Will the New FASB Code Change Accounting?

Less than three weeks away from the July 1 launch of the codification system, there are still many unknowns.

Alix Stuart
- CFO.com | US

June 17, 2009

Get ready to say good-bye to the alphabet soup that currently
comprises Generally Accepted Accounting Principles.  As of July 1,
standards now known as FAS, FSP, EITF, or APB, among others, will be
subsumed into a new and less letter-centric organizational system as
part of the Financial Accounting Standards Board's codification project.

The debut of the online filing cabinet promises to streamline GAAP
by grouping all rules into roughly 90 topics, and should draw a sharper
distinction between authoritative and non-authoritative GAAP. "Instead
of GAAP being represented by thousands of different documents, it's
represented by one single authoritative source," says Ronald P.
Guerrette, vice president of the Financial Accounting Foundation, which
oversees FASB. However, less than three weeks away from the launch,
there are still many unknowns, including whether or not the FASB's
promise that GAAP is not changing will turn out to be true.

The first surprise for some may be that this codification project is
happening at all. Over 50% of 530 U.S. CFOs and senior comptrollers
surveyed by Grant Thornton in late April said they didn't know about
the rules restructuring, despite the fact that a preliminary version
has been available for viewing and comment since January 2008. FASB is
now sending out e-mail codification updates, and offers a tutorial on
the new system on a website dedicated to the project. Over 70,000
people have signed up for that website so far, says Guerrette.

CFOs who are aware of the coming change are fairly positive. But
they're also realistic about the hassle of the transition period. "It's
a great step, and will absolutely decrease the amount of time my staff
spends on accounting research, but there are going to be some areas of
ambiguity; it's just the cost of doing the project," says Steffan
Tomlinson, CFO of wireless-networking firm Aruba Networks. Adds Netgear
CFO Christine Gorjanc: "It will be really good for the young people,
and will take a little more effort for those of us who have been around
20 years or so - but in the long run, it makes sense."

The most obvious change that all CFOs must make is to change
financial statements to eliminate the old rule references and either
replace them with topic and subtopic numbers, or eliminate them
altogether in favor of plain English. That part should be simple, says
John Hepp, a partner at Grant Thornton, in part because the
codification system has a feature that helps with cross-referencing.
The changes will apply to all quarterly and annual financial statements
issued for periods ending after September 15.

"The harder issue," says Hepp, is that CFOs will need to review all
accounting manuals and internal controls to adjust for the new system.
"You have to make sure you weren't relying on any ambiguity in the
wording or that there wasn't something in lower-level GAAP that's been
brought up [to be authoritative]," he says. "When you change words from
'should' or 'generally' to 'must' or 'will' - which has been done -
there could be some changes. And such changes could lead to a
restatement if there's a significant change.

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Tomlinson, for example, has already worked with outside auditors to
help prepare himself and his staff on the new system, but based on the
available information, can't tell yet if he'll have to change any
accounting policies or footnote disclosures. "Regardless, we'll be
prepared to comply, but it's those gray areas that are giving us a
little bit of heartburn," he says.

The lack of context in the new system may also be a problem, says
Hepp. "Sometimes we'll find what we're looking for in the codification,
but then we have to go back to the original docs to see what they're
talking about," he says. "As you get into more-nuanced interpretations
of GAAP, the more context matters." The rules in their current form
will be archived on the FASB website and available for searching.

For their part, FASB staffers stand by the promise that nothing
about GAAP has fundamentally changed. Tom Hoey, director of the
codification project, says only one small item related to software
revenue recognition was elevated from non-authoritative to
authoritative GAAP in the process, and that the change has long been
required by the Securities and Exchange Commission for public
companies, in any case.

As for context, "the idea was that if there is contextual
information that is needed to help make a decision, it would have been
retained," he says, and there's been little feedback from testers so
far on the lack of it. Finally, should users find disparate
interpretations between new and old language, he says, a
soon-to-be-created FASB committee will be at the ready to deal with
them.

Only time will tell how thorny the changeover may be. CFOs,
meanwhile, may eliminate some of these potential problems on their own
by using privately-provided databases of accounting research. Gorjanc,
for one, says her staff does much of its research using Comperio,
provided by Pricewaterhouse Coopers, and isn't likely to drop it even
if the new FASB tool proves worthwhile.  "We rarely use one source,
anyway," she says. She particularly likes the information provided by
the accounting firms because "you get an opinion, or at least some
interesting questions" about how the rules apply.

One unknown until yesterday was pricing for use of the codification.
The basic version will be free, FASB announced. But the "professional
view" version, which includes features like advanced text searching and
a cross-referencing function, will cost $850 per "single concurrent
user," meaning that only one person could use it at a time at that
price.

For more information on New FASB Codification system on CFO.com.

Posted by Dan Walter

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