Generally Accepted Accounting Principles (GAAP) are standards and rules for reporting financial information, as established and approved by the Financial Accounting Standards Board. GAAP is concerned with the measurement of economic activity, the time when such measurements are to be made and recorded, the disclosures surrounding the activity, and the preparation and presentation of summarized economic information in the form of financial statements. There are two broad categories of accounting principles: recognition and disclosure.
Recognition principles determine the timing and measurement of items that enter the accounting cycle and impact the financial statements. These are quantitative standards that require economic information to be reflected numerically. Disclosure principles deal with the factors that are always not numeric. Disclosures involve qualitative information that is an essential ingredient of a full set of financial statements. The following are the bodies which have involved in the creation of GAAP:
- Committee on Accounting Procedure
- Accounting Principles Board
- Financial Accounting Standards Board (FASB)
- American Institute of Certified Public Accountants (AICPA)
- Accounting Standards Codification etc
- International Accounting Standards Board (IASB)
- Securities and Exchange Commission (SEC) etc
Different Generally Accepted Accounting Principles (GAAP) have been developed in various countries over the past decades. These differences have risen largely due to unique legal, regulatory, social, economic, religious and cultural environments. It is resulting in financial statements that are not comparable and difficult for users to interpret. Most recently there has been a movement towards harmonization and convergence of GAAP. The most significant initiative has been led by the International Accounting Standards Board (ISAB) formerly known as International Accounting Standards Committee (IASC).
The SEC requires all publicly owned companies to follow generally accepted accounting principles. As new standards are developed or refined, accountants interpret the standards and adapt accounting practices to the new standards. Private companies are given an option to follow or not follow GAAP but it is advantages for even for private organization when competing with their foreign competitors.
Why IASB not FASB?
The objective of IASB is to develop in the public interest, single set of high quality understandable enforceable global accounting standards that require high quality, transparent and complete information in financial statements and other financial reporting to help participants in the world’s capital markets and other users make economic decisions.
In United States, the FASB and Securities Exchange Commission (SEC) are both presently committed to promoting and assisting in development of one set of high quality accounting standards that are globally accepted. The FASB had developed rules to integrate itself into IASB to make universal accounting standards. The FASB mainly considered the US domestic businesses and worked in accordance with GAPP. Therefore IASB is more broad and standard in nature compare to FASB. Therefore organizations should follow and implement IASB rather than FASB standards in the global market for harmonization of accounting standards.