Businesses adhere to specific accounting principles to abide by financial norms and regulations properly, across the world. In the USA, GAAP or the Generally Accepted Accounting Principles is what businesses follow in this regard. Publicly traded ventures operating in the country must comply with the US GAAP standards. Entities failing to adhere to the generally accepted accounting principles standards can face serious repercussions.

The definition of US GAAP

generally accepted accounting principles is a collection of accounting guidelines and standards that publicly traded U.S. businesses have to follow, as per the SEC’s rules. They need it to compile and report vital financial information. By adhering to the generally accepted accounting principles, such entities can produce legitimate financial reports. Through these guidelines and standards, creditors, investors and the govt organizations can assess the financial health and functioning of a business. 

The scope and implications of GAAP accounting

The Financial Accounting Standards Board (FASB) is the organization that publishes and manages generally accepted accounting principles protocols. It also updates the nuances of generally accepted accounting principles, from time to time. The publicly traded and regulated US businesses are under the legal obligation to adhere to GAAP accounting principles. However, several private companies in the USA also adhere to these accounting guidelines while making financial statements. The US governmental accounting entities also typically adhere to GAAP norms.

Accounting professionals in publicly traded US companies have to adhere to generally accepted accounting principles protocols when handling and crafting financial reports. This set of regulations ensures businesses across various sectors can come up with comprehensible and clear financial data. They are able to prepare comparable, complete, consistent financial reports, liability declarations and tax preparations by using generally accepted accounting principles. 

The importance of US GAAP compliance

As compliance with GAAP accounting principles is mandatory for US public companies, their financial statements and records must reflect this aspect. The US Securities and Exchange Commission requires such companies to come up with generally accepted accounting principles -compliant financial statements regularly. External entities and investors analyzing the financial records of such companies also seek proper GAAP compliance.

For a publicly traded US business violating the GAAP accounting norms, the consequences can be serious.

• A significant amount of monetary fine can be imposed on the company.
• Its brand image will take a serious hit, repelling potential investors and affecting stakeholder confidence adversely.

While non-publicly traded US companies are not legally bound to adhere to generally accepted accounting principles norms, most lenders and creditors prefer entities adhering to these norms. Most financial organizations ask for yearly GAAP-compliant financial statements while issuing business loans. 

The 10 Major GAAP Principles

The US GAAP is based on 10 key principles. These principles are used to regulate, standardize, and define the financial information reporting of a venture. Their usage also helps thwart unethical practices and data tampering while making such financial reports.

• Principle of Regularity

GAAP norms must be followed by businesses and their accountants at all times while dealing with financial information. These regulations can neither be changed nor altered by a company or its accounting staff.

• Principle of Consistency

Accountants must use the same standards and protocols for all accounting periods. If a method is changed or the company hires a new accountant using a different system, such changes must be documented properly. The change should be present in the footnotes of its financial statements. This ensures the internal financial documentation of a company remains consistent over time.

• Principle of Sincerity

According to this principle, any accounting team or accountant hired by a company has to prepare an accurate and unbiased financial report. This remains valid even if a company is passing through a dire financial situation.

• Principle of Permanence of Methods

As per this principle, accountants have to deploy the same reporting method protocols through the entire range of financial statements prepared. This ensures any report prepared by a business can be compared easily to other reports.

• Principle of Non-Compensation

The accounting team of a company has to report all positive and negative aspects in any financial statement, no matter how that impacts the company. Accountants should not cover up losses and report debts and revenues incorrectly.

• Principle of Prudence

While making financial reports, the data must be based on clear, concrete numbers. It should be fact-driven, too. This principle ensures accountants stay grounded when making analysis about financial aspects. Businesses can make speculation and forecasting, but the distinction with formal financial statements should be maintained.

• Principle of Continuity

While preparing financial reports, accountants must assume the venture will keep on functioning. The company status should not affect the report preparation.  

• Principle of Periodicity

As per this principle, accountants must report financial information during the relevant accounting period. For instance, when an accountant is preparing a quarterly report on the venture’s revenue, the report must be focused on that specific quarter. This reduces the risk of data fudging across time. A company may earn more in one quarter than another and this must reflect properly in the report prepared by the accountant. He/she should not alter either the data or dates.

• Principle of Materiality

Accountants must disclose the available financial information of the company, fully and clearly while making reports. They have to acquire this information from the venture. 

• Principle of Utmost Good Faith

Anyone involved with the financial aspects and operations of a company must be honest while preparing reports and analysis. This ensures an ethical and transparent approach in all financial analysis.

Additional GAAP Guidelines that matter

Apart from these 10 major principles, there are 4 other aspects of US GAAP regulations. Businesses should maintain these while crafting financial statements.

• Recognition-

A financial statement has to reflect the financial commitments, expenses, liabilities, and assets of the company accurately. There should not be any omissions or modifications.

• Measurement in US GAAP-

Financial statements must be made to meet generally accepted accounting principles properly. Accountants must abide by 10 major generally accepted accounting principles, regardless of the sector.

• Presentation-

Every financial report must have these parts: a balance sheet, a cash flow statement, an income statement, and a shareholder’s equity/ ownership statement. The absence of any of these documents may lead to external audits.

• Disclosure-

Any relevant and additional information required to fathom the financial reports has to be disclosed fully. This can be in the report’s footnotes or description section.

GAAP vs. IFRS- what’s different?

While the GAAP is the official set of accounting guidelines for public US companies, in other countries IFRS is often the standard to follow. International Financial Reporting Standards, created by IASB is used in over 150 jurisdictions, including nations like Canada, Australia, Japan, and the EU. It is maintained and updated by the IFRS Foundation. US companies operating across multiple countries often use dual reporting methods to make financial statements.

The major differences between GAAP and IFRS are:

• The notable difference between the 2 norms is in dealing with accounting entries. generally accepted accounting principles and IFRS have varying policies in the treatment of inventory. IFRS rules prohibit the usage of LIFO (last-in, last-out) inventory accounting methods but GAAP allows it, for example. 
• Financial policymakers and analysts feel IFRS is principle-centric while generally accepted accounting principles is more rule-based. IFRS guidelines contain fewer overall details compared to generally accepted accounting principles. So, the principles and theoretical framework of the IFRS tend to lengthy financial statement disclosures, leaving room for interpretations. 
• In GAAP, there are no room for inventory reversals but in IFRS this can be allowed under certain conditions.

Top benefits of adhering to US GAAP for businesses

• Makes planning early easier-

With GAAP, business owners get a clear picture of the financial health of their ventures, and plan accordingly.

• Helps maintain consistency-

Businesses deploy GAAP to follow the same accounting norms in their financial statements and reports, throughout the year, leading to consistency.

• Lowers the risk of fraud-

With generally accepted accounting principles, companies can reduce the risks of financial data misrepresentation and audit errors.

• Detailed analysis of expenditure in US GAAP-

Businesses using GAAP to prepare financial reports can fathom all nuances of their expenditure easily.

• Helps win the trust of shareholders-

When the stakeholders of a company know it is adhering to generally accepted accounting principles norms, their confidence level gets a boost. 

• Helps attract investors-

For a business adhering to GAAP protocols, it is easier to attract potential investors and business partners. 

Summing it up

Overall, GAAP accounting standard is the foundation for businesses to analyze their financial activities and prepare audit and tax reports with utmost accuracy. They rely on this set of accounting guidelines to avoid legal hassles and boost their image, eventually. To ensure GAAP compliance, US-based ventures often hire ace accounting outsourcing entities.

Sources:

• https://www.forbes.com/advisor/business/generally-accepted-accounting-principles-gaap-guide/
• https://www.investopedia.com/terms/g/gaap.asp
• https://www.businessnewsdaily.com/5486-generally-accepted-accounting-principles-gaap.html
• https://chargezoom.com/blog/top-6-benefits-of-gaap-accounting-for-your-business