Accounting: The Language of Business - Vol. 1 (Intermediate: Part 20)

... preliminary accounting, banking and surveying (known as arithmetic, algebra and geometry).

Alan Watts

Judgment and Applied Financial Accounting Research (Part E)

by

Charles Lamson

Authoritative Literature Used in Applied Financial Accounting Research

Accountants undertake financial accounting research whenever they need information to determine the appropriate reporting treatment for a business transaction. In addition, accountants use financial accounting research whenever the analysis and interpretation of an economic event or accounting standard is not clear and thus requires judgment. Accounting standards may be unclear for three main reasons:

1. Judgment is involved because the standard setters allow for management discretion.

2. The issue is sufficiently complex that, although a single correct answer exists, it requires research to determine the correct answer.

3. There is simply no information in the accounting standards that directly provides guidance to resolve a specific reporting issue.

In these cases, accountants must research the authoritative literature and develop a recommended accounting treatment. Research is the systematic investigation into an issue. We will focus our discussion on applied research that requires critical thinking skills, knowledge base, thoroughness, and professional judgment. We begin our discussion with the content of the authoritative literature. An upcoming post will then outline the steps to follow in the research process.

Authoritative Literature

U.S. standard-setters have issued a number of different types of authoritative statements over the years that are part of U.S. GAAP. These standards include, but are not limited to, Accounting Research Bulletins of the Committee on Accounting Procedure, Accounting Principles Board Opinions, and Statements of Financial Accounting Standards of the Financial Accounting Standards Board (FASB). 

Due to the large volume of diverse and complex standards, the body of U.S. GAAP became difficult to use. In response to this problem, the FASB developed the Financial Accounting Standards Board Accounting Standards Codification (ASC), often referred to as the Codification, which groups and summarizes all current standards by topic. When the FASB issues a new announcement, it is referenced as an Accounting Standards Update (ASU).  Once approved, ASUs are incorporated into the Codification.

Codification Structure. The Codification is divided into topics, subtopics, sections, and paragraphs. Exhibit 3.4 presents the nine major topic groupings. The complete list of topics included in the Codification can be found in Appendix A. Appendix A at the end of this post presents the subtopics for Topic 350 – Intangibles, Topic 450 - Contingencies, and Topic 505 - Equity.

EXHIBIT 3.4 Major Codification Topic Groupings

  

The number and type of subtopics vary depending on the main topic but are generally distinguished by accounting area or scope. For example, the Codification breaks down the topic of intangibles into the various types of intangibles such as goodwill. Exhibit 3.5 presents the subtopics included under the topic of intangibles. Note that the topics will also cross-reference relevant industry topics. For example, Topic 350 includes Topic 908 Airlines. 

EXHIBIT 3.5 Codification Subtopics for Topic 350 Intangibles---Goodwill and Other

The sections under each subtopic are uniform throughout the Codification. For example, Section 25 is always recognition and Section 30 is always initial measurement. Appendix A presents the full set of sections included in the Codification.

The U.S. Securities and Exchange Commission (SEC) has the authority to promulgate accounting standards. For convenience, the Codification contains S sections written by the SEC, rather than the Financial Accounting Standards Board (FASB). For example, S30 is a section that contains information about initial measurement issued by the SEC. All of the S sections refer to Section S99, which contains the actual text of the SEC documents. Accountants exercise caution when using S99 Sections: They do not represent the full breadth of SEC materials and may exclude the most recent information.

Accountants reference material from the codification with a specific shorthand. To illustrate, consider the reference ASC 350–20-35–1. Exhibit 3.6 illustrates how to disaggregate a Codification reference.

EXHIBIT 3.6 Codification Reference

EXAMPLE 3.1

Referencing the Codification

PROBLEM: You are the accountant for JC's Emporium. JC's has been sued and you have concluded that it must record a liability for the loss (a loss contingency). You are unsure what amount to report on the balance sheet. using the "Structure of the U.S. GAAP Codification" in Appendix A, what are the best topic, sub topic, and sections to use to find this information in the codification?

SOLUTION: Start in the liabilities topic grouping---the 40s. In Appendix A, Contingencies are Topic 450. Within topic 450, Subtopic 20 covers lost contingencies. Finally, because you are interested in how JC's should initially record the contingency, you will go to section 30 - Initial Measurement. Thus, the information is most likely to be found in ASC 450-20–30. 

*GORDON, RAEDY, SANNELLA, INTERMEDIATE ACCOUNTING, 2ND ED., PP. 64-66, 85-88*

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