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Who Moved My FASB?
After years of increasing concerns over the growing complexity of authoritative U.S. generally accepted accounting principles (“U.S. GAAP”), relief has finally arrived. As of July 1, 2009, the FASB's Accounting Standard Codification (“ASC,” or “Codification”) topical system has permanently changed how accountants, lawyers, educators, regulators, and finance professionals will cite and research myriad rules that govern how companies account for and present their financial transactions and financial statements.
The new ASC replaces the historical organization method of authoritative FASB accounting pronouncements into approximately 90 individual topics and alters how those pronouncements are researched or cited ' using plain English instead of numeric references. For example, prior to ASC, it would be common to see “as required by FASB Statement 133, the Company ' ” Under the new ASC, such a footnote will simply refer to the accounting topic itself “ as required by the Derivatives and Hedging Topic of the FASB ASC.”
When Does the Change Take Place and What Does It Mean?
FASB Statement No. 168 is the final standard that will be issued by FASB in that form. All future guidance will follow the ASC topical format. The change is effective for financial statements ending after Sept. 15, 2009, which means that footnotes in a company's SEC forms 10K and 10Qs will look a bit different next quarter. The new references are required in financial statement footnotes, though “dual referencing” will remain an option for companies. But the ASC does more than just change the way financial footnotes are referenced.
Historically, the standard-setting and interpretive bodies that release guidance required users to keep up with each new item independently and, as such, necessitated that users understand both the context and items for which any new guidance applied. With the new, topic-based ASC, all newly issued and historical authoritative U.S. GAAP is kept under “one roof.” As new guidance is issued, it will remain organized within the original topical structure (as opposed to a chronological release date). FASB also eliminated much of the ambiguous terms such as “usually,” “ordinarily,” and “generally,” which should make accounting literature easier to understand for everyone.
It is also no longer necessary to know that a particular FASB or EITF has been effectively superseded by a new pronouncement. The clever folks at the FASB built the topic-based ASC with future updates in mind. As new guidance on a topic is released, new paragraphs (located within the topic) will replace or add to superseded information as appropriate. Each update will be sequentially identified by the year in which it was released regardless of which standard-setting and interpretive bodies released the update (i.e., the first update in 2010 will be cited as Accounting Standards Update 2010-001.)
The simplification into a single codification also alleviates chasing down several disparate sources of information. Consider inventory ' under the pre-codification world, GAAP related to inventory was comprised of no less than 12 pieces of literature derived from eight separate sources, including ARBs, FINs, EITFs, SFASs, SOPs, and SABs. Now, inventory GAAP is contained under the simple ASC Topic 330 Inventory. Consider also that FASB ASC Subtopic 840-10 (Leases) is sourced from seven FASB statements, 12 Emerging Issues Task Force (“EITF”) guidance, four FASB Technical Bulletins (“FTB”), and four FASB Interpretations (“FIN”). The new system alleviates much of the endless referencing and cross-referencing necessary to fully understand an issue as required under the current system.
In addition to making research on U.S. GAAP more intuitive, the Codification also draws a clear line between authoritative U.S. GAAP and non-authoritative U.S. GAAP. If you can't find it in the Codification, it's not authoritative U.S. GAAP. As such, the Codification will be the sole source used in U.S. GAAP-related disputes and litigation.
What Does This Mean to Me?
ASC codification is important for any general counsel, transactional attorney, white collar or securities litigator, or anybody who must refer to authoritative GAAP. Consider a securities litigation attorney whose complaints, motions to dismiss, and other filings historically often cite various FASBs, EITFs, and APBs to explain why a company's accounting may, or may not, have been appropriate. In fact, any attorney with an SEC registrant client should be aware that the pages of footnote disclosures in an SEC filing that cites to GAAP will now do so using the new ASC references.
Consider again the prior example that instead of the previously required “as required by FASB statement 133,” footnotes will now refer to “as required by the Derivatives and Hedging Topic of the FASB Accounting Standard Codification.” While a change from referencing “FASB 133″ to “Derivatives and Hedging Topic of the FASB ASC” may seem a subtle change, take a look at the notes to a good-sized company's public filings these days and you'll be awash in numerical references to FASBs, APBs, and EITFs that have no obvious connection and don't even necessarily provide you with all of the other authoritative U.S. GAAP that might also be relevant to the accounting at issue. The straightforward descriptions and topical, drill-down organization of the ASC simplify the technical alphabet soup.
Most argue the change to FASB Codification was well overdue. In fact, a FASB survey of 1,400 users of U.S. GAAP taken prior to the ASC project showed 80% of respondents believed U.S. GAAP to be confusing and 85% believed the required level of research was excessive. A full 95% of respondents believed the codification project should be pursued. The ASC project itself was a huge undertaking. The Codification combines more than 2,000 accounting standards and required the efforts of more than 200 individuals from multiple entities working over a five-year period.
Using the ASC System: Topics and Subtopics
Finding answers to accounting-related issues under the ASC is a much more intuitive process as individual topical issues unfold into further levels of detail as one drills deeper. The ASC is broken into the following four sections: Topics; Subtopics; Sections; and Subsections.
Topics
Topics are the broadest categorization of content and each is assigned a three-digit code. There is a general order with broad concepts and principles in the 100s; financial statements presentation in the 200s; financial statement accounts such as assets, liabilities, equity, revenue, and expenses from the 300s-700s; business transactions in the 800s; and industry-specific accounting treatments in the 900s. Examples: 305 ' Cash & Cash Equivalents, or 840 ' Leases.
Subtopics
The subtopics are usually divided by type or by scope and are assigned a two-digit code (i.e., under the broader 840 Lease topic are the subtopics for operating leases under 840-20 while capital leases are covered under 840-30. Sale'Leaseback transactions are covered under 840-40.
Sections
Each subtopic is then further divided into sections with detailed information such as the subtopic's status, objectives, scope, and accounting treatment.
Consider the following entry for the initial measurement of a Capital Lease by a lessee. It is found by drilling down from Topic 840 (leases), to Subtopic 30 (capital leases) and finally to Section 30 (initial measurement). Paragraphs 1-3 discuss the measurement of the value of the asset: 840-30-30-1, 2, 3:
30-1 The lessee shall measure a capital lease asset and capital lease obligation initially at an amount equal to the present value at the beginning of the lease term of minimum lease payments during the lease term excluding that portion of the payments representing executory costs (such as insurance, maintenance, and taxes to be paid by the lessor) including any profit thereon.
30-2 If the portion of the minimum lease payments representing executory costs (including profit thereon) is not determinable from the provisions of the capital lease, an estimate of the amount shall be made. The discount rate to be used in determining the present value of the minimum lease payments shall be that prescribed for the lessee in the minimum-lease-payments criterion in paragraph 840-10-25-1(d).
30-3 If the present value of the minimum lease payments exceeds the fair value of the leased property at lease inception, the amount measured initially as the asset and obligation shall be the fair value. If the lease agreement or commitment, if earlier, includes a provision to escalate minimum lease payments for increases in construction or acquisition cost of the leased property or for increases in some other measure of cost or value, such as general price levels, during the construction or preacquisition period, the effect of any increases that have occurred shall be considered in the determination of the fair value of the leased property at lease inception for purposes of this paragraph.
The Advantages of Being Familiar with ASC
While the GAAP codification may affect the everyday world of accountants and finance professionals more readily than attorneys, there are a number of advantages to being familiar with ASC:
- Authoring legal filings that reference adherence to (or deviation from) authoritative GAAP;
- Getting a base understanding of pertinent accounting issues or concepts impacting a client without facing a towering stack of confusing and disparate historical sources;
- Familiarity to references when reviewing a public company's financial statements or SEC filings ( i.e., 10-K, 10-Q, etc.)
To take a test drive, go to www.fasb.org and see for yourself how the system works. Try looking into a revenue recognition or inventory write-down issue. To do the same research in a pre-codification world would have required either access to an expensive proprietary research system, an accounting expert, or access to printouts of the various FASBs and SABs issued on the topic.
Anything to Look Out for?
Yes! The Codification is not the end all and be all of accounting standards organization. For instance, state and local government accounting are excluded from the Codification. Also, only relevant portions of authoritative content issued by the SEC and selected SEC staff interpretations and administrative guidance have been included in the Codification. SEC's rules related to Management's Discussion and Analysis (“MD&A”), auditing, and independence are not in the Codification. Thus, public companies still need to refer to SEC rules for other guidance.
Additionally, accounting-related disputes and litigation frequently deal with whether historical transactions were properly reflected; however, having knowledge of how to research, present and critique GAAP within historical time frames remains an issue. Although the FASB has included a tool that allows you to look up a standard's pre-codification address, if a standard has been updated and changed a few times, not all of the old addresses will be shown in the cross-reference tool. For example, FASB Statement No. 141(R), Business Combinations (revised), will
be shown as the old address of Topic 805 Business Combinations and you will not find the original, earlier address of FASB Statement No. 141 ' so don't toss those hard copy FASB pronouncements just yet.
Finally, though not anticipated, there will likely be inadvertent or unforeseen contradictions that may need to be sorted out. Remember, this project took more than 2,000 standards and broke them down issue by issue, line by line, and then reconstructed them into approximately 90 topics in the ASC.
What's Next?
The Codification won't render accounting expertise obsolete ' not by a long shot. However, it will tilt the playing field back toward allowing a layperson to quickly research the authoritative guidance around an accounting issue. The ASC was also built with the imminent convergence of the U.S. GAAP and the International Financial Reporting Standards (“IFRS”) in mind. The Codification correlates closely with the standards issued by the IASB (International Accounting Standards Board), which will allow for a more smooth transition from U.S. GAAP to IFRS.
The Basic View of the ASC is available to the public free of charge on the FASB's Web site at www.FASB.org. FASB also provides an in-depth online tutorial demonstrating the ASC Web site's functions and features. Next time an accounting issue arises, take a quick run through ' you'll be surprised how easily you may find the answer to your accounting question.
John LaBella is a director and Wing Wong is a vice president with AlixPartners LLC in San Francisco. LaBella provides financial advisory and accounting consulting services related to litigation, corporate investigations, valuation, merger and acquisition disputes and other matters. LaBella also advises in matters related to restructuring and bankruptcy. He may be reached at 415-848-0321 or [email protected]. Wong provides financial advisory and consulting services in the areas of internal investigations, disputes consulting, interim management, and Foreign Corrupt Practices Act compliance assessment. She may reached at 415-848-0309 or [email protected].
After years of increasing concerns over the growing complexity of authoritative U.S. generally accepted accounting principles (“U.S. GAAP”), relief has finally arrived. As of July 1, 2009, the FASB's Accounting Standard Codification (“ASC,” or “Codification”) topical system has permanently changed how accountants, lawyers, educators, regulators, and finance professionals will cite and research myriad rules that govern how companies account for and present their financial transactions and financial statements.
The new ASC replaces the historical organization method of authoritative FASB accounting pronouncements into approximately 90 individual topics and alters how those pronouncements are researched or cited ' using plain English instead of numeric references. For example, prior to ASC, it would be common to see “as required by FASB Statement 133, the Company ' ” Under the new ASC, such a footnote will simply refer to the accounting topic itself “ as required by the Derivatives and Hedging Topic of the FASB ASC.”
When Does the Change Take Place and What Does It Mean?
FASB Statement No. 168 is the final standard that will be issued by FASB in that form. All future guidance will follow the ASC topical format. The change is effective for financial statements ending after Sept. 15, 2009, which means that footnotes in a company's SEC forms 10K and 10Qs will look a bit different next quarter. The new references are required in financial statement footnotes, though “dual referencing” will remain an option for companies. But the ASC does more than just change the way financial footnotes are referenced.
Historically, the standard-setting and interpretive bodies that release guidance required users to keep up with each new item independently and, as such, necessitated that users understand both the context and items for which any new guidance applied. With the new, topic-based ASC, all newly issued and historical authoritative U.S. GAAP is kept under “one roof.” As new guidance is issued, it will remain organized within the original topical structure (as opposed to a chronological release date). FASB also eliminated much of the ambiguous terms such as “usually,” “ordinarily,” and “generally,” which should make accounting literature easier to understand for everyone.
It is also no longer necessary to know that a particular FASB or EITF has been effectively superseded by a new pronouncement. The clever folks at the FASB built the topic-based ASC with future updates in mind. As new guidance on a topic is released, new paragraphs (located within the topic) will replace or add to superseded information as appropriate. Each update will be sequentially identified by the year in which it was released regardless of which standard-setting and interpretive bodies released the update (i.e., the first update in 2010 will be cited as Accounting Standards Update 2010-001.)
The simplification into a single codification also alleviates chasing down several disparate sources of information. Consider inventory ' under the pre-codification world, GAAP related to inventory was comprised of no less than 12 pieces of literature derived from eight separate sources, including ARBs, FINs, EITFs, SFASs, SOPs, and SABs. Now, inventory GAAP is contained under the simple ASC Topic 330 Inventory. Consider also that FASB ASC Subtopic 840-10 (Leases) is sourced from seven FASB statements, 12 Emerging Issues Task Force (“EITF”) guidance, four FASB Technical Bulletins (“FTB”), and four FASB Interpretations (“FIN”). The new system alleviates much of the endless referencing and cross-referencing necessary to fully understand an issue as required under the current system.
In addition to making research on U.S. GAAP more intuitive, the Codification also draws a clear line between authoritative U.S. GAAP and non-authoritative U.S. GAAP. If you can't find it in the Codification, it's not authoritative U.S. GAAP. As such, the Codification will be the sole source used in U.S. GAAP-related disputes and litigation.
What Does This Mean to Me?
ASC codification is important for any general counsel, transactional attorney, white collar or securities litigator, or anybody who must refer to authoritative GAAP. Consider a securities litigation attorney whose complaints, motions to dismiss, and other filings historically often cite various FASBs, EITFs, and APBs to explain why a company's accounting may, or may not, have been appropriate. In fact, any attorney with an SEC registrant client should be aware that the pages of footnote disclosures in an SEC filing that cites to GAAP will now do so using the new ASC references.
Consider again the prior example that instead of the previously required “as required by FASB statement 133,” footnotes will now refer to “as required by the Derivatives and Hedging Topic of the FASB Accounting Standard Codification.” While a change from referencing “FASB 133″ to “Derivatives and Hedging Topic of the FASB ASC” may seem a subtle change, take a look at the notes to a good-sized company's public filings these days and you'll be awash in numerical references to FASBs, APBs, and EITFs that have no obvious connection and don't even necessarily provide you with all of the other authoritative U.S. GAAP that might also be relevant to the accounting at issue. The straightforward descriptions and topical, drill-down organization of the ASC simplify the technical alphabet soup.
Most argue the change to FASB Codification was well overdue. In fact, a FASB survey of 1,400 users of U.S. GAAP taken prior to the ASC project showed 80% of respondents believed U.S. GAAP to be confusing and 85% believed the required level of research was excessive. A full 95% of respondents believed the codification project should be pursued. The ASC project itself was a huge undertaking. The Codification combines more than 2,000 accounting standards and required the efforts of more than 200 individuals from multiple entities working over a five-year period.
Using the ASC System: Topics and Subtopics
Finding answers to accounting-related issues under the ASC is a much more intuitive process as individual topical issues unfold into further levels of detail as one drills deeper. The ASC is broken into the following four sections: Topics; Subtopics; Sections; and Subsections.
Topics
Topics are the broadest categorization of content and each is assigned a three-digit code. There is a general order with broad concepts and principles in the 100s; financial statements presentation in the 200s; financial statement accounts such as assets, liabilities, equity, revenue, and expenses from the 300s-700s; business transactions in the 800s; and industry-specific accounting treatments in the 900s. Examples: 305 ' Cash & Cash Equivalents, or 840 ' Leases.
Subtopics
The subtopics are usually divided by type or by scope and are assigned a two-digit code (i.e., under the broader 840 Lease topic are the subtopics for operating leases under 840-20 while capital leases are covered under 840-30. Sale'Leaseback transactions are covered under 840-40.
Sections
Each subtopic is then further divided into sections with detailed information such as the subtopic's status, objectives, scope, and accounting treatment.
Consider the following entry for the initial measurement of a Capital Lease by a lessee. It is found by drilling down from Topic 840 (leases), to Subtopic 30 (capital leases) and finally to Section 30 (initial measurement). Paragraphs 1-3 discuss the measurement of the value of the asset: 840-30-30-1, 2, 3:
30-1 The lessee shall measure a capital lease asset and capital lease obligation initially at an amount equal to the present value at the beginning of the lease term of minimum lease payments during the lease term excluding that portion of the payments representing executory costs (such as insurance, maintenance, and taxes to be paid by the lessor) including any profit thereon.
30-2 If the portion of the minimum lease payments representing executory costs (including profit thereon) is not determinable from the provisions of the capital lease, an estimate of the amount shall be made. The discount rate to be used in determining the present value of the minimum lease payments shall be that prescribed for the lessee in the minimum-lease-payments criterion in paragraph 840-10-25-1(d).
30-3 If the present value of the minimum lease payments exceeds the fair value of the leased property at lease inception, the amount measured initially as the asset and obligation shall be the fair value. If the lease agreement or commitment, if earlier, includes a provision to escalate minimum lease payments for increases in construction or acquisition cost of the leased property or for increases in some other measure of cost or value, such as general price levels, during the construction or preacquisition period, the effect of any increases that have occurred shall be considered in the determination of the fair value of the leased property at lease inception for purposes of this paragraph.
The Advantages of Being Familiar with ASC
While the GAAP codification may affect the everyday world of accountants and finance professionals more readily than attorneys, there are a number of advantages to being familiar with ASC:
- Authoring legal filings that reference adherence to (or deviation from) authoritative GAAP;
- Getting a base understanding of pertinent accounting issues or concepts impacting a client without facing a towering stack of confusing and disparate historical sources;
- Familiarity to references when reviewing a public company's financial statements or SEC filings ( i.e., 10-K, 10-Q, etc.)
To take a test drive, go to www.fasb.org and see for yourself how the system works. Try looking into a revenue recognition or inventory write-down issue. To do the same research in a pre-codification world would have required either access to an expensive proprietary research system, an accounting expert, or access to printouts of the various FASBs and SABs issued on the topic.
Anything to Look Out for?
Yes! The Codification is not the end all and be all of accounting standards organization. For instance, state and local government accounting are excluded from the Codification. Also, only relevant portions of authoritative content issued by the SEC and selected SEC staff interpretations and administrative guidance have been included in the Codification. SEC's rules related to Management's Discussion and Analysis (“MD&A”), auditing, and independence are not in the Codification. Thus, public companies still need to refer to SEC rules for other guidance.
Additionally, accounting-related disputes and litigation frequently deal with whether historical transactions were properly reflected; however, having knowledge of how to research, present and critique GAAP within historical time frames remains an issue. Although the FASB has included a tool that allows you to look up a standard's pre-codification address, if a standard has been updated and changed a few times, not all of the old addresses will be shown in the cross-reference tool. For example, FASB Statement No. 141(R), Business Combinations (revised), will
be shown as the old address of Topic 805 Business Combinations and you will not find the original, earlier address of FASB Statement No. 141 ' so don't toss those hard copy FASB pronouncements just yet.
Finally, though not anticipated, there will likely be inadvertent or unforeseen contradictions that may need to be sorted out. Remember, this project took more than 2,000 standards and broke them down issue by issue, line by line, and then reconstructed them into approximately 90 topics in the ASC.
What's Next?
The Codification won't render accounting expertise obsolete ' not by a long shot. However, it will tilt the playing field back toward allowing a layperson to quickly research the authoritative guidance around an accounting issue. The ASC was also built with the imminent convergence of the U.S. GAAP and the International Financial Reporting Standards (“IFRS”) in mind. The Codification correlates closely with the standards issued by the IASB (International Accounting Standards Board), which will allow for a more smooth transition from U.S. GAAP to IFRS.
The Basic View of the ASC is available to the public free of charge on the FASB's Web site at www.FASB.org. FASB also provides an in-depth online tutorial demonstrating the ASC Web site's functions and features. Next time an accounting issue arises, take a quick run through ' you'll be surprised how easily you may find the answer to your accounting question.
John LaBella is a director and Wing Wong is a vice president with AlixPartners LLC in San Francisco. LaBella provides financial advisory and accounting consulting services related to litigation, corporate investigations, valuation, merger and acquisition disputes and other matters. LaBella also advises in matters related to restructuring and bankruptcy. He may be reached at 415-848-0321 or [email protected]. Wong provides financial advisory and consulting services in the areas of internal investigations, disputes consulting, interim management, and Foreign Corrupt Practices Act compliance assessment. She may reached at 415-848-0309 or [email protected].
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