What is US GAAP?

The GAAP is a set of principles that US companies must adhere to when preparing their annual financial statements.

The Generally Accepted Accounting Principles (GAAP or US GAAP) are a set of financial reporting accounting rules and standards that are widely followed. The GAAP specifications, which are the standards adopted by the United States Securities and Exchange Commission (SEC), include definitions of concepts and principles, as well as industry-specific rules.

The goal of US GAAP is to ensure that financial reporting is consistent and transparent from one organization to the next.

Although its principles work to improve financial statement transparency, they do not guarantee that a company’s financial statements are free of errors or omissions intended to mislead investors.

The SEC has stated its intention to transition from US GAAP to International Financial Reporting Standards (IFRS). However, they differ significantly from US GAAP, and progress toward adoption or convergence has been slow. (For more information, see International Financial Reporting Standards (IFRS).)

While GAAP is not government-regulated, it exists as a result of the collaboration of government and business. Although the use of GAAP is not required for all businesses, the SEC requires publicly traded and regulated companies to use GAAP for financial reporting.

Difference between US GAAP and IFRS

GAAP is concerned with the accounting and financial reporting of companies based in the United States. These accounting and financial reporting standards are established by the Financial Accounting Standards Board (FASB), an independent nonprofit organization.

The International Financial Reporting Standards (IFRS), established by the International Accounting Standards Board, are the treatment of accounting entries that differs significantly between GAAP and IFRS. The treatment of inventory is a major issue.

Last-in, first-out (LIFO) inventory accounting methods are prohibited by IFRS rules. LIFO is permitted under GAAP. Both systems support the first-in, first-out (FIFO) and weighted average-cost (WAC) methods. Inventory reversals are not permitted under GAAP, but they are permitted under certain conditions under IFRS.

When a company has investments on its balance sheet, such as stocks, bonds, or derivatives, it must account for them and their value changes. Both GAAP and IFRS require investments to be classified into discrete asset categories.

The main distinction is in recognising income or profits from an investment: under GAAP, this is largely determined by the legal form of the asset or contract; under IFRS, the legal form is irrelevant and is determined solely by when cash flows are received.

Other distinctions can be found in the treatment of exceptional items and discontinued operations. In practise, because much of the world follows the IFRS standard, convergence to IFRS could benefit both international corporations and investors.