Theory Base of Accounting

Accounting Standards, GAAP and IFRS

To keep uniformity and consistency in the accounts some rules and regulations have to be followed. We call these principles of accounting. Every accounting body has their own such rules, standards, principles etc. These are regarded and accepted by the accounting professionals. Here we will look at a few such principles – AS, GAAP and IFRS.

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Generally Accepted Accounting Principles (GAAP)

GAAP stands for Generally Accepted Accounting Principles. These are some commonly followed practices of accounting that have found some level of global acceptance. These accounting principles specify certain definitions, the accounting treatment for confusing entries, and even some industry-specific rules and procedures.

The purpose of GAAP is to ensure some basic level of consistency in accounting statement of all different organizations. It enables external users of the financial statements to easily decipher and understand the accounts of a company. GAAP will also allow intra-firm and inter-firm comparisons, which help these users take investment decisions.

Another purpose of imposing GAAP is to ensure that the representation of the financial statement is true and fair. These principles will ensure that the management is not manipulating accounts to suit their purposes. If GAAP rules are being religiously followed then there is a certain level of certainty in the fairness of the financial statements.

However, there are no universal code or accounting standards. GAAP is not universal. The details and specifications of GAAP will vary according to different geographic locations, industries, accounting body etc. Like for example, in USA GAAP rules have been modified by the Financial Accounting Standards Board (FASB). Accordingly many countries and accounting bodies modify the GAAP rules to suit their industries and economies.

Accounting Standards (AS)

Accounting standards are the rules, regulations, directives etc that are issued by accounting and governing bodies of the world. The intention is to make sure all companies and organizations follow the same rules for accounting and have the same format for their financial statements.

These accounting standards are implemented in the whole country. So this means the entire national economy can implement the same standards and can adopt similar accounting terminology. So all organizations and business units have a uniform, precise and correct financial statements and records.

Indian Accounting Standards (IAS) are issued by the Institute Of Chartered Accountants of India (ICAI). These Accounting Standards are named as well as numbered similarly to the IFRS. They are based on and adapted from the GAAP with modifications necessary for the Indian economy.

These standards deal with conflicting accounting issues, detailing the accounting treatment, rules, and directives. They are detailed and informative to avoid any confusion or uncertainty. In total there are some 32 Indian Accounting Standards. Let us take a look at some of the important ones.

 AS 1 Disclosure of Accounting Policies
AS 2 Valuation of Inventories
AS 3 Cash Flow Statements
AS 7 Construction Accounting
AS 9 Revenue Recognition
AS 10 Accounting for Fixed Assets
AS 15 Employee Benefits
AS 20 Earnings per Share
AS 26 Intangible Assets
 AS 28 Impairment of Assets

International Financial Reporting Standards (IFRS)

Image result for ifrs

The name in itself is pretty self-explanatory. The IFRS is an international framework for accounting records and financial statements. These are developed by the independent accounting body based out of London known as the International Accounting Standards Boards (IASB).

As we know many countries around the world follow their own versions of the GAAP. The USA, Canada, Australia, UK all have their own GAAPs. India has the Indian Accounting Standards. There is a clear lack of uniformity. Also, it poses a problem for Multi-National Companies having branches in many countries. Hence the IFRS was developed, so all nations could adopt one global accounting standard.

Currently around 120 countries globally have started following the IFRS. Soon many more are to follow. As a result, all companies across the world will report their accounts and financial statements following the same rules and regulations. This will lead to uniformity, ease of comparison, less confusion and better compatibility among nations. It is hoped that eventually, all countries of the world (including the USA) will merge with the IFRS.

However, this will not be an easy process. The efforts to converge US GAAP and the IFRS have been ongoing since 2002 but has had limited success. Currently, this convergence process is on hold. In reality, we may never see a full convergence. But instead, all accounting board around the world are working towards reducing the points of difference with their GAAP and the IFRS. Even today the EU country has adopted almost all of the IFRS rules and the US GAAP is also on its way to do the same.

Currently, India has not yet adopted the IFRS for its domestic or international companies. However, keeping with the global trends this is soon on the cards in the future.

Solved Example for You

Q: Accounts must be honestly prepared & they must disclose all material information is know as ____________.

  1. Disclosure Concept
  2. Entity Concept
  3. Materiality Concept
  4. None of the above

Ans: The correct option is A. The full disclosure principle states that you should include in the financial statements all information required that would affect a users understanding of such statements.

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