Adhering to GAAP standards allows companies and investors to connect in a common accounting standard. Learn how Hum approaches GAAP standards.
What is GAAP and Why is it Important?
Financial reports are needed for raising capital, initial public offerings (IPOs), mergers or acquisitions (M&A), and even events like qualifying for stimulus loans, grants, and loan forgiveness. For both internal and external-facing purposes, a standardized, comparable accounting method helps with month-to-month consistency and allows the performance of the company to be compared with the performance of other companies.
This is why GAAP was created and is a common accounting standard among both companies and investors in the United States. GAAP stands for Generally Accepted Accounting Principles. These principles are the guidelines most finance professionals in the United States use to record and report financial performance in a company. Again, the purpose of these standardized practices is to ensure consistency and completeness in financial reporting, and to set a basis by which performance can be compared across multiple companies.
The SEC (Securities & Exchange Commission) only requires publicly traded companies and companies obligated to publicly release their financial statements to adhere to GAAP. However, most finance professionals choose to follow these guidelines. This is especially true if a company wants to one day pursue activities where their financial history, performance, and data will be evaluated. These activities may include raising capital, going public, or being part of an M&A.
For more information of the core principles of GAAP and what they entitle, please reference this section of the article.
Why is GAAP Important?
The purpose of GAAP is to create a consistent, clear, and comparable method of accounting. It ensures that a company’s financial records are complete and homogeneous. This is important to business leaders because it gives a complete picture of the company’s health. Because GAAP ensures consistency, it also means business leaders can more accurately compare company performance month-over-month.
In addition, GAAP is important for external activities such as raising capital, public trading, or even competitive comparisons. This is because GAAP ensures consistency in reporting in all businesses, making the financial reports that are produced complete and comparable.
How does Hum Capital address GAAP?
Hum Capital believes in presenting data in Hum’s Intelligence Capital Market (ICM) in a standardized and homogenous way. Displaying data in GAAP standards benefits both companies and investors.
For companies, showing their financial reports and performance while adhering to GAAP standards gives confidence to investors that they are looking at reliable, consistent, and accurate financial data. This in turn helps accelerate the investor’s due diligence and decision making, thereby helping to also accelerate the fundraising process for companies.
For investors, not only does it help reassure them of the quality of the financial data they are receiving, but allows them to compare different companies with a standard view.
When Hum ingests a company’s data into the ICM, we standardize that data into the GAAP standard. At times, companies may notice their data to adjust in order to adhere to GAAP standards.
It is important to note that although Hum tries to conform to GAAP standards we cannot guarantee that all efforts comply completely with GAAP.
If you have any further questions about Hum’s stance on GAAP standards, please contact support@humcapital.com
The Core Principles of GAAP
Below are what are considered the core principles of GAAP.
- Principle of Regularity
All accountants will adhere to the standards set forth by GAAP.
- Principle of Consistency
Finance professionals are committed to applying the same accounting standards from one period to the next. This ensures comparability between periods.
- Principle of Sincerity
Accountants strive to produce accurate and impartial depictions of the company’s financial performance.
- Principle of Permanence of Methods
Like the principle of consistency, the principle of permanence states that uniform procedures and practices should be applied in financial accounting and reporting to ensure comparability.
- Principle of Non-Compensation
This principle means that all aspects of an organization’s finances should be reported. An asset should not be used to offset (compensate for) a liability.
- Principle of Prudence
All aspects of financial reporting should be fact-based, reasonable, and prudent—not based on speculation.
- Principle of Continuity
This means that all assets should be valued based on the assumption that the company will continue to operate moving forward.
- Principle of Periodicity
This principle refers to the standardization of time periods for financial reporting—such as annually, quarterly, or monthly.
- Principle of Materiality
The financial reports for a company should provide full disclosure and present the organization’s genuine financial position.
- Principle of Utmost Good Faith
All organizations should be honest and complete in their financial reporting.
Note: If there are ever any changes in the standards used in accounting, the finance professional is expected to fully disclose this change and explain the reasons behind this change in the footnotes to the financial statements.