Under ASC 105 (Generally Accepted Accounting Principles), the FASB Accounting Standards Codification is the single source of authoritative U.S. GAAP for nongovernmental entities. If a specific transaction is not addressed anywhere within the Codification, what should an entity do before considering non-authoritative guidance?
- Consider Codification guidance for similar or related transactions and apply it by analogy
- Immediately adopt IFRS guidance as if it were authoritative U.S. GAAP
- Default to whatever policy the entity's external auditor recommends without independent analysis
- Treat the transaction as immaterial and omit any disclosure of it
Correct answer: A. Consider Codification guidance for similar or related transactions and apply it by analogy
ASC 105 establishes the Codification as the sole source of authoritative U.S. GAAP for nongovernmental entities, and when a transaction is not specifically addressed, standard practice under the Codification's own framework directs preparers to first look at Codification guidance for similar or related transactions and apply it by analogy, before turning to any non-authoritative source. IFRS, academic writing, or other professional literature may only be considered as non-authoritative help after Codification analogy has been exhausted, and even then it is not adopted directly as GAAP, which is why treating IFRS as automatically authoritative is wrong. Deferring entirely to the auditor's recommendation without the entity performing its own analysis does not represent applying the accounting hierarchy and risks reaching a conclusion nobody can support with Codification reasoning. Materiality is a separate judgment made once an appropriate accounting policy has been identified; it is not a shortcut for skipping the analysis altogether or omitting disclosure by default.
Source: FASB Accounting Standards Codification: ASC 105-10, Generally Accepted Accounting Principles — Overall