What’s this ‘codification’ stuff my auditor is talking about?

You may have heard auditors talking about the codification of accounting rules. Well, it isn’t about everything getting fishy. (Bad joke – sorry!) You probably have seen lots of odd comments in the notes to your financial statements.  Instead of mentioning FAS Statement #157 when discussing fair value accounting of your investments, your notes now refer to something like ASC 820.  What happened?

The accounting rule makers (that would be the Financial Accounting Standards Board, or FASB) took hundreds and hundreds of separate accounting rules and blended them into one large document with structured coding and with a specific format.  Now we have one huge database that has all the accounting rules in it.  Why bother?  Because in the past if you wanted to look up the accounting rules for one specific item, there was no one index or list of rules you could check to find everything that is on point.  You might have to go to half a dozen resources to find all the rules that applied. Now you can go to a searchable database that has all the rules and be sure you looked at everything.

What does this mean?  All the references in your financial statements to an accounting rule will look different.  Also, your auditors might be a bit befuddled as they learn the new terminology and new ways of researching accounting questions. 

Most importantly, a completely different referencing structure will be in play.  Descriptions of new accounting rules will sound odd – you will be hearing about Accounting Standards Updates, or ASUs instead of new FASB statements.  Instead of talking about the new FASB #190-something (which is in sequence after the last update), we will be talking about ASC 2010-06 or ASC 11-02 (which has a year and sequence number within the year).  Old accounting rules will sound odd too.  That lease you may have to capitalize will no longer be a FAS 13 issue — instead it will be an ASC 840 issue.

Will this be an improvement?  I think so. It will take a lot of adjustment, but it will be worth it.

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