Generally Accepted Accounting Principles, USA GAAP or GAAP stands for "generally accepted
accounting principles".
Although the U.S. Securities and Exchange Commission has stated that it intends to move
from US GAAP to the International Financial Reporting Standards, they differ considerably
from GAAP and progress has been slow and uncertain.
The FASB expressed US GAAP in XBRL beginning in 2008.
History 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 subject to Securities and Exchange Commission regulations.
The AICPA first created the Committee on Accounting Procedure in 1939, and replaced that with
the Accounting Principles Board in 1959.
In 1973, the Accounting Principles Board was replaced by the Financial Accounting Standards
Board 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, formed in 1984, and the Public Company Accounting
Oversight Board.
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 United States to abandon Generally Accepted Accounting Principles in the future, 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.
The SEC expressed their aim to fully adopt International Financial Reporting Standards
in the U.S. by 2014.
With the convergence of the U.S. GAAP and the international IFRS accounting systems,
as the highest authority over International Financial Reporting Standards, the International
Accounting Standards Board is becoming more important in the United States.
Basic objectives 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 Basic concepts
To achieve basic objectives and implement fundamental qualities GAAP has four basic
assumptions, four basic principles, and four basic constraints.
Assumptions 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 unforeseeable future.
Monetary Unit principle: assumes a stable currency is going to be the unit of record.
The FASB accepts the nominal value of the US Dollar as the monetary unit of record unadjusted
for inflation.
The Time-period principle implies that the economic activities of an enterprise can be
divided into artificial time periods.
Principles 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, 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 holds that companies may not record revenue until it is realized
or realizable and when it is earned.
The flow of cash does not have any bearing on the recognition of revenue.
This is the essence of accrual basis accounting.
Conversely, however, losses must be recognized when their occurrence becomes probable, whether
or not it has actually occurred.
This comports with the constraint of conservatism, yet brings it into conflict with the constraint
of consistency, in that reflecting revenues/gains is inconsistent with the way in which losses
are reflected.
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.
This principle allows greater evaluation of actual profitability and performance.
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 Constraints
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 period to period.
Conservatism principle: when choosing between two solutions, the one which has the less
favorable outcome is the solution which should be chosen.
Due to recent developments in the convergence of US GAAP and IFRS, SFAC No. 8 replaced SFAC
No. 1 and 2 in September 2010.
Chapter 3 of SFAC No 8 includes only the following constraint,
Cost Constraint- The benefits of reporting financial information should justify and be
greater than the costs imposed on supplying it.
Conservatism is no longer a constraint, and materiality is a feature of relevance that
is determined at the entity-specific level.
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.
Setting GAAP These organizations influence the development
of GAAP in the United States.
United States Securities and Exchange Commission The SEC was created as a result of the Great
Depression.
At that time there was no structure setting accounting standards.
The SEC encouraged the establishment of private standard-setting bodies through the AICPA
and later the FASB, believing that the private sector had the proper knowledge, resources,
and talents.
The SEC works closely with various private organizations setting GAAP, but does not set
GAAP itself.
American Institute of Certified Public Accountants In 1939, urged by the SEC, the AICPA appointed
the Committee on Accounting Procedure.
During the years 1939 to 1959 CAP issued 51 Accounting Research Bulletins that dealt with
a variety of timely accounting problems.
However, this problem-by-problem approach failed to develop the much needed structured
body of accounting principles.
Thus, in 1959, the AICPA created the Accounting Principles Board, whose mission it was to
develop an overall conceptual framework.
It issued 31 opinions and was dissolved in 1973 for lack of productivity and failure
to act promptly.
After the creation of the FASB, the AICPA established the Accounting Standards Executive
Committee.
It publishes: Audit and Accounting Guidelines, which summarizes
the accounting practices of specific industries 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.
Financial Accounting Standards Board Realizing the need to reform the APB, leaders
in the accounting profession appointed a Study Group on the Establishment of Accounting Principles.
This group determined that the APB must be dissolved and a new standard-setting structure
be created.
This structure is composed of three organizations: the Financial Accounting Foundation, the Financial
Accounting Standards Advisory Council, and the major operating organization in this structure
the Financial Accounting Standards Board.
FASB has 4 major types of publications: 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.
In 1984 the FASB created the Emerging Issues Task Force which deals with new and unusual
financial transactions that have the potential to become common.
It acts more like a problem filter for the FASB - the EITF deals with short-term, quickly
resolvable issues, leaving long-term, more pervasive problems for the FASB.
Governmental Accounting Standards Board Created in 1984, the GASB addresses state
and local government reporting issues.
Its structure is similar to that of the FASB's.
Other influential organizations Other influential organizations The Government
Finance Officer's Association also influences financial policies for governments.
Disagreements between the GFOA and GASB are rare, but can continue for many years.
Precedence of GAAP-setting authorities 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;
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 Codification
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 Codification 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, guidance that follows the same
topical structure in separate sections in the Codification.
To prepare users for the change, the AICPA 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.
See also
Notes
External links SEC Accounting Bulletins — United States
SEC Division of Corporate Finance — United States
Financial Accounting Standards Board Website — United States
Government Accounting Standards Board Website — United States
US GAAP XBRL Taxonomy - United States