What are Accounting Standards and why do they matter?

Author: Hitesh Sharma

What are Accounting Standards?

Accounting standards exist to ensure that accounting decisions are made in a unified and reasonable way for effective functioning of the businesses and capital markets. The most important role of accounting standards is the universality that they bring to financial record keeping of both the government as well as non-government organizations.

They are designed to enforce transparency which is especially important in the case of public entities, including the governments or publicly traded companies. The standards enable investors to make comparisons on a like-for-like basis and provide assurance that key elements of a company’s financial controls and systems have been assessed and reported on.

Why use accounting standards?

The International Financial Reporting Standards (IFRS), which was developed by the International Accounting Standards Board, are a set of accounting rules followed by, or being adopted by more than 100 countries. All the listed companies operating in and from the European Union member nations are required to use IFRS after the 28-nation bloc adopted them in 2005. Meanwhile in the US, these standards are called the generally accepted accounting principles or GAAP, the set of standards, guidelines and procedures developed by the Financial Accounting Standards Board and are to be used when accounting for the affairs of most governmental and non-governmental bodies.

Recent reports reveal that all other major economies have initiated a process to consider convergence or adoption of IFRS in the coming future. Since 2007, even the US has allowed the cross-listed firms on the country’s stock markets to file statements prepared under IFRS. Due to the increasing globalization of financial markets and of companies, the use of a single set of financial reporting standards across countries also reduces the cost of preparing the consolidated financial statements of groups made up of companies conducting business worldwide.

Experts suggest that without accounting standards, an investor who has studied the financial statements of a large publicly traded company would not know whether to trust the findings on those statements. Standards mean that taxpayers can see how their tax dollars are being spent and regulators can ensure that laws are followed.

A practicing or a prospective accountant both need to have a thorough understanding of the accounting principles and standards while preparing the financial report of a government or private entity. However, if a person is simply preparing individual income tax statements, understanding of these standards probably isn’t as important.

IFRS accounting standards:

Some of the most important IFRS are listed below in order of their relevance:

IFRS 1: First-time Adoption of International Financial Reporting Standards

IFRS 2: Share-based Payment

IFRS 3: Business Combinations

IFRS 4: Insurance Contracts

IFRS 5: Non-current Assets Held for Sale and Discontinued Operations

IFRS 6: Exploration for and Evaluation of Mineral Assets

IFRS 7: Financial Instruments: Disclosures

IFRS 8: Operating Segments

IFRS 9: Financial Instruments