U.S. Generally Accepted Accounting Principles (U.S. GAAP)
U.S. GAAP is “a technical accounting term which encompasses the conventions, rules, and procedures necessary to define accepted accounting practice at a particular time.” This definition implies two points:
1. U.S. GAAP is a fluid set of principles based on current accounting thought and practice. It changes in response to changes in the business environment. Therefore, the researcher must review the most current authoritative support, recognizing that recent Accounting Standards Updates (ASUs) sometimes supersede or modify older standards.
2. U.S. GAAP allows alternative principles for similar transactions and the alternatives are considered equally acceptable. Therefore, the researcher must keep searching for alternatives rather than quitting after locating one acceptable principle.
Major U.S. GAAP functions include:
1. Measurement. U.S. GAAP requires recognizing or matching expenses of a given period with the revenues earned during that period (for example, depreciating fixed assets and recognizing stock option compensation expense and bad debt allowances). Besides attempting to measure periodic income objectively, the measurement principle focuses on the valuation of financial statement accounts (for example, adjusting trading securities each reporting period to fair value).
2. Disclosure. U.S. GAAP provides information necessary for the users’ decision models (for example, methods to aggregate accounts and descriptive terminology, as in reporting lease obligations in the footnotes). However, U.S. GAAP does not require disclosure of certain macroeconomic factors (for example, interest rates and unemployment rates) that may interest competitors, bankers, and other financial statement users.
CPAs may not express an opinion that the financial statements are presented in conformity with U.S. GAAP if the statements depart materially from an accounting principle promulgated by an authoritative body designated by the AICPA Council, such as the FASB and the AICPA's APB. While opinions from these bodies previously provided the “substantial authoritative support” necessary to create U.S. GAAP, other sources of U.S. GAAP were available. Most notable were standard industry practices either when a practice addresses a principle that does not otherwise exist in U.S. GAAP or when a practice seems to conflict with U.S. GAAP. In either case, management must justify the practice, and the CPA must evaluate the case to ascertain whether the practice violates established U.S. GAAP. In addition, if unusual circumstances would make it misleading to follow the normal procedure, management must disclose departures from the authoritative guidelines and justify the alternative principle.
The FASB uses the following guiding principles to establish and improve standards:
1. To be objective and ensure neutrality.
2. To solicit and weigh stakeholders’ views.
3. To examine costs versus benefits before issuing a standard.
4. To issue high-quality standards.
5. To manage the standard improvement process.
6. To provide clear and timely communications.
7. To review effects of past decisions.
It arrives at U.S. GAAP by considering objectives of financial reporting set out in Statement of Financial Accounting Concepts No. 8. Financial reporting should provide information that:
1. Is useful to present and potential investors, creditors, and other users in making rational investment, credit, and similar decisions. The information should be comprehensible to those who have a reasonable understanding of business and economic activities and are willing to study the information with reasonable diligence.
2. Helps present and potential investors, creditors, and other users in assessing the amounts, timing, and uncertainty of prospective cash receipts and disbursements from dividends or interest, as well as the proceeds from the sale, redemption, or maturity of securities or loans.
3. Provides information about the economic resources of an enterprise; the claims to those resources (obligations of the enterprise to transfer resources to other entities and owners’ equity); and the effects of transactions, events, and circumstances that change its resources and claims to those resources.
4. Is useful for assessing financial performance as reflected by accrual accounting. Accrual accounting better enables users to assess past and future performance of an entity compared to cash flows alone.
5. Helps assess changes in economic resources and claims to those resources not reflected in financial performance.
6. Provides investors and creditors with cash flows related to enterprise cash flows. Financial reporting should provide information to help investors, creditors, and others assess the amounts, timing, and uncertainty of prospective net cash inflows to the related enterprise.
