Generally Accepted Accounting Principles

(United States)
Generally Accepted Accounting Principles (GAAP or U.S. GAAP, pronounced like
"gap") is the accounting standard adopted by the U.S. Securities and Exchange
Commission (SEC).[1] While the SEC previously stated that it intends to move from U.S.
GAAP to the International Financial Reporting Standards (IFRS), the latter differ
considerably from GAAP and progress has been slow and uncertain.[2][3] 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.
[4]

The Financial Accounting Standards Board (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.[5]
Accounting standards have historically been set by the American Institute of Certified
Public Accountants (AICPA) subject to U.S. Securities and Exchange
Commission (SEC) regulations.[6] The AICPA first created the Committee on Accounting
Procedure in 1939 and replaced that with the Accounting Principles Board in 1959. In
1973, the Accounting Principles Board was replaced by the Financial Accounting
Standards Board (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.[7] Other organizations involved in
determining United States accounting standards include the Governmental Accounting
Standards Board (GASB), formed in 1984; and the Federal Accounting Standards
Advisory Board (FASAB), formed in 1990.[8]
Circa 2008, the FASB issued the FASB Accounting Standards Codification, which
reorganized the thousands of U.S. GAAP pronouncements into roughly 90 accounting
topics.[9]
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.[10] As of 2010,
the convergence project was underway with the FASB meeting routinely with the IASB.
[11]
 The SEC expressed their aim to fully adopt International Financial Reporting
Standards in the U.S. by 2014.[12] With the convergence of the U.S. GAAP and the
international IFRS accounting systems, as the highest authority over International
Financial Reporting Standards, the International Accounting Standards Board is
becoming more important in the United States.
Basic concepts[edit]
To achieve basic objectives and implement fundamental qualities GAAP has four basic
assumptions, four basic principles, and four basic constraints.
Assumptions[edit]
 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: assumes that the business will be in operation indefinitely. This
validates the methods of asset capitalization, depreciation, and amortization. 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 is going to be the unit of
record. The FASB accepts the nominal value of the US Dollar 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[edit]
 Historical cost principle requires companies to account and report assets &
liabilities acquisition costs rather than fair market value . 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 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. 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. Expenses have to be matched with revenues 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[edit]
 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)
 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.[13]

Involved in development
These organizations influence the development of GAAP in the United States.
 United States Securities and Exchange Commission  (SEC)
The SEC was created as a result of the Great Depression. At that time there was
no structure 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. The SEC works closely with various private organizations setting
GAAP, but does not set GAAP itself.
 American Institute of Certified Public Accountants  (AICPA)
In 1939, urged by the SEC, the 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 and was dissolved in 1973
for lack of productivity and failure to act promptly. After the creation of the FASB,
the AICPA established the Accounting Standards Executive
Committee (AcSEC). It publishes:

1. 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.
U.S. GAAP does not take into account ethics in deciding its guidelines.
This allows room for the perpetuation of wage inequality.
2. Statements of Position, which provides guidance on financial reporting
topics until the FASB or GASB sets standards on the issue.
3. 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 (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:

1. Statements of Financial Accounting Standards – the most authoritative

GAAP setting publications. 168 standard has been issued before the New
codification.
2. 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.
3. Interpretations – modify or extend existing standards. There have been
around 50 interpretations published to date.
4. 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 Board (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, GAAP derives, in order of importance, from:

1. issuances from an authoritative body designated by the American Institute of

Certified Public Accountants (AICPA) Council (for example, the Financial
Accounting Standards Board Statements, AICPA Accounting Principles
Board Opinions, and AICPA Accounting Research Bulletins);
2. other AICPA issuances such as AICPA Industry Guides;
3. industry practice; and
4. into para-accounting literature in the form of books and articles.