The codification of GAAP: what tax executives need to know.

• Author: Fisher, Mark
• Position: Generally accepted accounting principles

What Is the Codification?

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).

Level A

* 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

Level B

* FASB Technical Bulletins (FTB)

* AICPA Industry Audit and Accounting Guides (if cleared by the FASB)

* Statements of Positions (SOP) (if cleared by the FASB)

Level C

* 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)

Level D

* 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...