GAAP and IFRSGAAP
GAAP (Generally Accepted Accounting Principles) is the set of rules US companies follow in their financial statements. Most other countries use IFRS. Both aim to make reported numbers consistent and comparable, though "non-GAAP" figures often appear alongside them.
When two companies report "$1 billion in profit", investors need to know they measured it the same way. Accounting standards — US GAAP and international IFRS — provide that common language. They also explain why company press releases highlight "adjusted" or non-GAAP numbers. This entry explains what GAAP is, how it compares with IFRS and how to treat non-GAAP measures.
- Category
- Accounting, Tax and Operations
- Reading time
- 3 min
- Also called
- Generally Accepted Accounting Principles, US GAAP, IFRS
- Updated
GAAP in plain words
GAAP is a commonly recognised set of rules and procedures governing corporate accounting and financial reporting in the US.1
Registered securities offerings typically require financial statements audited by an independent accounting firm.2
Most countries outside the US use International Financial Reporting Standards (IFRS) instead. See SEC Filings: 10-K, 10-Q and 8-K.
How standards shape financial reports, step by step
Standards are set
FASB in the US; IASB for IFRS.
Companies apply them
Revenue, expenses, assets, liabilities.
Auditors check
Independent audit of statements.
Reports are filed
10-K, 10-Q. See EDGAR.
Companies add adjusted figures
Non-GAAP measures.
Investors reconcile
Compare GAAP and adjusted numbers. See Quality of Earnings.
Worked examples
Example 1 — GAAP vs non-GAAP
50% higher adjustedGAAP net income $80m; adjusted income excludes $30m of stock compensation and $10m of restructuring.
| GAAP | $80m |
| Adjusted | $80m + $40m = $120m |
Adjusted figures can paint a rosier picture than GAAP results. See Quality of Earnings.
Example 2 — Comparable statements
ComparableTwo US retailers both report under GAAP.
| Revenue recognition | Same rules |
Common rules make financial statements comparable across companies.1
Example 3 — Audited numbers
VerifiedAn IPO prospectus includes three years of audited GAAP statements.
| Audit | Independent accounting firm |
Registration requires audited financial statements to help investors decide.2 See Prospectus.
US GAAP vs IFRS
| Aspect | US GAAP | IFRS |
|---|---|---|
| Used in | United States | EU, UK, much of the world |
| Style | More rules-based | More principles-based |
| Inventory (LIFO) | Allowed | Not allowed |
| Standard setter | FASB | IASB |
Why accounting standards matter
Comparing companies
Same rules, fair comparisons. See Price-to-Earnings Ratio.
Earnings quality
Spotting aggressive adjustments. See Quality of Earnings.
Cross-border investing
GAAP vs IFRS differences. See American Depositary Receipt.
Valuation inputs
Reliable profits and cash flows. See Discounted Cash Flow.
Advantages and disadvantages
Advantages
- Consistent, comparable reporting.
- Audited and regulated.
- Builds investor trust.
Disadvantages
- Complex and detailed.
- Can obscure economic reality.
- Non-GAAP figures vary widely.
Going deeper
Read as far as you need. Each level builds on the one before it.
A common language
Beginner
GAAP gives US companies one set of rules for accounting and reporting.1
Non-GAAP measures
Intermediate
Companies often report adjusted EPS or EBITDA; the SEC requires them to reconcile these to GAAP numbers. See Earnings per Share.
Convergence
Advanced
US and international standard setters have aligned some rules, such as revenue recognition, but important differences remain. See SEC Filings: 10-K, 10-Q and 8-K.
Common mistakes
Trusting adjusted figures blindly
Check what's excluded.
Comparing GAAP to IFRS directly
Adjust for differences.
Ignoring footnotes
Key policies live there.
Confusing profit with cash
Check cash flows. See Free Cash Flow.
Check your understanding
Test yourself before moving on. Each answer comes with an explanation.
Key points to remember
- GAAP sets US accounting rules.
- IFRS is used in most other countries.
- Both aim for comparable financial statements.
- Non-GAAP figures need careful checking.
- Audits add credibility.
Frequently asked questions
Is non-GAAP bad?
Who sets US GAAP?
Do foreign companies listed in the US use GAAP?
Further learning
- Free Cash Flow
Cash vs accounting profit.
- EDGAR
Finding financial statements.
Sources
This article is written in our own words. The sources below support the specific facts, rules and figures marked with a number in the text. Links open the original publisher’s page.
- Corporate Finance Institute. GAAP: Generally Accepted Accounting Principles (opens in a new tab) Checked .
- Investor.gov (SEC). Exercise Caution with Crypto Asset Securities: Investor Alert (opens in a new tab) Checked .
Educational content, not financial advice. Examples use hypothetical prices and simplified costs; actual fees, margin rules and regulations vary by broker, market and country. We are not affiliated with any publisher linked above. Last reviewed . Report an error or request a source credit.