GAAP
GAAP (Generally Accepted Accounting Principles) is the standardized set of accounting rules, standards, and procedures that U.S. public companies must use when preparing financial statements filed with the SEC.
GAAP represents the common accounting language of U.S. public company financial reporting. The principles are established and maintained by the Financial Accounting Standards Board (FASB), a private, non-profit organization recognized by the SEC as the official standard-setter for U.S. public company accounting. When the SEC requires public companies to file financial statements — in their annual Form 10-K, quarterly Form 10-Q, and various other filings — those statements must conform to GAAP unless a specific exemption applies.
GAAP encompasses a wide range of accounting standards, from how revenue should be recognized (ASC 606) to how leases should be reported on the balance sheet (ASC 842) to how fair value should be measured (ASC 820). These standards have been developed over decades through a process of public comment, deliberation, and revision. Major changes to GAAP standards — such as the shift to the new lease accounting standard — can have significant effects on how companies' financial statements look, even if the underlying economics of the business have not changed.
The core principles underlying GAAP include the accrual basis of accounting (revenues and expenses are recorded when earned or incurred, not necessarily when cash changes hands), the consistency principle (companies must apply the same accounting methods from period to period), the conservatism principle (when in doubt, recognize losses earlier and gains later), and the materiality principle (only information that would affect a reasonable investor's decision needs to be disclosed).
GAAP financial statements are audited by independent registered public accounting firms — the Big Four (Deloitte, PwC, EY, KPMG) handle the majority of large public company audits — under standards set by the Public Company Accounting Oversight Board (PCAOB), which was established by the Sarbanes-Oxley Act of 2002. PCAOB standards govern how auditors plan their work, gather evidence, and form opinions on whether financial statements are presented fairly in accordance with GAAP.
While GAAP is required for U.S. public companies, many other countries use International Financial Reporting Standards (IFRS), maintained by the International Accounting Standards Board (IASB). The SEC considered adopting IFRS for U.S. public companies but has not done so, meaning U.S. and non-U.S. companies often present financial statements prepared under different frameworks, complicating direct comparisons.