What Is GAAP?

What Is GAAP?

GAAP refers to a set of commonly accepted accounting principles and standards that are issued by the FASB that all the publicly listed companies are supposed to comply with. All the public companies in Canada must follow the Canadian GAAP procedures whole formulating their financial statements, recording their transactions, and reporting their revenues and expenses. The FASB recommends using these procedures for improved clarity, comparability, and consistency of the financial information.

Let’s study the subject matter in detail.

GAAP vs. IFRS

GAAP is quite the opposite of the regular pro forma accounting and financial reporting methods. The international alternative to GAAP is the IFRS (International Financial Reporting Standards), which is used in over 120 countries, including the EU.

The main differences between GAAP and IFRS are as follows:

  • GAAP uses the LIFO inventory method while IFRS doesn’t.
  • GAAP considers research and development costs as expenses, whereas IFRS capitalizes and amortizes them over multiple periods.
  • GAAP doesn’t allow any write-downs to be reversed, whereas IFRS allows.

Why do you need GAAP?

GAAP has largely standardized the assumptions and methods of accounting that are used across a wide range of industries. However, the most important topics that it covers are balance sheet classification, materiality, and revenue recognition.

GAAP’s end goal is to make it easier for an investor to use the financial statements and analyze useful information from them. The financial statements should be clear enough to facilitate comparison across multiple companies. This is also why GAAP is the standard financial reporting framework adopted by the U.S. Securities and Exchange Commission (SEC).

Notebook of an accountant working on a set of GAAP standards.

Different principles of GAAP

Any accountant that follows the GAAP must adhere to the principle of regularity, consistency, sincerity, the permanence of methods, non-compensation, prudence, continuity, periodicity, materiality, and utmost good faith. Suppose your financial statement doesn’t comply with any of these GAAP principles. In that case, the investors are cautious, and it becomes difficult for them to compare the financial statements—even within the same industries. Most investors compare both the GAAP and non-GAAP measures when analyzing financial reports.

Faber LLP provides a holistic suite of transparent and accurate corporate accounting services. The company not only helps you comply with GAAP financial accounting standards but also comply with your tax deadlines. The company’s services include bookkeeping, income tax preparation, financial statement compilation, and corporate reorganization. Get in touch if you’re based in Edmonton.

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