Accounting standards are the set off standards, principles and procedures that govern the financial accounting policies of publicly traded companies. They how and what data needs to be stored, as well as which financial statements need to be submitted, how they should be presented and all disclosures that need to be made. They also detail reporting timeframes for each statement. The purpose of accounting standards is to ensure the transparency of financial reporting in all countries. This is necessary to protect investors, potential clients and even the business owner themselves from misrepresentation, fraud and theft.

What are the Main Types of Accounting Standards

There are many different sets of accountancy standards, with most countries having their own guidelines set by their own governing body.

Generally Accepted Accounting Principles (GAAP)

The Generally Accepted Accounting Principles (GAAP) are the standard accounting principles that are adhered to in the US. Domestic firms are required to report in this format, but foreign firms are permitted to submit financial statements according to the IFRS. Other counties also have their own version of GAAP or other country-specific sets of guiding accounting principles. However, each set differs slightly even though they are called by the same name. For instance, the US GAAP Is based on the American Institute of Certified Public Accountants’ (AICPA) Audit and Accounting Guide, whereas the Canadian GAAP is based on the Canadian Accounting Standards Board’s (ACSB) Accounting Guideline. Each industry has its own Auditing and Accounting Guide. The main focus of GAAP’s principles is to report matters relating to costs, revenues, matching and disclosure.

International Financial Reporting Standards (IFRS)

The International Financial Reporting Standards (IFRS) are composed and overseen by the IFRS Foundation and the International Accounting Standards Board (IASB). Over 120 countries follow and accept these accounting principles for foreign firms. The US also recognizes them for international firms operating within the US. This is necessary as they provide standardized rules for public companies that are globally recognized, thereby making it easier for international firms to conduct business in other countries as they will not need to become familiar with a new set of guidelines for each new country in which they operate. Over 90 countries have even chosen to implement them as their country’s official accounting standards. These countries include the UK, Israel, Australia, Saudi Arabia, France and South Africa, among others.

There are certain differences between GAAP and IFRS standards, such as the IFRS not permitting LIFO, the IFRS uses a single-step method for write-downs rather than a two-step and that they have different approaches to registering capitalization of development costs.

Examples of Accounting Standards

  • Goodwill Accounting
  • Revenue recognition
  • Inventories valuation
  • Cash flow statements
  • Accounting of construction contracts
  • Balance sheet date, events and contingencies thereafter
  • Allowable method for depreciation
  • Lease classification
  • Borrowing costs
  • Employee benefits
  • Financial segments reporting
  • Intangible assets accounting
  • Investments in associates accounting

Benefits of Accounting Standards

Prior to prior accounting standards and specified reporting requirements being implemented, there was room for a great deal of misrepresentation of financial documents which allowed for fraud and tax evasion. Examples of this in the US were the Enron Corporation scandal that led to investors losing $63.4 billion in assets when the company went bankrupt in December 2011, as well as other instances that lead up to the 2008 financial crisis. Misrepresentation is also often cited as a major factor that led to the Great Depression in 1929.

Other benefits include:

  • Reliable financial statements
  • Allow for inter- and intra-firm compatibility
  • Assists auditors
  • Assists managerial decisions

Disadvantages of Accounting Standards

Although generally helpful, the major pitfalls to accounting standards are that they are time-consuming to process and create, are expensive to outsource or to hire a CPA on permanent staff, are inflexible and therefore prone to incurring fines or other consequences in response to human error and restrictive scope as they must always fit with the local laws. This makes it difficult to evaluate new assets, such as cryptocurrencies and other digital assets when they initially enter the market, as the accountant is stuck trying to determine the correct definitions for something that is as yet undefined.