When preparing financial statements, it’s important to note that you are complying with the legal standard set for your business. In the US, a business’ financial reporting and analysis must be compliant to the Generally Accepted Accounting Principles (GAAP) guidelines to make sure they are following the ethical and accurate process.
Setting the Standard
The American Institute of CPAs recommended to form an independent board to create standards for a fair and ethical reporting of financial information.
In the US, a non-profit organization called the Financial Accounting Standards Board (FASB) makes the pronouncements on GAAP. FASB is responsible for implementing and maintaining GAAP guidelines and keeping them up to date.
What is FASB’s Standard Setting Process?
With a vision of creating a standardized criteria for ethical accounting, FASB established a set of standard setting process to make sure the guidelines work in the public’s interest.
The FASB Standards-Setting Process
- Identify current investor issues
- Draft issue agenda and hold public meetings
- Publish Exposure Draft for investor commentary
- Propose new standards and invite business feedback
- Weigh all public responses and revise accordingly
- Announce final revisions to the ASC
Filling the GAAP
For a more transparent accounting and standardized assumptions, GAAP provided a set of practices for businesses backed by authoritative support. All financial statements, such as income statements, balance sheets, and cash flow movements follow the said principles to ensure consistency across companies.
GAAP is the cornerstone of financial accounting and reporting in the US. As it garnered the confidence of many, any non-conformities or inconsistencies from the guidelines may result in misleading business figures. A company must disclose any GAAP deviation to steer clear of any deceitful impressions in the company reports, which may lead to loss.
Diverse Company Types
As flexible as it may seem, GAAP is still insufficient to address the issues of various industries in the market. Due to the differences in the working environments and distinct industries, small businesses struggle in implementing the GAAP standards as they may be too complex for their accounting needs. An update to the GAAP is underway to fit with private entities and present alternatives.
Keeping the GAAP policy up to date is an extensive process. In addition, it is a very time-consuming activity which takes about a year to finish, and takes more time when there’s an update to the policies. The standard-setting process affects GAAP-compliant companies, as it can bring changes in their financial reports.
Differences in Compliance
GAAP is the gold standard in financial reporting for small businesses in the US. However, more and more countries outside the US are adopting the International Financial Reporting Standards (IFRS), such as the European Union, Australia, Canada, Japan, and Singapore. With this growing challenge of business globalization, both the FASB and the International Accounting Standards Boards are looking for ways to converge the standards.
Maintaining a fair marketplace for small businesses starts by keeping an accurate report of your finances. With proper compliance, companies can ensure consistency and alignment with international standards which makes them at par with the competitive industry.
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