Accounting standards are rules and guidelines set by governing bodies of the profession to keep accounting practices consistent and understandable across all companies and industries.
Accounting standards improve the transparency of financial reporting in all countries.
Examples of governing bodies include the Financial Accounting Standards Board and the International Accounting Standards Board (IASB).
Different countries have their own accounting standards which were created or adopted and subsequently implemented in their territory. In the United States, the Generally Accepted Accounting Principles (US-GAAP) form the set of accounting standards widely accepted for preparing financial statements. Many International companies follow the International Financial Reporting Standards, which are set by the International Accounting Standards Board and serve as the guideline for non-U.S GAAP companies reporting financial statements.
Accounting standards relate to all aspects of an entity’s finances, including assets, liabilities, revenue, expenses and shareholders’ equity. Specific examples of an accounting standard include revenue recognition, asset classification, allowable methods for depreciation, what is considered depreciable, lease classifications and outstanding share measurement.
Accounting standards ensure the financial statements from multiple companies are comparable. Because all entities follow the same rules, accounting standards make the financial statements credible and allow for more economic decisions based on accurate and consistent information.
History of Accounting Standards and Purpose.
The American Institute of Accountants, which is now known as the American Institute of Certified Public Accountants, and the New York Stock Exchange attempted to launch the first accounting standards in the 1930s. This attempt brought the Securities Act of 1933 and the Securities Exchange Act of 1934, which created the Securities and Exchange Commission.
Accounting standards specify when and how economic events are to be recognized, measured and displayed. External entities, such as banks, investors and regulatory agencies, rely on accounting standards to ensure relevant and accurate information is provided about the entity.
These technical pronouncements have ensured transparency in reporting and set the boundaries for financial reporting measures.
International Financial Reporting Standards Accounting Standards.
Generally Accepted Accounting Principles are heavily used among public and private entities in the United States. The rest of the world primarily uses IFRS. Multinational entities are required to use these standards. The IASB establishes and interprets the international communities’ accounting standards when preparing financial statements.Financial Accounting Standards Board (FASB)
An independent nonprofit organization, the Financial Accounting Standards Board (FASB) has the authority to establish and interpret generally accepted accounting principles (GAAP) in the United States for public and private companies and nonprofit organizations. GAAP refers to a set of standards for how companies, nonprofits, and governments should prepare and present their financial statements.