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Designed for accountants who needs a detailed introduction to new financial accounting standards and a refresher in other standards that apply to non-specialized companies. The course is a comprehensive study of FASB guidance that applies to all companies.
Objectives:Prerequisite: Experience in application of accounting
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Chapter 1 - The Financial Reporting Environment
Learning Objectives
As a result of studying this chapter you should
• Be aware of recent developments in Financial Accounting Standards Board (FASB) standard-setting practices including the development of the FASB Accounting Standards CodificationTM (ASC) expected to become the single source of authoritative U.S. Generally Accepted Accounting Principles (U.S. GAAP) on July 1, 2009.
• Understand how the U.S. 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 FASB, and the Governmental Accounting Standards Board (GASB).
• Be familiar with eXtensible Business Reporting Language (XBRL) for delivering financial information and the recently adopted SEC timeline for the use of XBRL in regulatory filings.
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 U.S. Securities and Exchange Commission (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 American Institute of Certified Public Accountants (AICPA) agreed that, after a transition period, the AICPA and AICPA's Accounting Standards Executive Committee (AcSEC) would no longer issue authoritative accounting guidance. Previously, AICPA Statement of Positions (SOP) and Industry Accounting and Audit Guides were cleared by the FASB and were placed in level B under the U.S. 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 U.S. GAAP hierarchy.
And third, beginning in 2003, the operation of the FASB's Emerging Issues Task Force (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 U.S. 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 U.S. 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 U.S. GAAP Hierarchy
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 U.S. 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 U.S. GAAP hierarchy should be embedded in the accounting literature, not the auditing literature.
In May 2008, the FASB issued a new Statement, SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles, which codifies the U.S. GAAP hierarchy (previously set forth in Statement on Auditing Standards No. 69, The Meaning of "Present Fairly in Conformity with Generally Accepted Accounting Principles"). SFAS No. 162 clearly delineates between authoritative and non-authoritative literature. Also, with the expected final approval in July 2009, the FASB ASC will be only source of authoritative guidance.
The FASB Accounting Standards CodificationTM
On July 1, 2009, the FASB is expected to formally approve the FASB ASC as the single source of authoritative U.S. GAAP, other than guidance issued by the Securities and Exchange Commission. To improve usability, the FASB ASC includes 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 FASB ASC will be superseded. At that time, with the exception of any SEC or grandfathered guidance, all other accounting literature not included in the FASB ASC will become non-authoritative.
The FASB ASC includes all accounting standards issued by a standard-setter within levels A through D of the current U.S. GAAP hierarchy, including the FASB, AICPA, EITF, and related literature. The FASB ASC does not change U.S. 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's primary goal in developing the FASB ASC is to simplify user access to all authoritative U.S. GAAP by providing all the authoritative literature related to a particular Topic in one place. The term authoritative includes all non-governmental level A-D U.S. GAAP that has been issued by a standard setter. The FASB ASC does not codify all U.S. GAAP since the U.S. GAAP hierarchy also includes items such as practice, textbooks, articles, and other similar content.
The FASB ASC is a major restructuring of accounting and reporting standards. While the content may reside in new locations within the FASB ASC, the FASB's intent in creating the FASB ASC is that the content accurately represents existing standards.
The FASB provided interested parties with a one-year period between January 2008 and January 2009 to verify that the FASB ASC accurately reflects current standards. The primary goals of the verification period were to acquaint constituents with the new structure and to obtain feedback regarding any issues with the FASB ASC content before it becomes authoritative. The FASB ASC project team's intention was to retain existing U.S. GAAP. Throughout the process, authors and reviewers were sensitive to this goal. However, combining disparate standards into a codified format introduces the possibility of unintentional changes to existing standards. One objective of the verification period was for constituents to identify any errors in the FASB ASC that resulted from any unintentional changes.
The FASB ASC will not be authoritative until approved by the FASB (expected July 1, 2009, as noted previously). Prior to becoming authoritative, content will continue to change, based on new standards and user feedback. The FASB asked constituents to use the FASB ASC during the verification period when performing research, while understanding that the content will not be authoritative until approved.
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 FASB ASC Research System (http://asc.fasb.org) includes various items that users should be aware of, including
• A suggested approach for verifying the FASB ASC content.
• A Notice to Constituents that describes FASB ASC-related matters, including content matters for constituent feedback. For example, the Notice addresses the standards and elevated guidance used to populate the FASB ASC, 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 FASB ASC Research System on the verification launch date. The FASB expects to release such content shortly after the initial launch.
The FASB ASC 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 FASB ASC 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.
730180
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