US GAAP vs. Non-GAAP Accounting What You Need to Know
GAAP stands for “Generally Accepted Accounting Principles.” It is a set of standardized accounting formats, rules, and guidelines related to the recognition or disclosure of companies. Companies around the world rely on US GAAP as their primary accounting standard.
However, there are also many companies that don’t fully follow GAAP. Instead, they operate as per the non-GAAP method. It includes any method of accounting other than GAAP where non-prescribed or nonstandard accounting principles are followed.
In this article, we’ll discuss the major differences between US GAAP and non-GAAP, so keep reading to learn all about them.
Overview of US GAAP
The Financial Accounting Standards Board (FASB) and the US Securities and Exchange Commission (SEC) are behind the creation and administration of GAAP accounting standards.
The primary goal of the GAAP standards is to have a uniform and standard way of evaluating the financial health of a company.
Some of the leading GAAP principles are:
- Recognition of a company’s revenue and expenses.
- Type of expenses that a company has capitalized as assets.
- Way of presenting information to shareholders.
- The way things are disclosed in notes to financial statements.
Generally, public companies use GAAP, but due to the standardization of these rules, many private companies also follow US GAAP methods to improve their accounting and auditing functions.
Overall, GAAP is highly useful for both investors and auditors. These standards make sure that you don’t have to create or implement accounting standards from scratch.
Instead, these globally accepted accounting standards are available to facilitate businesses’ following the best accounting practices.
Nevertheless, GAAP reporting has certain limitations as well. In some cases, investors don’t get a complete picture from these reports, especially when they are looking for a long-term plan for an organization. In such a situation, companies typically have to adopt non-GAAP reporting standards.
Overview of Non-GAAP
Non-GAAP refers to the alternative accounting standards and measures followed by private and public companies. Some companies often follow both US GAAP and non-GAAP standards as per their own working procedures.
However, it is important to note that when a company uses non-GAAP, it must disclose it in its reports.
Otherwise, it can result in significant challenges related to financial reporting and regulatory compliance.
Companies typically choose to use non-GAAP methods when they want more control over their internal accounting procedures, and the stakeholders believe US GAAP to be inconsistent with their business environment.
The extent of non-GAAP can greatly vary, but it typically includes unusual expenses, non-cash charges, company restructuring details, litigation, and other such information that is unique to the business.
Following are the key differences between GAAP and non-GAAP:
GAAP has a certain set of standards, formats, and accounting methods that the company must follow. On the other hand, non-GAAP does not have any prescribed or specific accounting methods.
Investors, professional accountants, and financial advisors are typically familiar with US GAAP standards. Hence, they can easily analyze the reports and documents made using GAAP.
Nevertheless, GAAP reports are quite challenging to understand for inexperienced and common users. In such a situation, non-GAAP is more useful to cater to all types of audiences.
While both US GAAP and non-GAAP are adopted by numerous companies, it is important to note that GAAP is the only industry standard.
As a result, regulatory authorities and experts familiar with GAAP are much more likely to prefer companies that follow GAAP in their accounting procedures.
US GAAP standards are meant to show a clear and complete picture of the business operations in terms of the financial health of the company. Non-GAAP requires adjustments to make sure it gives a complete picture of business operations.
One of the most significant differences between GAAP and non-GAAP is that non-recurring expenses are included in GAAP but excluded from non-GAAP.
US GAAP has very strict standards and accounting methods. It does not provide any scope for window dressing profitability in financial statements.
However, there is significant scope for “window dressing” of profitability in non-GAAP financial statements. This is a major reason why budding entrepreneurs and scaling businesses often prefer non-GAAP.
GAAP reports involve the comparison of financial results from industry to industry, company to company, and year to year. However, non-GAAP does not involve any kind of comparison between companies or industries.
Keeping all of the above factors in mind, it is evident that both US GAAP and non-GAAP have their own place in the accounting industry.
They facilitate organizations all over the world to bring fairness and transparency to their accounting standards to ensure the financial health of the company is crystal clear to all stakeholders.