Project Updates

GAAP Hierarchy

Last Updated: April 1, 2008. (Updated sections are indicated with an asterisk *)

The staff has prepared this summary of Board decisions for information purposes only. Those Board decisions are tentative and do not change current accounting. Official positions of the FASB are determined only after extensive due process and deliberations.

*Project Objective
*Due Process Documents
*Decisions Reached at the Last Meeting
*Summary of Decisions Reached to Date
*Next Steps
*Board/Other Public Meeting Dates
Related Articles
*Background Information
Contact Information

*Project Objective

The objective of this project is to improve the generally accepted accounting principles (GAAP) hierarchy by (1) moving that hierarchy from the American Institute of Certified Public Accountant’s (AICPA) Statement on Auditing Standards (SAS) No. 69, The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles, to FASB literature and (2) expanding the sources of category (a) accounting principles to include principles issued after being subject to the FASB’s due process.

This project addresses the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with GAAP. Therefore, the GAAP hierarchy will remain in SAS 69 for state and local governmental entities and federal governmental entities.

*Due Process Documents

The Board issued the Exposure Draft, The Hierarchy of Generally Accepted Accounting Principles, on April 28, 2005.

Exposure Draft

Comments Letters

In addition, the staff has posted to the FASB website a "near-final" version of the proposed Statement to (1) provide a mechanism for constituents to understand the decisions made during redeliberations and (2) expedite the issuance of a final Statement upon the Public Company Accounting Oversight Board’s (PCAOB) issuance of its auditing standard (which will reference the GAAP hierarchy).

[Download "Near-Final" Document]

*Decisions Reached at the Last Board Meeting

The Board decided to include in the final Statement the grandfathering provisions related to EITF Issues and Statements of Position in SAS 69. The Board also decided to refer to all SEC literature in one footnote rather than in two. Finally, the Board decided that the final Statement should have the same effective date as the auditing literature.

*Summary of Decisions Reached to Date

The Board decided the following:

The grandfathering provisions related to Emerging Issues Task Force (EITF) Issues and Statements of Position in SAS 69 should be included in the final Statement. (This reverses the previous decision to remove the grandfathering provisions from the final Statement.)

The final Statement should include a footnote stating that SEC observer comments are accounting principles for SEC registrants. The Statement should refer to all SEC literature in that footnote rather than in two footnotes. (This reverses the previous decision to explicitly include EITF D-Topics in category (c) of the GAAP hierarchy.)

The final Statement should have the same effective date as the auditing literature.

*Next Steps

The final Statement on the GAAP hierarchy will be issued concurrently with similar documents issued by the AICPA [Download] and the PCAOB. The FASB staff will coordinate with the AICPA and the PCAOB to ensure that all of the documents have a uniform effective date.

*Board/Other Public Meeting Dates

The Board meeting minutes are provided for the information and convenience of constituents who want to follow the Board’s deliberations. All of the conclusions reported are tentative and may be changed at future Board meetings. Decisions become final only after a formal written ballot to issue a final Statement, Interpretation, FSP, or Statement 133 Implementation Issue.

The following are links to the minutes for each meeting:

Related FASB Articles

FASB Response to SEC Study on the Adoption of a Principles-Based Accounting System (July 2004)

Principles-Based Approach to US Standard-Setting (October 2002)

*Background Information

In response to concerns about the quality and transparency of financial reporting, the Board issued a proposal in October 2002 titled "Principles-Based Approach to U.S. Standard Setting," which enumerated initiatives that the Board could undertake to improve the quality of standards and the standard-setting process. Shortly thereafter, the SEC issued a Study titled "Study Pursuant to Section 108(d) of the Sarbanes-Oxley Act of 2002 on the Adoption by the United States Financial Reporting System of a Principles-Based Accounting System" (Study). In response to that Study, the Board issued the FASB Response to SEC Study on the Adoption of a Principles-Based Accounting System in 2004. That document stated that the Board’s objectives of creating two levels of literature (authoritative and nonauthoritative) and elevating the conceptual framework within the GAAP hierarchy are key elements of its goals of improving the quality of the GAAP hierarchy and, therefore, the quality and transparency of standards and the standard-setting process. Since that time, the Board has taken on a number of initiatives outlined in those documents that are aimed at improving the quality of FASB standards and the standard-setting process. These initiatives include:

• Improving the conceptual framework

• Codifying existing literature

• Transitioning to a one-standard-setter regime

• Converging FASB and IASB standards.

Another initiative outlined in the SEC’s Study and in the FASB Response to SEC Study on the Adoption of a Principles-Based Accounting System is to improve the GAAP hierarchy. That hierarchy, which currently resides in SAS 69, provides guidance on how an auditor should resolve cases in which there are conflicts among relevant accounting principles from one or more authoritative categories. This conflict resolution approach historically has been necessary because of the multitude of standard setters issuing different forms of literature. These include:

• FASB Standards

• Accounting Standards Executive Committee (AcSEC) Statements of Opinion

• EITF Consensuses

• AICPA Accounting and Audit Guides.

The SAS 69 GAAP hierarchy generally establishes authority based on the entity issuing the literature and the extent to which the literature is subject to due process. SAS 69 has drawn some criticism because of its complexity and because its ranks the Statements of Financial Accounting Concepts, which are subject to the same level of due process as FASB standards, below industry practices that are widely recognized as generally acceptable but are not subject to due process.

In November 2004, the Board decided to add a project to its technical agenda to improve the GAAP hierarchy. As first steps toward improving that hierarchy, the project will move the hierarchy into FASB literature and expand the sources of category (a) accounting principles to include principles issued after being subject to the FASB’s due process.

Two of the Board’s current projects, the codification project and the conceptual framework project, are aimed at improving the quality of FASB standards and the standard-setting process. These projects address the root causes of the criticism about the GAAP hierarchy. To allow for the development of these projects, the scope of the GAAP hierarchy project must currently exclude creating two levels of literature and elevating the status of the conceptual framework.

Contact Information

Richard Paul
Practice Fellow
rcpaul@fasb.org

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