GAAP REVIEW SERIES Parts 1, 2, 3 and 4

This GAAP Review Series is designed for the accountant or practitioner who needs a detailed review of standards that apply to nonspecialized companies. The series provides a comprehensive study of FASB Statements and Interpretations and APB Opinions that apply to all companies and presents implementation guidelines and disclosure illustrations.

GAAP Review Series — Part 1

Objectives: 

• Understand FASB standards that impact financial assets, income statement presentation, interim reporting and cash flow statements
• Apply recent FASB pronouncements for these selected areas
• Prepare disclosures related to these selected areas

Prerequisite:  Experience in financial reporting.

Also available in the GAAP Review Series:

• Part 2
• Part 3
• Part 4

Chapter 1

The Financial Reporting Environment

Learning Objectives

As a result of this chapter you should

• Be aware of recent developments in FASB standard-setting practices.
• Understand how the GAAP hierarchy is applied when there are contradictions within the accounting literature.
• Understand the recent changes in the organizational structure of the Financial Accounting Foundation (FAF), the Financial Accounting Standards Board (FASB), and the Governmental Accounting Standards Board (GASB).
• Understand the due process procedures of the FASB and know how to participate in the standard setting process.
• Be familiar with other trends in financial reporting including:
  • Earnings management
  • The implications of Sarbanes-Oxley
  • Redefining "The Client"
• Be familiar with XBRL for delivering financial information.
• Be aware of select FASB international convergence project updates.

  Introduction

  In the past few years there have been three important changes in how accounting standards are set or, more specifically, by whom they are set. The first change is a relatively subtle one. Over the last ten years the prominence of the role played by the SEC in setting accounting standards has varied over time, with some administrations taking a very active role, and others taking more of an oversight role.

  The Sarbanes-Oxley Act of 2002 required the SEC to designate an organization as having the authority to promulgate accounting standards for public companies in the United States, which it did in April 2003 when it reaffirmed the FASB as the designated private-sector standard setter for public companies. The FASB has established a working protocol with the SEC for its staff to first refer issues it identifies that may have accounting standard setting implications to the FASB for consideration, with the understanding that the SEC staff reserves the right to exercise its legislative authority to deal with any issues it identifies.

  The second important change in standard setting began in the fall of 2002 when the FASB and the AICPA agreed that, after a transition period, the AICPA and AcSEC would no longer issue authoritative accounting guidance. Previously, SOPs and Industry Accounting and Audit Guides were cleared by the FASB and were placed in level B under the GAAP hierarchy. Going forward, the FASB will no longer clear any AICPA or AcSEC documents; consequently, any such documents now fall under level D in the current GAAP hierarchy.

  And third, beginning in 2003, the operation of the EITF has been fundamentally changed. In an effort to provide greater direction to the EITF in terms of the issues addressed by that group, two FASB members were added to the EITF Agenda Committee. The FASB also took greater direct ownership of GAAP established by the EITF by requiring that consensus positions be ratified by the Board.

  The objective of those changes was to simplify the accounting standard-setting process by eliminating the various organizations that might potentially deal with an accounting issue and giving constituents the ability to do "one-stop shopping" at the FASB. Consistent with this notion, the FASB also examined how they have historically issued accounting guidance and acknowledged that they had contributed to the complexity of GAAP by issuing accounting guidance in a variety of forms.

  For example, in 2002, the FASB introduced a new form of guidance, FASB Staff Positions (FSPs). The original reason for introducing FSPs was to eliminate further use of other forms of guidance. Another reason was to have a means to solicit constituent comments on proposed staff guidance, which had not been standard practice with some of the prior forms of guidance. Observers of the FASB process may have noticed that the use of FSPs has evolved rapidly over their short history such that they are not only being used to provide interpretive guidance, but also to make minor amendments to existing standards.

  Regardless of the form of the final guidance (e.g., a Statement or an FSP), the FASB staff will study the issue, the FASB will deliberate the issue and expose it for public comment, the staff will analyze the comments, and the FASB will redeliberate the issue before the guidance is finalized. The ultimate vision for simplification of standard setting is one process and one form of guidance.

  The GAAP Hierarchy and the Codification Project

  While the FASB is charged with setting accounting standards, the authoritative guidance on what constitutes generally accepted accounting principles and the relative authority of those principles (i.e., the GAAP hierarchy) resides in the auditing literature. After concentrating standard setting with the FASB, it became obvious to the FASB (and the SEC) that the GAAP hierarchy should be embedded in the accounting literature, not the auditing literature.

  As of March 1, 2008, the FASB is in the final stages of developing a new Statement that codifies the GAAP hierarchy (previously set forth in Statement on Auditing Standards No. 69, The Meaning of "Present Fairly in Conformity with Generally Accepted Accounting Principles"). The ED clearly delineates between authoritative and non-authoritative literature. There will be only one source of authoritative guidance – which will be identified as the Codification. A final FASB Statement will be issued concurrently with related AICPA and PCAOB documents. A near-final FASB Statement is posted to the FASB website at www.fasb.org.

  On January 15, 2008, the FASB officially launched the one-year verification phase of the Codification. During the verification period, users are strongly encouraged to use the online Codification Research System free of charge to research accounting issues and provide feedback on whether the Codification content accurately reflects existing U.S. generally accepted accounting principles (GAAP) for nongovernmental entities. Users are advised that the Codification content is not yet approved as authoritative and, therefore, they must verify research results using their existing resources for the currently effective literature.

  After addressing the issues raised during the constituent feedback process, the FASB is expected to formally approve the Codification as the single source of authoritative U.S. GAAP, other than guidance issued by the Securities and Exchange Commission (SEC). To improve usability, the Codification will include authoritative content issued by the SEC, as well as selected SEC staff interpretations. Upon approval by the FASB, all accounting standards (other than the SEC guidance) used to populate the Codification will be superseded. At that time, with the exception of any SEC or grandfathered guidance, all other accounting literature not included in the Codification will become non-authoritative.

  Registered users are able to review the Codification free of charge and provide specific contentrelated feedback at the individual paragraph level as well as general system-related feedback. During the verification period, Codification content will be updated for changes resulting from constituent feedback and new standards. The Codification includes all accounting standards issued by a standard-setter within levels A through D of the current U.S. GAAP hierarchy, including the FASB, American Institute of Certified Public Accountants (AICPA), Emerging Issues Task Force (EITF), and related literature. The Codification does not change GAAP; instead it reorganizes the thousands of U.S. GAAP pronouncements into roughly 90 accounting topics, and displays all topics using a consistent structure. The SEC guidance will follow a similar topical structure in separate SEC sections.

  The FASB expects that the new structure and new system will

  • Reduce the amount of time and effort required to solve an accounting research issue.
  • Improve usability of the literature thereby mitigating the risk of noncompliance with standards.
  • Provide real-time updates as new standards are released.
  • Assist the FASB with the research and convergence efforts required during the standardsetting process.
  • Become the authoritative source of literature for the completed XBRL taxonomy.

  The home page of the Codification Research System includes various items that users should be aware of, including

  • A suggested approach for verifying the Codification content.
  • A Notice to Constituents that describes Codification-related matters, including content matters for constituent feedback. For example, the Notice addresses the standards and elevated guidance used to populate the Codification, the use of December 31, 2008, as the authoring effective date, and conflicts resolved by Board decision for which the Board is requesting feedback.
  • Content excluded from the Codification Research System on the verification launch date. The FASB expects to release such content shortly after the initial launch.

  The Codification Research System also includes general information about how to use the online research system and special features such as Cross Reference Reports (to locate where standards reside), Join Sections (to join similar Sections from multiple Topics and Subtopics into a single document), and Go To (to jump directly to a specific Topic, Subtopic, Section, or paragraph). The Accounting Standards Codification excludes governmental accounting standards.

  Rules-Based vs. Principles-Based Standards

  The last and perhaps most challenging aspect of the path to simplification of accounting standards relates to the topic of "principles-based" standards. The nature of the challenge is that while it may appear that such a movement (towards principles-based guidance) is totally within the control of the FASB as the promulgator of accounting standards, in reality, it is not.

  A number of factors will influence how successful the FASB is in moving toward principlesbased standards, and that success will be subject to each individual's interpretation of what is meant by "principles-based." The goal should be that there are few scope exceptions, few bright lines, and understandable objectives upon which reasonable people can exercise judgment that will not be the subject of second guessing by auditors, regulators, and the plaintiffs' bar supported by good implementation guidance. The FASB has stated that they hope that other forces that influence the financial reporting system will allow them to move toward that goal.

  The Securities and Exchange Commission (SEC) has the statutory authority to establish financial reporting standards for those companies that fall within its jurisdiction.

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