Accounting Principles Explained: How They Work, GAAP, IFRS

A gap analysis is the process that companies use to compare their current performance with their desired, expected performance. This analysis is used to determine whether a company is meeting expectations and using its resources effectively. Privately held companies and nonprofit organizations also may be required by lenders or investors to file GAAP-compliant financial statements.

The ultimate goal of a profit gap analysis is to determine areas in which a competitor is being more financially efficient. For this reason, the company must also conclude its gap analysis by monitoring any changes. Other times, the gap might have been wider than the company thought or the company failed to adequately assess its current position. In any case, gap analysis can be a circular process gaap analysis where after changes have been made, the company can reevaluate its current position and where it compares against regarding other future states. This implementation stage often entails following a detailed set of processes at a specific cadence. As part of the gap analysis, the company has a defined outcome, and careful steps must be taken to ensure that more damage isn’t caused instead of cured.

  1. If a company is able to identify areas where product supply is not meeting consumer demand, then the company can take measures to personally fill that market gap.
  2. On the recommendation of the American Institute of CPAs (AICPA), the FASB was formed as an independent board in 1973 to take over GAAP determinations and updates.
  3. GAAP, or Generally Accepted Accounting Principles, is a commonly recognized set of rules and procedures designed to govern corporate accounting and financial reporting in the United States (US).

Under this principle, accountants must provide an accurate and unbiased depiction of the financial situation of a business. Forward-looking statements are important because valuations are largely based on anticipated cash flows. However, non-GAAP figures are developed by the company employing them; so, they may be subject to situations in which the incentives of shareholders and corporate management are not aligned. There are instances in which GAAP reporting fails to accurately portray the operations of a business. Companies are allowed to display their own accounting figures, as long as they are disclosed as non-GAAP and provide a reconciliation between the adjusted and regular results. With such a prominent difference in approach, dozens of other discrepancies surface throughout the standards.

What is the difference between GAAP and IFRS?

Since much of the world uses the IFRS standard, a convergence to IFRS could have advantages for international corporations and investors alike. ClearPoint is capable of automatically pulling in data from disparate systems around your organization, so you can view all your performance-related data in a single place. A fishbone diagram is created by determining the problem at hand and writing that at the center of an area. Then, major categories are written on branches that expand away from the main problem. Eventually, additional branches are added to these branches that identify why problems within each category exist.

History of GAAP

GAAP ensures companies generate clear, comprehensible and comparable financial data regardless of industry, status or affiliations. The generally accepted accounting principles (GAAP) are the standardized set of principles that public companies in the U.S. must follow. Thorough investment research requires an assessment of both GAAP and adjusted results (non-GAAP), but investors should carefully consider the validity of non-GAAP exclusions on a case-by-case basis. The reason is to avoid misleading figures, especially as reporting standards diverge.

Although exact GAAP requirements may vary depending on the industry, it is necessary to adhere to the principles at all times. Accountants must, to the best of their abilities, fully and clearly disclose all the available financial data of the company. They are obligated to acquire this information from the business, which is why an accounting team’s requests may seem intensely thorough when requesting financial information. GAAP must always be followed by accountants and businesses when handling financial information. At no point can a company or financial team choose to ignore or modify any of the regulations. Companies are still allowed to present certain figures without abiding by GAAP guidelines, provided that they clearly identify those figures as not conforming to GAAP.

Accounting Principles Explained: How They Work, GAAP, IFRS

Conducting a gap analysis can help you improve your business efficiency, your product, and your profitability by allowing you to pinpoint “gaps” present in your company. Once it’s complete, you’ll be able to better focus your resources and energy on those identified areas in order to improve them. Then, the company should understand whether those strengths and weaknesses are suitable to where the company wants to be. Gap analysis is the plan that attempts to change a company’s strengths and weaknesses. In addition, the opportunities and threats identified as part of a SWOT analysis are the risks that the plan outlined as part of a gap analysis will not be successfully carried out. PEST analysis can help with a gap analysis, as a company may not be considering external factors that may cause, exacerbate, or solve current gaps.

The chart below includes only a couple of the variations that may affect how a business reports its financial information. Because GAAP standards deliver transparency and continuity, they enable investors and stakeholders to make sound, evidence-based decisions. The consistency of GAAP compliance also allows companies to more easily evaluate strategic business options. Any financial statement must accurately reflect all of the company’s assets, expenses, liabilities and other financial commitments. Reports must therefore be thorough and clear, without any omissions or modifications.

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