FASB Codification Now the Sole Authority on

U.S. GAAP As Convergence with International

Financial Reporting Standards Continues

On June 3, 2009, the Financial Accounting Standards Board (FASB) voted to approve the “codification” – a freshly re-organized body of standards that will provide a significant benefit to public companies as U.S. and international financial reporting systems continue to converge. 

The result is that the codification is now the sole authoritative stance on U.S. generally accepted accounting principles (GAAP), and a GAAP hierarchy no longer exists.  All previous standards are now considered non-authoritative.  With its effective date of July 1, 2009, the codification is to be applied to interim and annual financial reporting periods ending after Sept. 15, 2009.

The codification has now become the single source of non-governmental authoritative GAAP.  This has produced major changes on how users research the authoritative literature on GAAP. It has also simplified the presentation of the vast pre-codification guidance that existed prior to its effective date.

One of the driving forces behind the initiation of the codification was that many of its users, which included both private and public practitioners, felt that GAAP was inordinately complicated.  The complexities of GAAP not only resulted in significant time to research and resolve an accounting issue, but also required a certain expertise to determine that all guidance had been vetted before arriving at any final conclusion.  The literature’s usability is enhanced and thus mitigates the risk of non-compliance.

Another of the key factors behind the codification was to align GAAP with the International Accounting Standards Board (IASB) guidance.  This required a structural overhaul that changed from a standards-based model (with thousands of individual standards) to a topically based model (with roughly 90 topics), modeled upon how the IASB had already established its authoritative literature. 

The project got officially underway in September 2004.  A goal was to codify all authoritative nongovernmental guidance, which also included Securities and Exchange Commission (SEC) guidance, without changing any of the language of the standards.  In addition, the project sought to minimize the content of the standards, and so all existing standards were divided into essential and nonessential content.  Essential items were carried into the codification with the nonessential items being removed. 

The SEC’s relevant content includes:

1. Regulation S-X (SX)
2. Financial Reporting Releases (FRR)/Accounting Series Releases (ASR)
3. Interpretive Releases (IR)
4. SEC Staff guidance in:
   • Staff Accounting Bulletins (SAB)
   • EITF Topic D and SEC Staff Observer comments

Examples of nonessential items include the historical content or discussions of previous practices that were previously disclosed in the standards.  To assist in the accomplishment of these goals, the FASB released the codification on Jan. 15, 2008 for a one year period so its intended users could become familiar with, and provide useful feedback on, how to improve it. 

For further information, the codification can be found at http://asc.fasb.org/home.

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