What is “Generally Accepted Accounting Principles” (GAAP)?
Generally Accepted Accounting Principles (GAAP) is the set of accounting standards, conventions and rules that public and many private companies in the United States must follow when preparing financial statements. U.S. GAAP is established by the Financial Accounting Standards Board (FASB) and is enforced by the SEC for public companies. GAAP ensures financial statements are comparable, consistent and transparent across companies.
Core GAAP principles
- Accrual basis: revenue recognised when earned, expenses when incurred (regardless of cash).
- Consistency: same methods applied period to period.
- Matching: expenses matched with revenue they helped produce.
- Conservatism: expenses and liabilities recognised promptly; revenue only when realised.
- Materiality: immaterial items can be simplified; material items require precise treatment.
- Full disclosure: all relevant information disclosed.
GAAP vs. IFRS / TFRS
- GAAP (U.S.): rules-based, more prescriptive.
- IFRS (International Financial Reporting Standards): principles-based, more flexible; used in EU, UK, Türkiye and most jurisdictions outside the U.S.
- TFRS (Türkiye Finansal Raporlama Standartları): Türkiye’s IFRS-aligned standards published by KGK.
- Major differences include treatment of LIFO inventory, development costs, revaluation of fixed assets — though IFRS 15/16 have narrowed many gaps.
Why GAAP matters for startups
- U.S. investors expect GAAP-compliant statements for Series A and beyond.
- Audit requires GAAP compliance.
- IPO process requires GAAP-compliant historical financials.
- M&A diligence reads GAAP statements; non-GAAP requires reconciliation.
GAAP in cross-border practice
For Turkish companies, GAAP usually arrives by relationship: a US investor wants GAAP-comparable statements, an acquirer needs a US GAAP conversion for consolidation, or a flip-up makes the Delaware topco the reporting entity. The conversion friction concentrates in revenue recognition (ASC 606’s five-step model applied to SaaS, marketplaces and multi-element deals), capitalised development costs, share-based compensation, and convertible-instrument classification — items where Turkish statutory books (VUK) and TFRS answers differ from US treatment. The legal echo: financial reps in SPAs and SAFEs reference an accounting framework, and “prepared in accordance with GAAP consistently applied” is a warranty someone must actually be able to stand behind. Decide the reporting framework before the documents promise it.