FASB issues Statement No. 162 the Hierarchy of Generally Accepted Accounting Principles

Here's some important news:

The Financial Accounting Standards Board (FASB) issued FASB Statement No. 162, The Hierarchy of Generally Accepted Accounting Principles, on May 9, 2008.

The new standard is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with U.S. generally accepted accounting principles (GAAP) for nongovernmental entities.

Statement 162 is effective 60 days following the Securities and Exchanges Commission's approval of the Public Company Accounting Oversight Board Auditing amendments to AU Section 411, The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles. It is only effective for nongovernmental entities; therefore, the GAAP hierarchy will remain in AICPA Statement on Auditing Standards (SAS) No. 69, The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles, for state and local governmental entities and federal governmental entities.

A news release details briefly the reasons for the new statement:
"SAS 69 has been criticized because it is directed to the auditor rather than the entity. Statement 162 addresses these issues by establishing that the GAAP hierarchy should be directed to entities because it is the entity (not its auditor) that is responsible for selecting accounting principles for financial statements that are presented in conformity with GAAP."

Statement No. 162 does not present any major changes, other than its direction to entities.

Here's what is included in the hierarchy in Statement No. 162:


The GAAP Hierarchy

The sources of accounting principles(1) that are generally accepted
are categorized in descending order of authority as follows:

a. 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Public Accountants (AICPA) Accounting Research Bulletins and Accounting Principles Board Opinions that are not superseded by actions of the FASB.

b. FASB Technical Bulletins and, if cleared (2) by the FASB, AICPA Industry Audit and Accounting Guides and Statements of Position

c. AICPA Accounting Standards Executive Committee 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) (3)

d. Implementation guides (Q&As) published by the FASB staff, AICPA Accounting Interpretations, AICPA Industry Audit and Accounting Guides and Statements of Position not cleared by the FASB, and practices that are widely recognized and prevalent either generally or in the industry.

If the accounting treatment for a transaction or event is not specified by a pronouncement in category (a), an entity shall consider whether the accounting treatment is specified by an accounting principle from a source in another category.

In such cases, if categories (b)–(d) contain accounting principles that specify accounting treatments for a transaction or event, then the entity shall follow the accounting treatment specified by the accounting principle from the source in the highest category—for example, follow category (b) treatment over category (c) treatment.

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), an entity shall first consider accounting principles for similar transactions or events within categories (a)–(d) and then other accounting literature. 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.

Other accounting literature includes, for example, FASB Concepts Statements,
AICPA Issues Papers, International Financial Reporting Standards (IFRSs)
of the International Accounting Standards Board (IASB), (4)
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.

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 bemore influential than other sources in this category.

Notes
1) 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.

(2) For purposes of interpreting categories (b) and (c), the word cleared means that the FASB does not object to the pronouncement’s issuance.

(3) 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.

(4) Paragraph 5 of International Accounting Standard (IAS) 8, Accounting Policies, Changes in Accounting Estimates and Errors, states that IFRSs are standards and interpretations adopted by the IASB, which comprise (a) IFRSs, (b) IASs, and (c) Interpretations originated by the International Financial Reporting Interpretations Committee or the former Standing Interpretations Committee.


In addition to the free FASB website, which has the new Statement, the new statement is available through subscription databases CCH Accounting Research Manager and RIA Checkpoint's Accounting, Corp Finance and Auditing. Auditing Statement No. 69 is available on RIA Checkpoint and CCH Accounting Research Manager.