GAAP Hierarchy
The FASB has released FASB Accounting Standards Codification, which organizes thousands of pronouncements comprising U.S. GAAP into
a combined single source. This includes pronouncements of the FASB,
the AICPA’s Accounting Standards Executive Committee (AcSEC) and the Emerging
Issues Task Force (EITF). The FASB is exposing this codification for a
verification phase of oneyear. During this time, users may register
to use the online system free of charge.
Press Release
http://www.fasb.org/news/nr011508.shtml
Codification
http://asc.fasb.org
On January 29, 2008, the PCAOB adopted amendments to the PCAOB's interim
auditing standards.
The PCAOB adopted the amendments in light of the
impending issuance of Statement of Financial Accounting Standards, The Hierarchy of Generally Accepted Accounting
Principles.
The PCAOB removed the hierarchy of generally accepted
accounting principles (GAAP) from its interim auditing standards. The GAAP
hierarchy identifies the sources of accounting principles and the framework for
selecting principles to be used in preparing financial statements. The
PCAOB believes that the GAAP hierarchy is more appropriately located in the
accounting standards. Because the FASB intends to incorporate the hierarchy in
the accounting standards, it no longer will be needed in the auditing standards.
The PCAOB has coordinated with the FASB and understands that the FASB intends
to coincide the effective date of its GAAP hierarchy standard with that of the
PCAOB.
The amendments will become effective 60 days after SEC
approval.
http://pcaob.org/News_and_Events/News/2008/01-29.aspx
Prior to the finalization of the above actions, see, generally, SEC Study on Adoption by the U.S. Financial Reporting System of a Principles-Based
Accounting System. The following briefly summarizes this background and provides the GAAP
Hierarchy at the end of this page with links to certain sources.
The SEC has the authority to establish accounting principles to be used in financial statements filed with the SEC under Section 19(a) of the Securities Act of 1933 and Section 13(b)(1) of the Securities Exchange Act of 1934.
Additionally, the SEC requires that financial statements filed with the SEC should not be misleading to investors. In that regard, the SEC has stated in Accounting Series Release ("ASR") No. 4:
In cases where financial statements filed with the [SEC] pursuant to its rules and regulations under the Securities Act or the Exchange Act are prepared in accordance with accounting principles for which there is no substantial authoritative support, such financial statements will be presumed to be misleading or inaccurate despite disclosures contained in the certificate of the accountant or in footnotes to the statements provided the matters involved are material.
Pursuant to ASR No. 4, the SEC took the position that only accounting principles having "substantial authoritative support" with the accounting profession would be appropriate for inclusion in financial statements filed with the SEC. In this connection, the SEC stated:
. . . when the registrant fails to apply accounting principles with substantial authoritative support, no amount of disclosure can cure the problem. . . The other side of that coin says that even if the accounting is appropriate, without complete and transparent disclosure, the company's filing is still deemed to be deficient.
Initially, the American Institute of Accountants ("AIA"), the predecessor to American Institute of Certified Public Accountants ("AICPA"), gave to its Committee on Accounting Procedure ("CAP") the responsibility for establishing accounting principles with "substantial authoritative support."
From 1939 to 1959, CAP issued a series of Accounting Research Bulletins ("ARBs").
In 1959, the AICPA, as successor to the AIA, established the Accounting Principles Board (“APB”) to replace CAP and gave the APB the authority to issue accounting standards.
In 1973, a new organization independent of the AICPA, the Financial Accounting Foundation ("FAF"), was created to oversee the standard setting process. The body created under the FAF to carry out that standard setting activity was the Financial Accounting Standards Board (“FASB”). The SEC established the authority of the FASB with the following statement:
For purposes of [ASR 4] principles, standards, and practices promulgated by the FASB in its Statements and Interpretations will be considered by the [SEC] as having substantial authoritative support and those contrary to such FASB promulgations will be considered to have no such support. Accounting Series Release No. 150, "Statement of Policy on the Establishment and Improvement of Accounting Principles and Standards," December 20, 1973
The SEC recently reaffirmed the authority of the FASB in setting accounting standard in Release No. 33-8221, "Policy Statement: Reaffirming the Status of the FASB as a Designated Private-Sector Standard Setter," April 25, 2003.
The FASB undertook to establish a conceptual framework of financial reporting to be used in developing standards of financial accounting and reporting. This is found in its Statements of Financial Accounting Concepts ("Concepts Statements").
The current GAAP hierarchy identifies several different bodies with the ability to issue authoritative accounting standards.
In addition to the FASB, the AICPA Accounting Standards Executive Committee ("AcSEC"), the Emerging Issues Task Force ("EITF"), and the FASB staff have had the ability to issue authoritative standards.
AcSEC issues Statements of Position ("SOPs"), Industry Audit and Accounting Guides, and Practice Bulletins, all of which are included within the GAAP hierarchy. AcSEC SOPs and Guides cleared by the FASB are in Category B of the GAAP hierarchy. Practice Bulletins cleared by the FASB are in category C of the GAAP hierarchy.
Consensus positions reached by the EITF constitute authoritative guidance. The EITF was formed in 1984 to provide timely financial reporting guidance. The FASB must now ratify EITF conclusions before they become authoritative. See EITF Topic D-1, "Implications and Implementation of an EITF Consensus." EITF Consensuses cleared by the FASB are in category C of the GAAP hierarchy.
The staff of the FASB issued formalized guidance on the application of existing standards through staff announcements or through the issuance of Q&As. These are in category D of the GAAP hierarchy. In February 2003, the FASB staff announced that it plans to issue future application guidance through FASB Staff Positions ("FSPs") that are reviewed by FASB Board members before they are issued.
Prior to the FASB, the AICPA staff issued "Interpretations" of APB Opinions.
Under the securities laws, the SEC has the responsibility to develop accounting standards to be used by public companies. Despite the fact that it has consistently looked to the private sector for assistance in this task, the SEC retains the authority to establish standards if it so chooses. The SEC's authority would allow it to overturn an FASB standard by passing a rule. This authority has rarely been used.
Statement on Auditing Standards ("SAS") No. 69, "The Meaning of `Present Fairly in Conformity With Generally Accepted Accounting Principles'," established a "hierarchy" of the relative authoritativeness of each type of document. The current GAAP hierarchy is organized as follows:
Authoritative Literature:
Level A
Although not specifically discussed in SAS 69, the SEC has stated that SEC rules and regulations also are Level A GAAP for public companies. See SEC Resources
Level B
AICPA AcSEC Statements of Position
AICPA AcSEC Industry Audit and Accounting Guides
Level C
AICPA AcSEC Practice Bulletins
Level D
FASB Staff Q&As
AICPA accounting interpretations
Industry practice
Other literature:
FASB Concept Statements
AICPA Issues Papers
International Accounting Standards
textbooks, articles in professional journals.