What Are the US GAAP
(Generally Accepted Accounting Principles) Standards?
A set of regularly followed accounting rules and standards for financial reporting is known as generally accepted accounting principles (GAAP or US GAAP).
The requirements of GAAP, the standard set by the U.S. Securities and Exchange Commission (SEC), contain regulations relevant to each sector, as well as explanations of concepts and principles.
GAAP is designed to make sure that financial reporting is open and uniform across all organizations. Such rules and regulations also allow professional accounting firms in Malaysia to provide reliable accounting services by following global industry standards.
History of US GAAP
Companies would be free to publish financial information in whatever style best suited their requirements if there were no regulatory restrictions. Investors might be readily duped by the capacity to present a company’s financial situation favourably.
Businesses’ inaccurate and deceptive reporting tactics were largely to blame for the Great Depression of 1929, a financial disaster that resulted in years of suffering for millions of Americans. In response, the federal government and expert accounting organizations set out to develop guidelines for the moral and truthful reporting of financial data.
Who Manages GAAP?
Although the U.S. federal government mandates that public corporations follow GAAP, it has no input into the creation of these guidelines. Instead, it is left to independent boards to establish, update, and maintain accounting rules.
These boards get together to talk about prospective modifications and new standards when GAAP problems or queries come up. For instance, the board members gathered to discuss how corporations and governments should disclose the financial impacts of the COVID-19 pandemic.
The Financial Accounting Foundation is in charge of ensuring that the boards behave appropriately and carry out their duties.
US GAAP and Industry Standards
GAAP is a collection of rules. While its principles aim to increase the openness of financial statements, they do not ensure that a company’s financial statements are free from mistakes or omissions that are meant to deceive investors.
The SEC aims to switch from using GAAP to using International Financial Reporting Standards, according to its statement (IFRS).
However, the latter departs significantly from GAAP, and adoption or convergence has made poor progress. (View IFRS, International Financial Reporting Standards.)
Although the government does not control GAAP, both the government and industry have worked together to make it possible.
All firms are not required to utilize GAAP, but those publicly listed and subject to SEC regulation are required to do so for the purposes of financial reporting.
Companies with external investors are not required to adhere to this standard, but those that do are held to it by the SEC, which mandates annual external audits by independent accountants.
Despite the requirement, the SEC is not in charge of the GAAP standards. Instead, any modifications to the corporate level’s financial reporting requirements are actively influenced by the Financial Accounting Standards Board (FASB).
The FASB seeks advice from the FASB Advisory Council (FASAC) on any issues that could affect GAAP regulations.
Governmental organizations, on the other hand, are subject to a set of guidelines that vary somewhat from GAAP. These standards are overseen by the Government Accounting Standards Board (GASB).
The GAAP regulations in other nations are distinct from those in the U.S. These regulations are made by the FASB in each nation, such as the Canadian Institute of Chartered Accountants (CICA).
The Securities and Exchange Commission published a tentative “roadmap” in 2008 that may eventually result in the United States abandoning GAAP and adopting the London-based International Financial Reporting Standards instead (IFRS).
3 Components of US GAAP
Following are the three main parts of US GAAP:
Basic Accounting Principles
There are ten principles that separate the business dealings of an organization from the private dealings of its owners, standardize the monetary units used in reports, and expressly state the time periods covered by certain reports. The recognized best practices for cost, transparency, matching, revenue recognition, professional judgment, and conservatism are all taken into consideration.
FASB Rules and Standards
The FASB publishes the FASB Accounting Standards Codification, a collection of standards that are formally recognized and often updated. Standards based on prior APB-established best practices are included in the compendium. These organizations have their roots in historical financial reporting laws that the federal government put in place after the 1929 stock market disaster that started the Great Depression.
Industry Practices
Not all businesses adhere to the GAAP paradigm. Instead, specialized organizations adhere to industry-specific best practices that are meant to represent the subtleties and complexity of various business fields. The accounting and financial reporting practices employed by banks, for instance, vary from retail enterprises.
Recent Updates in U.S. GAAP Standards
As financial reporting requirements evolve, it is essential for businesses to stay updated with the latest changes in U.S. Generally Accepted Accounting Principles (GAAP).
The Financial Accounting Standards Board (FASB) and regulatory bodies like the U.S. Securities and Exchange Commission (SEC) continuously refine these standards to improve transparency, comparability, and compliance. Below are some of the key updates that have been recently introduced.
1. Lease Accounting Updates – ASU 2023-01
One of the significant updates under GAAP is the issuance of Accounting Standards Update (ASU) 2023-01, which focuses on Leases (Topic 842) and applies specifically to common control arrangements.
Effective for fiscal years beginning after December 15, 2023, this update provides guidance for lease arrangements between entities under common control. The amendment allows private companies and nonprofit organizations to rely on the written terms and conditions of these agreements rather than conducting an extensive lease assessment.
Additionally, the update mandates that leasehold improvements tied to common control leases be amortized over their useful life rather than the lease term, ensuring better alignment with economic reality (Clark Nuber, 2023).
2. Stock Compensation Clarifications – ASU 2024-01
In 2024, FASB issued ASU 2024-01, which provides clearer guidance on Compensation – Stock Compensation (Topic 718). The update includes additional illustrative examples to help entities determine whether profits interest and similar awards should be accounted for under stock-based compensation rules. This refinement helps businesses avoid misclassifications and ensures that employee and executive compensation expenses are recorded accurately (Eide Bailly, 2024).
3. Increased Focus on Non-GAAP Measures and R&D Spending
The growing use of non-GAAP financial measures, such as Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA), has led FASB to prioritize new standards for reporting such metrics.
Starting in 2025, FASB is expected to introduce additional guidelines to improve the transparency and comparability of non-GAAP financial metrics. Similarly, the board is considering updates related to the accounting treatment of research and development (R&D) expenditures, as companies across industries have been lobbying for more flexibility in capitalizing these costs (Wall Street Journal, 2025).
These changes aim to provide investors with more consistent and reliable financial data.
4. Strengthened Audit Quality Standards by the SEC
To enhance the integrity of financial reporting, the SEC approved new audit quality standards in September 2024. These standards, proposed by the Public Company Accounting Oversight Board (PCAOB), impose stricter requirements on accounting firms to identify, manage, and continuously monitor audit risks.
The new framework, effective from December 2025, increases the accountability of audit firm leadership and aims to reduce the risk of audit failures (Reuters, 2024). With stricter compliance measures in place, businesses will need to ensure robust internal controls and adherence to updated auditing procedures.
The Future of U.S. GAAP: What to Expect?
The changes outlined above reflect the evolving nature of financial reporting under U.S. GAAP. As businesses continue to navigate regulatory shifts, staying informed about these updates is critical for maintaining compliance and financial transparency.
With FASB and the SEC focusing on issues such as lease accounting, stock compensation, non-GAAP metrics, and audit quality, companies should proactively adjust their financial reporting processes to align with the latest standards.
For organizations operating across multiple jurisdictions, particularly those expanding into markets like Malaysia, understanding how these U.S. GAAP changes interact with local financial reporting standards such as IFRS (International Financial Reporting Standards) is also crucial. Businesses should work closely with their financial advisors and auditors to ensure seamless compliance with both domestic and international accounting requirements.
Conclusion
Overall, US GAAP plays an important role in setting global standards that different organizations, businesses, industries, and firms, including accounting firms in Malaysia, can follow to ensure they comply with global accounting and auditing standards.
The goal of GAAP is to ensure that all businesses’ financial reporting is transparent and consistent. By adhering to international industry standards, these rules and regulations also enable Malaysian professional accounting firms to offer trustworthy accounting services.
