Home at last: FAS 162 and the GAAP hierarchy.

• Author: Davis, A.Christine
• Position: Regulatory news

up until now, the GAAP hierarchy resided in the auditing standards. A decade and a half after the issuance of Statement on Auditing Standards No. 69, The Meaning of Present Fairly in Conformity with Generally Accepted Accounting principles (SAS 69), the GAAP hierarchy is finally home--in the accounting standards. Statement on Financial Accounting Standards No. 162, The Hierarchy of Generally Accepted Accounting Principles (SFAS 162), was issued by the FASB in May 2008 for nongovernmental entities.

It is widely known that the GAAP hierarchy sets forth the level of authority attributed to a given accounting pronouncement or document. For example, an SFAS pronouncement, which is in category (a) of the GAAP hierarchy, has a higher authority than a FASB Technical Bulletin, which is in category (b). Prepares of financial statements will look to category (a) GAAP in selecting and applying appropriate accounting principles, and turn to categories (b), (c) and (d), in that order, only if the accounting for a transaction or event is not specified in category (a). Where there might be conflicting guidance between two categories, the more authoritative category will prevail.

SFAS 162 comes in response to an SEC study in July 2003, which, in part, endorsed an improvement to the SAS 69 GAAP hierarchy ("old GAAP hierarchy"). The old GAAP hierarchy has been described as complex, directed to the auditor, and ranks the Concepts Statements too low in the chain of command. Indeed, it is in the Concepts Statements that some of the most fundamental terms of our profession are defined: assets, liabilities, equity, income, expense, accrual basis of accounting and materiality, along with a profound discussion of the often-quoted "objectives of financial reporting."

In issuing SFAS 162, the FASB does not expect a change in current practice. What has changed is to whom the application of the GAAP hierarchy is directed. By being officially part of GAAP, SFAS 162 imposes the GAAP hierarchy on the reporting entities, not their auditors, based on the long-standing mandate that the entity's management, not their auditors, is responsible for selecting and applying the appropriate GAAP to their financial statements. The auditors' responsibility is to comply with GAAS as a basis for issuing their audit opinion.

SFAS 162 improved the GAAP hierarchy in three ways: (1) in its presentation, (2) in defining the driver for category (a), and (3) in making additions to the...