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Statement of Federal Financial Accounting Standards 34:

The Hierarchy of Generally Accepted Accounting

Principles, Including the Application of Standards Issued

by the Financial Accounting Standards Board

Status

Summary

The Federal Accounting Standards Advisory Board (FASAB) is the body designated by the

American Institute of Certified Public Accountants (AICPA) as the source of generally accepted

accounting principles (GAAP) for federal reporting entities.

As such, the FASAB is responsible

for identifying the GAAP hierarchy for federal reporting entities. The GAAP hierarchy consists

of the sources of accounting principles and the framework for selecting the principles used in the

preparation of general purpose financial reports

of federal reporting entities that are presented in

conformity with generally accepted accounting principles. However, the hierarchy for selecting

the principles used in the preparation of general purpose financial reports by federal reporting

entities was set forth in the AICPA Statement on Auditing Standards (SAS) No. 91, Federal

GAAP Hierarchy, rather than in the authoritative literature of the FASAB. This Statement

incorporates the hierarchy into the FASAB’s authoritative literature.

Incorporating the GAAP hierarchy into the authoritative literature of the FASAB is not intended to

cause a sudden and dramatic change in practice for federal entities. This Statement permits

those federal entities currently applying financial accounting and reporting standards issued by

the Financial Accounting Standards Board (FASB) to continue to do so. In addition, given that

the FASAB is the source of GAAP for federal entities, the Statement clarifies that a federal entity

that is preparing GAAP-based general purpose financial reports for the first time is required to

implement FASAB standards unless, in consultation with its auditors and bodies with oversight

authority, the entity clearly demonstrates that the needs of its primary users would be best met

through the application of FASB standards.

Issued July 28, 2009

Effective Date Upon issuance.

Affects None.

Affected by None.

Statement of Federal Financial Accounting Concepts (SFFAC) 2, Entity and Display, discusses the criteria for defining

federal reporting entities. Also, the terms federal reporting entity and federal entity are used interchangeably

throughout this Statement.

The term general purpose financial report is used throughout this Statement as a generic term to refer to the report

that contains the entity’s financial statements that are prepared pursuant to generally accepted accounting principles.

In the federal government, the report is known as the Performance and Accountability Report or the Agency Financial

Report.

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Table of Contents

Summary 1

Introduction 3

Purpose 3

Materiality 3

Effective Date 3

Accounting Standards 4

Scope 4

The Hierarchy of Generally Accepted Accounting Principles 4

Other Accounting Literature 5

Application of Standards Issued by the Financial Accounting Standards Board 6

Effective Date 7

Appendix A: Basis for Conclusions 8

Appendix B: Abbreviations 14

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Introduction

Purpose

1. The objective of this Statement is to identify the sources of accounting principles and the

framework for selecting the principles used in the preparation of general purpose financial

reports of federal reporting entities

that are presented in conformity with generally accepted

accounting principles (the GAAP hierarchy).

a. This Statement responds to a request from the American Institute of Certified Public

Accountants (AICPA) that FASAB incorporate the GAAP hierarchy, which currently

resides in the professional auditing literature, into the accounting literature.

b. This Statement also addresses (1) whether federal entities currently applying

standards issued by the Financial Accounting Standards Board (FASB) may continue

that practice, and (2) whether federal entities that are preparing GAAP-based general

purpose financial reports for the first time may also apply FASB standards.

Materiality

2. The provisions of this Statement need not be applied to immaterial items. The determination

of whether an item is material depends on the degree to which omitting or misstating

information about the item makes it probable that the judgment of a reasonable person

relying on the information would have been changed or influenced by the omission or the

misstatement.

Effective Date

3. The requirements in this standard are effective upon its issuance.

Statement of Federal Financial Accounting Concepts 2, Entity and Display, provides criteria for identifying federal

reporting entities. In addition, the Board is currently developing standards defining the federal reporting entity.

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Accounting Standards

Scope

4. This Statement applies to the general purpose financial reports of all federal reporting

entities that are presented in conformity with generally accepted accounting principles

(GAAP).

The Hierarchy of Generally Accepted Accounting Principles

5. The hierarchy of generally accepted accounting principles, hereafter referred to as the

GAAP hierarchy, governs what constitutes GAAP for federal reporting entities. It lists the

priority sequence of pronouncements that a federal reporting entity should look to for

accounting and financial reporting authoritative guidance. The sources of accounting

principles that are generally accepted are categorized in descending order of authority as

follows:

a. Officially established accounting principles consist of FASAB Statements of Federal

Financial Accounting Standards (Standards) and Interpretations. FASAB Standards

and Interpretations will be periodically incorporated in a publication by the FASAB.

b. FASAB Technical Bulletins and, if specifically made applicable to federal reporting

entities by the AICPA and cleared

by the FASAB, AICPA Industry Audit and

Accounting Guides.

c. Technical Releases of the Accounting and Auditing Policy Committee of the FASAB.

d. Implementation guides published by the FASAB staff, as well as practices that are

widely recognized and prevalent in the federal government.

The AICPA has designated the FASAB as the source of GAAP for federal reporting entities. Therefore, FASAB GAAP

would be the appropriate accounting standards for federal reporting entities in the executive, legislative, and judicial

branches.

For purposes of interpreting category (b), the word cleared means that the FASAB does not object to the

pronouncement’s issuance.

Such pronouncements specifically made applicable to federal reporting entities are presumed to have been cleared

by the FASAB, unless the pronouncement indicates otherwise.

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6. If the accounting treatment for a transaction or event is not specified by a pronouncement in

category (a), a federal reporting entity should consider whether the accounting treatment is

specified by an accounting principle from a source in another category. In such cases, if

categories (b)–(d) contain accounting principles that specify accounting treatments for a

transaction or event, the federal reporting entity should follow the accounting treatment

specified by the accounting principle from the source in the highest category—for example,

follow category (b) treatment over category (c) treatment.

7. If the accounting treatment for a transaction or event is not specified by a pronouncement or

established in practice as described in categories (a)–(d), a federal reporting entity should

then consider accounting principles for similar transactions or events within categories (a)–

(d) before considering Other Accounting Literature discussed in paragraph 8. For example,

it might be appropriate to report the event or transaction by applying, in a similar manner, an

accounting principle established within categories (a)-(d) for an analogous transaction or

event on the basis of its substance.

A federal reporting entity should not follow the

accounting treatment specified in accounting principles for similar transactions or events in

cases in which those accounting principles either (a) specifically prohibit the application of

the accounting treatment to the particular transaction or event or (b) indicate that the

accounting treatment should not be applied to other transactions or events by analogy.

Other Accounting Literature

8. Other Accounting Literature includes, for example, FASAB Concepts Statements; the

pronouncements referred to in category (b) of paragraph 5 when not specifically made

applicable to federal reporting entities by the FASAB; pronouncements of other accounting

and financial reporting standards-setting bodies, such as the FASB, Governmental

Accounting Standards Board, International Accounting Standards Board, and International

Public Sector Accounting Standards Board; professional associations or regulatory

agencies; and accounting textbooks, handbooks, and articles. The appropriateness of

other accounting literature depends on its relevance to particular circumstances, the

specificity of the guidance, and the general recognition of the issuer or author as an

authority. For example, FASAB Concepts Statements would normally be more influential

than other sources in this category.

Generally accepted accounting principles recognize the importance of reporting transactions and events in

accordance with their substance. Consideration should be given to whether the substance of transactions or events

differs materially from their form.

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Application of Standards Issued by the Financial Accounting Standards

Board

9. Some federal entities, including government corporations listed in the Government

Corporation Control Act and certain others, such as the United States Postal Service,

continue to publish financial reports pursuant to the accounting and reporting standards

issued by the FASB. Some entities also may be required to prepare statements pursuant to

standards set by a regulatory agency (e.g., the Federal Energy Regulatory Commission

(FERC)). General purpose financial reports prepared in conformity with accounting

standards issued by the FASB also may be regarded as in conformity with GAAP for those

entities that have in the past issued such reports.

10. Except as provided in paragraph 11, a federal entity that is preparing GAAP-based general

purpose financial reports for the first time should implement FASAB standards as FASAB is

the preferred method of reporting for federal entities.

11. In rare instances, a federal entity that is preparing GAAP-based general purpose financial

reports for the first time may, in consultation with its auditors and bodies with oversight

authority, elect to apply standards issued by the FASB if the entity clearly demonstrates that

the needs of its primary users would be best met through the application of FASB standards.

Unique user needs can arise from various sources that include, but are not limited to,

investors, SEC requirements, bondholders, and customers. Entities may determine that the

application of standards issued by the FASB more appropriately meets these unique user

needs. This determination should involve a number of considerations. Examples of factors

to consider include but are not limited to:

a. The entity’s primary funding is derived from a source other than through annual federal

appropriations.

b. The entity has been delegated the financial and operational authority to carry on its

activities in a manner similar to private business enterprises.

c. The entity sells goods and/or services to individuals outside of the government

reporting entity as its principal activity.

The FASAB has an existing project underway that will assist the Board in determining whether certain federal entities

should be permitted to continue applying FASB GAAP and, if so, whether additional reporting should be required. This

project will also consider whether federal entities should be permitted to convert from FASB standards to International

Financial Reporting Standards published by the International Accounting Standards Board.

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d. The entity is intended to, in the normal course of its operations, maintain its operations

and meet its liabilities from revenues received from sources outside of the federal

government reporting entity.

e. It is desirable to compare general purpose financial reports of the federal entity that is

preparing GAAP-based general purpose financial reports for the first time with an

existing entity that is already following FASB GAAP.

12. While the application of standards issued by the FASB may be acceptable for a limited

number of federal entities as noted above, entities that have already implemented standards

issued by the FASAB should continue to apply the federal standards, as FASAB is the

preferred method of reporting for federal entities.

Effective Date

13. The requirements in this standard are effective upon its issuance.

The provisions of this Statement need not be applied to information if the effect of applying the

provision(s) is immaterial. Refer to Statement of Federal Financial Accounting Concepts 1,

Objectives of Federal Financial Reporting, chapter 7, titled Materiality, for a detailed discussion

of the materiality concepts.

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Appendix A: Basis for Conclusions

This appendix discusses some factors considered significant by Board members in reaching the

conclusions in this Statement. It includes the reasons for accepting certain approaches and

rejecting others. Individual members gave greater weight to some factors than to others. The

standards enunciated in this Statement–not the material in this appendix–should govern the

accounting and reporting for specific transactions, events, or conditions.

This Statement may be affected by later Statements. The FASAB Handbook is updated annually

and includes a status section directing the reader to any subsequent Statements that amend this

Statement. Within the text of the Statements, the authoritative sections are updated for changes.

However, this appendix will not be updated to reflect future changes. The reader can review the

basis for conclusions of the amending Statement for the rationale for each amendment.

Project History

A1. Representatives of the American Institute of Certified Public Accountants (AICPA)

requested that the U.S. accounting standards-setters consider adopting certain guidance for

accounting and financial reporting issues that now reside in the professional auditing

literature. In July 2008, the FASAB joined the Governmental Accounting Standards Board in

responding to this request.

A2. In October 1999, The AICPA designated the FASAB as the standards-setting body for

federal entities. As such, the FASAB is responsible for identifying the sources of accounting

principles and providing federal entities with a framework for selecting the principles used in

the preparation of general purpose financial reports that are presented in conformity with

GAAP (GAAP hierarchy). The Board believes that incorporation of the GAAP hierarchy into

the FASAB’s authoritative literature would more clearly convey that financial statement

preparers are responsible for selecting the sources of the principles to be used in the

preparation of general purpose financial reports that are presented in conformity with GAAP.

The structure presented in this Statement generally carries forward the hierarchy as set

forth in SAS 91 and the Office of Management and Budget (OMB) Circular A-136, Financial

Reporting Requirements.

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Application of Standards Issued by the Financial Accounting Standards

Board

A3. Although the FASAB’s standards have been recognized as GAAP for federal entities

(FASAB GAAP) since October 1999, some federal entities follow GAAP for

nongovernmental entities promulgated by the private sector Financial Accounting Standards

Board (FASB GAAP). For example, federal government corporations, the U.S. Postal

Service, certain component entities of the U.S. Department of the Treasury, and some

smaller entities in the executive and legislative branches have historically applied FASB

GAAP and continue to do so.

A4. In early 2000, the FASAB recognized this practice as acceptable for those entities that had

been following FASB GAAP to avoid an immediate and unanticipated requirement that

these federal entities follow federal GAAP after the FASAB was recognized as the Rule 203

standards-setting body for the federal government. This guidance was published in the

January – March 2000 issue of FASAB News

and was intended as a temporary measure in

light of the unanticipated consequences of Rule 203 recognition. The existence of the issue

has also been acknowledged in Statement of Federal Financial Accounting Concepts

(SFFAC) 2, Entity and Display (paragraph 78); Statement of Federal Financial Accounting

Standards (SFFAS) 5, Accounting for Liabilities of the Federal Government (inside front

cover and Appendix A, paragraph 142); SFFAS 8, Supplementary Stewardship Reporting

(Introduction paragraph 40); and, SFFAS 24, Selected Standards for the Consolidated

Financial Report of the United States Government (Appendix A, paragraph 20).

A5. Providing interim guidance on the application of standards issued by the FASB serves to

proactively address entity concerns that moving the hierarchy of generally accepted

accounting principles into the accounting literature without addressing the use of FASB

GAAP would require a sudden and dramatic change in practice.

Application to Legislative and Judicial Branches

A6. The FASAB’s sponsors do not prescribe accounting standards for the legislative and judicial

branches. The legislative and judicial branches, and most entities within those branches,

are not currently required to prepare general purpose financial reports and those that do

prepare statements are not subject to any requirements by the FASAB’s sponsors to follow

FASAB GAAP or prepare a reconciliation between FASAB GAAP and FASB GAAP.

However, as the source of GAAP for federal reporting entities, FASAB GAAP would be the

FASAB News, Jan.-March 2000, p. 2.

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appropriate accounting standards for these entities to adopt if they prepare GAAP-based

general purpose financial reports.

Exposure Draft

A7. The Board published the exposure draft (ED), The Hierarchy of Generally Accepted

Accounting Principles for Federal Entities, Including the Application of Standards Issued by

the Financial Accounting Standards Board, on December 2, 2008, with comments

requested by February 3, 2009. Upon release of the ED, notices and press releases were

provided to: The Federal Register, FASAB News, The Journal of Accountancy, AGA Today,

the CPA Journal, Government Executive, the CPA Letter, and Government Accounting and

Auditing Update, The CFO Council, the Presidents Council on Integrity and Efficiency,

Financial Statement Audit Network, and the Federal Financial Managers Council, and

committees of professional associations generally commenting on EDs in the past.

A8. This broad announcement was followed by direct mailings of the ED to the Subcommittee

on Federal Financial Management, Government Information, and International Security,

Committee on Homeland Security and Governmental Affairs, United States Senate; and the

Subcommittee on Government Management, Organization, and Procurement, Committee

on Oversight and Government Reform, House of Representatives.

A9. The Board received 31 response letters from the following sources:

A10. The Board did not rely on the number in favor of or opposed to a given position. Information

about the respondents’ majority view is provided only as a means of summarizing the

comments. The Board considered the arguments in each response and weighed the merits

of the points raised. The respondents’ comments are summarized below.

A11. Respondents generally agreed that the hierarchy of GAAP that currently resides in the

professional auditing literature should be incorporated into the FASAB’s authoritative

literature. Also, respondents generally agreed that: 1) general purpose financial reports

prepared in conformity with accounting standards issued by the FASB should be regarded

as being in conformity with GAAP for those federal entities that have in the past issued such

FEDERAL

(Internal)

NON-FEDERAL

(External)

Users, academics, others 3

Auditors 5 1

Preparers and financial managers 22

Totals 27 4

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reports, and 2) a federal reporting entity that is preparing GAAP-based general purpose

financial reports for the first time should implement FASAB standards unless the entity

clearly demonstrates that the needs of its primary users would be best met through the

application of FASB standards.

A12. However, some respondents believed it would be useful to clarify certain aspects of the

Statement. Some respondents believed it would be useful to clarify where administrative

directives (e.g. OMB, Government Accountability Office, and Department of the Treasury

guidance) would be considered in the hierarchy. Some respondents questioned if “Other

Accounting Literature” was a part of or separate from the hierarchy.

A13. In addition, some respondents believed that those federal entities following FASB standards

could be required to reconsider their practices. For example, if they receive federal

appropriations, they should follow FASAB standards.

Clarifying the GAAP Hierarchy and Other Accounting Literature

A14. Paragraph 5 of the Statement presents the GAAP hierarchy for federal entities, and the

Board expects practice to be governed by this hierarchy. The hierarchy presented in the ED

referred to AICPA Statements of Position (SOP) and Practice Bulletins specifically made

applicable to federal reporting entities and cleared by the FASAB. However, the FASB is

codifying its accounting standards and SOPs and Practice Bulletins will generally be

incorporated into the codification and have no continued authority. Because of this matter

and because no SOPs and Practice Bulletins have been specifically made applicable to

federal reporting entities and cleared by the FASAB, these sources were removed from the

hierarchy.

A15. In addition, while some respondents believed that it would be useful to discuss the location

of administrative directives within the hierarchy, the FASAB believes that incorporating the

GAAP hierarchy in the accounting standards should be accomplished expeditiously due to

the AICPA’s planned removal of the hierarchy from the auditing standards. Since FASAB is

unaware of any practice problems arising due to the absence of explicit guidance placing

each type of administrative directive within the hierarchy, immediate action on this request is

not warranted.

FASAB also notes that there are multiple sources of administrative

directives, many types of directives, and varying processes for developing directives.

Resolving placement for all administrative directives may require significant study.

This request will be considered when the Board reviews its technical agenda to select new projects.

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Therefore, the Board is acting to adopt the GAAP hierarchy essentially as it currently exists

in the AICPA audit literature and does not intend to change current practices.

A16. Paragraphs 6 and 7 of the Statement provide guidance to assist readers in understanding

how the hierarchy should be considered when preparing general purpose financial reports in

conformity with GAAP.

A17. Paragraph 7 also discusses when to consider literature not discussed in the GAAP

hierarchy - Other Accounting Literature. The phrase “Other Accounting Literature” is

capitalized in the Statement and included under a separate heading to indicate its distinction

from the GAAP literature. Other Accounting Literature is presented separately from the

hierarchy because the items in this category do not establish GAAP and cannot amend

existing FASAB standards, interpretations, technical bulletins or releases, or staff

implementation guidance. Other Accounting Literature may only be relied upon by financial

statement preparers and auditors to resolve specific accounting issues in the absence of

literature in paragraph 5 of the Statement.

A18. The Board also recognizes that other standards-setting bodies are currently considering

codifying their pronouncements. As a result, listing the titles of specific pronouncements in

Other Accounting Literature may cause difficulty in referencing those documents in the

future. Thus, paragraph 8 of the Statement refers to pronouncements of other standards-

setting bodies rather than listing specific pronouncements.

Entities Following FASB GAAP

A19. As noted above, the Board primarily intended to incorporate the GAAP hierarchy into the

FASAB’s accounting literature and did not intend to change existing practices at this time.

The Board is continuing a separate project on reporting by federal entities that primarily

apply standards issued by the FASB. The project intends to determine whether certain

federal entities should be permitted to continue following FASB GAAP and what additional

reporting, if any, is needed for stand-alone financial reports of federal entities that are

permitted to continue applying FASB accounting standards.

A20. Paragraph 9 of the Statement states that those federal entities preparing general purpose

financial reports in conformity with FASB accounting and reporting standards are permitted

to continue current practices. The Statement does not preclude those entities from

reconsidering those practices.

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Board Approval

A21. This statement was approved for issuance by all members of the Board. The written ballots

are available for public inspection at the FASAB's offices.

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Appendix B: Abbreviations

AICPA American Institute of Certified Public Accountants

FASAB Federal Accounting Standards Advisory Board

FASB Financial Accounting Standards Board

GAAP Generally Accepted Accounting Principles

GAO Government Accountability Office

GASB Governmental Accounting Standards Board

IASB International Accounting Standards Board

IPSASB International Public Sector Accounting Standards Board

OMB Office of Management and Budget

SAS Statement on Auditing Standards

SFFAC Statement of Federal Financial Accounting Concepts