Hierarchy of GAAP

The Hierarchy of GAAP is a set of authoritative sources that accountants use to determine how to report financial information. The hierarchy is important because it provides accountants with a consistent set of rules to follow when preparing financial statements.

The hierarchy is divided into four levels:

• Level 1: The FASB Accounting Standards Codification (ASC) is the highest level of authority. It includes all authoritative accounting standards issued by the Financial Accounting Standards Board (FASB).
• Level 2: Pronouncements issued by the FASB before the codification are also authoritative. These include Statements of Financial Accounting Standards (SFAS), Interpretations of SFAS, and Technical Bulletins.
• Level 3: The American Institute of Certified Public Accountants (AICPA) Accounting Standards Executive Committee (AcSEC) Practice Bulletins are also authoritative.
• Level 4: Finally, other accounting literature, such as industry guides and articles, may be used as a source of guidance if no authoritative guidance exists.

The hierarchy of GAAP is important because it provides accountants with a consistent set of rules to follow when preparing financial statements. By following the hierarchy, accountants can ensure that their financial statements are prepared in accordance with generally accepted accounting principles (GAAP).

Here is a more detailed explanation of each level of the hierarchy:

• Level 1: FASB Accounting Standards Codification (ASC)

The FASB Accounting Standards Codification (ASC) is the highest level of authority in the hierarchy of GAAP. It includes all authoritative accounting standards issued by the Financial Accounting Standards Board (FASB). The ASC is organized into 38 topical areas, each of which contains a number of accounting standards.

• Level 2: Pronouncements issued by the FASB before the codification

Pronouncements issued by the FASB before the codification are also authoritative. These include Statements of Financial Accounting Standards (SFAS), Interpretations of SFAS, and Technical Bulletins. SFASs are the most authoritative type of pronouncement, followed by Interpretations and Technical Bulletins.

• Level 3: AICPA Accounting Standards Executive Committee (AcSEC) Practice Bulletins

The AICPA Accounting Standards Executive Committee (AcSEC) Practice Bulletins are also authoritative. Practice Bulletins are issued by the AICPA's Accounting Standards Executive Committee (AcSEC) to provide guidance on how to apply accounting standards in specific situations.

• Level 4: Other accounting literature, such as industry guides and articles

Finally, other accounting literature, such as industry guides and articles, may be used as a source of guidance if no authoritative guidance exists. However, such literature should be used with caution and only if it is relevant to the specific situation.

The hierarchy of GAAP is an important tool for accountants to use when preparing financial statements. By following the hierarchy, accountants can ensure that their financial statements are prepared in accordance with generally accepted accounting principles (GAAP).