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FAS 162 and the GAAP Hierarchy
By A. Christine Davis, CPA and Michael J.McPartlan, CPA
Up until now, the GAAP hierarchy resided in the auditing standards. A decade and a half after the issuance of Statement on Auditing Standards No. 69, The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles (SAS 69), the GAAP hierarchy is finally home—in the accounting standards. Statement on Financial Accounting Standards No. 162, The Hierarchy of Generally Accepted Accounting Principles (SFAS 162), was issued by the FASB in May 2008 for nongovernmental entities.
It is widely known that the GAAP hierarchy sets forth the level of authority attributed to a given accounting pronouncement or document. For example, an SFAS pronouncement, which is in category (a) of the GAAP hierarchy, has a higher authority than a FASB Technical Bulletin, which is in category (b). Preparers of financial statements will look to category (a) GAAP in selecting and applying appropriate accounting principles, and turn to categories (b), (c) and (d), in that order, only if the accounting for a transaction or event is not specified in category (a). Where there might be conflicting guidance between two categories, the more authoritative category will prevail.
SFAS 162 comes in response to an SEC study in July 2003, which, in part, endorsed an improvement to the SAS 69 GAAP hierarchy (“old GAAP hierarchy”). The old GAAP hierarchy has been described as complex, directed to the auditor, and ranks the Concepts Statements too low in the chain of command. Indeed, it is in the Concepts Statements that some of the most fundamental terms of our profession are defined: assets, liabilities, equity, income, expense, accrual basis of accounting and materiality, along with a profound discussion of the often-quoted “objectives of financial reporting.”
In issuing SFAS 162, the FASB does not expect a change in current practice. What has changed is to whom the application of the GAAP hierarchy is directed. By being officially part of GAAP, SFAS 162 imposes the GAAP hierarchy on the reporting entities, not their auditors, based on the long-standing mandate that the entity’s management, not their auditors, is responsible for selecting and applying the appropriate GAAP to their financial statements. The auditors’ responsibility is to comply with GAAS as a basis for issuing their audit opinion.
SFAS 162 improved the GAAP hierarchy in three ways: (1) in its presentation, (2) in defining the driver for category (a), and (3) in making additions to the hierarchy.
What Drives Category (a)
One exception to this expansion is the retention of EITF consensuses, which have been subjected to the FASB’s due process only since 2003, within category (c). The reason is the FASB’s desire to reduce the complexities of implementing SFAS 162, along with staying consistent with the EITF’s majority position that its consensuses “should remain interpretive and, therefore, should be not be elevated in the GAAP hierarchy.”
New Documents Added
In addition, because EITF consensuses are already in category (c), the FASB concluded that FASB staff announcements contained in EITF-D Topics should have the same authority as EITF consensuses and, therefore, are now part of category (c) GAAP. It is notable that the SEC, at times, utilizes EITF-D topics to publicly announce its views on accounting issues impacting SEC registrants. Therefore, not all EITF-D topics are applicable to non-SEC registrants.
Added to category (d) are AICPA Industry Audit and Accounting Guides and Statements of Position not cleared by the FASB.
Where Do the Concepts Statements Stand?
The FASB, however, has expressed plans to elevate the Concepts Statements within the GAAP hierarchy and has indicated it would address the role of Concepts Statements in its ongoing conceptual framework project.
The effective date of SFAS 162 has yet to be determined; it becomes effective for both SEC registrants and nonpublic entities 60 days after the SEC approves the PCAOB’s amendments to AU Section 411 of the AICPA Professional Standards, the codified version of SAS 69. What is certain is the GAAP hierarchy is, finally, home at last.