Accounting and Auditing Research and Databases: Practitioner's Desk Reference

The Levels of U.S. GAAP⁶ and FASB Accounting Standards Codification

A five-level hierarchy existed for the components of U.S. GAAP prior to the FASB Accounting Standards Codification Research System (the Codification). To create a single authoritative source of U.S. GAAP, the FASB flattened the five-level hierarchy to two levels (authoritative and nonauthoritative) via the Codification.⁷

Authoritative guidance is founded on the basic assumption and principles of financial accounting and reporting. The fundamental assumptions underlying financial reporting include the assumptions of economic entity, going concern, monetary unit, and periodicity. The fundamental principles relate to measurement, revenue recognition, expense recognition, and full disclosure. The assumptions and principles are constrained by cost/benefit and industry practices. Qualitative characteristics identify the types of information to be included in financial accounting and reporting. The fundamental characteristics are relevance and faithful representation. Information is relevant (capable of making a difference) if it has predictive value, confirmatory value, or both. It is constrained by materiality. Information has faithful representation if it is complete, neutral, and free from error. In addition to fundamental characteristics, the enhancing characteristics of comparability, verifiability, timeliness, and understandability improve the quality of information. As described next, the authoritative level is ...