GAAP Goes Out of Style; Hello Online Codification

It may be time for a book burning in the accounting world: the entire library of Generally Accepted Accounting Principles is about to become extinct.

Starting July 1, the Accounting Standards Codification will become the authoritative source for all matters accounting—replacing GAAP, and ushering in a new way of researching, using, and citing accounting rules in the United States. All those historical pronouncements from various governing bodies that have built GAAP bit by bit over the decades will be gone, replaced by an online system of topics, subtopics, sections, and sub-sections.

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

The Financial Accounting Standards Board has spent years slicing and dicing GAAP into its component topics, to develop the codification tool. It doesn’t alter the content of GAAP per se; applying fair-value judgments, for example, will still be as maddening as ever. But the tool radically restructures GAAP’s organization, so all guidance on fair value would be grouped together. The goal is to make information easier to find, and therefore make it easier to comply with rules related to specific topics.

Eubanks

“This affects [public accountants] across the board: financial statement preparers, auditors, academics, and analysts alike,” says Amy Eubanks, director of accounting and auditing publications at the American Institute of Certified Public Accountants. “GAAP itself isn’t changing, but its structure and presentation is significantly changing.”

For example, rules for revenue recognition are currently scattered among more than 100 different pronouncements all over GAAP, creating complexity that has been a common cause for restatements in recent years. In FASB’s codification tool, all that guidance is housed in one place.

“Today, there are tons of places to go to find information on revenue recognition,” Eubanks says. “The risk of missing something is greater before the codification. Now you can go to the codification, and everything that’s ever been issued is all in one location.”

Wright

Chris Wright, managing director at Protiviti, says the transition shouldn’t be too jarring for accountants accustomed to using electronic searches to find accounting rules. Yes, he warns, if you’re used to looking things up a certain way, there is some “research risk” around using a new tool. But diligent use of search-engine technology should defuse most risk out there.

Older accountants who grew up in a world of printed accounting guidance and books of FASB rules might have a steeper learning curve, says Randy Elder, an accounting professor at Syracuse University. But the online codification does bring the huge benefit of collecting all guidance from multiple sources into a single place, he adds.

Elder

“There are actually a dozen different sources of authoritative guidance,” he says. “By codifying all the authoritative guidance into one spot, someone researching can in essence access all that authoritative guidance in one location.”

Accountants also will benefit from FASB’s plan to update the codification continuously, which assures that they will always be following the most current guidance, Elder says. “If you buy a paper-based document, it eventually becomes out-of-date.”

Huh? We’re Doing What?

Although FASB has been working on the codification for years and has made it available on a trial basis since January 2008, the accounting world hasn’t paid much attention, says John Hepp, a partner in the national professional standards group at Grant Thornton. The firm recently polled more than 500 senior financial executives and found less than half even knew the codification existed. Only 19 percent expected the codification to make it easier to navigate accounting standards.

READY FOR CODIFICATION?

The following results are from a Grant Thornton survey of more than 500 corporate finance executives about their awareness of codification.

CHICAGO, April 29, 2009—In a national survey of CFOs and senior comptrollers conducted by Grant Thornton LLP, the U.S. member firm of Grant Thornton International Ltd, only 46 percent are aware of the FASB’s Accounting Standards Codification™ project.

The Codification will change U.S. GAAP by removing the current four-level U.S. GAAP hierarchy and replacing it with two levels: authoritative and non-authoritative. The Codification will become the single source of authoritative U.S. accounting and reporting standards, superseding all existing pronouncements of the FASB, the EITF, the AICPA and predecessor standards setters effective July 1, 2009. The proposed changes are included in an Exposure Draft, The Hierarchy of Generally Accepted Accounting Principles, issued on March 27, 2008.

“The FASB has concluded that the Codification is not in itself a change in GAAP,” said John Hepp, a partner in Grant Thornton’s National Professional Standards Group. “However, each reporting entity should review its critical accounting policies in light of the revised and reformatted text.” Any issues identified in the review that could be interpreted as a change in GAAP potentially requiring transition guidance should be reported to the FASB as a comment in response to the Exposure Draft. The comment deadline is May 8, 2009.

While the Codification will be a major change in the U.S. GAAP hierarchy, less than one in five (19%) CFOs think that the Codification project will make accounting standards easier to use. Only 16 percent of CFOs think that the Codification should become the sole source of authoritative GAAP this year.

Are you aware of the FASB’s FASB Accounting Standards Codification™ project?

Yes: 46%

No: 54%

Do you think the Codification project will make accounting standards easier to use?

Yes: 19%

No: 16%

Don’t know: 65%

The codification is set to become the sole source of authoritative GAAP later this year. Choose one of the following statements regarding the Codification project:

No opinion: 43%

The codification should become the sole source of authoritative GAAP but only after a longer transition period.

19%

The codification should be an additional research tool but the original standards should remain the source of authoritative GAAP.

17%

The codification should become the sole source of authoritative GAAP this year.

16%

The original standards are sufficient and there is no need for the codification.

6%

*May not total 100% due to rounding.

Source

Grant Thornton ( April 29, 2009).

Hepp

“People are unaware of it,” Hepp says. “The surprise to us is they didn’t seem to be as enthusiastic as we expected.” He theorizes the profession hasn’t followed the development of the codification partly because the tool doesn’t directly change the content of GAAP. He also suspects accountants have had their hands full addressing other more pressing matters.

In addition to altering the structure of GAAP, the codification eliminates the four basic levels of authority in GAAP—A, B, C, and D—where rules higher in the hierarchy outrank those that are lower. That is, if an accountant today finds a conflict between a Level D rule and a Level A rule, the Level A rule prevails.

With codification, everything in GAAP carries equal authority: If a rule is contained in the codification, it’s authoritative; if it’s not in the codification, it isn’t.

Hepp says there is some lingering concern that the new authority and new structure of GAAP could lead to differing conclusions or interpretations. “We’re not 100 percent certain this doesn’t change GAAP,” he warns.

As an example, he notes that some private entities are already changing the way they calculate pension and post-retirement benefit obligations based on how rules have been reorganized in the codification. Hepp says FASB moved some text from a financial statement’s “basis for conclusions” section and codified it in a way that gives it more authority.

“We know a lot of items have been brought up from the basis for conclusions, and that was previously nonauthoritative,” he says. “Now it’s Level A GAAP.”

Context is an important part of interpreting accounting rules, Hepp says, and he wonders if the reorganization will lead to other instances where new context leads to new conclusions. He suspects accountants will still refer to existing historical pronouncements for guidance if they get confused by following the new paths codification establishes.

Neuhausen agrees that some new accounting conclusions will probably arise from the codification. He expects it even may affect financial statements from prior periods. “There are going to be incidents of people going back and redoing old accounting because of new research,” he says.

Wright expects “limited practical potential” for new accounting interpretations as a result of the codification. “You will still have companies working collaboratively with their external advisers and their auditors, and this will not remove the interpretations that still exist at the national offices of the accounting firms,” he says. “This will not remove the process of interacting with advisors and auditors.”