Standards in accountancy mean the rules and regulations which are followed to record and report transactions in the financial statements.
Why are standards necessary in Accounting?
As stated standards are the rules and regulations like in every field, there are some set of guidelines which are followed to perform and manage the task. Imagine a world of streets without signs, scales without signs, or ballets without choreography what would happen?
The result would be absolute chaos and confusion. The same is the case with financial reporting. If companies, governments, or non-profits just put out random numbers for revenue, profit, and spending without any rules and regulations, the result would be economic chaos and confusion.
The investors wouldn’t know where to invest; citizens wouldn’t know whether the city, town, or state is utilizing their tax dollars efficiently, or the donors couldn’t judge the financial health of a charity.
So there are rules on how to present the financial information in the books of the business. These rules and regulations are termed as accounting standards.
How are standards developed?
Standard-setting bodies develop standards, The two bodies when it comes to setting accounting standards are the Financial Accounting Standards Board (FASB) in Norwalk, Connecticut, United States, and the International Accounting Standards Board (IASB) based in London, England.
Standards that are issued by the FASB in the US are called GAAP (Generally Accepted Accounting Principles), and those by the IASB are called IFRS (International Financial Reporting Standards), IFRS were previously known as IAS (International Accounting Standards).
US GAAP uses a rules-based approach while the IFRS uses a principle-based approach.
RULES BASED APPROACH VS PRINCIPLE BASED APPROACH.
A Principles-based approach states that a company’s financial statements must be understandable, readable, comparable, and relevant to current business transactions.
Rules-based accounting involves a list of detailed rules that companies and their accountants must follow when preparing financial statements.
The major drawback between these two approaches is that the rules-based approach no matter how precise it goes, taking in view the rapidly changing economic environment, there could be economic events that could fall out of the determined boundaries, but a principle-based approach provides a flexible overview and could potentially solve the problem.
US GAAP
US GAAP are the foundation of financial accounting for business entities in the US. The GAAP are the set of
Accounting principles, standards, and procedures that govern the preparation of financial statements.
FASB is the organization that develops, establishes, and communicates standards of financial accounting and reporting in the US.
SEC (Securities and Exchange Commission) regulates financial reporting and disclosure by the public companies in the US.
Public companies in the US are also required to submit audited financial statements to SEC quarterly and annually.SEC also monitors the Public Company Accounting Oversight Board (PCAOB), which is an entity created by the US congress as a component of the Sarbanes-Oxley Act of 2002.
The PCAOB oversees the audit of public companies and works in unison with the SEC to ensure faithful representation of the financial statements.
There are seven fundamental principles GAAP is based upon.
- Economic entity principle
This principle states that the business and the owners or shareholders are two separate entities with regards to accounting. The accounting of business should be carried out separately from the owners.
- Cost principle
Transactions are recorded at their historical cost of purchase, even if the value in the balance sheet arises over time. That’s a little conservative approach, by the way.
- Objectivity concept
The reporting should be free of bias, objective, and verifiable.
- Monetary unit concept
The transactions must have a currency unit, such as $.
- Revenue recording principle
The revenue should be recorded in the period when it has occurred.
- Accounting period concept
The transactions should be recorded in the accounting period in which the transactions relate to
- Matching concept
Revenues should be recorded in line with the expenses that occurred in generating those respective revenues.
IFRS or formerly IAS
“Global standard for global markets” or “Global solution for a global need” issued by IASB previously called IASC (International accounting standards committee).
IASC issued 41 accounting standards between 1973 and 2001, known as IAS. The interpretation committee for IASC was the standing Interpretation Committee (SIC).
IASB replaced IASC in 2001, and it adopted existing IAS from IASC. From 2001 onwards, the standards issued by the IASB are called IFRS, and the interpretive body of IASB is called the international financial reporting interpretations committee (IFRIC), and the interpretations are called IFRIC interpretations.
Objectives of IFRS
To develop a uniform set of internationally accepted standards.
To improve financial reporting internationally.
To develop the set of accounts
- Comparable.
- Understandable.
- Relevant.
- Reliable.
Under IFRS the companies are required to make a set of following statements
- Statement of financial position or balance sheet.
- Statement of comprehensive income or income statement.
- Statement of changes in equity.
- Statement of cash flows.
- Notes and significant accounting policies.
How are IFRS standards developed?
The IFRS evaluates the merit of adding a potential item to its agenda by reference to the needs of the investor’s
- relevance to users of information
- reliability that could be provided
- whether existing guidance is available
- the quality of standards Resource constraints
The IASB also considers the option to conduct the operations alone or with another standard-setting body depending upon the expertise and experience of the existing staff.
Discussion Paper
- publication of the discussion paper is not mandatory.
- IASB publishes it on a major issue to explain the topic.
It includes
- a comprehensive overview of the issue.
- Possible approaches to addressing the issue.
- The preliminary view of authors.
- An invitation to comment.
Exposure Draft
- The publication of the exposure draft is a mandatory step
- The exposure draft sets out a specific proposal in the form of a proposed standard.
- It is developed based on research, recommendations, comments received on the discussion paper, and suggestions made by IFRS advisory council working groups and standard setters.
Development and publication of IFRS
- IASB develops the IFRS considering the comments received on the exposure draft.
- If re-exposure is required, it may publish a second exposure draft.
- If no re-exposure is needed, the staff is directed to draft the final IFRS.
- The pre ballot draft is subject to external review by IFRIC.
- when the members of IASB have balloted in favour of publication, it is published
Post issuance of IFRS
- After issuing IFRS, regular meetings are held between staff and IASB members with interested parties.
- Studies are initiated to review IFRS application.
- To review the comments received by the IFRS advisory council and other parties.
There are total 16 IFRS and 29 IAS and approximately 120 nations and reporting jurisdictions permit or require IFRS for domestic listed companies, although approximately 90 countries have fully conformed with IFRS as promulgated by the IASB and include a statement acknowledging such conformity in audit reports.
For a finance professional, having a good knowledge of IFRS is very beneficial. As it has become mandatory compliance in approximately 120 nations, students who complete their Diploma in IFRS get the chance to expand their skill set to potential 120 countries.
The best place to study IFRS is through VG Learning Destination who has joined hands with Grant Thornton for IFRS. You will get a chance to learn from the industry experts who have practical hands on expertise and knowledge that will help you to understand the laws and complex concepts.
IFRS provides new options to raise and fund capital thus most of the economies are adopting these international standards and for that, they require IFRS qualified finance professionals who can assist them in moving their accounting procedures as per the international standards.
