Introduction to the Hierarchy of GAAP
In the glamorous world of accounting (yes, we accountants do have a peculiar definition of ‘glamour’), the Hierarchy of Generally Accepted Accounting Principles (GAAP) stands as the grand marshal, ensuring that all financial statements march to the beat of uniformity and precision. This hierarchy is not just a list; it’s a meticulously organized framework that ranks accounting principles and practices from the ‘supreme law of the land’ down to ‘friendly suggestions.’
Making Sense of the Layers
As if inspired by a four-layer cake, the creators of GAAP didn’t settle for a simplistic approach. Here’s the scoop, tier by tier:
Tier 1: The Cream of the Crop
This top layer includes the grandmaster’s rulebook: statements and interpretations by the Financial Accounting Standards Board (FASB), and the mighty hammer of the Securities and Exchange Commission (SEC)—essential for all those SEC registrants out there. Also, don’t forget the seasoned insights from the AICPA’s accounting research bulletins and opinions.
Tier 2: Important, but Not Supreme
Just below the apex, this level houses the FASB Technical Bulletins and AICPA’s industry audit and accounting guides and statements of position—only if they’ve received the FASB’s royal stamp of approval.
Tier 3: The Advisory Committee
Stepping down to a more consultative role, this level includes AICPA Accounting Standards Executive Committee Practice Bulletins, and consensus positions of the FASB’s Emerging Issues Task Force (EITF). It’s like the council of elders, not all-powerful but wise and respected.
Tier 4: The Common Folk
At the grassroots, here lies the practical wisdom of FASB implementation guides, AICPA Accounting Interpretations, and a potpourri of industry-specific guides and positions that haven’t caught the FASB’s eye. Also included are those accounting practices so well ingrained they’re almost tradition.
Why This Hierarchy Matters
Without the GAAP hierarchy, the accounting world might resemble a financial Wild West, with every accountant for themselves. This structured pecking order not only clarifies what to use when but also reinforces the sanctity of standardization—making sure that when you compare two financial statements, you’re actually comparing apples to apples, rather than apples to financial anomalies.
Related Terms
- Financial Accounting Standards Board (FASB): Sets the bar high by establishing and improving standards of financial accounting and reporting.
- Securities and Exchange Commission (SEC): The watchful eye over the securities industry, ensuring transparency and fairness.
- American Institute of Certified Public Accountants (AICPA): The elder statesman of the accounting world, upholding the standards of the profession.
Suggested Books for Further Giggles…uh, Studies
- “The Joy of GAAP” by I.M. Balanced - A light-hearted journey through the riveting world of accounting standards.
- “GAAP for the Laughter Impaired” by Audita T. Books - Breaks down complex principles into humorously digestible bites.
In conclusion, the GAAP hierarchy isn’t just a dry set of rules but a finely tuned symphony orchestrating the melody of financial reporting. So, whenever you delve into those thrilling financial statements, remember there’s a method to the madness, all thanks to this hierarchical guidebook.
