Search for "GAAP principles" and you will find a tidy list of ten or so named ideas: historical cost, revenue recognition, matching, full disclosure, consistency, conservatism and others. The list is useful teaching shorthand. It is not how US GAAP is written, and an auditor who cites "the matching principle" as authority for a proposed adjustment will not have a defensible position.
This guide separates the two things the phrase can mean: the authoritative requirements an auditor tests against, and the underlying concepts that explain why those requirements look the way they do. It paraphrases the FASB materials. Read the Codification and Concepts Statement text before relying on any specific point.
What is the authoritative source of GAAP?
For nongovernmental entities, the source of authoritative US GAAP recognized by the FASB is the FASB Accounting Standards Codification (ASC). It became the single source for nongovernmental GAAP for periods ending after September 15, 2009, replacing the earlier hierarchy of separate pronouncements. For SEC registrants, SEC rules and interpretive releases are also authoritative sources of GAAP (ASC 105, Generally Accepted Accounting Principles). State and local governments follow GASB standards instead. See GASB vs FASB and the GAAP hierarchy.
Two practical points follow.
- The Codification states requirements topic by topic. Revenue is ASC 606, leases are ASC 842, income taxes are ASC 740. There is no Codification topic called "the matching principle" or "the conservatism principle."
- Updates arrive as Accounting Standards Updates (ASUs). An ASU is the vehicle that changes the Codification. It is not itself the Codification. See the ASU tracker for private companies.
The auditor's report says whether the statements are presented fairly, in all material respects, in accordance with the applicable framework. For a GAAP audit, that framework is the Codification. See AU-C 700 and AU-C 200.
What is the Conceptual Framework, and is it GAAP?
The FASB's Concepts Statement No. 8, Conceptual Framework for Financial Reporting, sets out the objective of general purpose financial reporting and the characteristics that make information useful. It is the board's own guide when it writes standards. By its own terms it does not establish GAAP, does not require a change in existing GAAP and does not amend or interpret the Codification.
That has a direct consequence for practitioners: you cannot override a Codification requirement by pointing to the Framework. You can use it to understand the reasoning behind a requirement and to apply judgment where the Codification is silent, after working through the hierarchy.
The qualitative characteristics
Chapter 3 of Concepts Statement 8 describes two fundamental characteristics and four enhancing ones:
| Type | Characteristic | Plain meaning |
|---|---|---|
| Fundamental | Relevance | Information that can make a difference to a user's decision |
| Fundamental | Faithful representation | Complete, neutral and free from error as far as possible |
| Enhancing | Comparability | Users can identify similarities and differences between items and entities |
| Enhancing | Verifiability | Different knowledgeable observers could agree the depiction is faithful |
| Enhancing | Timeliness | Information is available in time to influence decisions |
| Enhancing | Understandability | Information is classified, characterized and presented clearly |
Materiality is treated as an entity-specific aspect of relevance, and a cost constraint applies: benefits of reporting information should justify the costs. Concepts Statement 8 notes that consistency relates to comparability but is not the same thing. See materiality.
How do the "textbook principles" map to the Codification?
The named principles are best read as a map of ideas that specific ASC topics implement. Use the table to find the real authority, not as a citation.
| Textbook idea | What it means | Where the requirement actually sits |
|---|---|---|
| Economic entity | Report the entity separately from its owners | Consolidation rules in ASC 810; see consolidation for private companies |
| Going concern | Assume the entity continues unless there is substantial doubt | ASC 205-40; see going concern assessment |
| Historical cost | Record assets at acquisition cost | Property and equipment at cost less depreciation (ASC 360); inventory at the lower of cost and net realizable value for most methods (ASC 330). Fair value applies where a topic requires it, see ASC 820 |
| Revenue recognition | Recognize revenue when control of a good or service transfers | ASC 606; see ASC 606 guide |
| Matching | Expenses recognized in the period that benefits | No single rule. Results from specific guidance, for example capitalizing and amortizing certain contract costs in ASC 340 |
| Full disclosure | Notes provide what users need beyond the face statements | Topic-specific disclosure requirements, plus ASC 235 on accounting policies and ASC 855 on subsequent events; see subsequent events |
| Consistency | Apply policies the same way period to period | A change in accounting principle is permitted only when the new principle is preferable, ASC 250; see ASC 250 |
| Materiality | Only information that matters to users must be reported | Concepts Statement 8; for SEC registrants also SEC staff guidance; see SAB 99 |
What about conservatism?
Many lists include conservatism. Concepts Statement 8 does not include prudence or conservatism as part of faithful representation, because the board concluded that either would be inconsistent with neutrality. Understating assets in one period tends to overstate performance in later ones. Some Codification guidance is asymmetric, such as accruing a loss contingency when it is probable and the amount can be estimated while not recognizing a gain contingency early. That is a feature of that guidance, not a general rule that lets management choose the lower number. See ASC 450.
Two worked examples
Both are illustrative.
Example 1: historical cost with a write-down (inventory)
A distributor holds 1,000 units at a cost of $48 each, so cost is $48,000. At year-end the expected selling price is $60 per unit and the costs to sell are $15 per unit.
- Net realizable value per unit: $60 - $15 = $45
- Net realizable value in total: 1,000 x $45 = $45,000
- Write-down: $48,000 - $45,000 = $3,000
Under ASC 330, inventory measured with FIFO or average cost is carried at the lower of cost and net realizable value, so the balance sheet shows $45,000 and the income statement carries a $3,000 charge. The starting point is cost, but the Codification, not a general "conservatism principle", is what requires the write-down. See inventory costing.
Example 2: expense timing from an accrual standard
On October 1, a company pays $12,000 for a 12-month insurance policy.
- Monthly cost: $12,000 / 12 = $1,000
- Expense for October to December: 3 x $1,000 = $3,000
- Prepaid asset at December 31: 9 x $1,000 = $9,000
The adjusting entry debits insurance expense $3,000 and credits prepaid insurance $3,000. No Codification topic is titled "matching"; the result follows from accrual accounting. See prepaid expenses and cash vs accrual.
How do auditors use all this?
- Test against the Codification. Misstatement conclusions cite the applicable topic and paragraph, not a named principle.
- Use the Framework to evaluate judgment. When management's policy is permissible but unusual, relevance and faithful representation are a reasonable lens for the conversation. See professional skepticism.
- Watch for non-GAAP frameworks. Cash basis, income tax basis and other special purpose frameworks do not use the Codification as the measurement basis. See cash and tax basis financial statements and AU-C 800.
- Check private company alternatives. The FASB has issued alternatives for private companies, so confirm whether the client elected one and applied it consistently.
Frequently asked questions
What are the main GAAP principles?
US GAAP is the body of requirements in the FASB Codification. The commonly listed principles, such as historical cost, consistency and full disclosure, are teaching concepts that specific Codification topics implement. The Codification does not list them as standalone rules.
Is the matching principle part of GAAP?
Not as a standalone requirement. Expense timing results from topic-specific guidance. The idea explains why, for example, a prepaid insurance cost is expensed over the coverage period.
Does GAAP require conservatism?
No general requirement. Concepts Statement 8 excludes conservatism from its characteristics because it conflicts with neutrality. Individual topics, such as loss contingencies, contain asymmetric recognition rules.
Who sets GAAP for private companies?
The FASB, through the Codification. Private companies follow the same Codification as public companies, with certain private company alternatives and disclosure scaling in specific topics. The SEC adds requirements for registrants.
Is the Conceptual Framework authoritative?
No. The FASB states that Concepts Statements do not establish GAAP. They guide the board and inform judgment but do not override the Codification.
Sources
- FASB, Accounting Standards Codification, Topic 105 (Generally Accepted Accounting Principles), Topic 250, Topic 330, Topic 360, Topic 606, Topic 235, Topic 855, asc.fasb.org
- FASB, Concepts Statement No. 8, Conceptual Framework for Financial Reporting, Chapter 1, Chapter 3 and Basis for Conclusions BC3.27 to BC3.29, storage.fasb.org
- AICPA, AU-C Section 200 and AU-C Section 700, aicpa-cima.com
Related
Part of CORAA University · US GAAP for private companies: related guides, calculators and templates.
AU-C references are to AICPA Professional Standards, paraphrased here; read the standard itself before relying on a requirement. This page is guidance, not professional advice. Report an error