To properly answer the question ‘what is an accounting standard?’ in such a way that managers from and those from non-financial background can understand it, we need to firstly refresh our mind on the importance of accounting.
You can refer to the linked article above for full article on the importance of accounting. I will however give a very high-level overview here to meet our needs of explaining what an accounting standard is.
Summary of usefulness of accounting
The usefulness of accounting is for the purpose of our discussion around what is an accounting standard will be summarized under the following five headings.
- Economic decision making and planning: business owners and managers are faced with varieties of decisions to make on a daily basis and therefore require some sort of yardstick to base their decisions. An important function of management for example is financial management and financial planning. Through utilization of accounting information system (AIS) platform, the required information in the right format and proportion is made available to the users of accounting information – business managers in this instance.
- Fulfillment of Stewardship obligation: owners of businesses (shareholders) are usually different from the management team thereby making it pertinent that there must be some sort of report to be provided. In the olden days where businesses are confined to their local environment, people didn’t have problems with interpreting and understanding the financial statement because it is largely or wholly based on local legislation and accounting standards. However, the advent of globalization and advancement in business technology made it possible owners of a company to be globally dispersed. This globally dispersed pool of shareholders gave rise to the need to prepare final accounts that the wide range of owners can understand.
- Keeping stakeholders informed: this nicely overlaps with the above discussed point. Stakeholders needs to be accurately informed about their interest. Note that stakeholders are not necessarily same as shareholders.
- Meeting regulatory requirements: another importance of keeping accounting records is to meet regulatory requirements.
- Stimulating economic growth and development: through the use of accounting information, plans that will help stimulate economic growth and developments are made. This point is vividly captured in my previous post on the role of accountants in economic growth and development.
Okay, now that our mind is properly conditioned for today’s discussion, let us now dive into exploration of what accounting standards are.
What is an accounting standard?
Accounting standards are authoritative common sets of principles, procedures, standards and acceptable ways of measuring, recognizing, derecognizing and presenting financial information in such a way that it serves the purpose of having an accounting standard as discussed above. Accounting standards vary from country to country but majority of the countries nowadays either adopt the IAS/IFRS (International Accounting Standards / International Financial Reporting Standards) or closely model their local accounting standards to be consistent with the provision of International Standards.
Uses, objectives and importance of accounting standards
- Harmonization of financial reporting
- Improvement of financial analysis and decision making
- Increase access to global fund
- Encourage international business and investment
- Saving compliance costs
Weaknesses and obstacles facing making accounting standards not to fulfill its objectives
- Differences in beliefs, laws, norms, cultures and ethos
- Different levels of development
- Different educational systems
- Political resistance
- Peculiarity of certain terrain.
Types of accounting standards
There are basically two types of accounting standards currently in operation. The rule-based accounting standards and the principles-based accounting standards. The rules-based accounting standards as the name implies requires the preparers of financial statements to follow sets of rules that must be followed – like ticking the box kind of practices. Principles based accounting standards on the other hand is more flexible and encourages the use of professional judgement in some cases.
Future of accounting standards The future of accounting standard is looking very bright as we are gradually seeing positive convergence between US GAAP and IFRS standards. They may never fully agree in all respect but we hope that a workable compromise will be sufficient.
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