GAAP and its Importance for US Businesses

GAAP and its Importance for US Businesses

All organizations have to publish financial reports. These reports communicate the operational performance and financial health of the institution to members, investors, shareholders, government, statutory regulators, and all other stakeholders.

However, it is not feasible for different organizations to apply their own rules, formats, principles and time frames for publishing the reports. The format of the reports has to be standardized. That is why in the United States, the Generally Accepted Accounting Principles or GAAP came into being. These accounting standards are controlled by the Financial Accounting Standards Board (FASB) and the Governmental Accounting Standards Board (GASB).

The Evolution of GAAP

The concepts and conventions of GAAP did not come into existence on one day. They evolved over a period of time. Even now changes are made to the principles as and when they are required. However, only the two regulatory accounting bodies have permission to make those changes and communicate them to the rest of the industry.

Making changes or amendments to the established principles is a long winding process. First the accounting regulators have to identify a burning financial reporting problem. Then they have to put forth proposals with their recommendations. They will have to seek the opinions of all the concerned stakeholders. Then they issue the final standards and publish implementation guidelines. The standards are also subject to review from time to time.

Importance of GAAP for Businesses

The significance of financial statements and accounting practices that are based on GAAP is described below:

  1. GAAP is based on certain principles. They dictate to the accountants what items should be recognized in the financial statements, which amounts should be reported, how these items and amounts should be displayed, and what disclosures are important to the readers of the financial statements.Accountants have to prepare the balance sheet or a statement of net position to explain the financial situation of the company. To elucidate the results of their operations, they have to prepare a statement of revenues and expenses, changes in net position, statement of comprehensive income, and all the additional explanations that are essential for understanding the true nature of the company’s results.
  2. When a company plans to issue stock or acquire another company, investors and traders examine the financial statements closely and decide if they should put their capital in the deal or not.
  3. Taxpayers look at the GAAP regulated statements prepared by government owned institutions and analyze if their hard earned money is being utilized efficiently.
  4. When policy makers have to decide on monetary policy and government budgeting, GAAP reporting helps them with all the data they need.
  5. GAAP is more than just a set of principles. It instills trust among the general public that the true performance of an organization is being revealed to them.
  6. GAAP allows audits and verifications to be conducted on an organization’s accounts.
  7. It breaks down complex financial numbers and makes it easily understandable for lenders, donors, and other stakeholders. Financial statements based on GAAP allow organizations to seek large quantum of loans from banks and non-banking finance companies. The lenders know that these statements represent the true worth of the company, and if the numbers look good, they can easily issue loans based on the statements.

Stakeholders have for long complained that some of the accounting principles are overly convoluted. Their complexity only serves to obscure vital information. Acting on these views, FASB and GASB are working towards simplifying GAAP. The general consensus is that simplicity in accounting helps in full disclosure of finances, quickens the accounting process, and enables all stakeholders to understand the financial standing of organizations better.

Every country has its own set of accounting principles. They differ from one another. This causes confusion and argument especially in matters of international trade. Recently, there has been a movement to get everyone to adhere to a set of International Financial Reporting Standards (IFRS). However, most economies still follow their own Generally Accepted Accounting Principles.

For information on how Invensis Technologies can deliver value to your business through Finance and Accounting Outsourcing Services that are based on GAAP, please contact our team on US +1-302-261-9036; UK +44-203-411-0183; AUS +61-3-8820-5183; IND +91-80-4115-5233; or write to us at sales {at} invensis {dot} net.

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