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What Is GAAP?

August 9, 2012

Tax Question:

What is GAAP?

Facts:

GAAP stands for Generally Accepted Accounting Principles, it is basically the rule book that accountants follow for preparing financial statements.

Discussion:

One of the purposes of preparing financial statements is to provide meaningful and comparable information to the reader. Thus, if you had the opportunity to invest in two companies that manufacture widgets, you would want to be able to compare each by looking at the financial statements. To do this you would want to know that you are comparing apples with apples. The challenge with financial reporting is that there can be many ways to report the same information. The old joke “ask four accountants the same question and you get four different answers” often rings true. For example, to depreciate an asset you have the choice of declining balance, straight line, activity-based, the sum of years’ digit, units of production, units of time and so on. It is useful in the financial statements to understand how the asset is being depreciated so that if both companies are using different approaches you can evaluate the impact on the financial statements.

To provide a measure of consistency the Accounting Standards Board in Canada has drafted a set of rules and regulations termed GAAP. They cover how an item should be recorded and classified in the financial statements along with any supplementary information that should be disclosed. The result is that when you look at a set of financial statements you know they are being prepared to a set standard and contain a minimum amount of information. Most countries have their own version of GAAP as accounting practices do change nation to nation, although there are a lot of conventions that are common across many jurisdictions.

Canada has two sets of GAAP, one for publically listed companies called International Financial Reporting Standards which follows internationally agreed-upon rules and one for private companies called Accounting Standards for Private Enterprises, which follows Canadian-based rules.

If you would like more information on this topic, please contact a member of the Empire CPA team by filling out the contact form below.

Canadian and foreign tax laws are complex and have a tendency to change on a frequent basis. As such, the content published above is believed to be accurate as of the date of this post. Before implementing any tax planning, please seek professional advice from a qualified tax professional. Empire, Chartered Professional Accountants will not accept any liability for any tax ramifications that may result from acting based on the information contained above.

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