What is GAAP and Non-GAAP?

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Let us first understand what GAAP.

GAAP (Generally Accepted Accounting Principles)

GAAP offers standards for the true and fair value of companies financial wellbeing. It is defined by Financial Accounting Standards Board (FASB) and the Securities and Exchange Commission (SEC).

Advantages of GAAP include

  • Facilities consistency
  • Increase investors trust.
  • Comparability of financial statements.
  • Decision making.

Disadvantages include:

  • Compels financial statements according to creditors instead of equity holders.

Non – GAAP (Generally Accepted Accounting Principles)

Non – GAAP is not a standard one. Necessary adjustments are made for conveying significant information. Securities and Exchange Commission (SEC) issues rules and regulations.

Advantages of Non – GAAP include −

  • Provides Quality information.
  • Provides Predictive information.
  • Provides relevant and required information.
  • Enables comparability factor.

Disadvantages include −

  • Lacks consistency.
  • Lacks comparability.

Following are the differences between GAAP and non-GAAP −

Prescribed standards and formats for accountingNo prescribed standards and formats for accounting
Industry standardsNot an industry standard
No scope for window dressingScope for window screening
Useful for investors in analyzing their investmentsFinancial statements are easily understand by Investors, common user and creditors
Get clear picture of business operationsAdjustments are needed to get clear picture of business operations
Reliable to compare financial results between industries, companies and yearlyNot reliable to compare financial results between industries, companies and yearly
Updated on 18-May-2022 13:38:02