Every audit, review and compilation under US GAAP rests on one question: which accounting guidance applies to this entity, and how authoritative is each source? ASC Topic 105, Generally Accepted Accounting Principles, answers it. This page explains the Codification, the order of authority, how the entity type changes the answer, and how to document a position when no guidance addresses the transaction. It also shows where AICPA Code Rule 1.320.001 and the audit report tie in.
What does ASC 105 establish?
ASC 105-10-10-1 states that the objective of the topic is to establish the FASB Accounting Standards Codification as the source of authoritative principles and standards recognized by the FASB to be applied by nongovernmental entities in preparing financial statements in conformity with GAAP. Rules and interpretive releases of the SEC under the authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. ASC 105-10-10-2 adds that the topic identifies the framework for selecting the principles used in preparing financial statements, the GAAP hierarchy.
The Codification organizes US GAAP by subject into Topics (for example 606 revenue, 842 leases, 740 income taxes), Subtopics, Sections and Paragraphs. Paragraph numbers follow the pattern Topic-Subtopic-Section-Paragraph, such as 740-10-25-6. Accounting Standards Updates (ASUs) are the vehicle FASB uses to amend the Codification. Cite the Codification paragraph that results from the update, not the ASU, in workpapers and technical memos, though the ASU is the source for effective dates and transition.
What are the sources of authority?
For a nongovernmental entity that is not an SEC registrant, the Codification is the authoritative source. For an SEC registrant, SEC rules and interpretive releases are also authoritative. Everything outside the Codification, including FASB staff Q&As, practice guides and textbooks, is nonauthoritative.
State and local governments follow a separate hierarchy set by the Governmental Accounting Standards Board (GASB), whose standards are codified in the GASB Codification of Governmental Accounting and Financial Reporting Standards. GASB Statement No. 76 set the GAAP hierarchy for those entities. GASB and FASB standards can differ on similar transactions, as the GASB 87 on leases shows.
What does the entity type change?
ASC 105 does not by itself apply the same rules to every nongovernmental entity. The guidance in the Codification differs by entity type, and an entity first determines which applies to the financial statements it is preparing. The four types are:
- Public business entity (PBE). Defined in the Master Glossary through five criteria, including entities required to file or furnish financial statements with the SEC and entities that have issued or are a conduit bond obligor for securities traded, listed or quoted on an exchange or over-the-counter market. Securities not subject to contractual restrictions on transfer, combined with a requirement to prepare and publish US GAAP financial statements periodically, is another route.
- Not-for-profit entity (NFP). The PBE definition excludes NFPs even if one of the criteria is met, for example by serving as a conduit bond obligor.
- Employee benefit plan (EBP). Plans within Topics 960, 962 and 965 are excluded from the PBE definition, even if they must file financial statements with the SEC.
- Private company. An entity other than a PBE, an NFP or an EBP.
The classification matters because many ASUs have different effective dates, or different disclosure requirements, for PBEs and for everyone else. The ASU 2023-09 page is one example, where private companies disclose qualitative information in place of the tabular reconciliation. Private company accommodations, which are exceptions, alternatives or deferred dates available only to private companies, depend on the same classification. Document the entity-type conclusion at planning, because a change, such as an entity filing a registration statement, can remove accommodations in the period it occurs.
What if the Codification is silent?
When guidance for a transaction is not specified in authoritative GAAP for the entity, the preparer considers accounting principles for similar transactions or events within authoritative GAAP for that entity, and then considers nonauthoritative guidance from other sources. Document the search and the reasoning, since the conclusion is a management judgment that the auditor evaluates. A short technical memo is the usual form: facts, the guidance searched, analogies considered, the conclusion, and the disclosure.
How does the hierarchy connect to the Code and the audit report?
AICPA Code Rule 1.320.001 prohibits a member from expressing an opinion or stating affirmatively that financial statements are presented in conformity with GAAP if the statements contain a departure from an accounting principle promulgated by bodies designated by Council that has a material effect on the statements taken as a whole. The exception is the member who can demonstrate that, due to unusual circumstances, the statements would otherwise have been misleading. The member must then describe the departure, its approximate effects if practicable, and the reasons why compliance would result in a misleading statement. See the AICPA Code guide.
Financial statements prepared on a basis other than GAAP, such as cash or tax basis, are prepared under a special purpose framework and are not labeled as GAAP. See the special purpose framework audit report template and the tax basis financial statements template.
What should a firm do in practice?
- Record the entity type and the basis of accounting at engagement acceptance and update it each year.
- Keep the Codification (or the firm's access to it) and the GASB Codification in the technical library, and train staff to cite paragraphs.
- Use the GAAP disclosure checklist that matches the entity type.
- Track ASU effective dates for the client's entity type and year-end, not for calendar-year PBEs by default.
- Require a technical memo whenever the client's treatment relies on analogy.
Common problems
Practice observations, not requirements:
- Financial statements described as "GAAP basis" when a departure, such as no lease liability under ASC 842 or revenue on a cash basis, makes them something else.
- Checklists built from a PBE disclosure list applied to a private company, or the reverse.
- Citing an ASU number in the footnote rather than the Codification topic.
- An entity that becomes a PBE mid-engagement, for example by filing financial statements with a regulator in preparation for a securities offering, without anyone re-checking effective dates.
- Treating nonauthoritative Q&A as a requirement, or ignoring authoritative SEC staff guidance for a registrant.
FAQ
Are ASUs part of authoritative GAAP?
ASUs communicate amendments to the Codification, and the Codification is the authoritative source. For effective dates, transition and basis for conclusions, read the ASU itself.
Are SEC rules binding on a private company's GAAP financial statements?
No. ASC 105-10-10-1 makes SEC rules and interpretive releases sources of authoritative GAAP for SEC registrants. A private company follows the Codification.
Is a Big 4 handbook authoritative?
No. Firm handbooks and guides are nonauthoritative interpretations and are useful for understanding, but a conclusion should cite the Codification paragraph.
Does the GAAP hierarchy apply to a not-for-profit?
Yes. NFPs apply the Codification, including the NFP-specific topics, and are not PBEs or private companies as those terms are defined.
Sources
- FASB Accounting Standards Codification Topic 105, Generally Accepted Accounting Principles, paragraphs 105-10-10-1 and 10-2, and the Master Glossary definitions of public business entity, private company and security, as reproduced in KPMG, Financial statement presentation handbook (2026), section 2.2: https://asc.fasb.org
- AICPA Code of Professional Conduct, Accounting Principles Rule 1.320.001 and Appendix A (Council Resolution Designating Bodies to Promulgate Technical Standards): https://pub.aicpa.org/codeofconduct/ethics.aspx
- GASB, Statement No. 76, The Hierarchy of Generally Accepted Accounting Principles for State and Local Governments: https://www.gasb.org
Related
Part of CORAA University · US GAAP for private companies: related guides, calculators and templates.
AU-C references are to AICPA Professional Standards, paraphrased here; read the standard itself before relying on a requirement. This page is guidance, not professional advice. Report an error