Talk:U.S. generally accepted accounting principles

hai i want some information how GAAP came in to existence in USA

I think I just did it :)

Could someone familiar with GAAP really explain the distinguishing characteristics of these style of coorperate account, in a way usefull for newbies. To me this would include:

explaining how the matching principle assumes everything is going to be orderly, and disordely events like a lawsuit creates a "charge" or "reserving" instead of just having the expense as it goes.

what "goodwill ammortization" means

It doesn't mean anything any more, since they changed the rules with FASB 142, issued June 2001. Probably your confused about the definition of Goodwill --Fredrik Coulter 04:57, Mar 8, 2005 (UTC)

a list of the major accounting changes of the last 15 years

I've started working on this for governmental GAAP. If you're interested, go to the Timeline of Governmental Accounting Standards - US. I'm expanding each of the Statements (one per day). I'll also be going back in time a little bit to the predecessor of the GASB. If I finish it, I may very well do the same thing for commercial GAAP, although I would be very happy if someone else did it first. (The FASB just issued Statement 153 in December 2004, so writing them up would be a major undertaking. It gets worse, since GAAP predates the FASB by decades, with earlier organizations also getting into the act.)--Fredrik Coulter 04:57, Mar 8, 2005 (UTC)

As a follow up, if someone does want to write up all the FASB Statements, I suggest using the format I've been using the the GASB Statements, which can be gotten (with comments) by going to the edit page of User:Fcoulter/tempfile (Just a thought.) --Fredrik Coulter 05:00, Mar 8, 2005 (UTC)

Governmental

GAAP for state and local governments is NOT the same as GAAP as defined here. However, I'm not ready to write the definitive article on it. But this difference should be mentioned here since the description, etc., only applies to GAAP for commercial (and to a lesser extent non-profit) entities.--Fredrik Coulter 04:57, Mar 8, 2005 (UTC)

Principles

Can someone good with accounting explain in more detail the various differnet principles of GAAP (ie. the whys? of the rules) besides whats already in the article. For example, the "matching rule" where revenues should be matched with expenses (I guess even though they may have occoured at different times), why do that? Is it to not mislead people into thinking that the company made all this money this quarter without spending much money (so as to give an accurate "snapshot" of the company)? Whats the purpose of recording certain types of assets using one kind of method but testing for "impairment"? From all the different things I have read in annual reports and stuff, it seems that one of the principles of the gaap accounting structure is that its designed not to just show the companies results and status in the absolute sense, but rather it is also structured in some ways to make clear to the investor that his money is being put to a GOOD use, in other words, not just sitting with the company. Am I making any sense? :).

The final thing, in the case of a mortgage servicing company which records its "mortgage servicing rights" as an asset I guess on the balance sheet: that number is like an estimate of the total value of those payments less guestimate prepays and defaults. If the facts that went into the guestimate changes the company has to change that asset number and record it to earnings (I think, I may be tottaly wrong). In this scenario, it seems to me like the company didn't "lose" money in the laymans sense, but rather sort of reversed out an income statement that it made previously. Now assuming I'm correct about all of this, if a company purchases an interest rate hedge of some kind to hedge this effect, is it spending real money to offset like a pure accounting scenario? If I'm off about what I have been saying, the article should still definately talk about the concept of "earnings smoothing" (which has been so much in the papers over the last 5 years) which to me seems to have a blurry line between legal and illegal versions.

Matching is good because it "matches" related revenues and expenses. For example, it may take $100 to buy materials in the month of January. It may take $150 to get the labor to turn the raw materials into finished goods. When we sell the product for $500, we recognize the $250 expense because it shows what we had to spend to make that $500. If it was not for the matching principle, then the expenses and revenues would not be shown during the same period, which would not show investors how much money it took to produce a good or service.

As far as recording as what value to record something at, we (at this time) record everything down at historical cost--or what we gave up to get the asset. Also, let's define an asset as a "future benefit." When we use the benefit, it is "expensed."

As time goes, we use the asset, so the future benefits from the asset will decrease. We show the use of future benefits as depreciation. Depreciation shows on the financial statement how "much" we used of our assets. It also allows a company to spread out the cost of an asset over several periods, rather than expensing it over a single period (thanks to the matching principle).

With certain types of assets, such as property, plant, and equipment, we test them annually for impairment. When we do this, we check to see if the asset is lower than fair value. For example, if the book value (historical cost less depreciation) is $500,000 and the fair value is $200,000, then we take a one-time impairment loss of $300,000.

Financial statements are far from perfect. In a utopia, we could compare Coca-Cola and Pepsi's finanical statements and could compare them, line to line, but we can't. In a perfect world, everybody would understand all financial statements; but they are designed only for people who know enough about financial statements. Because of all of this, it's easy to understand why most of the country is financially illiterate.

I'm not quite sure what you mean with a mortgage servicing company, mainly because I've never looked at their financial statements. But I can talk somewhat about the interest rate hedge. This is done all of the time by companies. It's not earnings management, it's the company taking a risk on interest rates going up or down to offset certain risks. Sometimes they win, sometimes they do not. Offhand, I'm not sure how they are shown on the statements, or if they are merely disclosed.

"Earnings smoothing" or what I like to call "earnings management" is what would be like raising the bad debts expense or depreciation rates in a good year, creating a "cookie-jar reserve" so when a bad year comes by, it looks like nothing significant happened. The SEC looks for stuff like this. --Zoop 19:40, 6 August 2005 (UTC)

GAAP versus GAAP described

With all due respect to the care with which this page was written, it appears to be based on textbook descriptions of GAAP rather than GAAP itself. I know it's probably not fair to commment without suggesting the corrections, but the description of objectives, qualities, and concepts is, in total, a parochial view of the author rather than from the actual documents themselves. For example, many academics refer to "the matching principle" but that concept is not pervasive to GAAP or a term used in the FASB hierarchy (to my knowledge, if I am wrong please help me understand). Everyone loves to refer to "the matching principle" but I dare someone to find it in GAAP. In some sense, the neutrality of this article should be deemed in question. That is, it seems interpretative rather than factual. If the author has the time and energy, I suggest taking a cold read and seeing what you can find to support your assertions in the actual literature. The FASB concept statements lay out a framework. But then a lot of detailed pronouncements contradict that framework (see for example, Concept Statement 7, then consider all the literature on estimates that do not follow Concept Statement 7. Where the assertions in the article are not borne out by the literature, consider either deleting them or couching them more carefully as observations. Sorry to not be of more help, and to pick at something I didn't contribute at all to, but thought you should know.