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Federal Accounting Standards Advisory Board (GAAP Hierarchy)

Updated: Feb 3

Generally Accepted Accounting Principles (GAAP) are a set of accounting standards and guidelines used in the preparation of financial statements. In the United States, compliance with GAAP is required for publicly traded companies and certain other entities.

Here's a breakdown of who must comply with GAAP accounting rules:

  1. Publicly Traded Companies: Companies that are listed on stock exchanges and issue securities to the public are required by the Securities and Exchange Commission (SEC) to comply with GAAP in their financial reporting. This includes large corporations with shares traded on major stock exchanges such as the New York Stock Exchange (NYSE) or NASDAQ.

  2. Private Companies: While private companies are not legally required to follow GAAP, many choose to do so voluntarily, especially if they plan to raise capital from investors, obtain financing from banks, or engage in transactions with public companies. Adhering to GAAP can enhance credibility and facilitate comparisons with other companies in the same industry.

  3. Non-Profit Organizations: Non-profit organizations in the United States are typically required to follow GAAP accounting standards, especially if they receive federal funding or grants. Compliance with GAAP helps ensure transparency and accountability in financial reporting, which is essential for maintaining public trust and donor confidence.

  4. Governmental Entities: State and local governments, as well as federal agencies, are required to adhere to Generally Accepted Accounting Principles in their financial reporting. However, they may follow specialized accounting standards tailored to the unique nature of governmental operations, such as the Governmental Accounting Standards Board (GASB) standards.

  5. Financial Institutions: Banks, credit unions, and other financial institutions are subject to regulatory requirements that often include compliance with GAAP or similar accounting standards. Accurate financial reporting is essential for assessing the financial health and stability of these institutions.

  6. International Companies: While GAAP is specific to the United States, many international companies follow similar accounting standards established by their respective countries or regions. However, some multinational corporations may reconcile their financial statements to GAAP for reporting purposes in the United States or if they have subsidiaries operating in the U.S.

In summary, compliance with GAAP accounting rules is primarily mandatory for publicly traded companies, certain private companies seeking credibility or financing, non-profit organizations, governmental entities, financial institutions, and international companies operating in the U.S. or reporting to U.S. regulators. However, adherence to GAAP principles is generally considered best practice for all entities to ensure accurate and reliable financial reporting.

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