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 StuartJune 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.

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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.

Going forward, new rules will come in the form of “codification updates,” which will include the text to be replaced in order to highlight the changes. “Being able to see the legacy text, and compare and contrast it, will be fantastic,” says Tomlinson.

Looking farther into the future, standards-setters also see this codification as an important step towards convergence with international standards. “There’s a high correlation between the topics in [U.S. GAAP] codification and international standards,” notes Guerrette. “The ability to compare the two is going to be much more straightforward than it ever has been in the past.”