Key insights
- Revenue recognition can be tricky. Many organizations misapply rules around bundled services, discounts, or contract changes.
- Expense classification matters. Mixing up repairs with improvements, or misallocating overhead, can distort financial results.
- Disclosures and cash flow statements deserve focus. Even when numbers are correct, missing disclosures or misclassifying cash flows can create confusion.
- Regularly reviewing your accounting practices, staying curious about new standards, and asking questions can help you catch issues early and keep your financial reporting in good shape.
Keep your financial records reliable and transparent.
Accurate financial reporting is essential for organizations of every size and sector. While many assume compliance with U.S. Generally Accepted Accounting Principles (GAAP ) is straightforward, the reality is that evolving standards and complex transactions can create pitfalls for even the most diligent teams.
Missteps in applying accounting principles can result in costly errors, regulatory scrutiny, and diminished stakeholder confidence. Review some common GAAP mistakes and get actionable steps to help your organization strengthen its financial reporting.
6 frequent GAAP errors and how to help avoid them
1. Misapplication of revenue recognition (ASC 606)
ASC 606 introduced a five-step model for revenue recognition, but many organizations still struggle with:
- Multiple performance obligations — Bundled offerings, such as services combined with implementation or support, often require separate allocation.
- Variable consideration — Discounts, rebates, or contingent fees can lead to premature or incorrect revenue recognition.
- Contract modifications — Scope or pricing changes mid-contract often trigger reassessment, especially for long-term agreements.
What to do
- Perform a detailed contract review — Identify all performance obligations and determine whether they are distinct.
- Allocate transaction price correctly — Use relative standalone selling prices for allocation.
- Monitor contract changes — Implement a process for reassessing revenue when terms change.
- Document judgments — Maintain clear documentation for auditors and regulators.
Choosing the right accounting method can help improve financial health and tax positions. As an example, learn the benefits of using the percentage of completion method.
2. Improper expense recognition
Expense misclassification can distort profitability and compliance. Common errors include:
- Capitalizing costs incorrectly — Treating routine maintenance as capital expenditures.
- Misallocating overhead — Failing to allocate shared costs accurately across projects.
- Ignoring accruals — Not recording expenses in the correct period.
What to do
- Establish clear capitalization policies — Differentiate between repairs and improvements.
- Implement allocation methodologies — Use consistent bases for overhead distribution.
- Perform monthly accrual reviews — Match expenses with the period of benefit.
3. Failure to account for deferred compensation and benefits
Deferred compensation plans and employee benefits often involve complex GAAP requirements. Errors include:
- Omitting liabilities — Not recording obligations for deferred compensation or bonuses.
- Misstating pension obligations — Incorrect actuarial assumptions or discount rates.
- Incomplete disclosures — Missing required footnotes on benefit plans or misleading disclosures around rabbi trusts.
What to do
- Review all agreements — Identify deferred compensation arrangements and benefit plans.
- Engage professionals — Use actuarial expertise for pension and post-retirement benefits.
- Update assumptions annually — Reflect current discount rates and mortality tables.
4. Income tax provision errors (ASC 740)
Income tax accounting under ASC 740 is often overlooked, leading to:
- Incorrect deferred tax calculations — Misidentifying temporary differences.
- Failure to recognize uncertain tax positions — Ignoring ASC 740-10requirements.
- Inadequate disclosures — Omitting reconciliation of effective tax rate or valuation allowances.
What to do
- Perform a thorough tax provision analysis — Identify temporary differences and apply correct tax rates.
- Document uncertain positions — Evaluate and disclose positions that may not be sustained on audit.
- Maintain a tax calendar — Implement timely updates for changes in tax law or rates.
5. Inadequate disclosure
Even when numbers are correct, organizations often fail to provide required disclosures, such as:
- Revenue recognition policies — Including performance obligations and significant judgments.
- Lease details — Weighted-average discount rates and maturity schedules.
- Contingencies — Pending litigation or guarantees.
What to do
- Use a disclosure checklist — Align with recommended GAAP and industry practices.
- Update annually — Incorporate new standards and company-specific changes like lease accounting ASC 842.
- Perform peer comparisons — Benchmark disclosures against similar organizations.
6. Cash flow statement errors
Cash flow statements often receive less attention than income statements and balance sheets, but errors here can mislead stakeholders about liquidity and operational health. Common mistakes include:
- Misclassifying cash flows — For example, recording financing activities under the operating section of the cash flow statement or vice versa.
- Ignoring non-cash transactions — Omitting disclosures for items like stock-based compensation or lease conversions.
- Incorrect reconciliation — Failing to reconcile net income to operating cash flows accurately.
What to do
- Follow ASC 230 guidance — Properly classify operating, investing, and financing activities.
- Track non-cash items — Maintain a schedule for non-cash transactions and include them in disclosures.
- Perform periodic reviews — Validate reconciliations and classifications against GAAP requirements.
How CLA can help with GAAP accounting
GAAP compliance is not just about getting the numbers right — it’s about applying standards consistently and providing transparent disclosures. Addressing these common errors proactively can help your organization strengthen financial reporting, reduce risk, and build trust with stakeholders.
At CLA, we help organizations review contracts for proper revenue recognition, set up clear expense policies, and improve disclosures for financial statements. Our team can walk through your accounting methods, help with tax provision analysis, and provide checklists for cash flow statements and footnotes.
Whether you need help with a specific question or want a full review, we’re ready to work with you to make your financial reporting clearer and more dependable.