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What is GAAP and Non-GAAP?
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 −
| GAAP | Non-GAAP |
|---|---|
| Prescribed standards and formats for accounting | No prescribed standards and formats for accounting |
| Industry standards | Not an industry standard |
| No scope for window dressing | Scope for window screening |
| Useful for investors in analyzing their investments | Financial statements are easily understand by Investors, common user and creditors |
| Get clear picture of business operations | Adjustments are needed to get clear picture of business operations |
| Reliable to compare financial results between industries, companies and yearly | Not reliable to compare financial results between industries, companies and yearly |
Updated on: 18-May-2022
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