Table of Contents |
Let's begin by discussing governing principles in accounting, specifically GAAP and IFRS, exploring what they are and the differences between them.
| Generally Accepted Accounting Principles (GAAP) | International Financial Reporting Standards (IFRS) | |
|---|---|---|
| Who it applies to | Represents the accounting standards for U.S. companies. Publicly traded U.S. companies are required to use U.S. GAAP; many privately held companies, although not required to use it, still do. | Represents the accounting standards for all international companies. This means that if you are doing business in any countries outside of the U.S., you would use IFRS. |
| Objectives |
Help financial statements achieve three things: *Relevance. Is the information relevant to the message we are trying to send through our financial statements? *Reliability. Can we rely on the information? *Comparability. Can we compare the financial statements of two different entities? |
Standardize the accounting procedures across all nations. |
Now, the U.S. has tried to get somewhat involved, although, as mentioned, U.S. GAAP exists in the United States and all publicly traded U.S. companies must use it. However, any non-publicly traded companies--meaning non-SEC registrants--can use either U.S. GAAP or IFRS for non-U.S. SEC registrants.
Next, we will discuss some of the governing bodies that play a role in this principle setting process. There are quite a few, and they help to create and modify accounting principles, provide guidance, and even enforce rules and regulations. The first group to cover includes the AICPA, the GASB, and the FASB:
| American Institute of Certified Public Accountants (AICPA) | Governmental Accounting Standards Board (GASB) | Financial Accounting Standards Board (FASB) |
|---|---|---|
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Established in 1887 It is the main professional association for CPAs and develops additional guides that assist them when they are implementing U.S. GAAP. |
Established in 1984 This board is in place to develop standards of financial reporting for state as well as local governments. |
Established in 1973 Likely the most important governing body in this group. They have a critical role relating in developing U.S. GAAP. The FASB develops new standards and controls the implementation of previous standards, as well as new standards that are coming out. |
There are also several federal agencies that are involved in the principle setting process.
| Securities and Exchange Commission (SEC) | Government Accountability Office (GAO) | Internal Revenus Service (IRS) |
|---|---|---|
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Established in 1934 Rule enforcer: develop rules and enforce securities law. |
Established in 1921 Government watchdog: work for Congress and play a very important role in investigating program spending related to the use of public funds. |
Established in 1862 Tax Man: deal with collecting taxes and enforcing the IRS code. |
Source: Adapted from Sophia instructor Evan McLaughlin.
