Table of Contents Hide
- What are Accounting Standards?
- Understanding Accounting Standards
- A Brief History
- Accounting Standards in the United States (GAAP)
- The Financial Accounting Standards Board (FASB)
- IFRS vs. US GAAP
- Important Points to Remember
- How Many Accounting Standards Are There?
- What Are the Main Accounting Standards?
- Is IAS the Same as IFRS?
- What Are 7 Accounting Standards?
- What Are the Differences Between GAAP and IFRS?
As business owners, it’s almost impossible to avoid the process of accounting considering its importance. The only escape route, however, often comes down to involving professionals. But beyond the process of preparing your Balance Sheets, Cash-Flow Statements, and Income statements lies the need to strictly adhere to financial accounting standards regardless of your business location. Hence, shortly we will go through all you should know about the international and FASB accounting standards including its codification.
Guess you’ve never heard of that before now. So, let’s set the ball rolling without further ado.
What are Accounting Standards?
An accounting standard is a regulated guiding concept that determines financial accounting policies and practices. Accounting standards basically promote financial reporting transparency while also facilitating financial accountability. In other words, a company’s financial reporting is affected by an accounting standard.
The United States Securities and Exchange Commission (SEC) uses the GAAP as its principal accounting standard. GAAPs have their origin in the United States. Hence, they serve as the foundation for accounting standards in the preparation and reporting of financial statements.
For multinational corporations outside the United States, on the other hand, the International Accounting Standards Board (IASB) is generally responsible for providing accounting standards. These standards first came under the name IAS with the goal of achieving uniformity of approach and meaning identity. With the same goal, it’s now known as the IFRS.
The governance structure and tax policy of a country have a significant impact on its accounting standards.
Understanding Accounting Standards
Accounting standards increase financial reporting openness in all countries. The GAAP, for example, is a collection of accounting standards in the United States. These principles serve as a basis for generating financial accounts. On the flip side, the International Financial Reporting Standards (IFRS), which are set by the IASB carry out the same function on a global scale. They serve as a guideline for non-US GAAP corporations across the globe reporting financial accounts.
Simply put, in the United States, the GAAP covers both public and private enterprises. The rest of the world follows the International Financial Reporting Standards (IFRS). These requirements must be followed by multinational companies. When producing financial statements, the IASB creates and interprets international accounting rules.
What Accounting Standards Cover
Accounting standards cover all areas of a company’s finances. This includes assets, liabilities, revenue, expenses, and equity. Some prominent examples of these standards include; revenue recognition, asset classification, permitted techniques for depreciation, what is considered depreciable, lease classifications, and outstanding share measurement.
Accounting standards define when, how, and when not to acknowledge, and show economic events. They also ensure that relevant and correct information about a company goes to external entities such as banks, investors, and regulatory bodies.
A Brief History
Before accounting standards came into the picture, each company used its own method of preparing and reporting financial data. Following the stock market disaster in the 1930s, the American Institute of Accountants founded the Committee on Accounting Procedure (CAP). They recommended five broad accounting principles in collaboration with the New York Stock Exchange (NYSE).
Along the line, to improve accounting methods, the Institute’s membership added a sixth principle, bringing the total to six. The Securities Act of 1933 and the Securities Exchange Act of 1934, which created the Securities and Exchange Commission, were gradually enacted by the institute (SEC). The SEC took the responsibility of assessing corporations’ periodic filings to ensure that they met the SEC’s criteria, particularly in terms of full disclosure, proper accounting, and comparability.
Accounting standards exist to specify how economic events should be recorded and reported. In other words, external stakeholders, like shareholders, banks, and regulatory agencies, always have to rely on them to guarantee accurate disclosure of pertinent information accurately. Technical norms define the boundaries between financial reporting metrics and make openness and accountability easier.
Accounting Standards in the United States (GAAP)
The first set of accounting standards was devised, monitored, and enacted by the American Institute of Certified Public Accountants. They handed these responsibilities to the new Financial Accounting Standards Board in 1973.
To appear on a U.S. securities exchange, all firms must adhere to U.S. GAAP accounting rules with regard to the preparation of their financial statements.
These accounting standards ensure that numerous companies’ financial accounts are comparable. They also make financial statements credible and allow for more economic judgments based on accurate and consistent information. This is because all organizations follow the same norms.
The Financial Accounting Standards Board (FASB)
The Financial Accounting Standards Board (FASB) is a private non-profit organization in the United States that is in charge of developing and interpreting financial accounting standards. It has a role in both public and private businesses. The body is also widely acknowledged as the primary body responsible for establishing accounting standards for public firms.
The FASB is based in Norwalk, Connecticut, and is governed by a board of seven full-time members. The Financial Accounting Foundation, which also serves as an oversight body for the FASB, appoints the board’s chairman.
The objective of the company is to develop and improve financial accounting processes in order to provide investors and other users with reliable and accurate information.
FASB Accounting Standards Codification
The development of the FASB Accounting Standards Codification (the “Codification”), which became official on July 1, 2009, is an important part of the Financial Accounting Standards Board’s march toward convergence of its standards with International Financial Reporting Standards.
- The FASB Accounting Standards Codification is a major reorganization of accounting and reporting rules that aims to make all authoritative U.S. GAAP more accessible to users by organizing the authoritative literature into a thematically ordered structure.
- It also includes relevant portions of SEC authoritative content, as well as selected SEC staff interpretations and administrative guidance. However, the Codification is not the official source of SEC guidance and does not include the entire population of SEC rules, regulations, interpretive releases, and staff guidance.
- The Codification’s thematic structure is quite similar to the International Accounting Standards Board’s standards (IASB). Presentation, financial statement accounts, wide transactions, and industries are the four key areas where coding subjects can be found. There are sections in each topic that correspond extremely closely to sections of individual international accounting standards.
You can visit the FASB Accounting Standards Codification official website to get more information. All content on the site, including the Codification, is accessible to registered users.
IFRS vs. US GAAP
The International Financial Reporting Standards (IFRS) describe different kinds of financial transactions and how international companies should manage and publish their financial accounts. It is a foundation-based accounting standard that lays the groundwork for investors and businesses to assess financial data and make decisions.
The International Financial Reporting Standards attempts to ensure that international markets around the world follow a uniform set of standards for transparency, efficiency, and accountability. The transparency that IFRS promotes is beneficial to businesses because it allows investors to participate in organizations that have transparent business processes.
Furthermore, the IFRS requirements cover the standards for cash flow, income, balance sheet, and change in equity statements.
The U.S. GAAP, on the other hand, allows foreign and local public firms to be listed on the New York Stock Exchange without having to reconcile their financial statements with the International Financial Reporting Standards (IFRS) and the United States’ Generally Accepted Accounting Principles (GAAP). The Accounting Principles Board of the American Institute of Certified Public Accountants (AICPA) is responsible for developing and implementing the first set of accounting standards.
The Financial Accounting Standards Board, however, took over the role in 1973. (FASB). Now, to qualify for a listing on the New York Stock Exchange, organizations must comply with all provisions of the US GAAP Accounting Standards.
The SEC’s minimum rule makes financial statements from different corporations more comparable.
Important Points to Remember
- An accounting standard is a policy that specifies how an accounting transaction should be treated in financial statements.
- They guide businesses in preparing and reporting relevant financial statements in a timely and accurate manner.
- The Generally Accepted Accounting Principles (GAAP) of the United States serve as the foundation for accounting standards that today vary by country.
How Many Accounting Standards Are There?
As of the year 2021, there are 41 International Accounting Standards including those that have been superseded by the IFRS and 13 IFRS
What Are the Main Accounting Standards?
In the United States, the Generally Accepted Accounting Principles (GAAP) are the main accounting standards while the IFRS covers public companies across the globe.
Is IAS the Same as IFRS?
Simply put, until 2001, IAS was the original IFRS. When IASB took over at the time, it decided to adopt most of the IAS standards with the title, IFRS.
What Are 7 Accounting Standards?
Accounting Standard 7 (AS 7) deals with building contract accounting. This accounting standard’s sole objective is to prescribe the accounting treatment of income and expenditures related with building contracts.
What Are the Differences Between GAAP and IFRS?
IFRS is a method of accounting that is used all over the world, while GAAP is only used in the United States. GAAP is based on rules and research, while IFRS is based on patterns and looks at the big picture. The Last-In, First-Out (LIFO) method is used by GAAP to estimate stock.