What are Accounting Standards and why do they matter?

What are accounting standards?What are accounting standards?

In their widest context, you will encounter accounting standards at all levels of a business. They are likely to start with standards of reporting and presentation within a company to ensure that the information gathered about the company’s affairs meets the needs of the company and the information is consistent. At the other end of the scale, you will encounter international accounting standards such as IFRS (International Financial Reporting Standards) and/or GAAP (Generally Accepted Accounting Principles). These accounting standards have been prepared to meet the needs of the international financial industry for standardised accounting reporting that can be relied on for uniform presentation of information.

The GAAP accounting standards have been largely developed within the United States while the IFRS accounting standards are more European based. There is an increasing tendency for IFRS to be the more commonly used accounting standard.

In between you will encounter accounting standards developed by individual countries which have been designed for more restricted jurisdictions. However, increasingly most countries are now requiring or adopting either GAAP or IFRS as the accounting standards to be used for reporting company results.

As a general rule, each country has its own agency or agencies which are responsible for approving accounting standards. These agencies are established by statute and therefore their determinations are law in their respective countries. For instance, in the US it is the responsibility of  the Financial Accounting Standards Board, while in the UK it is the responsibility of the Financial Reporting Council comprising six agencies. In Australia it is the responsibility of the Australian Accounting Standards Board, and in New Zealand it is the responsibility of the External Reporting Board.

Why do accounting standards matter?

In the increasingly sophisticated and internationalised financial industry, investment across countries is becoming commonplace. It is therefore essential for the coherence of the industry that analysts and investors can rely on financial reports to be consistent and accurate. This requires that the accounting treatment of all activities is well understood and reported in the same manner. A simple example of this is the treatment of the valuation of fixed assets which frequently comprise a large component of a business’ value. It is essential that financial analysts can rely on the basis of valuation for two (or more) alternative investments as having been made on a comparable basis.

Reliability of valuations and valuation methodologies are no less important for local investors where there have been classic examples of overstated asset valuations in past times.

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About the Author

Ross Bauld is a professional civil engineer with an MBA who has led major organizations in the public and private sectors at CEO level, managed company re-engineering and performance improvements, and developed large scale infrastructure projects. To lead these organizations effectively requires well developed leadership, management, and finance skills. Continuing Professional Development is fortunate to have Ross' expertise and enthusiasm available as a subject matter expert and Course Facilitator for our Finance Courses.


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