(Generally Accepted Accounting Principles (United States
In the U.S., Generally Accepted Accounting Principles are accounting rules used to prepare, present, and report financial statements for a wide variety of entities, including publicly-traded and privately-held companies, non-profit organizations, and governments. The term is usually confined to the United States; hence it is commonly abbreviated as US GAAP or simply GAAP. However, in the theoretical sense, Generally Accepted Accounting Principles encompass the entire industry of accounting, and not only the United States. Outside the academic context, GAAP means US GAAP.
Similar to many other countries practicing under the common law system, the United States government does not directly set accounting standards, in the belief that the private sector has better knowledge and resources. US GAAP is not written in law, although the U.S. Securities and Exchange Commission (SEC) requires that it be followed in financial reporting by publicly-traded companies. Currently, the Financial Accounting Standards Board (FASB) is the highest authority in establishing generally accepted accounting principles for public and private companies, as well as non-profit entities. For local and state governments, GAAP is determined by the Governmental Accounting Standards Board (GASB), which operates under a set of assumptions, principles, and constraints, different from those of standard private-sector GAAP. Financial reporting in federal government entities is regulated by the Federal Accounting Standards Advisory Board (FASAB).
The US GAAP provisions differ somewhat from International Financial Reporting Standards (IFRS), though former SEC Chairman Chris Cox set out a timetable for all U.S. companies to drop GAAP by 2016, with the largest companies switching to IFRS as early as 2009.
The FASB expressed US GAAP in XBRL beginning in 2008.
Auditors took the leading role in developing GAAP for business enterprises.
Accounting standards have historically been set by the American Institute of
Certified Public Accountants (AICPA) subject to Securities and Exchange
Accounting Procedure in 1939, and replaced that with the Accounting
Principles Board in 1951. In 1973, the Accounting Principles Board was
replaced by the Financial Accounting Standards Board (FASB) under the
supervision of the Financial Accounting Foundation with the Financial
Accounting Standards Advisory Council serving to advise and provide input
on the accounting standards. Other organizations involved in determining
United States accounting standards include the Governmental Accounting
Standards Board (GASB), formed in 1984, and the Public Company
Accounting Oversight Board (PCAOB). As international and U.S. GAAP
standards have converged, the International Accounting Standards Board
which produces International Financial Reporting Standards (IFRS) has
Circa 2008, the FASB issued the FASB Accounting Standards Codification, which reorganized the thousands of US GAAP pronouncements into roughly 90 accounting topics
In 2008, the Securities and Exchange Commission issued a preliminary "roadmap" that may lead the U.S. to abandon Generally Accepted Accounting Principles in the future (to be determined in 2011), and to join more than 100 countries around the world instead in using the London-based International Financial Reporting Standards. As of 2010, the convergence project was underway with the FASB meeting routinely with the IASB.
Financial reporting should provide information that is:
useful to present to potential investors and creditors and other users in making rational investment, credit, and other financial decisions.
helpful to present to potential investors and creditors and other users in assessing the amounts, timing, and uncertainty of prospective cash receipts.
about economic resources, the claims to those resources, and the changes in them.
helpful for making financial decisions
helpful in making long-term decisions
helpful in improving the performance of the business
useful in maintaining records
To achieve basic objectives and implement fundamental qualities GAAP has four basic assumptions, four basic principles, and four basic constraints.
Accounting Entity: assumes that the business is separate from its owners or other businesses. Revenue and expense should be kept separate from personal expenses.
Going Concern: assumes that the business will be in operation indefinitely. This validates the methods of asset capitalization, depreciation, and amortization. Only when liquidation is certain this assumption is not applicable. The business will continue to exist in the unforseeable future.
The Time-period principle implies that the economic activities of an enterprise can be divided into artificial time periods.
Historical cost principle requires companies to account and report based on acquisition costs rather than fair market value for most assets and liabilities. This principle provides information that is reliable (removing opportunity to provide subjective and potentially biased market values), but not very relevant. Thus there is a trend to use fair values. Most debts and securities are now reported at market values.
Revenue recognition principle requires companies to record when revenue is (1) realized or realizable and (2) earned, not when cash is received. This way of accounting is called accrual basis accounting.
Matching principle. Expenses have to be matched with revenues as long as it is reasonable to do so. Expenses are recognized not when the work is performed, or when a product is produced, but when the work or the product actually makes its contribution to revenue. Only if no connection with revenue can be established, cost may be charged as expenses to the current period (e.g. office salaries and other administrative expenses). This principle allows greater evaluation of actual profitability and performance (shows how much was spent to earn revenue). Depreciation and Cost of Goods Sold are good examples of application of this principle.
Full Disclosure principle. Amount and kinds of information disclosed should be decided based on trade-off analysis as a larger amount of information costs more to prepare and use. Information disclosed should be enough to make a judgment while keeping costs reasonable. Information is presented in the main body of financial statements, in the notes or as supplementary information
Objectivity principle: the company financial statements provided by the accountants should be based on objective evidence.
Materiality principle: the significance of an item should be considered when it is reported. An item is considered significant when it would affect the decision of a reasonable individual.
Consistency principle: It means that the company uses the same accounting principles and methods from year to year.
Conservatism principle: when choosing between two solutions, the one that will be least likely to overstate assets and income should be picked (see convention of conservatism).
Required departures from GAAP
Under the AICPA's Code of Professional Ethics under Rule 203 - Accounting Principles, a member must depart from GAAP if following it would lead to a material misstatement on the financial statements, or otherwise be misleading. In the departure the member must disclose, if practical, the reasons why compliance with the accounting principle would result in a misleading financial statement. Under Rule 203-1-Departures from Established Accounting Principles, the departures are rare, and usually take place when there is new legislation, the evolution of new forms of business transactions, an unusual degree of materiality, or the existence of conflicting industry practices.
These organizations influence the development of GAAP in the United States.
Audit and Accounting Guidelines, which summarizes the accounting practices of specific industries (e.g. casinos, colleges, airlines, etc.) and provides specific guidance on matters not addressed by FASB or GASB.
Statements of Position, which provides guidance on financial reporting topics until the FASB or GASB sets standards on the issue.
Practice Bulletins, which indicate the AcSEC's views on narrow financial reporting issues not considered by the FASB or the GASB.
Statements of Financial Accounting Standards - the most authoritative GAAP setting publications. More than 150 have been issued to date.
Statements of Financial Accounting Concepts - first issued in 1978. They are part of the FASB's conceptual framework project and set forth fundamental objectives and concepts that the FASB use in developing future standards. However, they are not a part of GAAP. There have been 7 concepts published to date.
Interpretations - modify or extend existing standards. There have been around 50 interpretations published to date.
Technical Bulletins - guidelines on applying standards, interpretations, and opinions. Usually solves some very specific accounting issue that will not have a significant, lasting effect.
Other influential organizations (e.g. American Accounting Association, Institute of Management Accountants, Financial Executives Institute)
Other influential organizations The Government Finance Officer's Association (GFOA) also influences financial policies for governments. Disagreements between the GFOA and GASB are rare, but can continue for many years.
In the United States, GAAP derives, in order of importance, from:
issuances from an authoritative body designated by the American Institute of Certified Public Accountants(AICPA) Council (for example, the Financial Accounting Standards Board Statements, AICPA Accounting Principles Board Opinions, and AICPA Accounting Research Bulletins);
other AICPA issuances such as AICPA Industry Guides;
industry practice; and
into para-accounting literature in the form of books and articles.
Codification in Accounting - FASB Accounting Standards CodificationTM
The Codification is effective for interim and annual periods ending after September 15, 2009. All existing accounting standards documents are superseded as described in FASB Statement No. 168, The FASB Accounting Standards CodificationTM and the Hierarchy of Generally Accepted Accounting Principles. All other accounting literature not included in the Codification is nonauthoritative.
The Codification reorganizes the thousands of U.S. GAAP pronouncements into roughly 90 accounting topics and displays all topics using a consistent structure. It also includes relevant Securities and Exchange Commission (SEC), guidance that follows the same topical structure in separate sections in the Codification.
To prepare constituents for the change, the FASB has provided a number of tools and training resources.
While the Codification does not change GAAP, it introduces a new structure—one that is organized in an easily accessible, user-friendly online research system. The FASB expects that the new system will reduce the amount of time and effort required to research an accounting issue, mitigate the risk of noncompliance with standards through improved usability of the literature, provide accurate information with real-time updates as new standards are released, and assist the FASB with the research efforts required during the standard-setting process.
House of GAAP
Note that the House of GAAP is no longer authoritative. Please reference the codification above**
The term "House of GAAP concept" derives from an article by Steven Rubin in the Journal of Accountancy June 1984 issue, and is commonly used to illustrate the hierarchy of pronouncements, standards, and similar literature which establish US GAAP.
|House of GAAP|
|FASB Standards and Interpretations||Accounting Principles Board (APB) Opinions||Accounting Research Bulletins (ARBs)|
|Category (B)||FASB Technical Bulletins||AICPA Industry Audit and Accounting Guides||AICPA Statements of Position (SOPs)|
|Category (C)||FASB Emerging Issues Task Force (EITF)||AICPA AcSEC Practice Bulletins|
|AICPA Accounting Interpretations||FASB Implementation Guides (Q and A)||Widely recognized and prevalent industry practices|
Category A and B are considered authoritative. Category C and D are considered marginally authoritative, thoughts on interesting and unique issues, but could be invalid given a large level of materialism. Category C and D are considered a talking and reasoning phase of bringing issues to an authoritative level of GAAP.