Generally Accepted Accounting Principles,This terminology used to refer to the standard framework of guidelines for financial accounting used in any given jurisdiction which are generally known as accounting standards. It includes the standards, and rules accountants follow in recording and summarizing the transactions and financial statements, about how CPA firms are preparing and presenting their business assets, and liabilities, income and expenses in their financial statements, it contains many rules of how to report transactions. GAAP provides consistency and accuracy in the financial analysis, banks, shareholders, and the SEC in the reporting of companies and businesses. Using the GAAP, if Company A reports $1,000,000 of net income, than the public and other users of financial statements can compare that net income to another company that is reporting $500,000 of net income.
The rules for reporting by GAAP are not simple at all; it has developed over the time. Currently there are more than 150 "pronouncements" as to how to account for different types of transactions, ranging from how to report regular income from the sale of goods, and its related inventory values, to accounting for incentive stock option distributions. By using consistent principles, all companies reporting under GAAP report these transactions on their financial statements in a consistent manner.
The rules come from the Financial Accounting Standards Board (FASB) which is a non-profit organization that the accountant has created to implement the rules of GAAP reporting according to what the occasion requires. The pronouncements come as Statements of the Financial Accounting Board (SFAS). Changes in the GAAP rules will impact upon American business, know the rules of GAAP reporting can tell the user of financial statements a great deal. The study of accounting, in large part, entails learning the many rules set forth by FASB and how to apply those rules to actual business events.
Financial Accounting is information that must be reported objectively. For this reason, financial accounting relies on certain standards that are called "Generally Accepted Accounting Principles" (GAAP).Principles come from tradition, in reporting of financial statements such as, audit and review, it must show the reader whether or not the information contained within the statements complies with GAAP.
>> Types of principles:
Principle of regularity: defined as conformity to apply rules and laws.
Principle of consistency: states that when a business has once fixed a method for the accounting treatment of an item, it will enter all similar items that follow in exactly the same way.
Principle of sincerity: the accounting unit should reflect in good faith the reality of the company's financial status.
Principle of prudence: the goal from this principle is showing the reality. By recording the revenues typically without making correction to it, when it is certain and a provision should be entered for an expense which is probable.
Principle of Full Disclosure/Materiality: all information and values pertaining to the financial position of a business must be disclosed in the records.
>>International Accounting Standards and Rules
Many countries are using the international Financial Reporting Standards (IFRS), established and maintained by the IASB . In some countries, local accounting principles are applied for regular companies but listed or large companies must conforms to IFRS, so statutory reporting is comparable internationally, across jurisdictions.
>>Definition of global financial crises
The financial crises started since 2007, as a result from a liquidity shortfall in the United States banking system, and ruined the financial institutions, banks by national government, and reduced the number of stocks in market around the world. Moreover, it affects the housing market which results in evictions, foreclosures. Many economists consider the financial crises the worst ever since the great depression of 1930s, Because of the failure of key businesses, and a significant decline in economic activity.
The ruination of the housing bubble caused the values of securities tied to real estate pricing which decreased, and ruining the financial institutions globally. During late 2008 and early 2009, securities face large losses because of the bank solvency, decreases in credit availability, and damaged investor confidence which affect the global stock market. Economies worldwide slowed during this period as credit tightened and international trade declined. Critics argued that credit rating agencies, and investors failed to price the risk accurately involved with mortgage related financial products, and that governments did not adjust their regulatory practices to address 21st century financial markets.
>>Impacts on financial institutions:
From January 2007 to September 2009, more than 1$ trillion on toxic assets and from bad loans are considered loss in the large U.S. and European banks as estimation from The International Monetary Fund. These losses are expected to increase to $2.8Â trillion from October, 2007. U.S. banks losses were forecast to hit $1Â trillion and European bank losses will reach $1.6Â trillion. The IMF estimated that U.S. banks were about 60% through their losses.
Northern rock is a British bank, it is considered from the first victim because of the highly debts nature of its business led the bank to ask the bank of England for security which led to investor panic and a bank run in 2007.
In 2008, the British government failed to find a private sector buyer, and the bank was taken into public hands. Northern Rocks Problems proved to be an early indication of the troubles that would soon befall other banks and financial institutions.
>>The Role of GAAP on financial crises:
Since 2002 the financial accounting standards board and international accounting standards board which is controlled by Jamie S. Miller, who explained at the SAG meeting the way to improve U.S. generally accepted accounting principles and international financial reporting standards that the timing of the convergence is based on a series of targets still in the consideration. The Leaders of the accounting standard board outlined a convergence strategy in a letter to leaders of the Group of 20 nations and the plan drawn up between IASB and FASB in 2006, and updated in 2008 to 9 project goals.
According to Lynn E. Turner, senior adviser and managing director of LECG in San Francisco, and a former Securities and Exchange Commission chief accountant, the convergence need more time to test the effects and the costs and take feedback on the process. Moreover, according to Miller, the financial crises is the convergence deadline for FASB and IASB, and the only solution is to redouble the FASB and IASB efforts to complete the projects in less time , so the SEC can monitor the progress on the projects before making the decisions on IFRS. Also the deadline may happen because of some countries (Canada, Korea, Brazil and India), have announced plans and decisions to adopt IFRS for their companies.
However, according to Miller, there are still disagreements among FASB board members on details related to key issues including financial instruments, leases, and insurance. Also, if FASB and IASB achieve convergence on all of their major projects, U.S. GAAP and IFRS will not be completely converged. Differences will still exist among items such as component depreciation and "last in, first out" inventory. For instance, According to Barbara L. Roper "Someone needs to step up, be the parent, and point to the fact that the timing is wrong, and the results will be disastrous for companies and ultimately investors", director of investor protection at the Consumer Federation of America in Washington. Moreover, According to Roper "If no one comes forth and points out that the targeted deadline is simply not enough time to properly assess the convergence plan and its effects, groups involved in the process will face the blame for a bad aftermath," . Furthermore, According to Turner, many companies will face extensive costs in time, money, and resources in the process of conforming to the converged standards. "These are all costs that could possibly be detrimental to companies, and require an extensive amount of time to analyze," .Furthermore, more time should be allotted to the comment seeking process as well.
According to Thomas J. Linsmeier, FASB board member, "that the time line offered by FASB does contain target dates, and that such targets are necessary to keep the convergence process ongoing".
