The codification of GAAP: what tax executives need to know.
If someone were to tell you that the Financial Accounting Standards Board (FASB) issued its very last Statement of Financial Accounting Standards (SFAS or Statement) in June 2009, how quickly would you get to the neighborhood bar for a celebratory round with your colleagues? Well, hold the shots until you take a closer look. SFAS 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, replaces SFAS 162 and is indeed the FASB's last standard to be issued in the form of a Statement. This Statement, however, signifies perhaps the biggest change in the structure and organization of accounting standards to date in that it establishes the FASB Accounting Standard Codification (Codification) as the single source of authoritative, nongovernmental U.S. generally accepted accounting principles (GAAP).
The FASB launched the Codification on July 1, 2009. It is effective for financial statements issued for interim and annual periods ending on or after September 15, 2009 (i.e., third quarter 2009 financial statements for calendar year-end companies).
While the Codification may seem to have "come out of nowhere," the project began in 2004. In January 2008, the FASB commenced a one-year verification phase of the Codification. The verification phase gave constituents a chance to become familiar with the structure and functionality of the Codification, as well as to comment and provide input on whether the Codification accurately captured accounting and reporting guidance. Then, in March 2009, the Board issued an Exposure Draft, The Hierarchy of Generally Accepted Accounting Principles, for a 42-day comment period that ended in May 2009. The FASB granted final approval for the Codification on June 3, 2009.
Before codification, various sources of authoritative GAAP were categorized by paragraph 3 of SFAS 162 into a four-level hierarchy, often referred to as the Level A-D GAAP hierarchy summarized, as follows (in descending order).
* FASB Statements (SFAS)
* FASB Interpretations (FIN)
* FASB Staff Positions (FSP)
* American Institute of Certified Public Accountants (AICPA) Accounting Research Bulletins
* Accounting Principles Board (APB) Opinions
* FASB Technical Bulletins (FTB)
* AICPA Industry Audit and Accounting Guides (if cleared by the FASB)
* Statements of Positions (SOP) (if cleared by the FASB)
* AICPA Accounting Standards Executive Committee Practice Bulletins (if cleared by the FASB)
* Consensus positions of the FASB Emerging Issue Task Force (EITF)
* Topics discussed in Appendix D of EITF Abstracts (EITF D-Topics)
* FASB Staff Implementation Guides (Q&A)
* AICPA Accounting Interpretations
* Recognized and prevalent practices (1)
* AICPA Industry Audit and Accounting Guides (not cleared by the FASB)
* SOPs ( not cleared by the FASB)
While this hierarchy does not reflect where SEC guidance fits in, footnote I of SFAS 162 provides that "rules and interpretive releases of the Securities and Exchange Commission (SEC) are sources of category (a) [Level A above] accounting principles for SEC registrants."
The Codification selectively incorporates the guidance described above (Level A--D) and eliminates the hierarchy (everything that was codified is equally authoritative and any guidance that was not codified is now "non-authoritative"). The Codification also includes certain SEC regulations but does so only for the convenience of users. Any reference to SEC guidance should be to the SEC reference rather than to its citation in the Codification. This "not to be cited" SEC guidance is readily identifiable since there is an "S" preceding the section number. The Codification does not contain the entire population of SEC rules, regulations, interpretative releases, and staff guidance. For example, the Codification does not include content related to matters outside of the basic financial statements, such as management's discussion and analysis (MD&A), auditing, or independence matters. The Codification does include authoritative content issued by the SEC such as Regulation S-X, interpretative releases, and SEC Staff Accounting Bulletins. The SEC sections of the Codification are expected to change over time as the SEC continues to develop and provide guidance. While the FASB emphasizes its intent to work with the SEC to make every effort to provide timely SEC content updates, users should continue to monitor SEC sources for new or revised SEC content because there may be delays between SEC developments and the corresponding updates to the Codification.
In addition, there are other accounting standards that have not been codified that will be considered grandfathered and remain authoritative for transactions that have an ongoing effect in an entity's financial statements, after the effective date of the Codification. An example of such a grandfathered provision is the pre-FIN 48 guidance for tax uncertainties that continues to be applicable to companies that have not yet been required to adopt FIN 48 (historical FIN 48 was the only guidance related to tax uncertainties that was codified within ASC 740).
Sources of accounting guidance that were not codified (e.g., practices that are widely recognized and prevalent either generally or in the industry, FASB Concepts Statements, FASB Statement Basis for Conclusions (2) and accounting textbooks, handbooks, and articles) may still be used if the guidance for a transaction or an event is not specified within the Codification.
The Codification was designed to make it easier to research accounting issues and to mitigate the risk of applying one standard when another standard may have been more relevant. To achieve this goal, the Codification reorganized GAAP literature into roughly 90 accounting topics with a consistent organizational structure. The topical structure is expected to facilitate continuing convergence (3) efforts and make the standard-setting process more efficient.
How Is the Codification Structured?
The codified content in each of the roughly 90 topics in the Codification is arranged by subtopics, sections, subsections, and paragraphs. Becoming familiar with the codification structure is important to tax executives since it will affect not only an entity's financial statements, but also the research and documentation of issues that arise when accounting for income taxes.
Topics represent a collection of related guidance that is grouped in one of five main categories (see below). Each topic is assigned a numerical topic code.
* General Principles (Topic Code 105-199)--Topics relating to certain transitional guidance to the Codification. For example, Topic 105 includes the original text from SFAS 168 which was the last FASB Statement that adopted the Codification as the authoritative GAAP.
* Presentation (Topic Codes 205-299)--Topics relating to financial statement presentation matters; they address items that provide guidance on how financial statements are presented rather than how particular types of transactions should be accounted for. Topics include guidance related to income statement classification (e.g., guidance on extraordinary and unusual items), balance sheet presentation of certain transactions (e.g., if offsetting is appropriate), statement of cash flows and earnings per share.
* Financial Statement Accounts (Topic Codes 305-799)--The Codification organizes these topics in the typical order of a financial statement with categories for assets, liabilities, equity, revenue, and expenses (within expenses, topic number 740 provides guidance for income taxes).
* Broad Transactions (Topic Codes 805-899)--These topics relate to matters that affect multiple financial statement accounts and are generally transaction-oriented. Examples of broad transaction topics include business combinations, derivatives, and nonmonetary transactions.
* Industries (Topic Codes 905-999)--These topics relate to accounting that is unique to an industry or type of activity. Examples of industry related topics include airline, software, and real estate.
Subtopics represent subsets of a topic and are generally distinguished by type or by scope. Each topic always includes an overall subtopic with additional subtopics representing incremental or unique guidance not contained in the "overall" subtopic.
Sections further divide the content in a subtopic to include separate discussion related to recognition, measurement, implementation, etc. The section titles and numbering are the same for all subtopics. This uniform organization is expected to be a significant benefit for Codification users as each subtopic contains a section for scope and scope exceptions, recognition, initial measurement, subsequent measurement, etc. No more hunting for the guidance that seems hidden somewhere in a FASB Statement. For example, section number 25 is always recognition, 30 always measurement, 55 always implementation, etc. Sections are then further broken down into subsections, paragraphs, and subparagraphs. Not all sections have subsections and not all paragraphs have subparagraphs.
The topic "Income Taxes" can be found under the expense category with the topic code 740 (ASC 740). The income tax topic is frequently cross referenced by other topics for presentation of tax guidance, if applicable. For instance, the topic "Interim Reporting" is in the presentation category, under the Topic Code 270 (ASC 270). The interim reporting topic includes guidance that covers all areas of interim reporting, not limited to income taxes. Accounting for income taxes in an interim period is cross referenced to the interim reporting under the reference ASC 740-270. The accompanying table illustrates how the income tax topic is organized. This organization is generally consistent for all topics.
20 Intraperiod Tax Allocation
30 Other Considerations or Special Areas
270 Interim Reporting
323 Investments-Equity Method and Joint Ventures
718 Compensation--Stock Compensation
805 Business Combinations
830 Foreign Currency Matters
932 Extractive Activities--Oil and Gas
942 Financial Services--Depository and Lending
944 Financial Services--Insurance
946 Financial Services--Investment Companies
954 Health Care Entities
972 Real Estates--Common Interest Realty Associations
980 Regulated Operations
995 U.S. Steamship Entities
05 Overview and Background
15 Scope and Scope Exceptions
45 Other Presentation Matters
55 Implementation Guidance and Illustrations
45-12 If there is only one item other than continuing operations, the portion of income tax expense or benefit for the year that remains after the allocation to continuing operations shall be allocated to that item.
While the Codification has completely reorganized GAAP, it was not intended to change GAAP in any way. The previously mentioned verification process was intended to identify any re-wording that might be interpreted as a change from the historical GAAP. Any questions arising from re-wording of a historical GAAP provision should be resolved in a manner that preserves the understood meaning of the pre-codification literature. Consider the following examples of how the Codification affects SFAS 109, Accounting for Income Taxes, FIN 48, Accounting for Uncertainty in Income Taxes, FIN 18, Accounting for Income Taxes in Interim Period, and SFAS 123R, Share-Based Payment.
Paragraph 17 of SFAS 109 provided general guidance on the annual computation of deferred tax liabilities and assets. That guidance was codified in Topic Income Taxes (740), Subtopic Overall (10), Section Initial Measurement (30) and Paragraph (5). The complete reference to the Codification equivalent of paragraph 17 of SFAS 109 is ASC 740-10-30-5. The content of the paragraph from the original standard, while it has been organized differently, remains the same and unchanged.
Another example--paragraph 6 of FIN 18 made it clear that the "annual effective tax rate" methodology should be used for recording the tax effect of current-year ordinary income. Paragraphs 190 and 191, Basis for Conclusions of SFAS 109, referred to APB 28, Interim Financial Reporting for guidance related to interim tax reporting. While some paragraphs in the Basis for Conclusions were codified, paragraphs 190 and 191 were not codified because the use of an estimated annual effective tax rate to account for income taxes in an interim period already exists in ASC 740-270 with the codification of FIN 18, and it would be redundant had the two paragraphs been codified.
A third example--paragraph 59 of SFAS 123(R) provided guidance on the measurement of deferred taxes for compensation cost recognized related to share-based payments for financial reporting purposes. Under the Codification, the content of the same paragraph is codified in Topic Stock Compensation (718), Subtopic Income Taxes (740), Section Recognition (25) and Paragraph (2). In addition, footnote 82 of SFAS 123(R) (required the realization of a tax benefit for excess stock compensation deduction before APIC can be credited) was codified, in Topic Stock Compensation (718), Subtopic Income tax (740), Section Recognition (25) and Paragraph (10). As previously explained, any tax related paragraphs in the stock compensation topic are cross referenced to the income tax topic. The same paragraph (footnote 82) can also be found in the income tax topic under the same reference.
One last example--paragraph 11 of FIN 48 provided guidance on the timing of de-recognizing a previously recognized tax position due to a change in facts or new information. The same paragraph was codified in Topic Income Taxes (740), Subtopic Overall (10), Section De-recognition (40) and Paragraph (2).
How to Research the Codification
With a basic understanding of how the Codification is structured, it is easy to discern how the new Codification can simplify the accounting research process. There are several codification research tools available on the market currently. On July 1, 2009, concurrent with the launch of the Codification, the FASB officially released its online research system, the FASB Accounting Standards Codification. This online research system is available in two views: professional and basic. The basic view, which is available to the public at no cost, allows for identifying the location of original standards (using the cross referencing feature), access to all authoritative nongovernmental GAAP (including SEC content) and basic print functionality. The professional view costs $850 for an annual subscription and can be purchased through the FASB website. In addition to the same basic view access, the professional view allows for added search features to access content, a glossary term display for quickly viewing definitions, cross-links from original standards to the codification content and enhanced print functionality, among other enhanced features.
In addition to the FASB online research system, each of the major accounting firms has incorporated the Codification into its own accounting research system. For example, Deloitte has recently updated its Technical Library to reflect the Codification. Deloitte's Technical Library includes interpretative guidance that clarifies the application of certain aspects of the Codification and includes other functionality that is not available from the FASB.
For practitioners who prefer a paper version, a bound edition of the Codification will be available by the end of August 2009. The registration process for access to file Codification started at the launch. One practical issue with the paper bound edition is that subsequent changes to the existing Codification will need to be updated manually.
The selection of a research tool largely depends on a company's preferred source for technical GAAP literature. Regardless of which tool a company chooses, searches can generally be done by one of the three approaches. The first approach, searching within a topic, is the FASB's intended method of research. Each topic has a table of contents that displays sections and allows users to quickly identify relevant literature. This method can be applied to either an online or paper service. This research process should be easier than the traditional research system when the guidance was spread over thousands of documents. As users familiarize themselves with the organization of codification, searching by topics should become easier.
A second approach is to use the cross reference function, which again can be a useful technique whether using an online or paper service. A cross-reference chart can be downloaded by original standard (e.g., SFAS 109 or FIN 48) from the FASB website free of charge. This approach can be an efficient method if a user knows their way around the pre-Codification literature. The cross reference links original standards with the Codification either by standard or by Codification reference. Certain paragraphs from an original standard, however, may have been split and placed in several locations in the Codification. For example, various sentences of SFAS 109, paragraph 31 (that addresses the recognition of a deferred tax liability associated with an outside basis difference) have been placed separately in ASC 740-30-25-18, 740-10-25-1, and 740-10-25-3. Therefore, before making a reference, users should drill down and read the "cross referenced" paragraph in the Codification to confirm its content.
A third approach (which will require an online service or a thoroughly indexed paper service) will be to search by keywords. For example, in the FASB online research system, the keywords "tax holiday" would generate several hits which direct the user to a SEC SAB topic that requires certain disclosure related to a public registrant's tax holiday.
Overall, the Codification offers additional flexibility in researching accounting issues. One of the FASB's original goals for the Codification is to reduce the amount of time required to do a research. With the various tools available on the market, accounting research should become easier post codification.
How the Codification Affects Tax Executives
Tax executives will likely work closely with the CFO or corporate controller to remove financial statement references to pre-codification GAAP and replace them with reference to the Codification. During a FASB webcast on the Codification, FASB member Larry Smith commented that he hoped the movement to the Codification will motivate financial statement preparers to use "plain English" instead of a specific (now very numeric) reference to GAAP. (4) The reference changes apply to all quarterly and annual financial statements issued for periods ending after September 15, 2009, and related tax workpapers.
From an internal control perspective, all accounting manuals and accounting policies including those that pertain to income taxes will need to be updated to reflect the Codification. Tax executives should pay particular attention to certain old paragraphs that were not codified. For example, paragraph 82 of FIN 18 was not codified and since it illustrates a circumstance under which an annual effective tax rate might not be reliable, it would not be surprising that a memorandum would cite it. The same conclusion will now have to be supported by other guidance that was codified. In addition, there will likely be training necessary to familiarize the accounting and tax personnel with the company's chosen accounting research system as well as new referencing added to the company's internal manuals related to accounting, reporting, and controls. For tax executives who may have memorized paragraphs from old standards, there will be a learning curve to adjust to the Codification, both orally and in writing. This may be challenging initially because of the tiered numbering system used in codification.
Codification also changes the way that new accounting guidance will be issued. In place of the current standard setting system, all new authoritative GAAP will be issued by the FASB under the title of "Accounting Standards Update YYYY-XX." YYYY is the year and XX is the sequential number for each update. For example, the first update issued after the effective date of the Codification was Accounting Standards Update No. 2009-01. All updates will be issued in the same format, unlike the variety of forms that new guidance could take previously (e.g., EITF, FASB Staff Positions, FASB Statements, and FIN). The FASB will then organize the updates following the same section headings as those used in the Codification. Each codification update will also include an appendix containing codification update instructions that display marked changes to the pertinent sections of the Codification. The Codification Updates are posted on the FASB website following the FASB's approval. The updates will not be considered authoritative until the Codification reflects those changes. Because all new standard updates will be issued in the same format, it may be difficult to identify and follow new standard updates that are relevant to tax executives. Therefore, tax executives should have procedures in place to monitor new FASB activity and be kept up to date in real time.
Development Since the Launch
Since the Codification's launch on July 1, the FASB has issued two accounting standard updates. Accounting Standards Update 200901, Topic 105, Generally Accepted Accounting principles, incorporates into the Codification the FASB's last standard (Statement of Financial Accounting Standards No. 168--The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles). The second update, Accounting Standards Update 2009-02, Omnibus Update, included technical corrections to various topics.
Recognizing that it may take time to make all the necessary changes, Chief Accountant of the SEC, James Kroeker, signalled on June 30 at a meeting of FASB's main advisory council that a reference to the old system's numbers for guidance would not be cause for a restatement. (5) Companies can expect to receive a letter from the SEC, however, requesting them not to make reference to "outdated GAAP."
Mr. Kroeker further stated that the SEC staff encourages companies to use more "plain English" rather than seeking a chapter and verse reference to a passage in the Codification. To encourage public companies to update their GAAP citation, the SEC staff would recommend that the commission issue an interpretative release to guide preparers and readers of financial statements to effectively align new citations with the old. The interpretative release may be presented to the commissioners within a few weeks. (6)
With the completion of the Codification, FASB's plan to reduce accounting research time appears to be achieved. Certain practical issues (such as how the Codification is referred to), however, remains to be resolved. Tax executives should work closely with their accounting counter-parts to update their accounting and tax system to reflect the Codification.
(1.) Practices widely recognized and prevalent either generally or in the industry previously included in Level D did not become authoritative in the Codification
(2.) In some instances, portions of a Statement's Basis for Conclusions were codified if deemed necessary by the FASB and are now considered authoritative.
(3.) The FASB has an ongoing agreement with the IASB to converge US GAAP with the IFRSs. Refer to the updated MOU at www.fasb.org/ jsp/FASB/FASBContent_C/NewsPage&cid=1175801858257.
(4.) FASB's June 22, 2009, webcast was entitled "Transition to the FASB Codification on July 1, 2009."
(5.) BNA Tax News, FASB Launches Single, Online Book of Authoritative GAAP (July 2, 2009).
(6.) BNA Tax News, FASB Launches Single, Online Book of Authoritative GAAP, July 2, 2009
Mark Fisher is the managing partner of the Financial Accounting and Reporting-Income Tax group in the Washington National Tax Office of Deloitte Tax LLP. He has more than 30 years of public accounting experience. In his current role, Mr. Fisher focuses on the technical aspect of accounting for income taxes, acting as a concurring reviewer for all external articles and presentations, as well as for the firm's accounting manual in addition to providing consultations to hundreds of clients annually. He may be contacted at email@example.com.
Rich Paul is a partner in the Accounting Standards and Communications Group in Deloitte AERS's National Office. His areas of expertise include the accounting for income taxes, business combinations, and other generalist topics. Mr. Paul has written several of Deloitte's accounting publications and is responsible for developing the interpretative accounting guidance in those publications. He was graduated from Baruch College with a B.A. degree in Accountancy. He may be contacted at firstname.lastname@example.org.
Alice Loo is an senior tax manager with Deloitte, completing a two-year Management Development Program in the firm's Washington National Tax Financial Accounting and Reporting-Income Tax group. She has more than 11 years of public accounting experience. Ms. Loo was graduated front Duke University with a B. A. degree in Economics, a Masters degree in Accounting from University of North Carolina at Chapel Hill, and a Masters in Taxation from Golden Gate University. She may be contacted at email@example.com.
Tom Dong is a manager with Deloitte, completing a two year Management Development Program in the Washington National Tax Financial Accounting and Reporting-Income Tax group. In his current role, he consults on accounting for income taxes related technical issues and develops external and internal articles, presentations, training materials, and the firm's accounting manual. Mr. Dong was graduated front California State Polytechnic Institute (Pomona) with a B.A. degree in Accountancy. He may be contacted at firstname.lastname@example.org.
FAS 109 [paragraph]17 Guidance ASC Cite Comments Deferred Taxes shall be 740-10-30-5 Same guidance determined separately for each tax-paying component (an individual entity or group of entities that is consolidated for tax purposes) in each tax jurisdiction. That determination includes the following procedures: a. Identify types and amount 740-10-30-5a Same guidance of temporary differences and tax at tributes. b. Measure the total deferred 740-10-30-5b Same guidance tax liability for taxable temporary differences using the applicable tax rate 118). c. Measure the total deferred 740-10-30-5c Same guidance tax liability for taxable temporary differences and NOL carryforwards using the applicable tax rate. d. Measure deferred asset for 740-10-30-5d Same guidance each type of tax credit carryforward. e. Reduce the deferred tax 740-10-30-5e Same guidance assets by a valuation allowance, if, based on the weight of available evidence, it is more-likely-than-not (a likelihood of >50%) that some portion or all of the deferred tax assets will not be realized. The valuation allowance should be sufficient to reduce the deferred tax asset to the amount that is more-likely than-not to be realized. FIN 18 [paragraph]6 Guidance ASC Cite Comments The tax (or benefit) related 740-270-25-2 Same guidance to ordinary income (or loss) shall be computed at an estimated annual effective tax rate and the tax (or benefit) related to all other items shall be individually computed and recognized when the items occur. Guidance ASC Cite Comments SFAS 123(R) [paragraph] 59 The cummulative amount of 718-740-25-2 Same guidance compensation cost recognized for instruments classified as equity that ordinarily would result in a future tax reduction under existing tax law shall be considered to be a deductible temporary difference in applying FASB Statement No. 109, Accounting for Income Taxes. The deductible temporary difference shall be based on the compensation cost recognized for financial reporting purposes. Footnote 82 A share option exercise may 718-740-25-10 Same guidance result in a tax deduction prior to the actual realization of the related tax benefit because the entity, for example, has a net operating loss carryforward. In that situation, a tax benefit and a credit to APIC for the excess deduction would not be recognized until that deduction reduces taxes payable. FIN 18 [paragraph]11 Guidance ASC Cite Comments An enterprise shall 740-10-40-2 Same guidance derecognize a previously recognized tax position in the first period in which it is no longer more likely than not that the tax position would be sustained upon examination. Use of a valuation allowance is not a permitted substitute for derecognizing the benefit of a tax position when the more-likely than-not recognition threshold is no longer met.
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|Title Annotation:||generally accepted accounting principles|
|Author:||Fisher, Mark; Paul, Rich; Loo, Alice; Dong, Tom|
|Date:||Jul 1, 2009|
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