Among the most valuable components of the US capital and equities market is the enforcement of generally accepted accounting principles (GAAP). This was issued by the Financial Accounting Standards Board (FASB) to improve the consistency and transparency of public companies in the United States and must be followed.
These procedures and principles mandate that publicly traded companies report consistently and accurately across various industries.
What Is US GAAP?
GAAP is the standardized principles and procedures all public companies must follow when producing financial statements. The term is short for Generally Accepted Accounting Principles and is a codification of standards produced by the Financial Accounting Standards Board (FASB).
What Is The Financial Accounting Standards Board (FASB)?
FASB is an independent nonprofit organization that takes on the responsibility of producing accounting and financial reporting policies and procedures. These policies and procedures create a financial reporting framework for all publicly owned companies in the US. FASB was created as the successor to the Accounting Principles Board in 1973 and works with the International Accounting Standards Board (IASB) to assist in creating a global set of comparable standards.
Why Is US GAAP Important?
US GAAP has had a tremendous impact on the quality and confidence of the US financial markets and is widely adopted across the globe as the gold standard for financial reporting. The immense value of US GAAP comes from its application in the capital markets as a reliable, consistent, and clear method of accounting. This allows both internal and external stakeholders to easily read and interpret financial results regardless of the business.
The reporting standards create a legal framework by which reporting entities must comply and its application is monitored by independent third-party auditors. It creates a financial system that is reliable, trustworthy, and consistent which helps investors to build confidence in the US capital markets.
Internally, business leaders rely on GAAP reporting for its consistency and accuracy. Because it is a standardized method of reporting, it allows for easy comparison across different time periods and does not require a great deal of time to be spent on trying to interpret the results.
Due to its reliability and consistency, it is often used by non-public entities for reporting to lenders and other external stakeholders. Lenders especially prefer US GAAP financial statements as it allows them to easily measure the business’s financial position and other risk factors. The mere use of US GAAP provides lenders with confidence because it demonstrates that the reporting entity is following the highest standard of financial reporting.
Businesses that implement and utilize US GAAP are more likely to accurately reflect their income and expenses along with their financial position. This creates a reliable set of data by which to create future budgets and other financial models that are needed by the finance department.
Why Follow US GAAP?
Some opponents to US GAAP cite the fact that it is not government regulated and therefore should not be relied on so heavily, however, GAAP is created in collaboration with businesses and government. While it is not mandatory for all businesses, it is nevertheless very highly recommended that all businesses adopt GAAP as a standard in their organization.
If your business is seeking to gain investments through either public offerings or through other avenues it is a significant benefit to adopt US GAAP as your reporting standards.
Resources For US GAAP
Since FASB is the issuing and governing body of US GAAP, all information surrounding changes made to the codification can be found directly on their website www.fasb.org. The accounting standards codification is available via a subscription service on their website. Additionally, a hard copy can be purchased.
Updates to the codification and resources to assist in the implementation of new standards can be found at https://www.fasb.org/implementation. All updates have been listed on the sidebar of the implementation landing page.
Additional resources can be found at any of the big four accounting firms, Deloitte, PWC, KPMG, and EY.
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