Understanding Gaap: Navigating The Levels Of Guidance

Generally Accepted Accounting Principles (GAAP) is a set of accounting rules, standards, and procedures that outline how financial statements should be prepared and presented. The GAAP hierarchy is a four-tiered framework that classifies the guidance of multiple regulatory bodies by their level of authority. The top level of the hierarchy contains the most authoritative guidance, with subsequent levels dealing with more technical issues. The top level of the GAAP hierarchy includes statements and interpretations by the Financial Accounting Standards Board (FASB), rules and interpretive releases by the U.S. Securities and Exchange Commission (SEC), and accounting research bulletins and opinions issued by the American Institute of Certified Public Accountants (AICPA).

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The four-level hierarchy of GAAP

• Statements and Interpretations by the FASB, Rules and Interpretive Releases by the SEC, and Accounting Research Bulletins and Opinions issued by the AICPA: This top level provides the most authoritative guidance on accounting principles and practices. It includes the Statements of Financial Accounting Standards as put forth by the Financial Accounting Standards Board (FASB), along with official interpretations of these standards issued by the FASB. Level one also includes the Accounting Research Bulletins and the official Opinions from the American Institute of Certified Public Accountants (AICPA), provided they do not conflict with the official statements and interpretations.
• FASB Technical Bulletins, AICPA Industry Audit and Accounting Guides and Statements of Position (if cleared by the FASB): The second level of the GAAP hierarchy consists of more technical issues and detailed accounting guidance that may not apply to all organizations.
• 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: The third level of the hierarchy provides further detailed guidelines and addresses more specific accounting topics.
• FASB Implementation Guides, AICPA Accounting Interpretations, AICPA Industry Audit and Accounting Guides and Statements of Position not cleared by the FASB, and widely recognized and commonly used accounting practices: The fourth and final level of the GAAP hierarchy includes additional sources of guidance and addresses specific industry or market sector accounting practices.

The GAAP hierarchy is primarily relevant in the United States, where multiple regulatory bodies oversee various parts of the accounting profession. The hierarchy helps to identify the most relevant and authoritative guidance on accounting topics, promoting uniformity and clarity in financial reporting. While GAAP is widely used in the US, most other countries follow the International Financial Reporting Standards (IFRS).

Statements and interpretations by the FASB

The Financial Accounting Standards Board (FASB) issues Statements of Financial Accounting Standards ("SFAS" or simply "FAS"), Statements of Financial Accounting Concepts, Interpretations, Technical Bulletins, and Staff Positions. These pronouncements provide rules and guidelines for preparing, presenting, and reporting financial statements within the United States according to generally accepted accounting principles ("GAAP").

The FASB's Statements of Financial Accounting Standards have been superseded by the FASB Accounting Standards Codification (ASC), which became effective for interim and annual periods ending after September 15, 2009. All existing accounting standards documents are superseded by the ASC, and all other accounting literature not included in the Codification is deemed non-authoritative.

The FASB's Statements of Financial Accounting Concepts are not part of US GAAP but set fundamental objectives and concepts that FASB will use to develop future U.S. GAAP. As of September 2006, 48 FASB Interpretations have been published. These interpretations extend or explain existing standards, primarily the Statements of Financial Accounting Standards, and are considered part of U.S. GAAP.

The FASB regularly reviews and updates its accounting standards and guidance. For example, in 2015, the FASB completed a post-implementation review of its changes to the fair value reporting principle, which took 10 years. The FASB works with the International Accounting Standards Board (IASB) to align GAAP with the International Financial Reporting Standards (IFRS), which is widely used worldwide.

Rules and interpretive releases by the SEC

The U.S. Securities and Exchange Commission (SEC) is responsible for rules and interpretive releases that constitute GAAP, the Generally Accepted Accounting Principles. GAAP is the default accounting standard used by companies based in the United States. It is designed to ensure that a company's financial statements are complete, consistent, accurate, and transparent, allowing investors to analyse and extract useful information.

The SEC's rules and interpretive releases are sources of authoritative GAAP for SEC registrants. The SEC staff also issues Staff Accounting Bulletins that outline practices followed by the staff in administering SEC disclosure requirements. These bulletins are not rules, regulations, or statements of the Commission, but rather informal interpretations intended as general guidance.

The SEC has also adopted Regulation G, which requires public companies that disclose or release non-GAAP financial measures to include a presentation of the most directly comparable GAAP financial measure and a reconciliation of the two. This regulation aims to ensure that investors and other market participants are not misled by the use of non-GAAP financial measures. Amendments have been made to Item 10 of Regulation S-K and Item 10 of Regulation S-B to provide additional guidance to registrants that include non-GAAP financial measures in Commission filings.

The Financial Accounting Standards Board (FASB) publishes and maintains the Accounting Standards Codification (ASC), the single source of authoritative nongovernmental U.S. GAAP. The FASB also issues Accounting Standards Updates (ASUs) to communicate changes to the FASB Codification, including changes to non-authoritative SEC content. ASUs are not authoritative standards but provide explanations for changes to U.S. GAAP, background information, and effective dates.

GAAP combines authoritative standards set by policy boards with widely accepted methods for recording and reporting accounting information. It is primarily used in the U.S., while most other countries follow the International Financial Reporting Standards (IFRS).

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AICPA accounting research bulletins and opinions

Generally Accepted Accounting Principles (GAAP) are a set of accounting rules, standards, and procedures that outline the criteria for preparing, presenting, and reporting financial statements in the United States. The Financial Accounting Standards Board (FASB) and the Governmental Accounting Standards Board (GASB) issue and frequently revise these principles.

The AICPA Accounting Research Bulletins (ARBs) were a series of publications issued by the Committee on Accounting Procedure (CAP) of the American Institute of Certified Public Accountants (AICPA) from 1939 to 1959. The bulletins provided guidance, interpretations, and recommendations on various accounting principles and practices. The Committee on Accounting Procedure was an early standard-setting body in the United States that aimed to improve accounting practices and increase consistency and comparability among financial statements.

A total of 51 ARBs were issued, covering topics such as revenue recognition, depreciation, inventory valuation, consolidations, and contingencies. ARB No. 43, issued in 1953, was particularly significant as it consolidated and revised multiple previous bulletins, including those on revenue recognition principles. Other notable ARBs include ARB No. 7 on inventory pricing, ARB No. 18 on depreciation of tangible assets, and ARB No. 24 on consolidation of parent and subsidiary companies.

While the ARBs played an influential role in shaping accounting practices in the United States during their time, many of them have since been superseded or incorporated into the current GAAP framework as accounting standards evolved. Today, the FASB and GASB are responsible for managing and updating GAAP accounting standards, ensuring that financial reporting remains consistent, accurate, and transparent across various industries in the United States.

FASB Technical Bulletins

Generally Accepted Accounting Principles (GAAP) are a set of accounting rules, standards, and procedures issued and frequently revised by the Financial Accounting Standards Board (FASB) and the Governmental Accounting Standards Board (GASB). The FASB and GASB are responsible for managing GAAP accounting standards and regularly reviewing and updating their respective accounting standards and guidance.

FTBs are typically issued when the FASB identifies a need for further guidance or interpretation of existing standards. They may also be released in response to new or changing industry practices, regulatory requirements, or other factors that could impact financial reporting. Each FTB focuses on a specific topic and provides detailed instructions, illustrations, or interpretations to assist accountants and financial professionals in applying GAAP appropriately.

Some examples of FASB Technical Bulletins include:

• FTB 79-1(R): This bulletin outlines the purpose and scope of FASB Technical Bulletins and the procedures for their issuance.
• FTB 79-3: Addresses subjective acceleration clauses in long-term debt agreements.
• FTB 79-4: Provides guidance on segment reporting for Puerto Rican operations.
• FTB 79-5: Clarifies the meaning of the term "customer" as it applies to health care facilities under FASB Statement No. 14.
• FTB 79-9: Offers guidance on accounting in interim periods for changes in income tax rates.
• FTB 79-18: Discusses the transition requirements for certain FASB amendments and interpretations of FASB Statement No.

These bulletins are important as they provide additional clarity and direction to accountants, helping them navigate complex accounting scenarios and ensuring consistent application of GAAP across different industries and entities.

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