What is the GAAP Hierarchy?
The GAAP hierarchy specifies the relative level of authority of accounting principles and guidelines under the Generally Accepted Accounting Principles that govern accounting standards in the United States.
The hierarchy consists of four levels. The highest levels of the hierarchy provide broad, general rules for accounting, typically applicable to any company or other entity required to keep accounting records. The lower levels of the hierarchy provide more detailed accounting guidance that may not apply to all organizations.
The purpose of establishing the GAAP hierarchy was to further promote uniformity in accounting practices and clarify governing standards. The need for a hierarchy of accounting principles guidance arose primarily from the fact that several different regulatory entities in the U.S. provide accounting guidelines – principally, the American Institute of Certified Public Accountants (AICPA), the Financial Accounting Standards Board (FASB), and the Securities and Exchange Commission (SEC).
- The GAAP hierarchy specifies the relative level of authority of accounting principles and guidelines under the Generally Accepted Accounting Principles that govern accounting standards in the United States.
- The hierarchy specifies the Financial Accounting Standards Board as the preeminent authority for accounting principles and practices.
- The purpose of the GAAP hierarchy is to clarify guidance on accounting practices and to promote uniform accounting.
The Four Levels of the GAAP Hierarchy
The highest level of the GAAP hierarchy, which supplies the most authoritative guidance for accounting principles and practices, includes the Statements of Financial Accounting Standards as put forth by the Financial Accounting Standards Board, along with official interpretations of the standards issued by the FASB.
Level one also includes the Accounting Research Bulletins and the official Opinions from the American Institute of Certified Public Accountants, as long as they do not conflict with the official statements and interpretations issued by the FASB. In instances where a conflict of guidance might arise, the guidance from the FASB takes precedence.
The second level of the GAAP hierarchy includes Technical Bulletins published by the FASB and the Industry Audit and Accounting Guides and Statements of Position that are issued by the AICPA. Again, the premier governing authority is the FASB. The AICPA’s Statements of Position aims to clarify and improve accounting guidance provided previously or elsewhere, and they are frequently later incorporated into the FASB’s basic accounting standards.
The third level of the hierarchy comprises further, more detailed guidelines that are put forth in publications from both the AICPA and the FASB. The governing AICPA documents at the third level are the periodically issued Accounting Standards Executive Committee Practice Bulletins. The third level guidance from the FASB is found in the FASB’s Consensus Positions, which come from the FASB Emerging Issues Task Force (EITF), and in the accounting topics discussed in detail in EITF Abstracts, Appendix D.
The fourth and final level of the GAAP hierarchy consists of Implementation Guides published by the FASB, the official Accounting Interpretations issued by the AICPA, and the Industry Audit and Accounting Guides and Statements of Position, also from the AICPA. The fourth level of the hierarchy also includes any and all accounting practices that are widely and generally recognized and commonly in use, either in general accounting or within a specific industry or market sector.
The GAAP hierarchy is discussed in detail in the FASB’s Statement of Financial Accounting Standards No. 162, published in May of 2008.
The Entities Governing Accounting Standards in the United States
Of the three entities that provide accounting regulations, standards, principles, and professional guidance for accountants, only the SEC is an official government entity with legal enforcement powers. The SEC’s interest in accounting standards is primarily limited to accounting requirements for publicly traded companies.
The FASB is a non-profit organization founded in 1973 to establish standardized accounting and financial reporting practices for both for-profit and non-profit entities. Its authoritative position in reference to accounting standards and practices gradually increased over the years until it ultimately became the preeminent body about interpreting the GAAP.
The AICPA is the primary professional organization for Certified Public Accountants (CPAs) in the United States. Along with professional members, it also has student affiliate members in the U.S. and associate members in other countries. It is the largest professional accounting organization worldwide.
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