![]() The IRS, on the other hand, uses income tax reporting to achieve social and economic objectives, such as reducing unemployment and encouraging investment in capital assets. The FASB measures GAAP-based income so that the information provided is useful to those making economic decisions (i.e., investors and creditors). Usually, financial statements prepared for income tax purposes are significantly different than statements prepared under GAAP, mainly because they each measure income differently. However, if you are simply preparing your individual income tax statements, understanding GAAP probably isn't as important to you. If you have anything to do with the financial reporting of a company or government entity, you should understand the principles of GAAP. For example, there is a general assumption that financial statements must be based on the premise that a company will continue in existence unless there is substantial evidence to the contrary.īecause of the myriad of GAAP sources, accountants must rely on their own knowledge and professional judgment when deciding how the GAAP concepts should be interpreted and applied. Some of the APB opinions and ARBs are still in force today.Īlthough the rules found in the formal pronouncements of the FASB and its predecessors are the main sources of GAAP, GAAP rules are also found in statements from the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants pronouncements by expert accountants and other practices that are not found in formal pronouncements but are generally accepted because they represent a common practice in a particular industry. The APB was preceded by the Committee on Accounting Procedure, which issued 51 pronouncements known as Accounting Research Bulletins (ARBs) from 1939 to 1959. Before the FASB was formed, its predecessor, the Accounting Principles Board (APB), issued 31 opinions between 19. Since its formation in 1973, the FASB has issued over 100 formal FAS pronouncements. Government entities, however, must follow a different set of GAAP standards as determined by the Governmental Accounting Standards Board (GASB).Īccountants apply GAAP through FASB pronouncements called Financial Accounting Standards (FASs). The SEC does not set GAAP GAAP is primarily issued by the Financial Accounting Standards Board (FASB). Although smaller companies are not required to use GAAP, there are certain situations, such as obtaining credit or seeking investors, which require, by contract, those companies to also follow GAAP when preparing their financial statements. Securities and Exchange Commission (SEC) requires publicly traded companies and other regulated companies to follow GAAP for financial reporting. In order to be useful and helpful to users, GAAP requires information on financial statements to be relevant, reliable, comparable, and consistent.Īlthough it is not written in law, the U.S. Because financial statements prepared under GAAP are intended to reflect economic reality, GAAP makes a company's financials comparable and understandable so that investors, creditors, and others can make a rational investment, credit, and other financial decisions. Without GAAP, companies would be free to decide for themselves what financial information to report and how to report it, making things quite difficult for investors and creditors who have a stake in that company. ![]()
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