Get ready to say good-bye to the alphabet soup that currently comprises Generally Accepted Accounting Principles. As of July 1, standards now known as FAS, FSP, EITF, or APB, among others, will be subsumed into a new and less letter-centric organizational system as part of the Financial Accounting Standards Board’s codification project.
The debut of the online filing cabinet promises to streamline GAAP by grouping all rules into roughly 90 topics, and should draw a sharper distinction between authoritative and non-authoritative GAAP. “Instead of GAAP being represented by thousands of different documents, it’s represented by one single authoritative source,” says Ronald P. Guerrette, vice president of the Financial Accounting Foundation, which oversees FASB. However, less than three weeks away from the launch, there are still many unknowns, including whether or not the FASB’s promise that GAAP is not changing will turn out to be true.
The first surprise for some may be that this codification project is happening at all. Over 50% of 530 U.S. CFOs and senior comptrollers surveyed by Grant Thornton in late April said they didn’t know about the rules restructuring, despite the fact that a preliminary version has been available for viewing and comment since January 2008. FASB is now sending out e-mail codification updates, and offers a tutorial on the new system on a website dedicated to the project. Over 70,000 people have signed up for that website so far, says Guerrette.
CFOs who are aware of the coming change are fairly positive. But they’re also realistic about the hassle of the transition period. “It’s a great step, and will absolutely decrease the amount of time my staff spends on accounting research, but there are going to be some areas of ambiguity; it’s just the cost of doing the project,” says Steffan Tomlinson, CFO of wireless-networking firm Aruba Networks. Adds Netgear CFO Christine Gorjanc: “It will be really good for the young people, and will take a little more effort for those of us who have been around 20 years or so – but in the long run, it makes sense.”
The most obvious change that all CFOs must make is to change financial statements to eliminate the old rule references and either replace them with topic and subtopic numbers, or eliminate them altogether in favor of plain English. That part should be simple, says John Hepp, a partner at Grant Thornton, in part because the codification system has a feature that helps with cross-referencing. The changes will apply to all quarterly and annual financial statements issued for periods ending after September 15.
“The harder issue,” says Hepp, is that CFOs will need to review all accounting manuals and internal controls to adjust for the new system. “You have to make sure you weren’t relying on any ambiguity in the wording or that there wasn’t something in lower-level GAAP that’s been brought up [to be authoritative],” he says. “When you change words from ‘should’ or ‘generally’ to ‘must’ or ‘will’ – which has been done – there could be some changes. And such changes could lead to a restatement if there’s a significant change.