Generally Accepted Accounting Principles (GAAP) is the methods, rules,

practices and other procedures that have evolved to govern the preparation of

Financial Statements. Justify the statement.

Generally Accepted Accounting Principles (GAAP) is the methods, rules, practices and other

procedures that have evolved to govern the preparation of Financial Statements. These are the

principles and procedures to maintain the uniform financial reporting system so that readers of

financial statements do not have to face difficulties in interpreting the reports from organizations

to organizations and broadly from country to country around the world.

Uniformity and Transparency are the latest corporate desires. As globalization spread, more and

more corporates are going abroad for funds and an increasing number of foreign investors are

pouring their money into the capital markets. Now the need of the hour is an accounting

language, which can be understood by the international investing community. A few corporates

have realized this and started working in this direction. And many more are expected to follow

soon. When a company wants to raise funds in the global markets, or desires to get listed on

stock exchanges abroad or invites foreign institutional investors to take part in its equity, it needs

to comply with some international accounting standards while preparing its annual reports. There

are two popular internationally recognized accounting standards, the US GAAP and the

International Financial Reporting standards (IFRS). Of these two the former is more acceptable

to many. Hence, some companies around the world have voluntarily started preparing their

accounts according to the US GAAP. Though their net profits according to US GAAP are lesser

than those according to local standards, the companies are resorting to this route to maintain

greater transparency. This will be in tune with the spirit of corporate governance and shareholder
value. This display of transparency has also found favor with the markets despite the fall in the

net profit. Other companies in the same business are now under pressure to prepare their

accounts in accordance with international standards. For example Banking Institutions are

regarded as the organizations that has the best corporate principles.

ORIGINATION OF GAAP

The origin of the generally accepted accounting principles (GAAP) can be traced to the 1929

when US stock market crash where the accounting profession of USA realized the need to adopt

a standardized set of principles for of accounting. The AIA (American Institute of Accountants,

which now known as American Institute of Certified Public Accountants) was asked to draw up

a uniform code of accounting principles to guide the profession. The enactment of the securities

act of 1933, constituting the Securities Exchange Commission, was the second step towards

laying down the generally accepted accounting principles. The AIA published a document titled

auditing of corporate accounts, which outlined a proposal for generalized accounting principles.

An Organization with research orientation called the Accounting Principles Board (APB) was

formed in 1957 to spell out the fundamental accounting postulates in the United States. Since

APB’ efforts in the standard setting process did not match the requirements, the wheat committee

was appointed in 1971 to examine the problems of APB and to provide solutions. The

committee’s findings resulted in the formation of the Financial Accounting Standards Board

(FASB) in 1973. The constant support of the securities exchange commission (SEC) to the

FASB pronouncements has lent considerable support to the general acceptance of its accounting

policy statements. The United States took the lead in formulating the GAAP. The early years of

standard setting in the United Kingdom, Australia, Canada and other countries by and large

followed the trend set by the American standard setting bodies.

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IMPACT OF NON COMPLIANCE OF GAAP

European Union which is second largest economic power after USA has adopted a proposal that

all companies domiciled in EU with publicly traded shares on a European Exchanges must use

IFRS for their financial reporting by December 2005. Non-compliance of IFRS may lead to

delisting of shares from the stock exchange. Now Europe and most of the countries around the

world, have either approved or mandated the application of GAAP, are moving towards a

common accounting standard, other countries which still are stuck to their local accounting

standards will find it difficult in coming days to deal with these countries for non-adoption of

IFRS.

NEED FOR NEPALESE COMPANIES TO CONFIRM TO GAAP

In the past, there were no compulsion to share information with their shareholders who either

blindly bought the shares and the major shareholders, besides the promoters, were usually the

financial institutions, whose equity positions were due to a result of government policy and did

not consider it necessary to obtain detailed data. Shareholder’s and investor’s needs for data have

changed dramatically with the arrival of foreign institutional investors (FII), Foreign Direct

Investments (FDI) and mutual funds. As corporates compete for these institutions attention, they

have no choice but to meet their demand for realistic data. Simultaneously Nepalese Institution’s

rush into global market’s for debt and equity has necessitated the disclosure of sufficient

information to compete with global contenders for same capital. With the disintegration of

political boundaries and emergence of global financial markets, GAAP or IFRS is increasingly

become relevant and overshadowing regional accounting standards. Globalization of GAAP is

also necessitated as global financial markets are integrating and investors are looking for more

consistency in the financial reporting of multinational corporations.

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PRACTICE IN NEPAL

The Accounting Standards Board (ASB) is an independent statutory body with the responsibility

to set and issue accounting standards for preparation and presentation of financials statements in

Nepal. The Government of Nepal established ASB in March 2003 with an amendment to the

Institute of Chartered Accountants of Nepal Act 1997 incorporating the provision for its

establishment and operation. The ASB is primarily responsible for setting accounting and

financial reporting standards for business enterprises in line with the International Financial

Reporting Standards (IFRSs).

With the view to conform GAAP, Standards and Interpretations adopted by the Accounting

Standards Board (ASB) is called Nepal Financial Reporting Standards (NFRSs) which

comprise:

(a) Nepal Financial Reporting Standards;

(b) Nepal Accounting Standards;

(c) IFRIC Interpretations issued by the International Accounting Standards Board; and

(d) SIC Interpretations issued by the International Accounting Standards Board.