Hierarchy Of GAAP

GAAP stands for "Generally Accepted Accounting Principles." It lays out the rules accountants are supposed to follow when they prepare a company's books. Like any set of rules, the seriousness varies depending on the pronouncement.

Some restrictions are iron-clad moral laws. Others more resemble guidlines. Meanwhile, some rules apply across the board, in all situations. Others only come up in very narrow circumstances.

You see a speed limit sign. You take the 65 mph restriction under advisement, but you don't feel too badly if you end up going 72. On a deserted road on a clear day, you don't feel much guilt cranking up the radio and pounding your foot on the gas, sailing along in the mid-90s.

However, the law against murder isn't something you mess around with. If someone comes at you with a pitchfork, you might use violence to defend yourself. But, in general, you don't routinely go around casually breaking that rule.

That's how the Hierarchy of GAAP works. It breaks down GAAP rules by their importance and applicability. The top-end of the hierarchy presents the general, wide-sweeping items. At the lower-end, it details more situational/technical matters that might only apply in very specific circumstances.

There are four levels to the hierarchy. Each is defined by where the rule is published.

At the top are statements made by the GAAP governing bodies, the Financial Accounting Standards Board (FASB), and opinions by the American Institute of Certified Public Accountants (AICPA). On the other end of the spectrum are implementation Q&As produced by FASB staff and other more niche publications put out by the AICPA.