Overview of GAAP Accounting Methods
GAAP stands for Generally Accepted Accounting Principles. It is a standardized system of definitions, procedures and best practices for the use of accountants in analyzing and reporting the financial status of a company, either internally to management or externally to shareholders, creditors and government regulators. There are two levels of GAAP in the U.S.: authoritative, which represents guidance that has been specifically published and codified by the Financial Accounting Standards Board, and nonauthoritative, which is guidance published by other sources.
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History
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The history of the standardization of accounting procedures on a global basis began in 1939, with the formation of the Committee on Accounting Procedure (CAP) by the American Institute of Accountants (AIA.) The AIA renamed itself to the American Institute of Certified Public Accountants (AICPA) in 1957, and formed the Accounting Principles Board in 1959. In 1973, the AICPA formed the Financial Accounting Standards Board (FASB), the current authority on GAAP and accounting procedure.
Application
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The standardization of accounting definitions and procedures allows for the orderly and efficient communication of financial information. In order to function, the capital markets require a clear and universally accepted set of standards to convey information used to direct the allocation of capital. If investors cannot rely on consistent information in annual reports and loan applications to portray an accurate picture of the financial state of a company, there will be fewer loans made, and investors would demand a much higher rate of return on capital to compensate for the risk of the unknown,
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Major Provisions
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The Federal Accounting Standards Advisory Board has issued a set of standards on 39 different subjects. Major subject areas include accounting for assets and liabilities, accounting for direct loans and loan guarantees, accounting for inventory and related property, accounting for liabilities of the Federal Government, managerial cost accounting and management's discussion and analysis standards.
Managerial Discussion Obligations
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In addition to standardizing much of the general reporting of financial information, the Federal Accounting Standards Advisory Board has also set specific expectations for company managers in discussing their own financial reporting. Specifically, GAAP principles require management to discuss their mission and structure, their goals and results for the last reporting period, to discuss their financial statements, and to address accounting systems, controls and compliance issues. GAAP also requires managers to discuss the possible effects of risks and trends on the company or entity they lead.
Other Considerations
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In addition to GAAP considerations, stock-issuing companies must comply with a number of other federal laws, including the Securities Act of 1935, the Investment Company Act of 1940 and the Investment Advisers Act of 1940.
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