Glossary
GAAP
Generally Accepted Accounting Principles, the accounting standards US public companies must use in their financial statements.
On this page
GAAP, short for Generally Accepted Accounting Principles, is the body of accounting rules that US companies follow when they prepare financial statements. The SEC requires domestic public companies to report under GAAP, and the private Financial Accounting Standards Board (FASB) writes the standards, which have been organized since 2009 in the Accounting Standards Codification (ASC). GAAP exists so that revenue, profit and assets mean roughly the same thing from one company to the next, and so that investors can compare them.
How it works
GAAP is built on accrual accounting: revenue is recorded when it is earned and expenses when they are incurred, not when cash moves. Topics are numbered, for example ASC 606 for revenue recognition, ASC 842 for leases and ASC 820 for fair value measurement. An independent auditor gives an opinion on whether a company's annual statements are presented fairly in accordance with GAAP.
GAAP, non-GAAP and IFRS
Companies often add their own adjusted figures, such as adjusted EPS that excludes stock compensation or restructuring costs. These non-GAAP measures are allowed, but SEC rules require them to be reconciled to the closest GAAP number and not given greater prominence. Most other countries use International Financial Reporting Standards (IFRS); foreign companies listed in the US may file under IFRS without reconciling to GAAP. The two systems are similar in spirit but differ in details such as inventory methods and development costs.