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Some have likened the hierarchy of generally accepted accounting principles to a house, with different floors corresponding to the different levels of authority of the various standards. (See JofA, June84, page 122.) The "house of GAAP" rests on a foundation of general concepts, such as those outlined in Governmental Accounting Standards Board and Financial Accounting Standards Board concepts statements. In May, the American Institute of CPAs auditing standards board unveiled proposed revisions to the accounting standards hierarchy. The changes, in the form of an exposure draft of a proposed statement on auditing standards, The Meaning of "Present Fairly in Conformity With Generally Accepted Accounting Principles" in the Independent Auditor's Report, would remodel the house of GAAP by changing the levels of authority of certain accounting pronouncements.
MOTIVATION FOR THE PROJECT
The impetus for revising the GAAP hierarchy was the decision in late 1989 of the Financial Accounting Foundation (FAF), which oversees both the FASB and GASB, to request a change in the accounting hierarchy for state and local government entities. The existing hierarchy, described in AICPA Professional Standards, AU section 411, was established shortly after the GASB began operations in 1984. The existing hierarchy provides category (a) status for GASB statements and interpretation regarding state and local government entities; however, if the accounting treatment of a transaction or event is not specified by the GASB, applicable FASB pronouncements are presumed to apply. As a result, state and local government entities are required to follow a FASB standard even if the GASB is currently addressing the issue.
A 1989 FAF report, The Structure for Establishing Governmental Accounting Standards, found the existing hierarchy was causing difficulty for the GASB and its constituency. Because new FASB statements had the potential to change GAAP for state and local governments, the hierarchy was disrupting the GASB's project agenda.
On two occasions the GASB felt it necessary to issue "negative standards" telling state and local government entities not to follow a particular FASB standard. These included GASB Statement no. 4, Applicability of FASB Statement no. 87, "Employers' Accounting for Pensions," to State and Local Governmental Employers, and GASB Statement no. 8, Applicability of FASB Statement no. 93, "Recognition of Depreciation by Not-for-Profit Organizations," to Certain State and Local Governmental Entities. GASB...