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Codification of AICPA Accounting Standards in SASs

Primary Objective: The objective of this project is to consider incorporating accounting and financial reporting standards that are included in current and recently modified Statements on Auditing Standards (SASs) to more effectively present those standards so that these requirements are more clearly the responsibility of the financial statement preparers. In its initial form, the project also included incorporation of the hierarchy of generally accepted accounting principles (GAAP hierarchy) to identify, in the GASB’s authoritative literature, the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of state and local governments that are presented in conformity with GAAP. The GAAP hierarchy portion of the project was later established as a separate project as discussed below.

Status: Statement No. 56, Codification of Accounting and Financial Reporting Guidance Contained in the AICPA Statements on Auditing Standards, was approved in March 2009.
 

Codification of AICPA Accounting Standards in SASs—Project Plan

Project Description: This project will consider incorporating accounting and financial reporting standards that are included in current and recently modified Statements on Auditing Standards (SASs) to more effectively present those standards so that these requirements are more clearly the responsibility of the financial statement preparers. In its initial form, the project also included incorporation of the hierarchy of generally accepted accounting principles (GAAP hierarchy) to identify, in the GASB’s authoritative literature, the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of state and local governments that are presented in conformity with GAAP. The GAAP hierarchy portion of the project was later established as a separate project as discussed below.

Background: Representatives of the American Institute of Certified Public Accountants (AICPA) have stated that they would like the standards setters to consider adopting standards for accounting and financial reporting issues that now only reside in the SASs. The responsibility for complying with financial reporting standards is attributable to the preparers of financial statements; however, the requirements do not reside in established accounting principles.

In September 2006, the United States Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 108, which provides authoritative guidance on considering the effects of prior year misstatements when quantifying misstatements in current year financial statements. That guidance is applicable to publicly traded companies. That action highlights the fact that these issues have not been addressed in a governmental environment (for example, restatement issues for reporting units). The Omnibus project initially included this “materiality” issue, adapted from the SEC’s staff bulletin, for correcting errors in previously issued financial statements. However, as discussed below, the Board later eliminated that issue from the project.

Accounting and Financial Reporting Issues: The primary issue is identifying, in the SASs, the various accounting and financial reporting requirements that should be incorporated into the accounting and financial reporting level “a” literature. Based on a review of the audit literature, the significant areas that would be included in the omnibus project are related party considerations, going concern considerations, subsequent events, and materiality issues.

Current Developments: The Board reviewed a preballot draft of the proposed standard at the July meeting and voted to issue the ED after reviewing the ballot draft at the August meeting. The ED was issued August 28, with a comment period ending October 30. Approximately 32 letters were received, most of which generally supported the ED as proposed. The redeliberations based on the comments received may take place at the December Board meeting (rather than the March 2009 meeting), if time permits, accelerating the preballot and ballot review sessions accordingly.

Codification of AICPA Accounting Standards in SASs—Minutes for Deliberations

Minutes of Teleconference, March 31, 2009

The Board discussed the ballot draft of Statement No. 56, Codification of Accounting and Financial Reporting Guidance Contained in the AICPA Statements on Auditing Standards and finalized the wording for the going concern time horizon as well as for other paragraphs in the ballot draft. After consensus was reached on these wording changes, the Board unanimously approved the issuance of the Statement. This standard is expected to be issued by the end of April 2009.

Minutes of Meeting, March 10-12, 2009

The Board reviewed the preballot draft of a final Statement, Codification of Accounting and Financial Reporting Guidance Contained in the AICPA Statements on Auditing Standards. The Board discussed the appropriateness of paragraph 7 in the related party transactions section that addressed some aspects of the governmental environment. The Board tentatively decided that the last sentence in that paragraph should not be included in the final standard as it may cause undue confusion between it and the provisions in an earlier paragraph. The Board also discussed the proposed language that describes the disclosures for nonrecognized subsequent events as necessary when they are “essential to a user’s understanding of the financial statements” and tentatively decided that it was more appropriate than the original language describing these disclosures as “required to keep the financial statements from being misleading.” The Board also discussed the time horizon over which the going concern assessment should be evaluated. It tentatively decided that the time horizon should be defined as one year beyond the financial statement date but that additional language should be added to address the inclusion, in certain circumstances, of the short time thereafter when other information affecting the going concern assessment is currently known.

A ballot draft of the final Statement will be discussed by the Board at the March teleconference meeting.

Minutes of Meeting, January 6, 2009

The Board continued its discussion of the comment letters received for the Exposure Draft, Codification of Accounting and Financial Reporting Guidance Contained in the AICPA Statements on Auditing Standards. The Board tentatively decided that Type I and Type II subsequent events should be named “recognized” and “non-recognized,” respectively, in the final standard. Additionally, the Board tentatively decided that the notion of financial statements being “available to be issued,” as set forth in the FASB Exposure Draft, Subsequent Events, does not apply to a governmental setting and, therefore, should not be adopted in the final standard. In reference to going concern issues, the Board tentatively decided that clarification is needed in the final standard to express that the “legal entity level” is the entity level to which the going concern assessment should be applied. The Board tentatively decided that the original time horizon for which going concern should be evaluated of “not to exceed one year” should be replaced with a notion that does not create such a bright-line cut-off date. The Board considered, but did not adopt the wording used in the FASB Exposure Draft, Going Concern, which describes the time horizon over which going concern should be evaluated as “at least, but not limited to, one year.” Instead, the Board requested that the staff propose alternative language.

Minutes of Meeting, December 16–18, 2008

The Board reviewed and considered feedback from the constituent responses to the Exposure Draft, The Hierarchy of Generally Accepted Accounting Principles for State and Local Governments. The Board recognized that many of the issues raised (for example, authoritative status of Implementation Guides or the reconsideration of certain Statement No. 20, Accounting and Financial Reporting for Proprietary Funds and Other Governmental Entities That Use Proprietary Fund Accounting, provisions based on the FASB codification efforts) deserve additional consideration. However, the Board tentatively concluded that the “codify versus modify” approach in this project should continue to be applied in the preparation of this final hierarchy standard and that the issues raised by constituents that called for changes to either the hierarchy or to Statement 20 should be reconsidered at a future date. The Board then reviewed and began its consideration of feedback from respondents to the Exposure Draft, Codification of Accounting and Financial Reporting Guidance Contained in the AICPA Statements on Auditing Standards. The Board discussed issues related to the scope of the final standard and tentatively concluded that no changes should be made at this time. In discussing comments regarding the proposed guidance on related party transactions, the Board tentatively concluded that the “except in routine transactions" provision in the first sentence in paragraph 7 should be eliminated. The Board will continue its deliberations on this topic at the January teleconference.

Minutes of Meeting, August 19-21, 2008

The Board reviewed a ballot draft of the proposed Statement, Codification of Accounting and Financial Reporting Guidance Contained in the AICPA Statements on Auditing Standards. In the detailed review of the draft, the Board agreed on several editorial changes. The most significant modifications were to delete (1) proposed footnote 4 regarding liquidation measurement basis and (2) the transition guidance from the standard. Footnote 4 was removed because a similar observation about the use of liquidation measurements is made in the Basis for Conclusions. The transition guidance was removed because the Board believes that compliance with the standard should not cause changes to practice, and in the event that it would, the effect on financial statements should be treated as a correction of an error, rather than a change resulting from application of a new standard. The six Board members voted unanimously to proceed with issuance of an Exposure Draft.

Minutes of Meeting, July 8-10, 2008

The Board indicated general agreement with the preballot draft of the AICPA Omnibus Exposure Draft, noting that some editorial or style changes were to be made, but the substance of the document was left unchanged.

The Board will consider the ballot draft of the document at the August meeting.

Minutes of Meeting, May 21-23, 2008

The Board began the session with a discussion about the related party transactions section of the issues paper. The Board members generally agreed with the staff’s approach; however, it was suggested that some additional language be added to recognize the difficulty often faced in determining the substance versus form of transactions between related parties. The project staff will incorporate the suggested content into the draft for the next meeting. The Board also tentatively agreed that the Exposure Draft should refer to the disclosure requirements in FASB Statement No. 57, Related Party Disclosures.

With regard to the going concern considerations issue, the Board tentatively agreed with a Board member suggestion that the Exposure Draft address the absence of specific guidance in situations in which a governmental entity’s ability to continue as a going concern is beyond a reasonable doubt. The Board generally supported the staff’s recommendations regarding the carrying forward of the GAAP Hierarchy and the accounting guidance for subsequent events from the AICPA Statements of Auditing Standards (SASs).

The Board also discussed the issue of “Considering the Effects of Prior-Year Misstatements When Quantifying Misstatements in Current-Year Financial Statements,” as established in the Securities and Exchange Commission’s Staff Accounting Bulletin 108, of the same title. A board member suggested that the issue be dropped from the project primarily for two reasons. First, it is dissimilar to the other issues in the sense that it does not represent accounting guidance in the SASs, and second, because governments have traditionally corrected prior-year misstatements by restating beginning net assets/fund balances, rather than correcting previously issued financial statements. Following the discussion, the Board agreed to eliminate that issue from the project scope.

Codification of AICPA Accounting Standards in SASs —Major Tentative Decisions to Date

Statement No. 56, Codification of Accounting and Financial Reporting Guidance Contained in the AICPA Statements on Auditing Standards, was approved in March 2009.

Codification of AICPA Accounting Standards in SASs–Relevant Links