Definition

Hierarchy of GAAP

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What is the Hierarchy of GAAP?

GAAP stands for the Generally Accepted Accounting Principles. GAAP hierarchy lays down the relative authority of accounting guidelines and principles which governs the accounting standards of the United States.

The GAAP hierarchy includes four levels. The first level of the hierarchy extends the general and broad rules for accounting which are applicable to all companies which are required to keep the accounting records. The lower level provides detailed rules and guidelines for accounting that are not applicable to all types of organisations.

The hierarchy of GAAP was introduced to keep uniformity in account recording and management practices. Furthermore, it added clarity to the governing standards. The necessity to introduce hierarchy arose because of the presence of numerous accounting regulatory entities in the United States, each extending its own set of accounting guidelines. The major accounting entities are the Securities and Exchange Commission (SEC), the Financial Accounting Standards Board (FASB), and the American Institute of Certified Public Accountants (AICPA).

Summary
  • GAAP hierarchy lays down the relative authority of accounting guidelines and principles which govern the accounting standards of the United States.
  • The first level of the hierarchy extends the broad rules for accounting while the lower level provides detailed rules and guidelines for accounting that may not be applicable to all types of organisations.
  • The hierarchy of GAAP was introduced to keep uniformity in account recording and management practices and adding clarity to the governing standards.
  • The major accounting entities are the Securities and Exchange Commission (SEC), the Financial Accounting Standards Board (FASB), and the American Institute of Certified Public Accountants (AICPA).

Frequently Asked Questions (FAQs)

Why is hierarchy of GAAP required?

There were multiple regulatory bodies that were providing guidelines in the accounting practices and covering different parts of the profession. Therefore, it was necessary to pinpoint the most relevant guidelines in the accounting practice.

The accounting guidance which was released by the regulatory bodies had varying formats along with the varying levels of authority. The hierarchy of GAAP was introduced to improve comparability and consistency within financial reporting. The hierarchy of GAAP states the principles which should be used by the accountants while preparing financial statements.

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What are the four levels of GAAP hierarchy?

  1. Level one is composed of the Statements of Financial Accounting Standards which are specified by the Financial Accounting Standards Board. It also includes the interpretations of the standards which are issued by the FASB. The first level also includes the opinions released by the American Institute of Certified Public Accountants and the Accounting Research Bulletins. The level ensures that the conflict statements are not issued by the FASB. In case of conflicting statements, the FASB’s guidelines are given priority.
  2. The hierarchy of GAAP’s second level comprises of the technical bulletins which are published by the FASB and the statement of position, accounting guides and the industry issued by AICPA. The statement of position issued by the AICPA intends to improve and clarify the accounting standard which is issued previously.
  3. The third level provides detailed guidelines which are published by the FASB and the AICPA. The AICPA documents periodically issue the Accounting Standards Executive Committee Practice Bulletins.
  4. The fourth level of the GAAP hierarchy includes the Implementation Guides which are published by FASB and the Accounting Preparations which are released by the AICPA along with the Industry Audit and Accounting Guides and Statements of Position which is also published by AICPA.

The details about the GAAP Hierarchy are available in the FASB’s Statement of Financial Accounting Standards No. 162 which was published in 2008.

Which entities are governing accounting standards in the United States?

Out of all the entities which lay down the standards, professional guidelines, principles and regulations for accounts, SEC is the only official government entity that has the legal enforcement powers. The guidelines extended by the SEC are majorly in the interest of accounting requirements of the companies which are trading publicly.

In 1973, the FASB, a non-profit organisation was founded to lay down the standardised financial and accounting reporting practices keeping in view the interest of both non-profit and for-profit organisations. In reference to the financial practices and accounting standards, FASB’s authorities position increased gradually over the years and ultimately it became a preeminent body that deals with the interpretation of GAAP.

In the United States, The AICPA is the primary organisation which deals with Certified Public Accounts (CPAs). AIPCA have professional members, students affiliate members and members who are associated with other countries. It is one of the largest professional organisations across the globe.  

What is GASB?

GASB stands for the Governmental Accounting Standards Board which was established in 1984. It is an independent and is a private sector organisation that is based in Norwalk, Connecticut. The organisation is involved in the establishment of the financial reporting and accounting standards for the local government and the United States which follows the GAAP (Generally Accepted Accounting Principles).

The GASB standard is identified by the state and local government, the American Institute of CPAs (AICPA) and state boards of Accountancy as authoritative. The accounting standards are issued and developed by the GASB through an inclusive process and by maintaining transparency with the aim to promote financial reporting. It aims to generate reports which can extend information to tax payers, investors, public official and other parties who are interested in the financial reports.

FAF (Financial Accounting Foundation) oversees and supports the GASB. FAF was established in 1972. It is a private sector, independent and not-for-profit organisation that is based in Norwalk, Connecticut. It is responsible for the administration, oversight, appointment, and financing of the GASB and FASB (Financial Accounting Standards Board).

What is the mission of GASB?

The mission of the FASB, the FAF and the GASB is to improve and establish reporting standards and financial accounting to extend crucial information to all the users of the financial reports. The financial reports are also useful in educating the stakeholders regarding the implementation of the standards.

The FASB, the GASB, the FAF management and trustees have a collective mission and each entity have a specific function and rule –

  • The FASB and the GASB: They adopt an inclusive, comprehensive and robust processes to set the accounting standards of the highest quality.
  • The FAF management: It is accountable for providing services and strategic counselling that support the stands-setting board’s work.
  • The FAF trustee: It helps in promoting and providing oversight to the standard setting process.