Gaap Hierarchy

GAAP Hierarchy Review of Standard Setting

The primary standard-setting bodies responsible for establishing GAAP are the: ◆ FASB

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Financial Accounting Standards Board

◆ SEC

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Securities & Exchange Commission

The primary standard-setting bodies responsible for establishing GAAP are the: ◆ AICPA

◆ IASB

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American Institute of Certified Public Accountants

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International Accounting Standards Board

AICPA Code of Ethics ◆

.01 Rule 203—Accounting principles. A member shall not (1) express an opinion or state affirmatively that the financial statements or other financial data of any entity are presented in conformity with generally accepted accounting principles or (2) state that he or she is not aware of any material modifications that should be made to such statements or data in order for them to be in conformity with generally accepted accounting principles, if such statements or data contain any departure from an accounting principle promulgated by bodies designated by Council to establish such principles that has a material effect on the statements or data taken as a whole. • [As adopted January 12, 1988.]

Council has designated . . . ◆

Financial Accounting Standards Board (FASB) • FASB Statements of Financial Accounting Standards, together with those Accounting Research Bulletins and APB Opinions which are not superseded by action of the FASB, constitute accounting principles as contemplated in rule 203

Council has designated . . . ◆

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Governmental Accounting Standards Board (GASB), with respect to Statements of Governmental Accounting Standards issued in July 1984 and thereafter, is the body designated to establish financial accounting principles for state and local governmental entities pursuant to rule 203 Federal Accounting Standards Advisory Board (FASAB), with respect to Statements of Federal Accounting Standards adopted and issued in March 1993 and subsequently, is the body designated to establish accounting principles for federal government entities pursuant to rule 203

Sarbanes-Oxley? Things are changing, obviously, with the new body. AICPA will no longer set auditing standards. ◆ The SEC has designated FASB to establish accounting principles for publicly-traded companies so that probably will not change ◆

Organizational Structure for Setting Accounting Standards FAF FASB

GASB Staff and Task Forces

FASAC

GASAC

Evolution of U.S. GAAP 21 years

14 years

1938

1959

1973

CAP formed

APB formed

FASB formed

CAP Issued 51 ARBs

APB Issued 31 Opinions

31 years

5 to 6 per year FASB Issued 150+ ____ Statements

The Process of Standard Setting Place topic on agenda

Hold Public Hearings

Analysis of public response

Appoint Task Force

Hold public hearing

Modify exposure draft

Conduct Research

Analysis of public response

Vote (approval requires 4 of 7)

Issue Discussion Memorandum

Issue Exposure Draft

Issue Standards Statement

The House of GAAP

Least Authoritative

AICPA Accounting Interpretations

FASB Implementation Guides (Q&A), FSP

FASB Emerging Issues Task Force

FASB Technical Bulletins

Most Authoritative

FASB Statements and Interpretations

Widely recognized and prevalent industry practices

AICPA AcSEC Practice Bulletins

AICPA Industry Audit and Accounting Guides

AICPA Statements of Position AICPA

APB Opinions

Accounting Research Bulletins

FSP = something new Least Authoritative

AICPA Accounting Interpretations

The House of GAAP

FASB Implementation Guides (Q&A), FSP

FASB Emerging Issues Task Force

FASB Technical Bulletins

Most Authoritative

FASB Statements and Interpretations

Widely recognized and prevalent industry practices

AICPA AcSEC Practice Bulletins

AICPA Industry Audit and Accounting Guides

AICPA Statements of Position AICPA

APB Opinions

Accounting Research Bulletins

FASB Statements These have traditionally been numbered in sequence ◆ In Dec 2003, they have apparently started a new system of issuing REVISED versions of existing numbers ◆ FAS 132 (revised 2003) ◆ FIN 46 (revised Dec. 2003) ◆

FASB Statements Two ways to reference (works until we figure out impact of the new “revised version” system) ◆ From “Original Pronouncements” ◆

• FAS140, ¶102 ◆

Current Text F39.187

Current Text vs. Original Pronouncements ◆

Current Text has all the latest rules by SUBJECT • Omits basis for conclusions material from original pronouncements • There is always a cross reference to the original pronouncement – General Standards’ chapters have single letter in reference – Industry Standards’ chapters have two letters in reference (first one capitalized): In6.110

Current Text vs. Original Pronouncements ◆

Original Pronouncements notes rules no longer in effect by SHADING and rules modified by a LINE IN MARGIN • No cross reference to Current Text • The basis for conclusions if often helpful in figuring out why FASB chose one course over another and MIGHT be helpful but it is not GAAP per se

Interpretations FASB Interpretations are just as authoritative as the Statements ◆ Reference: FIN 46, ¶4 ◆

Concept Statements These are NOT in and of themselves GAAP for purpose of audit opinions ◆ They function more like a “constitution” to which FASB is supposed to adhere when setting standards ◆ Reference = CON2, ¶6 ◆

Emerging Issues Task Force ◆ ◆

Formed in 1984 The mission of the EITF is to assist the FASB in improving financial reporting through the timely identification, discussion, and resolution of financial accounting issues within the framework of existing authoritative literature. • The EITF was designed to minimize the need for the FASB to spend time and effort addressing narrow implementation, application, or other emerging issues that can be analyzed within existing GAAP.

Emerging Issues Task Force ◆

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The 12 or so Task Force members are drawn from a cross section of the FASB’s constituencies, including auditors, preparers, and users of financial statements. FASB’s Director of Technical Application and Implementation Activities is chairman of the Task Force. Observers (non-voting participants) • Chief accountant of the Securities and Exchange Commission • Chairman of the Accounting Standards Executive Committee (AcSEC) of the AICPA. • FASB Board members

Emerging Issues Task Force ◆

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If the group can reach a consensus on an issue, usually that is taken by the FASB as an indication that no Board action is needed. If the Task Force is unable to reach a consensus, it may be an indication that action by the FASB is necessary. A consensus on an EITF issue is reached if no more than three of the voting members present at the meeting object to a proposed position on an issue. Although FASB Board members do not vote on consensuses at Task Force meetings, all consensuses are subject to ratification by the FASB at an ensuing open public meeting of the Board.

Emerging Issues Task Force ◆

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A consensus on an EITF issue is reached if no more than three of the voting members present at the meeting object to a proposed position on an issue. If the group can reach a consensus on an issue, usually that is taken by the FASB as an indication that no Board action is needed. • If the Task Force is unable to reach a consensus, it may be an indication that action by the FASB is necessary.

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EITF consensuses are subject to ratification by the FASB at an ensuing open public meeting of the Board

Emerging Issues Task Force ◆ ◆

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Meetings of the Task Force are open to the public and generally are well attended EITF Abstracts comes in a loose-leaf version, which is updated after each Task Force meeting. A soft-bound version of EITF Abstracts, which is updated annually, is sold separately. EITF Abstracts are also included in the FASB's Financial Accounting Research System (FARS) , available on CD-ROM or diskettes.

Referencing EITFs ◆

EITF’s numbers refer to the year consensus was reached • So the numbering starts over with a new year • Example: EITF 02-18, ¶2

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Be very careful that you are quoting the “conclusion” rather than just the discussion. These are like “minutes” of a meeting rather than an official standard

Referencing EITFs ◆

EITF documents preceded by “D” instead of a number for the year are not as authoritative as the regular EITF • They are staff announcements and NOT a consensus reached and approved by FASB • We’ll probably see FSPs now instead of “EITF D-2” issuances

Supplemental Guidance ◆

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The FASB staff frequently receives questions about the appropriate application of FASB literature. Historically, questions are considered to have widespread relevance to constituents have been disseminated through • Staff Implementation Guides (Q&As) • Staff Announcements (EITF Abstracts, Topic No. D-XXX), • Technical Bulletins

FASB Staff Announcements ◆

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Staff Announcements, in particular, permitted the FASB and SEC staffs to use EITF meetings as a forum to take advantage of the timely nature of the distribution of information associated with the EITF Staff Announcements are published first in the EITF minutes and later in EITF Abstracts. Reference is to Appendix D of EITF abstracts (e.g., EITF D-44)

FASB Staff Positions ◆

Beginning in February 2003, the FASB staff introduced the FASB Staff Position (FSP) to issue application guidance (like that found in Staff Implementation Guides and Staff Announcements). • Because the procedures for issuing an FSP provide for ease of distribution and retrieval, as well as an exposure period, the staff believes that this new form of guidance will ensure more timely and consistent communication about the application of FASB literature.

FASB Staff Positions ◆

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At the direction of the Board, the FASB staff also may use FSPs to make narrow and limited revisions to Statements or Interpretations that would have previously been made through Technical Bulletins Examples: • To delay the effective date of a pronouncement • To make technical corrections required to better convey the Board’s intent with respect to a particular issue

FASB Staff Positions ◆

Constituents’ input is sought prior to issue but it is a faster process than is typical for exposure drafts • The comment period for FSPs is generally 30 days • A shorter comment period of not less than 15 days may be used for Board-directed FSPs to defer an effective date or make a technical correction.

Referencing of FSPs ◆

FSPs are numbered according to the standard they address. • FSP FIN 46-5

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FSPs will be incorporated into Current Text similar to the manner used for Q&As in the Staff Implementation Guides.

Referencing of FSPs ◆

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During the drafting stage, an FSP will have a letter suffix to distinguish it from any other draft FSP for that particular standard. Example: The first draft FSP related to Statement 141 would be listed as "FSP FAS 141-a" Upon final approval it would be numbered as "FSP FAS 141-1"