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 currently 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

Although there is no single reference source for GAAP, there is a hierarchy established by the AICPA in Statement on Auditing Standards No. 69, The Meaning of "Present Fairly in Conformity With Generally Accepted Accounting Principles" in the Independent Auditor's Report (SAS 69). At the foundation of that hierarchy are the principles established by the FASB and its predecessors, the APB and the AICPA Committee on Accounting Procedure. From that foundation, the hierarchy formulates a "pecking order" for all the rules and procedures that are incorporated in the preparation of financial statements and that have come to be known as GAAP.

The GAAP hierarchy includes four successive categories (A-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 ac counting literature should be considered. How ever, 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 Ac counting Standards and 44 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:5

• 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.

The AICPA's Accounting Standards Executive Committee (AcSEC), which works closely with the FASB and its staff, is the senior technical committee of the AICPA authorized to set accounting standards and to speak for the AICPA on accounting matters. AcSEC's standard-setting activities are often industry-specific or narrow in scope, whereas the FASB's activities result in standards that are more general and broader in scope. AcSEC issues AICPA Statements of Position, which present conclusions with respect to an emerging problem or diversity in practice. In addition, AcSEC issues AICPA Audit and Accounting Guides, which either interpret GAAP as applicable to a specific industry or, in some cases, establish industry-specific GAAP. For example, Guides have been published for agricultural producers and cooperatives, airlines, casinos, construction contractors, and health care organizations.

Category C Category C consists of (1) AcSEC Practice Bulletins that have been cleared by the FASB and (2) consensus positions of the FASB Emerging Issues Task Force (EITF). AcSEC Practice Bulletins are available individually from the AICPA as published and are also included collectively in AICPA Technical Practice Aids. Consensus positions of the EITF are available individually from the FASB as published and are included collectively in EITF Abstracts, which is published by the FASB.

The EITF was established by the FASB in 1984 to assist in the early identification of emerging issues affecting financial reporting and of problems in implementing authoritative pronouncements. Each EITF Abstract summarizes the accounting issue involved and the results of the EITF discussion, including any consensus reached on the issue. Each Abstract also reports, in its "status" section, subsequent developments on that issue, such as issuance of a relevant Securities and Exchange Commission Staff Accounting Bulletin or an FASB Technical Bulletin. If the EITF can reach consensus on an issue, usually that is taken as an indication that no action is needed by the FASB or AcSEC. Alternatively, if no consensus is possible, it may be an indication that action by one of those bodies is necessary.

AcSEC Practice Bulletins are used to disseminate AcSEC's views for the purpose of providing practitioners and preparers with guidance on narrow financial accounting and reporting issues.6 The issues covered by Practice Bulletins are limited to those that have not been and are not being considered by the FASB. Therefore, AcSEC Practice Bulletins, which are reviewed by the FASB, are only issued after the FASB has informed AcSEC that it has no current plans to consider the issue.

Category D Category D includes (1) AICPA Accounting Interpretations, (2) FASB staff implementation guides, and (3) practices that are widely recognized and prevalent either generally or in an industry.

AICPA Accounting Interpretations (not to be confused with FASB Interpretations, which are included in Category A) were issued from March 1971 through November 1973. The purpose of the interpretations was to provide timely guidance for applying APB Opinions without the formal procedures required for an APB Opinion. In addition, they were used to clarify points on which past practice may have varied and been considered generally accepted. The interpretations, prepared by AICPA staff and reviewed by members of the accounting profession, are not considered to be official pronouncements of the APB. Although most of the interpretations have been superseded by other accounting standards, Volume II of Original Pronouncements includes those that continue in effect as well as reference pages for those that have been superseded.

Implementation guides, which appear in a question-and-answer format, are issued as aids to understanding and implementing various FASB Statements. Typically, those guides are issued when an unusually high number of inquiries are received and the accounting required by a given FASB Statement is particularly complex. The positions and opinions expressed in those guides are those of the FASB staff and do not represent official positions of the FASB. Staff implementation guides are available individually from the FASB as published and also are included collectively in FASB Staff Implementation Guides.

OTHER ACCOUNTING LITERATURE

Occasionally new transactions or events for which there are no established accounting principles must be reported. In those instances, it is sometimes possible to identify an analogous transaction or event for which there is an established principle and report the new transaction or event similarly. In the absence of a pronouncement in one of the four categories above or an analogous transaction or event, other accounting literature should be considered. Examples of other literature include: FASB Concepts Statements; APB Statements; AICPA (AcSEC) Issues Papers; pronouncements of other accounting standard-setting bodies, professional associations, or regulatory agencies; technical information service inquiries; and accounting textbooks, handbooks, and articles.

SUMMARY

Generally accepted accounting principles are not a set of specific circumscribed standards that can be easily found in one convenient set of rules. Rather, they are an amalgam arising from various sources and with an established hierarchy. Generally accepted accounting principles range from official standards established by the FASB, through literature from the AICPA, to, in some situations, articles. Yet the system seems to work reasonably well. Financial statements prepared pursuant to GAAP are highly regarded in the United States for the quality and comparability of the information they provide. Thus, investors and other users have been well served by our system of financial reporting, which results in the fair presentation of financial information prepared in conformity with generally accepted accounting principles.