US GAAP: Generally Accepted Accounting Principles
What Is GAAP?
Generally Accepted Accounting Principles (GAAP or US GAAP) are a collection of commonly-followed accounting rules and standards for financial reporting. The specifications of GAAP, which is the standard adopted by the U.S. Securities and Exchange Commission (SEC), include definitions of concepts and principles, as well as industry-specific rules. The purpose of GAAP is to ensure that financial reporting is transparent and consistent from one organization to another.
US GAAP Standards
GAAP is merely a set of standards. Although its principles work to improve the transparency in financial statements, they do not provide any guarantee that a company's financial statements are free from errors or omissions that are intended to mislead investors.
The SEC has stated that it intends to move from GAAP to the International Financial Reporting Standards (IFRS). But the latter differ considerably from GAAP and progress toward adoption or convergence has been slow. (See International Financial Reporting Standards (IFRS).)
While GAAP itself is not government-regulated, it exists because of the combined efforts of government and business. The use of GAAP is not mandatory for all businesses, but SEC requires publicly traded and regulated companies to follow GAAP for the purpose of financial reporting.
Companies that issue stock are held to this standard by SEC, which requires yearly external audits by independent accountants, but companies without external investors are not obliged to follow this standard. Despite the mandate, the SEC is not responsible for the standards associated with GAAP. Instead, the Financial Accounting Standards Board (FASB) actively influences any changes in financial reporting standards used at the corporate level. The FASB Advisory Council (FASAC) advises the FASB on all matters that may influence GAAP rules.
Government entities, on the other hand, are influenced by a set of standards that are slightly different from GAAP. The Government Accounting Standards Board (GASB) manages those standards. Other countries have their own GAAP rules, which differ from those in the United States. Each country's own version of the FASB, such as the Canadian Institute of Chartered Accountants (CICA), creates these rules.
In 2008, the Securities and Exchange Commission issued a preliminary "roadmap" that may lead the United States to abandon GAAP in the future, and to join more than 100 countries around the world in using the London-based International Financial Reporting Standards (IFRS).
FASB and IASB Convergence
As of 2010, the convergence was underway with the FASB meeting routinely with the International Accounting Standards Board (IASB), which administers IFRS. The SEC expressed at that time its desire to fully adopt IFRS in the U.S. by 2014. (See International Financial Reporting Standards (IFRS).)
With the convergence of the U.S. GAAP and the IFRS accounting systems, as the highest authority, the IASB is becoming more important in the United States.
Although convergence efforts have stalled since FASB and IASB completed projects that better align accounting rules in U.S. GAAP and IFRS in February 2013—including revenue recognition, leases, and credit losses on financial instruments—former SEC Chair Mary Jo White said in January 2017 just prior to her departure that collaboration between the two boards should continue. She called for renewed emphasis on global accounting standards that would best serve investors through collaboration between FASB and IASB.
CFA Institute Viewpoint
Investors increasingly make their investment decisions in a global context of comparing investments in companies located in many countries that use different accounting, auditing, and other business practices. Making such comparisons is difficult, time-consuming, complex, and risky, even for seasoned professionals.
The current SEC reconciliation requirement is an important tool that allows them to compare companies in different countries on an apples-to-apples basis. To the extent accounting standards have not yet converged (or new differences develop) investment professionals rely on the reconciliation as an efficient and cost effective way of bringing to their attention the material differences in accounting.
For that reason, CFA Institute has long supported, as well as actively engaged in, the development of global accounting standards. Our objective has always been to encourage the IASB in developing financial reporting standards that meet the needs of investors, investment professionals, and other users. We also support the memorandum of understanding between the IASB and FASB to work together on converging IFRS and U.S. GAAP.
The current reconciliation requirement for IFRS to U.S. GAAP serves as a primary tool for identifying the material differences in practice as well as in principle. We believe that the removal of that requirement would severely impede the Boards’ efforts to converge and improve financial reporting standards. We believe that the elimination of the reconciliation requirement could be expedited when the IASB and FASB complete their work on key projects, such as the conceptual framework, financial statement presentation, revenue recognition, and financial instruments.