OUTLOOK & ANALYSIS

Are You Ready for GAAP Codification?

The biggest change in 50 years is coming.

by Rick Telberg

After years in the making, the Financial Accounting Standards Board (FASB) on Wednesday, July 1, will launch the new GAAP (Generally Accepted Accounting Principles) codification.

Don’t be alarmed if you’re only dimly aware of the GAAP codification project. Apparently other CPAs are too. A recent reader poll in the AICPA CPA Letter Daily showed only about one in three accountants had looked into it. A few weeks ago, a Grant Thornton survey found less than half of all CFOs and senior comptrollers had even heard of the codification project.

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Still, it’s probably the biggest change in the structure and organization of GAAP “in over 50 years,” according to Mara Bruce, audit manager at Schneider Downs, the regional CPA firm based in Pittsburgh, Pa.

While it isn’t intended to change U.S. GAAP, this reorganization will change how accountants refer to guidance in financial statements and any underlying memos and research, Bruce said. “It’s time to start to learn to navigate through the codification, so you aren’t left in the dark.”

On July 1, FASB launches its Accounting Standards CodificationTM (referred to and referenced as FASB ASC) as authoritative. As the single source of authoritative U.S. accounting and reporting standards for nongovernmental entities, the new FASB ASC replaces a system of GAAP rules built up piece by piece over decades dating back to the Accounting Principles Board, which was disbanded in 1973 after issuing the profession’s first 30 pronouncements in 24 years.

“For people like me, who have grown very accustomed to the existing setup, it’s going to be a particularly big change,” says Ben Neuhausen, national director of accounting for BDO Seidman. “Our whole way of thinking about accounting references is going to change.”

The codification changes the GAAP hierarchy by removing the current four-level U.S. GAAP hierarchy and replacing it with simply two levels: authoritative and non-authoritative. When the codification becomes the single source of authoritative U.S. accounting and reporting standards, it will supersede all existing pronouncements of the FASB, the EITF (Emerging Issues Task Force) and the AICPA.

That means, according to Amy Eubanks, director of accounting and auditing publications at the AICPA, no more FASB Statement Nos., FINs, accounting SOPs (Statements of Position), etc. Those standards you’ve come to memorize such as FIN 46 or FASB Statement No. 133 will have a new FASB ASC reference for you to now refer.

The codification incorporates the entire GAAP hierarchy (for nongovernmental entities), including:

  • FASB
    • Statements (FAS)
    • Interpretations (FIN)
    • Technical Bulletins (FTB)
    • Staff Positions (FSP)
    • Staff Implementation Guide (Q&A)
  • EITF
    • Abstracts
    • Topic D
  • Derivative Implementation Group (DIG) Issues
  • Accounting Principles Board (APB) Opinions
  • Accounting Research Bulletins (ARB)
  • Accounting Interpretations (AIN)
  • AICPA
    • Accounting Statements of Position (SOP)
    • Incremental guidance (only) from Audit & Accounting Guides
    • Practice Bulletins
    • Technical Inquiry Service (TIS) – only for Software
      Revenue Recognition
  • Select SEC guidance

The FASB’s codification includes a Web-based search tool, FASB Accounting Standards CodificationTM Research System, offering the ability to select multiple sections from different topics and subtopics and join them into a single document. A cross-reference feature allows users to see where current standards are located in the codification’s topical structure.

“U.S. GAAP will be completely reconfigured in a way that will vastly improve the ease of researching U.S. GAAP issues, superseding existing authoritative literature, including FASB’s original pronouncements,” FASB Chairman Robert Herz has said. “Preparers and auditors of financial statements need to familiarize themselves with the changes so that they are ready for
the switch.”

“This affects CPAs across the board: financial statement preparers, auditors, academics and analysts alike,” said Eubanks.

Wondering what to do first? Start here, with some Eubanks recommends:

  1. CPAs can start by visiting the FASB ASC site as well as the AICPA dedication site. Read and share the AICPA’s “Where Will You Be When GAAP Is Codified” (PowerPoint presentation). Consider using this resource to conduct training sessions for members of your entity
    or firm.
  2. Familiarize yourself with the codification so you can identify and cite authoritative GAAP as appropriate.
  3. Conduct impact studies on what this change means to your entity’s or firm’s documentation including such things as accounting policies and procedures, technical accounting memorandums, financial statements, and engagement working papers. For example, you’ll need to update documentation regarding determination of levels within the fair value hierarchy of FASB ASC 820, Fair Value Measurements and Disclosures(instead of FASB Statement No. 157) in your entity’s accounting policies and procedures or in your firm’s related engagement
    work papers.
  4. Determine which set of financial statements will first need to reflect FASB ASC. The FASB ASC will be effective for interim and annual periods ending after September 15, 2009, which means that preparers must begin to use FASB ASC for periods that begin on or about
    July 1, 2009.

Eubanks mentions two more important points:

  • As a result of the topically organized codification, some companies may discover they have been improperly accounting for certain transactions. FASB has indicated in the replacement FASB Statement No. 162 exposure draft that this should 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).
  • In addition, certain paragraphs of AICPA Technical Inquiry Service Section 5100 on software revenue recognition have been elevated to authoritative guidance in FASB ASC. FASB has included specific provisions for first-time application of this guidance in the replacement FASB Statement No. 162 exposure draft, including a post July 1 effective date.

To be sure, GAAP itself isn’t intended to change, but its structure and presentation is changing significantly. Will you be ready? Join the
survey here.

AICPA RESOURCES: FASB Accounting Standards Codification. Where will you be when GAAP is codified?