When Lauren Bahr, CPA and VP of Finance at Occupier, joined for an episode of The Role Forward, she cited an AICPA study that found 75% of CPAs will retire in the next 10 years — and that the pipeline of college graduates in finance and accounting just isn’t there to replace them.
One way to spark a renewed interest in finance and accounting is to shed the perception of these roles as mere scorekeepers in favor of a push toward strategic partnership.
But for all the effort to elevate accounting’s role in the business, the fact remains that rigorous scorekeeping is still the top priority. You need to have your numbers right.
No effort to embrace a more strategic accounting role is possible without the foundation of solid GAAP financial statements month in and month out. Get that process in place first and then think about how you can layer more strategic initiatives on top.
Table of Contents
What Is GAAP?
GAAP stands for generally accepted accounting principles, a collection of compliances standards and rules from the Financial Accounting Standards Board (FASB). The 10 core principles provide a common set of procedures and requirements for reporting financial information, regardless of industry.
While GAAP is the common set of accounting rules in the United States, its international counterpart is principles-based accounting standards from the International Financial Reporting Standards (IFRS) organization.
The Importance of GAAP in SaaS
GAAP’s importance in SaaS, first and foremost, is a matter of compliance. If you’re a publicly-traded company, you are legally required to submit GAAP-compliant financial statements to the SEC on a quarterly basis. That’s the simple answer to why any SaaS accounting team should care about GAAP, but it’s not the only one.
The other side of GAAP’s importance in SaaS lies in its ability to create a common financial language for all stakeholders in and outside of your organization. The same way finance needs to find a common language with department leads to plan properly, accounting needs to adhere to GAAP standards so regulators, investors, and board members can understand financial performance relative to other organizations.
The common language of GAAP financials is valuable for private companies as well, even if they aren’t legally required to report them. Getting in the rhythm of GAAP reporting can help you:
- Create stronger alignment with board members and investors who may not specialize solely in the SaaS space.
- Keep you prepared for a financial audit at all times, so the process is minimally disruptive to your business.
- Build a sense of confidence among potential investors by showing that your org has a stable foundation for operations.
- Ensure you have the latest financial information ready off the shelf in case a potential investor or current one asks for something ad hoc.
- Practice your financial storytelling in a way that weaves together GAAP and non-GAAP metrics to better describe the health of your organization.
10 Principles of GAAP Accounting
You can explore the FASB website to dig deep into the legalese behind GAAP standards. But it’s widely understood that the guidelines revolve around four constraints and 10 core principles.
The four constraints are:
- Recognition. Financial statements must accurately and clearly reflect all assets, expenses, liabilities, and commitments for an organization following accrual accounting methods and strict revenue recognition rules.
- Measurement. Report financials according to the core concepts/principles of GAAP.
- Presentation. Provide regulators with income statement, balance sheet, cash flow statement, and summary of shareholder equity/ownership.
- Disclosure. Further explain financial information using disclosures wherever necessary to maximize clarity.
These general guidelines underpin all of the 10 principles of GAAP accounting, which are as follows.
Accounting teams regulated by GAAP must always follow the standards when reporting financials. This principle makes clear that companies cannot modify or omit pieces of the requirements.
Companies following GAAP are expected to apply the standards consistently across all reporting periods. Any deviations must be disclosed.
Financial reporting, whether done by internal accounting teams or third parties, must be objective and accurate. Accountants must report the financial reality of the business.
Similar to the consistency principle, this concept requires companies to maintain the same reporting methods and processes across all submitted statements. This principle is what ensures regulators and investors can compare financial reports across companies.
Any assets and liabilities must be presented as-is on financial statements. This principle ensures accountants do not compensate any debts or expenses with assets/revenue to paint the company in a better light.
There should be no speculation or forecasting within the formal financial statements an accounting team produces. The GAAP reporting process is entirely fact-based, with forecasts reserved for dedicated, forward-looking guidance.
The assumption when submitting compliant financial statements and reports is that the business entity will remain operational for the foreseeable future.
This principle ensures accounting teams maintain clear lines between time periods in reporting. If your financial report is covering the latest quarter, it should only provide details about the revenue and expenses from that quarter.
Accounting teams must be thorough in reporting all available financial information for the given period. This principle assumes that accounting teams will provide any and all financial data of material interest when submitting reports.
10. Good Faith
This principle is an ethical standard that assumes anyone in a business providing GAAP reporting will be honest in all submissions.
The Four Financial Statements Required for GAAP Compliance
There are four different financial statements that GAAP requires companies to report: income statement (or P&L statement), balance sheet, cash flow statement/statement of cash flows, and the statement of owner’s equity.
We’ll use Snowflake’s December 2022 10-Q (the quarterly filing for public company financial reporting) to walk through examples of each statement.
1. The Income Statement
The income statement (called a statement of operations in Snowflake’s filings) provides an overview of the financial performance of a company’s operations. It begins with top-line revenue and includes line items for operating expenses, concluding with the company’s net income.
This condensed example from Snowflake shows how a non-GAAP SaaS P&L that you might use for internal reporting becomes a compliant income statement.
2. The Balance Sheet
The balance sheet provides an overview of a company’s financial position in terms of its assets (cash on hand, accounts receivable balance, investment returns, fixed assets, etc.), liabilities (accounts payable balance, deferred revenue, accrued expenses, etc.), and equity (preferred and common stock).
3. The Statement of Cash Flows
The cash flow statement provides a summary of the changes in cash balance as well as both the sources and uses of cash in the business. It is meant to show whether or not a company has enough cash on hand to cover expenses, breaking sources of cash out into operating, investing, and financing activities.
4. The Statement of Owners’ Equity
The statement of owners’ equity, also called either the statement of stockholders’ equity or statement of shareholders’ equity, combines information from the income statement and balance sheet to show changes in the equity value of a company. It shows share capital and retained earnings (or net loss).
How Mosaic Supports Transparency for GAAP and Non-GAAP Reporting
The job of an accounting team is, above all, to make sure that financial data is reported accurately and in compliance with GAAP standards as necessary. But the job can’t stop there. According to Parker Gilbert, CEO and Co-Founder of Numeric, you have to do so much more.
It’s not good enough anymore as an accounting team to just prepare a set of audited financial statements. There are things you need to do to make sure that you are ready to produce your financials at the end of the month, quarter, and year. But what stakeholders are really asking for on an ongoing basis is much higher level detail into your accounting data.
The most strategic accounting teams can maintain the mission-critical work of producing GAAP financial statements while also publishing non-GAAP management reports for internal stakeholders.
But more than anything, providing this level of transparency and insight is a data-wrangling challenge. Teams stuck in manual reporting cycles barely have enough time to get the GAAP statements out the door, let alone set the stage for FP&A counterparts to go deeper on the numbers.
Mosaic solves these data-wrangling challenges by integrating with your critical source systems and providing visibility into your actuals in real time. This gives accounting and finance teams more time to collaborate on custom financial reports that highlight the true narrative of business performance.
If you want to see how Mosaic’s automated financial reporting works and what it can do for your team, reach out for a personalized demo.
GAAP Financial Statement FAQs
How many rules are there in GAAP?
There are more than 800 standards from the Financail Accounting Standards Board (FASB) that adhere to GAAP rules. However, there are 10 basic GAAP principles that each of those rules follows. They are the principles of:
- Good Faith