Generally Accepted Accounting Principles

Encyclopedia of Business, 2nd ed., (1999) by Edmund Jenkins, Cheri Mazza

GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

Most individuals who understand the basics of financial reporting are familiar with the phrase generally accepted accounting principles (GAAP) and will readily identify the Financial Accounting Standards Board (FASB) as the standard-setting body in the United States responsible for establishing accounting principles for nongovernmental entities. However, some may not be aware that there is no single reference source for GAAP because these principles are derived from a variety of sources. For example, although the FASB is responsible for issuing FASB Statements of Financial Accounting Standards, Interpretations, and Technical Bulletins, the American Institute of Certified Public Accountants (AICPA) issues Statements of Position, Audit and Accounting Guides, and Practice Bulletins, and the FASB Emerging Issues Task Force (EITF) issues EITF Abstracts.

It may seem that accounting principles could be generally accepted because of popular vote or consensus of opinion. However, generally accepted accounting principles is a technical accounting phrase defined in Accounting Principles Board (APB) Statement No. 4, Basic Concepts and Accounting Principles Underlying Financial Statement of Business Enterprises , as "the conventions, rules, and procedures that define accepted accounting practice at a particular time." GAAP includes not only broad guidelines of general application but also detailed practices and procedures that provide a standard by which to measure financial presentations. For the most part, in financial reporting, generally accepted implies substantial authoritative support.

THE GAAP HIERARCHY

The GAAP hierarchy includes four successive categories (A to D), each of which establishes a different level of authority. Generally speaking, if there is a conflict between accounting principles relevant to the circumstances from one or more sources in Categories A, B, C, or D, the treatment specified by the source in the higher category is then followed. In other words, Categories A through D of the hierarchy descend in authority. Therefore, Category A takes precedence over all others, Category B takes precedence over Categories C and D, and Category C takes precedence over Category D. If a situation is not covered by guidelines in Categories A through D, other accounting literature should be considered. However, that literature should be consulted only when guidelines in higher categories are not applicable.

Category A

Category A consists of the following officially established accounting principles: (1) FASB Statements of Financial Accounting Standards, (2) FASB Interpretations, (3) APB Opinions, and (4) AICPA Accounting Research Bulletins. All of those accounting principles are included in Volumes I and II of Original Pronouncements , which is updated annually and published by the FASB. In addition, FASB Statements and Interpretations are available individually from the FASB as published.

The accounting principles included in Category A are often referred to as "Rule 203 pronouncements" because the bodies responsible for establishing those principles have been so designated by the AICPA Council, pursuant to Rule 203 of the AICPA Code of Professional Conduct. Specifically, from September 1939 to August 1959 the AICPA committees on terminology and on accounting procedure were responsible for issuing fifty-one Accounting Research Bulletins (ARBs). In 1953, the first forty-two of those were revised, restated, or withdrawn and now appear as ARB No. 43, Restatement and Revision of Accounting Research Bulletins . On September 1, 1959, the AICPA committees were superseded by the APB, which issued thirty-one Opinions until it ceased operations in June 1973. At that time, the FASB took over the responsibilities of standard setting from the APB and as of March 31, 2000, had issued 137 Statements of Financial Accounting Standards and forty-four Interpretations.

Category B

Category B consists of (1) FASB Technical Bulletins and, if cleared by the FASB, (2) AICPA Statements of Position and (3) AICPA Industry Audit and Accounting Guides. Technical Bulletins are available individually from the FASB as published and are also included collectively in Volume II of Original Pronouncements . Statements of Position and Audit and Accounting Guides are available individually from the AICPA as published. In addition, Statements of Position are included collectively in AICPA Technical Practice Aids .

FASB Technical Bulletins provide timely guidance for applying Category A accounting principles and resolving accounting issues not directly addressed in those principles. The following kinds of guidance may be provided in a Technical Bulletin:

Guidance that clarifies, explains, or elaborates on an underlying standard. Guidance for a particular situation (usually a specific industry) that differs from the general application required by the standard in an ARB, APB Opinion, or FASB Statement or Interpretation. For example, the guidance in a Bulletin may specify that the standard does not apply to enterprises in a particular industry or may provide for deferral of the effective date of a standard for that industry. Guidance that addresses areas not directly covered by existing standards.