What is Accounting Interpretation

Accounting interpretation is a statement clarifying how accounting standards should be applied. Accounting interpretations are issued by accounting standards groups, such as the Financial Accounting Standards Board (FASB), American Institute of CPAs (AICPA) or International Accounting Standards Board (IASB). Interpretations are generally not requirements, but rather outline best practices and give further explanation.

BREAKING DOWN Accounting Interpretation

As financial transactions continue to evolve, new situations develop that may not have been foreseen by the existing accounting standards. In this case, accounting boards may choose to issue an interpretation outlining the recommended practices for accounting as questions arise. In other cases, an entirely new standard may be issued for a class of financial transactions that did not previously exist, or a standard could be updated ("ASU," or Accounting Standard Update, in the parlance of the FASB) if the nature of a change in a transaction is significant enough to warrant an adjustment.

Example of Accounting Interpretation

In December 2006, the FASB issued Interpretation No. 48 for FASB Statement No. 109 regarding Accounting for Income Taxes. In the interpretation, the accounting board "prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return." The interpretation describes the two-step process of recognition and measurement and the resultant impact on financial statements with respect to income taxes payable or receivable, as well as deferred tax assets and liabilities.

When the FASB releases an interpretation, it will also cite the reason for it and explain how the interpretation will improve financial reporting. In the case of No. 48, FASB states that "this Interpretation will result in increased relevance and comparability in financial reporting of income taxes because all tax positions accounted for in accordance with Statement 109 will be evaluated for recognition, derecognition and measurement using consistent criteria."