The GAAP hierarchy refers to the order of priority of sources to consult when determining the appropriate accounting treatment for specific transactions or arrangements under U.S. Generally Accepted Accounting Principles (GAAP). The hierarchy was established to improve financial statement comparability and consistency.
Under the GAAP hierarchy, accounting principles issued by the Financial Accounting Standards Board (FASB) are the highest authority, including their Accounting Standards Codification, which is intended to be a single source of authoritative U.S. GAAP.
The GAAP hierarchy was primarily classified into four categories (A-D) before the Accounting Standards Codification (ASC) became effective in 2009. The hierarchy was simplified into just two categories in Accounting Standards Update (ASU) 2015-01, as follows:
- Category A: FASB Statements and Interpretations, Accounting Principles Board (APB) Opinions, and AICPA Accounting Research Bulletins that are not superseded by actions of the FASB.
- Category B: FASB Technical Bulletins, if not superseded by actions of the FASB; AICPA Industry Audit and Accounting Guides; AICPA Statements of Position, if not cleared by the FASB; pronouncements of the bodies designated to promulgate International Financial Reporting Standards; pronouncements of other professional associations or regulatory bodies; Accounting textbooks, handbooks, and articles.
As of September 2021, all U.S. GAAP standards are now integrated into the FASB Accounting Standards Codification. This system represents the single source of authoritative U.S. GAAP, and other literature is non-authoritative.
As always, accountants should ensure they are following the most current standards and hierarchy in their accounting practices.
Example of GAAP Hierarchy
Imagine you are an accountant and you need to determine the correct accounting treatment for a complex lease transaction. You would first look at the relevant sections within the FASB Accounting Standards Codification. This is the highest authority and the single source of U.S. GAAP.
Let’s assume that the lease arrangement includes some unique features, and the Codification doesn’t provide clear guidance on how to account for these features. In this case, you might then look to non-authoritative sources for insight on best practices or industry norms. For instance, you might consult accounting textbooks, articles, or whitepapers from respected accounting firms or industry bodies.
The key point here is that authoritative GAAP (the FASB Codification) takes precedence over non-authoritative sources. The latter should be used only when the Codification does not directly address a specific transaction or event.
It’s worth noting that the real-world application of accounting principles can be complex and often requires professional judgment. Depending on the nature of the transaction, it may be necessary to consult with a CPA or other accounting professional.