On July 1, 2012, the “Codification” of the Financial Accounting Standards Board (FASB) “celebrated” its third birthday. While CPAs around the world probably did not recognize this event by having cake or singing “Happy Birthday,” or giving gifts, it does prove that conservative accountants can make adjustments to the way they perform their research. Normally, CPAs do not like change but they accepted the FASB’s Accounting Standards Codification reasonably well. If the United States opts for change and decides to follow the accounting rules of the International Accounting Standards Board (IASB) rather than accounting rules of the FASB, the U.S. accounting profession will likely adapt as well—with a wrinkle here and there.
A Look Back—What the FASB Codification Did and Did Not Do
Prior to the release of the Codification, the FASB was issuing its rules chronologically via a FASB standard or interpretation. An example of such a standard is FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. Any new FASB guidance would include a discussion of the topic, the new rules, implementation guidance, and an itemization of how generally accepted accounting principles (GAAP) changed—listing the prior FASB rules and what paragraphs in the accounting literature were added or otherwise affected.
However, all those changes had to be “pieced together” by accountants to see the final “as amended” rule in effect. While the FASB would issue its “Current Text” publication that pieced the literature together for accountants, it was only published once a year and, believe it or not, the FASB termed it “nonauthoritative”! The only authoritative guidance was in the issued standard—for example, Statement 133 itself, together with the numerous amendments and interpretations thereto made by the FASB over the years.
All this changed on July 1, 2009, when the FASB released its Accounting Standards Codification, which put all historical U.S. GAAP literature into 89 accounting topics. Upon release of the Codification, the only authoritative source for U.S. GAAP was that contained in the Codification—all prior GAAP literature was superseded.
New FASB standards are now being issued in the form of sequentially numbered Accounting Standards Updates or ASUs. For example, on September 15, 2011, the FASB issued its eighth ASU in 2011, namely, ASU 2011-08, Intangibles—Goodwill and Other (Topic 350)—Testing Goodwill for Impairment. Upon release of a new ASU, the FASB issues a “paper copy” but also electronically updates its Codification and separates the new content from the old content, labeling the new material as “pending content” for a period of time.
Of note, the SEC staff thought it would be a good idea to incorporate many of its rules and guidance into the FASB Codification to allow users to learn views of the SEC and its staff. Such guidance is contained in the FASB Codification and separately tagged with an “S” to let users distinguish SEC guidance from FASB rules. However, the SEC rules and guidance reflected in the FASB Codification are not authoritative in and of themselves and are not updated as quickly as new guidance is released by the SEC and its staff. When the decision was made to add such content to the FASB Codification, the SEC staff was likely aware of these issues but believed that including its guidance in the FASB Codification was a better option than excluding it, even if it could not be 100% current.
The potential magnitude of the problem with non-current SEC content can be demonstrated with an actual situation. The SEC staff issued Staff Accounting Bulletin (SAB) No. 114 on March 7, 2011, to update the 14 accounting topics in the SAB series primarily to incorporate FASB Codification references and terminology. The various topics in the SAB series are reflected in the “S” sections within the FASB Codification. As of June 30, 2012, more than one year since SAB 114 was issued, the FASB had not yet updated its Codification for the changes made by this SEC release. Arguably, the changes are cosmetic in nature, but the situation illustrates the fact that there will be timing differences and, accordingly, U.S. registrants should be careful not to rely solely on SEC guidance in the FASB Codification.
The FASB also periodically updates its Codification to make minor corrections and remove old content that has been superseded by a new ASU—a concept termed a “roll-off.” Such corrections and tweaks are issued in the form of an “Editorial and Maintenance Update” or EMU. The most recent EMU, 2012-08, was issued by the FASB on June 29, 2012.
Convergence and the Codification Concept “Wrinkle”
The FASB and the IASB are striving to conform their accounting standards into a single set of rules. In the United States, the SEC and its staff are considering whether U.S. registrants should be allowed or possibly be required to follow accounting rules released by the IASB—issued by that body in the form of International Financial Reporting Standards or IFRS. While the two accounting boards have made considerable progress in their convergence effort, many hurdles remain.
Of note is that the concept of a codification issued by the IASB—assuming convergence occurs—does not seem to be a high priority for that board. When the FASB released its Codification three years ago, it did so having spent hundreds of man-hours over several years codifying and restructuring its literature. It also had a test version of the new Codification available for one year before it became authoritative.
If U.S. GAAP should be replaced by IFRS, accountants will have to adapt to another codification process some time in the future, having only recently celebrated the three-year anniversary of the U.S. FASB Codification.
About the Author
Ron Pippin is an experienced CPA based in Wheaton, IL. His 40 plus year career includes being an audit partner in Arthur Andersen, a member of Andersen’s Professional Standards Group (“national office”) in Chicago, the Director of Financial Reporting for a Fortune 50 company and most recently, the editorial director of CCH’s Accounting Research Manager. Currently, Ron does independent writing and analysis as well as accounting consultation on a variety of topics.