Answering a standard-setting question is like playing poker. The first card you see—the entity type—tells you which hand you're allowed to play. Misreading that first card guarantees you lose the pot before the real thinking even starts.
The CPA FAR exam tests the standard-setting process by requiring you to identify the correct standard-setter (FASB for non-governmental, GASB for governmental) for a given entity. Questions focus on the due process for creating standards and the hierarchy of authoritative literature, primarily through multiple-choice questions.
Key facts
- Oversight Body: Financial Accounting Foundation (FAF)
- Standard-Setter (Private Sector): Financial Accounting Standards Board (FASB)
- Standard-Setter (Public Sector): Governmental Accounting Standards Board (GASB)
- Authoritative Guidance (FASB): FASB Accounting Standards Codification (ASC)
- Authoritative Guidance (GASB): GASB Statements and Interpretations
- Exam Section: Financial Accounting and Reporting (FAR)
The AICPA reports the cumulative pass rate for the FAR section was 40.6% in 2026 (AICPA).
How Does the Standard-Setting Process Work?
The standard-setting process is the formal procedure for creating and maintaining U.S. Generally Accepted Accounting Principles (GAAP). For the FAR exam, this isn't just trivia; it's a test of your ability to identify the source of accounting authority. The exam requires you to know who makes the rules, how they make them, and which rules apply to a specific organization.
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The key is understanding that this is a test of professional judgment, not just lookup skills. A CPA must know why a rule exists and which body has the authority to issue it. The AICPA embeds this test in scenarios where choosing the wrong standard-setter makes the correct answer impossible to find. The most common error is misidentifying the governing body, a mistake VoraPrep’s adaptive learning engine frequently sees. Our 9,500+ CPA practice questions are designed to train this specific judgment.
Who Sets Accounting Standards? FASB vs. GASB
Your mental model for these questions must be a decision tree that starts with a single question: "What kind of entity am I looking at?" The answer determines everything that follows. Both the FASB and GASB operate under the oversight of the Financial Accounting Foundation (FAF), but their jurisdictions are completely separate.
The Financial Accounting Standards Board (FASB)
The FASB establishes financial accounting and reporting standards for public companies, private companies, and not-for-profit organizations. Its authority is recognized by the Securities and Exchange Commission (SEC) and the AICPA.
The FASB’s output is organized into the FASB Accounting Standards Codification (ASC), which is the single, authoritative source of nongovernmental U.S. GAAP. When the FASB issues a new standard, it does so as an Accounting Standards Update (ASU), which is not authoritative on its own but serves to amend the Codification. Also of note is the Private Company Council (PCC), which advises the FASB on potential GAAP alternatives for private companies.
The Governmental Accounting Standards Board (GASB)
The GASB sets accounting standards for all U.S. state and local governmental entities. This includes states, cities, counties, and special-purpose governments like public school districts, state universities, and government-owned utilities.
The most critical distinction, and a favorite exam trick, is that ownership, not activity, dictates the standard-setter. A hospital owned by a city is a governmental entity subject to GASB, even if it provides the same services as a private hospital subject to FASB.
The Due Process for Creating New Standards
Both boards follow a rigorous public process to ensure new standards are well-vetted. You must know the sequence.
Step 1: Identify the Issue & Add to Agenda
The Board identifies a reporting issue from stakeholders and votes to add the project to its technical agenda.Step 2: Research and Deliberation
Staff conducts research, and the Board holds public meetings to discuss the issue. Early-stage documents like a Discussion Paper may be released.Step 3: Issue an Exposure Draft (ED)
This is the proposed standard, released to the public for comment. It is the most critical stage for stakeholder feedback.Step 4: Analyze Feedback and Re-deliberate
The Board analyzes comment letters and public input, modifying the proposal as needed.Step 5: Issue a Final Standard
A majority vote of the Board is required to issue a final standard. For the FASB, this is an ASU to amend the Codification. For the GASB, this is a new GASB Statement.What is the GAAP Hierarchy?
The GAAP hierarchy establishes the authority of different accounting literature. Per GASB Statement No. 76, the framework has been simplified, and you must know the difference between the two primary standard-setters.
| Entity Type | Highest Authority (Authoritative GAAP) | Other Sources (Nonauthoritative) |
|---|---|---|
| Nongovernmental (Private & Public Companies, Not-for-Profits) | FASB Accounting Standards Codification (ASC) | All other literature, including FASB Concepts Statements, AICPA publications, and industry practice. |
| Governmental (State & Local Governments) | GASB Statements and Interpretations | GASB Technical Bulletins, GASB Implementation Guides, and AICPA literature cleared by GASB. |
The key takeaway is simple. For nongovernmental entities, the FASB Codification is the only source of authoritative GAAP. For governmental entities, GASB Statements are the highest level of authority.
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Worked Example: Applying the Standard-Setter Decision Tree
This example mirrors a common FAR question where the calculation is irrelevant if you can't first identify the correct rulebook.
> 💡 Worked example: > The City of Voralis owns and operates Voralis General Hospital. In 2026, the hospital received a $5 million grant from a federal program specifically to acquire new MRI equipment. The hospital's controller, a new hire, is unsure how to recognize the revenue from this grant. She recalls from her prior job at a private hospital that contribution revenue is governed by FASB ASC 958. > > Which of the following provides the most authoritative guidance for Voralis General Hospital on recognizing the grant revenue? > > A. FASB ASC 958, Not-for-Profit Entities > B. GASB Codification guidance on nonexchange transactions > C. SEC Staff Accounting Bulletin (SAB) No. 99, Materiality > D. Statements of Federal Financial Accounting Standards (SFFAS)
Let's break this down with a disciplined approach.
Step 1: Identify the Entity Type
The first sentence is the only one that matters for this decision: "The City of Voralis owns and operates Voralis General Hospital." Ownership by a city makes the hospital a governmental entity. Full stop.Step 2: Determine the Primary Standard-Setter
Because Voralis General is a governmental entity, the Governmental Accounting Standards Board (GASB) provides the authoritative GAAP. The FASB has no jurisdiction.Step 3: Evaluate the Answer Choices
- A. FASB ASC 958...: This is the classic trap. It's the right topic (contributions) but the wrong standard-setter. The controller's past experience is a distractor designed to make you choose this.
- B. GASB Codification guidance...: This is the correct answer. GASB sets the standards for governmental entities, and its codification contains guidance on nonexchange transactions like grants, originating from pronouncements like GASB Statement No. 34.
- C. SEC Staff Accounting Bulletin...: The SEC governs publicly traded companies. A city-owned hospital is not a public registrant. This is irrelevant.
- D. Statements of Federal Financial Accounting Standards (SFFAS): This is a subtle distractor. SFFAS apply only to the U.S. Federal Government itself, not state and local governments.
> ⚠️ Exam trap: > The number one trap is focusing on the activity (healthcare) instead of the ownership (municipal). Exam writers know candidates associate hospitals with private or not-for-profit accounting under FASB. They use this assumption to create a very compelling wrong answer (Choice A). Your defense is a simple, disciplined first step: always ask "Who owns the entity?" before you think about anything else.
How to Study for Standard-Setting Questions
This topic rewards precision over volume. Use these tactics to earn these points on exam day.
- Create a FASB vs. GASB Chart: Make a one-page comparison of FASB and GASB. List their jurisdiction, primary output (ASC vs. Statements), and three examples of entities they each cover. Review it daily the week before your exam.
- Drill the Due Process: Draw the five-step due process from memory. An exam question might ask what step comes immediately before an Exposure Draft is issued.
- Link to Governmental Concepts: Understanding GASB's role makes learning its unique rules easier. When you study the specifics of governmental accounting principles, you reinforce this foundational knowledge.
- Time Allocation: These should be fast questions. Identify the entity type in five seconds. If you can do that, you've solved half the problem. Don't second-guess your initial judgment.
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