Accounting Standards

Publication Date :

24 Dec, 2024

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Table Of Contents

What Are Accounting Standards?

Accounting Standards are a set of accounting principles and guidelines used to maintain common policies and accounting practices across industries, making it easier for everyone to deal with and interpret the accounts and financial statements of the company conveniently. Stakeholders rely on this set of rules when it comes to trusting the accuracy of the reported figures.

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Following accounting standards allows an individual or organization to specify transactions and other financial events so that they can be recognized, assessed, presented, and appropriately disclosed in financial statements. Through common standards, investors, traders, market analysts, creditors, banking institutions, and other participants can interpret financial statements more efficiently and make better decisions.

Key Takeaways

Accounting standards are basic accounting principles and practices that are used to record and represent financial statements and could easily be understood by everyone across companies.
The United States follows Generally Accepted Accounting Principles (GAAP), while many other nations have adopted the International Financial Reporting Standards (IFRS).
Different international bodies such as the IFRS Foundation, AISB, GASB, FAF, AICPA, FASB, and even SEC determine the accounting standards for different regions.
The accounting standards ring uniformity, transparency, reliability, and accuracy in financial reporting and make accounting accessible and understandable to everyone.

Accounting Standards Explained

Accounting standards are a series of accounting principles, rules, and practices that are adopted by a country to formulate its accounting operations. These accounting standards are then used by every firm, authority, entity, and business, inducing uniformity in accounting so that the financial statements can be understood, interpreted, and analyzed equally by everyone, promoting transparency and accountability.

The accounting standards also serve as a single point of authority that must be obliged by firms while preparing, auditing, and using financial statements. There is a list of accounting standards, which serve as rules to be followed and hence create a concrete theory on accounting education for everyone. While the United States uses generally accepted accounting principles (GAAP), other countries follow International Financial Reporting Standards (IFRS) as their accounting standards.

Different bodies create accounting standards for different regions. For the US and international accounting standards, the Financial Accounting Standards Board (FASB), IFRS Foundation, International Accounting Standards Board (IASB), Securities and Exchange Commission (SEC), American Institute of Certified Public Accountants (AICPA), Governmental Accounting Standards Board (GASB) and Financial Accounting Foundation (FAF) are some of the key regulatory bodies that determine the accounting standards.

All these international bodies together form harmony when it comes to financial reporting to ensure that accurate accounting is represented and that there is no scope for financial fraud or scams. Without accounting standards, there would be no theory, rule, or framework, and without an accounting system, there would be no monitoring, compliance, protection, awareness, or adherence to laws.

Types

The two main types of accounting standards are -

#1 - Generally Accepted Accounting Principles (GAAP)

Guided and enforced by FASB and SEC, respectively, GAAP is a collection of accounting standards and rules for financial reporting. It includes both concepts and industry-specific rules with the main objective of bringing accuracy, consistency, and transparency across different organizations and periods. GAAP was initially developed and managed by AICPA, but these responsibilities were transferred to FASB in the 1970s, with four significant standards of accrual accounting methods: depreciation and capital expenditures, reporting of historical costs, and bad debts.

There are 10 primary principles of GAAP, which define regularity, consistency, sincerity, permanence, non-compensation, prudence, continuity, periodicity, materiality, and good faith. Accounting professionals in the US use it. However, there is no universal GAAP standard, and it varies depending on geographical location.

#2 - International Financial Reporting Standards (IFRS)

IFRS accounting standards were developed by the International Accounting Standards Board (IASB) with the ambition of offering investors and other market participants the ability to compare financial statements and make wise investment decisions. Currently, more than 168 jurisdictions have adopted the IFRS, including the European Union and two-thirds of G20 nations. The IFRS is based on four main principles – relevance, clarity, reliability, and comparability. It is often confused with International Accounting Standards (IAS), which were the older accounting standards replaced by IFRS in 2001.

Examples

Here are two instances that would help understand the accounting standards meaning and working in a better way:

Example #1

Suppose Canadian Company A, ready for acquisition in the next quarter, presented its financial statements and reports for the final quarter of 2023. The firm’s standards are issued by the Accounting Standards Board (AcSB), which is based on the IFRS standards. Though the company mentions everything accurately, it does not disclose the figures related to borrowed funds and investments correctly, which may lead to impairment.

When the acquiring company studied the document, its analysts figured out some discrepancies in the report, which led to the loss of their trust in Company A. As a result, they canceled the deal. In addition, an inquiry was made by the Canadian accounting authority, leading to a thorough check of the previous reports presented by the company.

The non-disclosure of such major transactions in the financial statements and reports led to non-compliance with the accounting standards. This not only hampered their corporate reputation but also called for an investigation, making them liable for paying whatever penalty decided by the concerned authority.

Example #2

In September 2024, the Fiji Institute of Chartered Accountants (FICA) Council announced that the South Pacific nation cannot practice two recent globally accepted accounting standards until 2026. According to the council, IFRS S1 and IFRS S2 accounting standards were scheduled to become effective from January 1, 2024, for reporting sustainability and climate change issues, but it would take more time to prepare for compliance with these rules. As a result, the implementation of the standards has been delayed to January 1, 2026. The report further states that the decision was taken after preliminary discussions with all stakeholders.

Importance

The points listing the importance of accounting standards are as follows:

Serves as guidelines, rules, and regulations for the accounting process.
Promotes transparency in financial reporting among firms, market participants, and other stakeholders.
Creates a common understanding of financial statements, bookkeeping, and accounting records across industries, making reports more efficiently interpretable and leading to better decision-making.
Offers auditors, accountants, and other accounting professionals a strong concrete theory to process accurate financial reporting and accounting practices.
Introduces uniformity in accounting, which makes the financial statements of different firms and different periods comparable.
Although most countries have adopted different accounting standards, all of them serve the same purpose of offering a single source of accounting authority and guidance.