What is an Accounting Interpretation?

Accounting Interpretation is a statement issued by an accounting standard group clarifying the methods of implementing the accounting standards. The Financial Accounting Standards Board (FASB), International Accounting Standards Board (IASB), American Institute of CPAs (AICPA) and other accounting standard groups issue such statements to interpret the best practices and explain the concepts laid out in the standards.

How is an Accounting Interpretation Used?

The aim of the accounting interpretation is to further expand the concepts described in the accounting standards and to explain how those standards should be implemented. The financial transactions evolve with time and its terms changes. In this process a situation may arise, in which the existing accounting standards are not sufficient. That means when the accounting standards were formulated this particular situation have not been foreseen. Thus, further explanation is needed to understand the best practices in this situation. On such occasions, accounting boards may decide to issue an accounting interpretation that outlines the recommended practices. Apart from interpreting the existing accounting standards, entirely new standards may be issued by the accounting standard boards to provide guidelines for a class of financial transactions that did not exist before. The existing standards can also be updated to meet the need when the change in a transaction is significant enough. This is called the Accounting Standard Update (ASU) by the FASB. The accounting interpretations are primarily used by the public and private accountants. The key users of an organizations financial statement may also refer to the accounting interpretation for a better understanding. It helps them understand if a financial statement is compiled in accordance with all the applicable accounting standards.

Example of Accounting Interpretation

The Financial Accounting Standards Boards Interpretation No. 48 clarifies the accounting standards laid out in FASB Statement no. 109, Accounting for Income Taxes. The FASB issued this interpretation as they found the interpretations of the accounting income taxes standard are inconsistent and applications are not ununiformed. The accounting for income taxes is structured by tax lax and different accountants may use different methodologies while implementing the rules. These differences in application raised concerns within the FASB and they felt there is a need to formally interpret the FASB Statement No. 109 to remove the ambiguity. The interpretation was issued for improving the financial reporting of income taxes and to ensure that it follows the accounting standards.