Moving on up: FAS 168 changing how CPAs view, research, evaluate GAAP.

With the issuance of the FASB Accounting Standards Codification came a single source of authoritative U.S. generally accepted accounting principles for nongovernmental entities--and a major change in the way CPAs view, research and evaluate the application of GAAP.

FASB Statement No. 168, which becomes effective for financial statements issued for interim and annual periods ending after Sept. 15, 2009, replaced FAS 162, The Hierarchy of Generally Accepted Accounting Principles, which became effective in November 2008.

When FAS 162 was issued, the GAAP hierarchy set forth in SAS 69 was moved from the auditing standards into the "home" in which it truly belongs: the accounting standards. While FAS 162 essentially kept the GAAP hierarchy intact, it reaffirmed that the responsibility to prepare financial statements in accordance with GAAP rests on a reporting entities' management, rather than its outside auditors.

Moreover, FAS 162 recognized the various authoritative sources of GAAP and presented a hierarchal structure containing categories (a) through (d) GAAP, with Category (a) as the most authoritative. Some readers may be asking why FAS 162 has become extinct before the paint is barely dry. The answer is that FASB had much bigger plans in place that involved moving on up to FAS 168.

The Codification

FAS 168 establishes the Codification as the source of authoritative GAAP recognized by FASB to be applied by nongovernmental entities. The SEC's rules and interpretive releases under federal securities laws are also sources of authoritative GAAP for SEC registrants. Once the Codification becomes effective, all of its content will hold an equal level of authority.

The Statement also reduces the GAAP hierarchy to two levels: authoritative and nonauthoritative. Basically, an accounting treatment that's not in the Codification is not authoritative. The Codification aims to synthesize and integrate existing GAAP--not to create new GAAP.

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The Codification contains authoritative standards broken down by topics, rather than by pronouncements, that are applicable to both public and nonpublic nongovernmental entities. The topics represent a collection of related guidance and reside in five areas:

1. General Principles (Topic Code 105-199): Relates to conceptual matters and includes GAAP (whereby FAS 168 is codified in Topic 105).

2. Presentation (Topic Codes 205-299): Relates to presentation matters.

3. Financial Statement Accounts (Topic Codes 305-700): Includes assets, liabilities, equity, revenue and expenses.

4. Broad Transactions (Topic Codes 805-899): Includes business combinations, derivatives and so forth.

5. Industry (Topic Codes 905-999): Relates to accounting that is unique to an industry or type of activity. Topics include airlines, financial services and so forth.

The SEC sections of the Codification relate to SEC registrants only. These sections are provided for their applicability to a given topic and do not represent the entire body of SEC rules, regulations, interpretative releases or staff guidance. It's expected that the Codification sections will change over time. Changes will be known as "Accounting Standards Updates." The Codification does not replace or affect SEC guidance previously issued for public entities that file their financial statements with the SEC.

If guidance for a particular transaction or event is not specified within authoritative GAAP, an entity should first consider accounting transactions for similar transactions or events within a source of authoritative GAAP for that entity and then consider nonauthoritative guidance from other sources. An entity should look to the accounting principles for similar transactions within the sources of authoritative GAAP for that entity unless those accounting principles either prohibit the application of the accounting treatment to that particular transaction or if it's indicated that the accounting treatment cannot be applied by analogy.

Sources of nonauthoritative guidance that may be considered include the FASB Concept Statements; AICPA Issues Papers; International Financial Reporting Standards of the International Accounting Standards Board; pronouncements of professional associations or regulatory agencies; technical information service inquiries and replies included in AICPA technical practice aids; and accounting textbooks, handbooks and articles.

Some users may be wondering, "What about the Concepts?," as it does not look like anything changed with regard to their standing as "other accounting literature" within the nonauthoritative guidance.

While FASB may decide to elevate the Concepts Statements into the Codification as part of its conceptual framework project, it decided that the Concept Statements should have the same level of influence as other nonauthoritative GAAP until such decision is made. As a result and to avoid any confusion--FASB removed the statement "FASB Concepts Statements would normally be more influential than other sources" in nonauthoritative guidance from FAS 168. This statement had been in FAS 162.

The message to fans of the Concepts, which define the most fundamental terms used in the accounting profession, is once again: Be patient.

Accounting standard updates issued after the effective date of FAS 168 will not be considered authoritative on their own. These updates will modify the Codification, provide background information about the guidance and explain the basis for the change in conclusion(s) in the Codification.

Additionally, once FAS 168 becomes effective, all nongrandfathered, non-SEC accounting literature that is not included in the Codification is superseded and deemed nonauthoritative.

What Guidance Is Grandfathered?

As noted previously, FAS 162 described categories (a) through (d) of the GAAP hierarchy. Entities that have followed accounting treatments that were in the lower categories [i.e., (c) and (d)] may in certain instances continue to apply their current accounting treatments, provided this treatment was in effect as of March 15, 1992. For standards with an effective date after March 15, 1992, an entity shall follow the guidance in the Codification, excepting for certain Emerging Issue Task Force consensus positions issued before March 16, 1992, that had effective dates after March 15, 1993.

The continued application of superseded accounting standards for transactions that have an ongoing effect in an entity's financial statements are allowed for selected accounting standards. This superseded guidance was not included in the Codification, but will be considered as grandfathered and remain authoritative for those transactions after the effective date of FAS 162. Some of the more prominent examples of grandfathered guidance include:

* Pooling of interests in a business combination described in paragraph B217 of FAS 141, Business Combinations.

* Pension transition assets or obligations described in paragraph 77 of FAS 87, Employers' Accounting for Pensions.

* Loans restructured in a troubled debt restructuring before the effective date of FAS 114, Accounting by Creditors for Impairment of a Loan, described in paragraph 24 of FAS 118, Accounting by Creditors for Impairment of a Loan--Income Recognition and Disclosures.

There are several other affected standards that are described in more detail within paragraph 13 of FAS 168.

When Does FAS 168 Go into Effect?

As noted above, FAS 168 will be effective for financial statements issued for interim and annual periods ending after Sept. 15, 2009, except for nonpublic nongovernmental entities that have not followed the guidance included in the AICPA Technical Inquiry Service Sec. 5100, "Revenue Recognition," paragraphs 38-76. Thus, on the effective date of FAS 168, all existing, non-SEC accounting and reporting standards are superseded, except for the following standards, which will remain authoritative until they are integrated into the Codification:

* FAS 164, Not-for-Profit Entities: Mergers and Acquisitions

* FAS 166, Accounting for Transfers of Financial Assets 

* FAS 167, Amendment to FASB Interpretation No. 46(R)

The application of the provisions of FAS 168 shall be accounted for, in most instances, either as a change in accounting principle or correction of an error in accordance with FAS 154 Accounting Changes and Errors Corrections (Section 250-10-50 of the Codification).

Why the Change and What Are the Goals?

FASB committed in 2004 to making the Codification the source of authoritative nongovernmental GAAP. Before the Codification, there were a large number of standards issued by various standard setters in diverse forms, and in an organizational structure that can be best described as not easy to follow. Attempting to locate the appropriate GAAP for a particular subject could be an adventure, and users had concerns whether there was a standard out there that had been overlooked--or maybe applied inappropriately.

The Codification project was initiated to alleviate these issues by organizing and simplifying authoritative GAAP literature for users.

The Codification reorganized GAAP pronouncements into some 90 accounting topics within a consistent structure. Additionally, to increase the usefulness for public nongovernmental companies, relevant portions of SEC issued authoritative guidance and selected SEC Staff Interpretations and administrative guidance have also been included in the Codification for reference purposes.

FASB expects the Codification to reduce the amount of time and effort needed to research an accounting issue, minimize the risk of noncompliance through improved usability of the literature and provide the ability to provide timely updates of new accounting standard updates. As a result, it's expected that most users will view the Codification as a welcome change. The journey of locating, understanding and implementing the applicable GAAP has been simplified, saving time and effort for CPAs and their clients.

In that sense, FAS 168 plays a big part in helping GAAP users move on up to that experience.

Michael J. McPartlan, CPA, CFF is a litigation consulting manager at Hemming Morse, Inc. You can reach him at [e-mail].

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Download a Codification Q&A at www.fasb.org/cod_project/Cod_overview_12-08.pdf.

BY MICHAEL J. McPARTLAN CPA, CFF