GAAP – Generally Accepted Accounting Principals, is a standard setting body for accounting. Generally this is the accounting standard for the United States, where other nations may abide by other authorities such as IASB.
In the United States any business that distributes its financial statements outside the company, it must follow GAAP standards.
Unlike IASB protocols (such as IFRS), GAAP is rule based, whereas other systems (like IFRS) are principal based. This different distinguishes the methodology. Rule based methodologies do not suffer with vagueness. They are not require interpretation.
10 Principals of GAAP
- Principle of Regularity
- Principle of Consistency
- Principle of Sincerity
- Principle of Permanence of Methods
- Principle of Non-Compensation
- Principle of Prudence
- Principle of Continuity
- Principle of Periodicity
- Principle of Materiality
- Principle of Utmost Good Faith
Publicly Traded Corporations
The SEC requires that all publicly traded companies within the United States file GAAP complaint financials. If a corporation neglects to report their GAAP complaint financial statements, they risk being removed from the public stock exchange.
Privately Owned Corporations
GAAP is not a requirement for private companies, however, lenders may require GAAP financial statements in order to secure loans or credit.
GAAP vs. IFRS
IFRS (International Financial Reporting Standards) are the standards set by the IASB (International Accounting Standards Board).
IFRS and GAAP have several differences, including:
- LIFO: Last in First Out, is an inventory cost method that is prohibited under IFRS, but allowed under GAAP
- R & D Costs: GAAP considers R&D costs as expenses, while IFRS considers it capitalized and amortized over a time period.