If a major U.S. city issues bonds, which standard-setting body's pronouncements dictate its financial reporting? Is it FASB, GASB, or FASAB? If you confidently chose GASB, you're on the right path. But what if that city operates a public university, and which specific document establishes the order of authority for those GASB rules? The lines blur fast, and the CGFM exam tests those precise boundaries, not just the names of the boards.
The CGFM Exam 2 requires you to differentiate the GAAP hierarchy and primary standard-setting bodies: GASB for state and local governments, FASAB for the U.S. federal government, and FASB for private entities. The key exam trap involves governmental enterprise funds, which often apply FASB standards. However, the default for public universities and hospitals remains GASB, and the formal hierarchy of authority is dictated by GASB Statement No. 76.
Key facts
- Official Body
- Association of Government Accountants (AGA)
- CGFM Exam Sections
- 3 (Governmental Environment; Governmental Accounting, Financial Reporting & Budgeting; Governmental Financial Management & Control)
- CGFM2 Focus
- Governmental Accounting, Financial Reporting, and Budgeting
- GAAP Hierarchy Authority
- GASB Statement No. 76, The Hierarchy of Generally Accepted Accounting Principles for State and Local Governments
- Average Pass Rate
- Approximately 60% across all CGFM exams
- Recommended Study Hours
- 90-130 hours total for all three exams
The AGA reports an average pass rate of approximately 60% across all three CGFM exams (AGA), highlighting the need for precise knowledge. To see where you stand, you can try VoraPrep's free CGFM practice questions designed to mirror these exam challenges.
Who Sets the Rules? The 3 Standard-Setters for CGFM Exam 2
The first step to mastering this topic is to clearly define the jurisdiction of each standard-setting body. For the CGFM exam, your decision process should start by identifying the type of entity in the question stem.GASB (Governmental Accounting Standards Board)
GASB is the primary standard-setter for generally accepted accounting principles (GAAP) for all U.S. state and local governmental entities. This is your default answer for any question involving a state, county, city, school district, public employee retirement system, or most public universities and hospitals.FASAB (Federal Accounting Standards Advisory Board)
FASAB establishes accounting principles exclusively for the U.S. federal government and its agencies. If the entity is a federal department (e.g., Department of Homeland Security) or agency (e.g., NASA), FASAB standards apply. This is usually the most straightforward distinction on the exam.FASB (Financial Accounting Standards Board)
FASB sets GAAP for all non-governmental U.S. entities, including private companies and not-for-profit organizations. For CGFM candidates, FASB becomes relevant in one critical area: certain business-type activities of state and local governments, which we'll dissect further down.This table summarizes their domains for quick reference.
| Standard-Setting Body | Primary Jurisdiction | Key Characteristics |
|---|---|---|
| GASB | State and Local Governments | Accountability to citizens; fund accounting; modified accrual (governmental funds); full accrual (enterprise funds and government-wide). |
| FASAB | U.S. Federal Government | Accountability for federal resources; stewardship; full accrual; unique federal reporting requirements. |
| FASB | Private Sector Entities | Financial performance for investors/creditors; full accrual; applies to government enterprise funds by exception. |
The GASB 76 GAAP Hierarchy: Beyond Just Naming the Board
Knowing which board applies is only half the battle. The CGFM exam also expects you to understand the levels of authority within those standards. GASB Statement No. 76 establishes the official GAAP hierarchy for state and local governments.Many candidates miss this entirely, but it's a source of easy points if you know it.
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The hierarchy has two main categories of authoritative guidance:
- Category A: This is the most authoritative level. It consists of officially established accounting principles, which are GASB Statements and Interpretations. If a GASB Statement addresses an issue, it is the final word.
- Category B: If an issue is not covered by Category A, you look to Category B. This includes GASB Technical Bulletins, GASB Implementation Guides, and literature of the AICPA that has been specifically cleared by the GASB.
Think of it as a legal system. GASB Statements are the statutes passed by the legislature (Category A). Technical Bulletins and Implementation Guides are the official regulations that clarify those statutes (Category B). You must follow the statute first.
Calculate Your CGFM Score & Study Hours by Domain
Adjust your practice scores across official CGFM blueprint domains to predict your pass probability and generate a domain-weighted study schedule.
The #1 CGFM2 Trap: When Governmental Entities Use FASB
The most difficult questions on this topic involve scenarios where a government-owned entity applies FASB standards. This happens with proprietary funds, specifically enterprise funds.An enterprise fund is used to account for operations that are financed and operated in a manner similar to private business enterprises. The intent is that the costs of providing goods or services to the general public on a continuing basis are financed or recovered primarily through user charges.
The rule, stemming from GASB Statement No. 62, is as follows:
- All applicable GASB pronouncements must be applied.
- Then, apply FASB pronouncements issued on or before November 30, 1989, unless they conflict with or contradict GASB pronouncements.
- After that, a government has an election: it can choose to apply all FASB Statements and Interpretations issued after November 30, 1989 (except for those that conflict with GASB), or it can choose to apply none of them.
This election creates the nuance tested on the exam.
Worked Example: Applying the Hierarchy Under Exam Pressure
Let's apply this to a classic CGFM scenario.
- A) GASB Statements: This is the most tempting wrong answer. Candidates see "municipal" and default to GASB. However, the question stem specifically states that GASB does not provide guidance on this issue, making this choice incorrect in this context.
- B) FASAB Standards: Incorrect. FASAB is for the federal government only.
- D) GAO Yellow Book: Incorrect. The GAO sets auditing standards (GAAS), not accounting principles (GAAP).
How to Master the GAAP Hierarchy in 7 Days
Use this weekly drill to move from memorization to true application. Day 1-2: Core Concepts.- Read the jurisdiction of GASB, FASAB, and FASB. Create a flashcard for each.
- Read and summarize GASB Statement No. 76. Create a separate flashcard for Category A vs. Category B GAAP.
- Review VoraPrep's interactive lessons on standard-setting to see these concepts in action.
- Complete at least 25 practice questions on GAAP hierarchy. A comprehensive CGFM study guide will have a dedicated section for this.
- For every question involving a state/local entity, first ask: "Is this a governmental activity or a business-type activity?"
- If you get one wrong, don't just review the answer. Articulate the specific rule you missed (e.g., "I forgot that public universities default to GASB"). If you're using VoraPrep, ask Vory, your 24/7 tutor, to explain the reasoning step-by-step.
- Find practice questions specifically about enterprise funds, public hospitals, and universities.
- Drill the GASB 62 / post-1989 FASB election rule. Explain it out loud.
- Take a timed 15-question quiz exclusively on this topic.
- For each question, actively identify the "most tempting wrong answer" and write down why it's designed to trap you.
- Review your flashcards and notes from the week.
- Explain the entire GAAP hierarchy, from identifying the entity to applying GASB 76, to a colleague or into a voice recorder.
This focused practice is far more effective than passively reading. For a complete plan, see how VoraPrep compares to other CGFM review courses.
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