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What are Statements of Position?

Statements of Position

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Statements of Position

Statements of Position (SOPs) are pronouncements issued by the American Institute of Certified Public Accountants’ (AICPA) Accounting Standards Executive Committee (AcSEC). These statements provide guidance on financial reporting topics until the Financial Accounting Standards Board (FASB) or another standards-setting body addresses those topics. The intent of SOPs is to reduce diversity in practice on timely financial reporting issues by providing authoritative guidance.

Here’s what you need to know about SOPs:

  • Scope and Objective: SOPs typically address specific accounting issues that are either not covered by existing U.S. GAAP or where there might be some ambiguity or diversity in practice. They provide more clarity and guidance on how entities should handle these issues in their financial statements.
  • Authoritative Nature: While SOPs are not issued by the FASB, they are considered to be authoritative under U.S. GAAP for nongovernmental entities. This means that entities are required to follow the guidance provided in SOPs when preparing their financial statements.
  • Process: Before an SOP is issued, it typically goes through an exposure draft process where the proposed guidance is released for public comment. This allows stakeholders to provide feedback and ensures that various perspectives are considered.
  • Examples: Over the years, SOPs have covered a broad range of topics, such as accounting for certain types of revenue, accounting for costs in software industries, or guidance on financial reporting in certain sectors of the economy.
  • Supersession: While SOPs provide important guidance, they can be superseded by later pronouncements from the FASB or other standard-setting bodies. When the FASB issues a standard that addresses the same topic as an SOP, the FASB’s guidance takes precedence.

For those practicing accounting or auditing in the U.S., it’s crucial to be familiar with SOPs, especially if they’re operating in an area where specific SOP guidance has been issued.

Example of Statements of Position

Let’s look at an example of a Statement of Position (SOP) to provide clarity on its contents and purpose.

SOP 98-5: “Reporting on the Costs of Start-Up Activities”

Objective and Background: The purpose of SOP 98-5 was to address the diversity in financial reporting of costs related to start-up activities, including organizational costs. Before this SOP, companies were inconsistent in their accounting for these costs, with some capitalizing them as assets and others expensing them as incurred.

Primary Provisions:

  • Costs of Start-Up Activities: The SOP required that all costs related to start-up activities be expensed as they are incurred. Start-up costs include any costs related to opening a new facility, introducing a new product or service, starting a new operation in a new location, etc.
  • Organizational Costs: Costs associated with establishing a corporation or partnership, like legal and filing fees, had to be expensed when incurred.
  • No Capitalization: Entities were explicitly prohibited from capitalizing any costs related to start-up activities or organization, irrespective of whether they believed they would derive future economic benefits from these expenditures.

Example in Practice:

Suppose TechStart Inc., a technology company, is setting up a new facility in a different state. The costs associated with this include training the new employees, rent for the facility before it’s operational, utilities set-up, and more.

Before SOP 98-5, TechStart Inc. might have considered capitalizing some of these costs, arguing that the new facility would bring in future revenues, making these costs essentially an investment in that future.

However, with the guidance provided in SOP 98-5, TechStart Inc. would need to expense all these costs in the period they are incurred. So, on their income statement, during the period of setting up the new facility, their expenses would be higher due to these start-up costs, reducing their net income for that period.

The main reasoning behind this SOP was to increase consistency and comparability across entities in how they account for these types of costs. By requiring all companies to expense start-up and organizational costs as they occur, it eliminated the variability and potential manipulation of capitalizing and then subsequently amortizing such costs over multiple periods.

It’s important to note that over time, as with many SOPs, the guidance can be integrated into broader accounting standards or get updated based on new insights and changes in the business environment.

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