Understanding the Four-Tier Framework of GAAP
The hierarchy of generally accepted accounting principles (GAAP) establishes a structured framework for classifying accounting guidelines as per their authority. This is essential for ensuring consistency and comparability in financial reporting by U.S. entities. Governed by the Financial Accounting Standards Board (FASB), the Securities and Exchange Commission (SEC), and the American Institute of Certified Public Accountants (AICPA), GAAP’s hierarchy spans four levels based on the significance and scope of guidance.
Key Takeaways
- Systematic Framework: The GAAP hierarchy is a four-tier system guiding accountants in preparing financial statements for nongovernmental entities.
- Authority Differentiation: Recognizes distinctions among guidance issues by various accounting regulatory bodies, ensuring utilization of the most relevant and authoritative standards.
- Application Sequence: Starts from the highest authority level, gradually moving downwards if higher-level guidelines don’t provide specific information.
The Dimensions of GAAP Hierarchy
Given the extensive range of regulatory bodies and their distinct guidance formats, the GAAP hierarchy is pivotal in discerning the most relevant instructions for precise accounting practices.
Financial Accounting Standards Board (FASB)
The FASB, established in 1973, is an independent organization responsible for setting accounting and financial reporting standards for public and private entities as well as nonprofits in the U.S. These standards enable vast standardization, easing comparability across financial statements of different entities in the same sector.
Securities and Exchange Commission (SEC)
Formed in 1934, the SEC acts as an independent federal government body that safeguards investors, maintains fair market practices, and aids capital creation. It specifies reporting standards and regulations primarily for public companies.
American Institute of Certified Public Accountants (AICPA)
The AICPA, launched in 1887, is a professional organization representing Certified Public Accountants (CPAs) in the U.S. Its contributions include developing standards for external audits of private corporations.
Requirements and Levels of the GAAP Hierarchy
The GAAP hierarchy’s four levels embody escalating authority for accounting research and practices. Accountants should commence their research using the highest level, progressing downward as necessary.
- Top Level: Statements and interpretations by the FASB, SEC rules for SEC registrants, and accounting research bulletins and opinions issued by the AICPA.
- Second Level: FASB Technical Bulletins, AICPA Industry Audit guide, and Statements of Position (once cleared by the FASB).
- Third Level: AICPA Accounting Standards Executive Committee Practice Bulletins, consensus opinions by FASB’s Emerging Issues Task Force (EITF), and Appendices of EITF Abstracts.
- Lowest Level: FASB implementation guides, non-cleared AICPA Industry Audit guides, AICPA Accounting Interpretations, and other widely accepted industry practices.
The FASB’s Statement of Accounting Standards No. 162 presents an in-depth portrayal of these hierarchies, guiding how to access and apply them.
Related Terms: Financial Accounting Standards Board, Securities and Exchange Commission, American Institute of Certified Public Accountants, Accounting Guidelines.
