The Hierarchy of Generally Accepted Accounting Principles (GAAP) is the foundation for the accounting and financial reporting of private businesses and not-for-profit organizations. It offers the framework for choosing which accounting standards should be applied and how their interpretations should be applied in a given situation. The hierarchy of GAAP is often referred to as the four levels of GAAP as it is a four-tiered system.

The four levels of GAAP are:

Level 1 – SEC Regulations

At this level are the Regulations issued by the U.S. Securities and Exchange Commission (SEC). These regulations detail the rules governing the financial reporting of publicly-held companies. They provide the most authoritative guidance on financial statements for SEC registrants and should be followed above all else.

Level 2 – Accounting Standards Codification (ASC)

The Accounting Standards Codification provides the most comprehensive source of authoritative accounting guidance in the U.S. The Codification is issued by the Financial Accounting Standards Board (FASB) and is organized by topic. It covers all aspects of financial accounting and reporting in a consistent and understandable framework.

Level 3 – AICPA Statements on Auditing Standards (SASs)

The auditing standards issued by the American Institute of Certified Public Accountants (AICPA) stand at level three in the hierarchy. The AICPA SASs provide guidance to auditors on how to conduct company audits. The SASs describe the elements of an audit, the procedures an auditor should take when conducting an audit, and the standards of performance that should be followed when performing an audit.

Level 4 – Industry Practices and Procedures

At the lowest level of the GAAP hierarchy are industry practices and procedures. These include practices and procedures specific to a particular industry. They often differ from one industry to another and are generally accepted as good accounting practice within their respective industries.

The hierarchy of GAAP is an important tool to ensure that all financial statements comply with the appropriate standards. While some knowledge of lower-tier guidance is important for understanding how to read and prepare financial statements, the reporting accountant should always ensure that the highest level of guidance is being followed. Failing to adhere to higher-level guidance can lead to incorrect reporting or misstatements of financial information. Additionally, it is important to note that the primary purpose of the hierarchy of GAAP is to provide guidance in the preparation of financial statements; it is not meant to be used as a substitute for professional judgment. Ultimately, it is up to the reporting accountant to use the information presented in the GAAP hierarchy to accurately and fairly prepare financial statements.