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The new GAAP hierarchy.

In an unqualified opinion, the auditor states that a client's financial statements "present fairly ... in conformity with generally accepted accounting principles." The phrase "generally accepted accounting principles" (GAAP) is defined in SAS 69, The Meaning of Present Fairly in Conformity with Generally Accepted accounting principles in the independent auditor's Report, as follows:

"The phrase |generally accepted accounting principles' is a technical accounting term that encompasses the conventions, rules and procedures necessary to define accepted accounting practice at a particular time. It includes not only broad guidelines of general application but also detailed practices and procedures. Those conventions, rules and procedures provide a standard by which to measure financial presentations."

Because the number of "broad guidelines" and "detailed practices and procedures" is numerous, a hierarchy of these sources of authority is needed. SAS No. 43, Omnibus Statement on Auditing Standards, has provided that hierarchy for a number of years. In January, 1992, the Auditing Standards Board issued SAS 69 that revised the hierarchy by changing the level of authority of certain accounting pronouncements. This article explains the new hierarchy and highlights differences between the old and new hierarchies.

The Need for Revision

The primary motivation for the issuance of SAS 69 concerned accounting differences between nongovernmental and governmental entities. Although the objectives and accounting methods of nongovernmental and governmental entities differ, the two types of entities previously applied the same hierarchy.

After the Governmental Accounting Standards Board (GASB) began in 1984, a conflict developed regarding which set of standards a governmental entity should follow. The conflict developed because statements of the Financial Accounting Standards Board had the potential for changing GAAP for governmental entities. As a result, in some cases state and local governments were required to follow FASB standards even though the GASB was currently addressing the same issue. In addition, the GASB felt it necessary to issue "negative standards" advising governmental entities not to apply certain FASB Statements.

The Financial Accounting Foundation (FAF), which oversees both the FASB and the GASB, studied the problem and issued a report regarding the jurisdiction of the two boards. The FAF's report, The Structure for Establishing Governmental Accounting Standards, recommended that the FASB and the GASB should each have the primary responsibility for setting standards for its own constituents. This report paved the way for revision of the GAAP hierarchy in SAS 69.

Sources of Established Accounting Principles

According to SAS 69, there are four sources of established accounting principles that are generally accepted in the United States. These sources are: (a) Accounting principles promulgated

by a body designated by

the AICPA Council to establish

such principles, pursuant to rule

203 of the AICPA Code of Professional

Conduct. (b) Pronouncements of bodies composed

of expert accountants that

deliberate accounting issues in

public forums for the purpose of

establishing accounting principles

or describing existing accounting

practices that are generally

accepted, provided those

pronouncements have been exposed

for public comment and

have been "cleared" by a body

referred to in category (a). The

word "cleared" means that a

professional body referred to in

category (a) has indicated that it

does not object to the issuance of

the proposed pronouncement. (c) Pronouncements of bodies organized

by a body referred to in

category (a) and composed of

expert accountants that deliberate

accounting issues in public

forums for the purpose of interpreting

or establishing accounting

principles or describing existing

accounting practices that

are generally accepted or pronouncements

that are referred to

in category (b) that have been

cleared by a body referred to in

category (a) but have not been

exposed for public comment. (d) Practices or pronouncements

that are widely recognized as

being generally accepted because

they represent prevalent practice

in a particular industry, or the

knowledgeable application to

specific circumstances of pronouncements

that are generally

accepted.

GAAP recognizes the importance of reporting transactions and events in accordance with their economic substance. Thus the auditor should consider whether the substance of a transaction or event differs from its legal form. If the accounting treatment of a transaction or event is specified by a pronouncement covered by rule 203, that treatment should ordinarily be applied. If the accounting for that transaction or event is not covered by rule 203, the auditor should consider whether the treatment is specified by another source of established accounting principles. If an established principle from one or more sources in category (b), (c) or (d) is relevant to the circumstances, the auditor should apply the treatment in the higher category--e.g., category (b) over category (c)--or be prepared to justify a conclusion that a treatment specified by a source in a lower category better represents the economic substance of the transaction in the circumstances.

In circumstances where there are no established accounting principles for reporting a specific transaction or event, the transaction or event may be reported on the basis of its economic substance by selecting an accounting principle that appears more appropriate when applied in a manner similar to the application of an established accounting principle to an analogous transaction or event.

Application to Nongovernmental Entities

For financial statements other than governmental entities, the four categories of sources of established accounting principles include the following:

Category (a) consists of FASB Statements and Interpretations, Accounting Principle Board (APB) Opinions and AICPA Accounting Research Bulletins.

Category (b) consists of FASB Technical Bulletins and, if cleared by the FASB, AICPA Industry Audit and Accounting Guides and AICPA Statements of Position. The auditor should assume such pronouncements are cleared by the FASB unless the pronouncement indicates otherwise.

Category (c) consists of AICPA Accounting Standards Executive Committee (AcSEC) Practice Bulletins that have been cleared by the FASB and consensus positions of the FASB Emerging Issues Task Force (EITF). The auditor should assume such pronouncements are cleared by the FASB unless the pronouncement indicates otherwise.

Category (d) includes AICPA accounting interpretations and implementation guides ("Qs and As") published by the FASB staff, and practices that are widely recognized and prevalent either generally or in the industry.

In the absence of a pronouncement covered by rule 203 or another source of established accounting principles, the auditor of financial statements of entities other than governmental entities may consider other accounting literature. Other accounting literature includes, for example, FASB Statements of Financial Accounting Concepts; APB Statements; AICPA Issues Papers; International Accounting Standards of the International accounting Standards Committee; GASB Statements, Interpretations or Technical Bulletins; pronouncements of other professional associations or regulatory agencies; Technical Information Service Inquiries and Replies included in AICPA Technical Practice Aids; and accounting textbooks, handbooks and articles.

Some source of other accounting literature may be more appropriate than another in particular circumstances. Factors that should be considered in weighing the appropriateness of alternative sources of other literature are its relevance to particular circumstances, the specificity of the guidance and the general recognition of the issuer or author as an authority. For example, FASB Statements of Financial Accounting Concepts would normally be more influential than other sources in this category.

Application to State and Local Governmental Entities

For financial statements of state and local governmental entities, the four sources of established accounting principles include the following:

Category (a) consists of GASB Statements and Interpretations and AICPA and FASB pronouncements specifically made applicable to state and local governmental entities by GASB Statements and Interpretations.

Category (b) consists of GASB Technical Bulletins and, if specifically made applicable to state and local entities by the AICPA and cleared by the GASB, AICPA Industry Audit and Accounting Guides and AICPA Statements of Position. The auditor should assume such pronouncements specifically made applicable to state and local governments have been cleared by the GASB unless the pronouncement indicates otherwise.

Category (c) consists of AICPA AcSEC Practice Bulletins if specifically made applicable to state and local governmental entities and cleared by the GASB, as well as consensus bulletins of a group of accountants organized by the GASB that attempts to reach consensus positions on accounting issues applicable to state and local governmental entities. The auditor should assume such pronouncements specifically made applicable to state and local governments have been cleared by the GASB unless the pronouncement indicates otherwise.

Category (d) includes implementation guides ("Qs and As") published by the GASB staff as well as practices that are widely recognized and prevalent in state and local government.

In the absence of a pronouncement covered by rule 203 or another source of established accounting principles, the auditor of financial statements of state and local governmental entities may consider other accounting literature. Other accounting literature includes, for example, GASB Concepts Statements; the pronouncements referred to in categories (a) through (d) for entities other than governmental entities when not specifically made applicable to state and local governmental entities either by the GASB or by the organization issuing them; APB Statements; FASB Concept Statements; AICPA Issues Papers; International Accounting Standards of the International Accounting Standards Committee; pronouncements of other professional associations or regulatory agencies, Technical Information Service Inquiries and Replies included in AICPA Technical Practice Aids; and accounting textbooks, handbooks and articles.

Some source of other accounting literature may be more appropriate than another in particular circumstances. Factors that should be considered in weighing alternative sources of other literature are its relevance to particular circumstances, the specificity of the guidance and the general recognition of the issuer or author as an authority. For example, GASB Statements of Financial Accounting Concepts would normally be more influential than other sources in this category.

Significance of SAS 69

SAS 69 provides for three major changes in the existing hierarchy. SAS 69 replaces the single hierarchy (see Table 1) of SAS 43 with parallel hierarchies (see Table 2), one for governmental entities and one for nongovernmental entities. Under SAS 69, AICPA and FASB pronouncements apply to governmental entities only if specifically made applicable.

Secondly, the new hierarchy is easier to apply because each category has a different level of authority. If a conflict occurs between principles on different levels, the auditor must follow the principle with the higher level of authority. Under SAS 43, there was confusion because categories (b) and (c) were considered to have the same authority.

Lastly, SAS 69 increases the authority of opinions of the FASB Emerging Issues Task Force. Under the old hierarchy, these pronouncements were included with "other accounting literature" in category (d). In the new hierarchy, EITF pronouncements have level (c) authority, along with AcSEC Practice Bulletins that are cleared by the FASB.

SAS 69 is effective for audits of financial statements for periods ending after March 15, 1992. The new GAAP hierarchy is, however, not intended to force accounting changes. A grandfather provision will prevent such a problem from occurring. This provision states that an entity following an accounting treatment in category (c) or (d) as of March 15, 1992, need not change to an accounting treatment in a category (b) or category (c) pronouncement whose effective date is before March 15, 1992. Therefore, an entity following a prevalent industry practice, [(category (d) under SAS 43] need not change under SAS 69 to a category (b) or (c) treatment whose effective date is before March 15, 1992.

For pronouncements whose effective date is after March 15, 1992, and for entities that are initially applying an accounting principle after March 15, 1992 (except for FASB Emergency Issues Task Force consensus positions issued before March 16,1992, which become effective on the hierarchy for initial application of an accounting principle after March 15, 1993), the auditor must follow the new hierarchy.

GAAP Hierarchy under SAS 43
Category Type of Pronouncements
 (a) FASB Statements and Interpretations, APB Opinions, AICPA Accounting
 Research Bulletins; and for state and local governments,
 GASB statements and interpretations.
 (b) AICPA Industry Audit and Accounting Guides, AICPA Statements
 of Position, Technical Bulletins issued by the FASB or the GASB.
 C) AICPA accounting. interpretations, as well as practices that are
 widely recognized and prevalent in the industry.
 (d) Other accounting literature, including APB Statements, AICPA Issues
 Papers, AcSEC Practice Bulletins, minutes of the FASB EITF,
 Concepts Statements issued by the FASB or the GASB, International
 Accounting Standards Committee Statements, pronouncements
 of other professional associations or regulatory agencies and
 accounting textbooks and articles.


GAAP Hierarchy under SAS 69

Nongovernmental Entities (a) FASB Statements of Financial Accounting Standards and Interpretations, APB Opinions and Accounting Research Bulletins (b) FASB Technical Bulletings and, if cleared by the FASB, AICPA Industry Audit and Accounting Guides and AICPA Statements of Position (c) AICPA AcSEC Practice Bulletins that have been cleared by the FASB and consensus positions of the FASB EITF (d) AICPA accounting interpretations, "Qs and As" published by the FASB staff and practices that are widely recognized and prevalent either generally or in the industry (e) Other accounting literature

State and Local Governments (a) GASB Statements and Interpretations, as well as AICPA and FASB pronouncements if made applicable to state and local governments by a GASB Statement or Interpretation (b) GASB Technical Bulletins and the following pronouncements if specifically made applicable to state and local governments by the AICPA: AICPA Industry Audit and Accounting Guides and AICPA Statements of Position (c) Consensus positions of the GASB EITF and AICPA Practice Bulletins if specifically made applicable to state and local governments by the AICPA. (d) "Qs and As" published by the GASB staff, as well as industry practices widely recognized and prevalent (e) Other accounting literature

James H. Thompson is professor of accounting at Oklahoma City University. He received his PhD from the University of Oklahoma and has published in numerous professional journals.
COPYRIGHT 1993 National Society of Public Accountants
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Title Annotation:generally accepted accounting principles
Author:Thompson, James H.
Publication:The National Public Accountant
Date:Oct 1, 1993
Words:2251
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