what are the generally accepted accounting principles gaap 
the generally accepted accounting principles gaap are a set of accounting rules standards and procedures issued and frequently revised by the financial accounting standards board fasb and the governmental accounting standards board gasb these principles ensure consistency accuracy and transparency in financial reporting across various industries in the united states public companies must follow gaap when preparing their financial statements which is also widely used in governmental accounting 1theresa chiechi investopediaunderstanding gaapgaap combines authoritative standards set by policy boards and widely accepted methods for recording and reporting accounting information it covers revenue recognition balance sheet classification and materiality the main objective of gaap is to ensure that a company s financial statements are complete consistent and comparable allowing investors to analyze and extract useful information from financial statements it also facilitates the comparison of financial information across different companies 2unlike pro forma accounting a non gaap method gaap provides a standardized framework internationally the equivalent standard is the international financial reporting standards ifrs used in 168 jurisdictions worldwide gaap is also utilized by government entities all 50 states follow gaap and many local entities such as counties cities towns and school districts must adhere to these principles 3compliance with gaapif a corporation s stock is publicly traded its financial statements must follow rules set by the u s securities and exchange commission sec the sec mandates that publicly traded companies in the u s file gaap compliant financial statements regularly to maintain their public listing on stock exchanges 4 gaap compliance is verified through an appropriate auditor s opinion resulting from an external audit by a certified public accounting cpa firm while non publicly traded companies aren t required to follow gaap it is still highly regarded by lenders and creditors most financial institutions require annual gaap compliant financial statements as a part of their debt covenants when issuing business loans leading many u s companies to adopt gaap investors should be cautious if a financial statement isn t prepared using gaap comparing financial statements across different companies even within the same industry becomes challenging without gaap some companies may use gaap and non gaap measures to report their financial results gaap regulations require that non gaap measures be identified in financial statements and other public disclosures such as press releases 5even with gaap s transparency rules financial statements can still contain errors or misleading information always scrutinize financial statements as there s potential for manipulation within gaap s framework gaap vs ifrsthe international financial reporting standards ifrs set by the international accounting standards board iasb is an alternative to gaap that is widely used worldwide 6one key difference between gaap and ifrs is the treatment of inventory ifrs rules ban using last in first out lifo inventory accounting methods whereas gaap permits lifo both systems accept the first in first out fifo and weighted average cost methods 7since 2002 the iasb and the fasb have worked to align ifrs and gaap 8 a significant milestone was reached in 2007 when the sec allowed non u s companies registered in the u s to use ifrs without reconciling to gaap 9 this was a big achievement because it eliminated the need for non u s companies on u s exchanges to provide gaap compliant financial statements as global operations and markets expand international standards like ifrs are gaining traction even in the u s nearly all s p 500 companies report at least one non gaap measure in their financial statements 10 this trend is evident in the widespread use of several non gaap metrics with 77 of s p 500 companies reporting adjusted earnings 77 using adjusted eps earnings per share and 29 reporting ebitda or adjusted ebitda 11since much of the world uses the ifrs standard a convergence to ifrs could benefit international corporations and investors alike 