CC BY
5UDK 657
Nurdinova Kanyshai
bachelor's degree, International University of Innovation Technologies
Kyrgyzstan, Bishkek
PRACTICAL APPLICATION OF GAAP STANDARDS IN FINANCIAL RISK MANAGEMENT AND IMPROVING REPORTING EFFICIENCY
Abstract: This article examines the practical application of generally accepted accounting principles (GAAP) in managing financial risks and enhancing the efficiency of financial reporting. The mechanisms by which companies can identify and control market, credit, operational, and liquidity risks are explored. The role of GAAP standards in ensuring the transparency of financial reporting is analyzed, highlighting how they help reduce uncertainty for investors and increase the investment attractiveness of companies. Examples of companies such as Walmart and Delta Air Lines, which successfully use GAAP standards to minimize risks and maintain financial stability, are provided.
Keywords: Generally accepted accounting principles (GAAP), market risks, credit risks, operational risks, liquidity risks, financial reporting, hedging.
INTRODUCTION
Generally accepted accounting principles (GAAP) are essential in financial reporting, setting standard rules and methods for accounting and presenting financial information. In the world economy, where companies engage with global investors, creditors, and regulators, adherence to GAAP principles is crucial for maintaining transparency, consistency, and reliability in financial statements.
An important advantage of GAAP is its role in controlling financial risks, which is an important aspect of any business. Market, credit, operational, and various other risks could harm a company's financial health. The quality and structure of financial information directly impact their precise evaluation and handling. Utilizing GAAP is crucial for enhancing the efficiency of reporting. Following these standards enables businesses to improve their internal controls, establish trust with stakeholders, and guarantee the comparability of reports with other firms. The goal of this research consideration of the practical application of GAAP standards for financial risk management and improving the effectiveness of financial reporting.
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MAIN PART. FUNDAMENTALS OF GAAP STANDARDS
Standards GAAP are a collection of regulations that oversee the accounting process and financial report preparation. Applying these standards serves the purpose of guaranteeing uniformity and facilitating the comparison of financial reports across different companies. They discuss different accounting topics like asset management, liability management, revenue management, expense management, and disclosure responsibilities.
Principles GAAP serve as the foundation for accounting and financial reporting, instructing companies to maintain transparency, reliability, and a uniform approach to displaying financial information. These principles help to ensure that financial reporting is transparent and valuable for all parties involved. (fig. 1).
Business Entity
Conservatism
Monetary Unit
Materiality Time
Principle Period
GAAP
Revenue . .
Recognition _ . . .
_ . . . Principle Principle r
Full ........ ,
. Historical Disclosure _ „ . . , Cost Principle Going concern
Principle
Figure 1. The basic principles of GAAP [1] One of the important principles in GAAP is the regularity principle, which mandates accountants to follow established accounting standards diligently. This principle serves as the foundation for acquiring dependable financial data that can be trusted by both users within the organization and outside stakeholders of financial reports. The next crucial factor is the principle of consistency, which is closely related to regularity. A business must use consistent accounting practices annually. This guarantees that the financial performance can be compared across various reporting periods and enables financial statement users to monitor changes over time. The principle of sincerity plays a crucial role in fostering trust between the company and ISSN 3034-2627 44 coldsciencepublisher.com
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the users of its financial reports. Accountants need to approach report preparation with honesty and impartiality in order to show sincerity.
Another crucial principle is the method's coherence, which enhances the concept of consistency. It involves utilizing one method of accounting for an extended duration. This establishes consistency in reporting, particularly crucial for investors who are evaluating a company's performance across multiple years.
The principle of non-compensation ensures that financial reports show data transparently. Based on this concept, businesses are required to report gains and losses independently, without offsetting assets against liabilities. The next principle, prudence, is aimed at ensuring a cautious approach to the accounting of assets and liabilities [2]. The principle of continuity assumes that the company will continue its operations for the foreseeable future.
The periodicity principle also plays an important role, determining the need for reporting over set time periods, such as a quarter or a year. The principle of full disclosure enhances the transparency of reporting by requiring companies to provide all information that may influence the economic decisions of users. Lastly, the principle of utmost good faith demands that all parties involved in preparing financial statements act honestly and transparently.
Adherence to GAAP principles provides companies with a reliable and structured foundation for accounting and financial reporting. These principles contribute to the creation of fair and trustworthy reports, allowing users to gain a complete picture of the business, minimize financial risks, and make informed decisions.
THE IMPACT OF GAAP STANDARDS ON FINANCIAL RISK
MANAGEMENT
Standards GAAP play a critical role in managing financial risks, providing companies with clear and structured rules for accounting. They offer specific requirements for the disclosure of information, allowing companies to systematically analyze various financial risks. Market, credit, operational, and liquidity risks can be properly identified and assessed thanks to clear accounting rules for assets, liabilities, and company operations (table 1).
Table 1. Financial risk management through GAAP standards [3, 4]
Type of risk Risk description GAAP standards for evaluation
Market risks Associated with price fluctuations in the market (stocks, currencies, commodities) that affect the value of assets. Fair value asset evaluation, hedge accounting to protect against market fluctuations.
Credit risks Arise from counterparties' failure to meet their obligations, which can lead to losses. Establishment of reserves for impaired receivables, application of the expected credit loss model.
Operational risks Operational risks occur due to failures in business processes, human errors, or inefficient management. Accurate accounting of expenses and liabilities to identify operational risks, disclosure in reporting.
Liquidity risks Emerge when a company faces difficulties in timely fulfilling its short-term obligations due to a lack of liquid funds. Preparation of cash flow statements, accounting for short-term liabilities, disclosure of reserves and liquidity mechanisms.
According to the author, GAAP standards enable effective financial risk management by ensuring accurate financial statement preparation. Specific GAAP standards address every kind of risk, aiding companies in both identifying and evaluating potential threats effectively. An example would be how hedging shields a business from adverse changes in prices, currency exchange rates, or interest rates. This aids in reducing financial losses caused by market fluctuations and preserving the company's stability. By implementing the expected credit loss model, businesses can evaluate the probability of counterparties defaulting and promptly set aside funds to address potential losses. This method lowers the chances of financial problems stemming from debtors failing to pay and assists in preserving the company's liquidity. Precise and thorough tracking of operational costs and debts helps businesses detect possible risks and track shifts in operational effectiveness. Revealing important operational costs and risks in financial statements improves transparency in company operations and enhances users' comprehension of potential challenges. GAAP principles also mandate companies to share details about short-term liabilities, enabling improved oversight of liquidity risks. Businesses need to clearly specify short-term liabilities to help with managing cash flow and liquidity [5].
Standards GAAP serve as a useful resource for companies to effectively handle financial risks by offering clear accounting guidelines and frameworks for recognizing, ISSN 3034-2627 46 coldsciencepublisher.com
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evaluating, and managing different risk types. They guarantee openness in reporting, enable companies to make educated choices, and assist users of the reports in accessing precise information for risk evaluation. Adherence to GAAP standards is essential for safeguarding a company's financial stability in the long run and building confidence among external financial market stakeholders.
ENHANCING REPORTING EFFICIENCY THROUGH GAAP The principles and standards of GAAP play an important role in improving the efficiency of companies' financial reporting. Their application ensures accuracy, transparency, and comparability of financial data, which helps reduce risks, increase trust in the company, and improve its investment attractiveness.
The application of GAAP standards allows companies to significantly improve internal financial control. They establish strict accounting rules that minimize the possibility of errors and data manipulation. Every aspect of the company's financial activity, whether accounting for assets, liabilities, or profits, is regulated by relevant standards, which ensures a high level of control over the accuracy and completeness of data. It also requires mandatory disclosure of information about all significant financial transactions, which helps to improve the audit and internal control process. Companies must maintain accurate records and provide reports for each transaction, minimizing the risk of errors in accounting data. As a result, company managers can more effectively manage financial resources, make well-informed decisions, and prevent possible financial misconduct.
Standards GAAP also play an important role in reducing uncertainty for investors and other stakeholders. Financial statements prepared according to GAAP provide clear and reliable information about a company's current financial position. This, in turn, helps investors assess the real risks and prospects of their investments [6]. The clarity, transparency, and consistency of GAAP-compliant reporting make a company more attractive to investors, as they can confidently rely on the accuracy of the data when making investment decisions.
Another significant advantage of GAAP is ensuring harmonization and comparability of financial statements. Standards GAAP establish uniform rules and
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procedures for accounting, making it easy to compare financial reports of different companies both within the same industry and across different regions. This is particularly important for investors and analysts seeking to conduct comparative analysis of companies and evaluate their competitiveness.
Through GAAP standards, financial reporting becomes standardized, simplifying the analysis process. For example, companies from different regions or sectors of the economy, adhering to the same standards, can present their financial data in a comparable format. This facilitates identifying the strengths and weaknesses of a company and improves strategic planning and decision-making.
The use of GAAP not only enhances the quality and accuracy of financial reporting but also significantly increases the efficiency of managing financial risks. Applying GAAP standards helps companies manage their resources effectively and create a solid financial foundation for long-term growth and development.
PRACTICAL EXAMPLES OF GAAP IN RISK MANAGEMENT AND
REPORTING EFFICIENCY
The application of GAAP standards in managing financial risks is a crucial element of a company's successful operations. Standards GAAP set clear requirements for accounting, information disclosure, and asset evaluation, enabling companies to effectively control credit, market, and operational risks. Moreover, these standards help organizations improve the transparency of their reporting and strengthen the trust of investors and other stakeholders.
One successful example of GAAP in risk management is Walmart, which uses GAAP to manage risks by creating reserves for the impairment of accounts receivable. This allows the company to protect itself from potential losses related to non-payment by suppliers and customers. Walmart also discloses significant information about its liabilities under GAAP, increasing the trust of investors and creditors [7].
Another example is Delta Air Lines, which effectively applies hedging to manage the risks associated with fuel price fluctuations. Principles GAAP require the company to reflect hedging in its financial statements, enhancing transparency and allowing investors to see how the company manages its operational risks. Amid fuel price
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volatility, this strategy enables the company to reduce losses and maintain cost stability [8].
These examples of practical GAAP applications in risk management show that accounting standards play an important role in minimizing financial threats. By using GAAP principles, companies can effectively control credit risks, market fluctuations, and use hedging to protect against potential losses. This not only enhances financial stability but also improves the transparency of reporting, strengthening the trust of investors and creditors.
CONCLUSION
The practical application of GAAP standards plays a crucial role in the effective management of financial risks and the improvement of companies' financial reporting quality. These standards ensure transparency, accuracy, and comparability of data, which not only strengthens the trust of investors and creditors but also helps companies minimize various types of risks. Standards GAAP help companies manage credit, market, and operational risks through mechanisms such as creating reserves for impaired receivables, fair value asset evaluation, and hedging.
Examples of GAAP applications demonstrate how these standards can be effectively used to enhance business resilience and improve its investment appeal. Walmart successfully controls credit risks by creating reserves for accounts receivable losses, while Delta Air Lines efficiently manages operational risks through hedging strategies. Thus, adherence to GAAP standards not only reduces risks but also improves overall financial control and reporting transparency, creating a foundation for long-term growth and financial stability in a competitive market.
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