Tuesday, June 30, 2009

Codification Nation

A defining moment in the history of U.S. GAAP (Generally Accepted Accounting Principles) was made on June 29, when the Financial Accounting Standards Board released FASB Statement No. 168, entitled, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting. FAS 168 represents the last numbered standard to be issued by FASB under the old (pre-Codification) numbering system, and amends the GAAP hierarchy to set the stage for a watershed moment - the July 1 launch of FASB’s Codification (full name: the FASB Accounting Standards Codification TM.) The Codification will supercede existing GAAP for nongovernmental entities; governmental entities will continue to follow standards issued by FASB's sister organization, the Governmental Accounting Standards Board (GASB).

As noted in the Summary provided at the beginning of FAS 168: "Following [issuance of] this Statement, the Board will not issue new standards in the form of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts. Instead, it will issue Accounting Standards Updates. The Board will not consider Accounting Standards Updates as authoritative in their own right. Accounting Standards Updates will serve only to update the Codification, provide background information about the guidance, and provide the bases for conclusions on the change(s) in the Codification."

Launch Date vis-a-vis Effective Date
FASB has publicized since
Dec. 4. 2008 the Codification will be officially launched on July 1, following the one-year verification phase that began on Jan. 15, 2008. The Codification is a reorganization of existing GAAP, aimed at making it simpler to use, and the FASB board has stated they do not anticipate the Codification will change existing GAAP, with the exception of a particular revenue recognition issue for private companies noted below.

The Codification was originally anticipated to be carry an ‘effective date’ of July 1, but FASB agreed to clarify the effective date, as noted in this
June 3 FASB press release, as follows:
The Financial Accounting Standards Board (FASB) today voted to approve the FASB Accounting Standards CodificationTM as the single source of authoritative nongovernmental U.S. Generally Accepted Accounting Principles (GAAP) to be launched on July 1, 2009. The Codification will be effective for interim and annual periods ending after September 15, 2009, which means that preparers must begin to use the Codification for periods that begin on or about July 1, 2009. All existing accounting standard documents are superseded. All other accounting literature not included in the Codification will be considered nonauthoritative.

Paragraph A14 of FAS 168 adds on this point:
The Board decided that this Statement should be effective for financial statements issued for interim and annual periods ending after September 15, 2009…In the Board’s view, an extended transition period is not necessary for this Statement because it is not expected to change GAAP and constituents have been able to access and use the Codification since January 2008. Respondents to the Exposure Draft were generally supportive of the proposed effective date, which was July 1, 2009. To clarify when this Statement should be applied and to provide additional time for constituents to update their financial statement disclosures, the Board decided to revise the effective date to interim and annual periods ending after September 15, 2009.

Not Expected To Change GAAP, Except One Area For Private Co’s
FASB states in the introductory pages to FAS 168: “In the Board’s view, the issuance of this Statement and the Codification will not change GAAP, except for those nonpublic nongovernmental entities that must now apply the American Institute of Certified Public Accountants Technical Inquiry Service Section 5100, “Revenue Recognition,” paragraphs 38–76.”

Transition provisions for nonpublic, nongovernmental entities impacted by the specific change regarding revenue recognition are provided in FAS 168, para. 14 as follows: "Those entities shall account for the adoption of that guidance as a change in accounting principle on a prospective basis for revenue arrangements entered into or materially modified in those fiscal years beginning on or after December 15, 2009, and interim periods within those years. If an accounting change results from the application of that guidance, an entity shall disclose the nature and reason for the change in accounting principle."

More generally, with respect to transition, FAS 168, paragraph 16 states: “Except as described in paragraph 14, any effect of applying the provisions of this Statement shall be accounted for as a change in accounting principle or correction of an error, as applicable, in accordance with FASB Statement No. 154, Accounting Changes and Error Corrections (Section 250-10-50 of the Codification). An entity shall follow the disclosure requirements of Statement 154 and disclose the accounting principles that were used before and after the application of the provisions of this Statement and the reason that applying this Statement resulted in a change in accounting principle or correction of an error."

GAAP vis-a-vis SEC Rules
FAS 168, para. 6 notes that "Rules and interpretive releases of the SEC under federal securities laws are also sources of authoritative GAAP for SEC registrants." Para. 7 adds, "In addition to the SEC’s rules and interpretive releases, the SEC staff issues Staff Accounting Bulletins that represent practices followed by the staff in administering SEC disclosure requirements, and it utilizes SEC Staff Announcements and Observer comments made at Emerging Issues Task Force (EITF) meetings to publicly announce its views on certain accounting issues for SEC registrants."

According to para. 8 of FAS 168: "Content contained in the SEC Sections of the Codification is provided for convenience and relates only to SEC registrants. The SEC Sections are not the authoritative sources of such content and do not contain the entire population of SEC rules, regulations, interpretive releases, and staff guidance. Content in the SEC Sections is expected to change over time, and there may be delays between SEC and staff changes to guidance and Accounting Standards Updates. The Codification does not replace or affect guidance issued by the SEC or its staff for public entities in their filings with the SEC."

Bright Lines and Analogies
(I couldn't help humming Jim Croce's "Photographs and Memories" when I wrote that subtitle...) Some may view the Codification as adding certain bright lines, others will recognize that certain principles-based approaches such as use of analogies in certain circumstances are still permitted.

For example, para. A15 of FAS 168 states: "The Board received feedback from constituents about accounting changes resulting from replacing the term should with shall and the removal of generic terms, such as usually, generally, ordinarily, and similar terms from accounting and disclosure requirements included in the Codification. In the Board’s view, the removal of such terms further clarifies that a particular standard must be followed. If an entity believes such a modification would result in an accounting change, the Board believes the entity should evaluate the matter to determine whether the change should be accounted for as an accounting change or as a correction of an error in accordance with Statement 154."

Separately, paragraph 9 of FAS 168 states: "If the guidance for a transaction or event is not specified within a source of authoritative GAAP for that entity, an entity shall first consider accounting principles for similar transactions or events within a source of authoritative GAAP for that entity and then consider nonauthoritative guidance from other sources. An entity shall not follow the accounting treatment specified in accounting guidance for similar transactions or events in cases in which those accounting principles either prohibit the application of the accounting treatment to the particular transaction or event or indicate that the accounting treatment should not be applied by analogy." Paragraph 10 then describes 'nonauthoritative' sources of GAAP.

Additional Considerations
Refer to this
FEI Summary for a discussion of additional considerations with respect to the Codification, including as relate to:

  • Errors in previous accounting
  • Unintended changes or questions
  • Industry practice
  • Concepts Statements

Additional information on FASB's Codification can be found in FASB’s Codification Resources, which includes links to archived webcasts, “Countdown to Codification Alerts,” subscription information, and more. Access/pricing, and more. A particularly useful document for a quick, general understanding of the role of the Codification can be found in the Codification FAQs, which, among other things, notes that "the Codification will assist the FASB with the research and convergence efforts required during the standard-setting process," and that "[t]he FASB is working with the IASB to determine the role of the Codification in a converged accounting world."

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1 comment:

Shona said...

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