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Generally Accepted Accounting Principles (GAAP or U.S. GAAP, pronounced like "gap") is the
accounting standard Publicly traded companies typically are subject to the most rigorous standards. Small and midsized businesses often follow more simplified standards, plus any specific disclosures required by their specific lenders and shareholders. Some firms opera ...
adopted by the
U.S. Securities and Exchange Commission The U.S. Securities and Exchange Commission (SEC) is a large independent agency of the United States federal government, created in the aftermath of the Wall Street Crash of 1929 The Wall Street Crash of 1929, also known as the Great Crash ...
(SEC). While the SEC previously stated that it intends to move from U.S. GAAP to the
International Financial Reporting Standards International Financial Reporting Standards, commonly called IFRS, are accounting standard Publicly traded companies typically are subject to the most rigorous standards. Small and midsized businesses often follow more simplified standards, plus ...
(IFRS), the latter differ considerably from GAAP and progress has been slow and uncertain."IFRS: Current situation and next steps"
pwc.com
More recently, the SEC has acknowledged that there is no longer a push to move more U.S companies to IFRS so the two sets of standards will "continue to coexist" for the foreseeable future.
SEC January 5, 2017, sec.gov
The
Financial Accounting Standards Board The Financial Accounting Standards Board (FASB) is a private standard-setting body whose primary purpose is to establish and improve Generally Accepted Accounting Principles Publicly traded companies typically are subject to the most rigorous ...
(FASB) published U.S. GAAP in Extensible Business Reporting Language (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 The American Institute of Certified Public Accountants (AICPA) is the national professional organization of Certified Public Accountants (CPAs) in the United States, with more than 418,000 members in 143 countries in business and industry, public ...
(AICPA) subject to
U.S. Securities and Exchange Commission The U.S. Securities and Exchange Commission (SEC) is a large independent agency of the United States federal government, created in the aftermath of the Wall Street Crash of 1929 The Wall Street Crash of 1929, also known as the Great Crash ...
(SEC) regulations. The AICPA first created the Committee on Accounting Procedure in 1939 and replaced that with the
Accounting Principles BoardThe Accounting Principles Board (APB) is the former authoritative body of the American Institute of Certified Public Accountants The American Institute of Certified Public Accountants (AICPA) is the national professional organization of Certified ...
in 1959. In 1973, the Accounting Principles Board was replaced by the
Financial Accounting Standards Board The Financial Accounting Standards Board (FASB) is a private standard-setting body whose primary purpose is to establish and improve Generally Accepted Accounting Principles Publicly traded companies typically are subject to the most rigorous ...
(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 BoardThe Governmental Accounting Standards Board (GASB) is the source of generally accepted accounting principles (GAAP) used by state and local governments in the United States The United States of America (USA), commonly known as the United Sta ...
(GASB), formed in 1984; and the
Federal Accounting Standards Advisory Board The Federal Accounting Standards Advisory Board (FASAB) is a United States federal advisory committee whose mission is to improve federal financial reporting through issuing federal financial accounting standards and providing guidance after co ...
(FASAB), formed in 1990. Circa 2008, the FASB issued the FASB Accounting Standards Codification, which reorganized the thousands of U.S. 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 Convergence may refer to: Arts and media Literature *Convergence (book series), ''Convergence'' (book series), edited by Ruth Nanda Anshen *Convergence (comics), "Convergence" (comics), two separate story lines published by DC Comics: **A four-par ...
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 International Financial Reporting Standards, commonly called IFRS, are accounting standard Publicly traded companies typically are subject to the most rigorous standards. Small and midsized businesses often follow more simplified standards, plus ...
, the
International Accounting Standards Board The International Accounting Standards Board (IASB) is the independent, accounting standard Publicly traded companies typically are subject to the most rigorous standards. Small and midsized businesses often follow more simplified standards, plus ...
is becoming more important in the United States.


Basic concepts

To achieve basic objectives and implement fundamental qualities GAAP has four basic assumptions, four basic principles, and four basic constraints.


Assumptions

* Business 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 A going concern is a business Business is the activity of making one's living or making money by producing or buying and selling products (such as goods and services). Simply put, it is "any activity or enterprise entered into for profit." H ...
: assumes that the business will be in operation indefinitely. This validates the methods of asset capitalization, depreciation, and
amortization Amortization (or amortisation; ) is paying off an amount owed over time by making planned, incremental payments of principal Principal may refer to: Title or rank * Principal (academia) The principal is the chief executive and the chief academ ...
. 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 A currency, "in circulation", from la, currens, -entis, literally meaning "running" or "traversing" in the most specific sense is money Money is any item or verifiable record that is generally accepted as payment for goods and services ...

currency
is going to be the unit of record. The
FASB The Financial Accounting Standards Board (FASB) is a private standard-setting body whose primary purpose is to establish and improve Generally Accepted Accounting Principles Publicly traded companies typically are subject to the most rigorous ...
accepts the nominal value of the
US Dollar The United States dollar (symbol A symbol is a mark, sign, or that indicates, signifies, or is understood as representing an , , or . Symbols allow people to go beyond what is n or seen by creating linkages between otherwise very diffe ...
as the monetary unit of record unadjusted for inflation. * Time-period principle: implies that the economic activities of an enterprise can be divided into artificial time periods.


Principles

*
Historical cost In accounting Accounting or Accountancy is the measurement ' Measurement is the number, numerical quantification (science), quantification of the variable and attribute (research), attributes of an object or event, which can be used to compar ...
principle requires companies to account and report assets & liabilities acquisition costs rather than
fair market value The fair market value of property is the price at which it would change hands between a willing and informed buyer and seller. The term is used throughout the Internal Revenue Code The Internal Revenue Code (IRC), formally the Internal Revenue C ...
. 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 The revenue recognition principle is a cornerstone of accrual accounting together with the matching principle In accrual accounting, the revenue recognition principle states that revenues should be recorded during the period in which they are e ...
principle holds that companies should record revenue when earned but not when received. The flow of cash does not have any bearing on the recognition of revenue. This is the essence of
accrual basis accountingAccrual (''accumulation'') of something is, in finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with the creation and management of money and investments. ...
. 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 In accrual accounting, the revenue recognition principle states that revenues should be recorded during the period in which they are earned, regardless of when the transfer of cash occurs. And the matching principle instructs that an expense shou ...
.
Expense Expenditure is an outflow of money Money is any item or verifiable record that is generally accepted as payment for goods and services and repayment of debts, such as taxes, in a particular country or socio-economic context. The main function ...
s have to be matched with
revenue In accounting Accounting or Accountancy is the measurement ' Measurement is the number, numerical quantification (science), quantification of the variable and attribute (research), attributes of an object or event, which can be used to comp ...
s 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


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 (see
convention of conservatism In accounting, the convention of conservatism, also known as the doctrine of prudence, is a policy of anticipating possible future losses but not future gains. This policy tends to understate rather than overstate net assets and net income, and t ...
) * Cost Constraint: The benefits of reporting financial information should justify and be greater than the costs imposed on supplying it.


Required departures from GAAP

Under the
AICPA The American Institute of Certified Public Accountants (AICPA) is the national professional organization of Certified Public Accountants Certified Public Accountant (CPA) is the title of qualified accountants in numerous countries in the En ...
'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.


Involved in development

These organizations influence the development of GAAP in the United States. *
United States Securities and Exchange Commission The U.S. Securities and Exchange Commission (SEC) is a large independent agency of the United States federal government, created in the aftermath of the Wall Street Crash of 1929 The Wall Street Crash of 1929, also known as the Great Cras ...

United States Securities and Exchange Commission
(SEC) *: The SEC was created as a result of the
Great Depression The Great Depression was a severe worldwide economic depression An economic depression is a sustained, long-term downturn in economic activity in one or more economies. It is a more severe economic downturn than a economic recession, recess ...
. At that time there was no structure setting accounting standards. The SEC encouraged the establishment of private standard-setting bodies through the
AICPA The American Institute of Certified Public Accountants (AICPA) is the national professional organization of Certified Public Accountants Certified Public Accountant (CPA) is the title of qualified accountants in numerous countries in the En ...
and later the
FASB The Financial Accounting Standards Board (FASB) is a private standard-setting body whose primary purpose is to establish and improve Generally Accepted Accounting Principles Publicly traded companies typically are subject to the most rigorous ...
, 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 The American Institute of Certified Public Accountants (AICPA) is the national professional organization of Certified Public Accountants (CPAs) in the United States, with more than 418,000 members in 143 countries in business and industry, public ...
(AICPA) *: In 1939, urged by the SEC, the AICPA appointed the Committee on Accounting Procedure (CAP). 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 (APB), 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 Financial Accounting Standards Board (FASB) is a private standard-setting body whose primary purpose is to establish and improve Generally Accepted Accounting Principles Publicly traded companies typically are subject to the most rigorous ...
, the AICPA established the Accounting Standards Executive Committee (AcSEC). It publishes: *:# 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. U.S. GAAP does not take into account ethics in deciding it's guidelines. This allows room for the perpetuation of wage inequality *:# 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 The Financial Accounting Standards Board (FASB) is a private standard-setting body whose primary purpose is to establish and improve Generally Accepted Accounting Principles Publicly traded companies typically are subject to the most rigorous ...
(FASB) *: 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 chair Francis Wheat). This group determined that the APB must be dissolved and a new standard-setting structure is created. This structure is composed of three organizations: the Financial Accounting Foundation (FAF, it selects members of the FASB, funds and oversees their activities), the Financial Accounting Standards Advisory Council (FASAC), and the major operating organization in this structure the Financial Accounting Standards Board (FASB). FASB previously had 4 major types of publications: *:# Statements of Financial Accounting Standards – the most authoritative GAAP setting publications. 168 standard has been issued before the New codification. *:# 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 or Staff Positions – 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 (EITF) which deals with new and unusual financial transactions that have the potential to become common (e.g. accounting for Internet-based companies). 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. *:However, now all GAAP resides in the ASC (Accounting Standards Codification) so the FASB and EITF do not issue new standards but rather updates to the Codification. The Concepts statements still exist outside of the ASC but are not authoritative. *
Governmental Accounting Standards BoardThe Governmental Accounting Standards Board (GASB) is the source of generally accepted accounting principles (GAAP) used by state and local governments in the United States The United States of America (USA), commonly known as the United Sta ...
(GASB) *: Created in 1984, the GASB addresses state and local government reporting issues. Its structure is similar to that of the FASB's, and the FASB and GASB are located together and share resources. * 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); American Accounting Association, Institute of Management Accountants, Financial Executives Institute.


Precedence of GAAP-setting authorities

In the
United States The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country Continental United States, primarily located in North America. It consists of 50 U.S. state, states, a Washington, D.C., ...

United States
, GAAP derives, in order of importance, from: # issuances from an authoritative body designated by the
American Institute of Certified Public Accountants The American Institute of Certified Public Accountants (AICPA) is the national professional organization of Certified Public Accountants (CPAs) in the United States, with more than 418,000 members in 143 countries in business and industry, public ...
(AICPA) Council (for example, the
Financial Accounting Standards Board The Financial Accounting Standards Board (FASB) is a private standard-setting body whose primary purpose is to establish and improve Generally Accepted Accounting Principles Publicly traded companies typically are subject to the most rigorous ...
Statements, AICPA
Accounting Principles BoardThe Accounting Principles Board (APB) is the former authoritative body of the American Institute of Certified Public Accountants The American Institute of Certified Public Accountants (AICPA) is the national professional organization of Certified ...
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 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 non-authoritative. 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 The U.S. Securities and Exchange Commission (SEC) is a large independent agency of the United States federal government, created in the aftermath of the Wall Street Crash of 1929 The Wall Street Crash of 1929, also known as the Great Cras ...
(SEC), 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

*
Accounting standard Publicly traded companies typically are subject to the most rigorous standards. Small and midsized businesses often follow more simplified standards, plus any specific disclosures required by their specific lenders and shareholders. Some firms oper ...
*
Fin 48 FIN 48 (mostly codified at ASC 740-10) is an official interpretation of United States accounting rules that requires businesses to analyze and disclose income tax risks. It was effective in 2007 for publicly traded entities, and is now effective for ...
*
International Financial Reporting Standards International Financial Reporting Standards, commonly called IFRS, are accounting standard Publicly traded companies typically are subject to the most rigorous standards. Small and midsized businesses often follow more simplified standards, plus ...
* Other comprehensive basis of accounting *
Philosophy of accounting The philosophy of accounting is the conceptual framework for the professional preparation and auditing of financial statement Financial statements (or financial reports) are formal records of the financial activities and position of a business, ...
* Statutory accounting principles for US insurance companies


Notes


External links

{{Library resources box
SEC Accounting Bulletins
– United States
SEC Division of Corporate Finance
– United States
Financial Accounting Standards Board Website (FASB)
– United States
Government Accounting Standards Board Website (GASB)
– United States
US GAAP XBRL Taxonomy
– United States * U.S. Securities and Exchange Commission es:Principios de Contabilidad Generalmente Aceptados he:עקרונות חשבונאיים מקובלים