Introduction to Accounting Standards:- Accounting standards are a set of guidelines and principles that govern how financial statements are prepared and presented. They provide a framework for consistent and transparent financial reporting, making it easier for investors and other stakeholders to compare financial information across different companies and industries. Accounting standards are established by regulatory bodies such as the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB), and are mandatory for companies to follow in their financial reporting. These standards cover a wide range of topics, including revenue recognition, inventory valuation, depreciation, and financial statement presentation.
Accounting standards deal with the following aspects:
Financial statement presentation: Accounting standards provide guidelines on the structure and content of financial statements, including the balance sheet, income statement, and statement of cash flows.
Also read: Accounting Standards, including International Financial Reporting Standards
Revenue recognition:
Accounting standards provide guidance on when to recognize revenue, how to measure revenue, and how to present revenue in financial statements.
Asset and liability measurement: Accounting standards provide rules for measuring and reporting assets, such as property, plant, and equipment, as well as liabilities, such as loans and leases.
Disclosure requirements:
Accounting standards require organizations to provide information in financial statements that is relevant, reliable, and understandable to users.
Auditing and assurance:
Accounting standards provide guidelines for auditors to ensure that financial statements are free from material misstatement.
Ethics:
Accounting standards require accountants to follow ethical principles, including integrity, objectivity, confidentiality, and professional competence.
These aspects ensure that financial reporting is consistent, transparent, and accurate, allowing users to make informed decisions about an organization’s financial health and performance.
2. STANDARDS SETTING PROCESS
The standards-setting process is the process by which accounting standards are established and updated. The following are the general steps in the standards-setting process:
Identifying the issue:
Accounting standards-setting bodies, such as the Financial Accounting Standards Board (FASB) or the International Accounting Standards Board (IASB), identify an accounting issue that needs to be addressed.
Research and analysis:
The standard-setting body conducts research, analyzes information, and consults with experts to develop a preliminary proposal.
Exposure draft:
The standard-setting body issues an exposure draft, which is a proposed accounting standard, and solicits feedback from stakeholders.
Public hearing:
The standard-setting body holds a public hearing to gather feedback from interested parties, including investors, regulators, and accountants.
Board deliberations:
The standard-setting body evaluates feedback received and makes changes to the proposed accounting standard based on the feedback.
Final standard:
The standard-setting body issues a final accounting standard, which becomes effective on a specific date.
Implementation:
Once the new standard is effective, companies are required to implement the changes and provide the necessary disclosures in their financial statements.
The standards-setting process ensures that accounting standards are developed through a rigorous and transparent process, with input from a variety of stakeholders, resulting in high-quality accounting standards that are widely accepted and useful to users of financial statements.
HOW MANY ACCOUNTING STANDARDS?
The number of accounting standards depends on the specific accounting framework or standard-setting body being used. Some of the major accounting frameworks and standard-setting bodies, and the number of standards they have established, are:
International Financial Reporting Standards (IFRS): IFRS comprises a set of 16 standards (as of September 2021), which provide guidance on financial statement presentation, revenue recognition, asset and liability measurement, and disclosure requirements for companies around the world.
Generally Accepted Accounting Principles (GAAP): GAAP includes a large number of standards issued by different standard-setting bodies in the United States, such as the Financial Accounting Standards Board (FASB) and the Governmental Accounting Standards Board (GASB).
International Public Sector Accounting Standards (IPSAS): IPSAS is a set of 38 standards that provides guidance on accounting and financial reporting for governments and other public sector entities.
Islamic Financial Accounting Standards (IFAS): IFAS provides guidance on accounting and financial reporting for Islamic financial institutions and comprises a set of 25 standards.
Chinese Accounting Standards (CAS): CAS are the accounting standards used in China and consist of a set of 42 standards.
Overall, the number of accounting standards can vary based on the framework or standard-setting body being used, and the number of standards can change over time as new standards are issued or existing standards are revised.
STATUS OF ACCOUNTING STANDARDS
The status of accounting standards can vary depending on the specific standard-setting body and the country or region in which they are used. However, in general, accounting standards are considered to be authoritative guidance for financial reporting and are widely used by companies, auditors, regulators, and investors.
In many countries, accounting standards are mandated by law or regulation, and companies are required to follow them in preparing their financial statements. For example, in the United States, companies are required to follow the Generally Accepted Accounting Principles (GAAP) established by the Financial Accounting Standards Board (FASB) for financial reporting purposes. In other countries, International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB) are used.
In addition, accounting standards are frequently updated to reflect changes in the business environment, new transactions, and emerging issues. As a result, accounting standards are dynamic and constantly evolving. Standard-setting bodies regularly review and update their standards to ensure they remain relevant and useful to users of financial statements.
Overall, the status of accounting standards is critical to ensuring the transparency, consistency, and comparability of financial reporting. Accounting standards provide a common language for financial reporting and play a vital role in the functioning of capital markets by providing users of financial statements with the information they need to make informed decisions.
NEED FOR CONVERGENCE TOWARDS GLOBAL STANDARDS
The need for convergence towards global accounting standards arises due to several factors, including:
Increasing globalization:
As companies expand and do business in multiple countries, there is a growing need for a common set of accounting standards to ensure consistency and comparability in financial reporting across borders.
Facilitating cross-border transactions:
Convergence towards global accounting standards can help to reduce barriers to cross-border transactions, increase investor confidence, and reduce the cost of capital for companies.
Reducing complexity and cost:
Companies that operate in multiple jurisdictions face the challenge of complying with different accounting standards, which can be costly and time-consuming. Convergence towards global accounting standards can help to reduce this complexity and cost.
Improving transparency and comparability:
Global accounting standards can help to improve the transparency and comparability of financial reporting by providing a common language for financial reporting that is widely understood by investors and other stakeholders.
Enhancing the quality of financial reporting:
Convergence towards global accounting standards can help to enhance the quality of financial reporting by promoting best practices and improving the consistency and accuracy of financial information.
To address these challenges, several initiatives have been undertaken to converge accounting standards towards a common global set of standards. For example, the International Accounting Standards Board (IASB) has been working to develop International Financial Reporting Standards (IFRS) that can be adopted by countries around the world. Similarly, the US Financial Accounting Standards Board (FASB) has been working to converge US Generally Accepted Accounting Principles (GAAP) with IFRS. The aim of these initiatives is to promote global harmonization of accounting standards, reduce complexity and cost, and enhance the quality and comparability of financial reporting.
INTERNATIONAL ACCOUNTING STANDARD BOARD (IASB)
The International Accounting Standards Board (IASB) is an independent standard-setting body that develops and promotes International Financial Reporting Standards (IFRS). IFRS are a set of accounting standards that provide guidance on financial reporting for companies, with the aim of promoting transparency, comparability, and consistency in financial reporting worldwide.
The IASB was established in 2001 to replace the International Accounting Standards Committee (IASC) and is based in London, United Kingdom. The IASB operates under the oversight of the International Financial Reporting Standards Foundation (IFRS Foundation), which is an independent organization that oversees the development and adoption of IFRS.
The main functions of the IASB are:
Developing and issuing IFRS: The IASB is responsible for developing and issuing IFRS, which are a set of accounting standards that are used in many countries around the world. IFRS provide guidance on financial statement presentation, revenue recognition, asset and liability measurement, and disclosure requirements.
Updating and revising IFRS:
The IASB regularly reviews and updates IFRS to reflect changes in the business environment and emerging issues. The IASB also engages in research and consultation to identify areas where new or revised standards may be required.
Promoting the adoption of IFRS:
The IASB works to promote the adoption of IFRS by companies and countries around the world. The IASB provides guidance on how to apply IFRS and supports the development of local language versions of IFRS to promote their use.
Collaborating with other standard-setting bodies:
The IASB collaborates with other standard-setting bodies, such as the US Financial Accounting Standards Board (FASB), to promote convergence towards a common set of accounting standards.
Overall, the IASB plays a critical role in promoting the development and adoption of global accounting standards, which are essential for promoting transparency, comparability, and consistency in financial reporting worldwide.
INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) AS GLOBAL STANDARDS
International Financial Reporting Standards (IFRS) are a set of accounting standards developed and promoted by the International Accounting Standards Board (IASB). IFRS are used in many countries around the world, including in Europe, Asia, and South America.
IFRS are considered to be global standards because they provide a common set of accounting principles that can be applied by companies in different countries, enabling investors and other stakeholders to compare financial statements across borders. IFRS are designed to promote transparency, comparability, and consistency in financial reporting worldwide.
IFRS cover a wide range of topics, including financial statement presentation, revenue recognition, asset and liability measurement, and disclosure requirements. The standards are based on principles rather than rules, and provide companies with the flexibility to apply judgment and make informed decisions in preparing their financial statements.
The adoption of IFRS has several benefits, including:
Improved transparency and comparability: IFRS provide a common language for financial reporting that is widely understood by investors and other stakeholders, enabling them to make informed decisions.
Reduced complexity and cost:
Companies that operate in multiple jurisdictions can benefit from adopting IFRS, as it provides a common set of accounting principles that can reduce complexity and cost associated with complying with different accounting standards.
Increased investor confidence:
Adopting IFRS can increase investor confidence in the quality and reliability of financial statements, which can reduce the cost of capital for companies.
Facilitating cross-border transactions:
IFRS can reduce barriers to cross-border transactions, making it easier for companies to expand and do business in multiple countries.
Overall, the adoption of IFRS as global standards is essential for promoting transparency, comparability, and consistency in financial reporting worldwide, which in turn promotes investor confidence, reduces complexity and cost, and facilitates cross-border transactions.
Becoming IFRS compliant involves several steps that companies need to take to ensure that they are adhering to the International Financial Reporting Standards (IFRS). These steps include:
Understanding the IFRS requirements:
Companies need to understand the requirements of IFRS by reading and studying the standards, and attending training sessions to ensure that their accounting staff are knowledgeable about the requirements.
Conducting an IFRS impact assessment: Companies need to assess the impact of IFRS on their financial statements, business operations, and internal control systems. This will enable them to identify areas where changes need to be made to comply with IFRS.
Implementing changes to accounting policies:
Companies need to implement changes to their accounting policies to ensure compliance with IFRS. This may involve changing the way they account for certain transactions or revising their internal control systems to ensure that financial data is accurate and complete.
Revising financial statements:
Companies may need to revise their financial statements to ensure that they comply with IFRS requirements. This may involve restating financial statements from previous years to ensure consistency with IFRS.
Disclosure requirements:
Companies need to ensure that they meet the disclosure requirements of IFRS. This involves providing detailed information in the financial statements and notes to the financial statements to enable users to understand the financial performance and position of the company.
Regular review and monitoring:
Companies need to regularly review and monitor their compliance with IFRS to ensure that they are meeting the requirements. This will enable them to identify and address any issues that arise and ensure ongoing compliance with IFRS.
Overall, becoming IFRS compliant requires careful planning, implementation, and ongoing monitoring to ensure that companies are meeting the requirements of the standards. Companies may require the assistance of IFRS experts and accounting professionals to ensure that they are fully compliant with IFRS.