OVERVIEW

Financial reporting is the language that communicates information about the financial condition and operational results of a company (public or private), not-for-profit organization, or state or local government.

Specifically, financial reporting includes the following information:

• Financial position (balance sheet, statement of net position)
• Results of operations (statement of revenues, expenses and changes in net position, statement of comprehensive income, etc.), and
• Disclosures.

The accounting standards developed and established by the Financial Accounting Foundation’s (FAF) standard-setting Boards—the Financial Accounting Standards Board (FASB) and the Governmental Accounting Standards Board (GASB)—determine how those financial statements are prepared. The standards are known collectively as Generally Accepted Accounting Principles—or GAAP.

For all organizations, GAAP is based on established concepts, objectives, standards and conventions that have evolved over time to guide how financial statements are prepared and presented. For companies or not-for-profits, GAAP is set with the objective of providing information that is useful to investors, lenders, or others that provide or may potentially provide resources.

An additional objective applies to financial reporting for state and local governments: to provide information that enables taxpayers and others who use governmental financial statements to hold governments accountable.

GAAP includes principles on:

• Recognition—what items should be recognized in the financial statements (for example as assets, liabilities, revenues, and expenses)
• Measurement—what amounts should be reported for each of the elements included in financial statements,
• Presentation—what line items, subtotals and totals should be displayed in the financial statements and how might items be aggregated within the financial statements
• Disclosure—what specific information is most important to the users of the financial statements. Disclosures both supplement and explain amounts in the statements.

WHO SETS GAAP?

The Financial Accounting Foundation (FAF) is the independent, private-sector, not-for-profit organization based in Norwalk, Connecticut responsible for the oversight, administration, financing, and appointment of the Financial Accounting Standards Board (FASB) and the Governmental Accounting Standards Board (GASB).

• The FASB establishes financial accounting and reporting standards for public and private companies and not-for-profit organizations.
• The GASB establishes accounting and financial reporting standards for U.S. state and local governments.

The FASB and the GASB are responsible for ensuring that GAAP remains the high-quality benchmark of financial reporting so that investors, lenders, capital providers, and other users have access to the information they need to make sound decisions.

The FASB is recognized by the Securities and Exchange Commission as the designated accounting standard setter for public companies. The FASB’s standards are recognized as authoritative by many other organizations, including State Boards of Accountancy and the American Institute of CPAs (Rule 203, Rules of Professional Conduct, as amended May 1973 and May 1979).

The FASB establishes financial accounting and reporting standards for public and private companies and not-for-profit organizations.

Investors, lenders, and other users of financial information rely on financial reporting based on GAAP to make decisions about how and where to provide financing, and to help financial markets operate as efficiently as possible. More information on the FASB can be found here.

The GASB’s standards are recognized as authoritative by state and local governments, State Boards of Accountancy, and the American Institute of CPAs (AICPA).

The GASB establishes accounting and financial reporting standards for U.S. state and local governments that follow GAAP.

Today, taxpayers, holders of municipal bonds, members of citizen groups, legislators, and oversight bodies rely on this financial information to shape public policy and make investments. These standards also help government officials demonstrate to their stakeholders their accountability and stewardship over public resources. For state and local governments, it is important to note that GAAP is applicable to external financial reporting, and not to budgeting. More information on the GASB can be found here.

Both organizations’ missions are accomplished through a comprehensive and independent due process that encourages broad participation, objectively considers all stakeholder views, and is subject to oversight by the FAF’s Board of Trustees.
 
The FASB and the GASB use the following due process procedures to set accounting and financial reporting standards:

• First, the Board identifies a financial reporting issue that needs to be addressed based on recommendations from stakeholders, staff research, Board members’ concerns, or other means. The Board then votes on whether to add a project to the technical agenda, and discusses the issue and the technical staff’s work at public meetings.
• The Board drafts and issues a proposal (in the form of an Exposure Draft) for public comment. Depending on the complexity of the issue, the Board may issue a preliminary Discussion Paper, Invitation to Comment, or Preliminary Views document before the Exposure Draft to seek initial stakeholder input on various solutions and approaches.
• The Board seeks stakeholder input on the proposal via comment letters, roundtables, meetings, public hearings, etc. The Board subsequently redeliberates based on the stakeholder input received.
• The Board issues a final standard and provides implementation guidance to preparers, auditors, and users of financial statements on the new standard.
• If a standard is significant in nature and has been in place for at least two years, the FASB and the GASB may decide to evaluate its effectiveness through their respective Post-Implementation Review (PIR) processes.

THE QUALITIES OF GAAP

Companies, not-for-profits, and governments use accounting standards as the foundation upon which to provide users of financial statements with the information they need to provide financing, lend or donate money, or determine how public officials are spending tax dollars.

Investors and citizens trust financial statements that follow GAAP and use this information to assess the financial condition and determine how well an organization or government manages its resources.

When financial statements are prepared under GAAP , they are based on standards developed by a robust, open due process that results in information that is:

• Relevant, representationally faithful, and reflective of economics
• Comparable with other organizations or governments
• Verifiable and auditable by a third party
• Understood by lenders, investors, donors, taxpayers, and others.

The high-quality financial reporting standards within GAAP are essential to the efficient functioning of our capital markets.

The high-quality financial reporting standards within GAAP are essential to the efficient functioning of our capital markets. For example, GAAP leads to better financial information and is helpful to an organization or government in the following ways:

• To attract the financing they need to hire workers, build plants, and invest in research and development, companies and others organizations must report financial information in a way that investors, lenders, donors, and others find credible and useful.
• Greater comparability in accounting and financial reporting also results in better financing decisions—investors, lenders, and donors make wiser decisions about where to put their money.
• It will also help governments better demonstrate to their citizens and bond holders their stewardship over their government’s resources.

High quality financial accounting and reporting standards promote better information in the marketplace. Better information fosters greater transparency. Transparent, relevant information helps investors and lenders make better decisions about where to put their money with confidence. Investors, recognizing the value of high quality financial information, support an objective and inclusive standard-setting process. This “virtuous cycle” ultimately helps make our capital markets more efficient and robust.