Generally Accepted Accounting Principles (GAAP) history

A body of accounting rules that consists of agreed-upon standards, conventions, and procedures that define financial accounting and reporting in a society. Accounting standards are necessary for the economy to function efficiently. Financial reports prepared according to GAAP help investors and lenders to allocate their resources among business organizations.

The SECURITIES EXCHANGE ACT OF 1934 gives the Securities and Exchange Commission (SEC) the legal authority to establish GAAP for companies that issue securities to the public in the United States. Throughout its history, the SEC has relied upon the private sector to establish GAAP, as long as it performs this function in the public interest. From 1936 to 1959, the Committee on Accounting Procedures (CAP) of the American Institute of Certified Public Accountants (AICPA) issued 51 accounting research bulletins (ARBs) on various subjects to establish GAAP. In 1953, the CAP issued ARB 43, which codified preceding research bulletins and remains widely influential. From 1959 to 1973, the Accounting Principles Board (APB) of the AICPA established GAAP through its 31 opinions. Unlike the CAP, the APB had a full-time research staff.

The FINANCIAL ACCOUNTING STANDARDS BOARD (FASB) began operations in 1973 to provide an equal opportunity for all interested groups to participate in the standards-setting process. In contrast, independent auditors dominated the CAP and the APB. The FASB has seven board members who work full time to resolve financial accounting issues, communicate with constituents, and serve as a focal point for research. Members preserve their independence as standard setters by severing ties with their previous employers, unlike the part-time members of the CAP and APB. The FASB endorsed the pronouncements of the CAP and APB as GAAP, unless superseded or amended by its own pronouncements. The FASB creates GAAP through three types of pronouncement: statements of financial accounting standards (SFAS), interpretations, and technical bulletins. The board follows due process publicly before issuing any pronouncement.

Statements of financial accounting standards (SFAS) consist of principles at the highest level, approved by a two-thirds majority of board members. As of February 2001, the FASB had issued 140 SFAS, although many amend or rescind prior standards. Among the topics covered by SFAS are accounting for leases, income taxes, pensions, derivative financial instruments, not-for-profit organizations, segments of an enterprise, motion picture films, oil and gas producing activities, insurance enterprises, foreign currency translation, research and development costs, earnings per share, and contingencies. The development of an SFAS often involves controversy. Employers fought against SFAS 106, which caused them to recognize a liability for postretirement benefits other than pensions. The business community vigorously criticized a proposed standard to charge executive stock options against earnings. The relevant standard, SFAS 123, required disclosure of the cost of most stock options in footnotes, rather than on the income statement.

Unlike its predecessors, the FASB issued seven statements of financial accounting concepts (SFACs) as a framework for standard setting. The SFACs, while not GAAP, have significant implications for the development of GAAP. The seven existing SFACs describe objectives for financial reporting, qualitative characteristics of accounting information, elements of financial statements, recognition and measurement in financial statements, and use of cash flow information and present value in accounting measurements.

See also SARBANES-OXLEY ACT; SECURITIES ACT OF 1933.

Further reading

• Baskin, Jonathan B., and Paul Miranti. A History of Corporate Finance. Cambridge: Cambridge University Press, 1997. 
• Previts, Gary, and Barbara Merino. A History of Accountancy in the United States: The Cultural Significance of Accounting. Columbus: Ohio State University Press, 1998. 

Mary Michel