The FASB (Financial Accounting Standards Board) made a set of procedures, rules, and standards for accounting called "GAAP (Generally Accepted Accounting Principles)." GAAP is what accountants in the U.S. have to do when they put together the financial statements of public companies. GAAP is a set of rules and standards based on ten main principles. It is often compared to the IFRS (International Financial Reporting Standards), which are more of a set of rules. IFRS is a more international standard, and there have been recent efforts to switch from GAAP to IFRS reporting. GAAP rules must be followed by companies that share their financial statements with the public or are traded on stock exchanges or indices.

Learning GAAP

GAAP is a set of rules that accountants usually follow when they record and report information. These rules are set by policy boards and are very important. GAAP is meant to make it easier for people to understand, compare, and use financial information. GAAP is similar to pro forma accounting, which is not based on GAAP but is a way to report on finances. IFRS (International Financial Reporting Standards) are like GAAP in the US, but for the rest of the world. One hundred sixty-six countries use IFRS right now.

GAAP is a set of general guidelines and rules that keep the accounting world in order. It tries to ensure that all accounting assumptions, definitions, and methods are the same across all industries. GAAP talks about how to put things on a balance sheet and how important something is. The main goal of GAAP is to make sure that a business's monetary reports are consistent, easy, and complete to compare with those of other companies. This makes it easier for investors to look at the company's financial statements and find useful information, like data on trends over time. It also makes it easier to compare how money is handled by different businesses.

Why Is GAAP Vital?

GAAP is important because it keeps people's trust in the markets. Without GAAP, investors would be less likely to trust the information companies give them because they wouldn't be sure it's true. Without that trust, there might be fewer transactions, which could make transaction costs go up and make the economy weaker. GAAP also makes it easier for investors to compare companies by making it easier to compare "apples with apples."

What Do "Non-GAAP Measures" Mean?

Companies can still show numbers that don't follow GAAP rules as long as they say so. When companies think GAAP rules aren't flexible enough to cover all the details of how they run their business, they sometimes do this. In that case, they might give special metrics that aren't required by GAAP and the information required by GAAP. Investors should be careful, though, because non-GAAP measures can sometimes be used to trick people.

IFRS vs. GAAP

GAAP is all about how accounting is done and how money is reported by U.S. companies. These accounting and financial reporting standards are set by the FASB (Financial Accounting Standards Board), an independent, non-profit group. The IASB (International Accounting Standards Board) makes the IFRS (International Financial Reporting Standards), which are like GAAP but for the rest of the world.

The FASB and the IASB have been working since 2002 to make IFRS and GAAP more similar. Due to the progress made in this partnership, the SEC no longer requires non-U.S. companies registered in the U.S. to reconcile their financial reports with GAAP if their accounts are already in line with IFRS. In 2007, this took place. Before the ruling, companies from outside the U.S. that traded on U.S. exchanges had to give financial statements that met GAAP standards.

Getting along with GAAP

If a company's stock is traded on a public market, its financial statements must follow the rules of the U.S. SEC (Securities and Exchange Commission). The SEC makes public companies in the U.S. file financial statements that follow GAAP regularly if they want to stay on the stock market. An auditor's opinion, which comes from an external audit done by a CPA firm, makes sure that a company is following GAAP.

GAAP isn't required for companies that don't trade on the stock market, but lenders and creditors like it. Most banks have debt covenants that require annual financial statements that follow GAAP when they give out business loans. GAAP is used by most businesses in the US because of this. Investors should be careful with financial statements that weren't made using GAAP. Without GAAP, it would be hard to compare the financial statements of different companies, even if they are all in the same industry. It would be hard to compare "apples to apples" in this case. Some companies may report both non-GAAP and GAAP measures along with their financial results.