GAAP (Generally Accepted Accounting Principles)

Term Definition

GAAP, (Generally Accepted Accounting Principles), is the standard framework of guidelines for financial accounting. It includes the standards, conventions and rules that accountants follow in recording and summarizing transactions, and in the preparation of financial statements. Every country has their own version of GAAP with standards set by a national governing body. Due to globalization, international financial reporting standards are required and established by the International Accounting Standards Committee.

Organizations must have effective systems for project governance and compliance. Compliance threats can jeopardize projects, its executives and the company whether they are intentional or unintentional violations of government, industry and accounting regulations, (such as employment wage laws, family and medical leave act, and generally accepted accounting principles). Compliance violations may also occur for project-related matters such as revenue recognition, work in progress and what projects to capitalize or expense.

Global organizations face even greater challenges, as they must comply with various governing bodies and regulations. For example, an organization with offices in Europe, Canada and the United States would be required to comply with each country’s version of GAAP.

Organizations face a number of threats from ineffective systems to ensure compliance. Companies may be overstating their expenses. For example, SOP 98 mandates a company to capitalize certain types of software projects. Companies may be understating their expenses by capitalizing projects that should not be capitalized according to GAAP. Inaccurate revenue reporting may lead to Sarbanes-Oxley Section 404, noncompliance and audit failure.

Solutions to the above threats could be facilitated with automated tools. To prevent threat the company should determine the nature of the project as part of the project initiation process and whether the project costs are material. Whether a project is to be capitalized or expensed must be determined in this early stage to ensure that all subsequent progress and risk reports, and interim financial reports properly classify this project as a balance sheet (and asset classes that should be depreciated according to regulations) or an income statement (an expense) item. A project initiation workflow accomplishes the above. Advanced operational control software can also categorize work types (expensed or capitalized) within a project based on milestones, phases or at the task level.

Revenue recognition and cost accounting are two areas that are particularly challenging with GAAP accounting. Project management software provides revenue recognition and cost accounting capabilities that can simplify and streamline GAAP compliance.

Area of Application
Cost Accounting
Revenue Recognition