Generally Accepted Accounting Principles (GAAP) were put in place after the 1929 Stock Market Crash which was the starting point of The Great Depression. It is believed that the Market Crash was partially caused as the public trading companies were not blunt about their financial detailing.
The government, then, began to work with professional accounting groups to set up norms and practices that would ensure authentic and steady financial listing. One of the most significant questions which arise is GAAP Accounting Procedures are followed in which countries?
GAAP has been established under the Securities Act of 1933 as well as the Securities Exchange Act of 1934. Over the years, the GAAP advanced with the needs of the markets and the evolving technologies to suit the economic needs.
An introduction to GAAP accounting procedures
These are a set of rules that are designed to keep an eye on the corporate accounting procedures and their financial reporting in the United States. These standard norms were put in place by both the Financial Accounting Standards Boards (FASB) and by the Governmental Accounting Standards Board (GASB).
These rules apply to both non-profit as well as governmental accounting. All public trading companies and other companies have to release their financial documents to the government and follow the GAAP principles and accounting procedures.
An alternative to GAAP is the International Financial Reporting Standards (IFRS). This was put in place by the International Accounting Standards Board (IASB). IFRS regulates the accounting norms in the EU (European Union) and many South American and Asian countries.
What are the principles of GAAP?
10 principles come under GAAP which helps the business owners understand its need. Those principles are:
Principle of consistency
Accountants are counted upon disclosing the accurate financial data and explaining if there are any inconsistencies present within the listings. The data is then compared to the previous records provided to see if any fluctuations have occurred.
Principle of regularity
In this, the accountant is expected to send the financial data to the federal agencies regularly.
Principle of sincerity
The accountant responsible is expected to provide the federal agencies with data that is impartial and accurate. It should fully depict the status of the company’s finances.
Principle of permanence of methods
The methods used to draw the financial reports should be steady so that they can be compared with the previous information provided by the organization. If there are any changes in the procedure, explain it plainly.
Principle of non-compensation
Both the strengths and the weaknesses of the company should be reported without any debt compensation expectations. It should be transparent for the people responsible to understand the company and analyze it as needed.
Principle of prudence
There should not be any speculation in the data provided. All of it should be cold, hard fact-based with a proper representation of it to support the facts.
Principle of continuity
When evaluating the value of the assets, the accountant should presume that the business will in operation.
Principle of periodicity
The data entries provided should be distributed evenly. Revenue reporting should be consistent and a periodic evaluation of it should be forwarded.
Principle of materiality
There should a full disclosure of the entire financial listing and accounting data in the reports provided. There should not be any discrepancies.
Principle of utmost good faith
Strive ahead in business with utmost honesty, keeping in mind the Latin term “Uberrimae Fidei” which is commonly used in the insurance industry. The phrase means utmost good faith. All involved parties should be honest while in business.
GAAP not only has accounting principles set, but it also supervises revenue and cost recognition, disclosures required, set currency units, financial statement presentations, and formats, etc.
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Importance of GAAP
To make the financial listings are standardized and transparent through procedures and standards, Generally Accepted Accounting Principles (GAAP) are used.
This makes it easy for the investors and other parties to understand the financial status of a company before they invest in it. These also help in drawing a comparative analysis between the two companies.
While some companies present their figures without following the GAAP accounting procedures, they also believe that the rules are not very flexible. There are non-GAAP methods, however, investors are quite skeptical about these as they can be used for malpractices.
Countries that follow these procedures
Many of you might have doubts regarding GAAP accounting procedures that are followed in which countries Only the United States follows the rules and regulations of the GAAP.
IFRS (International Financial Reporting Standards) is followed as an alternative in 110 countries. IFRS, as mentioned before, is regulated by the International Accounting Standards Boards (IASB).
When one nation opts for another nation’s accounting methods, conflict arises. The reason behind this is that one cannot set a universally preferred standard for accounting. The GAAP is based on the rules of the United States whereas the IFRS is principle-based.
Despite that, universally, the governments expect the companies to document and publish their financial information consistently. Even though the two systems are different from each other, they have their own rules, norms, and guidelines, GAAP and IFRS have been collaborating to merge the two systems to suit the needs of many.
Difference between IFRS and GAAP
While both the systems are designed to regulate the accounting data, there are a few differences between them:
- Last in First Out inventory (LIFO): GAAP allows companies to use the LIFO for inventory cost method, it is not allowed by the IFRS.
- Research and Development Costing: Under the regulation of IFRS, the capitalization of costs and paying them off in multiple periods if the conditions placed are met. Under GAAP, some costs are charged when they are incurred GAAP.
- Write-down reversal: It mentions the amount of write-down of the fixed assets that cannot be reversed if or when the market value of the asset decreases under GAAP. IFRS allows write-down reversals.
While GAAP is used to ensure that the financial records of an organization are publicly released for both government and investors, it is advised to businesses to be honest with their practices. Keep a concise record of all the transactions and add footnotes in case of any changes made in the system.