FOLLOWING UP FROM THE STORY/ARTICLE, THE OTHER DAY; Using The Law To Break The Law (http://www.familymediasite.com/im-w-o-k-e-using-the-law-to-break-the-law-aka-the-patriot-act/#warrior_T6WS5YPOLz1696259198649) AND (https://terryreece.substack.com/p/im-woke-and-im-proud-using-the-law?utm_source=post-email-title&publication_id=476694&post_id=137595650&utm_campaign=email-post-title&isFreemail=false&r=rm0gs&utm_medium=email); BECAUSE I HAVE AND DO MAKE SOME SMALL/TINY “INVESTMENTS”; LET’S JUST EXPLORE 1/ONE/SOME OF THE “MANY CRIMES/FRAUDS THAT T-MAN HAS DONE TO THE WORLD…NOT EVEN GETTING INTO HIS “MURDEROUS CRIMES AND ATTEMPTED “INTERNATIONAL MOB BOSS CRIMES”=LET’S JUST TAKE A “LOOK-SEE” AT: GAAP: Understanding It and the 10 Key Principles
GAAP: Understanding It and the 10 Key Principles
U.S. public companies must follow GAAP for their financial statements
By
Updated May 24, 2023
Reviewed by
Fact checked by
Fact checked by Suzanne Kvilhaug
Suzanne is a content marketer, writer, and fact-checker. She holds a Bachelor of Science in Finance degree from Bridgewater State University and helps develop content strategies for financial brands.
Learn about our editorial policies (
GAAP: Understanding It and the 10 Key Principles
U.S. public companies must follow GAAP for their financial statements
By
Updated May 24, 2023
Reviewed by
Fact checked by
Fact checked by Suzanne Kvilhaug
Suzanne is a content marketer, writer, and fact-checker. She holds a Bachelor of Science in Finance degree from Bridgewater State University and helps develop content strategies for financial brands.
Learn about our editorial policies
What Are the Generally Accepted Accounting Principles (GAAP)?
Generally accepted accounting principles (GAAP) refer to a common set of accounting rules, standards, and procedures issued by the Financial Accounting Standards Board (FASB). Public companies in the U.S. must follow GAAP when their accountants compile their financial statements.
GAAP is guided by ten key tenets and is a rules-based set of standards. It is often compared with the International Financial Reporting Standards (IFRS), which is considered more of a principles-based standard. IFRS is a more international standard, and there have been recent efforts to transition GAAP reporting to IFRS.
KEY TAKEAWAYS
- GAAP is the set of accounting rules set forth by the FASB that U.S. companies must follow when putting together financial statements.
- GAAP aims to improve the clarity, consistency, and comparability of the communication of financial information.
- GAAP may be contrasted with pro forma accounting, which is a non-GAAP financial reporting method.
- The ultimate goal of GAAP is to ensure a company’s financial statements are complete, consistent, and comparable.
- GAAP is used mainly in the U.S., while most other jurisdictions use the IFRS standards.
Understanding GAAP
GAAP is a combination of authoritative standards (set by policy boards) and the commonly accepted ways of recording and reporting accounting information. GAAP aims to improve the clarity, consistency, and comparability of the communication of financial information.
GAAP may be contrasted with pro forma accounting, which is a non-GAAP financial reporting method. Internationally, the equivalent to GAAP in the U.S. is referred to as International Financial Reporting Standards (IFRS). IFRS is currently used in 166 jurisdictions.1
GAAP helps govern the world of accounting according to general rules and guidelines. It attempts to standardize and regulate the definitions, assumptions, and methods used in accounting across all industries. GAAP covers such topics as revenue recognition, balance sheet classification, and materiality.
The ultimate goal of GAAP is to ensure a company’s financial statements are complete, consistent, and comparable. This makes it easier for investors to analyze and extract useful information from the company’s financial statements, including trend data over a period of time. It also facilitates the comparison of financial information across different companies.
The 10 Key Principles of GAAP
There are 10 general concepts that lay out the main mission of GAAP.2
1. Principle of Regularity
The accountant has adhered to GAAP rules and regulations as a standard.
2. Principle of Consistency
Accountants commit to applying the same standards throughout the reporting process, from one period to the next, to ensure financial comparability between periods. Accountants are expected to fully disclose and explain the reasons behind any changed or updated standards in the footnotes to the financial statements.
3. Principle of Sincerity
The accountant strives to provide an accurate and impartial depiction of a company’s financial situation.
4. Principle of Permanence of Methods
The procedures used in financial reporting should be consistent, allowing a comparison of the company’s financial information.
5. Principle of Non-Compensation
Both negatives and positives should be reported with full transparency and without the expectation of debt compensation.
6. Principle of Prudence
This refers to emphasizing fact-based financial data representation that is not clouded by speculation.
7. Principle of Continuity
While valuing assets, it should be assumed the business will continue to operate.
8. Principle of Periodicity
Entries should be distributed across the appropriate periods of time. For example, revenue should be reported in its relevant accounting period.
9. Principle of Materiality
Accountants must strive to fully disclose all financial data and accounting information in financial reports.
10. Principle of Utmost Good Faith
Derived from the Latin phrase uberrimae fidei used within the insurance industry. It presupposes that parties remain honest in all transactions.
Compliance With GAAP
If a corporation’s stock is publicly traded, its financial statements must adhere to rules established by the U.S. Securities and Exchange Commission (SEC). The SEC requires that publicly traded companies in the U.S. regularly file GAAP-compliant financial statements in order to remain publicly listed on the stock exchanges.3 GAAP compliance is ensured through an appropriate auditor’s opinion, resulting from an external audit by a certified public accounting (CPA) firm.
Although it is not required for non-publicly traded companies, GAAP is viewed favorably by lenders and creditors. Most financial institutions will require annual GAAP-compliant financial statements as a part of their debt covenants when issuing business loans. As a result, most companies in the United States do follow GAAP.
If a financial statement is not prepared using GAAP, investors should be cautious. Without GAAP, comparing financial statements of different companies would be extremely difficult, even within the same industry, making an apples-to-apples comparison hard. Some companies may report both GAAP and non-GAAP measures when reporting their financial results. GAAP regulations require that non-GAAP measures be identified in financial statements and other public disclosures, such as press releases.
Selecting GAAP Principles
The hierarchy of GAAP is designed to improve financial reporting. It consists of a framework for selecting the principles that public accountants should use in preparing financial statements in line with U.S. GAAP. The hierarchy is broken down as follows:2
- Statements by the Financial Accounting Standards Board (FASB) and Accounting Research Bulletins and Accounting Principles Board opinions by the American Institute of Certified Public Accountants (AICPA)
- FASB Technical Bulletins and AICPA Industry Audit and Accounting Guides and Statements of Position
- AICPA Accounting Standards Executive Committee Practice Bulletins, positions of the FASB Emerging Issues Task Force (EITF), and topics discussed in Appendix D of EITF Abstracts
- FASB implementation guides, AICPA Accounting Interpretations, AICPA Industry Audit, and Accounting Guides, Statements of Position not cleared by the FASB, and accounting practices that are widely accepted and followed
Accountants are directed to first consult sources at the top of the hierarchy and then proceed to lower levels only if there is no relevant pronouncement at a higher level. The FASB’s Statement of Financial Accounting Standards No. 162 provides a detailed explanation of the hierarchy.4
GAAP vs. IFRS
GAAP is focused on the accounting and financial reporting of U.S. companies. The Financial Accounting Standards Board (FASB), an independent nonprofit organization, is responsible for establishing these accounting and financial reporting standards.5 The international alternative to GAAP is the International Financial Reporting Standards (IFRS), set by the International Accounting Standards Board (IASB).6
The IASB and the FASB have been working on the convergence of IFRS and GAAP since 2002.7 Due to the progress achieved in this partnership, the SEC, in 2007, 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.8 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.
Some differences that still exist between both accounting rules include:
- LIFO Inventory: While GAAP allows companies to use the Last In First Out (LIFO) as an inventory cost method, it is prohibited under IFRS.
- Research and Development Costs: These costs are to be charged to expense as they are incurred under GAAP. Under IFRS, the costs can be capitalized and amortized over multiple periods if certain conditions are met.
- Reversing Write-Downs: GAAP specifies that the amount of write-down of an inventory or fixed asset cannot be reversed if the market value of the asset subsequently increases. The write-down can be reversed under IFRS.
As corporations increasingly need to navigate global markets and conduct operations worldwide, international standards are becoming increasingly popular at the expense of GAAP, even in the U.S. Almost all S&P 500 companies report at least one non-GAAP measure of earnings as of 2019.9
Key Differences
There are some important differences in how accounting entries are treated in GAAP vs. IFRS. One major issue is the treatment of inventory. IFRS rules ban the use of last-in, first-out (LIFO) inventory accounting methods. GAAP rules allow for LIFO. Both systems allow for the first-in, first-out method (FIFO) and the weighted average-cost method. GAAP does not allow for inventory reversals, while IFRS permits them under certain conditions.
History[edit]
Accounting standards are currently set by the Financial Accounting Standards Board and were historically set by the American Institute of Certified Public Accountants (AICPA) subject to U.S. Securities and Exchange Commission (SEC) regulations.[7] Auditors took the leading role in developing GAAP for business enterprises.[8]
Standard Setting Prior to the Creation of the FASB[edit]
The United States Securities and Exchange Commission (SEC) was created as a result of the Great Depression. At that time there was no organization 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. Currently, the SEC works closely with various private organizations setting GAAP, but does not set GAAP itself.
In 1939, urged by the SEC, the American Institute of Certified Public Accountants (AICPA) appointed the Committee on Accounting Procedure (CAP). During 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 (APB), whose mission it was to develop an overall conceptual framework. It issued 31 opinions until it was dissolved in 1973.
Realizing the need to reform the APB, leaders in the accounting profession appointed a Study Group on the Establishment of Accounting Principles (commonly known as the Wheat Committee for its chairman Francis Wheat). This group determined that the APB must be dissolved and a new standard-setting structure created.
THE VERY 1ST TIME, I KNEW ABOUT SUCH BUSINESS ACCOUNTING METHODS, WAS DURING MY 1992 “BUSINESS MANAGEMENT CLASSES” AND AFTER RECEIVING MY “CERTIFICATE OF COMPLETION”; I REALLY GOT “REAL LIFE” EXPOSED/”HIPPED” TO THE PRACTICE BY A CERTAIN “FRIENDS OF RED BIRD AIRPORT” ACQUAINTANCE WHO DID THE “BOOKS AND ACCOUNTING STUFF FOR THE RED BIRD AIRPORT MANAGER, BACK THEN; “HE”, THE PERSON THAT “HIPPED ME” TO THE “GAAP” METHODS OF “Using The Law To Break The Law”=HE LAUGHED AT ME WHEN HE TOLD ME: “TERRY, HERE’S THE ACCOUNTING AND ASSETS AND BUSINESS PLAN THAT WE SUBMIT TO THE BANKS; AND HERE’S THE OTHER PACKAGE THAT WE USE TO RUN OUR RED BIRD DEVELOPMENT CORPORATIONS AND THE AIRPORT’S BUSINESS”!!!
I COULD VERY EASILY SEE THE “ART OF THE DEALS” OF/FOR LYING ABOUT MANY CORPORATE THINGS AND ACCOUNTING S=BUTTT, AS SHOCKED AS I WAS TO “SEE IT BEING DONE IN PERSON, REAL LIFE, I PERSONALLY HAVE NEVER/EVER WANTED TO USE IT WITHIN OUR COMPANIES’ OPERATIONS AND “BLACK AND BROWN AND OTHERS” OF BUSINESS PEOPLE, GENERALLY DON’T GET TO “GAAP” OUR COMPANIES THESE WAYS, WITHOUT GETTING INTO “JAIL-ABLE HOT WATER TROUBLES”! TO ME, THIS STUFF WAS/IS “LEGALIZED PONZI SCHEMES PRACTICES”!!!!
Ponzi scheme=(https://en.wikipedia.org/wiki/Ponzi_scheme)=”LYING ABOUT ASSETS AND INVESTOR HOLDINGS” FOR “ENRICHMENT” ” OF A FEW, AT THE TOP OF THE “PYRAMID SCHEME” AND YET;
THE “LEGALIZED” WAY TO LIE ABOUT STUFF/ASSETS/INVESTMENT OPPORTUNITIES IS CALLED: “GAAP” AND CAN BE USED TO VASTLY “CHEAT” PEOPLE, “IF” NOT “CHECKED” AND “MONITORED” CLOSELY, BY WILLING LAW AUTHORITIES. WHEN I TOOK THE “SERIES 7/SEVEN” TESTS, “COLD-TURKEY”; THE 3 QUESTIONS THAT CAUSED ME TO FAIL THE WHOLE SERIES TEST, WERE WITHIN THE “GAAP” AREAS OF QUESTIONS… MY TENDENCY TO BE “REAL/TRUTHFUL”; MADE ME FAIL THE TESTS…Watch: Trump in courtroom for fraud trial
FINALLY; UTILIZING THE “STATEMENTS” THAT “NO ONE WAS HURT” BY THESE TYPES OF “EXCESSIVE GAAP” METHODS IS BEING “DISHONEST/LYING/DECEPTIVE/DISINGENUOUS”; YEAHH, THE BANKS MADE MONEY AND T-MAN GOT WHAT HE WANTED=MONEY/$$ AND POWER AND LYING FAME S…BUT, “tiny/Small” Businesses GOT DENIED BANK LOANS, BECAUSE OF FINANCIAL BANK ASSETS PLACED UPON THE “HOLDINGS” FOR T-MAN=SIDES OF THE FINANCIAL BOOKS, RATHER THAN TO “LIQUID/LOAN ABLE TO ALL OTHERS” SIDES OF THE BOOKS. AND MEMBERS OF THESE BANKS=CHARGED THEIR DEPOSITORS AND CONTRIBUTORS, MORE FOR ALL OTHER TYPES OF BANKING SERVICES AND LOANS/%’S THAN OTHERWISE WOULD HAVE/SHOULD HAVE BEEN ACCEPTABLE PRACTICES….
NNOOWWW, THAT HE’S “CAUGHT” AS THE “RICO/FRAUDSTER/EVIL/HATER/THIEF/MURDERER”, THAT HE HAS BEEN FOR LIFE=HE WANTS PEOPLE THAT ARE FALLING OVER AND OVER FOR HIS “SATANIC/LUCIFER CON-JOBS” TO “STEAL/KILL/DESTROY” ALL OTHERS, THAT SEE THROUGH HIS EVILNESS!!!!
©I’M W.O.K.E. & I’M PROUD!; “FINANCIAL/ECONOMIC, SYSTEMIC DISCRIMINATION”=AGAIN; Using The Law To Break The Law
