INTRODUCTION

United States Generally Accepted Accounting Principles (GAAP) is the standard platform of guidelines that governs the rules of financial accounting utilized in the preparation of financial statements. The US GAAP can be quite flexible in its interpretations and rulings, but the framework of GAAP is based upon certain constraints and principles in the preparation of financial reports. This paper shall endeavor to address the organization of GAAP and some of the specific areas of its governing responsibility.
BODY

GAAP is defined as a set of accounting patterns that are required to prepare and report the financial statements of public and private companies and non-profit organizations in the United States. It hand down the standards and rules for the aid of accountants so that they can record and prepare a summary of their transactions, for their financial statements. The Governmental Accounting Standards Board (GASB) in the United States is responsible for codifying the rules of GAAP that is referred to as US GAAP. In the United States, the American Institute of Certified Public Accountants (AICPA), The Financial Accounting Standards Board (FASB) and the Securities and Exchange Commission (SEC) provide guidance, assistance, and enforcement of the standard acceptable practices of accounting. GAAP is used to prepare all the financial documents of a company and increase its understandability and faithfulness for the investors. Without GAAP, companies would not have to follow a standard format and would not be able to provide or report accurately consistent financial information to an investor, stakeholder, and creditor. When a public company does not follow the guidelines, the Securities and Exchange Commission (SEC) can fine the company. In some cases, criminal actions can also be taken against a company for wrongful acts. Private companies are also required to follow GAAP, if not, the reasons should be mentioned in the notes of the financial statements. GAAP is based on four fundamental qualities that the financial statements must possess base on the following assumptions: ❑ Economic entity assumption (a business is singled out from its owner or another business, personal expenses are kept apart from revenue) ❑ Going Concern Assumption (a business continues to exist until an indefinite time period) ❑ Monetary Unit Assumption (presumes US dollars as the monetary unit) ❑ Periodic Reporting Assumption (economic activities to be split up according to a time period)
The financial statements must be relevant, reliable, consistent, and comparable.
GAAP exercises the following four basic principles to achieve it objective: ❑ Historical Cost Principle: Companies should consider the acquisition costs and not fair market value for their liabilities and assets. ❑ Revenue Recognition Principle: Accrual basis accounting is preferred. ❑ Matching Principle: This principle allows greater evaluation of actual profitability and performance as the expenses are matched with the revenues. ❑ Principle of Full Disclosure: Information disclosed in the financial statement should be enough to make a judgment while keeping the costs reasonable.
Furthermore, GAAP is based upon the representational faithfulness of the follow constraints: ❑ Provided company statements should have documented evidence. ❑ A financial item's significance should be looked at and evaluated. ❑ Consistency in accounting principles and methods should be followed each year. ❑ A solution should be picked that is less likely to exaggerate assets and income. However the accounting profession has struggled with the idea that the financial reporting needs of small closely held businesses often differ from those required by large, publicly traded companies. In formulating GAAP the profession has primarily addressed the needs of a public corporation. This is partly attributed to the importance of ensuring the integrity of U.S. capital markets. Smaller, private organizations have generally been subject to the same reporting requirements as public corporations. For many years, accountants have proposed that the same accounting standards do not have to be required for both public and private companies. In May 23, 2005, a resolution was subsequently passed by the governing Council of the AICPA directing AICPA management to work with the Financial Accounting Foundation (FAF) and the Financial Accounting Standards Board (FASB) to identify a process that would evaluate, where appropriate, potential changes in recognition, measurement, and disclosure for nonpublic companies from current GAAP, as applied by public companies (Zanzig, 2006). Nevertheless FAF, FASB, an the SEC have declined to introduce separate GAAP standards for private and nonprivate businesses. The AlCPA's Private Company Financial Reporting Task Force began comprehensive research in early 2004 to consider whether the general-purpose financial statements of private companies, prepared in accordance with GAAP, meet the financial reporting needs of constituents of those reporting, and whether the cost of providing them justified the benefits they provide to private company constituents. The AICPA task force concluded that most of the constituencies in the 2004 study are of the opinion that it would be useful if the underlying accounting for public versus nonpublic (private) companies were different in certain situations. It found that some of the GAAP requirements for public companies studied lack relevance/decision usefulness for private companies. In addition, the task force found that respondents rated certain GAAP requirements as low on decision/relevance usefulness; respondents appear to believe that the benefits of complying with GAAP outweigh such costs. The 2004 study conducted by the AlCPA's Private Company Financial Reporting Task Force clearly points out the inadequacy of having a single set of GAAP that is geared to public companies. Both public and private companies have unique and important reporting environments that can best be addressed by having GAAP applicable to what is truly useful to the parties using the information. In response, The FASB Chairman, Robert Hertz stated in 2005, "Private companies are a vital force in the
Nation’s economy and it is, therefore, critical that their financial reporting be conceptually sound, cost effective, and provide relevant, reliable and useful information." This does not mean that there should be two sets of GAAP requirements that do not share some common components. The information drawn from the task force study provides a good starting place for identifying the beginning principles of GAAP for private companies (Zanzig, 2006, p. 44). Other noted differences exist in GAAP financial reporting and Income Tax Basis reporting. For instance, in the Real Estate Industry there are differences in the recognition of rental income. GAAP requires rental income to be recognized on a straight-line basis over the life of the lease and Income Tax Basis requires reporting of income to align with the cash flows outlined in the lease agreement. GAAP requires a method such as straight-line depreciation over the life of the asset. Whereas, Income Tax Basis reporting allows the use of an accelerated depreciation method that aligns with the deductions taken in the tax return. Under GAAP, real estate must be evaluated for impairment on a regular basis, and it is possible to have a large write down of the asset. Under Income Tax Basis reporting, the real estate asset will be carried at historical cost, less depreciation, with no write down. While each method has its advantages, there is no "right" choice for reporting.
Management should review the facts and circumstances of their particular situation and choose the best method for their situation (Real Estate Financial Reporting, 2013).
Summary
In conclusion, U.S. GAAP is the authoritative guideline for US financial reporting and organized to received opinions and recommendations from the AICPA, FSB, and other professional organizations. Although the SEC governs the enforcement of U.S. GAAP there is no clear set of standards that provides an absolute reporting solution to all financial reporting situations. Nevertheless, GAAP is a codified set of guidelines that serves as the standard of representational faithfulness and consistency in financial reporting of public and nonpublic businesses activities to constituents, alike.

REFERENCES

Jeffers, Agatha; Mengyu Wei, Sidney Askew (2010). "The Switch from US GAAP to IFRS". Proceedings of the Northeast Business & Economics Association: 48–54.

Ochoa, O. (2010). Filling the "GAAP": Why Generally Accepted Accounting Principles Should Inform U.C.C. Article 9 Decisions. Texas Law Review, 89(1), 207-226.

Real Estate Financial Reporting: GAAP vs. Income Tax Basis Reporting--How to Choose the Best Method for Your Company. (2013). Orange County Business Journal, 36(8), 55.

Zanzig, J. L. (2006). GAAP Requirements for Nonpublic Companies. CPA Journal, 76(5), 40.