For every legitimate business entity, regular financial reporting is a legal requirement. And to prepare such, not only is it necessary to understand GAAP, but you must be GAAP-compliant, especially for companies in places like the United Kingdom, Canada, Europe, and the U.S. Being GAAP-compliant will save your company from a lot of ramifications such as fines, errors, and distrust.
What is GAAP?
Generally accepted accounting principles (GAAP) is a combination of authoritative standards, principles, and procedures set by policy boards as the generally accepted ways of recording and reporting financial information.
As the general rules and guidelines governing the compilation of financial statements, GAAP attempts to standardise and regulate the definitions, methodologies, and assumptions used in corporate accounting across all industries.
This ensures the consistency, clarity, comparability, and completeness of an organisation’s financial statements, making it easier for external parties such as investors and lenders to analyse the information and make data-driven decisions.
GAAP in the United Kingdom
GAAP in the UK (UK GAAP) is published by the UK’s Financial Reporting Council (FRC). Since 2005, private and public companies in the UK have been required to prepare their consolidated financial statements in accordance with International Financial Reporting Standards (IFRS).
Previously, FRS 100 and FRS 101 were in use. However, in March 2013, FRC issued the new UK GAAP standard called FRS 102, ‘The financial reporting standard applicable in the UK and Republic of Ireland’ to replace a mix of standards (FRSs, SSAPs, and UITFs).
This new standard is based on the IFRS for SMEs, which is a simplified IFRS standard developed by the International Accounting Standards Board for non-publicly accountable entities.
What does it mean to be GAAP-compliant?
Being GAAP-compliant means getting your company to file and maintain financial records in a way and standard that allows relevant stakeholders (such as investors, prospective buyers, auditors, lending institutions, potential partners, etc.) to see accurate information about your financials so that they can make a sound decision regarding your company.
Here are the GAAP 10-point principles created to help companies understand what is required to be GAAP-compliant and to help accountants compile fully compliant reports:
- Principle of Regularity: Accountants must strictly adhere to established rules and regulations as a standard
- Principle of Consistency: Accountants must apply the same standards consistently throughout the financial reporting process. If there are changes, the accountant must explain in the footnotes.
- Principle of Sincerity: Accountants are to make sure they provide accurate and impartial reports.
- Principle of Permanence of Methods: The procedures and methodologies used in financial reporting are to be consistent, allowing financial comparability between periods.
- Principle of Non-Compensation: All the negative and positive aspects of an organisation’s performance should be reported with full transparency and with no expectation of debt compensation.
- Principle of Prudence: Financial data should be reported factually without speculation of any kind.
- Principle of Continuity: Asset valuation should be done with the idea that the business will continue to operate.
- Principle of Periodicity: The report should be divided across the standard accounting periods.
- Principle of Materiality: Financial reports should fully disclose the organisation’s financial situation.
- Principle of Utmost Good Faith: This principle presupposes that all parties involved are assumed to be acting with complete honesty.
What are the ramifications of not being GAAP-compliant?
GAAP is not a law but the governing rules for accounting compilation. However, companies are required by law to follow the standards. In fact, violating GAAP can have costly consequences.
First off, not following GAAP can lead to errors and omissions, which can, in turn, impact a company’s credibility with lenders, investors, and other parties who rely on financial statements to make decisions.
Second, companies may be punished (say with heavy fines) by a government regulatory agency for not following the GAAP rules. For instance, in 2019, the U.S Securities and Exchange Commission (SEC) fined Hertz a whopping $16 million for inaccurate financial reporting that did not align with GAAP principles.
How to Become GAAP-Compliant
Becoming GAAP-compliant is simple: first, your accounting team should get to know what the recommended principles, standards, and procedures are and then get to apply them fully.
One way to ensure all your financial reports are GAAP-compliant is using financial management software that supports GAAP.
And you don’t need to look any further: SunSystems is a powerful financial management system that supports multiple GAAP reporting in multiple languages.
This industry-leading accounting software allows you to prepare error-free and transparent financial statements that not only help internal members make informed decisions but also allow external users to see accurate financial data of your organisation.