Generally Accepted Accounting Principles (USA)
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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 rigorous standards. Small and midsized businesses often follow more simplified standards, plus any specific disclosures required by their specific lenders and shareholders. Some firms operate on th ...
adopted by the U.S. Securities and Exchange Commission (SEC) and is the default accounting standard used by companies based 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., ...
. 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 (GAAP) within the United States in the public's interest. The Securi ...
(FASB) publishes and maintains the
Accounting Standards Codification In US accounting practices, the Accounting Standards Codification is the current single source of United States Generally Accepted Accounting Principles (United States), Generally Accepted Accounting Principles (GAAP). It is maintained by the Financ ...
(ASC), which is the single source of authoritative nongovernmental U.S. GAAP. The FASB published U.S. GAAP in Extensible Business Reporting Language (XBRL) beginning in 2008.


Sources of GAAP

The FASB Accounting Standards Codification is the source of authoritative GAAP recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. In addition to the SEC's rules and interpretive releases, the SEC staff issues Staff Accounting Bulletins that represent practices followed by the staff in administering SEC disclosure requirements, and it utilizes SEC Staff Announcements and Observer comments made at Emerging Issues Task Force meetings to publicly announce its views on certain accounting issues for SEC registrants. Examples of nonauthoritative accounting guidance and literature include the following: * Practices that are widely recognized and prevalent either generally or in the industry * FASB Concepts Statements * American Institute of Certified Public Accountants (AICPA) Issues Papers * International Financial Reporting Standards of the International Accounting Standards Board * Pronouncements of professional associations or regulatory agencies * Technical Information Service Inquiries and Replies included in AICPA Technical Practice Aids * Accounting textbooks, handbooks, and articles. The FASB issues an Accounting Standards Update (Update or ASU) to communicate changes to the FASB Codification, including changes to non-authoritative SEC content. ASUs are not authoritative standards. Each ASU explains: * How the FASB has changed U.S. GAAP, including each specific amendment to the FASB Codification * Why the FASB decided to change U.S. GAAP and background information related to the change * When the changes will be effective and the transition method.


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 that is assumed will meet its financial obligations when they become due. It functions without the threat of liquidation for the foreseeable future, which is usually regarded as at least the next 12 months or the spec ...
: assumes that the business will be in operation indefinitely. This validates the methods of asset capitalization, depreciation, and
amortization Amortization or amortisation may refer to: * The process by which loan principal decreases over the life of an amortizing loan * Amortization (accounting) In accounting, amortization refers to expensing the acquisition cost minus the residual v ...
. 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, Wikt:currens, currens, -entis, literally meaning "running" or "traversing" is a standardization of money in any form, in use or currency in circulation, circulation as a medium of exchange, for example ba ...
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 rigorous standar ...
accepts the nominal value of the
US Dollar The United States dollar (Currency symbol, symbol: Dollar sign, $; ISO 4217, code: USD; also abbreviated US$ or U.S. Dollar, to distinguish it from Dollar, other dollar-denominated currencies; referred to as the dollar, U.S. dollar, American ...
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, also known as accountancy, is the measurement, processing, and communication of financial and non financial information about economic entity, economic entities such as businesses and corporations. Accounting, which ...
principle: requires companies to account and report assets and 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. They both determine the accounting period in which revenues and expenses are recognized. According to the principle, revenues are recogn ...
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 accounting Accrual (''accumulation'') of something is, in finance, the adding together of interest or different investments over a period of time. Accruals in accounting For example, a company delivers a product to a customer who will pay for it 30 days l ...
. 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 matching principle instructs that an expense should be reported in the same period in which the corresponding revenue is earned, and is associated with accrual accounting and the revenue recognition principle states tha ...
:
expense An expense is an item requiring an outflow of money, or any form of Wealth, fortune in general, to another person or group as payment for an item, service, or other category of costs. For a leasehold estate, tenant, renting, rent is an expense. Fo ...
s have to be matched with
revenue In accounting, revenue is the total amount of income generated by the sale of goods and services related to the primary operations of the business. Commercial revenue may also be referred to as sales or as turnover. Some companies receive rev ...
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: 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'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.


History

Accounting standards are currently set 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 (GAAP) within the United States in the public's interest. The Securi ...
and were historically been set by the American Institute of Certified Public Accountants (AICPA) subject to U.S. Securities and Exchange Commission (SEC) regulations. Auditors took the leading role in developing GAAP for business enterprises.


Standard Setting Prior to the Creation of the FASB

The
United States Securities and Exchange Commission The U.S. Securities and Exchange Commission (SEC) is an independent agencies of the United States government, independent agency of the United States federal government, created in the aftermath of the Wall Street Crash of 1929. The primary pu ...
(SEC) was created as a result of the
Great Depression The Great Depression (19291939) was an economic shock that impacted most countries across the world. It was a period of economic depression that became evident after a major fall in stock prices in the United States. The Financial contagion, ...
. 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 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 rigorous standar ...
, 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 The Wheat Committee, an American study group on the establishment of accounting Accounting, also known as accountancy, is the measurement, processing, and communication of financial and non financial information about economic entity, econo ...
for its chair Francis Wheat). This group determined that the APB must be dissolved and a new standard-setting structure created.


Financial Accounting Standards Board (FASB)

In 1973, the APB 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 (GAAP) within the United States in the public's interest. The Securi ...
(FASB) under the supervision of the
Financial Accounting Foundation The Financial Accounting Foundation (FAF) is located in Norwalk, Connecticut, United States. It was organized in 1972 as a non-stock, Delaware Corporation. It is an independent organization in the private sector, operating with the goal of ensur ...
with the Financial Accounting Standards Advisory Council serving to advise and provide input on the accounting standards. After the creation of the FASB, 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, and airlines) 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. In 1984, the FASB created the Emerging Issues Task Force (EITF). The mission of the EITF is to "assist the FASB in improving financial reporting through the timely identification, discussion, and resolution of financial accounting issues within the framework of the FASB Accounting Standards Codification." The FASB currently publishes the following: * Accounting Standards Codification, the only source of authoritative nongovernmental U.S. GAAP. In 2009, the Codification superseded the FASB's Statements of Financial Accounting Standards. 168 standards had been issued before the Codification. * Concepts Statements, 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. As they are not part of the Codification, they are not authoritative GAAP. There have been 8 concepts published to date, of which 5 have been superseded. * Technical Bulletins or Staff Positions, guidelines on applying standards, interpretations, and opinions. Usually solve some very specific accounting issue that will not have a significant, lasting effect or respond to questions from practitioners. * Accounting Standards Updates (ASU), where the FASB issues an ASU to communicate changes to the FASB Codification, including changes to non-authoritative SEC content. * Exposure Documents, where the FASB issues Exposure Documents to solicit an ASU to communicate changes to the FASB Codification, including changes to non-authoritative SEC content.


Codification in Accounting – FASB Accounting Standards Codification

Circa 2008, the FASB issued the FASB Accounting Standards Codification, which reorganized the thousands of U.S. GAAP pronouncements into roughly 90 accounting topics. 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 an independent agencies of the United States government, independent agency of the United States federal government, created in the aftermath of the Wall Street Crash of 1929. The primary pu ...
(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.


Other Organizations

Other organizations involved in determining United States accounting standards include: *
Governmental Accounting Standards Board The Governmental Accounting Standards Board (GASB) is the source of generally accepted accounting principles Publicly traded companies typically are subject to rigorous standards. Small and midsized businesses often follow more simplified standar ...
(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. *
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 c ...
(FASAB). Created in 1990, the FASAB addresses federal government financial reporting issues. The FASAB issues federal financial accounting standards and provides guidance to federal reporting entities. Other influential organizations include the Government Finance Officer's Association (GFOA), American Accounting Association, Institute of Management Accountants, and Financial Executives Institute.


Convergence with International Financial Reporting Standards

See also:
Convergence of accounting standards The convergence of accounting standards refers to the goal of establishing a single set of accounting standards that will be used internationally.FASB, 2012International Convergence of Accounting Standards—Overview Retrieved on April 27, 2012. Co ...
In 2006, the FASB began working with the
International Accounting Standards Board The International Accounting Standards Board (IASB) is the independent accounting standard-setting body of the IFRS Foundation. The IASB was founded on April 1, 2001, as the successor to the International Accounting Standards Committee (IASC). It ...
(IASB) to reduce or eliminate the differences between U.S. GAAP and the
International Financial Reporting Standards International Financial Reporting Standards, commonly called IFRS, are accounting standards issued by the IFRS Foundation and the International Accounting Standards Board (IASB). They constitute a standardised way of describing the company's fina ...
(IFRS), known as the IASB-FASB convergence project. The scope of the overall IASB-FASB convergence project has evolved over time. The IASB and FASB issued converged standards for accounting topics including Business combinations (2008), Consolidation (2011), Fair value measurement (2011), and Revenue recognition (2014). Other convergence projects have been discontinued. As of 2022, the convergence project is coming to an end and no new projects will be added to the agenda. In 2008, the Securities and Exchange Commission issued a preliminary "roadmap" that indicated it was considering whether to adopt or allow domestic issuers to use IFRS instead of U.S. GAAP. In 2010, the SEC expressed their aim to fully adopt International Financial Reporting Standards in the U.S. by 2014. However, standards under IFRS differ considerably from U.S. GAAP, so progress was slow and uncertain."IFRS: Current situation and next steps"
, pwc.com

Ken Tysiac, January 10, 2013, journalofaccountancy.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


See also

*
Accounting standard Publicly traded companies typically are subject to rigorous standards. Small and midsized businesses often follow more simplified standards, plus any specific disclosures required by their specific lenders and shareholders. Some firms operate on th ...
* Fin 48 *
International Financial Reporting Standards International Financial Reporting Standards, commonly called IFRS, are accounting standards issued by the IFRS Foundation and the International Accounting Standards Board (IASB). They constitute a standardised way of describing the company's fina ...
* Other comprehensive basis of accounting *
Philosophy of accounting The philosophy of accounting is the conceptual framework for the professional preparation and auditing of financial statements and accounts. The issues which arise include the difficulty of establishing a ''true and fair'' value of an enterpr ...
* Statutory accounting principles for U.S. 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