Definition
Accounting standards are rules according to which accounting statements have to be prepared. They demand minimum levels of disclosure, establish fundamental principles, delineate the meanings of terms, and stipulate how numbers must be calculated. Accounting standards vary not only between countries but also between industries.
The financial situation and operations of a business are reported through accounting statements, which are generally required by law and are prepared by an enterprise to communicate its performance. The balance sheet provides information on the financial position of a business. The income statement provides information on the performance of a business. The elements of the balance sheet are assets, liabilities, and equity. The elements of the income statement are revenues, expenses, gains, losses, and other items. Collectively, the six fundamentals are referred to as the core accounts in an accounting statement.
There are no legally laid down, internationally recognized accounting standards. Generally Accepted Accounting Principles (GAAP) are sets of rules, accounting principles, and standards that are used in specific countries, regions or industries.
In March 2001, in an attempt to bring about an internationally accepted accounting standard, the International Accounting Standards Committee (IASC) Foundation was formed as a not-for-profit corporation, incorporated in the US State of Delaware. The IASC Foundation is the parent entity of the International Accounting Standards Board (IASB), an independent accounting-standards regulator based in London, United Kingdom. The IASB is responsible for developing the International Financial Reporting Standards (IFRS) and for promoting the use and application of these standards. In the global trading world, even countries that have not adopted IFRS are now attempting to converge their national standards with IFRS.
In the case of European Union (EU) members, both EU and national legislation apply and incompatible requirements may mean that reconciliations need to be made available or more than one set of accounts needs to be presented. Companies that have EU and US listings will also need to reconcile or present more than one set of accounts.
Advantages
-
Financial standards protect governments, businesses and consumers alike, as they set down standardized rules of conduct, which give society financial stability and, if the rules are broken, recourse in law.
-
Financial standards allow for the comparison of companies on equal terms. This gives potential investors the tools to judge and compare the viability and liabilities of companies or industries.
-
Financial standards provide regulatory benchmarks for companies and individuals.
-
Financial standards give governments the instruments to impose impartial taxes to pay for government services.
Action Checklist
-
Check which GAAP are used in the specific enterprise, business area or country in which you are interested.
-
If in doubt, contact the authority that sets GAAP in your area of interest.
-
Obtain as much information as you can and be ready to be involved in a long and tedious process.
-
Seek specialist help, from different sources. Accountants, like doctors, are not infallible.
-
Don’t be afraid to ask what may seem naïve or awkward questions.
-
Consider how different accounting standards may affect your attitude and judgment when quantifying risk.
Dos and Don’ts
Do
-
Check which accounting statements have to be prepared according to the correct GAAP norms.
-
Make sure that particular accounting standards apply to the specific industry.
-
When in doubt, contact the authority that sets the nationally accepted accounting principles.
-
Get professional advice; “cooking the books” is not that uncommon, especially in loosely regulated countries.
-
When operating in countries with unfamiliar accounting standards, get in touch with your country’s consular officials, who will generally have a list of reliable local accountants.
-
Carefully examine any departures from GAAP norms, as they may indicate deeper problems.
Don’t
-
Don’t rely on accounting standards to protect you from fraud.
-
Don’t be put off by the complexity of GAAP when investigating a company.
-
Don’t make the mistake of basing a decision purely on GAAP. Accounting standards are highly complex and require professional advice.
-
Don’t forget that if an enterprise is a multinational, it may have to prepare two or more reconcilements.
-
Don’t forget that in the case of EU members, both EU and national legislation apply.
www.qfinance.com