These are used to prepare, present and report financial statements for a wide variety of entities, including publicly traded and privately held companies, non-profit organizations, and government authorities, with the Financial Accounting Standards Board (FASB) establishing rules for public and private companies, and non-profit organizations; the Governmental Accounting Standards Board (GASB) determining a different set of assumptions, principles for local and state governments - and the Federal Accounting Standards Advisory Board (FASAB) performing a similar role for federal government entities.
Although the SEC has a stated goal of moving from US GAAP to the International Financial Reporting Standards (IFRS), the provisions of which differ considerably from GAAP - progress has been slow and uncertain.
The FASB expressed US GAAP in XBRL beginning in 2008.
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 (AICPA) subject to Securities and Exchange Commission regulations. The AICPA first created the Committee on Accounting Procedure in 1939, and replaced that with the Accounting Principles Board in 1951. 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. Other organizations involved in determining United States accounting standards include the Governmental Accounting Standards Board (GASB), formed in 1984, and the Public Company Accounting Oversight Board (PCAOB).
Circa 2008, the FASB issued the FASB Accounting Standards Codification, which reorganized the thousands of US GAAP pronouncements into roughly 90 accounting topics
In 2008, the Securities and Exchange Commission issued a preliminary "roadmap" that may lead the U.S. to abandon Generally Accepted Accounting Principles in the future (to be determined in 2011), 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 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, the International Accounting Standards Board is becoming more important in the U.S.
Financial reporting should provide information that is:
- useful to present to potential investors and creditors and other users in making rational investment, credit, and other financial decisions.
- helpful to present to potential investors and creditors and other users in assessing the amounts, timing, and uncertainty of prospective cash receipts.
- about economic resources, the claims to those resources, and the changes in them.
- helpful for making financial decisions
- helpful in making long-term decisions
- helpful in improving the performance of the business
- useful in maintaining records
To achieve basic objectives and implement fundamental qualities GAAP has four basic assumptions, four basic principles, and four basic constraints.
- Accounting 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.
- The Time-period principle implies that the economic activities of an enterprise can be divided into artificial time periods.
- Historical cost principle requires companies to account and report based on acquisition costs rather than fair market value for most assets and liabilities. 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 requires companies to record when revenue is (1) realized or realizable and (2) earned, not when cash is received. This way of accounting is called accrual basis accounting.
- 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
- 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 that will be least likely to overstate assets and income should be picked (see convention of conservatism).
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.
These organizations influence the development of GAAP in the United States.
- 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.
- 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.
- Statements of Financial Accounting Standards - the most authoritative GAAP setting publications. More than 150 have been issued to date.
- 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 - guidelines on applying standards, interpretations, and opinions. Usually solves some very specific accounting issue that will not have a significant, lasting effect.
- Other influential organizations (e.g. American Accounting Association, Institute of Management Accountants, Financial Executives Institute)
- 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.
In the United States, GAAP derives, in order of importance, from:
- 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);
- 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 nonauthoritative.
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 (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.
- "IFRS: Current situation and next steps", pwc.com
- "New mechanisms eyed by FASB, IASB in long march toward global comparability", Ken Tysiac January 10, 2013, journalofaccountancy.com
- Gauthier, Stephen J. Governmental Accounting, Auditing, and Financial Reporting.
- Financial Accounting Standards. QuickMBA.
- Financial Accounting Standards Advisory Council (FASAC). FASB FASAC.
- AICPA (2008-02). AICPA Applauds FASB's Issuance of GAAP Codification. The CPA Letter
- Crovitz, L. Gordon (2008-09-08). "Closing the Information GAAP". The Wall Street Journal. Retrieved 2008-09-24.
- Progress Report on Commitment to Convergence of Accounting Standards—June 24, 2010. FASB.
- Jeffers, Agatha; Mengyu Wei, Sidney Askew (2010). "The Switch from US GAAP to IFRS". Proceedings of the Northeast Business & Economics Association: 48–54.
- Page 56. "Auditing, an integrated approach" by Alvin Arens and James Loebbecke, published in 1980 by Prentise Hall, ISBN 0-13-051656-2 [Amazon-US | Amazon-UK].
- 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