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Do You Speak ASC?
By Glen Roland, Public Companies Group
It is hard to imagine what life was like before popular technological advances like the mobile phone, television, or even a bar coding system at the supermarket. Do you remember how long it would take to do a week's worth of grocery shopping when the cashier had to hand type every item's price into the cash register? At the Financial Accounting Standards Board ("FASB") they are hoping that accounting practitioners will soon be reminiscing about the good old days. The days when you would try to research an accounting issue only to be bombarded with a plethora of information from various sources within the FASB hierarchy like FASB's, EITF's, ARB's, APB's, etc. Well the good old days have officially ended, because for reporting periods ending after September 15, 2009, the FASB's Accounting Standards Codification ("ASC") project became effective.
The ASC was the FASB's version of spring cleaning as the FASB finally determined that after thousands of pronouncements issued by various bodies within the FASB hierarchy it was time to get organized. The Codification project does not change GAAP in any way shape or form; it only reorganizes the existing pronouncements into one single source of U.S. GAAP. In addition to reorganizing, it also did some cleaning up as any pronouncement not included in the Codification does not have authoritative standing. This is the FASB's effort to enhance the accounting guidance and its usability by practitioners through a regrouping of the authoritative guidance. Ultimately this should allow for faster and more accurate research and updates for changes, with the underlying goal of enhancing the convergence with International Accounting Standards.
The Codification project condenses all of the previous authoritative accounting literature into a topically organized system, sort of a Dewey Decimal System for accountants. The new system has a standardized format of AAA-BB-CC, where the first "A" represents one of the eight topics that the literature has been coded by which are;
2AA Presentation (deals with presentation matters for basic financial statements)
3AA Assets
4AA Liabilities
5AA Equity
6AA Revenue Recognition
7AA Expenses
8AA Broad Transactions (deals with transaction-based accounting issues that affect multiple accounts)
9AA Industries (deals with GAAP rules unique to a specific industry)
The next two "AA" digits represent specific broad topics related to the main topic. The following sequence, "BB", represents a two-digit subtopic that usually contains the primary GAAP guidance for the topic. The final sequence, "CC", represents standardized subsections that relates to all topics. For SEC Registrants, the Codification content contains most of the guidance from the SEC and is denoted within each section with an "S" prefix, in a separate SEC section.
The new Accounting Standards Codification will completely change the way financial statement preparers go about researching, referencing, and quoting accounting literature, through its centrally organized, one-stop shop. The good news is that you can finally get on the same page with that one guy in every office who has seemingly read and memorized every FASB piece of issued guidance, as none of the previous citations continue to survive. No more will you have to memorize what topics FASB 123R or EITF 98-1 represent, as those references do not exist in the new hierarchy. The bad news is that financial statement preparers will have to now revise their financial statements to use the new "coding" system. Therefore, references to accounting standards within a financial statement (for private companies) or within a SEC filing (for SEC Registrants) will have to be eliminated or changed. This will have the biggest effect on SEC Registrants beginning with the financial statements for periods ending after September 15, 2009. At first glance, one might only think of changing the footnotes and MD &A. However, for most SEC Registrants changes will also have to made to their technical research memos, accounting policy manuals, websites, investor relations communications, SOX 404 write-ups and just about anywhere else you can think of that includes an "old" reference to an accounting standard.
For financial statements issued after the ASC's effective date, all technical references will use the ASC format. Then again is the technical reference even needed at all, as this represents an excellent opportunity for companies to eliminate unnecessary technical references. As such, Companies will have to make a policy decision to either change all technical references to the new equivalent codification reference (using ASC 740-10-25 instead of FIN 48) or to use a "Plain English" approach (saying the Company accounts for income taxes using the asset and liability approach instead of stating that the Company accounts for income taxes in accordance with SFAS No. 109 or ASC 740-10-25). For SEC Registrants, it gives them the opportunity to make their financial statements more user friendly by allowing them to reconsider the use, or in most cases overuse, of specific technical references in favor of plain English disclosures. Only time will tell if this new organization system will be a timesaver or if another call to the organizational experts is needed. In the meantime, the next time you're talking to that accounting geek in your office who reads FASB's for fun and he/she quotes an old reference, make sure to let them know that the citation that they just quoted doesn't exist anymore, and ask if they speak ASC!
For more information on the Codification, or for an on-line tutorial, log onto the FASB's website at www.fasb.org.
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