Understand what we mean by GAAP to STAT adjustments. This article discusses the different standards that are used for multiple representations of the financial results for global organizations. Understand the meaning of US GAAP, Local GAAP, STAT, IFRS, and STAT. Finally, understand why accounting differences arise and how they are adjusted for different financial representations.
All companies keep track of their financial results through accounting using the general ledger. However, during the process, there are several different methods of accounting that these companies can use, and usage of these methods can result in different accounting treatments for the same transaction. Cash and Accrual are two fundamental accounting methods.
Leveraging the fundamental principles of accounting, different bodies prescribe some standards that need to be followed by organizations coming under their authority. The Financial Accounting Standards Board (FASB) is the authoritative body having the primary responsibility for developing accounting principles. The FASB publishes Statements of Financial Accounting Standards as well as Interpretations of these Standards.
Apart from “Financial Accounting Standards Board” (FASB), the American Institute of Certified Public Accountants (AICPA), and the Securities and Exchange Commission (SEC) along with the statutory authoritative bodies of various countries (Example – Institute of Chartered Accountants of India, for India), all have all played an influential role in developing generally accepted accounting principles which span across boundaries of nation and have global acceptability. Efforts are still going on to emerge globally accepted principles, as we still found variations in principles from countries to countries as well as from businesses to businesses that warrant a need to have different accounting methods.
Companies following under the jurisdiction of different geographies may have to follow standards prescribed by different bodies. For example, all companies that are registered in the United States of America need to follow US GAAP, and if, these counties are operating in different countries, they need to follow the accounting standards prescribed by the governments of that particular country for the legal entities registered in these foreign countries.
Two of the most common accounting methods that businesses employ are the Generally Accepted Accounting Principles and the STAT (Local Statutory Accounting Principles). To convert from one standard to another method, a business must make certain adjustments to its financial statements. Given below are some of the commonly used standards:
In the U.S., Generally Accepted Accounting Principles are accounting rules used to prepare, present, and report financial statements for a wide variety of entities, including publicly traded and privately held companies, non-profit organizations, and governments. The term is usually confined to the United States; hence it is commonly abbreviated as US GAAP.
US GAAP is not written in the law, although the U.S. Securities and Exchange Commission (SEC) requires that it be followed in financial reporting by all publicly traded companies. The Financial Accounting Standards Board (FASB) is the highest authority in establishing generally accepted accounting principles for public and private companies, as well as non-profit entities. All companies registered with US SEC have to comply and present their financial statements as per USGAAP.
Generally Accepted Accounting Principles encompass the entire industry of accounting and not only the United States. As US Government has notified standards for US companies, similarly most of the countries have established and notified accounting standards and principles that need to be adhered to and complied with all organizations operating within the jurisdiction of respective countries. Generally Accepted Accounting Principles (GAAP) refer to the standard framework of guidelines for financial accounting used in any given jurisdiction; generally known as accounting standards. Local GAAP includes the standards, conventions, and rules accountants follow in recording and summarizing, and in the preparation of financial statements, where the word local refers to and can be replaced by the respective authority or jurisdiction. For example - A US company operating in other countries needs to comply with respective Local GAAPs for operations in respective countries and need to report its consolidated results in US GAAP.
International Financial Reporting Standards (IFRS) are principles-based standards, interpretations, and the framework adopted by the International Accounting Standards Board (IASB). They are also known by the older name of International Accounting Standards (IAS) and they aim for international accounting standards that can be adopted by all organizations worldwide.
Among other standards, IFRS is best positioned to be a global standard. Local and US GAAPs are slowly being phased out in favor of the International Financial Reporting Standards as the global business becomes more pervasive. US GAAP applies only to United States financial reporting and thus an American company reporting under US GAAP might show different results if it was compared to a British company that uses the International Standards or Local UK GAAP. While there is a tremendous similarity between GAAP and the international rules, the differences can lead a financial statement user to incorrectly believe that company A made more money than company B simply because they report using different rules. The move towards International Standards seeks to eliminate this kind of disparity. At present, IFRS is used in many parts of the world, including the European Union, India, Hong Kong, Australia, Malaysia, Pakistan, GCC countries, Russia, South Africa, Singapore, and Turkey. As of August 2008, more than 113 countries around the world require or permit IFRS reporting. It is generally expected that IFRS adoption worldwide will be beneficial to investors and other users of financial statements, by reducing the costs of comparing alternative investments and increasing the quality of information. However, this requires a big-picture strategic approach that ensures global consistency in financial reporting policies and practices.
Many governments prescribe different accounting standards for companies operating in a particular domain. For example, US SAP is a set of accounting standards and procedures that insurance companies use to report their financial data. US GAAP and US SAP procedures differ considerably. State insurance regulators require insurance companies to keep their accounting records for filing annual financial reports in accordance with statutory accounting principles (SAP) and the Statutory Accounting Principles (SAP) forms the basis for preparing the financial statements of insurance companies. As the US insurance industry falls under state regulation, actual rules vary further by state. Similarly, tax laws for various countries may prescribe different accounting treatments in certain cases that do not match even with the respective Local GAAPs.
Today organizations are more global than ever and they operate across boundaries of nations. GAAP and STAT in this context are terms used to define how the results of a multinational corporation will be recorded and reported for different purposes. In the context of general ledger, GAAP generally refers to the GAAP prescribed by the home country where the organization’s parent company is registered and has an obligation to report the consolidated results. The STAT term is generally used to refer to the local statutory books of accounts to reflect the operations in a specific foreign country for operations in that country as per the Local GAAP for that specific country.
As companies need to report results from the same business operations using different accounting standards, they need to make adjustments to their recorded financial data, to convert the financial information recorded using one accounting method to another. These adjustments entries are in the nature of permanent adjustments, timing adjustments, reclassifications, or eliminations.
To adjust a balance sheet from one accounting method to another (for example GAAP to STAT), an accountant must identify and adjust the accounting entries that would require a different treatment. From an accounting perspective, there are three distinct stages for this adjustment process, assess individual situation and requirements, complete the conversion activities, and sustain ongoing reporting. Organizations need to develop a framework and systems design for accounting, reporting, consolidation, and reconciliation processes and controls. Modern general ledger systems enable accountants to organize and record accounting data by providing an operating model for multiple financial representations.
In this article, we will describe how to determine if an account needs adjustment entries due to the application of the matching concept. Learners will get a thorough understanding of the adjustment process and the nature of the adjustment entries. We will discuss the four types of adjustments resulting from unearned revenue, prepaid expenses, accrued expenses, and accrued revenue.
Reversing Journals are special journals that are automatically reversed after a specified date. A reversing entry is a journal entry to “undo” an adjusting entry. When you create a reversing journal entry it nullifies the accounting impact of the original entry. Reversing entries make it easier to record subsequent transactions by eliminating the need for certain compound entries. See an example of reversing journal entry!
Matrix Organizational Structures
In recent times the two types of organization structures which have evolved are the matrix organization and the network organization. Rigid departmentalization is being complemented by the use of teams that cross over traditional departmental lines.
Internally, an organization can be structured in many different ways, depending on their objectives. The internal structure of an organization will determine the modes in which it operates and performs. Organizational structure allows the expressed allocation of responsibilities for different functions and processes to different entities such as the branch, department, workgroup and individual.
Record to report (R2R) is a finance and accounting management process that involves collecting, processing, analyzing, validating, organizing, and finally reporting accurate financial data. R2R process provides strategic, financial, and operational feedback on the performance of the organization to inform management and external stakeholders. R2R process also covers the steps involved in preparing and reporting on the overall accounts.
Explore the concept of journal reversals and understand the business scenarios in which users may need to reverse the accounting entries that have been already entered into the system. Understand the common sources of errors resulting in the reversal of entries and learn how to correct them. Discuss the reversal of adjustment entries and the reversal functionalities in ERPs.
This article explains the process of entering and importing general ledger journals in automated accounting systems. Learn about the basic validations that must happen before the accounting data can be imported from any internal or external sub-system to the general ledger. Finally, understand what we mean by importing in detail or in summary.
The sole trader organization (also called proprietorship) is the oldest form of organization and the most common form of organization for small businesses even today. In a proprietorship the enterprise is owned and controlled only by one person. This form is one of the most popular forms because of the advantages it offers. It is the simplest and easiest to form.
When the quantum of business is expected to be moderate and the entrepreneur desires that the risk involved in the operation be shared, he or she may prefer a partnership. A partnership comes into existence when two or more persons agree to share the profits of a business, which they run together.
GL - Unearned / Deferred Revenue
Unearned revenue is a liability to the entity until the revenue is earned. Learn the concept of unearned revenue, also known as deferred revenue. Gain an understanding of business scenarios in which organizations need to park their receipts as unearned. Look at some real-life examples and understand the accounting treatment for unearned revenue. Finally, look at how the concept is treated in the ERPs or automated systems.
© 2023 TechnoFunc, All Rights Reserved