Latest / VoraPrep Audio — Professional Licensure & Certification Exam Prep / [CPA] FAR: Master the GAAP Hierarchy & FASB Codification
Transcript
- Marcus: Emma, let’s start with a scenario I think every new associate faces. You’re given a complex transaction, maybe something on software development costs. Your first instinct is to type it into a search engine. You find a really clear, well-written article from a university professor. Are you done? Can you base your work on that? Emma: That's such a critical question, Marcus. And the answer is absolutely not. Relying on what I call 'Google GAAP' is a serious professional error. It feels right, and it feels fast, but it's not authoritative. In the world of U.S. GAAP, for nongovernmental entities, there is only one official library. Marcus: Okay, so if my search engine isn't the library, what is? What's the single source of truth? Emma: It's the FASB. Accounting Standards Codification. Most people just call it the Codification or the ASC. Before 2009, GAAP was a total mess. It was a patchwork of old documents from different bodies. You had SFAS, APB. Opinions, AICPA papers... it was a maze. Marcus: So the FASB didn't create all new rules in 2009? They just organized the existing ones? Emma: Exactly. It was a massive housekeeping project. They took all the authoritative literature that existed. Then they put it into one single, logical, searchable structure. Nothing about GAAP itself changed, but the address for every rule did. Marcus: And that means all those old standards, like an SFAS for leases that people might still see referenced, are officially obsolete? Emma: Completely. They were superseded. Citing an old SFAS number today is like citing a law that's been repealed. The Codification is the only place to go. Marcus: This brings up another huge question we always get. We hear about the FASB, but we also hear about the SEC. Who is actually in charge of setting the rules? Emma: It’s a great question because the relationship is unique. The FASB is an independent, private-sector organization. They set the accounting standards for all the major players. This includes public companies, private companies, and not-for-profits. Marcus: Okay, so the FASB covers almost everyone. Where does the SEC fit in? Emma: The SEC is a U.S. government agency. They have the legal, statutory authority to set accounting rules. But their authority is specifically for public companies. Those are the ones whose stock is traded. We call them 'issuers' or 'registrants'. Marcus: So for a public company, you have two rule-makers. What happens if their guidance conflicts? Who wins? Emma: The SEC wins. Every time. The SEC generally lets the FASB set the standards. But for public companies, the SEC has the final say. Think of it this way. The FASB writes the national building code for all houses. But the federal government might have extra, stricter rules for its own official buildings. For those specific buildings, the government's stricter rules override the national code. Marcus: That makes sense. The SEC rules are an authoritative overlay, but only for public companies. Emma: Precisely. So for a public company, the GAAP hierarchy includes both the FASB. Codification and the SEC's own publications. That includes things like Regulation S-X and Staff Accounting Bulletins. Marcus: Let's build out that hierarchy then. For a private company or a not-for-profit, what is the single, top-level source of authoritative GAAP.? Emma: It’s just one thing: the FASB. Accounting Standards Codification. That's it. Full stop. Marcus: Okay. But now let’s say the company is public. What are the authoritative sources? Emma: For a public company, it's two things at that top level. It's the FASB. Codification and the rules and interpretive releases from the SEC. Marcus: Now, let's talk about the things that feel official but are not. I see FASB. Concepts Statements referenced a lot. Where do they fit in? Emma: This is a classic exam trap. FASB. Concepts Statements are non-authoritative. They are incredibly important for understanding the theory—the 'why' behind a standard—but they are not GAAP. Marcus: Can you give me an analogy for that? Emma: Think of it like a chef's cookbook. The Codification is the recipe itself. It says "add 1 cup of flour, bake at 350 degrees for 20 minutes." That's the rule you must follow. The Concepts Statement is the introduction to the chapter. It's where the chef explains the theory of why baking at that temperature creates the perfect crust. It's fascinating and foundational, but it's not the instruction. Marcus: So you can’t justify your accounting by citing the theory. What about other sources, like AICPA. Issues Papers, textbooks, or even IFRS.? Emma: All non-authoritative. They can be helpful for understanding a complex topic, but they have no authority. You cannot tell an auditor your justification for a transaction is "because it said so in my textbook." Marcus: This is so important for exam day. How do we turn this knowledge into a reliable process for answering questions? What's my first step when I read a scenario? Emma: The very first thing you must do is identify the entity type. Is it a public company? A private company? A not-for-profit? Or a state or local government? Everything else flows from that single fact. Marcus: Okay, I’ve identified the entity. Let's say it's a private, non-issuer. What's my second step? Emma: Step two is to determine the governing body. For that private company, the authority is the FASB. If it had been a city government, the authority would be a different body entirely. Marcus: And from there, step three is pinpointing the actual source document. Emma: Exactly. For our private company, the authoritative source is the FASB. Codification. If it were a public company, we’d say the Codification plus SEC guidance. Marcus: Which brings us to the last step: what to ignore. Emma: Step four is to immediately identify and discard the non-authoritative noise. The question will try to distract you with options like FASB. Concept Statements, IFRS, or AICPA practice aids. Cross them out mentally. They are never the right answer for the most authoritative source. Marcus: Let's walk through an example. I'm auditing Nexus Corp., a publicly-traded company. The CFO gives me an analysis for a big new lease. He's basing it on an old internal policy that cites a superseded SFAS standard. How do I respond using that framework? Emma: Perfect. Let's apply the steps. Step one: What's the entity type? Marcus: Nexus Corp. is publicly-traded, so it's an issuer. Emma: Right. Step two: Who is the governing body? Marcus: Since it's public, it's primarily the FASB, but the SEC has overriding authority. Emma: Excellent. Step three: What is the pinpoint authoritative source for a lease transaction today? Marcus: Well, the CFO is citing a superseded standard. We know the current guidance is in the Codification. Emma: There you have it. So your conclusion is clear. The CFO's analysis is based on a non-authoritative standard. You need to direct him to the current guidance for leases in the FASB. Codification as the controlling guidance. Marcus: The citations in the Codification look a bit like IP addresses. Can you decode that structure for us? Emma: It's much simpler than it looks. Think of it as a street address for a rule. It starts with the Topic. That's the broad subject, like Leases or Revenue. It's the main street. Marcus: Okay, so the Topic is the main street. What's next? Emma: Next is the Subtopic, which narrows it down. Think of it as the specific building on the street. After that comes the Section. This tells you the nature of the content, like a chapter in a book. For example, one section might be for 'Recognition' and another for 'Disclosure'. Think of the Section as the floor of the building. Marcus: And the last part? Emma: The last part is the Paragraph. That's the specific office where the rule lives. So the whole thing is a logical drill-down: Topic, Subtopic, Section, and Paragraph. Marcus: Got it. Now, let's just hammer home one last point about a different rule-making body. We've focused on the FASB. What if the entity in the question is the City of Denver? Emma: If the entity is a state or local government, you are in a different universe. The FASB. Codification does not apply. The authoritative standards for them are set by the Governmental Accounting Standards Board, or GASB. Marcus: So on the exam, if I see 'City of' or 'State of', my brain has to immediately switch tracks to GASB. Emma: Immediately. It’s a common way to test whether you're paying attention to that crucial first step: identifying the entity. Marcus: This leads to my final question. For the exam, how important is it to know the specific Topic numbers for major areas, like leases or revenue? Emma: It's certainly helpful. You won't be asked to cite a specific paragraph number from memory. But knowing the major Topic for a common transaction can help you quickly identify the relevant rules in a scenario. So, it's good to be familiar with the general areas covered by the main Topic numbers. Marcus: Okay, Emma, this has been incredibly clear. Let's recap the absolute must-knows. Emma: First, the FASB. Codification is the single source of authoritative U.S. GAAP for all nongovernmental entities. Marcus: And for public companies? Emma: For public companies, the SEC's rules are also authoritative. And they override the FASB if there's a conflict. Marcus: What about governments? Emma: State and local governments follow GASB, not the FASB. Marcus: And the last big takeaway? Emma: Finally, remember that things like Concepts Statements and textbooks are non-authoritative. They're just theory, not rules you can cite. VoraPrep is a full exam-prep app — lessons, practice questions, and an AI tutor in one place. Get started at Vora Prep dot com.