Wiley GAAP 2015 interpretation and application of generally accepted accounting principles 2015

GAAP

2015

Interpretation and Application of
GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES


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GAAP

2015

Interpretation and Application of
GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES

Joanne M. Flood


This edition first published 2015
© 2015 John Wiley & Sons Ltd
Copyright © by the American Institute of Certified Public Accountants, Inc. Several items were quoted or
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CONTENTS
Preface

vii

About the Author

xi
xiii

Codification Taxonomy
1

ASC 105 Generally Accepted Accounting Principles

2

ASC 205 Presentation of Financial Statements

29

3

ASC 210 Balance Sheet

45

4

ASC 215 Statement of Shareholder Equity

61

5

ASC 220 Comprehensive Income

63

6

ASC 225 Income Statement

71

7

ASC 230 Statement of Cash Flows

83

8

ASC 235 Notes to Financial Statements

103

9

ASC 250 Accounting Changes and Error Corrections

109

10

ASC 255 Changing Prices

137

11

ASC 260 Earnings Per Share

141

12

ASC 270 Interim Reporting

171

13

ASC 272 Limited Liability Entities

187

14

ASC 274 Personal Financial Statements

191

15

ASC 275 Risks and Uncertainties

199

16

ASC 280 Segment Reporting

205

17

ASC 305 Cash and Cash Equivalents

217

18

ASC 310 Receivables

221

19

ASC 320 Investments—Debt and Equity Securities

257

20

ASC 323 Investments—Equity Method and Joint Ventures

283

21

ASC 325 Investments—Other

317

22

ASC 330 Inventory

329

23

ASC 340 Other Assets and Deferred Costs

367

24

ASC 350 Intangibles—Goodwill and Other

375

25

ASC 360 Property, Plant, and Equipment

399

26

ASC 405 Liabilities

445

27

ASC 410 Asset Retirement and Environmental Obligations

449

28

ASC 420 Exit or Disposal Cost Obligations

465

v

1


Contents

vi
29

ASC 430 Deferred Revenue

471

30

ASC 440 Commitments

473

31

ASC 450 Contingencies

477

32

ASC 460 Guarantees

485

33

ASC 470 Debt

499

34

ASC 480 Distinguishing Liabilities From Equity

539

35

ASC 505 Equity

555

36

ASC 605 Revenue Recognition

587

37

ASC 705 Cost of Sales and Services

645

38

ASC 710 Compensation—General

647

39

ASC 712 Compensation—Nonretirement Postemployment Benefits

653

40

ASC 715 Compensation—Retirement Benefits

655

41

ASC 718 Compensation—Stock Compensation

707

42

ASC 720 Other Expenses

745

43

ASC 730 Research and Development

751

44

ASC 740 Income Taxes

757

45

ASC 805 Business Combinations

811

46

ASC 808 Collaborative Arrangements

859

47

ASC 810 Consolidations

869

48

ASC 815 Derivatives and Hedging

901

49

ASC 820 Fair Value Measurements

961

50

ASC 825 Financial Instruments

985

51

ASC 830 Foreign Currency Matters

995

52

ASC 835 Interest

1023

53

ASC 840 Leases

1041

54

ASC 845 Nonmonetary Transactions

1115

55

ASC 850 Related-Party Disclosures

1127

56

ASC 852 Reorganizations

1129

57

ASC 853 Service Concession Arrangements

1135

58

ASC 855 Subsequent Events

1139

59

ASC 860 Transfers and Servicing

1143

60

ASC 900s Specialized Industry GAAP

1181

Appendix Disclosure Checklist for Commercial Businesses

1317

Index

1419

PREFACE

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Wiley GAAP 2015: Interpretation and Application provides analytical explanations,
copious illustrations, and nearly 300 examples of all current generally accepted accounting
principles. The book integrates principles promulgated by the FASB in its Accounting
Standards Codification.TM
This edition of Wiley GAAP is organized to align fully with the structure of the FASB
Codification. Each chapter now begins with a list of the Subtopics included within the Topic,
major scope and scope exceptions, technical alerts of FASB Updates, and an overview of the
Topic. The remainder of each chapter contains a detailed discussion of the concepts and
practical examples and illustrations. This organization facilitates the primary objective of the
book—to assist financial statement preparers and practitioners in resolving the myriad
practical problems faced in applying GAAP.
Meaningful, realistic examples abound, guiding users in the application of GAAP to
complex fact situations that must be dealt with in the real world practice of accounting. In
addition to this emphasis, a major strength of the book is that it explains the theory of GAAP
in sufficient detail to serve as a valuable adjunct to accounting textbooks. Much more than
merely a reiteration of currently promulgated GAAP, it provides the user with the underlying
conceptual bases for the rules. It facilitates the process of reasoning by analogy that is so

necessary in dealing with the complicated, fast-changing world of commercial arrangements
and transaction structures. It is based on the author’s belief that proper application of GAAP
demands an understanding of the logical underpinnings of all its technical requirements.
As a bonus, a comprehensive disclosure checklist, following the main text, offers practical
guidance to preparing financial statements in accordance with GAAP. For easy reference and
research, the checklist follows the order of the codification.
The following FASB Accounting Standards Updates were issued since the Wiley GAAP
2013. Their requirements are incorporated in this edition of Wiley GAAP, as and where
appropriate. Information on ASU 2014-09 is included in the chapter on ASC 605.

vii


Preface

viii

Number

Title

Issue Date

ASU 2014-09

Revenue from Contracts with Customers (Topic 606)

5/28/2014

ASU 2014-08

Presentation of Financial Statements (Topic 205) and
Property, Plant, and Equipment (Topic 360): Reporting
Discontinued Operations and Disclosures of Disposals
of Components of an Entity

4/11/2014

ASU 2014-07

Consolidation (Topic 810): Applying Variable Interest
Entities Guidance to Common Control Leasing Arrangements (a consensus of the Private Company
Council)

3/20/2014

ASU 2014-06

Technical Corrections and Improvements Related to
Glossary Terms

3/14/14

ASU 2014-05

Service Concession Arrangements (Topic 853) (a
consensus of the FASB Emerging Issues Task Force)

01/23/14

ASU 2014-04

Receivables—Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential
Real Estate Collateralized Consumer Mortgage Loans
upon Foreclosure (a consensus of the FASB Emerging
Issues Task Force)

01/17/14

ASU 2014-03

Derivatives and Hedging (Topic 815): Accounting
for Certain Receive-Variable, Pay-Fixed Interest Rate
Swaps—Simplified Hedge Accounting Approach (a
consensus of the Private Company Council)

01/16/14

ASU 2014-02

Intangibles—Goodwill and Other (Topic 350): Accounting for Goodwill (a consensus of the Private
Company Council)

01/16/14

ASU 2014-01

Investments—Equity Method and Joint Ventures
(Topic 323): Accounting for Investments in Qualified
Affordable Housing Projects (a consensus of the

FASB Emerging Issues Task Force)

01/15/14

ASU 2013-12

Definition of a Public Business Entity—An Addition
to the Master Glossary

12/23/13

ASU 2013-11

Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss
Carryforward, a Similar Tax Loss, or a Tax Credit
Carryforward Exists (a consensus of the FASB
Emerging Issues Task Force)

07/18/13


Preface

ix

ASU 2013-10

Derivatives and Hedging (Topic 815): Inclusion of
the Fed Funds Effective Swap Rate (or Overnight
Index Swap Rate) as a Benchmark Interest Rate for

Hedge Accounting Purposes (a consensus of the
FASB Emerging Issues Task Force)

07/17/13

ASU 2013-09

Fair Value Measurement (Topic 820): Deferral of the
Effective Date of Certain Disclosures for Nonpublic
Employee Benefit Plans in Update No. 2011-04

07/08/13

ASU 2013-08

Financial Services—Investment Companies (Topic
946): Amendments to the Scope, Measurement, and
Disclosure Requirements

06/07/13

Significant accounting changes are on the horizon. In the next year, the FASB is
expected to make strides on the following major projects and others:
•
•
•
•

Consolidation
Going Concern

Insurance Contracts
Financial Instruments—Classification and Measurement

Readers are encouraged to check the FASB website for status updates to the above and
other FASB projects.
In response to the 2011 report of the Blue Ribbon Panel on Standard Setting for Private
Companies, the AICPA and the FASB began separate initiatives. In July 2013, the AICPA
released its Financial Reporting Framework for Small- and Medium-sized Entities. The
AICPA has positioned the Framework as an alternative to U.S. GAAP and one that will
provide consistent, reliable information for small- and medium-sized entities that are not
required to prepare financial statements in accordance with U.S. GAAP. The FASB created
the Private Company Council to address the Blue Ribbon Panel’s report. The FASB issued a
framework for the FASB and the PCC to use in determining whether alternatives to existing
and proposed U.S. GAAP are warranted for private companies. In 2014, FASB issued three
ASUs that are consensuses of the PCC. Those are listed on the table above.
The author’s wish is that this book will serve preparers, practitioners, faculty, and students, as a reliable reference tool to facilitate their understanding of, and ability to apply, the
complexities of the authoritative literature.
Joanne M. Flood
June 2014



ABOUT THE AUTHOR
Joanne M. Flood, CPA, is an author and independent consultant on accounting and
auditing technical topics and e-learning. She has experience as an auditor in both an
international firm and a local firm and worked as a senior manager in the AICPA’s
Professional Development group. She received her MBA Summa Cum Laude in Accounting
from Adelphi University and her Bachelor’s degree in English from Molloy College.
While in public accounting, Joanne worked on major clients in retail, manufacturing,
and finance and on small business clients in construction, manufacturing, and professional

services. At the AICPA, Joanne developed and wrote e-learning, text, and instructor-led
training courses on US and International Standards. She also produced training materials in a
wide variety of media, including print, video, and audio, and pioneered the AICPA’s
e-learning product line. Joanne resides on Long Island, New York with her daughter,
Elizabeth. Joanne is the author of the following Wiley publications:
Financial Disclosure Checklist
Wiley GAAP 2014: Interpretation and Application of Generally Accepted Accounting
Principles
Wiley Practitioner’s Guide to GAAS 2014: Covering all SASs, SSAEs, SSARSs, and
Interpretations
Wiley GAAP: Financial Statement Disclosures Manual (Wiley Regulatory Reporting)
Wiley Revenue Recognition
And the following AICPA online and live CPE programs:
Audit Staff Essentials, Level 1 – New Hire
Audit Staff Essentials, Level 2 – Experienced Staff
Audit Staff Essentials, Level 3 – Audit Senior/In-Charge

xi



CODIFICATION TAXONOMY

I.

Topic # and title
General Principles and Objectives
105 Generally Accepted Accounting
Principles

Subtopic # and title
105-10

Overall

II. Overall Financial Reporting, Presentation, and Display Matters
A.

Overall Presentation of Financial Statements

205

Presentation of Financial Statements

210

Balance Sheet

215
220
225

Statement of Shareholders’ Equity
Comprehensive Income
Income Statement

230
235

Statement of Cash Flows

Notes to Financial Statements

205-10
205-20
205-30
210-10
210-20
215-10
220-10
225-10
225-20
225-30
230-10
235-10

Overall
Discontinued Operations
Liquidation Basis of Accounting
Overall
Offsetting
Overall
Overall
Overall
Extraordinary and Unusual Items
Business Interruption Insurance
Overall
Overall

B. Various Financial Reporting, Presentation, and Display Matters
250 Accounting Changes and Error

250-10 Overall
Corrections
255 Changing Prices
255-10 Overall
260 Earnings Per Share
260-10 Overall
270 Interim Reporting
270-10 Overall
272 Limited Liability Entities
272-10 Overall
274 Personal Financial Statements
274-10 Overall
275 Risks and Uncertainties
275-10 Overall
280 Segment Reporting
280-10 Overall
III. Transaction-Related Topics
A. Financial Statement Accounts
305 Cash and Cash Equivalents
310 Receivables

305-10
310-10
310-20
310-30
310-40

320
323

Investments—Debt and Equity Securities
Investments—Equity Method and Joint
Ventures

320-10
323-10
323-30

325

Investments—Other

325-10
325-20
325-30
325-40

xiii

Overall
Overall
Nonrefundable Fees and Other Costs
Loans and Debt Securities Acquired
with Deteriorated Credit Quality
Troubled Debt Restructurings by
Creditors
Overall
Overall
Partnerships, Joint Ventures, and
Limited Liability Entities

Overall
Cost Method Investments
Investments in Insurance Contracts
Beneficial Interests in Securitized
Financial Assets


Codification Taxonomy

xiv

330
340

Topic # and title
Inventory
Other Assets and Deferred Costs

350

Intangibles—Goodwill and Other

360

Property, Plant, and Equipment

405

Liabilities

410

Asset Retirement and Environmental
Obligations

420
430
440
450

Exit or Disposal Cost Obligations
Deferred Revenue
Commitments
Contingencies

460
470

Guarantees
Debt

330-10
340-10
340-20
340-30
350-10
350-20
350-30
350-40
350-50

360-10
360-20
405-10
405-20
405-30
405-40
410-10
410-20
410-30
420-10
430-10
440-10
450-10
450-20
450-30
460-10
470-10
470-20
470-30
470-40
470-50
470-60

480
505

Distinguishing Liabilities from Equity
Equity

605

Revenue Recognition

480-10
505-10
505-20
505-30
505-50
505-60
605-10
605-15
605-20
605-25
605-28
605-30
605-35
605-40

Subtopic # and title
Overall
Overall
Capitalized Advertising Costs
Insurance Contracts that Do Not
Transfer Insurance Risk
Overall
Goodwill
General Intangibles Other Than
Goodwill
Internal-Use Software
Web Site Development Costs

Overall
Real Estate Sales
Overall
Extinguishment of Liabilities
Insurance-Related Assessments
Obligations Resulting from Joint
and Several Liabilities
Overall
Asset Retirement Obligations
Environmental Obligations
Overall
Overall
Overall
Overall
Loss Contingencies
Gain Contingencies
Overall
Overall
Debt with Conversion and Other
Options
Participating Mortgage Loans
Product Financing Arrangements
Modifications and Extinguishments
Troubled Debt Restructurings by
Debtors
Overall
Overall
Stock Dividends and Stock Splits
Treasury Stock
Equity-Based Payments to NonEmployees

Spin-offs and Reverse Spin-offs
Overall
Products
Services
Multiple-Element Arrangements
Milestone Method
Rights to Use
Construction-Type and ProductionType Contracts
Gains and Losses


Codification Taxonomy
Topic # and title

606
610
705
710
712
715

Revenue from Contracts with
Customers
Other Income
Cost of Sales and Services
Compensation—General
Compensation—Nonretirement
Postemployment Benefits
Compensation—Retirement Benefits

718

Compensation—Stock Compensation

720

Other Expenses

605-45
605-50
606-10
610-10
705-10
705-20
710-10
712-10
715-10
715-20
715-30
715-60
715-70
715-80
718-10
718-20
718-30
718-40
718-50
720-10
720-15
720-20

720-25
720-30
720-35
720-40
720-45
720-50

730

Research and Development

730-10
730-20

740

Income Taxes

740-10
740-20
740-30

B. Broad Transactional Categories
805 Business Combinations

805-10
805-20

xv

Subtopic # and title
Principal–Agent Considerations
Customer Payments and Incentives
Overall1
Overall1
Overall
Accounting for Consideration
Received from a Vendor1
Overall
Overall
Overall
Defined Benefit Plans—General
Defined Benefit Plans—Pensions
Defined Benefit Plans—Other
Postretirement
Defined Contribution Plans
Multiemployer Plans
Overall
Awards Classified as Equity
Awards Classified as Liabilities
Employee Stock Ownership Plans
Employee Share Purchase Plans
Overall
Start-Up Costs
Insurance Costs
Contributions Made
Real and Personal Property Taxes
Advertising Costs
Electronic Equipment Waste
Obligations

Business and Technology
Reengineering
Fees Paid to the Federal
Government by Pharmaceutical
Manufacturers and Health Insurers
Overall
Research and Development
Arrangements
Overall
Intraperiod Tax Allocation
Other Considerations or Special
Areas

Overall
Identifiable Assets and Liabilities,
and Any Noncontrolling Interest
805-30 Goodwill or Gain from Bargain
Purchase, Including Consideration
Transferred
805-40 Reverse Acquisitions
805-50 Related Issues
805-740 Income Taxes


Codification Taxonomy

xvi

808
810

Topic # and title
Collaborative Arrangements
Consolidation

815

Derivatives and Hedging

820
825

Fair Value Measurements
Financial Instruments

830

Foreign Currency Matters

835

Interest

840

Leases

845
850
852

Nonmonetary Transactions
Related-Party Disclosures
Reorganizations

853
855
860

Service Concession Arrangements
Subsequent Events
Transfers and Servicing

Subtopic # and title
Overall
Overall
Control of Partnerships and Similar
Entities
810-30 Research and Development
Arrangements
815-10 Overall
815-15 Embedded Derivatives
815-20 Hedging—General
815-25 Fair Value Hedges
815-30 Cash Flow Hedges
815-35 Net Investment Hedges
815-40 Contracts in Entity’s Own Equity
815-45 Weather Derivatives
820-10 Overall
825-10 Overall

825-20 Registration Payment Arrangements
830-10 Overall
830-20 Foreign Currency Transactions
830-30 Translation of Financial Statements
830-230 Statement of Cash Flows
830-740 Income Taxes
835-10 Overall
835-20 Capitalization of Interest
835-30 Imputation of Interest
840-10 Overall
840-20 Operating Leases
840-30 Capital Leases
840-40 Sale-Leaseback Transactions
845-10 Overall
850-10 Overall
852-10 Overall
852-20 Quasi-Reorganizations
852-740 Income Taxes
853-10 Overall
855-10 Overall
860-10 Overall
860-20 Sales of Financial Assets
860-30 Secured Borrowings and Collateral
860-40 Transfers to Qualifying SpecialPurpose Entities
860-50 Servicing Assets and Liabilities
808-10
810-10
810-20

IV. Industry/Unique Topics

905
908
910

Agriculture
Airlines
Contractors—Construction

912

Contractors—Federal Government

915
920
922
924

Development Stage Entities
Entertainment—Broadcasters
Entertainment—Cable Television
Entertainment—Casinos

905-10
908-10
910-10
910-20
912-10
912-20
915-10
920-10

922-10
924-10

Overall
Overall
Overall
Contract Costs
Overall
Contract Costs
Overall
Overall
Overall
Overall


Codification Taxonomy

926

Topic # and title
Entertainment—Films

928
930
932
940

Entertainment—Music
Extractive Activities—Mining
Extractive Activities—Oil and Gas

Financial Services—Brokers and
Dealers

942

Financial Services—Depository and
Lending
Financial Services—Insurance

944

926-10
926-20
928-10
930-10
932-10
940-10

Subtopic # and title
Overall
Other Assets—Film Costs
Overall
Overall
Overall
Overall

940-20
942-10

Broker Dealer Activities

Overall

944-10
944-20
944-30
944-40

944-80
946-10

Overall
Insurance Activities
Acquisition Costs
Claim Costs and Liabilities for
Future Policy Benefits
Policyholder Dividends
Premium Deficiency and Loss
Recognition
Separate Accounts
Overall

946-20
948-10

Investment Company Activities
Overall

952-10
954-10
958-10

958-20
958-30
960-10

Overall
Overall
Overall
Financially Interrelated Entities
Split-Interest Arrangements
Overall

960-20
960-30
960-40
962-10

Accumulated Plan Benefits
Net Assets Available for Plan
Benefits
Terminating Plans
Overall

962-40
965-10

Terminating Plans
Overall

965-20
965-30

965-40
970-10
972-10

Net Assets Available for Plan
Benefits
Plan Benefits Obligations
Terminating Plans
Overall
Overall

974-10

Overall

976-10
978-10

Overall
Overall

944-50
944-60
946

Financial Services—Investment
Companies

948
950

952
954
958

Financial Services—Mortgage Banking
Financial Services—Title Plant
Franchisors
Health Care Entities
Not-for-Profit Entities

960

Plan Accounting—Defined Benefit
Pension Plans

962

Plan Accounting—Defined
Contribution Pension Plans

965

Plan Accounting—Health and Welfare
Benefit Plans

970
972
974
976
978

Real Estate—General
Real Estate—Common Interest Realty
Associations
Real Estate—Real Estate Investment
Trusts
Real Estate—Retail Land
Real Estate—Time-Sharing Activities

xvii


Codification Taxonomy

xviii

980

Topic # and title
Regulated Operations

985

Software

995

US Steamship Entities

980-10

980-20
985-10
985-20

Subtopic # and title
Overall
Discontinuation of Rate-Regulated
Accounting
Overall
Costs of Software to Be Sold,
Leased, or Marketed

V. Glossary

1

ASU 2014-09 added the Codification section. For more information on ASU 2014-09, see the Preface.


1

ASC 105 GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES

Perspectives and Issues
What is GAAP?
Recognition principles
Disclosure principles

History of GAAP

Pre Codification GAAP Hierarchy

3
4

SEC Guidance in the Codification

Standards-setting Process
Emerging Issues Task Force
Accounting Standards Updates
Maintenance Updates
American Institute of Certified Public
Accountants

Researching GAAP Problems
Codification Structure

Research Procedures
Step 1: Identify the Problem
Step 2: Analyze the Problem
Step 3: Refine the Problem Statement
Step 4: Identify Plausible Alternatives
Step 5: Develop a Research Strategy
Step 6: Search Authoritative Literature
Step 7: Evaluation

Search Authoritative Literature
(Step 6)—Further Explanation
Researching Wiley GAAP
Researching nonpromulgated GAAP

Internet-based research sources

The Concept of Materiality

CON 8—Chapter 1: The Objective of
General Purpose Financial Reporting
CON 8—Chapter 3: Qualitative
Characteristics of Useful Financial
Information.
CON 5: Recognition and Measurement
in Financial Statements of Business
Enterprises
CON 6: Elements of Financial
Statements

2
2

3
3

Other sources

Components of the conceptual framework

1

Definitions of Terms
Concepts, Rules, and Examples

GAAP Codification

The Conceptual Framework

1

4

4
5

5
6

Definitions of terms
Elements of not-for-profit financial
statements

6
7

CON 7: Using Cash Flow Information
and Present Value in Accounting
Measurements

7

7
7

How CON 7 measures differ from
previously utilized present value
techniques
Measuring liabilities
Interest method of allocation
Accounting for changes in expected cash
flows
Application of present value tables and
formulas
Example of present value calculation
Example of an annuity present value
calculation
Example of the relevance of present
values
Practical matters

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13

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13
14

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PERSPECTIVES AND ISSUES
What Is GAAP?
The FASB Accounting Standards CodificationTM (ASC) is the
…source of authoritative generally accepted accounting principles (GAAP)
recognized by the FASB to be applied by nongovernmental entities. Rules and
interpretive releases of the Securities and Exchange Commission (SEC) under
authority of federal securities laws are also sources of authoritative GAAP for
SEC registrants. In addition to the SEC’s rules and interpretive releases, the SEC
staff issues Staff Accounting Bulletins that represent practices followed by the

1

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18
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21
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23

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Wiley GAAP 2015

2

staff in administering SEC disclosure requirements, and it utilizes SEC Staff
Announcements and Observer comments made at Emerging Issues Task Force
meetings to publicly announce its views on certain accounting issues for SEC
registrants. ASC 105-10-05-1

In the absence of authoritative guidance, the FASB Codification (the Codification)
offers the following approach.
If the guidance for a transaction or event is not specified within a source of
authoritative GAAP for that entity, an entity shall first consider accounting
principles for similar transactions or events within a source of authoritative
GAAP for that entity and then consider nonauthoritative guidance from other
sources. An entity shall not follow the accounting treatment specified in
accounting guidance for similar transactions or events in cases in which those
accounting principles either prohibit the application of the accounting treatment
to the particular transaction or event or indicate that the accounting treatment
should not be applied by analogy. ASC 105-10-05-2

Nonauthoritative Sources. The Codification lists some possible nonauthoriative sources:
•
•

•
•

Practices that are widely recognized and prevalent either generally or in the industry
FASB Concepts Statements
American Institute of Certified Public Accountants (AICPA) Issues Papers
International Financial Reporting Standards of the International Accounting
Standards Board
• Pronouncements of professional associations or regulatory agencies
• Technical Information Service Inquiries and Replies included in AICPA Technical
Practice Aids
• Accounting textbooks, handbooks, and articles.
(ASC 105-10-05-3)
GAAP establishes
•
•
•
•

The measurement of economic activity,
The time when such measurements are to be made and recorded,
The disclosures surrounding this activity, and
The preparation and presentation of summarized economic information in the form
of financial statements.

GAAP develops when questions arise about how to best accomplish those items. In
response to those questions, GAAP is either prescribed in official pronouncements of authoritative bodies empowered to create it, or it originates over time through the development
of customary practices that evolve when authoritative bodies fail to respond. Thus, GAAP is
a reaction to and a product of the economic environment in which it develops. As such, the
development of accounting and financial reporting standards has lagged the development and

creation of increasingly intricate economic structures and transactions. There are two broad
categories of accounting principles—recognition and disclosure.
Recognition Principles. Recognition principles determine the timing and measurement
of items that enter the accounting cycle and impact the financial statements. These are
quantitative standards that require economic information to be reflected numerically.
Disclosure Principles. Disclosure principles deal with factors that are not always
quantifiable. Disclosures involve qualitative information that is an essential ingredient of a
full set of financial statements. Their absence would make the financial statements


Chapter 1 / ASC 105 Generally Accepted Accounting Principles

3

misleading by omitting information relevant to the decision-making needs of the reader.
Disclosure principles complement recognition principles by expanding on some quantitative
data and explaining assumptions underlying the numerical information and providing
additional information on accounting policies, contingencies, uncertainties, etc., which are
essential to fully understand the performance and financial condition of the reporting
enterprise.

DEFINITIONS OF TERMS
Source: ASC 105-10-20 Glossary
Nongovernmental Entity. An entity that is not required to issue financial reports in
accordance with guidance promulgated by the Governmental Accounting Standards Board or
the Federal Accounting Standards Advisory Board.
Nonpublic Entity. Any entity that does not meet any of the following conditions:
a. Its debt or equity securities trade in a public market either on a stock exchange
(domestic or foreign) or in an over-the-counter market, including securities quoted
only locally or regionally.

b. It is a conduit bond obligor for conduit debt securities that are traded in a public
market (a domestic or foreign stock exchange or an over-the-counter market,
including local or regional markets).
c. It files with a regulatory agency in preparation for the sale of any class of debt or
equity securities in a public market.
d. It is required to file or furnish financial statements with the Securities and Exchange
Commission.
e. It is controlled by an entity covered by criteria (a) through (d).

CONCEPTS, RULES, AND EXAMPLES
History of GAAP
From time to time, the bodies given responsibility for the promulgation of GAAP have
changed, and indeed more than a single such body has often shared this responsibility. In
response to the stock market crash of 1929, the AICPA appointed the Committee on
Accounting Procedure. This was superseded in 1959 by the Accounting Principles Board
(APB) created by the AICPA. Because of operational problems, in 1972 the profession
replaced the APB with a three-part organization consisting of the Financial Accounting
Foundation (FAF), Financial Accounting Standards Board (FASB), and the Financial
Accounting Standards Advisory Council (FASAC). Since 1973 the FASB has been the
organization designated to establish standards of financial reporting.
FASB is recognized as authoritative by the SEC, reaffirmed through the Sarbanes-Oxley
Act of 2002, and by the AICPA through Rule 203 of the AICPA Code of Professional
Conduct. FASB is an independent body relying on the FAF for selection of its members and
approval of its budgets. FASB is supported by the sale of its publications and by fees
assessed on all public companies based on their market capitalizations as mandated by the
Sarbanes-Oxley Act.
From its inception through the mid-2009 implementation of the Accounting Standards
Codification, FASB issued several types of pronouncements and used the following GAAP
hierarchy (FAS 162, The Hierarchy of Generally Accepted Accounting Principles).

Wiley GAAP 2015

4
Pre Codification GAAP Hierarchy
Standard Setting
Body

Type of Pronouncement

GAAP Level

AICPA

AICPA Accounting Research Bulletins (Not
superseded by FASB actions)

A

APB

APB Opinions (Not superseded by FASB actions)

A

FASB

Statement of Financial Accounting Standard

A

FASB

Interpretation

A

FASB

Staff Positions

A

FASB

Technical Bulletins

B

AICPA - AcSEC

Statement of Position (if cleared by the FASB)

B

AICPA - AcSEC

Industry Audit and Accounting Guides (if cleared
by the FASB)

B

EITF Task Force

Consensus Position

C

EITF Task Force

Topics discussed in Appendix D of EITF
Abstracts (EITF D-Topics)

C

AICPA - AcSEC

Practice Bulletins

C

FASB

Implementation Guides (Q&As) published by the
FASB Staff

D

AICPA

Accounting Interpretations

D

AICPA - AcSEC

Statement of Position not cleared by the FASB

D

Practices widely recognized and prevalent either
generally or in the industry

D

Other sources. Not all GAAP has resulted from the issuance of pronouncements by
authoritative bodies. For example, depreciation methods such as straight-line and declining
balance have both long been acceptable. There are, however, no definitive pronouncements
that can be found to state this. Furthermore, there are many disclosure principles that evolved
into general accounting practice because they were originally required by the SEC in
documents submitted to them. Even much of the content of statements of financial position
and income statements has evolved over the years in the absence of adopted standards.
GAAP Codification
FASB completed its project to codify GAAP and, on July 1, 2009, the Codification
became the single official source of authoritative, nongovernmental US generally accepted
accounting principles. It superseded all nongrandfathered (see ASC105-10-70-2 for a list of
grandfathered guidance), non-SEC accounting guidance, that is, extant FASB, AICPA, EITF,
and related literature. After that date, only one level of authoritative GAAP existed,
excluding the guidance issued by the Securities and Exchange Commission (SEC). All other
literature is nonauthoritative. In effect, therefore, all former Category A-D GAAP was compressed to two levels.

Chapter 1 / ASC 105 Generally Accepted Accounting Principles

5

The Codification did not change GAAP, but rather introduced a new structure—one that
is organized into an easily accessible, user-friendly online research system. The Codification
reorganizes the large number of discrete US GAAP pronouncements into roughly 90
accounting Topics, and displays all Topics using a consistent structure.
SEC Guidance in the Codification. To increase the utility of the Codification for
public companies, relevant portions of authoritative content issued by the SEC and selected
SEC staff interpretations and administrative guidance are included for reference in the
Codification. The sources include:
•
•
•
•

Regulation S-X,
Financial Reporting Releases (FRR)/Accounting Series Releases (ASR),
Interpretive Releases (IR), and
SEC staff guidance in:
• Staff Accounting Bulletins (SAB),
• EITF Topic D and SEC Staff Observer comments.

The Codification does not, however, incorporate the entire population of SEC rules,
regulations, interpretive releases, and staff guidance, such as content related to matters
outside of the basic financial statements, including Management’s Discussion and Analysis
(MD&A), or to auditing or independence matters.

Standards-setting Process
The FASB has long adhered to rigorous “due process” when creating new guidance. The
goal is to involve constituents who would be affected by the newly issued guidance so that
the standards created will result in information that reports economic activity as objectively
as possible without attempting to influence behavior in any particular direction. Ultimately,
however, the guidance is the judgment of the FASB, based on research, public input, and
deliberation. The FASB’s due process procedures are described below.
The FASB receives requests for new standards from all parts of its diverse constituency,
including auditors, industry groups, the EITF, and the SEC. Requests for action include both
suggestions for new topics and suggestions for reconsideration of existing pronouncements. In
consultation with the FASB Members and others, and subject to FAF oversight, the FASB
Chairman decides whether or not to add a project to the technical agenda. The FASB begins
by appointing an advisory group, which may be a task force or advisory committee of outside
experts. Care is taken to ensure that various points of view are represented in the advisory
group. The group meets with and advises the Board and staff on the definition and scope of the
project and the nature and extent of any additional research that may be needed. The FASB and
its staff then debate the significant issues in the project and arrive at tentative conclusions. As it
does so, the FASB and its staff study existing literature on the subject and conduct or
commission any additional research as needed. The advisory group meetings and the Board
meetings are open to public observation, and a public record is maintained. Many of these
proceedings are also available by live or archived audio Webcast as well as via telephone.
The basis of discussion for the meetings may be a Discussion Paper or an Exposure Draft.
Any individual or organization may request to speak at the public hearing, which is conducted by the FASB and the staff assigned to the project. Public observers are welcome.
After each individual speaks, the FASB and staff ask questions. Questions are based on
written material submitted by the speakers prior to the hearing as well as on the speaker’s oral
comments. In addition to the hearing, the staff analyzes all the written comments submitted.
The FASB members study this analysis and read the comment letters to help them reach
conclusions. The hearing transcript and written comments become part of the public record.