The GAAP doesn’t refer to the place where you buy the latest jeans. It’s the acronym for "generally accepted accounting principles," which are commonly used procedures for recording and reporting financial transactions like fees charged, salaries paid, and company profits and losses. In the mutual fund industry, the GAAP refers to a set of guidelines that investment companies follow so that everyone in the field is basically on the same page. By following GAAP, mutual fund managers don’t have to reinvent the wheel when they report earnings, revenues and expenditures.
GAAP reporting methods allow you to compare mutual fund companies before you invest. When everyone reports their risk and the average return of their products in the same way on their taxonomy reports, for example, you can measure the success of one fund compared to another. You can tell if one fund opts for higher-risk investments, versus which companies are safer, ensuring you’ll have some money when you retire.
The Securities and Exchange Commission (SEC) requires mutual-fund companies to follow GAAP reporting procedures when filing their reports. This is how they protect consumers from accountants who can fudge the numbers to make it look like a company is doing better than it is, or to hide losses and gains. The mutual funds must file taxonomy, or financial reports, when they first register with the SEC and in their annual statements, following the generally accepted accounting principles.
Some of the information covered by GAAP reporting requirements includes revenue and expenses incurred by the mutual fund company. They’ve got to disclose how much they charge in service and transaction fees. GAAP reporting requires them to report the salary and wages paid to the executives and employees of the company as well as legal expenses they incurred and personal expense account charges.
Once the mutual fund companies fill out their taxonomies following GAAP reporting guidelines, you can transfer the information into spreadsheets to locate figures as you need them. When following your mutual fund gains and losses for example, you’ll be able to retrieve the data and apply any number of different software applications to search it for information. The companies are more transparent when they all speak the same language so you, as an investor, can keep track of your money.
Linda Ray is an award-winning journalist with more than 20 years reporting experience. She's covered business for newspapers and magazines, including the "Greenville News," "Success Magazine" and "American City Business Journals." Ray holds a journalism degree and teaches writing, career development and an FDIC course called "Money Smart."