Hierarchy of GAAP

What Is the Hierarchy of GAAP?

The hierarchy of generally accepted accounting principles (GAAP) alludes to a four-level system that groups the Financial Accounting Standards Board (FASB), the U.S. Securities and Exchange Commission (SEC), and the American Institute of Certified Public Accountants (AICPA) guidance on accounting practices and standards by their level of authority. High level guidance normally addresses broad accounting issues while those at a lower level deal with additional technical issues.

Figuring out the Hierarchy of GAAP

With different regulatory bodies directing different parts of the accounting calling, there was a need to pinpoint the most significant and definitive guidance on accounting points. Moreover, each regulatory body releases accounting guidance in numerous arrangements that have changing levels of authority. The hierarchy of GAAP is intended to further develop consistency and similarity inside financial reporting. It is a structure for choosing the principles that accountants ought to use in getting ready financial statements of nongovernmental elements in conformity with U.S. GAAP.

Financial Accounting Standards Board (FASB)

The FASB, framed in 1973, is an independent nonprofit organization that is responsible for laying out accounting and financial reporting standards for public and private companies and nonprofit organizations in the United States. This considers more normalized reporting, empowering investors and other financial statement users to better compare the financial statements of numerous companies inside a common sector or industry.

Securities and Exchange Commission (SEC)

The SEC, made in 1934, is an independent national government agency responsible for protecting investors, keeping up with fair and orderly working of the securities markets, and facilitating capital formation. The SEC presents reporting standards and regulations for public companies.

American Institute of Certified Public Accountants (AICPA)

The AICPA, established in 1887, is the non-benefit professional organization that addresses certified public accountants (CPAs) in the United States. Among different tasks, the AICPA creates standards for outside audits of private companies.

Requirements for the Hierarchy of GAAP

There are four levels of the GAAP hierarchy. The highest point of the hierarchy is the most legitimate guidance. An accountant researching a given point ought to counsel first with the highest level for pertinent exhortation. Assuming no information on the subject is given at the higher levels, the accountant ought to seek the next level for significant declarations.

1. At the highest point of the GAAP hierarchy are statements and translations by the FASB, rules and interpretive releases by the SEC (for every SEC registrant), and accounting research bulletins and sentiments issued by the AICPA.
2. The second level comprises of FASB Technical Bulletins and, whenever cleared by the FASB, the AICPA Industry Audit and Accounting Guides and Statements of Position.
3. On the third level are AICPA Accounting Standards Executive Committee Practice Bulletins, consensus positions of the FASB Emerging Issues Task Force (EITF), and subjects talked about in Appendix D of EITF Abstracts.
4. On the least level are FASB implementation guides, AICPA Accounting Interpretations, and AICPA Industry Audit and Accounting Guides and Statements of Position not cleared by the FASB. Likewise remembered for the most minimal level are accounting practices that are widely recognized and commonly utilized, either overall or inside a given industry.

The FASB's Statement of Accounting Standards No. 162 gives a nitty gritty clarification of the hierarchy.

Features

• The GAAP hierarchy is a four-layered structure for choosing the principles that accountants ought to use in planning financial statements of nongovernmental substances.
• The hierarchy of GAAP recognizes which standards and best practices are the most legitimate for a specific example or problem.
• Since numerous organizations direct separate parts of the accounting world, there was a need to recognize the most significant standards for different accounting points.
• In the event that no information on the subject is given at the higher levels, the accountant ought to seek the next level down for important declarations.