GAAP (generally accepted accounting principles) is the set of accounting rules and standards that businesses should follow for accurate and efficient accurate reporting. These specifications comprise of all concepts and principles, aligned with industry-specific rules. GAAP not only ensures the transparency of financial reporting but also the consistency of the business organizations. As each geographical location demands each set of rules and guidelines for the businesses by the respective governments, each country designs its GAAP for their accounting reports.
This article is aimed at inferring all Generally Accepted Accounting principles that businesses should look for. In the United States, the government has put together a board for Financial Accounting Standards Board which stipulates overall GAAP which complies with all businesses in state and local government. Publicly traded companies are also guided for complying with all rules designed in parallel with SEC and GAAP requirements. This GAAP rules encompass all details, complexities, and legalities of corporate businesses and corporate accounting.
Adhered to all these rules, the Financial Accounting Standards Board (FASB), the United States government amends businesses in releasing all financial statements. Without all these regulatory standards, businesses would be free while submitting their financial information for whatever format businesses best suited for their requirements. With this complete freedom, while portraying a company’s fiscal standing, they can easily mislead investors.
Many of the global countries have already adopted the International Financial Reporting Standards which puts forward an international framework for public companies and businesses for preparation and disclosing of their financial statements. Businesses should stay parallel to these set of world-wide standards for simplifying their accounting procedures for delivering investors and auditors with a detailed view of finances.
Businesses Whose Shares are Publicly Traded on Stock Exchanges While Releasing Their Financial Statements to Public Companies Should Follow all GAAP Guidelines.
1. Principle of Regularity
This principle mandates accountants for using all GAAP-compliant rules while reporting and don’t just make it right as they proceed.
2. Principle of Consistency
With the application of consistent standards throughout the financial reporting process could ensure the whole system is employed universally. Businesses who opt to use GAAP guidelines for reporting should not switch to the International Financial Reporting Standards (IFRS) later.
3. Principle of Sincerity
While preparing accounting reports GAAP-compliant accountants should be committed to optimum accuracy and impartiality without misleading anyone. Accountants should present financial information and analysis fairly and accurately.
4. Principle of the Permanence of Methods
Just like any scientific procedure, through consistent procedures, businesses can prepare financial reports efficiently. Thus if another accountant follows the same steps, they should also the same conclusions.
5. Principle of Non-compensation
Compensation refers to offset accounts. While compliant to GAAP guidelines, business reporting must not hide negative accounting facts of debts behind assets or other costs behind revenue.
6. Principle of Prudence
Accountants are only required to report facts and not speculate or predict with fact-based reporting.
7. Principle of Continuity
While preparing reports, Accountants should assume that the business operations will continue to operate as it already has. All assumptions should be compiled as per what has happened in the past scenarios.
8. Principle of Periodicity
At accepted and consistent intervals, accountants should report financial data. The comparison should be done over standardized months, quarters, and years.
9. Principle of Materiality
Financial reports should disclose the overall organization’s monetary situation. No accounts or debts should mislead readers by omitting information during the financial reporting process.
10. Principle of Utmost Good Faith
All parties that are seeking participation should assume to be acting honestly.
Drawbacks of GAAP Reporting
While going through a company’s SEC filings will give a clear cut understanding over their adherence towards GAAP guidelines. The stringent rule sets of GAAP rarely capture the complexity of modern business. Following these principles smoothen the government regulations but it struggles to reflect the day-to-day business operations. Most businesses don’t prefer GAAP as they don’t prove to be much helpful for the internal decision-making process. These not only standardize the operations but does not benefit from micro-level insights into businesses.
Complexity and associated costs are other problems that businesses following GAP face while maintaining principles. This takes a lot of time, money, and specialized knowledge for building GAAP-compliant reports. Businesses who don’t plan accordingly will never nurture the full benefits of GAAP reporting as it is hard for them for justifying the cost as a preemptive strike.
Alternatives to GAAP
Businesses outside of the United States who don’t have much time or energy for making their operations compliant to GAAP rules should consider other alternatives of GAAP. Whatever straightforward system accounting operations follow if it doesn’t create any problems they don’t need to fix it.
Businesses can consider using International Financial Reporting Standards (IFRS) as it gives more focus on all detailed requirements of lenders, creditors, and any other users of SME financial statements. These statements will give a comprehensive understanding of cash flows, liquidity, and solvency. It also takes into account all costs related to the preparation of financial information.
IRS works best with small businesses for comprehensive functioning in international standards. Maintaining consistency over reports will guide businesses for functions for efficient functioning as per international standards. These reports prove to be valuable as it helps banks, investors, potential buyers, and businesses realize a clear view of their success.
Businesses while choosing their accounting system based on their business requirements and resources can be effective with strong accounting software packages. With consistent and accurate reporting businesses can get positive results. Companies should have a strong understanding of the GAAP guidelines.
The banking sector and indeed the financial world face many complications such as compliance issues, accounting principles, and business practices. Thus all the employees at every phase of the organization adhere to all rules and principles. They must also focus on giving optimum focus on maintaining on how efficient the accounting teams possess. Drop a query on how OURS GLOBAL’s finance and accounting service offerings will drive effective accounting operations with compliance to GAAP and IFRS guidelines as per their business requirements. We would like to hear from you at any time.