Accounting Standards Codification (#62)
/In this podcast episode, we discuss the structure of the accounting standards codification that has been produced for all GAAP accounting standards. Key points made are noted below.
The Need for a Codification
The Financial Accounting Standards Board is combining all accounting standards into a single database that’s indexed with a standard coding structure. This means you no longer have to look up a Statement of Position, or an Emerging Issues Task Force consensus, or a Statement of Accounting Standards. Instead, it’s all in one place.
Now keep in mind that this doesn’t change GAAP at all – but it does reorganize a couple of gazillion GAAP pronouncements into about 90 topics. This means you’ll spend less time researching accounting problems. And on top of that, every time they issue a new standard, they’ll drop the new text directly into the new coding structure.
Exceptions to the Codification
There are two exceptions to what you’ll find listed in the codification. One is guidance issued by the Securities and Exchange Commission, though even in that case, some of their content will be included. And the other exception is governmental accounting standards, which aren’t included at all.
The Verification Phase
This codification project is now in a one-year verification phase, while users check it out and make comments. After verification is completed at the end of 2008, this will supersede all other accounting standards. While the verification phase is going on, you can sign up for it for free and browse through it all you want. To do that, go to asc.fasb.org. You have to register to use the site, but that only takes a minute. I strongly suggest that you try it, because it’s really well done. If you look at the main FASB web site, which is fasb.org, you’ll notice that it’s functional, but they could use a professional web designer to clean it up. But the codification site is an entirely different story, because it’s an exceptionally fine piece of work.
The Codification Layout
Here’s how the layout works. Down the left side of the page, they itemize the top levels of the codification, so you’ll see just major categories, like assets, liabilities, equity, revenue, and expenses. And – the part I like – they have a category at the bottom for industry-specific GAAP.
My personal favorite is steamship company GAAP, which is parked way down at the bottom of the list. Not sure that applies to anyone anymore.
The top level also contains two other categories. One is called Presentation, and obviously it covers how to present information, so it has subcategories for things like the balance sheet and income statement, but also more specialized topics, like earnings per share and interim reporting.
The other category is their catchall, which is called Broad Transactions. It contains topics like business combinations, derivatives, and leases.
If you click on any of these categories, you can drill down through their menu system for as many as four levels. So for example, if you start at the Expenses level and then select the Compensation sub-level, that takes you to Retirement Plans, and from there, you can go to Defined Benefit Plans. But that’s pretty deep. In most cases, the menu structure stops at three levels.
So let’s say that you drill down all the way to the underlying text. If you do, you’ll have a selection of categories of information to choose from, like an overview, scope exceptions, the glossary, and of course the main discussion. But rather than clicking on each item in turn, your better option is to click on a button called “Join all Sections,” which merges all of this information into a single web page. I find that this makes it easier to read. Now once you get to this page, you’ll find that it also has lots of hyperlinks to cross-references.
Other Codification Features
The site has some other nifty features, too. If you go back to the home page, it has a tab on the right side that directs you to tutorials for how to use the site. And for all of us old-timers, there’s an awesome cross-referencing tool, where you can plug in the name of the original GAAP source, and it returns a list of where the same information is now listed under the new coding structure.
So for example, if you want to cross-reference an AICPA statement of position, you access the SOP category, the system comes back with a drop-down menu containing all of the current SOPs, then you select one, and click on the Generate Report button. Then it returns a complete list of where every single paragraph in the SOP can be found in the codification – with a hyperlink, of course.
So, what about the codification system itself? Well, it uses four levels, with a three-digit topic going first, then a three-digit subtopic, then a three-digit section, and then a paragraph. This is going to take some getting used to, especially when everyone has memorized their favorite accounting standards, and now has to convert this over to a new number. For example, many of us know what FAS 123R is, because it deals with stock-based compensation, and that’s been a hot topic for years. Well, now we have to remember that it’s subtopic number 718.
Yes, the new coding structure will take a fair amount of time to get used to, but on the other hand, this means we finally have a simplified way to research accounting topics. And that beats the old system, which was pretty arcane. Sure, we could navigate through it, but any newcomer to the field must have been wondering why they had to memorize all of those reference acronyms and numbers, like SOP 97-2 for software revenue recognition, or FAS 133 for derivatives.
Oh, and by the way, once you’ve memorized the new codes, there’s a search feature on the home page, so just plug in the code and it takes you straight to what you need.
So, how good is the new codification system? Well, because of the excellence of the web site, I have to rate this an A+ effort. To everyone involved in the project, which has been about 200 people for the past four years, you did a nice job.