Financial reporting is an essential aspect of business that conveys a company's financial performance and outcome. It documents and displays the company's financial situation, revenues, costs, and associated disclosures.
Financial reporting is vital for internal management to measure and analyze operations, assets, financial responsibilities, and success, but it is also critical for external stakeholders. Raising cash, initial public offers (IPOs), transactions like mergers or acquisitions, asking for a line of credit (LOC), and even recent events also including qualifying for stimulus funds, grants, and debt forgiveness need financial reporting.
A consistent, comparable accounting approach used by financial reporting services helps preserve month-to-month consistency and enables the company's performance to be compared to that of others for both internal and external objectives. Herein lies the role of GAAP.
What Is The Point Of GAAP?
"Generally Accepted Accounting Standards" (GAAP) are used by most US finance professionals to record and report firm financial performance. In the 1970s, the FASB and GASB collaborated to formulate these concepts (GASB). The goal of these standardized processes is to assure uniformity and accuracy in financial reporting, as well as to provide a foundation for comparing the performance of numerous organizations.
GAAP is only required by the SEC for publicly listed corporations and companies that must report their financial accounts. Yet, the majority of people working in finance, such as accountants, certified public accountants, bookkeepers, controllers, and chief financial officers, still prefer to adhere to these principles. This is particularly important if a firm wants to go public, merge, acquire, or raise finance.
At 2,400 pages long, GAAP presents a wide range of information on issues like:
- Financial statement presentation
- Liabilities Equity Revenue Expenses
- Business amalgamations
- Derivatives and insurance
- Reasonable value
- Leases in foreign currencies
- Nonmonetary exchanges
- Following events
- Specific industry accounting
It is under review by the Finance Standard Accounting Body (FSAB), which now has stringent procedures for introducing modifications to GAAP.
What Are The Key GAAP Principles?
Here are what are believed to be the GAAP's fundamental concepts.
- The Rule of Regularity
All accountants will conform to the GAAP-established norms.
- The Rule of Consistency
Financial experts are devoted to adopting the same accounting rules from year to period. This allows that periods may be compared.
- Sincerity as a Core Value
Accountants endeavor to provide accurate and objective assessments of a company's financial performance.
- Principle of Method Permanence
Similar to the concept of consistency, the concept of permanence argues that standard methods and practices must be used to assure comparability in reporting and accounting for finances.
- Non-Remuneration Principle
This concept requires that all financial components of an organization be revealed. A liability should not be offset (compensated for) by an asset.
- Principle of Caution
Fact-based, realistic, and responsible financial reporting should not be based on guesswork.
- The Rule of Continuity
This indicates that the value of each asset needs to be determined on the basis of the presumption that the firm would go on with its operations in the future. Click here to read more on the rule of continuity.
- The Periodicity Principle
This idea relates to the uniformity of financial reporting time periods, such as yearly, quarterly, and monthly.
- The Materialism Precept
A company's financial reports should give complete information and accurately reflect the organization's financial status.
- The principle of absolute good faith
Every organization’s financial reporting should be truthful and comprehensive.
Why is GAAP so vital?
The goal of GAAP is to provide a consistent, transparent, and comparable accounting procedure. It guarantees that the financial records of a corporation are full and consistent. This is essential for business executives since it provides a holistic picture of the health of the organization. Since GAAP provides consistency, business executives can more precisely compare month-to-month firm performance.
Furthermore, GAAP (https://fasab.gov/accounting-standar) is essential for external operations like capital-raising, public trading, planning for a transaction, and even comparisons with competitors. This is due to the fact that GAAP promotes uniformity in reporting across all organizations, allowing for the production of full and comparable financial reports. This is particularly critical for organizations that are publicly listed or compelled to reveal their financial accounts.
Should My Business Be On Board With GAAP?
Business and government produced GAAP, which is not governed by the government. While it is not required for any company, it is strongly suggested, particularly if you want to take your company public at some point in the future, if you anticipate raising cash in the near future, or if you are getting ready for another transaction.
If you are compelled to reveal your financial statements to the public or if you are a publicly listed firm in the United States, you must adhere to GAAP in your financial reporting. The SEC requires annual external audits to be conducted by independent auditors. GAAP is not required for organizations without external investors.