b y A . C h r i s t i n e D av i s , C PA & M i c h a e l J . M c Pa r t l a n , C PA
regulatorynews
Home at Last
u
p until now, the GAAP
hierarchy resided in the auditing
standards. A decade and a half
after the issuance of Statement on Auditing
Standards No. 69, The Meaning of Present Fairly
in Conformity with Generally Accepted Accounting
Principles (SAS 69), the GAAP hierarchy is
finally home—in the accounting standards.
Statement on Financial Accounting Standards
No. 162, The Hierarchy of Generally Accepted
Accounting Principles (SFAS 162), was issued by
the FASB in May 2008 for nongovernmental
entities.
It is widely known that the GAAP
hierarchy sets forth the level of authority
attributed to a given accounting
pronouncement or document. For example,
an SFAS pronouncement, which is in category
(a) of the GAAP hierarchy, has a higher
authority than a FASB Technical Bulletin,
which is in category (b). Preparers of financial
statements will look to category (a) GAAP in
selecting and applying appropriate accounting
principles, and turn to categories (b), (c) and
(d), in that order, only if the accounting for a
transaction or event is not specified in category
(a). Where there might be conflicting guidance
between two categories, the more authoritative
category will prevail.
SFAS 162 comes in response to an SEC
study in July 2003, which, in part, endorsed
an improvement to the SAS 69 GAAP
hierarchy (“old GAAP hierarchy”). The
old GAAP hierarchy has been described as
complex, directed to the auditor, and ranks
the Concepts Statements too low in the chain
of command. Indeed, it is in the Concepts
Statements that some of the most fundamental
terms of our profession are defined: assets,
liabilities, equity, income, expense, accrual
basis of accounting and materiality, along with
a profound discussion of the often-quoted
“objectives of financial reporting.”
In issuing SFAS 162, the FASB does not
expect a change in current practice. What
has changed is to whom the application of
the GAAP hierarchy is directed. By being
16 C a l i f o r n i a C P A july 2008
officially part of GAAP, SFAS 162 imposes
the GAAP hierarchy on the reporting entities,
not their auditors, based on the long-standing
mandate that the entity’s management, not
their auditors, is responsible for selecting
and applying the appropriate GAAP to
their financial statements. The auditors’
responsibility is to comply with GAAS as a
basis for issuing their audit opinion.
SFAS 162 improved the GAAP hierarchy
in three ways: (1) in its presentation, (2) in
defining the driver for category (a), and (3) in
making additions to the hierarchy.
FAS 162 and the
GAAP Hierarchy
Simplified Presentation
The old GAAP hierarchy presented the
sources of GAAP in two ways: based on
certain characteristics (SAS 69, par. 5), and
according to document type (SAS 69, par.
10). SFAS 162 presents the sources of GAAP
according to document type, such as the
SFASs, FINs, APBs and ARBs.
What Drives Category (a)
As the most authoritative GAAP, category
(a) was previously defined by what
pronouncements encompass it, collectively
Figure 1
The New GAAP Hierarchy • SFAS 162 (*new items in bold)
Category (a)
(Most
Authoritative)
For SEC
registrants,
this includes
SEC rules and
interpretive
releases.
FASB
Statements and
Interpretations
(SFAS, FIN)
FASB
Statement 133
Implementation
Issues
FASB
Staff
Positions
(FSP)
AICPA
Accounting
Research
Bulletins
(ARB)
Accounting
Principles
Board
Opinions
that are not
superseded
by actions of
the FASB
(APB)
Category (b)
FASB Technical Bulletins
(FTB)
AICPA
Industry Audit and Accounting
Guides if cleared by the FASB
(AAG)
and Statements of Positions
if cleared by the FASB
(SOP)
Category (c)
AICPA
Accounting Standards Executive
Committee
Practice Bulletins
that have been cleared by the FASB
(AcSEC PB)
Consensus Positions of the FASB
Emerging Issues Task Force
(EITF)
and the Topics discussed in
Appendix D of EITF Abstracts
(EITF D-Topics)
Category (d)
(Least
Authoritative)
Implementation Guides
(Q&As) published by
FASB Staff
“Other Accounting
Literature”
AICPA
Accounting Interpretations
(AIN)
AICPA Industry Audit
and Accounting
Guides (AAG)
and Statements
of Position (SOP)
not cleared by
the FASB, and
practices that are
widely recognized
and prevalent either
generally or in the
industry
FASB Concepts Statements; AICPA Issues Papers; International
Financial Reporting Standards (IFRSs) of the International Accounting
Standards Board (IASB); pronouncements of other professional
associations or regulatory agencies; Technical Information Service
Inquiries and Replies included in AICPA Technical Practice Aids, and
accounting textbooks, handbooks, and articles.
www.calcpa.org
called “officially established accounting
principles,” such as the SFASs, APBs and
ARBs. SFAS 162 clarifies and states the one
characteristic essential to category (a) GAAP:
the FASB’s “due process.” Therefore, FAS
162 has expanded category (a) to include all
GAAP “issued after being (a) deliberated by
the Board or its designee in a public forum,
(b) exposed to the public for comment, and
(c) approved by the Board.” As a result, new
documents have been added to category (a)
as discussed below. For SEC registrants, SEC
rules and interpretive releases continue to be
sources of category (a) GAAP.
One exception to this expansion is the
retention of EITF consensuses, which have
been subjected to the FASB’s due process only
since 2003, within category (c). The reason is
the FASB’s desire to reduce the complexities
of implementing SFAS 162, along with
staying consistent with the EITF’s majority
position that its consensuses “should remain
interpretive and, therefore, should be not be
elevated in the GAAP hierarchy.”
New Documents Added
Because of the new definition of category
(a) GAAP, the following documents are now
included in category (a): FASB Staff Positions
and SFAS 133 (Accounting for Derivative
Instruments and Hedging Activities)
Implementation Issues.
In addition, because EITF consensuses
are already in category (c), the FASB
concluded that FASB staff announcements
contained in EITF-D Topics should have
the same authority as EITF consensuses
and, therefore, are now part of category (c)
GAAP. It is notable that the SEC, at times,
utilizes EITF-D topics to publicly announce
its views on accounting issues impacting SEC
registrants. Therefore, not all EITF-D topics
are applicable to non-SEC registrants.
Added to category (d) are AICPA Industry
Audit and Accounting Guides and Statements
of Position not cleared by the FASB.
Where Do the Concepts Statements Stand?
SFAS 162 did not change the standing of
the Concepts Statements, maintaining the
status of Concepts within “other authoritative
literature.” Similar to the old hierarchy, the
application of “other authoritative literature”
in selecting the most appropriate GAAP in
preparing financial statements is triggered in
the absence of similar transactions or events
within categories (a) through (d). Still, SFAS
162 reiterated that the Concepts Statements
“would normally be more influential
than other sources of ‘other authoritative
literature.’ ”
The FASB, however, has expressed plans
to elevate the Concepts Statements within the
GAAP hierarchy and has indicated it would
address the role of Concepts Statements in its
ongoing conceptual framework project.
The effective date of SFAS 162 has yet to
be determined; it becomes effective for both
SEC registrants and nonpublic entities 60
days after the SEC approves the PCAOB’s
amendments to AU Section 411 of the
AICPA Professional Standards, the codified
version of SAS 69. What is certain is the
GAAP hierarchy is, finally, home at last. CPA
A. Christine Davis, CPA and Michael J.
McPartlan, CPA are director and manager,
respectively, at Hemming Morse, Inc. They
can be reached at davisc@hemming.com and
mcpartlanm@hemming.com.
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