is also supported by:

  • Accounting textbooks.
  • Accounting handbooks.
  • Professional journals.
  • Academic articles.

These publications help explain accounting principles and their practical application.

Influential Accounting Organizations

Several professional organizations contribute to the development and improvement of accounting practices. These include:

  • Government Finance Officers Association (GFOA)
  • American Accounting Association (AAA)
  • Institute of Management Accountants (IMA)
  • Financial Executives Institute (FEI)

These organizations promote research, education, and professional development in the field of accounting.

Accounting Standards Updates (ASU)

The Financial Accounting Standards Board (FASB) issues Accounting Standards Updates (ASUs) whenever changes are made to the Accounting Standards Codification (ASC).

An ASU explains:

  • The specific amendments made to accounting standards.
  • The reasons for introducing the changes.
  • Background information related to the amendments.
  • The effective date or timing of implementation.

ASUs help organizations understand and implement the latest changes in accounting standards.

Other Publications Issued by FASB

In addition to Accounting Standards Updates, FASB also publishes the following guidance:

Technical Bulletins and Staff Positions

These publications provide practical guidance on applying accounting standards, interpretations, and opinions.

They generally address:

  • Specific accounting issues.
  • Questions raised by accounting professionals.
  • Matters that do not have a significant long-term impact on accounting standards.

Exposure Documents

The FASB issues Exposure Documents to invite comments and suggestions from stakeholders before introducing changes to the Accounting Standards Codification (ASC).

These documents help the FASB obtain public feedback before finalizing new accounting standards or amendments.

Key Points

  • Sources of GAAP are classified into Authoritative and Non-Authoritative sources.
  • FASB Accounting Standards Codification (ASC) is the primary authoritative source of GAAP for non-governmental entities.
  • SEC Rules and Interpretive Releases are authoritative for SEC-registered companies.
  • GASB develops accounting standards for government entities.
  • FASAB develops accounting standards for federal government agencies.
  • Non-authoritative sources provide guidance but are not legally binding.
  • Accounting Standards Updates (ASUs) communicate amendments made to the Accounting Standards Codification.
  • Exposure Documents are issued to obtain public comments before introducing new accounting standards.

Exam Points

  • Primary authoritative source of GAAP: FASB Accounting Standards Codification (ASC).
  • Authoritative for SEC registrants: SEC Rules and Interpretive Releases.
  • SEC Staff Accounting Bulletins (SABs): Provide accounting guidance followed by SEC staff.
  • GASB: Sets accounting standards for governmental entities.
  • FASAB: Sets accounting standards for federal government agencies.
  • Non-authoritative sources: Industry practices, FASB Concepts Statements, AICPA guidance, IFRS, textbooks, and professional literature.
  • ASU (Accounting Standards Update): Issued by FASB to communicate changes to the Accounting Standards Codification.
  • Exposure Documents: Issued by FASB to obtain stakeholder feedback before finalizing accounting standard changes.