Hierarchy of GAAP

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.

Understanding the Hierarchy of GAAP

With 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 GAAP

There 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.

1. At the top of the GAAP hierarchy are statements and interpretations by the FASB, rules and interpretive releases by the SEC (for all SEC registrants), and accounting research bulletins and opinions issued by the AICPA.
2. The second level consists of FASB Technical Bulletins and, if 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 topics discussed in Appendix D of EITF Abstracts.
4. On the lowest level are FASB implementation guides, AICPA Accounting Interpretations, and AICPA Industry Audit and Accounting Guides and Statements of Position not cleared by the FASB. Also included on the lowest level are accounting practices that are widely recognized and commonly used, either in general or within a given industry.

The FASB's Statement of Accounting Standards No. 162 provides a detailed explanation of the hierarchy.