Saturday, May 30, 2009

GAAP Reorganization Will Cause Short-Term Frustration, But Should Improve Research Capabilities

On July 1, 2009, the Financial Accounting Standards Board (FASB) is expected to issue their "Accounting Standards Codification" (ASC) as the sole authoritative accounting guidance for U.S. generally accepted accounting principles (GAAP). The ASC will not change GAAP, but nevertheless represents a major shift in its organization and presentation. It is intended to simplify users' research and reference by providing all information in a single topically-organized structure.

The American Institute of Certified Public Accountants (AICPA) states that:

"…the project aims to:

• Reduce the amount of time and effort required to solve an accounting research issue.

• Mitigate the risk of noncompliance with standards through improved usability of the literature.

• Provide accurate information with real-time updates as new standards are released.

• Assist FASB with the research and convergence efforts required during the standard setting process.

• Become the authoritative source of literature for the completed XBRL taxonomy"

The ASC (i) reorganizes the thousands of U.S. GAAP pronouncements into roughly 90 accounting topics and (ii) displays all topics using a consistent structure. The topical structure of the Codification correlates closely to standards issued by the International Accounting Standards Board (IASB).

There are currently over 20 sources of GAAP, including Accounting Principles Board opinions, accounting research bulletins, FASB statements, FASB staff positions, FASB interpretations, American Institute of CPAs interpretations, AICPA statements of position, Emerging Issues Task Force abstracts, AICPA practice bulletins, and AICPA audit and accounting guides. The ASC will supersede all of this existing literature, leaving only one source of authoritative GAAP. All other accounting literature not in the ASC will be considered non-authoritative. Relevant Securities and Exchange Commission (SEC) accounting guidance will be also included in the codification, and will follow the same topical structure in separate sections.

By compiling all authoritative guidance in one place, the ASC is anticipated to reduce the effort required to research accounting issues. By placing all guidance for a topic together, the risk of overlooking a relevant piece of guidance should be less. This will hopefully address the results of a FASB survey that asked respondents how confident they would be of their findings if they had an unlimited amount of time to research an accounting or reporting issue. Even with an unlimited amount of time, 35 percent of respondents said they would not feel comfortable with their findings because of the multiple sources of guidance.

Once the ASC goes live, existing guidance will be updated and new guidance will be incorporated into the codification in real time, providing users with nearly immediate access to the most recent information stemming from the FASB's deliberations. As the FASB amends existing requirements, both the current paragraph and the updated paragraph will reside in the ASC until the new guidance becomes effective. During this transition period, the new guidance will be titled "pending text." Once the new guidance is effective, the outdated guidance will be removed. All guidance in the ASC will be updated through "Codification Update Instructions" (CUIs); meaning, the FASB will no longer issue FASB Statements, FASB Staff Positions (FSPs), FASB Interpretations (FINs), or Emerging Issues Task Force (EITF) Abstracts. As updates are made, they will be numerically numbered so constituents can track the updates. For example, for 2009, the updates will be numbered 2009-01, 2009-02, 2009-03, etc.

Given that the codification will not change any GAAP, here is why you should care:

1. The ASC divorces the codification content from the historical pronouncement. Accounting and legal professionals will need to re-learn everything they know about how U.S. GAAP is documented, updated, referenced, and accessed.

2. All existing GAAP guidance will be superseded. In financial statement footnotes, public securities filings, and other public statements, it will no longer be acceptable to refer to the accounting literature as has occurred previously. Editing of all such disclosures will be necessary. Instead, you will refer to an ASC topic, subtopic, section number, and paragraph number

3. There will no longer be a GAAP hierarchy. The four levels of GAAP that are currently in existence will no longer exist, because all guidance will either be "authoritative" or "non-authoritative." This will remove the users' burden of considering which authoritative source is the higher authority.

Fulcrum Inquiry is a forensic accounting firm.