Summaries / StatusSummary of Statement No. 55 The Hierarchy of Generally Accepted Accounting Principles for State and Local Governments (Issued 03/09)The objective of this Statement is to incorporate the hierarchy of generally accepted accounting principles (GAAP) for state and local governments into the Governmental Accounting Standards Board’s (GASB) authoritative literature. The “GAAP hierarchy” consists of the sources of accounting principles used in the preparation of financial statements of state and local governmental entities that are presented in conformity with GAAP, and the framework for selecting those principles. Show
The GASB is responsible for establishing GAAP for state and local governments. However, the current GAAP hierarchy is set forth in the American Institute of Certified Public Accountants’ (AICPA) Statement on Auditing Standards No. 69, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles, rather than in the authoritative literature of the GASB. How the Changes in This Statement Will Improve Financial Reporting The requirements in this Statement will improve financial reporting by contributing to the GASB’s efforts to codify all GAAP for state and local governments so that they derive from a single source. The Board concluded that the GAAP hierarchy should reside in the accounting literature established by the GASB and is issuing
this Statement to accomplish that objective. This Statement will make it easier for preparers of state and local government financial statements to identify and apply all relevant guidance. The Board does not expect that this Statement will result in a change in current practice.
What Is the Hierarchy of GAAP?The hierarchy of generally accepted accounting principles (GAAP) refers to a four-level framework that classifies 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. Top-level guidance typically addresses broad accounting issues while those at a lower level deal with more technical issues. Key Takeaways
Understanding the Hierarchy of GAAPWith multiple regulatory bodies overseeing various parts of the accounting profession, there was a need to pinpoint the most relevant and authoritative guidance on accounting topics. Additionally, each regulatory body releases accounting guidance in multiple formats that have varying levels of authority. The hierarchy of GAAP is designed to improve consistency and comparability within financial reporting. It is a framework for selecting the principles that accountants should use in preparing financial statements of nongovernmental entities in conformity with U.S. GAAP. Financial Accounting Standards Board (FASB)The FASB, formed in 1973, is an independent nonprofit organization that is responsible for establishing accounting and financial reporting standards for public and private companies and nonprofit organizations in the United States. This allows for more standardized reporting, enabling investors and other financial statement users to better compare the financial statements of multiple companies within a common sector or industry. Securities and Exchange Commission (SEC)The SEC, created in 1934, is an independent federal government agency responsible for protecting investors, maintaining fair and orderly functioning of the securities markets, and facilitating capital formation. The SEC sets forth reporting standards and regulations for public companies. American Institute of Certified Public Accountants (AICPA)The AICPA, founded in 1887, is the non-profit professional organization that represents certified public accountants (CPAs) in the United States. Among other tasks, the AICPA develops standards for external audits of private companies. Requirements for the Hierarchy of GAAPThere are four levels of the GAAP hierarchy. The top of the hierarchy is the most authoritative guidance. An accountant researching a given topic should consult first with the highest level for relevant advice. If no information on the topic is given at the higher levels, the accountant should look to the next level for relevant pronouncements.
The FASB's Statement of Accounting Standards No. 162 provides a detailed explanation of the hierarchy. What is the hierarchy of GAAP?"GAAP Hierarchy" means the relative authority of the standards, rules, procedures, and other literature on financial accounting and reporting, as set forth in the Statement on Auditing Standards No. 69. "GASB" means the Governmental Accounting Standards Board.
What are the 4 GAAP rules?The four basic constraints associated with GAAP include objectivity, materiality, consistency and prudence. Objectivity includes issues such as auditor independence and that information is verifiable.
What are the six organizations that are influential in the establishment of GAAP?Involved in development. United States Securities and Exchange Commission (SEC) ... . American Institute of Certified Public Accountants (AICPA) ... . Financial Accounting Standards Board (FASB) ... . Governmental Accounting Standards Board (GASB) ... . Federal Accounting Standards Advisory Board (FASAB). What are the 3 important set of rules that GAAP is based on?GAAP incorporates three components that eliminate misleading accounting and financial reporting practices: 10 accounting principles, FASB rules and standards, and generally accepted industry practices.
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