There’s a need for consistency when it comes to business tasks, especially those to do with accounting. In this blog, we explore the various accounting standards and the benefits of having them.
To achieve this, professional bodies have come up with standards to be followed by businesses. However, these standards often have a degree of disparity depending on the country they are established.
In this blog we look at accounting standards across the world and what they mean to the daily work of accountants.
What are accounting standards?
Accounting standards are a set of written statements and principles that define accounting practices. They are issued by authorised institutions of the accounting profession across the world.
In Canada, there’s the Accounting Standards Board, whereas in the UK the equivalent is the Financial Reporting Council.
In the US, the Financial Accounting Standards Board sets the standards for non-profit and commercial entities. The Governmental Accounting Standards Board does the same for governmental accounting in the US.
Besides conformity, these standards also promote financial integrity. As accounting standards are useful in fiscal analysis, they exist across almost all levels of a business.
Today, there are several accounting standards in the world. The significant ones are full-accrual based, cash-based, and tax-based accounting standards. Each of these are referred to as Generally Accepted Accounting Principles.
Some common GAAPs include:
International Financial Reporting Standards (IFRS)
The International Financial Reporting Standards Foundation issues and governs these standards.
IFRS are common with business entities that have shares listed on a public stock exchange. This includes EU listed companies, Australian companies and other entities.
US Generally Accepted Accounting Principles
As the name suggests, these are adopted by the US Securities and Exchange Commission. However, the SEC revealed it had plans to switch to the IFRS. The IFRS and US GAAPs do have some significant differences. Nonetheless, they still continue to coexist.
UK Generally Accepted Accounting Practice
These are used by the UK as well as Irish companies that don't use IFRS. It’s worth noting that a new reporting framework was established and adopted at the beginning of 2015. The Financial Reporting Council currently governs accounting standards in the UK.
Canadian PE GAAP
These apply to private enterprises in Canada. The private enterprises have an option to adopt either the PE GAAP or the IFRS. The public companies, on the other hand, have no options - they have to abide by the IFRS. Others include German, Russian, and Swiss GAAP.
Currently, there’s an agenda to merge all accounting standards to a single set of uniform standards. This ongoing project is being carried out by the International Accounting Standards Board.
Why Accounting Standards Matter
Although the responsibility of accounting standards primarily falls to accountants, other personnel in need to understand these standards.
The standards that apply to their professional category such as banking. It’s essential to understand accounting standards as they help organisations operate well and maintain balance in the financial areas of any business.
Another side of the finance industry is the investment section. Investors and analysts need accurate and consistent financial data to make informed decisions. To achieve this, there’s a need to grasp the way accountants deal with activities and report financial data.
Benefits of Accounting Standards
Standards exist to guide accounting practitioners in the application of accounting practices. They form a fundamental limb in the accounting profession. Here are some of the benefits:
- Promote credibility of financial statements and consequently their reliability
- Help avoid fraudulent and misleading audits that are a result of inappropriate and varying accounting principles
- Provide a cogent frame of reference to measure financial performance
- Help assess managerial accountability and gauge the overall efficiency of the management's administration
Types of Accounting Standards
Accounting standards can be divided based on their subject-matter. Here are the main types of accounting standards.
Disclosure standards refer to the basic systematic set of guidelines for external reporting. These standards entail only a plain but clear-cut disclosure of the assumptions, accounting principles, and methods used in preparing financial statements.
These standards outline the accounting information that passes for presentation and the order. This information can include specific financial statements. Relative to disclosure statements, presentation standards have a small degree of restriction on the choice of accounting policies.
As the name suggests, these specify the content to be published. Content standards have three aspects, i.e. disclosure, specific and conceptually.
National & Global Accounting Standards
Although some businesses operate only within the country's border, others have a reach far beyond the borders. For the latter, this has meant adopting international accounting standards. This is where the International Finance Reporting Standards comes in.
The IFRS declares on their website:
More than a third of all financial transactions occur across borders, and that number is expected to grow.
To that end, IFRS sees to it that accountability and transparency are achieved on the international scale by using accounting principles. However, the shift from national to global accounting standards is a challenging task.
Even the IFRS declares, "Changing to IFRS Standards does not come without cost and effort. The companies reporting will generally need to change at least some of their systems and practices; investors and others using financial statements need to analyze how the information they are receiving has changed; and securities regulators and accounting professionals need to change their procedures."
A total of 11 countries have their accounting standards, albeit some companies within those countries adopt the IFRS. Most of the other countries embrace the International Finance Reporting Standards.
There exists some minor difference between financial statements prepared under IFRS and those prepared under GAAP. These differences are only technical. Fortunately, the organisations and bodies that set these standards have put in place resources both online and offline to help construe these technicalities.