Description
The United States Generally Accepted Accounting Principles also referred to as the U.S. GAAP are the accounting standards adopted by the United States Securities and Exchange Commission. In other words, they are a set of common accounting standards, principles, and procedures that must be adhered to by companies when compiling and balancing their financial statements. According to Ampofo & Sellani (2005), GAAP is the amalgamation of authoritative standards put in place by the policy boards and the commonly agreeable means of reporting and recording information. Moreover, GAAP augments the clarity of the communication and feedback of information pertinent to finances of a c ompany. With regards to its origin, they were first set by the American Institute of Certified Accounts (AICPA) under strict conformity to the regulations by the Securities and Exchange Commission (SEC).
GAAP is mandated with maintaining a minimal degree of consistency in the financial statements of a company thus making it easier for investors to access, extract, as well as analyze useful information. Further description of GAAP elaborates on its function of facilitating cross-comparison across an array of companies regarding their financial information. With regards to compliance, the GAAP must be adhered to during the outside distribution of financial statements by a company. The phenomenon is further invoked if and when the stocks of a corporation or organization are publicly traded subsequently requiring the company to act under the strict provisions of the U.S. Securities and Exchange Commission.
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Other than the publicly traded stocks of a corporation, the GAAP as well covers other financial facets such as classification of items on a balance sheet, revenue recognition, as well as outstanding share measurements. GAAP also has regulations that non-GAAP compliance measures to be identified and stated in financial statements as well as other public disclosures such as press releases. Apart from the regulations, the US GAAP is divided into various principles as follows: historical cost principle, matching principle, revenue recognition principle, as well as the full disclosure principle. Essentially, the principles represent the aspects pertinent to entity finances such as revenues, costs, and expenses.
The Financial Accounting Standards Board also referred to as FASB issues the GAAP. Additionally, GAAP has an international alternative referred to as the International Financial Reporting Standards (IFRS) which is set by the International Accounting Standards Board (IASB) (Ampofo & Sellani, 2005). Due to the vitality of both the GAAP and the IFRS, their provision boards FASB and IASB have long been working together to converge both phenomena. Despite the fact that the GAAP is a set of guiding standards geared towards bolstering the transparency in financial statements, it is not a guarantee that the standards will rid the financial statements of omissions and errors meant to mislead the investors. Based on this, GAAP has substantial loopholes and gaps that mischievous accountants can exploit to distort figures (Ampofo & Sellani, 2005).
With regards to pension costs, the US GAAP determines the costs parallel to the US Statements of Financial Accounting Standards numbers 87 and 88. The scope of GAAP standards is inclusive of the deferred taxation concept whereby the standards require the provision of deferred taxation on a complete liability basis. With regards to dividends, invoking the US GAAP mandates recording the dividends in the same period that they were declared. Ultimately, under the element of impairment, the US GAAP requires that a company or corporation conduct an assessment or analysis to determine whether the impairment has accrued from undisputed future cash flows or the market value and this should be illustrated in the income statement (BT Group, 2002).
Fundamental assumptions demonstrated by GAAP make references to the business entity where the GAAP holds that the business is a separate entity from its owners as well as other businesses and as such, it requires that expenses and revenues be kept separate from personal expenses. Concerning the monetary unit, the phenomenon maintains that a stable currency is the unit of record and as such, the FASB accepts the US dollar in its nominal value unadjusted for inflation as a monetary unit of record.
Sources of GAAP
The Financial Accounting Standards Advisory Board is not only responsible for establishing the GAAP but also identifying the GAAP hierarchy for federal reporting entities. As such, the GAAP hierarchy is composed of the sources of the accounting principles fundamental in the preparation of federal reporting entities’ financial statements presented parallel to the GAAP and the framework for selecting those principles. The hierarchy thus lists the priority sequence of salient sources of GAAP that an entity has to consider due to its accounting and reporting guidance as discussed in SFFAS 34. In this regard, the sources of GAAP that are commonly accepted are classified in ascending order of saliency and authority as shown below:
Perhaps the most significant source of GAAP authority is the GASB statements as well as interpretations applicable to state and local government entities. In essence, the GASB is the standard-setting authority of the GAAP for the entities mentioned above inclusive of school districts (NCES, 2003).
The second authoritative source of GAAP duly recognized by the FASB is the Accounting Standards Codification applied by the nongovernmental entities (Deloitte, 2017).
The Securities and Exchange Commission’s interpretive releases and rules as well serve as authoritative sources of GAAP under the authority of the federal security laws that apply to the Securities Exchange Commission registrants.
The GASB and FASAB technical Bulletins and the AICPA industry audit, as well as accounting guides and statements of position particularly made to state and local governments through the AICPA and approved by the GASB also serve as sources of GAAP authority.
The Federal Financial Accounting Standards and interpretations periodically incorporated by the FASAB is a fundamental source of GAAP authority.
An additional source of GAAP authority are the technical releases proffered by the Auditing and Accounting Policy Committee of the FASAB, Accounting Tools, 2015).
GASB and FASAB implementation guides published by both organizations’ staff conclude the sources of GAAP authorities.
Other than the authoritative sources above, GAAP also has non-authoritative sources. However, the paper’s discourse is centered singularly around the authoritative sources and their hierarchy. The saliency of the hierarchy of the Generally Accepted Accounting Principles is a significant precept in recognition of the responsibility of the reporting entity rather than the auditor. It is further important in the selection and application of accounting principles and the adequacy of disclosure of financial statements. Further, the hierarchy ensures that the issues under consideration by the GAAP are those that relate to the top-notch pronouncement intended for broader issues rather than addressing the minor technical topics. Instead, the minor topics are dealt with the lesser pronouncements that deal with the technical issues of the same.
The hierarchy is salient in defining the levels or degrees of authority pertinent to different accounting pronouncements. Other than defining the level of authorities, it provides relevant and proper advice regarding the entities that can apply the authority of the GAAP as well as information regarding the sources of authority. As alluded to by the term, the GAAP hierarchy edifies degree of importance of the various authorities thereby elaborating on the variant degrees of importance or salience. Ultimately, the hierarchy determines which authorities to apply when making financial decisions under the standards set by GAAP.
References
Accounting Tools. (2015). GAAP Hierarchy. Retrieved from https://www.accountingtools.com/articles/gaap-hierarchy.html
Ampofo, A. A., & Sellani, R. J. (2005, June). Examining the differences between United States Generally Accepted Accounting Principles (US GAAP) and International Accounting Standards (IAS): implications for the harmonization of accounting standards. In Accounting forum (Vol. 29, No. 2, pp. 219-231). Elsevier.
BT Group Annual Report. (2002). The United States Generally Accepted Accounting Principles. Retrieved from https://www.btplc.com/report/pdf02/Annualreport/UnitedState.pdf
Deloitte. (2017). ASC 105 - Generally Accepted Accounting Principles. US GAAP Plus. Retrieved from https://www.iasplus.com/en-us/standards/fasb/general-principles/asc105
NCES. (2003). Governmental Accounting: Governmental GAAP Hierarchy. U.S. Department of Education. Retrieved from https://nces.ed.gov/pubs2004/h2r2/ch_4.asp
