Question

What is the hierarchy of GAAP for state and local governments

Answer 1

The Governmental Accounting Standards Board (GASB) issued guidance on June 29 that is intended to make the hierarchy of Generally Accepted Accounting Principles (GAAP) less complex for users of state and local government financial statements.

Under GASB Statement No. 76, the Hierarchy of Generally Accepted Accounting Principles for State and Local Governments, the standard-setting board reduced the GAAP hierarchy from four categories to two. Those two categories of authoritative GAAP include:

1. GASB statements of governmental accounting standards.
2. GASB technical bulletins and implementation guides, as well as guidance from the American Institute of CPAs that are specifically cleared by the GASB.

Category A guidance always takes precedence. Category B guidance is relevant if the appropriate accounting treatment for a transaction or event is not specified by a pronouncement in Category A. If specific guidance cannot be found in either category, financial statement preparers and auditors are to consider guidance in both categories for similar transactions or events (unless the treatment itself, or its application by analogy, is prohibited).

The GAAP hierarchy identifies the sources of guidance that state and local governments follow when preparing financial statements in conformity with GAAP and lists the order of priority for pronouncements to which a government should look for guidance. This GAAP Hierarchy also identifies non-authoritative sources of GAAP that could be useful to financial statement preparers and auditors if relevant authoritative guidance is not available (presuming it does not contradict authoritative guidance):

(i) GASB Concepts Statements.

(ii) Guidance of other standard-setting bodies (Financial Accounting Standards Board, Federal Accounting Standards Advisory Board, International Public Sector There are multiple potential sources of guidance as to what constitutes GAAP for state and local governments. 48 Government Finance Review | December 2015 Accounting Standards Board, International Accounting Standards Board).

(iii) Relevant AICPA guidance not cleared by the GASB.

(iv) Widely recognized and prevalent practice.

(v) Other literature (professional associations, regulatory agencies, accounting textbooks, handbooks, and articles).

When evaluating the usefulness of such non-authoritative guidance, financial statement preparers and auditors will need to consider the following factors:

(i) Consistency with GASB Concepts Statements (primary consideration).

(ii) Relevance. n Specificity.

(iii) General recognition of the issuer or author as an authority.

Also, GASB Statement No. 76 clarifies that the GASB’s Codification of Governmental Accounting and Financial Reporting Standards (Codification) may itself be quoted as a direct source of authoritative guidance, rather than the underlying standards.