Will the Alphabet Soup of GAAP Soon Become Consomme?

ARB, APB, SFAS, SOP, EITF, FSP, AIN, FIN, CON, SAB, AAER, FRP, ASR, S-X.  These are all authoritative sources of GAAP, and I probably left some out. So, four years ago, the FASB began work on its project to simplify the process of finding answers to accounting questions by creating a single, authoritative on-line Codification—with the significant exception of SEC literature. On January 15th, the FASB launched a one-year “verification” period, during which the Codification Research System will be available online free of charge.  To access the Codification, a user must first register at http://asc.fasb.org. 

I have by no means done a thorough review of the Codification software, but I decided to replicate a research project I recently performed for a client as a test of its usability.  My client had a series of questions about an anticipated sale of part of their operations, and in particular whether presentation as discontinued operations was specified for the current and future periods.  My resulting first impressions of the Codification as a research tool are these:

• Response time is slow.  I'm concerned that as more users access the codification, performance will degrade even further.
• The organization of topics could be more logical.  For example, the FASB is working toward an asset/liability approach to recognition and measurement; so, why are revenues and expenses discussed separately from their balance sheet counterparts?  However, I was able to navigate to the place where discontinued operation guidance resides very quickly.
• The ability to place the cursor over a defined term and read its definition without clicking is very convenient.  The organization of each topic in a systematic series of sections and subsections  appears logical, consistent and potentially helpful.  However, reading off the computer screen gets old very quickly, in no small part because the subsections are too granular to be reader-friendly.   For my task, I chose to simplify things by using the command to join all subsections together -- and then dump everything to paper along with citations to the source documents.  I suppose that if you are looking for a particular sentence or two in answer to a very narrow question, reading off the screen and jumping around using hyperlinks could work fine; but I wonder if that's more the exception than the rule.  Usually, I need to be able to scan the entire content with my eyes before I can hone in on the words I need.

Overall, the codification project continues to hold high promise and is proceeding apace.  A logical next step for the SEC would be to determine how they can reasonably make accounting researcher more efficient and definitive by incorporating their own literature into the FASB's codification. At present,the Codification does include "authoritative" content issued by the SEC (though not all), as well as selected SEC staff interpretations. Under the current regime, GAAP can be created in an instant practically every time an enforcement action takes place; or a commissioner or high ranking staff member opes their ruby lips to offer their two cents worth about accounting.

Come to think of it, my discontinued operations project is one example of potentially important gaps (pardon the pun) in the Codification filled by obscure SEC utterance.  The Codification is silent on the presentation of discontinued operations in the statement of cash belows, but luckily, I just happen to remember that a staff member gave a speech a couple of years ago describe how the SEC thinks it should be done.  So, I'm off to SEC.gov to find it.  What year was it?  Who gave it?  Was it actually a speech, or some letter?  What a system.

Comments

[Edith Orenstein, FEI]

Tom,
I believe the speech you are referring to re: discontinued operations in the statement of cash flows may be the Dec. 6, 2005 speech by Corp Fin's Joel Levine at the AICPA SEC/PCAOB conference. Related slides were linked in the speech. The thing I remember most about this speech is how some found it to be a quintessential example of the downside of ‘speech GAAP.

Speech GAAP has been criticized by various committees on competitiveness and others for two reasons: first, by creating an unlevel playing field (i.e. those in the know – who are aware of speeches, which have less visibility than rules or SABs, and a sometimes uncertain level of authority – vs. those who aren’t even aware of the speeches), and secondly, for sometimes being viewed as ‘interpretations’ of GAAP or in essence, rulemaking, which more properly (under the Administrative Procedures Act) require a vote by the Commission and public comment.

Additional complications in this particular case included the fact that the speech (and possibly the related slides too) were not even posted on the SEC website until months later, since you can see it listed as a new web posting on the SEC’s “What’s New” page for March 15, 2006. Additionally, the criticisms of ‘speech GAAP’ were viewed as further exacerbated by some through the communication of further ‘SEC staff views’ through a third party vehicle, specifically the AICPA’s then-Center for Public Company Audit Firm’s (CPCAF) Alert No. 90 on Feb. 15, 2006, further amended by CPCAF Alert No. 98 issued April 19, 2006. Most critically, CPCAF 90 included a very near-term cutoff (e.g. in the next filing, which for many companies would be the 10-K almost out the door) set forth by the SEC staff, after which adjustments made to conform to the guidance in the 12.5.06 speech would be deemed corrections of an error, but before which they would not. It appears the bright line may have been modified some in CPCAF Alert 98.

In general, it is no doubt helpful to get SEC staff view out there, as Jack Ciesielski noted in his AAOweblog on Dec. 14, 2007. However, the level playing field and due process issues noted above remain a concern regarding ‘speech GAAP.’ Coincidentally, Commissioner Atkins made a speech to the AICPA conference the day before Levine’s speech, and Atkins said: “[W]e should not foster a regulatory environment that relies on informal guidance as a basis for enforcement action,” and alluding to ‘speech GAAP,’ said: “You will hear from many of the fine accountants on our staff during this conference. The SEC is fortunate to have such a wealth of talent. But the preferred approaches of SEC staff accountants, even when expressed in a widely attended meeting such as this one, should not be viewed as binding law unless those views have been formalized through Commission action.”
We didn’t cover this particular issue in the FEI blog back in early 2006 since our blog was focused on Sarbanes-Oxley 404 issues at the time, but we have since widened the scope of the FEI Financial Reporting blog to SEC, PCAOB, FASB, IASB and other regulatory matters generally.

I hope this info is helpful, and please note these comments are my own and not those of FEI or any of its other staff, officers or members.