FASB Accounting Standards Codification Will Have an Impact on SEC Reports

The Financial Accounting Standards Board (FASB) recently issued Statement of Financial Accounting Standards No. 168. This standard established the FASB Accounting Standard Codification™ as the source of authoritative accounting principles for use by nongovernmental entities in preparing financial statements in conformity with generally accepted accounting principles (GAAP).

FAS 168 and the Codification are effective for reporting periods ending after September 15, 2009.

Impact on Financial Statement Disclosures

The new Codification was designed as a compilation of FASB's existing sources of GAAP—including statements of financial accounting standards and Accounting Principles Board (APB) opinions—rather than as a substantive revision of GAAP. Accordingly, adoption of the Codification should have little or no impact on the operating results or financial statement balances of most companies.

However, the narrative disclosure public companies make related to their financial statements—in particular, management's discussion and analysis of financial condition and results of operations (MD&A)—often includes references to particular FASB statements or APB opinions. Such references will generally need to be revised when companies become subject to the Codification.

Sources of GAAP for Public Companies under FAS 168

FAS 168 establishes the Codification as the primary source for GAAP recognized by the FASB, but it is not the only source of GAAP for public companies. In fact, FAS 168 expressly recognizes the rules and interpretive releases of the Securities and Exchange Commission as sources of GAAP for public companies.

Accordingly, current and future SEC staff accounting bulletins, Emerging Issues Task Force issue statements and other SEC guidance will continue to be sources of GAAP. In addition, FAS 168 "grandfathered" a number of original accounting pronouncements as sources of GAAP and exempted a few others until they are integrated into the Codification.

Since it has adopted the Codification, the FASB will no longer issue new standards in the form of statements of financial accounting standards. It will instead issue "accounting standards updates." The updates alone will not be authoritative sources of GAAP. Rather, they will offer guidance and provide the bases for conclusions on changes to the Codification.

GAAP Pronouncements by Topic

The Codification reorganizes prior GAAP pronouncements into approximately 90 accounting topics that follow a consistent topical model. Each of the 90 topics is arranged into four major subject areas, which include general principles, presentation, financial statement accounts and broad transactions. A fifth subject area, industry, provides information related solely to a single industry, such as airlines, software or real estate.

Each of the topics is further divided between subtopics and sections. The end result is a Dewey Decimal­–like system, where particular elements of GAAP are referenced by a unique number as follows: XXX-YY-ZZ, where XXX is the topic, YY is the subtopic, and ZZ is the section.

Where to Find the Codification

FASB has established a Web site at http://asc.fasb.org for access to the Codification and related information. There is no charge to registration for the "basic view" on the Web site, which allows users to browse the Codification—and provides cross references from legacy pronouncements to new Codification citations.

A "professional view" also is available for an annual fee per user based on the number of users at an entity. The fee ranges from $850 for a single user, to $510 per user for 36 to 49 users, with special pricing available for 50 or more users. Among other features, the professional view offers enhanced browsing of the Codification, provides enhanced cross reference searching and allows access to legacy accounting pronouncements.

Impact on SEC Reports

Revising SEC disclosure to eliminate references to legacy accounting pronouncements and replace them with references to the Codification could be a challenging task. However, revisions of detailed GAAP references may not be required.

The FASB Accounting Standards Codification Notice to Constituents (v 2.0), issued in connection with the codification project, states that in financial statement footnotes the FASB encourages "plain English" broad references to Codification topics, rather than numerical citations to the Codification. It seems likely that other references to legacy accounting pronouncements outside of the footnotes may evolve to similar "plain English" broad references.

References to accounting pronouncements often appear in the MD&A section of financial reports. In particular, the critical accounting polices section of MD&A generally includes references to specific accounting pronouncements. Such references also may appear in the results of operation or liquidity and capital resources sections of MD&A. References to accounting pronouncement occasionally even appear in the risk factor sections of SEC reports.

Transition to SEC Disclosure Preparation Under FAS 168

The task of revising disclosure in SEC reports to eliminate references to legacy accounting pronouncements will fall primarily to accounting staff members working with their company's independent registered public accounting firm. However, following a company's adoption of FAS 168, other professionals responsible for preparing or reviewing SEC reports should verify that references to sources of GAAP have been checked for accuracy.

A smooth transition between SEC disclosure with references to legacy accounting pronouncements and SEC disclosure prepared under FAS 168 will require early identification of necessary revisions. Close collaboration with accounting professionals in revising references to legacy accounting pronouncements will also be essential.