The GAAP hierarchy consists of four tiers that guide accountants in choosing the appropriate principles when creating financial statements for non-governmental entities. Since different organizations oversee different aspects of accounting, it was necessary to determine the most applicable standards for various accounting subjects. The GAAP hierarchy determines the most reliable standards and practices for a specific situation or issue. If there is no information regarding the topic at higher levels, the accountant should search for relevant pronouncements at the next level down.
Basics
Accounting practices and standards are governed by a comprehensive hierarchy known as the generally accepted accounting principles (GAAP). This four-level framework classifies the guidance provided by key entities, including the Financial Accounting Standards Board (FASB), the U.S. Securities and Exchange Commission (SEC), and the American Institute of Certified Public Accountants (AICPA). Each level within this hierarchy represents a varying degree of authority, ensuring that various accounting issues are appropriately addressed. The top-level guidance tackles overarching accounting matters, while the lower levels focus on intricate technical concerns.
Hierarchy of GAAP: Understanding Regulatory Bodies in Accounting
In order to establish clear and authoritative guidance on accounting matters, the accounting profession relies on a hierarchy that considers multiple regulatory bodies overseeing various aspects of the field. These bodies release accounting guidance in diverse formats, each with its level of authority. The purpose of the hierarchy of GAAP is to enhance consistency and comparability in financial reporting. It provides a framework for selecting the appropriate principles for preparing financial statements in accordance with U.S. GAAP for non-governmental entities.
Financial Accounting Standards Board (FASB)
Since its inception in 1973, the Financial Accounting Standards Board has played a crucial role as an independent nonprofit organization. Its primary responsibility is to establish accounting and financial reporting standards for public and private companies, as well as nonprofit organizations in the United States. The FASB's standards facilitate standardized reporting, enabling better comparison of financial statements across companies within the same industry.
Securities and Exchange Commission (SEC)
Established in 1934, the Securities and Exchange Commission operates as an independent federal government agency. It serves multiple purposes, including investor protection, ensuring fair and orderly functioning of securities markets, and facilitating capital formation. The SEC sets forth reporting standards and regulations specifically for public companies.
American Institute of Certified Public Accountants (AICPA)
The American Institute of Certified Public Accountants, founded in 1887, is a nonprofit professional organization representing certified public accountants (CPAs) in the United States. Among its various responsibilities, the AICPA develops standards for external audits of private companies, contributing to the overall quality and reliability of financial reporting.
Hierarchy of GAAP: Requirements for Establishing Authority
Establishing a clear hierarchy is crucial for the Generally Accepted Accounting Principles, ensuring accountants have authoritative guidance when researching accounting topics. This hierarchy consists of four levels, with the highest level holding the most authority. Accountants should consult the highest level for relevant advice on a given topic, progressing to the next level if no information is found at the higher levels.
The top level of the GAAP hierarchy comprises statements and interpretations from the Financial Accounting Standards Board, rules and interpretive releases from the Securities and Exchange Commission applicable to all SEC registrants, and accounting research bulletins and opinions issued by the American Institute of Certified Public Accountants.
Moving down to the second level, we find FASB Technical Bulletins, along with the AICPA Industry Audit and Accounting Guides and Statements of Position, cleared by the FASB.
The third level includes AICPA Accounting Standards Executive Committee Practice Bulletins, consensus positions of the FASB Emerging Issues Task Force (EITF), and topics discussed in Appendix D of EITF Abstracts.
Lastly, at the lowest level, we have FASB implementation guides, AICPA Accounting Interpretations, and AICPA Industry Audit and Accounting Guides and Statements of Position that have not been cleared by the FASB. This level also encompasses widely recognized and commonly used accounting practices, both in general and within specific industries.
For a comprehensive understanding of the hierarchy, the FASB's Statement of Accounting Standards No. 162 provides a detailed explanation of its structure and components.
Conclusion
The GAAP hierarchy guides accountants in selecting appropriate principles for non-governmental entities. It ensures consistency and comparability in financial reporting, considering guidance from the FASB, SEC, and AICPA. The top level includes FASB statements and interpretations, SEC rules and releases, and AICPA bulletins. As accountants progress, they encounter technical bulletins, industry guides, and emerging issues. The lowest level includes implementation guides, accounting interpretations, and widely recognized practices.