Gapp - the Data Model

History of GAAP

Chris Moolayil

                                               Accounting 321

Texas A&M University-Commerce

History of GAAP

        GAAP stands for Generally Accepted Accounting Principles. It is the standard framework that includes the standards, conventions, and rules that accountants follow when they are preparing financial statements. A lot of countries are using or about to start using the International Financial Reporting standards (IRFS), which was established by the International Accounting Standards Board.         In some countries they use local accounting principles for some companies, but if they are listed or a large company they must use the IFRS rules, so that statutory reporting is comparable internationally, across jurisdiction.

The American Institute of Certified Public Accountants (AICPA), governed by the Securities and Exchange Commission (SEC), has historically set accounting standards. Before we go into the history of GAAP we must know why we started having accounting principles in the first place. After the stock market crash of 1929, the American Institute of Accountants special committee in correspondence with the New York stock exchange recommended that five board principles, which have won fairly general acceptance and introduce financial statements in accordance with accepted principles of accounting.

The five board principles purpose was to help improve accounting practices. In 1934 because of the stock market crash, two major securities acts create the SEC in order to restore faith in the public and investors. The SEC becomes strict regulators and wants comparability and transparency, full disclosure. In 1935 the SEC created the Office of chief accountants and they insist to use historical cost accounting so that financial statements do not have misleading disclosures.

From the beginning the SEC only wanted to use historical cost accounting in the financial statements. This reaction was because that listed companies before any federal regulations overstated the value of their assets and also had questionable market values. Because they hid those information it misled many investors when they where judging their shares in the great market crash. The SEC did not want this to happen again due to what effect it had on the economy.

In 1936 the institute publishes The Examination of Financial Statements which is a pamphlet that  deals with accountants examination of the balance sheet of a business enterprise at a specified date. In this the term generally accepted accounting principles is introduced. 1938 to 39 the SEC has supported that a private sector will establish GAAP with the SEC over seeing and having the final say. Congress during this time also played a key role by permitting companies to use the last in first out method (LIFO).  Under the FIFO method, companies where paying a huge amount of taxes. Under the LIFO method companies could save money on taxes and the LIFO method was forced on the accounting body to accept this method for is financial reporting purpose.