Generally Accepted Accounting Principles (GAAP) hierarchy is a tiered system that serves as a guideline for accountants and other financial professionals seeking answers to questions regarding financial reporting rules and regulations. When looking for an answer, accountants and chief financial officers should go to the top of the hierarchy and work their way down until they find an applicable principle. The system of GAAP hierarchy, which is an important component of the concept of generally accepted accounting principles in the Unites States, is intended to ensure unanimity in the way that corporation finances are reported. There are four tiers in the hierarchy, ranging from statements and opinions issued and accepted as standards by the Financial Accounting Standards Board (FASB) and American Institute of Certified Public Accountants (AICPA) at the top to generally accepted practices at the bottom.
It is important that all financial reporting occurs on a level playing field. Otherwise, some companies could use creative bookkeeping to skew their bottom lines and make themselves look more valuable than they are. Generally accepted accounting principles also must be used to ensure that corporations pay a fair amount of taxes. When reporting questions arise, corporate bookkeepers must understand the GAAP hierarchy before they go looking for answers.
As of 2011, the most recently established version of the GAAP hierarchy was established in the United States by FASB Statement 162 in 2008. When a pertinent financial reporting issue is raised by a company, it should first go to the top of the hierarchy, at Level A, to seek out the proper source for the answer. If no source is available at Level A, Level B should be consulted, and so on down the line until an answer is found.
At the top of the GAAP hierarchy are the standards set by the FASB and AICPA. This level is comprised of official rulings that have been reached by these organizations and are published so that they may be consulted by corporations. Level B is comprised of technical guides and bulletins agreed upon by these two overseeing organizations.
After that, the GAAP hierarchy continues with Level C, which is comprised of technical releases of a committee devoted to the accounting and auditing policies within the FASB. Level D contains guides that are published by members of the FASB. If those don't contain any applicable answers, general practices that are widely accepted and used by government organizations should be used as the basis for the actions of corporations in their financial reporting.
