New Codification System Will Make Old Approach Obsolete
The Change: Starting July 1, the FASB will be switching out of its old “cataloguing” system using standard numbers and adopt a codification approach – a theme-based database that sorts out US GAAP by topic, and subtopics all the way down to the paragraph level the most granular), with each level carrying a specific numeric identifier. At the same time, the Board will collapse the multi layers of GAAP (e.g., Emerging Issues Task Force abstracts, AICPA, white papers, etc.) into a single layer of authoritative guidance and then group other guidance under non-authoritative guidance (which will not be part of the codification process).These changes may have the biggest effect on audit firms, but are very likely to impact corporates preparing their financial statements.
The Goal: The Board says its objective is to make it easier for users to find the right information. According to the Board, “The FASB Accounting Standards Codification? Research System features menu-based Topic, Subtopic, and Section navigation. In addition, landing pages for Topics and Subtopics present tree-based navigation to paragraph heading-level content.” It also provides cross referencing to the paragraph in the pre-codification standards. All future guidance will be added directly to the codification system and never issued in the traditional FAS numerical order.
The Effective Date: While the codification system will go live in early July, the Board decided to delay the effective date (from periods starting after July 1 2009), to interim and annual periods ending on or after September 15, 2009. Under this guidance, calendar year-end companies would initially apply the Codification to their third-quarter interim financial statements.
The Impact: Clearly, this new approach to maintaining US GAAP will quickly and directly affect firms in the accounting and auditing space, which will have to revise their manuals and paragraph references in materials they use with clients. A Deloitte partner noted in a recent webinar that the firm has been working intensely for the past three months to update Deloitte’s own manuals.
However, others will also feel the effects. The breadth of the impact was captured by the fact that 6,000 people participated in the Deloitte webinar. Where corporates will be affected is in any reference they have to accounting rules generally in the financial statement and specifically in their hedge documentation. It is no uncommon to have direct references to standards, or specific paragraphs, e.g. FAS 133. Once the effective date hits, the financials cannot carry references to the old FAS line-up. During the webinar, the partners urged companies to not switch the references but rather write a sentence that describes the guidance. This way, when other changes come around, e.g., a switch to IFRS, there’s no further need to find paragraph or standard references.
In fact, the switch to IFRS under the SEC’s roadmap begs the question of why the Board is spending so many resources – and asking preparers and companies to spend so much of their resources – to the codification approach. There is no clear answer. One of the Deloitte partners noted that the IASB may embark on a similar approach and thus make the eventual convergence more seamless from an information consolidation standpoint. However, there’s no clear indication that the IASB plans to follow in the FASB’s step.
It’s important to note, too, that in order to make the codification “search” tool more effective, the FASB will include “relevant portions of authoritative content issued by the SEC and selected SEC staff interpretations and administrative guidance. The SEC Sections-distinguished with an “S” preceding the section number-contain SEC content related to matters within the basic financial statements.” Although the SEC content is organized by topic with the rest of the guidance, it is also presented separately (and the authoritative guidance remain with the SEC).
The Board will update the SEC content as it will for other changes or new guidance, as part of the overall maintenance of the site. But the SEC and its Staff will continue to use existing procedures for communicating new or revised content. As a result, there may be some delay between the time the SEC issues guidance and the update to the codification site.
The Bright Spots: While this may sound overwhelming and for a while it probably will be, as auditors, accountants and companies scramble to update manuals and references, but there are some good news. First, the system does contain a cross referencing tool so users can refer back to their favorite 133 paragraphs. Second, once up and running, the new web interface will make it a lot easier to navigate the often treacherous waters of US GAAP by grouping like content together, e.g., all content about derivatives in one spot vs. FAS 52, FAS 133, FAS 157, DIGs, EITFs, and so forth.
The new website is already up and running and usage is free until the go-live date of July 1, 2009, so it’s a good time to learn how to use the system. (http://asc.fasb.org/help&cid=1176153627761). There are also free tutorials and webcasts to familiarize users with the new system.
Key to Success: What will be the key to the success of this new approach for cataloguing accounting literature is the logic of the database hierarchy, i.e., if the guidance is organized in an intuitive and logical fashion? At least at first glance, that seems to be the case.
The guidance is organized by eight larger topics and down from there, with extensive drop down menus to help users find the relevant language. At the highest level of data hierarchy are eight broad topics, including assets, liabilities, equities, presentation and broad transactions. Below are two examples of how the Board has reorganized its guidance.
Example 1: (Topic) Presentation of Financial Statements
210 – Balance Sheet
215 – Statement of Shareholder Equity
220 – Comprehensive Income
225 – Income Statement
230 – Statement of Cash Flows
235 – Notes to Financial Statements
250 – Accounting Changes and Error Corrections
255 – Changing Prices
260 – Earnings per Share
270 – Interim Reporting
272 – Limited Liability Entities
275 – Risks and Uncertainties
Example 2: (Topic) Broad Transactions
805 – Business Combinations
808 – Collaborative Arrangements
810 – Consolidation
815 – Derivatives and Hedging
820 – Fair Value Measurements and Disclosures
825 – Financial Instruments
830 – Foreign Currency Matters
835 – Interest
840 – Leases
845 – Nonmonetary Transactions
850 – Related Party Disclosures
852 – Reorganizations
855 – Subsequent Events
860 – Transfers and Servicing
If nothing else, the need to review existing (and often old) disclosures and references will yield some new clarity, according to audit firm Deloitte. While companies are not required to make references to GAPP in their financial statements, it’s often hard not to. “The codification may provide an opportunity to make financial statements more useful by drafting language in their (companies} financial statements to avoid specific references and more clearly explain accounting concepts.”