GAAP and Private Companies

Overview

Many private companies, especially those seeking to get loans, expand their business, or considering going public, make the decision to use GAAP-based financial reporting.

GAAP is important to the efficient functioning of the economy because decisions about the allocation of resources rely heavily on credible, concise, and understandable financial information.

GAAP financial statements are commonly understood by lenders to and investors in private companies, and they are often subjected to audits or reviews by a third party.

Because of the credibility provided by GAAP reporting, private companies may realize greater flexibility in the types of financing available to them.
Because of the credibility provided by GAAP reporting, private companies may realize greater flexibility in the types of financing available to them and in the number of investors willing to provide it. They may also benefit from a lower cost of financing because providers have come to appreciate the fundamental qualitative characteristics of GAAP.

GAAP also may help ease the transition from private to public status. When a private company goes public, the company will have a different ownership and capital structure, varying investment strategies of its investors, generally more accounting resources, and limited investor access to management. Therefore, the company must immediately meet the regulatory requirements in which they are filing, which may include submitting GAAP financial statements with the U.S. Securities and Exchange Commission.

Other Resources