Accounting Standards

Accounting standards are guidelines that help companies prepare and report financial statements for a variety of purposes. These guidelines are developed by the International Accounting Standards Committee (IASC) with the participation of professional accountancy bodies worldwide. The committee has dual objectives: to formulate and promote international accounting standards, and to harmonize these standards.

In addition to providing broad guidance for the preparation of financial statements, the standards also require some specific accounting practices. For example, they require that the cost of inventory be measured using a standard cost method. However, they are not uniform among all companies. For example, some entities apply the standard cost method, whereas others use the retail cost method.

In the United States, generally accepted accounting principles (GAAP) are the most common set of accounting standards. Complying with GAAP helps businesses communicate financial information clearly to investors and banks. GAAP compliance also allows regulatory bodies to better monitor private companies. Generally accepted accounting principles also require accountants to use a uniform method for preparing financial records and disclose all relevant information.

The main purpose of accounting standards is to provide accurate financial information to investors. By ensuring the accuracy of financial reports, they help investors make the best decisions. In addition, the standards help to prevent fraud. Companies that adopt these principles are more likely to be transparent and be able to defend their financial statements. The standards also ensure a high level of accountability among accounting professionals.

Although public companies generally follow the most stringent accounting standards, smaller businesses often follow guidelines that are less detailed. Midsized businesses may follow specific disclosure requirements required by lenders. Some smaller firms follow a cash-method of accounting, which is simple and requires little disclosure, while larger firms generally follow an accrual basis of accounting. Accounting standards require the details of how these accruals are made and how they are reported in financial statements.

Differences in accounting standards can occur when one standard allows an enterprise to choose between two methods while another requires a specific method. An example of this is the difference between a capital expenditure and an expense. In some cases, the difference between a standard and its counterpart is not significant enough to cause a problem for users of the financial statements.

However, differences between standards can also arise due to lack of guidance or requirements. In one instance, one standard may contain specific guidance for government grants, while its counterpart may not. Some other differences are due to differences in the basis for presenting financial statements. In addition to these, there may be differences in consolidation policy, segment reporting, and business combination provisions.

The application of accounting standards is important for the integrity and quality of financial reporting. Though conceptually sound, accounting standards that are not rigorously applied may not provide accurate and transparent financial information. Therefore, regulators and auditors must insist on their application in order to maintain transparency and comparability.