Get on the FAS Track with FASB's ASC

Introduction: FAS Switch?

When bankers start talking about accounting and GAAP in evaluating financial statements, FAS 95 often comes up in analyzing cash flow, FAS 13 and FAS 133 in evaluating leases, FAS 5 and FAS 114 in estimating loan losses. But a little over ten years ago, the Financial Accounting Standards Board replaced the financial accounting standards (FAS) nomenclature with ASC (Accounting Standards Codification). Let’s find out why.

Why the Change?[i]

Over the last ninety years or so the number of authoritative pronouncements issued by FASB, AICPA, their predecessor organizations and countless other standard-setters have numbered in the thousands. Practitioners had to look for conflicts, amendments, and superseded statements when following authoritative GAAP guidance. In addition, there was no defined organization within each standard to assist practitioners when researching. Further, the 1990’s and early 21st century saw some of the most egregious cases of fraud and mismanagement at companies like Enron, WorldCom, Waste Management, and Computer Associates. Many believed that the complex and often difficult to follow accounting standards contributed to these failures.

There was plenty of blame to go around, and some felt that the regulators had failed to provide proper oversight of these companies who used the complexity and sheer volume of accounting standards to camouflage their misdeeds:

·       The Securities and Exchange Commission (SEC), International Accounting Standards Committee (IASC), Public Oversight Board (POB), American Institute of Certified Public Accountants (AICPA), Financial Accounting Standards Board (FASB), and others faced scrutiny and criticism. In FASB’s defense, changes it proposed during the years that preceded the meltdown were opposed by corporate America, the big accounting firms, and congressional leaders. FASB, in turn, tried to explain its role as an authoritative body and suggested that Congress should be involved in the overall process of FASB oversight without interfering in the process of technical decision-making.

·       The POB was disbanded by the SEC, and the Sarbanes-Oxley Act of 2002 (SOX) created the Public Company Accounting Oversight Board (PCAOB) to oversee auditors of public companies.

·       “Transparency” became a frequently-used word when describing efforts to resolve perceived problems in the system.

·       In 2003, steps toward international convergence of accounting standards and financial reporting were leading to a single source of GAAP (excluding SEC guidance), its development of and maintenance for which FASB would be responsible.

The end result was the FASB Accounting Standards Codification? (ASC) project. By itself, ASC was critical to the process of streamlining GAAP standards and designating a sole authoritative source for the U.S. GAAP XBRL taxonomy.

With over 2,000 pronouncements accumulated over a 70-year period, and estimated to fill the equivalent of 20,000 pages, U.S. GAAP had become badly bloated, overly complex, and almost impossible to navigate. In September 2004, the Trustees of the Financial Accounting Foundation (FAF), the FASB’s oversight board, approved a 4-year project that involved over 200 people at an estimated cost of about $16 million, with the following objectives:

·       Clarify the authoritative status of accounting literature,

·       Reduce the time and effort necessary to research issues,

·       Improve the usability of GAAP and mitigate the risk of noncompliance,

·       Provide a platform for real-time updating as new standards are released,

·       Facilitate a smoother path to convergence with international financial reporting standards, and

·       x Support the development of the U.S. taxonomy for eXtensible Business Reporting Language (XBRL).

Background[ii]

In US accounting practices, the Accounting Standards Codification (ASC) is the current single source of United States Generally Accepted Accounting Principles (GAAP). It is maintained by the Financial Accounting Standards Board (FASB).[iii] On July 1, 2009 the Financial Accounting Standards Board (FASB) released the authoritative version of the FASB Accounting Standards Codification (Codification) as the single source of authoritative nongovernmental U.S. Generally Accepted Accounting Principles (GAAP).

On June 30, 2009, FASB released FASB Statement No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, that created Codification Topic 105, Generally Accepted Accounting Principles, and established that the Codification is effective for interim and annual periods ending after September 15, 2009. The Codification includes all accounting standards issued by a standard-setter, including FASB, American Institute of Certified Public Accountants (AICPA), Emerging Issues Task Force (EITF), and related literature. All existing accounting standard documents were superseded, and all other accounting literature not included in the Codification were deemed nonauthoritative. 

The Codification reorganizes the thousands of U.S. GAAP pronouncements into roughly 90 accounting topics and displays all topics using a consistent structure. It also includes relevant Securities and Exchange Commission (SEC) guidance that follows the same topical structure in separate sections in the Codification.

To prepare constituents for the change, the FASB provided a number of tools and training resources including an online tutorial, various webcasts and presentations, and a series of weekly “Countdown to Codification Alerts” emails. While the Codification does not change GAAP, it introduces a new structure—one that is organized in an easily accessible, user-friendly online research system.  The FASB expects ASC:

·       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 standard-setting process.

·       Become the authoritative source of literature for the completed XBRL taxonomy.

The Codification includes all accounting standards issued by standard-setters in the current U.S. GAAP hierarchy, including FASB, American Institute of Certified Public Accountants (AICPA), and the Emerging Issues Task Force (EITF). 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, which are the responsibility of FASB’s sister organization, the Governmental Accounting Standards Board (GASB).

FASB Accounting Standards Codification[iv]

As mentioned earlier, all prior accounting standards documents were superseded as described in FASB Statement No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles. Accounting literature not included in the Codification is non-authoritative, i.e., it is not GAAP.

Structure. Each ASC reference is structured as a series of four numbers separated by hyphens: a three-digit Topic (the first digit of which represents an Area), a two-digit Subtopic, a two-digit Section, and a two- or three-digit Paragraph.

Topic Series       Area

100       General Principles

200       Presentation

300       Assets

400       Liabilities

500       Equity

600       Revenue

700       Expenses

800       Broad Transactions

900       Industry

Subtopic 10 is always "Overall."

Section numbers are standardized across topics although not all subtopics have all sections as follows:

Section number      Section title

00         Status

05         Overview and Background

10         Objectives

15         Scope and Scope Exceptions

20         Glossary

25         Recognition

30         Initial Measurement

35         Subsequent Measurement

40         Derecognition

45         Other Presentation Matters

50         Disclosure

55         Implementation Guidance and Illustrations

60         Relationships

65         Transition and Open Effective Date Information

70         Grandfathered Guidance

75         XBRL Elements

For instance, 210-10-20 is Balance Sheet, Overall, Glossary. 605-40-25-1 is Revenue Recognition, Gains and Losses, Recognition, first paragraph. 

So what about FAS 95, the cash flow statement. Well, it became ASC 230, “The Statement of Cash Flows,” This Topic provides guidance on reporting cash flows in general purpose financial statements:

·       Classifying in the statement of cash flows of cash receipts and payments as either operating activities, investing activities, or financing activities

·       Applying the direct method and the indirect method of reporting cash flows

·       Presenting the required information about noncash investing and financing activity and other events

·       Classifying cash receipts and payments related to hedging activities.

Other Topics, including industry-specific Topics, may have Statement of Cash Flows Subtopics addressing Topic-specific requirements for the statement of cash flows. The guidance in those Subtopics is intended to be incremental to the guidance otherwise established in the Statement of Cash Flows. Topics with incremental Statement of Cash Flows Subtopics include:

·       Foreign Currency Matters, Subtopic 830-230

·       Development Stage Entities, Subtopic 915-230

·       Entertainment—Films, Subtopic 926-230

·       Financial Services—Depository and Lending, Subtopic 942-230

ASU. FASB issues an Accounting Standards Update (Update or ASU) to communicate changes to the FASB Codification, including changes to non-authoritative SEC content. ASUs themselves are not authoritative standards. Instead, each ASU explains:

1-How the FASB has changed US GAAP, including each specific amendment to the FASB Codification

2-Why the FASB decided to change US GAAP and background information related to the change

3-When the changes will be effective and the transition method.

Summary and Closing: FASB on the Right Track

Victor Hugo advised, “Change your opinions, keep to your principles; change your leaves, keep intact your roots. A decade ago, FASB turned over a new leaf to organize the vast accounting literature into the Accounting Standards Codification (ASC). The old FAS numbering system was incorporated into the ASC so that today each ASC reference is a series of four numbers separated by hyphens: a three-digit Topic (the first digit of which represents an Area), a two-digit Subtopic, a two-digit Section, and a two- or three-digit Paragraph. This Herculean effort has not received much attention outside of the accounting world, so this explanation of the change is one step toward giving users of financial statements the good news. Edward R. Murrow warned, “We cannot make good news out of bad practice,” but an organized GAAP is good accounting practice, and good practice makes for great principles. Kudos to FASB!

[i] Decoding the FASB Codification, SELF-STUDY CONTINUING PROFESSIONAL EDUCATION, Thomson Reuters: Fort Worth, TX, 2010, file:///C:/Users/Martin%20Strischek/Downloads/CODTG10%20V5.ps.pdf

[ii] FASB Accounting Standard Codification, July 9, 2009, https://www.fasb.org/jsp/FASB/FASBContent_C/ProjectUpdatePage&cid=900000011088

[iii] You can find FASB’s web site home page at www.fasb.org , and on the upper right hand side of the screen is its search function. As you look at the masthead, you will several titles. If you click on “Standards,” you will open a menu that includes “Accounting Standards Codification.”

[iv] FASB offers “How to Use the Codification,” dated 11/02/2019 at https://asc.fasb.org/cs/ContentServer?c=Document_C&cid=1175805121281&d=&pagename=FAF%2FDocument_C%2FCodDocumentPage&sitepfx=FAF