GAAP

GAAP
Name	Generally Accepted Accounting Principles
Abbreviation	GAAP
Type	Accounting standard
Jurisdiction	United States
Established	Early 20th century
Issuing bodies	Financial Accounting Standards Board; Securities and Exchange Commission; American Institute of Certified Public Accountants

GAAP is a common set of accounting standards, procedures, and conventions used for financial reporting in the United States. It provides a framework for preparing financial statements so that results reported by corporations, nonprofit organizations, and government-sponsored enterprises can be compared across periods and entities. The framework is shaped by standard-setting bodies and regulatory authorities that also interact with courts, legislators, and market participants.

Overview

GAAP covers recognition, measurement, presentation, and disclosure of financial information for entities subject to oversight by the Securities and Exchange Commission, audit by members of the American Institute of Certified Public Accountants, or participation in capital markets such as those governed by the New York Stock Exchange and NASDAQ. The principal private-sector standard-setter is the Financial Accounting Standards Board, which issues accounting standards and updates, while the SEC retains enforcement authority and interacts with federal courts like the United States Court of Appeals for the Second Circuit in precedent-setting cases. GAAP is applied by preparers ranging from multinational corporations like General Electric and Apple Inc. to smaller publicly traded firms listed on exchanges such as the Chicago Board Options Exchange.

Principles and Components

GAAP comprises several interlocking concepts and authoritative pronouncements including statements issued by the Financial Accounting Standards Board, accounting interpretations from the American Institute of Certified Public Accountants through bodies such as the Financial Accounting Standards Board's Emerging Issues Task Force, and rules enforced by the Securities and Exchange Commission. Core concepts often referenced include the historical cost principle as applied in the accounting methods of firms like IBM and Ford Motor Company, revenue recognition policies impacting companies such as Microsoft and Amazon (company), and impairment testing exemplified in cases involving Enron-era reform debates. Components also encompass financial statement presentation requirements affecting balance sheets, income statements, statements of cash flows, and statements of shareholders' equity used by corporations including ExxonMobil, Procter & Gamble, Coca-Cola, and Walmart. Authoritative literature includes accounting standards codifications used by auditors at firms like PricewaterhouseCoopers, Deloitte, Ernst & Young, and KPMG.

Application and Compliance

Public companies listed on New York Stock Exchange and NASDAQ apply GAAP in preparing annual reports filed with the Securities and Exchange Commission, audited by registered public accounting firms subject to oversight by the Public Company Accounting Oversight Board. Compliance involves internal accounting policies adopted by corporate officers, audit committees often modeled after governance practices at General Motors and Johnson & Johnson, and external audits resulting in opinions issued by firms such as BDO USA and the Big Four. Enforcement actions involving SEC investigations or litigation in tribunals like the United States District Court for the Southern District of New York have influenced compliance practices; notable enforcement matters touched companies like WorldCom and Tyco International during post-2000 regulatory reforms.

Differences from Other Frameworks

GAAP is frequently contrasted with other reporting frameworks such as the International Financial Reporting Standards issued by the International Accounting Standards Board, and specialized frameworks used by entities in jurisdictions like United Kingdom with its standards-setting history at the Financial Reporting Council (United Kingdom). Unlike reporting under tax codes such as the Internal Revenue Code of 1986, GAAP focuses on providing decision-useful information to investors and creditors, similar in intent to standards applied in financial centers like Tokyo Stock Exchange and Euronext. Comparisons between GAAP and frameworks used by multinational groups headed by firms like Toyota Motor Corporation, Siemens, or Nestlé highlight differences in recognition, measurement, and disclosure, which affect cross-border consolidation, mergers and acquisitions overseen by authorities like the Federal Trade Commission or Department of Justice (United States).

History and Development

The evolution of GAAP involved early 20th-century developments in response to corporate growth, market failures, and crises culminating in legislative responses such as the Securities Act of 1933 and the Securities Exchange Act of 1934, which established the Securities and Exchange Commission. Subsequent professional activity by the American Institute of Certified Public Accountants and the founding of the Financial Accounting Standards Board followed accounting scandals and economic episodes involving companies such as Lehman Brothers and Arthur Andersen. Landmark regulatory initiatives like the Sarbanes–Oxley Act of 2002 and policy debates in the U.S. Congress shaped the priorities and authority of standard-setters and enforcement bodies. Over time, codification efforts by the FASB and dialogues with international organizations including the International Accounting Standards Board influenced the contemporary structure and content of GAAP.

Criticisms and Limitations

Critics have argued that GAAP can be complex and rules-based compared with principles-based frameworks advocated by thinkers and institutions such as the International Accounting Standards Board and some academics at Harvard University and University of Chicago. High-profile corporate failures and accounting restatements involving Enron, WorldCom, and HealthSouth fueled debates about auditor independence, regulatory capture, and the effectiveness of oversight by bodies like the Public Company Accounting Oversight Board. Other limitations cited include difficulties in fair value measurement in volatile markets such as those experienced by Lehman Brothers during the 2007–2008 financial crisis, and challenges for small- and medium-sized entities similar to firms listed on regional exchanges like OTC Markets Group.

Category:Accounting