The New Face of GAAP: FASB’s GAAP Codification

By Victor Valdivia, CPA, PhD, NYSSCPA Banking Committee Chair

Goodbye FAS 157, paragraph 22. Hello 820-10-35-37? The Financial Accounting Standards Board (FASB) is codifying its standards and in the process, renaming the financial accounting standards CPAs have come to know so well.

The project, which you may have heard about, is called the Accounting Standard Codification. It was the topic of a recent presentation by Bruce Pounder, a convergence consultant, at a recent Banking Committee meeting.

“In less than one year, FASB’s Accounting Standards Codification will affect the day-to-day work of nearly every CPA who practices, teaches or researches accounting in accordance with U.S. GAAP [generally accepted accounting principles],” Pounder said. “The codification completely changes the way that U.S. GAAP will be documented, updated, referenced and accessed.”

Codification will have a vast and significant impact on the work of most CPAs—something that many have not yet begun to prepare for.

What is Codification?

U.S. GAAP has evolved into a hodgepodge of diverse components, including FASB standards, interpretations and staff positions; Accounting Principles Board opinions; accounting research bulletins; FASB technical bulletins; AICPA Statements of Position; and AICPA industry audit and accounting guides. Some of these sources are considered more authoritative than others, and navigating GAAP’s complex waters is challenging, error-prone, and can take years to learn. FASB is looking to improve the situation by reorganizing the content.

The result is a single source of U.S. GAAP. Starting in April 2009, this will be the only authoritative source of U.S. GAAP, and will replace the “House of GAAP” that we are all familiar with. The codification will not create new GAAP rules, but will reorganize the existing content. FASB will maintain this single source of GAAP and will make it available online.

FASB launched on Jan. 15 a one-year verification phase for the codification. CPAs and others may now use the online Codification Research System for free at http://asc.fasb.org to research accounting issues and provide feedback on whether the codification content accurately reflects U.S. GAAP for nongovernmental entities. Users must register to review the codification and provide content-related feedback at the individual paragraph level, as well as general system-related feedback.

Content will be organized according to broad topical categories. There are more than 100 topics in general accounting principles, presentation, financial statement accounts, transactions, and industries. Each topic is organized into subtopics, which in turn are organized in sections, then into paragraphs. For example, FAS 157, paragraph 22, which describes the fair value hierarchy, is codified in topic 820, subtopic 10, section 35, and paragraph 37. Therefore, any reference made today to “FAS 157, paragraph 22” would have to be made instead to “820-10-35-37.”

The codification also includes industry-specific guidance. For example, there is guidance for depository and lending institutions, brokers and dealers, insurance companies, mortgage banks and investment companies. For added user convenience, FASB’s online codification site includes Securities and Exchange Commission guidance—even though the SEC guidance is not U.S. GAAP and is not maintained by FASB.

Who Will Be Affected?

Anyone who refers to GAAP will have to become well-versed in the codification— including accountants in industry who prepare financial statements in accordance with U.S. GAAP. Those who file statements with the SEC will have to modify any references to GAAP to follow the new codification convention. Accountants at banks, financial institutions and any firm that develops, updates and maintains accounting policy documentation will also have to become familiar with the codification in order to modify documentation to align with the new GAAP codes.

Auditors, reviewers, regulators and users of financial statements will also have to learn the codification. Educators and authors will have not only have to learn it, but will also have to rewrite their textbooks and teaching materials with updated references.
Learning a new language takes time—so start learning it now. A good place to start is the AICPA’s Web site, which has compiled several resources, including a webcast at: www.aicpa.org.

The upcoming annual FAE Banking Conference on Sept. 25 will highlight GAAP codification and other topics of interest to CPAs, controllers, CFOs, auditors, regulators, and bank and financial institution employees who want to keep up with the latest in bank accounting, auditing, and tax matters.

Victor Valdivia, PhD, CPA, can be reached at v.valdivia@gmail.com.