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Wednesday, October 6, 2010

FASB Implements the New Codification of Accounting Standards


Your company’s financial statements are being held to a new standard, and it’s a standard that you may not know about. The landmark change has received little fanfare but is critical for companies as they prepare their financial statements for the upcoming year.

Not too long ago, financial statement preparers researching revenue recognition for the appropriate treatment of a specific revenue transaction would refer to a host of different standards: SAB 104, EITF 00-21, EITF 00-03 -- and don’t forget SOP 97-2. The appropriate accounting guidance existed in various pronouncements issued by multiple organizations – all with different levels of authority.

That all changed July 1, 2009.

Now, you can find all your revenue recognition information in one area — Topic # 605. That’s right, after years of refinement, there’s now a one-stop, comprehensive resource for accounting guidance.

The Financial Accounting Standards Board implemented new accounting practices for nongovernmental entities, altering the Generally Accepted Accounting Principles (GAAP) hierarchy. All public and private companies and nonprofits must adhere to the new codification for every financial statement for interim or annual reporting periods ending after Sept. 15, 2009.

Who’s Impacted?

If you’re the CFO or controller of a public company, large private company, Mom-and-Pop donut shop or nonprofit, you need to be aware of this change. The codification is now the source of authoritative GAAP.

How are Companies Impacted?

This change will require additional time to research the appropriate accounting for new and existing transactions due to the new structure of how GAAP is organized. With change there will always be uneasiness. But even the old system, with its complex maze of references and guidance with different levels of authority, led to criticism. For instance, the current GAAP hierarchy was criticized for being too complex and directed to the auditor rather than management.

How did this Change Begin?

In 2004, the FASB said enough was enough with the complicated system. They committed to creating a Codification that would become the source of nongovernmental GAAP.

On January 15, 2008, the Board launched a one-year verification phase of the Codification. That time period gave potential users a chance to (a) verify whether the Codification accurately captured the accounting and reporting guidance about each topic before it became authoritative and (b) become familiar with the structure and functionality of the Codification. A 2004 survey showed an overwhelming majority of constituents in favor of a Codification to make U.S. accounting and reporting guidance less complex and more streamlined.

Details of the Change

In the Codification, GAAP will be narrowed down into about 90 accounting topics from thousands of individual standards.

To increase the utility of the Codification for public, nongovernmental companies, relevant portions of authoritative content issued by the SEC and selected SEC staff interpretations and administrative guidance have been included for reference in the Codification. However, the Codification does not replace or affect guidance issued by the SEC or its staff for public companies in their filings with the SEC. Furthermore, the content labeled as SEC staff guidance does not constitute rules or interpretations of the SEC, nor does such guidance bear official Commission approval.

Future updates

Accounting Standards Updates issued after Sept. 15, 2009 will not be considered authoritative in their own right. Instead, the new standards will serve only to update the Codification, provide background information about the guidance, and provide the bases for conclusions on the change(s) in the Codification. Guidance from new standards will be appropriately labeled as Pending Content within the Codification and will include information on the effective date of the new guidance. Issued Exposure Drafts will be readily accessible by the public on the FASB website. Non-authoritative

On the effective date of this Statement, all non-grandfathered, non-SEC accounting literature not included in the Codification is superseded and deemed non-authoritative. The FASB will no longer update or maintain the superseded standards, but those standards will be available for reference on the FASB website. The archived standards will include the original bases for conclusions.

How Armanino can assist you?

Armanino is a natural fit to assist you in transitioning to the new accounting practices. We specialize in accounting, auditing and consulting. We are committed to keeping up-to-date on the latest changes in accounting practices, including this landmark change.

Concerned that your company may not be able to comply with the new standards in time or at all? Why not utilize Armanino as an outsourced consultant to draft your financial statements We also offer consulting for the appropriate treatment of all complex accounting transactions.

It’s a largely unreported change, but a landmark one. It’s time to prepare.

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