Question

The Financial Accounting Standards Board (FASB) is responsible for the Generally Accepted Accounting Principles (GAAP). Select a Concept or Principle and explain how it impacts business.

Answer 1

U.S. law requires businesses that release financial statements to the public and companies that are publicly traded on stock exchanges and indices to follow GAAP guidelines, which incorporate 10 key concepts:

• Principle of regularity: GAAP-compliant accountants strictly adhere to established rules and regulations.
• Principle of consistency: Consistent standards are applied throughout the financial reporting process.
• Principle of sincerity: GAAP-compliant accountants are committed to accuracy and impartiality.
• Principle of permanence of methods: Consistent procedures are used in the preparation of all financial reports.
• Principle of non-compensation: All aspects of an organization’s performance, whether positive or negative, are fully reported with no prospect of debt compensation.
• Principle of prudence: Speculation does not influence the reporting of financial data.
• Principle of continuity: Asset valuations assume the organization’s operations will continue.
• Principle of periodicity: Reporting of revenues is divided by standard accounting time periods, such as fiscal quarters or fiscal years.
• Principle of materiality: Financial reports fully disclose the organization’s monetary situation.
• Beyond the 10 principles, GAAP compliance is built on three rules that eliminate misleading accounting and financial reporting practices. These rules create consistent accounting and reporting standards, which provide prospective and existing investors with reliable methods of evaluating an organization’s financial standing. Without these rules, accountants could use misleading methods to paint a deceptive picture of a company or organization’s financial standing.

• These three rules are:

• Basic accounting principles and guidelines: These 10 guidelines separate an organization’s transactions from the personal transactions of its owners, standardize currency units used in reports, and explicitly disclose the time periods covered by specific reports. They also draw on established best practices governing cost, disclosure, going concern, matching, revenue recognition, professional judgment, and conservatism.
• Rules and standards issued by the FASB and its predecessor, the Accounting Principles Board (APB): The FASB issues an officially endorsed, regularly updated compendium of principles known as the FASB Accounting Standards Codification. The compendium includes standards based on the best practices previously established by the APB. These organizations are rooted in historic regulations governing financial reporting, which were implemented by the federal government following the 1929 stock market crash that triggered the Great Depression.
• Generally accepted industry practices: There is no universal GAAP model followed by all organizations across every industry. Rather, particular businesses follow industry-specific best practices designed to reflect the nuances and complexities of different areas of business. For example, banks operate using a different set of accounting and financial reporting methods than those used by retail businesses.