U.S. GAAP
U.S. GAAP is the set of accounting rules that American companies must follow when preparing financial statements.
What You'll Learn
- What GAAP means and what it covers
- The role of FASB in creating GAAP
- How the ASC codification system works
- The relationship between FASB, SEC, and PCAOB
- Key differences between GAAP and IFRS
- Public vs private company considerations
First: What Is This?
Generally Accepted Accounting Principles (GAAP) is the accounting framework used in the United States. It is a comprehensive set of rules, standards, and conventions that U.S. companies follow when recording transactions and preparing financial statements.
GAAP is established primarily by the Financial Accounting Standards Board (FASB), an independent private-sector organization. The Securities and Exchange Commission (SEC) has the legal authority to set accounting standards for public companies but has historically delegated this responsibility to FASB.
Since 2009, all GAAP standards have been organized into the Accounting Standards Codification (ASC), a single searchable database organized by topic number. When accountants refer to 'ASC 606' or 'ASC 842,' they are referring to specific topics within this codification.
Who Does It Apply To?
Is It Mandatory?
U.S. GAAP is mandatory for all companies registered with the SEC (publicly traded companies). Private companies in the U.S. are not legally required to follow GAAP, but many do because lenders, investors, and business partners often require GAAP-compliant financial statements. Some private companies use the simplified 'FRF for SMEs' framework instead.
What Is GAAP?
Generally Accepted Accounting Principles (GAAP) comprise the authoritative standards and conventions that govern financial accounting and reporting in the United States. GAAP encompasses the standards issued by FASB, its predecessor bodies, and certain SEC rules and interpretive releases for public companies.
GAAP is the American rulebook for keeping financial records. It tells companies exactly how to count their money, report their profits, and present their financial health. Every public company in the U.S. must follow these rules, and most private companies choose to follow them too.
Imagine you and your friends all have lemonade stands. GAAP is like the teacher saying: 'Everyone must count their money the same way. If someone owes you money for lemonade, you write it down the same way your friend does. That way, when we compare who sold the most, the comparison is fair.'
After the stock market crash of 1929 and the Great Depression, the U.S. government realized that companies were reporting financial information inconsistently, making it impossible for investors to make informed decisions. GAAP was developed to restore trust in financial reporting by ensuring all companies follow the same rules.
People often say 'GAAP' as if it is one document. It is actually hundreds of standards organized into about 90 topics in the ASC codification. Each topic covers a different area of accounting.
The Role of FASB
The Financial Accounting Standards Board (FASB) is the designated organization in the private sector for establishing financial accounting and reporting standards in the United States. FASB standards are recognized as authoritative by the SEC and the AICPA.
FASB is the group that writes the U.S. accounting rules. It is a private organization (not a government agency) with seven full-time board members. The SEC has given FASB the authority to set the rules, but the SEC can override FASB if it disagrees.
Think of FASB as the people who write the rules for a board game. They are not the players (companies) or the referees (auditors) or the tournament organizers (SEC). They just write the rulebook that everyone agrees to follow.
The ASC Codification System
The FASB Accounting Standards Codification (ASC) is the single source of authoritative nongovernmental U.S. GAAP. It organizes all standards into approximately 90 topics, each identified by a three-digit number. Topics are further divided into subtopics, sections, and paragraphs.
The ASC is like a giant encyclopedia of accounting rules, organized by topic number. Instead of searching through decades of individual standards, accountants look up the topic number. ASC 606 covers revenue. ASC 842 covers leases. ASC 350 covers goodwill. Everything is in one place.
Imagine if your school had hundreds of different rule sheets scattered everywhere - one for the cafeteria, one for the playground, one for the library. The ASC is like putting ALL the rules into one big organized book with a table of contents, so you can quickly find the rule you need.
When an accountant needs to know how to account for a lease, they look up ASC 842. The number 842 is the topic code. Within ASC 842, they find subtopics like 842-10 (overall), 842-20 (lessee accounting), and 842-30 (lessor accounting). Each subtopic has sections covering recognition, measurement, disclosure, and more.
Frequently Asked Questions
What does GAAP stand for?
GAAP stands for Generally Accepted Accounting Principles. It is the standard framework for financial accounting and reporting in the United States.
Who creates GAAP?
GAAP is primarily created by the Financial Accounting Standards Board (FASB), a private-sector organization. The SEC has legal authority over accounting standards for public companies but delegates this to FASB.
Is GAAP mandatory?
GAAP is mandatory for all U.S. publicly traded companies (SEC registrants). Private companies are not legally required to follow GAAP but many choose to because lenders and investors expect it.
What is the difference between GAAP and IFRS?
GAAP is the U.S. standard; IFRS is the international standard used in 140+ countries. Both produce reliable financial statements but differ in specific rules. GAAP tends to be more rules-based with detailed guidance; IFRS tends to be more principles-based.