Simply Put

How Accounting Standards Codification (ASC) makes life easier for tax practitioners.

November 2, 2009
Sponsored by Gear Up

What would the business landscape look like if one corporate scandal after another hadn’t made the headlines? In many cases, accounting discrepancies were at the heart of these company dishonors (remember Enron and Adelphia?). These corporate indecencies lit the fuse that started the fire to overhaul the current U.S. Generally Accepted Accounting Principles (GAAP) and find standards with greater simplicity and transparency.

Today, practitioners have a new story to read about.

Led by the Trustees of the Financial Accounting Foundation, the oversight board of the Financial Accounting Standards Board (FASB), the GAAP overhaul was intended for one main purpose: to streamline the standards so all practitioners could work from a more manageable set of practices that reduced confusion and boosted transparency. After four years and $16 million, FASB gave the thumbs up to the Accounting Standards Codification (ASC), also known as Codification, and set off a positive ripple effect for accountants in several key areas.

Codification alters the way accountants conduct GAAP research. Before Codification, the standards were cumbersome and painful to navigate, and mistakes (several of which led to misdeeds) were many. With Codification, the standards are reorganized, allowing easier navigation and interpretation. Further, an online searchable database, known as the FASB Accounting Standard Codification Research System (FASCRS), gives practitioners a quick reference guide and simpler navigation because thousands of pages are organized into one integrated, concise document. The database is divided into about 90 topics and further arranged by subtopic, section and subsection. This organizational system is designed to save practitioners hours (and hours and hours) of time on research and interpretation.

In addition, Codification alters the GAAP hierarchy by shifting from an audit focus to an entity focus, which in essence reduces the number of GAAP levels from four to two. These levels are named authoritative and non-authoritative, and their denotations are just as easy to remember: authoritative sources are found within the Codification; non-authoritative sources are not.

As Winford Paschall, director of third-party CPE relations for Thomson Reuters explains, “Under this new Codification, the doubt is removed because the Codification is authoritative.”

Preparing for International Standards

In addition to simplifying information and saving hours of research, one of the biggest advantages of Codification is that it aligns with the requirements for International Financial Reporting Standards (IFRS), should this become the de facto standard. While the IFRS is under evaluation by the Securities and Exchange Commission (SEC), the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB), many experts predict IFRS will be the new reality in the near future for the United States. In practice, 113 nations currently follow IFRS with several more countries expected to follow suit in the coming months.

“If and when we ever reach the point of adopting IFRS, we already have the mechanism in place to fold them into the Codification,” Paschall explains. “We’ve got the vehicle for taking the IFRS and including them in the Codification. The practitioner would see very little change in the way that standards are codified.”

But just how simple does Codification make the standards? Paschall puts the numbers this way: U.S. GAAP standards number about 20,000 pages. When these standards were codified, the figure dropped to around 15,000 to 16,000 pages. With IFRS, the standards are reduced to about 2,000 pages, and for small and medium sized entities, the standards under IFRS drop dramatically to about 240 pages. And while most smaller businesses aren’t going to implement the simplified standard immediately due to a learning curve, and the need to educate lenders and other statement users, Paschall says the point is that Codification has paved the way for simplicity and adoption of IFRS. (It’s important to note that ASC won’t provide all of the SEC’s rules, regulations, interpretive releases or the governmental accounting standards. Obtaining the basic version of ASC is free, but the “professional” version, which includes advanced text searching and cross-reference capabilities, will cost $850 per user.

In short, Codification is designed to make the accounting profession more transparent and more streamlined. As with any paradigm shift, education is key. While the FASB offers training, the best way to learn is to listen to the professionals. “In order to quickly become accustomed to the new Codification standards and how they will impact your business, consider taking one of the Thomson Reuters classes,” Paschall says. Popular courses include:

Practitioners can work to ensure that implementation of ASC is as smooth as possible by training staff members, updating policy and procedures manuals to reflect that the firm references ASC and checking (and then double-checking) their accounting to catch any potential errors due to the depth and breadth of changes. While the transition to Codification requires legwork, reaching the goal of implementation is expected to be well worth it.

“Codification should simplify the process and make it easier for accountants in public practice to defend their position when they establish GAAP requirements for their clients,” Paschall says. “For the most part Codification made no significant changes in GAAP — it just changed the format and organization of the standards. It’s just a format change, but a good format change that I think will benefit the profession.”

— From the CPE & Training Solutions ezine from the Tax & Accounting business of Thomson Reuters, October 2009. To view current and past issues of the ezine, click here.

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