When a brand of new accounting standards were set by IASB, several countries adopted these standards before they fit in their country’s accounting standards. In turn, these standards as set by the particular accounting standard board influenced the manner in which GAAP became for every country. In the US for example, it is the Financial Accounting Standards Board (FASB) that came up with the regulations and rules that became GAAP.
GAAP is a set of standards or rules followed by accountants. These set of financial accounting standards were developed by the Financial Accounting Standards Board that had been established in 1973. GAAP offers companies with a guideline on how financial reports should be prepared. The set of standards ensure that businesses are able to uniformly disclose similar information.
The main goal of FASB is to offer leadership to public companies in the establishment and improvement of accounting methods used in the preparation of financial statements. Even though FASB cannot enforce the accounting standards, it is the body authorized to set them. SEC is the body that enforces the standards. FASB takes recommendations from AIPA and SEC when improving or devising standards even though not required to.
The financial accounting standards’ goals is in helping stakeholders to make investment decisions that are involved based on sincere financial statements. The standards are designed in order to promote transparency in financial reporting. Transparent information is not only visible but also well understood by the public. Creditors and potential investors are enabled to make accurate business finance evaluations. Accounting standards also assist the board of directors to assess the effectiveness of management. The financial statements help in identifying areas that require improvement and enable the boards to take corrective action early on.
The accounting standards that FASB develops greatly impacts how items such as debt, inventory costs, revenue, assets, taxation and stockholder’s equity are reported. For instance, in the year 2010, FASB made an announcement that businesses should report revenue in the period in which it was earned. Companies previously reported revenue when received.
FASB enables businesses to choose the manner in which assets are depreciated in the financial statements. Businesses are however expected to disclose the method used and which must be consistently applied in the life of the asset.
- When it comes to revenue recognition, there is a detailed guidance developed by the US GAAP for the various industries that incorporate standards suggested by other organizations of accounting standards locally. FASB mentions two main revenue standards that relate to the recognition of revenue.
- The instruments recognized as equity by US GAAP are regarded as debt under FASB.
- There are various criteria for consolidation under the US GAAP while under FASB, a company consolidates based on its exercising power and on the operational and financial policies of the other organization. By being responsible for the performance and reporting, the financial arrangements of the new entity can be affected.
- Unlike GAAP, FASB prohibits companies from using the Last in First Out method of inventory costing. The companies using LIFO have to transition to other methods of costing.
- Under the GAAP, the documents that are supposed to be included in the financial statements include the Balance Sheet, Statement of Comprehensive Income, Income Statement, Cash flow Statement, Changes in Equity and the Footnotes. Under FSB, all other reports are prepared apart from the Statement of Comprehensive Income
- GAAP recommends the separation of noncurrent, current assets and liabilities in the Balance sheet while FASB requires that these items be separated
- Minority interest under GAAP is included as a separate item in liabilities while the same is included as a separate line item under FASB
- Bank overdraft is included as a financing activity under GAAP whereas it is classified as cash if used in cash management under FASB