Wiley GAAP Codification Enhanced

Barry J. Epstein, Ralph Nach, Steven M. Bragg

• Publisher: Wiley
• Year: 2009
• ISBN:
  9780470498309
• Edition: 6
• Topic: Aides à l'étude
• Subtopic: Guides d'étude CPA

Your single, authoritative source to GAAP under the new Accounting Standards Codification (ASC) system

By mid-2009, the Financial Accounting Standards Board (FASB) is expected to release its Accounting Standards Codification (ASC), a new, clearer indexing system that is much easier to access and research. Though the Codification does not change U.S. generally accepted accounting principles (GAAP), it does reorganize the thousands of U.S. GAAP pronouncements from difficult-to-use chronological listings and multiple series of pronouncements into a single, easily accessible source conveniently organized by topic/subject.

Arriving at just the right time, Wiley GAAP Codification Enhanced contains complete coverage of all levels of GAAP, as well as integrated cross-references to the new ASC. In addition, Wiley GAAP Codification Enhanced renders GAAP more understandable and accessible for research and is designed to reduce the amount of time and effort you spend to solve accounting research issues.

Your authoritative guide to GAAP under the new codification system, this invaluable resource makes learning the new ACS system a breeze, with at-your-fingertips information that does the work for you. Practical and reliable, Wiley GAAP Codification Enhanced is your essential tool to navigate through these new, uncharted waters.

1

RESEARCHING GAAP MATTERS

DEVELOPMENT OF GAAP

What Is GAAP?

The phrase “generally accepted accounting principles” is a technical accounting term that encompasses the conventions, rules, and procedures necessary to define accepted accounting practice at a particular time. It includes not only broad guidelines of general application, but also detailed practices and procedures. Those conventions, rules, and procedures provide a standard by which to measure financial presentations. Auditing Standards Board (ASB), AU Section 411

Generally accepted accounting principles (GAAP) are concerned with the measurement of economic activity, the time when such measurements are to be made and recorded, the disclosures surrounding this activity, and the preparation and presentation of summarized economic information in the form of financial statements. GAAP develops when questions arise about how to best accomplish those objectives—measurement, timing of recognition, disclosure, or presentation. In response to those questions, GAAP is either prescribed in official pronouncements of authoritative bodies empowered to create it, or it originates over time through the development of customary practices that evolve when authoritative bodies fail to respond. Thus, GAAP is a reaction to and a product of the economic environment in which it develops. As such, the development of accounting and financial reporting standards has lagged the development and creation of increasingly intricate economic structures and transactions.

There are two broad categories of accounting principles—recognition and disclosure. Recognition principles determine the timing and measurement of items that enter the accounting cycle and impact the financial statements. These are quantitative standards that require economic information to be reflected numerically.

Disclosure principles deal with factors that are not always numeric. Disclosures involve qualitative information that is an essential ingredient of a full set of financial statements. Their absence would make the financial statements misleading by omitting information relevant to the decision-making needs of the reader. Disclosure principles complement recognition principles by explaining assumptions underlying the numerical information and providing additional information on accounting policies, contingencies, uncertainties, etc., which are essential to fully understand the performance and financial condition of the reporting enterprise.

Who Created GAAP?

From time to time, the bodies given responsibility for the promulgation of GAAP have changed, and indeed more than a single such body has often shared this responsibility. GAAP established by all earlier standard-setting bodies, to the extent not withdrawn or superseded, remains in effect at the present time. These bodies are described in the following paragraphs.

Committee on Accounting Procedure. The first serious attempt to create formalized generally accepted accounting principles began in 1930, primarily as a consequence of the stock market crash of 1929 and the widespread perception that an absence of uniform and stringent financial reporting requirements had contributed to the rampant stock market speculation of the preceding decade that culminated with that crash. (Previously, GAAP had largely been defined by academic writings and general industry practices.) The American Institute of Accountants, (which in 1957 was renamed the American Institute of Certified Public Accountants [AICPA]), created a special committee to work with the New York Stock Exchange toward the goal of establishing standards for accounting procedures. The special committee recommended five rules to the Exchange that were published in 1938 as Accounting Research Bulletin (ARB) 1 of the Committee on Accounting Procedure. The Committee subsequently published 51 such bulletins, including Accounting Research Bulletin 43, which consolidated and superseded Bulletins 142. The Committee also attempted to achieve uniformity in accounting terminology. However, the Committee’s limited resources and lack of serious research efforts in support of its pronouncements were questioned in the late 1950s, particularly as a number of very complex controversial topics loomed on the horizon.

Accounting Principles Board. The profession’s response was to substitute, under its auspices, the Accounting Principles Board (APB) for the Committee on Accounting Procedure. This was done to facilitate the development of principles, which were to be based primarily on the research of a separate division of the AICPA, the Accounting Research Division. Under this strategy, the Division was to undertake extensive research, publish its findings, and then permit the Accounting Principles Board to take the lead in the discussions that would ensue concerning accounting principles and practices. The Board’s authority was enforced primarily through prestige and Rule 203 of the AICPA Code of Professional Conduct. Furthermore, formal approval of Board issuances by the Securities and Exchange Commission (SEC) gave additional support to its activities.

During the Board’s fourteen years of existence, it issued 31 authoritative opinions and 4 nonauthoritative statements. They dealt with amendments of Accounting Research Bulletins, opinions on the form and content of financial statements, and issuances requiring changes in both the recognition and disclosure principles of the profession. However, the Board did not make use of the efforts of the Accounting Research Division, which published fifteen research studies during its lifetime. Both the Board and the Division acted independently in selecting topics for their respective agendas. The Board issued pronouncements in areas where little research had been done, and the Division performed research studies without seeking to be all-inclusive or exhaustive in analysis. The Accounting Principles Board did not, ultimately, operate differently or more effectively than had the Committee on Accounting Procedure.

Financial Accounting Standards Board. As a result of these operational problems, in 1971 the AICPA appointed the “Wheat Study Group” chaired by Francis M. Wheat, a former SEC commissioner. The Wheat Study Group was charged with examining the standard-setting process and making recommendations regarding the form and structure of the standard-setting process as well as whether standard setting should reside in the government or in the private sector. Based on the recommendations of this group, the Financial Accounting Standards Board (FASB) was formed in 1972. The Board consists of seven full-time members; they have diverse backgrounds with three coming from public accounting, two from private industry, and one each from academia and from an oversight body. The Board is assisted by a staff of professionals who conduct research and work directly with the Board.

FASB is recognized as authoritative through Financial Reporting Release 1 of the Securities and Exchange Commission and through Rule 203 of the AICPA Code of Professional Conduct.

FASB is an independent body relying on the Financial Accounting Foundation for selection of its members and approval of its budgets. FASB is supported by the sale of its publications and by fees assessed on all public companies based on their market capitalizations. (The imposition of this fee was established by the Sarbanes-Oxley Act and replaces the voluntary private-sector contributions that previously supported the Foundation. The change was made to allay any public concerns about the FASB’s perceived independence from contributors.) The Board of Trustees of the Foundation is composed of members of

American Accounting Association
American Institute of Certified Public Accountants
CFA Institute
Financial Executives International
Government Finance Officers Association
Institute of Management Accountants
National Association of State Auditors, Comptrollers, and Treasurers
Securities Industry Association

The Board issues several types of pronouncements.¹ The most important of these are Statements of Financial Accounting Standards and Interpretations, which are used to clarify or elaborate on existing Statements or pronouncements of predecessor bodies. Standards and Interpretations constitute category A GAAP, which also includes FASB staff positions—a relatively new form of guidance—and the Board’s FAS 133 implementation issues. Technical Bulletins, which are category B GAAP, usually address issues not covered directly by existing standards and are primarily used to provide guidance where it is not expected to be costly or create a major change. Bulletins are discussed at Board meetings and subject to Board veto. Both Bulletins and Interpretations are designed to be responsive to implementation and practice problems on relatively narrow subjects (the last Bulletin was issued in 2001; that role will now apparently be filled by FASB staff positions, a substantial number of which have already been produced).

The FASB staff can issue implementation guides and staff positions, which are category D GAAP. In a question-and-answer format, implementation guides address specific questions that arise when a standard is initially issued. Staff positions are responses to questions on appropriate application of FASB literature that are expected to have widespread relevance. The questions addressed in implementation guides and staff positions are submitted by phone, letter, or through the FASB Web site’s technical inquiry service. Implementation guides and staff positions are drafted by the staff and issued provided that a majority of the FASB Board members do not object. In addition, staff positions must be exposed on the FASB Web site for a 30-day comment period before issuance.

American Institute of Certified Public Accountants (AICPA). The Accounting Standards Executive Committee (AcSEC) is the senior technical committee at the AICPA. It is composed of fifteen volunteer members, representative of industry, academia, analysts, and both national and regional public accounting firms. All AcSEC members are CPAs and members of the AICPA.

AcSEC is authorized to set accounting standards and to speak for the AICPA on accounting matters. The accounting standards that AcSEC issues are prepared largely through the work of AICPA committees and task forces. AcSEC issues Statements of Position (SOPs) and industry audit and accounting guides, which are reviewed and cleared by the FASB and thus constitute category B GAAP. SOPs provide guidance on financial accounting and reporting issues. Industry audit and accounting guides provide guidance to auditors in examining and reporting on financial statements of entities in specific industries and provide standards on accounting problems unique to a particular industry. AcSEC Practice Bulletins (category C GAAP) usually provide guidance on very narrowly defined accounting issues. Until recently, the standards issued by AcSEC addressed topics broadly applicable to all industries in addition to industry-specific topics. Effective November 2002, FASB reclaimed the sole authority to promulgate general-purpose GAAP, relegating AcSEC to the issuance of industry-specific accounting and auditing standards.

Emerging Issues Task Force (EITF). The Emerging Issues Task Force (EITF) was formed in 1984 by the FASB in order to assist the Board in identifying current or emerging issues and implementation problems before divergent practices become entrenched. The guidance provided is often on narrow issues that are of immediate interest and importance. Task Force members are drawn primarily from public accounting firms but also include individuals who would be aware of issues and practices that should be considered by the group. The Task Force meets every other month with nonvoting representatives of the SEC and the FASB attending for discussion purposes.

For each agenda item, an issues paper is developed by members, their firms, or the FASB staff. After discussion by the Task Force, a consensus may be reached on the issue, in which case the consensus is referred to the FASB for ratification at its next scheduled meeting. If no consensus is reached, the problem may end up on the Board agenda or be resolved by the SEC, or the issue will remain unresolved with no standard-setting organization currently considering it. These issues may be in especially narrow areas having little broad-based interest. Occasionally, FASB may include a narrow issue in the scope of a broader project and reaffirm or supersede the work of the Task Force.

FASB publishes a volume of EITF Abstracts, which are summaries of each issue paper and the results of Task Force discussion.

Although EITF pronouncements are technically category C GAAP, they are so specialized that generally there is no category A or B GAAP covering the respective topics. The SEC believes that a Task Force consensus is GAAP for public companies, and they will question any accounting that differs from it. In addition, the SEC believes that the EITF supplies a public forum to discuss accounting concerns and assist in providing advice. Thus, they are supportive of the Task Force’s work.

The EITF also previously published Discussion Issues, which are FASB staff announcements and SEC staff announcements regarding technical matters that are deemed important by the FASB or SEC staff, but that do not relate specifically to a numbered EITF issue. These announcements were designed to help provide guidance on the application of relevant accounting pronouncements. It is anticipated that no further discussion issues will be issued by EITF, however.

Other sources. Not all GAAP has resulted from a deliberative process and the issuance of pronouncements by authoritative bodies. Certain principles and practices evolved into current acceptability without adopted standards. For example, depreciation methods such as straight-line and declining balance are both acceptable, as are inventory costing methods such as LIFO and FIFO. There are, however, no definitive pronouncements that can be found to state this. Furthermore, there are many disclosure principles that evolved into general accounting practice because they were originally required by the SEC in documents submitted to them. Among these are reconciling the actual rate with the statutory rate used in determining income tax expense, when not otherwise obvious from the financial statements themselves. Even much of the content of balance sheets and income statements has evolved over the years without adopted standards.

Following about five years’ effort, FASB has completed its project to codify GAAP, which will eliminate the multilevel hierarchy in favor of a bifurcation between authoritative and nonauthoritative guidance. In early 2008, FASB initiated a one-year verification phase of this Codification, during which time its constituents were encouraged to provide feedback on whether its content accurately reflects existing US GAAP for nongovernmental entities. Following completion of this trial period, pending any final revisions, FASB intends to release this by mid-2009, at which time all existing authoritative literature will be withdrawn. This book is based on the structure of the Codification as it exists in late 2008, which is not anticipated to change much, if at all.

In the interim, the GAAP hierarchy, which had been defined for decades in the auditing literature, has been moved from SAS 69 to a new FASB standard, FAS 162. This was issued in May 2008, to become effective when the PCAOB, responsible for public company auditing rules, takes action to amend its version of SAS 69 (as of year-end 2008, this has not been done). The only changes from the present hierarchy made were to include within category A GAAP virtually all accounting principles that are issued after being subject to FASB’s due process; EITF consensuses were not moved to category A, however.

According to the FASB, the new hierarchy was considered because of the complexity of the long-standing hierarchy set forth by SAS 69, because that hierarchy was directed to auditors rather than reporting entities, and because of the anomaly of ranking FASB concepts statements lower than industry practices, although the former are subject to due process while the latter are not. The new standard still relegates concepts statements to the lowest level in the five-level hierarchy, but gives these primacy over ...