The standard guidelines for financial accounting that apply in all legal bodies are termed as generally accepted accounting principles or GAAP. These principles include sign conventions and standards that all accountants are subject to follow when recording financial transactions and creating balance statements.
Do all businesses follow GAAP?
Many businesses which specially depend on cash transactions can often leave out these practices from their financial departments. These practices dictate that financial decisions need to be made based on the conditions described in writing statements regardless of the actual credit situation.
The best example can be presented as having two ways of balancing your account. You can either balance it based on the amounts of incoming and outgoing checks or use the actual amounts of money that are in your account at any given time. This is because a check is a promissory note of a fund and is not equal to cash in any monetary definition.
Why GAAP?
GAAP can provide consistent financial statements and are especially useful for judging the worth of investment opportunities. GAAP standards require balance sheet item classification and also include the reporting of their outstanding shares. A company which does not follow these rules may be fishy and generally regarded as bad for investment. Current International Standards
Although there are no global standards that are currently followed throughout the world but countries are quickly establishing the International Financial Reporting Standards or IFRS as the global standard. The IFRS has been established by the International Accounting Standards Board or IASB. The board also updates these standards according to the requirements of global transactions and recordkeeping.
Most companies are of an international nature and this means that local accounting principles are not enough for them to coordinate with their headquarters or other offices. This means that they have to use IFRS so that their financial reporting standards are similar to an international equivalent.
Position of the United States
The United States currently does not conform to a particular standard, but the Securities and Exchange Commission (SEC) has discussed that they are strongly in favor of a unified and global system of accounting standards and they find that currently the IFRS is the best set of practices and can quickly be applied to companies operating in the country.
The Two Current Standard Bearers
There are only two standard producers in the industry. The first is IASB and the second is the Financial Accounting Standards Board or FASB. Both boards have recognized the need for uniform standards and have decided to work together to create international standards applicable to all financial transactions.
Further Reading
- Earnings management under German GAAP versus IFRS – www.tandfonline.com [PDF]
- Impact of the IFRS and US‐GAAP on economic‐financial indicators – www.emerald.com [PDF]
- Economic benefits of adopting IFRS or US‐GAAP–have the expected cost of equity capital really decreased? – onlinelibrary.wiley.com [PDF]
- The value-relevance of changes in financial leverage beyond growth in assets and GAAP earnings – journals.sagepub.com [PDF]
- The role of institutional and economic factors in the strategic use of non-GAAP disclosures to beat earnings benchmarks – www.tandfonline.com [PDF]
- Post-enron reform: Financial-statement insurance and GAAP revisited – heinonline.org [PDF]
- Rating agency adjustments to GAAP financial statements and their effect on ratings and credit spreads – meridian.allenpress.com [PDF]
- Voluntary adoption of non-local GAAP in the European Union: A study of determinants and consequences – www.tandfonline.com [PDF]
- Detecting GAAP violation: Implications for assessing earnings management among firms with extreme financial performance – www.sciencedirect.com [PDF]
- Changing from German GAAP to IFRS or US GAAP: A survey of German companies – www.tandfonline.com [PDF]
