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Remodeling the house of GAAP; proposed changes in the GAAP hierarchy may be the most extensive ever.

Some have likened the hierarchy of generally accepted accounting principles The standard accounting rules, regulations, and procedures used by companies in maintaining their financial records.

Generally accepted accounting principles (GAAP) provide companies and accountants with a consistent set of guidelines that cover both broad accounting
 to a house, with different floors corresponding to the different levels of authority of the various standards. (See JofA, June 84, page 122.) The "house of GAAP GAAP

See: Generally Accepted Accounting Principles


See generally accepted accounting principles (GAAP).
" rests on a foundation of general concepts, such as those outlined in Governmental Accounting Standards Board The Governmental Accounting Standards Board (GASB) is currently the source of generally accepted accounting principles (GAAP) used by State and Local governments in the United States of America.  and Financial Accounting Standards Board Financial Accounting Standards Board (FASB)

Board composed of independent members who create and interpret Generally Accepted Accounting Principles (GAAP).
 concepts statements. In May, the American Institute of CPAs auditing standards board In the United States, the Auditing Standards Board (ASB) is the senior technical committee designated by the American Institute of Certified Public Accountants (AICPA) to issue auditing, attestation, and quality control statements, standards and guidance to certified public  unveiled proposed revisions to the accounting standards hierarchy. The changes, in the form of an exposure draft of a proposed statement on auditing standards, The Meaning of "Present Fairly in Conformity With Generally Accepted Accounting Principles" in the Independent Auditor's Report Auditor's Report

Recorded in the annual report, the auditor's report tests to see that a corporation's financial statements comply with GAAP. This is sometimes referred to as the clean opinion.

Most auditor's reports consist of three paragraphs.
, would remodel re·mod·el  
tr.v. re·mod·eled also re·mod·elled, re·mod·el·ing also re·mod·el·ling, re·mod·els also re·mod·els
To make over in structure or style; reconstruct.
 the house of GAAP by changing the levels of authority of certain accounting pronouncements. MOTIVATION FOR THE PROJECT The impetus for revising the GAAP hierarchy was the decision in late 1989 of the Financial Accounting Foundation (FAF FAF
financial aid form
), which oversees both the FASB FASB

See: Financial Accounting Standards Board


See Financial Accounting Standards Board (FASB).
 and GASB GASB Governmental Accounting Standards Board , to request a change in the accounting hierarchy for state and local government entities. The existing hierarchy, described in AICPA AICPA

See American Institute of Certified Public Accountants (AICPA).
 Professional Standards, AU section 411, was established shortly after the GASB began operations in 1984. The existing hierarchy provides category (a) status for GASB statements The Governmental Accounting Standards Board Statements (GASB Statements in short) are issued by GASB to set generally accepted accounting principles (GAAP) for state and local governments in the United States of America.  and interpretations regarding state and local government entities; however, if the accounting treatment of a transaction or event is not specified by the GASB, applicable FASB pronouncements This article is a list of Financial Accounting Standards Board (FASB) pronouncements, including Statements, Concepts Statements, Interpretations, and Technical Bulletins, which are issued to provide rules and guidelines in preparing, presenting, and reporting financial statements  are presumed to apply. As a result, state and local government entities are required to follow a FASB standard even if the GASB is currently addressing the issue.

A 1989 FAF report, The Structure for Establishing Governmental Accounting Governmental accounting is an umbrella term which refers to the various accounting systems used by various public sector entities. In the United States, for instance, there are three levels of government which follow different accounting standards set forth by independent, private  Standards, found the existing hierarchy was causing difficulty for the GASB and its constituency. Because new FASB statements FASB Statement

A standard set by the Financial Accounting Standards Board regarding a financial accounting and reporting method. Essentially, FASB statements determine the acceptable accounting practices that Certified Public Accountants use in reporting
 had the potential to change GAAP for state and local governments, the hierarchy was disrupting the GASB's project agenda.

On two occasions the GASB felt it necessary to issue "negative standards" telling state and local government entities not to follow a particular FASB standard. These included GASB Statement no. 4, Applicability of FASB Statement no. 87, 'Employers' Accounting for Pensions, " to State and Local Governmental Employers, and GASB Statement no. 8, Applicability of FASB Statement no. 93, Recognition of Depreciation by Not-for-Profit Organizations," to Certain State and Local Governmental Entities. GASB Statement no. 9, Reporting Cash Flows of Proprietary and Nonexpendable Trust Funds and Governmental Entities That Use Fund Accounting, was added to the GASB project agenda because of confusion over the applicability of FASB Statement no. 95, Statement of Cash Flows, to state and local government entities.

To overcome the problems, the FAF (as part of its November 1989 jurisdiction determination) established a framework for a new GAAP hierarchy. The FAF said the objective of the hierarchy is for the FASB and GASB to each have primary responsibility for setting standards for those reporting entities subject to the jurisdiction of that board (the primary board). Specifically, "an entity subject to the jurisdiction of a primary board should not be required to change its reporting principles as a result of a standard issued by [the other board]."


Soon after the FAF issued its jurisdiction determination, the ASB ASB Asbestos
ASB Arbeiter Samariter Bund (German medical help organisation)
ASB Anti-Social Behaviour
ASB Accounting Standards Board (UK FRC)
ASB Aarhus School of Business
 formed a task force to revise the GAAP hierarchy. The ASB task force includes representatives from the AICPA accounting standards executive committee (AcSEC), the FASB, the GASB and the ASB itself. That task force developed the revisions described in the ASB exposure draft. WHAT CHANGED? The three biggest changes to the existing hierarchy would

1. Set up two different but parallel hierarchies-one for state and local government entities and one for other entities. This was done to eliminate the "negative standards" problem described earlier.

2. Make each successive category in the hierarchy a different level of authority. Although the existing hierarchy has four categories, it has only three levels of authority since categories (b) and (c) are equal. The exposure draft, on the other hand, says, "If there is a conflict between accounting principles relevant to the circumstances from one or more sources in categories (b), (c) or (d), the auditor should follow the treatment specified by the source in the higher category [for example, follow category (b) treatment over category c)] or be prepared to justify a conclusion that a treatment specified by a source in the lower category better presents the substance of the transaction in the circumstances." This change would, for example, require entities to change from a widely recognized and prevalent industry accounting practice if it conflicted with a cleared AICPA statement of position, audit and accounting guide or practice bulletin issued in the future.

3. Create a new middle category for the FASB's emerging issues task force consensuses. Although for Securities Exchange Commission registrants, EITF EITF Emerging Issues Task Force
EITF Edinburgh International Television Festival
EITF Europe International Taekwon-Do Federation
 consensuses had to be followed because of the endorsement of the SEC chief accountant, the EITF actually is in the bottom category of the existing hierarchy. Thus, the proposal would require all entities-SEC registrants and nonregistrants alike-to follow EITF guidance issued in the future, and, if the entity was following another accounting treatment, to change its accounting.

The proposed revisions go beyond those needed to implement the FAF's jurisdictional determination. The ASB task force believes these other changes will resolve certain ambiguities in the existing hierarchy. The exhibit on page 34 compares the proposed and existing hierarchies.


Recently, the AICPA board of directors approved revisions to AeSEC's operating policies that permit the committee to issue pronouncements without clearance by either the FASB or GASB, although AcSEC is required to submit a proposed pronouncement to these bodies for their consideration. If the FASB or GASB do not clear the guidance, AESEC has the authority to revote on whether it should still issue the pronouncement.

To date, all ACSEC statements of position and audit and accounting guides have been cleared by the FASB or GASB. However, since the potential for uncleared AcSEC documents exists, the task force believes these documents should not have the authority to change industry accounting practice. Thus, the proposed hierarchy distinguishes between cleared and uncleared AICPA audit and accounting guides and statements of position. SIGNIFICANCE OF DIFFERENT LEVELS

Where a pronouncement falls in the proposed hierarchy is significant since each of the categories has a different level of authority. The top category, (a), is referred to as a "rule 203 pronouncement." Rule 203 of the AICPA code of professional conduct says, "A member shall not (1) express an opinion or state affirmatively that the financial statements or other financial data of any entity are presented in conformity with generally accepted accounting principles or (2) state that he or she is not aware of any material modifications that should be made to such statements or data in order for them to be in conformity with generally accepted accounting principles, if such statements or data contain any departure from an accounting principle promulgated prom·ul·gate  
tr.v. prom·ul·gat·ed, prom·ul·gat·ing, prom·ul·gates
1. To make known (a decree, for example) by public declaration; announce officially. See Synonyms at announce.

 by bodies designated by Council to establish such principles that has a material effect on the statements or data taken as a whole." AICPA council has designated the FASB and GASB as bodies that may issue rule 203 pronouncements.

The second point in rule 203 quoted above was added to clarify that the rule applies to review engagements conducted in accordance with both statements on standards for accounting and review services (SSARS SSARS Statements on Standards for Accounting and Review Services ) and SAS (1) (SAS Institute Inc., Cary, NC, A software company that specializes in data warehousing and decision support software based on the SAS System. Founded in 1976, SAS is one of the world's largest privately held software companies. See SAS System.  no. 35, Review of Interim Financial Information. As a result, rule 203 requires category (a) pronouncements to be followed in those engagements. Although SSARS do not explicitly provide a hierarchy of accounting standards, it is commonly held that the entire hierarchy in AU section 411-not only category (a) pronouncements-applies to compilation and review engagements as well as audits. The AICPA accounting and review services committee plans to address this particular issue in the future.

Rule 203 does allow departures from category (a) pronouncements in unusual circumstances in which following the pronouncements would cause the financial statements to be misleading. Although this situation may arise from "new legislation or the evolution of a new form of business transaction," it occurs rarely and requires the auditor to describe in the audit report the departure and its approximate effects. The auditor is also required to explain the reasons why compliance with the rule 203 pronouncement would result in misleading financial statements. Categories (b) through (d) of the proposed hierarchy descend de·scend  
v. de·scend·ed, de·scend·ing, de·scends

1. To move from a higher to a lower place; come or go down.

 in authority: Category (b) takes precedence The order in which an expression is processed. Mathematical precedence is normally:

1. unary + and - signs
2. exponentiation
3. multiplication and division
 over categories (c) and (d), and category (c) takes precedence over category (d). Pronouncements in these categories are all considered sources of established accounting principles. The auditor needs to be aware of the requirements in these pronouncements and follow them if an accounting treatment is not specified by a category (a) pronouncement. If the treatment specified in categories (b) through (d) is relevant and the auditor concludes another accounting treatment is generally accepted, no mention of this is required in the audit report, although the auditor must be prepared to justify his conclusion.

If a situation is not covered not covered Health care adjective Referring to a procedure, test or other health service to which a policy holder or insurance beneficiary is not entitled under the terms of the policy or payment system–eg, Medicare. Cf Covered.  by pronouncements in categories (a) through (d), the proposed hierarchy says the auditor may consider other accounting literature, referred to in the exhibit as category (e). The auditor need not be familiar with all pronouncements described as other accounting literature; the auditor would consult this literature only when pronouncements in higher categories are not relevant. Examples of other accounting literature include FASB and GASB concepts statements, pronouncements of professional associations (such as statements on management accounting issued by the National Association of Accountants) and accounting textbooks, handbooks and articles.


The task force that developed the proposed hierarchy believes the new hierarchy should not in itself trigger accounting changes. This could have occurred because the proposed hierarchy elevates certain pronouncements to new levels of authority. To avoid such a problem, the proposal includes a grandfather provision that specifies, "An entity following an accounting treatment in category (c) or (d) as of the effective date of this statement need not change to an accounting treatment in a category (b) or e) pronouncement whose effective date is before the effective date of this statement." This means, for example, even though cleared AESEC statements of position [category (b)] have greater authority than established industry practice [category d)], the exposure draft would not require an entity following an established industry practice to change to the treatment specified in a statement of position with an effective date preceding the proposed statement's effective date. WHAT ABOUT NOT-FOR-PROFIT ORGANIZATIONS?

In some cases, the applicability of accounting research bulletins, APB opinions Accounting Principles Board (APB) Opinions were published by Accounting Principles Board (APB). The board was created by American Institute of Certified Public Accountants (AICPA) in 1959 and was replaced by Financial Accounting Standards Board (FASB) in 1973.  and FASB standards to not-for-profit organizations is unclear. This is due in part to the discussion in ARB no. 43, Restatement Restatement

A revision in a company's earlier financial statements.

The need for restating financial figures can result from fraud, misrepresentation, or a simple clerical error.
 and Revision of Accounting Research Bulletins, of the applicability of opinions by the AICPA committee on accounting procedures. Although the proposed hierarchy does not address this issue, the AICPA accounting standards division plans to issue an exposure draft of a proposed statement of position that would require not-for-profit organizations to follow ARBS ARBS Angle Rate Bombing System
ARBS Angle Rate Bombing Set
ARBS Algorithmic and Rule-Based Blackboard System
ARBS Automated Repair Bureau System (Sprint)
ARBS Angular/Angle-Rate Bombing System
, APB opinions and FASB standards except for those pronouncements that explicitly exempt such organizations. REBUILDING THE HOUSE OF GAAP

If finalized See finalization. , the changes to the house of GAAP would be the most extensive renovations to date. In addition to solving the FASB/GASB hierarchy issue, the proposed changes would affect the authority of future standards issued by the EITF and AESEC. Already, the proposed statement has had an effect on the accounting standard-setting process. (See the sidebar (1) A Windows Vista desktop panel that holds mini applications (gadgets) such as a calendar, calculator, stock ticker and Vonage phone dialer. It is the Windows counterpart to the Dashboard in the Mac. See Windows Vista and gadget.  at left.) Additional effects are likely to be identified during the exposure process.

The ASB encourages practitioners to provide comments or suggestions about the proposed standard. The ASB is particularly interested in comments about the workability of the grandfather provision. Copies of the draft are available from the AICPA order department; call 1-800-334-6961 (in New York New York, state, United States
New York, Middle Atlantic state of the United States. It is bordered by Vermont, Massachusetts, Connecticut, and the Atlantic Ocean (E), New Jersey and Pennsylvania (S), Lakes Erie and Ontario and the Canadian province of
 State, 1-800-248-0445). The ASB will consider comments received by the AICPA auditing standards division by August 1, 1991. n
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Author:Sauter, Douglas P.
Publication:Journal of Accountancy
Date:Jul 1, 1991
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