Is There a Gap in Your Knowledge of GAAP?

Abstract

As recent accounting scandals have demonstrated, an understanding of the accounting rules underlying financial information is important before analysts or users of financial statements can rely on that information. Accounting guidance comes from numerous sources. We summarize the sources of generally accepted accounting principles, explain the hierarchy of these sources of guidance, and indicate where analysts and users of financial statements can find the electronic and printed texts of the rules.

The Enron Corporation scandal and other high-profile accounting investigations have demonstrated the importance of understanding how accounting rules are applied in preparing financial statements. Thus, financial analysts and other users of financial statements need to increase the attention they pay to the rules underlying companies' financial statements. Most financial statement users are familiar with the term “generally accepted accounting principles” and are familiar with key U.S. accounting rules, but few users of financial statements know what constitutes the universe of GAAP or where such information can be found. We set forth precisely the constituents of the GAAP universe, the various sources of GAAP, the relative position of each source in the hierarchy of accounting authority, and where this information can be found.

The hierarchy of GAAP consists of five categories. Category A, the most authoritative level, includes Financial Accounting Standards Board (FASB) Statements of Financial Accounting Standards (SFAS) and Interpretations, Accounting Principles Board Opinions, and Accounting Research Bulletins issued by the American Institute of Certified Public Accountants (AICPA). Category B is a lower tier of authoritative documents issuing from the FASB and AICPA. An important part of Category C is consensus positions of FASB's Emerging Issues Task Force, which provides financial reporting guidance that is more timely than SFAS can be. Category D consists of such material as AICPA Accounting Interpretations and FASB Staff Implementation Guides, as well as sundry industry practices that are widely followed (but do not have the imprimatur granted GAAP in the first tier). Category E is a catchall group that includes written sources of accounting authority ranging from FASB Statements of Financial Accounting Concepts to accounting textbooks.

Also in the GAAP universe are pronouncements and rules established by the U.S. SEC under its power to establish accounting standards for publicly traded companies.

Unfortunately, no single source contains all these materials. We describe several paper and online sources, however, that can be consulted. The primary electronic resource for materials promulgated by the FASB is the Financial Accounting Research System, which is available on CD-ROM. Most of the same material is also available in a printed volume, Annual Bound Editions of FASB Original Pronouncements and Current Text. Many of the AICPA materials are now available through a new service, reSOURCE, which is offered by the AICPA via CD-ROM or via a fee-based Internet service. For relevant SEC material, the most comprehensive source is Lexis-Nexis, a fee-based service that is now available on the Web. In addition, a number of specialized accounting databases are available.