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Generally Accepted Accounting Principles (GAAP)

What are 'Generally Accepted Accounting Principles - GAAP'

Generally accepted accounting principles (GAAP) are a common set of accounting principles, standards and procedures that companies must follow when they compile their financial statements. GAAP is a combination of authoritative standards (set by policy boards) and the commonly accepted ways of recording and reporting accounting information. GAAP improves the clarity of the communication of financial information.

Explaining 'Generally Accepted Accounting Principles - GAAP'

GAAP is meant to ensure a minimum level of consistency in a company's financial statements, which makes it easier for investors to analyze and extract useful information. GAAP also facilitates the cross comparison of financial information across different companies.

Compliance

GAAP must be followed when a company distributes its financial statements outside of the company. If a corporation's stock is publicly traded, the financial statements must also adhere to rules established by the U.S. Securities and Exchange Commission (SEC).

GAAP vs. IFRS

GAAP is focused on the practices of U.S. companies. The Financial Accounting Standards Board (FASB) issues GAAP. The international alternative to GAAP is the International Financial Reporting Standards (IFRS) set by the International Accounting Standards Board (IASB). The IASB and the FASB have been working on the convergence of IFRS and GAAP since 2002. Due to the progress achieved in this partnership, in 2007, the SEC removed the requirement for non-U.S. companies registered in America to reconcile their financial reports with GAAP if their accounts already complied with IFRS. This was a big achievement, because prior to the ruling, non-U.S. companies trading on U.S. exchanges had to provide GAAP-compliant financial statements.

Notes

GAAP is only a set of standards. Although these principles work to improve the transparency in financial statements, they do not provide any guarantee that a company's financial statements are free from errors or omissions that are intended to mislead investors. There is plenty of room within GAAP for unscrupulous accountants to distort figures. So, even when a company uses GAAP, you still need to scrutinize its financial statements.


Further Reading


… States Generally Accepted Accounting Principles (US GAAP) and International Accounting Standards (IAS): implications for the harmonization of accounting standards
www.tandfonline.com [PDF]
… The authorities responsible for setting GAAP are generally the International Accounting Standards Board, and/or … In general, non-purchased goodwill is not recognized as an asset under US and IAS … assets are recorded at their historical or book values that are usually lower than …

GAAP as a symbol of legitimacy: New York State's decision to adopt generally accepted accounting principlesGAAP as a symbol of legitimacy: New York State's decision to adopt generally accepted accounting principles
www.sciencedirect.com [PDF]
… The authorities responsible for setting GAAP are generally the International Accounting Standards Board, and/or … In general, non-purchased goodwill is not recognized as an asset under US and IAS … assets are recorded at their historical or book values that are usually lower than …

Institutional theory and accounting rule choice: an analysis of four US state governments' decisions to adopt generally accepted accounting principlesInstitutional theory and accounting rule choice: an analysis of four US state governments' decisions to adopt generally accepted accounting principles
www.sciencedirect.com [PDF]
… The authorities responsible for setting GAAP are generally the International Accounting Standards Board, and/or … In general, non-purchased goodwill is not recognized as an asset under US and IAS … assets are recorded at their historical or book values that are usually lower than …

A comparison of the International Financial Reporting Standards (IFRS) and Generally Accepted Accounting Principles (GAAP) for small and medium-sized entities …A comparison of the International Financial Reporting Standards (IFRS) and Generally Accepted Accounting Principles (GAAP) for small and medium-sized entities …
search.proquest.com [PDF]
… The authorities responsible for setting GAAP are generally the International Accounting Standards Board, and/or … In general, non-purchased goodwill is not recognized as an asset under US and IAS … assets are recorded at their historical or book values that are usually lower than …

Earnings management under German GAAP versus IFRSEarnings management under German GAAP versus IFRS
www.tandfonline.com [PDF]
… The authorities responsible for setting GAAP are generally the International Accounting Standards Board, and/or … In general, non-purchased goodwill is not recognized as an asset under US and IAS … assets are recorded at their historical or book values that are usually lower than …

A unifying model of how the tax system and generally accepted accounting principles affect corporate behaviorA unifying model of how the tax system and generally accepted accounting principles affect corporate behavior
www.nber.org [PDF]
… The authorities responsible for setting GAAP are generally the International Accounting Standards Board, and/or … In general, non-purchased goodwill is not recognized as an asset under US and IAS … assets are recorded at their historical or book values that are usually lower than …

Toward an empirical institutional governance theory: Analyses of the decisions by the 50 US state governments to adopt generally accepted accounting principlesToward an empirical institutional governance theory: Analyses of the decisions by the 50 US state governments to adopt generally accepted accounting principles
papers.ssrn.com [PDF]
… The authorities responsible for setting GAAP are generally the International Accounting Standards Board, and/or … In general, non-purchased goodwill is not recognized as an asset under US and IAS … assets are recorded at their historical or book values that are usually lower than …



Q&A About Generally Accepted Accounting Principles (GAAP)


Why was it important for the SEC to remove the requirement for non-U.S. companies registered in America to reconcile their financial reports with GAAP if their accounts already complied with IFRS?

It was important because prior to this ruling, non-U.S. companies trading on U.S exchanges had to provide GAAP compliant financial statements even though they were already complying with IFRS standards which were more international in nature than American based ones such as those issued by FASB or other US based regulatory bodies like SEC or PCAOB etc... This meant that foreign companies had to comply with two sets of standards instead of one which was not only redundant but also costly and time consuming due to having two different sets of auditors reviewing each company's books at different times thus increasing costs both financially and time wise for these organizations who would have otherwise been able answer questions from investors about their finances using just one set of standards rather than two thus saving them money while also being able to better focus on running their business rather than trying to figure out how best how best comply with both sets of regulations simultaneously especially since IFRS is more internationally focused than US based ones like those issued by FASB etc... Thus this ruling made sense as it allowed foreign companies listed on American

What are generally accepted accounting principles?

Generally accepted accounting principles (GAAP) are a common set of accounting principles, standards and procedures that companies must follow when they compile their financial statements.

Who issues GAAP?

The Financial Accounting Standards Board (FASB) issues GAAP.

What is an alternative to GAAP?

International Financial Reporting Standards (IFRS).

How does GAAP improve the clarity of communication?

GAAP improves the clarity of communication by providing a common set of rules for recording and reporting information.