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The financials of my company differ slightly than the GAAP principals.
Is this bad, or are the GAAP principals more guidelines that accountants use? Any insight would be helpful so I can figure out how to address this discrepancy with my team.
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4 Answers
Well. Are we talking about a Public company or a Privately held company? Are the financial statements for internal use or external use?
GAAP is the principals and standards developed by the financial accounting profession to ensure consistency in the way financial information is provided to the outside world. Public companies, for all intensive purposes, must comply with GAAP. When exceptions are made, there must be some compelling reasoning as to why.
If this is a privately held company, then GAAP rules do not necessarily apply. Most privately held companies DO adhere to GAAP, for various reasons, when sharing financial information with the outside world (usually banks) or if held by an investment group (since these investors generally want to see financials that are consistent with their other investments).
Statements produced for strictly internal consumption (the numbers that management actually uses to run the business) rarely conform to GAAP because GAAP financial statements don't really tell managers that much about how the business is performing and are very easily to manipulate.
Hope this helps!
David. I hope you got what you needed from the three post thus far. As you can see, there is considerable difference of opinion on the matter. The vast majority of accountants in the US have been taught to live in the "cost world" where accrual accounting reigns. This is a world that was born in the 19th century and grew up during the 20th century. Before computers. In a time where Labor was the chief component of cost.
During the last quarter-century, forward thinking accountants have made a paradigm shift in thinking. Most of these accountants are heavily involved in companies that adhere to the management philosophy known as Theory of Constraints. In the "Throughput" world, providing information to management that can help them drive the business is more important than adherence to GAAP.
My final recommendation is to make certain that the financials are prepared with integrity and accuracy and that they can be bridged (reconciled) with GAAP statements.
I find the answer above a little surprising in that a statement is made that GAAP financials are not that useful and easy to manipulate. This is a very simplistic view of the value of GAAP statements.
The main difference in a private company between GAAP statements and other forms of statements, usually cash based, is the need to make accruals for transactions that would not otherwise be on the books. This requirement for making accruals is what makes GAAP statements far more accurate than cash based or more random statements. If statements are accrual based, all liabilities of the company should be stated correctly and expenses and revenues of the company should be in their most accurate form.
There are some issues with revenue recognition where GAAP accounting does raise some concerns as compared with simpler methods. Software revenue recognition rules are very difficult to understand and interpret by those not trained in them. But in principal, GAAP rules are there to avoid recognition of revenue before it is earned and to take away the flexibility of a firm to make its revenues what looks good rather than what a lot of very smart people in the accounting profession believe might be more appropriate from a correct analysis of the underlying transaction. These rules seldom impact more mundane firms selling tangible products. Regardless of revenue recognition rules, cash flow statements in GAAP accounting will accurately show the change in cash balances and whether a firm is gaining or losing cash.
For small firms that do not license software and do not issue stock options, GAAP accounting and Accrual based accounting are very similar. In my mind there is no excuse for not following accrual based accounting. This will be adequate for most firms that have no public reporting requirement and do not have to provide GAAP statements to their bank (who may well accept accrual based statements, as does the IRS).
I see that here we are again discussing financials and GAAP reporting. I believe as Rick has stated. There has to be a foundation and that foundation for now is GAAP.
The International Financial Reporting Standards (IFRS) are moving closer to a reality here in the states as well as abroad. In fact I would ask what and where if any business this company does on an international level. If so, they may also have concerns or problems with consolidations as well, which may or may not impact their financial reporting.
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