Question

Accounting: *Comment on the significance of US GAAP? *

Would financial accounting information have any value without US GAAP?

*Would you trust financial statements by a small company not using GAAP? If not, why?

Answer 1

US GAAP(Generally Accepted Accounting Policies) are a set of commonly followed accounting policies followed by all the companies, be it big or small. The purpose of GAAP is to have uniformity among the financial statements of the entities and the users have the ability to compare the statements.

Financial accounting information without US GAAP can still hold some value if there are full disclosures regarding the policies and principles used, so that users can understand how the financial information has been collected and presented. BUT GAAP present the most common accounting principles and policies, and if any user is not following it, then the user is most certainly following a principle or policy which is different from the norm. It may be applicable to it due to the special characterstic of the business or the industry. In present scenario, there are many industries where there are specific accounting principles suggested by law and entities have to follow those principles instead of GAAP, like in electricity distribution industry. But it does not mean that the financial information is useless.

The financial information loses its ability to be compared with other companies or the ability of user to easily understand the information, but it is still holding value to the actual users.

But in normal circumstances, where there is no law to follow accounting principles other than GAAP or there are special circumstances where GAAP are not applicable, a user generally does not and should not trust the financial information by a small company, which is not using GAAP. The small company not following GAAP can allow the company to make estiamtes and judgements based on its own internal mechanism, which cannot be verified or checked by the users easily. So the financial information is susceptible to manipulation and misrepresentation.