EITF consensuses and the GAAP hierarchy.

This month's column departs from recent emerging issues task force (EITF) actions to focus on a new auditing standard that will change how accountants apply EITF consensuses. We discuss how EITF minutes fit into the new GAAP hierarchy and how EITF consensuses' increased authority may affect practice for nonpublic companies. We also include a special matrix that interprets the standard's transition provisions and a sidebar listing consensuses outstanding as of March 15,1992.

EITF Abstracts, copyrighted by the Financial Accounting Standards Board, is available in soft-cover and loose-leaf versions and may be obtained by contacting the FASB order department at 401 Merritt 7, PO. Box 5116, Norwalk, Connecticut 06856-5116. Phone: [phone], ext. 10.

EITF Abstracts summarizes the minutes of all EITF meetings, including the accounting issues discussed and views expressed. If the task force does not reach a consensus, nonconsensus positions held by opposing parties are often presented in the minutes. As new developments occur, the FASB supplements the EITF Abstracts with a section updating issue status.

AUTHORITY OF EITF MINUTES

Before Statement on Auditing Standards no. 69, The Meaning of "Present Fairly in Conformity With Generally Accepted Accounting Priciples" in the Independent Auditor's Report, all EITF minutes (consensuses and other opinions) were classified as "other literature," the lowest level in the GAAP hierarchy, and compliance with EITF minutes was optional for nonpublic companies. (The Securities and Exchange Commission requires public companies to comply with EITF consensuses.)

Statement no. 69 revised the GAAP hierarchy effective for audits of financial statements for periods ending after March 15, 1992. (See Official Releases, JofA, Mar.92, pages 108-111.) This new hierarchy also applies to compilations and reviews of GAAP financial statements.

The statement elevated certain GAAP sources, including EITF consensus positions, in the hierarchy. This is significant since accountants must know both existing and future consensuses and understand when they are applicable. Generally, EITF consensuses are effective on issuance.

Under Statement no. 69, however, EITF consensuses represent category c guidance within established accounting principles." An entity that has been following a less authoritative accounting principle or is accounting for a new transaction or event may need to follow EITF consensuses.

Nonconsensus opinions in the EITF Abstracts still represent other literature" in the GAAP hierarchy. Therefore, adoption of these views is not required.

RULES FOR ADOPTING EITF CONSENSUSES

Existing accounting practices. If an EITF consensus is contrary to an entity's existing accounting practice or is relevant to a new accounting issue facing the entity, accountants must determine whether Statement no. 69 requires adoption of the consensus.

Statement no. 69 has special transition requirements for implementing EITF consensuses within the new GAAP hierarchy. The transition rules ensure existing EITF consensuses do not trigger accounting changes simply because of the new hierarchy. The requirements are governed by two key factors:

* Is the entity accounting for a new transaction or following an existing accounting principle affected by an EITF consensus?

* Was the EITF consensus issued before or after March 15, 1992?

An accounting change is not required if the entity has been following an existing accounting practice as of March 15, 1992, that is affected by an EITF consensus issued before March 15, 1992. An accounting change is required if that existing accounting practice is affected by an EITF consensus issued after March 15,1992.

Accounting changes from another accounting principle to an EITF consensus should be accounted for in accordance with Accounting Principles Board Opinion no. 20, Accounting Changes. Entities should adopt a consensus prospectively, record a cumulative catch-up adjustment in the current-year income statement and provide Opinion no. 20 disclosures for an accounting principle change.

Initial application of an accounting principle. If an entity is applying an accounting principle for the first time, different transition provisions apply. The purpose of these provisions is to give accountants additional time to become familiar with EITF consensuses. The need to adopt an EITF consensus is governed not only by the consensus's issuance date but also by the timing of an accounting principle's initial application.

That is, if an accounting principle's initial application occurs after March 15, 1992, but before March 15, 1993, the entity must adopt an applicable consensus issued after March 15, 1992, but does not have to adopt a consensus reached before that date. However, if initial application occurs after March 15, 1993, the entity must comply with all applicable consensuses regardless of issuance date. See the sidebar on page 103 for a comprehensive decision matrix of Statement no. 69's transition provisions applicable to nonpublic companies.

THE EDUCATION PROCESS

The transition period allows accountants some additional time to become familiar with over 150 existing EITF consensuses outstanding as of March 15, 1992. The sidebar beginning below was derived from the FASB's EITF Abstracts and divides consensuses outstanding into 18 subject categories. Although some consensuses apply to several categories, each issue appears only once. In future issues of the Journal, we will summarize EITF consensuses issued after March 15, 1992, and emphasize important consensuses issued before March 15, 1992.