Accounting -- The House of GAAP

The role that accounting standards play in establishing the rules for disclosing both public and private financial reporting assumes levels of authority of "more to less" which guide reliance on and determines the weight of the standards. Understanding this hierarchy is paramount to grasping the meaning of "generally accepted accounting principles" (GAAP), and the many supporting documents.

The concept of the "house of GAAP" was introduced in a 1984 article from the Journal of Accountancy. The author describes and defines the vast universe of accounting standards as a hierarchy structured along the lines of the floor plan of a house. "Like any other structure, the house of GAAP rests on a foundation, in this case a foundation of the basic concepts and broad principles that underlie financial reporting, without which, like a house of cards, the house of GAAP would tumble." 1

In 199I the AICPA's Auditing Standards Board remodeled the house of GAAP by changing some of the levels of authority of certain accounting pronouncements and distinguishing between the standards defining state and local government entities, established by the Government Accounting Standards Board (GASB) and those for all others, falling under the FASB's jurisdiction. 2

Using Rubin's visual model of a house, following is the floor plan adapted to the revised hierarchy:

First Floor (Category A) Constitutes the highest level of GAAP authority. Officially established, authoritative accounting principles; also referred to as authoritative literature or pronouncements.

FASB Statements of Financial Accounting Standards (SFAS)
FASB Interpretations (FIN) which modify, extend, clarify and elaborate on existing SFAS, AICPA Accounting Principles Board Opinions and Accounting Research Bulletins
AICPA Opinions and their Interpretations which have not been superseded
AICPA Accounting Research Bulletins which have not been superseded
Examples:
- Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information
- APB Opinion No. 18, The Equity Method of Accounting for Investments in Common Stock

Second Floor (Category B) Pronouncements of organizations, composed of expert accountants, that discuss and analyze accounting issues in public for the purpose of establishing accounting principles or describing existing accounting practices that are generally accepted and approved by FASB and GASB and have been exposed for public comment:

FASB Technical Bulletins (TB)
AICPA Industry Audit and Accounting Guides
AICPA Statements of Position (SOP)
Examples:
- SOP 97-2, Software Revenue Recognition
- FASB Technical Bulletin No. 01-1, Effective Date for Certain Financial Institutions of Certain Provisions of Statement 140 Related to the Isolation of Transferred Financial Assets

Third Floor (Category C) Includes pronouncements of organizations, composed of expert accountants, organized by FASB, that discuss and debate accounting issues in public forums for the purpose of interpreting and establishing accounting principles or describing existing accounting practices that are generally accepted:

FASB Emerging Issues Task Force (EITF) consensus position
AICPA Practice Bulletins approved by the FASB
Examples:
- EITF Issue No. 98-10, Accounting for Cotracts Involved in Energy Trading and Risk Management Activities
- AICPA Practice Bulletin 14, Accounting and Reporting by Limited Liability Companies and limited Liability Partnerships

Fourth Floor (Category D) If an accounting treatment is not specified in a source from any of the first three floors, the accountant may consider other accounting literature; the appropriateness of the source depends on its relevance to particular circumstances, the specificity of the guidance, and the general recognition of the author as an authority:

AICPA Accounting Interpretations
FASB Implementation Guides in Q and A format
Uncleared AICPA Statements of Position and Industry Audit and Accounting Guides
Industry practices that are widely recognized and prevalent
Examples:
- FASB Special Report, A Guide to Implementation of Statement 125 on Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities
- AICPA Accounting Interpretations, Reporting the Results of Operations: Accounting Interpretations of APB Opinion No. 30

Fifth Floor (Category E) When a generally accepted accounting pronouncement is not covered by Categories A-D, the independent auditor may use other sources of guidance as deemed relevant:

FASB Financial Accounting Concepts (CON)
AICPA Accounting Principles Board Statements
AICPA Issues Papers
Pronouncements of other professionals associations or regulatory agencies
AICPA Technical Practice Aids
Accounting textbooks, handbooks and articles
Examples:
- AICPA Issues Paper, Identification and Discussion of Certain Financial Accounting and Reporting Issues Concerning LIFO Inventories
- FASB Concept No. 5, Recognition and Measurement in Financial Statements of Business Enterprise

References

1 Steven Rubin, "The House of GAAP," Journal of Accountancy, June 1984, pp. 122-128

2 Douglas Sauter, "Remodeling the House of GAAP," Journal of Accountancy , July 1991, pp. 30-37; Adrian P. Fitzsimons, Marc H. Levine, "A Roadmap Through GAAP," The Practical Accountant, May 1993, pp. 47-52