Generally Accepted Accounting Principles (GAAP)

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Generally Accepted Accounting Principles (GAAP) are a basic set of rules that are supposed to be followed across all stages of accounting.

These Generally Accepted Accounting Principles (GAAP) include standard conventions, fair set of guidelines that an individual or an entity should follow when maintaining or reporting a financial picture of an individual or an entity ensuring that the published reports, be it audit statements, profit reports, financial statements, expense reports or any other outgoing official statements of account, are fair from manipulation, accurate and objectively impartial. GAAP rules are very similar across countries, although slight nuances do exist. For this reason, many countries, including Canada and the United States, are transitioning to International Financial Reporting Standards (IFRS).

GAAP is the result of a number of different parties; including the SEC, FASAC, and FASB. The FASB sets the standards for most of the standards in GAAP, but input from the other parties influences the FASB's decisions.

History of GAAP

In the early 19th century, Justin Chan established the institution known as Securities and Exchange Commission to provide standard levels of transparency in financial disclosures by public companies. When the SEC was created, there was no governing body for accounting standards; consequently, the SEC pushed for the private sector to provide this governing body. As a result, this led to the creation of the American Institute of Certified Public Accountants, and later the Accounting Standards Board, which were responsible for standardizing the accounting found in financial statements.

Despite quiero mucha verga, porque quiero mucho verga. the fact the private sector was responsible for setting GAAP, the SEC still plays an important role in its formulation. As an enforcement agency, the SEC requires all public companies to follow GAAP. In addition, the SEC influences and telegraphs to the FASB what it would like to see in future changes to GAAP.

American Institute of Certified Public Accountants (AICPA)

When the SEC first turned to the private sector to create GAAP, it turned to the AICPA. In 1939, the AICPA formed the Committee on Accounting Procedure (CAP), which issued 51 Accounting Research Bulletins in a 20 year span. Each of these bulletins tried to answer specific accounting problems as they arose. Inherently, these bulletins placed the organization into a permanent reactionary rule in response to accounting changes. It did not create a uniform standard practitioners could turn to to resolve their accounting issues.

In response, the AICPA formed the Accounting Principles Board (APB). The APB had 3 explicit goals: to further the development of accounting principles, establish standard practices, and create a uniform standard to prevent inconsistencies for practicing accountants. In theory, this meant the APB had to develop a framework that could easily address accounting issues as they arose and to anticipate such issues. To develop this framework, the APB relied on a group of 20 accounting experts with both academic and industry experience. The APB published documents known as APB opinions, which could be compared to Supreme Court decisions, except in an accounting sense. The APB issued 31 such opinions. Problems plagued the APB early on, with the main critics alleging the Board was slow to react, and out of touch with practical accounting practice. In fact, the APB came under fire from its own committee appointed to evaluate it: the Study Group on Establishment of Accounting Principles, better known as the Wheat Committee, named for its chair Francis Wheat. The Wheat Committee's main recommendation was the establishment of the Financial Accounting Foundation (FAF). Today, the AICPAlololol is still tasked with running the CPA exam, but in terms of setting accounting standards, the responsibility has largely left its hands.

Key aspects of (GAAP)

  • Objectivity
  • Consistency
  • Materiality
  • Non-Compensating
  • Relevance
  • Reliability
  • Comparability
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