What is the new “Codification” issued by the FASB, and how does it affect U.S. public companies?

The “Codification” imposes a new structure for GAPP, without amending the guidance that GAAP provides, but modifies the way that one accesses, references and documents U.S. GAAP.

The Financial Accounting Standards Board (FASB) adopted Statement of Financial Accounting Standards No. 168, The FASB Accounting Standards Codification™ (ASC) changes the structure and hierarchy of accounting standards, including all existing U.S. Generally Accepted Accounting Principles (GAAP) pronouncements and literature distributed by the FASB, the Emerging Issues Task Force (EITF) and the American Institute of Certified Public Accountants (AICPA). The FASB ASC is now the single source of authoritative non-governmental U.S. GAAP and is effective for interim and annual periods ending after September 15, 2009. Any literature not contained in the codification is considered non-authoritative.

The FASB ASC is the result of a major five year project that involved more than 200 people from multiple entities and is significantly different from the structure of previous standards. U.S. GAAP has historically been a collection of many different kinds of accounting pronouncements issued by different standard-setters over time, including FASB, EITF and AICPA. This led to a lot of variation in the components of U.S. GAAP.

There were three primary goals in developing FASB ASC:

1. To simplify user access by codifying all authoritative U.S. GAAP into one repository;
2. To ensure that the content accurately represented authoritative U.S. GAAP as of July 31, 2009; and
3. To create a research system that is up-to-date for the released results of standard-setting activity.

FASB ASC should be less confusing, with required information being easier to retrieve. It is not changing the guidance that GAAP provides, but is imposing a new structure for it. This changes the way that one accesses, references and documents U.S. GAAP.

Some examples of the old nomenclature and new topic numbers are as follows:

The compilation of U.S. GAAP pronouncements resulted in thousands of nongovernmental accounting pronouncements. These have been organized into approximately 90 main topics. Each topic is further divided into subtopics, sections and paragraphs. The structure of the classification system is represented in the following formula:

XXX-YY-ZZ-PP

The topic is indicated first (XXX) followed by the subtopic (YY), section (ZZ) and paragraph (PP). When referenced in working papers, articles, textbooks and other related items, FASB recommends using the detailed numerical referencing system as represented by the above formula. For example:

“Under FASB ASC 820-10-35-18, ABC Entity is required to use its own credit spreads in determining the current value for its derivatives liabilities and all other liabilities for which it has elected the fair value option.”

FASB also encourages the use of “plain English” to describe broad FASB ASC topic references, such as, “As required by the Fair Value Measurements and Disclosures Topic of FASB ASC, ABC Entity is required to use its own credit spreads in determining the current value for its derivatives liabilities and all other liabilities for which it has elected the fair value option.”

Going forward, U.S. GAAP will now be updated through one pronouncement type known as an Accounting Standards Update, or “ASU”. When an ASU is issued during a calendar year it will be numbered sequentially; as an example, 2009 ASU’s have been issued as ASU 2009–01, ASU 2009–02, and in 2010 they will be issued as ASU 2010–1, ASU 2010–2, etc.

Basic codification content and information is available online free of charge. To perform in-depth research and gather information regarding the codification will require a paid subscription. The effects of the codification are far reaching and will require updating any material which references U.S. GAAP. To view the codification online go to http://asc.fasb.org/imageRoot/32/6737032.pdf.

Did you like this article? Click here to sign up for The AccuVal AdVisory™ or send us an e-mail with your comments at inquiry@accuval.net.

---

About AccuVal
AccuVal provides a broad range of valuation, advisory and asset management solutions that contribute to growth or help ensure survival. We appraise the business enterprise and shareholder equity; bonds; intangibles and intellectual property; machinery and equipment; inventory; real estate and accounts receivables in over 100 industries worldwide. Learn more at www.accuval.net.