Summary of FAS 162, GAAP Hierarchy
May 9, 2008
FEI Summary
On May 9, 2008 the Financial Accounting Standards Board (FASB) announced the release of FASB Statement of Financial Accounting Standards No. 162, The Hierarchy of Generally Accepted Accounting Principles (FAS 162 or the ‘GAAP hierarchy’).
The GAAP hierarchy sets forth levels of authority for various types of accounting standards.
Prior to FAS 162, the GAAP hierarchy was set forth in an auditing standard, Statement of Auditing Standards No. 69 The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles (SAS 69).
By moving the GAAP hierarchy to the accounting literature, FAS 162 establishes that decisions with respect to the GAAP hierarchy rest primarily with an entity – not its auditor – in selecting accounting principles for financial statements that are presented in conformity with GAAP.
FASB Expects No Costs To Be Imposed By This New Standard
FASB states in the Basis for Conclusions section of the new standard, “The board believes that this Statement will not impose any costs on its constituents.”
Additionally, FASB states, ”The board does not anticipate any significant change in financial reporting to result from the issuance of this statement.”
Effective Date Tied to Related PCAOB Standard
To fully effectuate the movement of the GAAP hierarchy from the auditing literature to the accounting literature, the Public Company Accounting Oversight Board (PCAOB) has released a final amendment to the auditing standards contained in AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles (including SAS 69 noted above). The effective date of FAS 162 will be 60 days after the U.S. Securities and Exchange Commission (SEC) approves the PCAOB’s amendments to AU Section 411.
Transition Provisions
FAS 162 states: “The board does not expect that this statement will result in a change in current practice. However, transition provisions have been provided in the unusual circumstance that the application of the provisions of this statement results in a change in practice.”
Following are the transition provisions: “An entity that has and continues to follow an accounting treatment in category (c) or category (d) as of March 15, 1992, need not change to an accounting treatment in a higher category ((b) or (c)) if its effective date was before March 15, 1992. For example, a nongovernmental entity that followed a prevalent industry practice (category (d)) as of March 15, 1992, need not change to an accounting treatment included in a pronouncement in category (b) or category (c) (such as an accounting principle in a cleared AICPA Statement of Position or Accounting Standards Executive Committee Practice Bulletin) whose effective date is before March 15, 1992. For pronouncements whose effective date is after March 15, 1992, and for entities initially applying an accounting principle after March 15, 1992 (except for EITF consensus positions issued before March 16, 1992, which become effective in the hierarchy for initial application of an accounting principle after March 15, 1993), an entity shall follow this statement.”
Additionally, FAS 162 states: “Any effect of applying the provisions of this statement shall be reported as a change in accounting principle in accordance with FASB Statement No. 154, Accounting Changes and Error Corrections. An entity shall follow the disclosure requirements of that statement, and additionally, disclose the accounting principles that were used before and after the application of the provisions of this statement and the reason why applying this statement resulted in a change in accounting principle.”
GAAP Hierarchy Established in FAS 162
“The sources of accounting principles that are generally accepted are categorized in descending order of authority as follows,” according to FAS 162, are:
- FASB Statements of Financial Accounting Standards and Interpretations, FASB Statement 133 Implementation Issues, FASB Staff Positions, and American Institute of Certified Public Accountants (AICPA) Accounting Research Bulletins [ARBs] and Accounting Principles Board [APB] Opinions that are not superseded by actions of FASB;
- FASB Technical Bulletins and, if cleared by the FASB, AICPA Industry Audit and Accounting Guides and Statements of Position [SOPs];
- AICPA Accounting Standards Executive Committee (AcSEC) Practice Bulletins that have been cleared by the FASB, consensus positions of the FASB Emerging Issues Task Force (EITF) and the Topics discussed in Appendix D of EITF Abstracts (EITF D-Topics); and
- Implementation guides (Q&As) published by FASB staff, AICPA Accounting Interpretations, AICPA Industry Audit and Accounting Guides and Statements of Position not cleared by FASB, and practices that are widely recognized and prevalent either generally or in the industry.
Role of SEC, FASB Staff Announcements in the GAAP Hierarchy
Footnote 1 in FAS 162 states: “Rules and interpretive releases of the Securities and Exchange Commission (SEC) are sources of category (a) accounting principles for SEC registrants. In addition, the SEC staff issues Staff Accounting Bulletins that represent practices followed by the staff in administering SEC disclosure requirements and utilizes EITF D-Topics and Observer comments in EITF Issues to publicly announce its views on certain accounting issues for SEC registrants.”
Footnote 3 in FAS 162 states: “The FASB staff has utilized EITF D-Topics to publicly announce its views on certain accounting issues. These FASB staff announcements are considered category (c) accounting principles.”
What to do if Accounting Not Specified in Level a-d Literature
“If the accounting treatment for a transaction or event is not specified by a pronouncement or established in practice as described in categories (a)–(d),” states FAS 162, then, “an entity shall first consider accounting principles for similar transactions or events within categories (a)–(d) and then other accounting literature.”
However, FAS 162 adds, “An entity shall not follow the accounting treatment specified in accounting principles for similar transactions or events in cases in which those accounting principles either prohibit the application of the accounting treatment to the particular transaction or event or indicate that the accounting treatment should not be applied by analogy.”
FAS 162 defines “other accounting literature” as: “includ[ing], for example, FASB Concepts Statements, AICPA Issues Papers, International Financial Reporting Standards (IFRSs) of the International Accounting Standards Board (IASB), 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.”
Furthermore, FAS 162 states, “The appropriateness of other accounting literature depends on 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 Concepts Statements would normally be more influential than other sources in this category.”
Prepared May 9, 2008 by Edith Orenstein, Director, Technical Policy Analysis, Financial Executives International (FEI). This summary does not represent FEI opinion unless specifically noted above.