CGFM2: GAAP Hierarchy and Standard-Setting: GASB, FASAB, and FASB

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So, picture this. You're deep into an exam block. You get a question about a county government trying to account for a new lease. The answer choices include a GASB standard, an FASB standard, and maybe an FASAB standard just to make it interesting. And you freeze for a second. Which one is it? Do the rules ever overlap?

It feels like a trick question. But getting it right comes down to one simple, foundational concept. You just need to know who makes the rules for whom. This is one of those areas where if you get the framework right, you can knock out questions fast and with confidence.

Think of it like different sports leagues. You’ve got the NFL for professional football, the NBA for basketball, and Major League Baseball. They all have teams, they all have a ball, and they're all sports. But the rulebooks are completely different. You can't use a baseball rule in a basketball game. It just doesn't work.

Accounting standards are the same way. We have three main "leagues" or rule-making bodies you absolutely have to keep straight.

The first one is GASB.—the Governmental Accounting Standards Board. This is the rulebook for state and local governments. We’re talking about cities, counties, and public school districts. It also includes state universities and public hospitals. Basically, it covers any governmental entity that isn't the U.S. federal government. GASB was set up back in 1984, and it's the official source of GAAP for this entire sector. It deals with all the unique stuff you see in government, like fund accounting and the modified accrual basis. When you hear about standards like GASB 34 on financial statements or GASB 87 on leases, that's their work.

Then you have FASAB.—the Federal Accounting Standards Advisory Board. The "F" is your keyword here. This is the rulebook exclusively for the U.S. federal government. The Department of Defense, the Treasury, the EPA.... all the big federal agencies play by FASAB's rules. It was established in 1990 by the three big financial leaders in the federal government. That’s the Secretary of the Treasury, the Director of the Office of Management and Budget, and the Comptroller General. They focus on really specific federal issues, like budgetary accounting. For example, if you ever see something about the USSGL 4000-series, that's a federal thing. Their main pronouncements are called Statements of Federal Financial Accounting Standards, or SFFAS.

So, GASB is for state and local, FASAB is for federal.

And the third league? That's FASB.—the Financial Accounting Standards Board. This is the one you probably heard about first in your accounting career. FASB sets the rules for the private sector. Public companies, private businesses, and even non-governmental not-for-profits. They all follow FASB.

Now, here's the critical part for your exam: FASB's rules generally do not apply to government. Period. A county government does not use FASB's lease standard. A federal agency doesn't follow FASB's revenue recognition rules. Think of them as playing a completely different sport. The only exception is very rare. It's when GASB or FASAB specifically says to use an FASB rule because they don't have their own rule for a specific issue. But unless the question explicitly tells you that, you assume FASB stays in its own lane.

Okay, so you've identified which league you're in. But even within, say, GASB's world, not all guidance is created equal. This is where the GAAP hierarchy comes in. It's just a ranking of what's most authoritative.

At the very top, you have Level A. This is the official, binding law of the land. For state and local governments, this includes GASB. Statements, GASB. Interpretations, and GASB. Technical Bulletins. For the federal government, it's the FASAB. Statements, the SFFAS. This is your most authoritative source. If a Level A standard exists, that's what you follow.

Then you have Level B. Think of these as official clarifications that provide more detail. For GASB, this level includes their Implementation Guides and things like AICPA. Practice Bulletins. They're super helpful for applying the standards. But remember, if Level B guidance ever seems to contradict a formal Level A Statement, the Statement always wins.

Below that, you have other literature. This includes things like AICPA practice guides. Now, here's a key detail for this guidance to be considered authoritative. It must be specifically "cleared" by GASB or FASAB. If it's not cleared, it's considered non-authoritative. For the exam, your focus will almost always be on knowing that Level A guidance is king.

So, how do you put this all together on exam day? It's a simple, three-step thought process.

First, always identify the entity. Read the question and ask, "Who am I dealing with?" Is it the City of Austin? That's a local government. Is it the Department of Veterans Affairs? That's a federal agency. Is it a private hospital? That's private sector.

Second, based on that entity, you know the primary rule-maker. City of Austin means you're in GASB's world. Department of Veterans Affairs puts you in FASAB's territory. The private hospital is under FASB.

And third, you apply the rules from that body's hierarchy, starting with the most authoritative source.

Let’s walk through a typical question. A newly appointed finance director for a large city is implementing the latest guidance for leases. Which standard-setting body provides the rules? The options are FASB, GASB, FASAB, and maybe the GAO.

Okay, step one: what's the entity? A large city. A city is a local government. Step two: who makes the rules for local governments? That's GASB. So the answer has to be GASB. It's not FASB, because that's for the private sector. It's not FASAB, because that's for the federal government. And it's not the GAO, the Government Accountability Office, because they issue auditing standards, not accounting principles. See how that simple process just filters out all the noise?

The exam loves to trap you on this. The most common trap is trying to get you to apply an FASB standard to a government entity. They'll describe a situation at a school district and one of the answer choices will be a perfectly reasonable-sounding accounting treatment... that comes from an FASB pronouncement. Don't take the bait. Remember the different sports leagues.

Another trap is mixing up GASB and FASAB. They might give you a scenario involving a federal agency and offer a GASB standard as an answer. They sound similar, but their jurisdictions are completely separate. Just remember: F in FASAB is for Federal.

So, the key takeaway is simple. GASB is for state and local governments. FASAB is for the U.S. federal government. And FASB is for the private sector. Your first move, on any question, is to figure out which of those three buckets the entity falls into. That one step will point you to the right answer almost every time.

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