Meaning of US GAAP
US Generally Accepted Accounting Principles (US GAAP) are the accounting principles and standards followed for financial reporting in the United States. US GAAP continues to remain a separate accounting framework from International Financial Reporting Standards (IFRS).
The Securities and Exchange Commission (SEC) requires domestic companies in the United States whose securities are publicly listed to prepare their financial statements according to US GAAP. Such domestic listed companies are not permitted to use IFRS instead of US GAAP. Apart from the United States, US GAAP is also used by some companies in Japan and other parts of the world.
Convergence of US GAAP and IFRS
Efforts have been made to reduce the differences between US GAAP and IFRS. In 2002, the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) announced a joint programme known as the Norwalk Agreement.
The main objective of the Norwalk Agreement was to eliminate differences between IFRS and US GAAP and bring the two accounting frameworks closer to each other. The IASB represents the development of IFRS, while the FASB is the accounting standard-setting body responsible for US GAAP.
In 2012, the SEC stated that separate US GAAP was expected to continue for the foreseeable future. However, the SEC also encouraged further efforts to align US GAAP and IFRS. Therefore, instead of immediately replacing US GAAP with IFRS, the focus remained on reducing differences and improving consistency between the two accounting frameworks.
Principles-Based IFRS and Rules-Based US GAAP
An important difference between IFRS and US GAAP relates to their general approach to accounting standards. IFRS is often described as a principles-based accounting framework, whereas US GAAP is generally described as a rules-based accounting framework.
A principles-based approach provides broad accounting principles that guide the preparation of financial statements. In comparison, the rules-based approach under US GAAP contains more detailed instructions regarding the application of accounting standards to specific situations, examples, and industries.
Therefore, US GAAP generally provides more specific guidance on how accounting standards should be applied in particular circumstances, while IFRS is more focused on broader accounting principles.
Key Exam Points
US GAAP remains separate from IFRS. The SEC requires domestic U.S. companies with listed securities to use US GAAP and does not permit such companies to replace it with IFRS.
The Norwalk Agreement was announced in 2002 by the IASB and FASB with the objective of eliminating differences between IFRS and US GAAP.
In 2012, the SEC indicated that US GAAP would continue as a separate accounting framework for the foreseeable future, while further convergence with IFRS would be encouraged.
For examination purposes, remember that IFRS is generally considered principles-based, whereas US GAAP is considered rules-based. US GAAP provides more detailed instructions for applying accounting standards to specific examples and industries.