Codification Has Officially Arrived

For those of you calendar year end issuers the time to eliminate references to the pre-codification GAAP standards is here.  Your 3^rd quarter interim financial information will no longer contain references to the various layers of GAAP.  Instead of taking the time to use the cross-reference tool to the old standards and inserting long paragraph number references in place of the SFASs, EITFs, SOPS, and SABs, a better approach would be to transform your footnote disclosures to what the SEC continually refers to as “plain English”.

The benefit of using this approach is actually providing your investors with a meaningful description as to how your company actually applies the appropriate accounting guidance, instead of simply regurgitating accounting standards that few, and a lessening number of people, honestly understand.

A good starting point is to review your internal accounting policies and procedures, which in my experience, do not generally reference or contain any language from the accounting standards.  Further, remember the following keys when drafting financial statement footnotes and compliance documents in general:

• Know your audience – remember these compliance documents are designed to provide useful information to investors and prospective investors, so be aware of the general level of sophistication and educational backgrounds of these groups.
• Focus on the significant and material items – Don’t spend a lot of time writing about things that ultimately are not going to be material to the financial statements or operations of the Company.
• Write concisely and avoid redundancy – Run-on sentences are the best way to lose the interest of your reader in addition to confusing them.  Redundancy leads to inconsistency leads to SEC Comment Letters.

For more tips you can find a “plain English” handbook on the SEC’s website.

Don’t fear codification, overcome the learning curve as quickly as possible; it should ultimately make complying with the accounting standards easier and provide more understandable disclosure to keep your investors interested.