From PLI’s Online Program
GAAP "Codification": What Attorneys Need to Know about the New
Accounting Rule System
#24855
GAAP “Codification”: What Attorneys Need to know about the New Accounting
about the New Accounting Rule System
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Joseph J. Floyd of Floyd Advisory LLC
Steven R. Paradise of Vinson & Elkins LLP
Charles R. Hacker,, Jr. of PricewaterhouseCoopers
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Agenda
• Accounting Rule Making and the Motivation for the Codification
• Overview of the Codification • Impact on Financial Reporting
• Researching an Accounting Topic
• Impact on Accounting and Auditing Litigation
• Alignment with IFRS
Alignment ith IFRS
• Q and A – Panel discussion and Participants
Pre‐Codification Assemblage of Rules and Guidance The “Alphabet Soup
The Alphabet Soup” of Accounting
of Accounting
1936‐1959 CAP issued 51 ARBs
1936
1959 CAP issued 51 ARBs
Plus
1959‐1973 APB issued 31 Opinions
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Plus
1973‐Present FASB issued 168 Statements
1984 EITF i f
1984 EITF is formed d
Plus
AICPA Guidance
AICPA Guidance
Equals
July 1, 2009 FASB’s GAAP Codification
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Source of slide content www.aicpa.org
The “OLD” GAAP HIERARCHY
A.
FASB Statements of Financial Accounting Standards and Interpretations, FASB Statement 133 Implementation Issues, FASB Staff Positions, and AICPA Accounting Research Bulletins and APB Opinions that are not superseded by actions of the FASB
that are not superseded by actions of the FASB
B.
FASB Technical Bulletins, if cleared by FASB, AICPA Industry Audit and Accounting Guides and Statements of Position
Accounting Guides and Statements of Position
C.
AICPA Accounting Standards Executive Committee Practice Bulletins that FASB cleared consensus positions of the FASB Emerging Issues
that FASB cleared, consensus positions of the FASB Emerging Issues Task Force and the Topics discussed in Appendix D of EITF Abstracts D.
Implementation guides (Q&As) published by the FASB staff, AICPA Implementation
guides (Q&As) published by the FASB staff, AICPA
Accounting Interpretations, AICPA Industry Audit and Accounting Guides and Statements of Position not cleared by the FASB, and practices widely recognized and prevalent either generally or in the i d t
industry
Source of content www.fasb.org
Motivation for the Codification
Motivation for the Codification
• All authoritative literature in one spot
• Simplify user access to all authoritative GAAP
• Reduce
Reduce the amount of time and effort required to solve an the amount of time and effort required to solve an
accounting research issue
• Mitigate the risk of noncompliance with standards through g
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improved usability of the literature
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• Provide readily available information with real‐time updates as new standards are released
new standards are released
• Context inclusion for a more complete understanding of the literature
The Process
• Fi
First suggested to FASB in 2001 by members of FASAC d FASB i 2001 b b f FASAC • In 2004 FASB surveyed 1400 users of GAAP, over 95% supported pursuing the Codification
• FAF approves funding for the FASB’s Codification and retrieval project
• Top financial reporting professionals were recruited for two to six month assignments
• Project was estimated to take three to five years to complete
• Thousands of pronouncements organized into 90 topics
• On June 30, 2009 FASB issued “The FASB Accounting Standards Codification
Standards Codification”
• The Codification is effective for financial statements issued for interim and annual periods ending after September 15, 2009
Source used for content www.fasb.org
Overview of the Codification
♦Areas: Grouping of approximately 90 topics
♦Topics: Broadest categorization of related content
♦Subtopics: Generally distinguished by type or scope
♦Sections: Correlate with IFRS/IAS sections
♦Subsections: Subsections: Allow further segregation and navigation of content All
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Source of slide content www.aicpa.org
Updates to the Codification
• Existing guidance will be updated and new guidance will be incorporated into the Codification in real time, providing users with access to most recent FASB deliberations
• As the FASB amends existing Codification paragraphs, both the current paragraph and the new paragraph, “Pending Text”, will reside in the Codification es de t e Cod cat o
• Once the new guidance is effective, the outdated guidance will be removed
• All guidance in the Codification will be updated through "Codification Update Instructions" ("CUIs") and the FASB will no l
longer issue FASB Statements, FASB Staff Positions (FSPs), FASB i
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(
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Interpretations (FINs), or Emerging Issues Task Force (EITF) Abstracts
Source of slide content www.pwc.com
Impact On Financial Reporting
• Financial statements issued for interim or annual periods ending after September 15, 2009, will make all references to the Codification or simply explain the accounting concepts
• FASB has publicly encouraged the use of plain English in financial statement disclosures
• The SEC encourages companies to draft financial statement disclosures to avoid specific GAAP references and to more clearly explain accounting concepts
explain accounting concepts
• “Old” GAAP references should not be used
• SEC has stated they will not require a preferability letter if an accounting change is in response to a newly issued update of FASB ASC.
Source of content www.aicpa.org and www.fasb.org
Researching an Accounting Topic
What Tools Are Available?
What Tools Are Available?
FASB website (www.asc.fasb.org)
• Basic view Basic view
– No charge
– Limited functionality, only content
• Professional view
– Requires a paid subscription
– Provides
Provides full functionality (including joining sections and viewing full functionality (including joining sections and viewing
original source documents via the print screen feature)
Comperio – PwC’s tool (www.pwccomperio.com)
• Updated to include Codification
U d t d t i l d C difi ti
• Includes much of the same functionality as professional view on FASB’s website
FASB website overview and basic view functionalityy
Codification home page
S bt i
Subtopics
Area
Topic
FASB website overview and basic view functionalityy
Sections within ASC 740‐10
FASB website overview and basic view functionalityy
Paragraphs 6 th
through 9 within h 9 ithi
ASC 740‐10‐30
FASB website overview and basic view functionalityy
Cross Reference feature
FASB website overview and basic view functionalityy
Cross Reference feature
generated report
Prior standard Prior
standard
reference (e.g., FIN 48, par. 8)
New ASC New
ASC
reference: 740‐10‐30‐7
FASB website overview and basic view functionalityy
Industry‐specific guidance
FASB website overview and basic view functionalityy
Master Glossary
FASB website overview and basic view functionalityy
New content FASB website overview and basic view functionality
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Recap of Key insights
f K i i ht
• Cross Reference feature
Cross Reference feature
– Allows users to cross reference historical references and new ASC references
• Master Glossary
– Provides a listing of all defined terms in the Codification
• Future Codification updates
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– Will contain a new standard along with instructions for how the standard will be incorporated into the Codification
Note – Users can still attain access to pre‐Codification standards
on the FASB’s website.
FASB Website Overview and Other Functionalityy
Defined term
Slide 24
FASB Website Overview and Other Functionalityy
SEC Material
Slide 25
FASB Website Overview and Other Functionalityy
To view source document
Slide 28
FASB Website Overview and Other Functionalityy
Source document
Slide 29
FASB Website Overview and Other Functionality
Impact on Accounting and Auditing Impact
on Accounting and Auditing
Litigation
• Benefits realized through Codification:
Benefits realized through Codification:
‐“One‐Stop Shopping”
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‐Increased access for attorneys and other non‐
accounting professionals
accounting professionals
‐Minimize Risk
‐Assure complete and thorough research
‐Minimize potential for surprise
•
Potential uncertainty:
– Unintentional changes to GAAP
‐Substantive GAAP not intended to change
Substantive GAAP not intended to change
‐Changes to structure and presentation may cause rules to be applied differently
‐Codification may use different phraseology
Effect on ability to advocate
Effect on ability to advocate
‐ May decrease ability to argue competing interpretations
‐ Former view: “GAAP is not [a] lucid or encyclopedic set of pre‐existing rules . . . . There are 19 different GAAP , y
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sources, any number of which present conflicting treatments of a particular accounting question.” Shalala v. Guernsey Memorial Hosp., 514 U.S. 87 (1995).
‐ Previously, the potential existed for parties to argue d ff
differing interpretations of an accounting principle. See, f
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e.g., In re Countrywide Fin. Corp. Secs. Litig., 588 F. Supp.2d 1132 (C.D. Cal. 2008) (arguing over proper method of accounting for loss contingencies).
method of accounting for loss contingencies).
Experts
• Codification applies prospectively
• When did the dispute arise? Is there a governing agreement?
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Advising Clients
‐Ensure Compliance ‐Obscure or ambiguous provisions may have been changed by the Codification
‐New/Existing Agreements
‐Include explicit references to Codification?
‐Financial Statements
‐Cite in “plain English” or to Codification
‐SEC
‐Releases clarify that all references in SEC rules/guidance refer to GAAP principals as set forth in the Codification
Q and A
Panel Discussion and Participants
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