Project Pages

Hierarchy of Generally Accepted Accounting Principles (GAAP Hierarchy)

Primary Objective:The objective of this project is to incorporate into the GASB’s authoritative literature the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of state and local governmental entities that are presented in conformity with generally accepted accounting principles (the GAAP hierarchy). The GAAP hierarchy currently is contained in the American Institute of Certified Public Accountants’ (AICPA) professional auditing literature in Statement of Auditing Standards (SAS) No. 69, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.

Status: Statement No. 55, The Hierarchy of Generally Accepted Accounting Principles for State and Local Governments, was approved in March 2009.

GAAP Hierarchy—Project Plan

Project Description: This project will incorporate into the GASB’s authoritative literature the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of state and local governmental entities that are presented in conformity with generally accepted accounting principles (the GAAP hierarchy). The GAAP hierarchy currently is contained in the American Institute of Certified Public Accountants’ (AICPA) professional auditing literature in Statement of Auditing Standards (SAS) No. 69, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.

Background: Representatives of the AICPA have stated that they would like the standards setters to consider adopting standards for accounting and financial reporting issues (including the GAAP hierarchy) that now only reside in the SASs. Because the GAAP hierarchy currently resides in the professional auditing literature it is directed to the auditor rather than the governmental entities themselves. The selection of principles used in the preparation of financial statements would more appropriately be addressed in accounting and financial reporting standards rather than the auditing literature. The hierarchy issue was initially included in the broader AICPA Omnibus project, but was separated in preparation for the July 2008 Board meeting so that the GASB and the Federal Accounting Standards Advisory Board (FASAB) could address the issue in a joint project.

The staff presented the results of research and initial recommendations regarding the proposed direction of the project in December 2007. The project prospectus (for the combined project) was discussed by the Governmental Accounting Standards Advisory Council (GASAC) at its March 2008 meeting (highly rated by the GASAC), and a revised prospectus was presented to the Board for consideration to be added to the active agenda at the April 2008 meeting.

Accounting and Financial Reporting Issues: The primary issue is analyzing the contents of the existing hierarchy levels to determine (a) if the structure should be incorporated into the GASB’s literature essentially “as is,” or (b) whether the standards-setting process and the governmental financial reporting environment have sufficiently evolved since the establishment of the hierarchy to warrant reconsideration or reconfiguration of certain aspects of the structure.

The Board reviewed a preballot draft of the proposed standard at the July meeting and met with the FASAB in August to discuss the ballot draft and approve it for issuance. The ED was issued August 28, 2008, with a comment period ending October 30, 2008. Approximately 32 letters were received, most of which generally supported the ED as proposed. The redeliberations based on the comments received may take place at the December Board meeting (rather than the March 2009 meeting), if time permits, accelerating the preballot and ballot draft review sessions accordingly.

GAAP Hierarchy—Minutes for Deliberations

Minutes of Meeting, March 10-12, 2009

The Board voted on the ballot draft and unanimously agreed to the issuance of Statement No. 55, The Hierarchy of Generally Accepted Accounting Principles for State and Local Governments.

Minutes of Meeting, February 17, 2009

The Board reviewed and discussed the preballot draft of a final Statement and agreed to proceed to a ballot draft.

Minutes of Meeting, August 19-21, 2008

The Board began the deliberations on August 20 in Norwalk with a discussion of the ballot draft of the proposed Statement, The Hierarchy of Generally Accepted Accounting Principles for State and Local Governments. The Board accepted the changes made pursuant to the previous month’s meeting and suggested a few additional modifications before the combined meeting with the Federal Accounting Standards Advisory Board the following day. In addition to several editorial items, the Board agreed to eliminate the standard transition guidance from the Exposure Draft and to add a footnote reference about the continuing applicability of Rule 203 of the AICPA’s Code of Professional Conduct. The meeting of the combined Boards in Washington, DC began with a review of the status of each Board’s progress to date. No additional changes were suggested during the Washington, DC meeting for the GASB’s proposed Statement. The six GASB members voted unanimously to approve the issuance of the Exposure Draft.

Minutes of Meeting, July 8-10, 2008

The Board reviewed the preballot draft of the GAAP Hierarchy Exposure Draft and tentatively agreed to add a reference to the International Public Sector Accounting Standards Board in the discussion of other accounting literature. Several editorial or wording changes were also suggested.

The Board will consider the ballot draft at the August meeting.

Minutes of Meeting, May 21-23, 2008

The Board began the session with a discussion about the related party transactions section of the issues paper. The Board members generally agreed with the staff’s approach; however, it was suggested that some additional language be added to recognize the difficulty often faced in determining the substance versus form of transactions between related parties. The project staff will incorporate the suggested content into the draft for the next meeting. The Board also tentatively agreed that the Exposure Draft should refer to the disclosure requirements in FASB Statement No. 57, Related Party Disclosures.

With regard to the going concern considerations issue, the Board tentatively agreed with a Board member suggestion that the Exposure Draft address the absence of specific guidance in situations in which a governmental entity’s ability to continue as a going concern is beyond a reasonable doubt. The Board generally supported the staff’s recommendations regarding the carrying forward of the GAAP Hierarchy and the accounting guidance for subsequent events from the AICPA Statements of Auditing Standards (SASs).

The Board also discussed the issue of Considering the Effects of Prior-Year Misstatements When Quantifying Misstatements in Current-Year Financial Statements, as established in the Securities and Exchange Commission’s Staff Accounting Bulletin 108, of the same title. A board member suggested that the issue be dropped from the project primarily for two reasons. First, it is dissimilar to the other issues in the sense that it does not represent accounting guidance in the SASs, and second, because governments have traditionally corrected prior-year misstatements by restating beginning net assets/fund balances, rather than correcting previously issued financial statements. Following the discussion, the Board agreed to eliminate that issue from the project scope.

GAAP Hierarchy—Major Tentative Decisions

Statement No. 55, The Hierarchy of Generally Accepted Accounting Principles for State and Local Governments, was approved in March 2009.

GAAP Hierarchy—Relevant Links