Do U.S. Companies Have to Use GAAP?

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Many American corporations have to use GAAP -- generally accepted accounting principles -- to keep their books. Other businesses may use GAAP even though they're not legally required to. GAAP is a set of rules drawn up by the Federal Accounting Standards Advisory Board based on established accounting practices. If an American accountant asserts that a financial statement conforms to standard practices, she's usually comparing it GAAP.

Who Uses GAAP?

If a corporation's stock is for sale on an American stock exchange, the company accounting has to meet GAAP standards. It's not enough for a company to claim this is true: A certified public accountant will have to check the books and verify that they meet GAAP standards. U.S. law doesn't require partnerships, sole proprietorships or privately held stock corporations to use GAAP. Banks or investors may require such businesses use GAAP accounting, however, and some businesses follow GAAP because doing so provides them with usable financial information.

IFRS

More than 100 countries around the world require or allow businesses to use International Financial Reporting Standards. An international accounting body based in London drew up the standards so that the financial world could use them consistently across the globe. Using IFRS allows a corporation operating in multiple nations to use the same accounting standards company wide. IFRS can also make it easier to raise capital across borders, and for investors compare the financial condition of companies in different countries.

GAAP or IFRS

As of 2011, the United States is the only country with a sophisticated investment market that doesn't allow companies to use IFRS to report their financial information. Even corporations from countries that use IFRS must make reports in the US using GAAP instead. The Securities and Exchange Commission has stated that it's considering adopting IFRS -- though not any sooner than 2015 -- but that the two standards are already converging toward each other, which might make a formal change unnecessary.

Considerations

IFRS differs in several technical ways from GAAP and provides less information for investors. A bigger obstacle to adopting it is that it's not just a matter of paperwork: Companies would have to change their tax reporting methods, internal audits and money-tracking and corporate IT systems if the SEC switched the country from GAAP to IFRS. This would be a particular burden for companies that don't do business outside the country and therefore gain nothing from the changeover.

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