Accounting is the language of business by which businesses showed their financial performance. Suppose for a short while that four individuals speaking totally different languages say, French, Italian, German, and Russian therefore nobody will perceive their thoughts of mind and feelings unless and until they speak a standard acceptable language say English.
Accounting is simply another language, a language that is employed by different companies to speak with different stakeholders (referred to as ‘users’). Interested parties need to listen to the story of the business and accountants have to be compelled to communicate the facts of the businesses through a standard language and the way to inform the story is called reporting. The language we need to tell the story in a manner that everyone understands with even less technical knowledge of accounting. Some companies in different countries need to inform the users using their own national standards, whereas other companies in different countries need to inform the users about the business facts using the international standards I.e. IFRSs or GAAP.
The intention is that companies around the world should use a uniform reporting language to communicate the business facts to the users using the one standard accounting language which is international standards.
WHY THERE'S A REQUIREMENT FOR HARMONIZATION OF THE ACCOUNTING STANDARDS
The language of accounting has developed thousands of years ago (some say quite 10,000 years and a few as several as twenty, 20,000 years – we are not understanding for sure) and is still continually evolving. The evolution, therefore, is accounted for as follows:
1st: It started as a basic recording of things like live stocks and stores of grain, using notches in clay tablets and sticks. Over time, this became slightly a lot of elaborate wherever it concerned a written account of business transactions, and then came the double-entry system (i.e. debits and credits).
Initially, businesses were mostly owned by sole proprietors and families, where record-keeping was a comparatively easy affair as a result of the homeowners additionally managing the business and were so intimate with the transactions the business entered into. However, when businesses grow and the owners got separated from those people managing the business then there arises the need for accounting to keep a record of every transaction to ensure transparency. As we know that businesses are working strictly on money. However, when the practice of loaning and credit was introduced, money-lenders needed data that might facilitate assessing whether or not it had been safe to continue providing credit to a business.
Furthermore, there is a need arises to set and adopt commonly accepted standards for reporting financial performance to the stakeholders because the stakeholders of the companies may be scattered around the world so the IFRSs came into existence, and now it is used in more than 120 countries.
WHAT WILL BE THE ADVANTAGES OF HARMONIZATION OF ACCOUNTING STANDARDS?
There is no international body forcing compliance with International financial reporting standards (IFRSs). However, a country’s own specific national legislative authority could enforce companies to ensure compliance with IFRSs. On the other hand, the national legislation of some countries neither needs nor disallows compliance with the IFRSs. Wherever the national legislation needs compliance, the answer to the question ‘why would one accommodates IFRS’ is clear. However, wherever compliance is neither needed nor disallowed by national legislative authority the question arises “why do entities need to adopt the IFRSs even if it’s not needed as per the local regulatory authorities? The answer is that compliance with IFRS brings credibility to the financial statements and makes them graspable to foreigners, so encouraging foreign investment adoption of the IFRSs is vital even if it’s not required to be followed or adopted by the national regulatory authority. Consider the example of South Africa, for several years; South Africa’s national legislation didn't comply with IFRSs and due to such non-compliance with the IFRSs foreign investors didn’t trust the financial statements of companies operating in South Africa a result many companies closed their businesses. However, a recent revision to South Africa’s legislation currently implies that other corporations operating in different countries should adopt and follow IFRSs.
The four points that highlight the advantages of harmonization of accounting standards are as follows:
1. Growth in International Business
The main stimuli for the harmonization of accounting standards come from the large enlargement that has taken place in world trade and in international investment after world war II. As an international business and investment multiply, accounting’s dimension broadens, and international financial reporting has become necessary because of the tool of communication among businessmen, entrepreneurs, financiers, and investors.
2. Economic process of Capital Markets
Nowadays, investors get investment opportunities everywhere on the planet. Equally, corporations can get capital at a very cheap rate so the investors are interested to understand the financial position of a business to assess the capability of a business and whether they can repay back in a timely manner or not, for this purpose the communication of the financial information using the uniform standards are too vital.
The investors are scattered around the world so to know the repaying potential of a business and the maximum returning potential on their investment they need to know the financial position of a business and this is worth investing in and understand the financial statements when such statements are prepared under the uniform accounting standards I-e IFRSs.
4. International Companies
International companies need a uniform standard to report the financial information to different stakeholders around the world and most large companies need consolidation of their financial statements. Therefore, they are in dire need to adopt uniform acceptable standards.
WHO IS SETTING THE INTERNATIONAL ACCOUNTING STANDARDS (IASs)
The International Accounting Standards Committee (IASC) was established in 1973 to develop international accounting standards with the aim of harmonizing accounting procedures throughout the world. The first International Accounting Standards (IASs) were issued in 1975. The work of the IASC was supported by another body referred to as the Standing Interpretation Committee (SIC). This body issued interpretations of rules in standards once there was divergence in an application. These interpretations were referred to as Standing Interpretation Committee Pronouncements (SICs). In 2001 the constitution of the IASC was modified resulting in the replacement of the IASC with a new body referred to as the International Accounting Standards Board (IASB) and also the International Financial Reporting Interpretations Committee (IFRIC). The IASB adopted all IASs and SICs that were issued at that time however after that when new standards were issued then they become the International financial reporting Standards (IFRS). The existence International Accounting Standards (IASs) were issued before 2001 as now all the standards issued are termed International Financial Reporting Standards (IFRSs).
Note that a lot of IASs and SICs are replaced or amended by the IASB since 2001. International accounting standards can't be applied in any country unless the national regulatory authority approves its implementation.
INTERNATIONAL ACCOUNTING STANDARD BOARD (IASB) AND ITS ROLE
The international accounting standard board is the international standards-setting body to develop the accounting standards within the public interest that are applicable to corporations throughout the world. The following method is adopted by the IASB in the development of accounting standards:
=> At first, a draft is planned and written by the international accounting standards board.
=> A draft is then circulated to the relevant body members for recommendations and amendments.
=> The different accounting standards implementations bodies in several countries forward the draft to the members for recommendations and amendments.
=> The members offer recommendations to their individual bodies and also the bodies then send the draft to the IASB.
=> The recommendations and amendments are considered and evaluated by the IASB so the ultimate draft of the accounting standard is issued.
=> The new accounting standard is then issued.
THE DISTINCTION BETWEEN INTERNATIONAL ACCOUNTING STANDARDS AND INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRSs)
Interestingly the international accounting standards once issued were providing a great opportunity for the accountants and there were fewer restrictions on accountants in the preparation of the financial statements, due to that the accountants were in an exceedingly position to simply manipulate the financial statements. Therefore, the international accounting standard board noticed this issue and that they were started issuing international financial reporting standards (IFRSs) instead of accounting standards.
International financial reporting standards offer less or maybe no house to accountants within the preparation of the financial statements as a result of the (IFRSs) need the businesses to produce disclosures concerning things within the financial statements or maybe need extra disclosures within the financial statements.
Realizing this issue the international accounting standard board began to issue (IFRSs) rather than accounting standards within the year 2000 and after the year 2000, no IASs were issued. The best example is the replacement of the international accounting standard (IAS 17 - Leases) with IFRS – 16 and (IAS 18- Revenue replaced with IFRS -15.
WHAT IS THE DISTINCTION BETWEEN INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) AND GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP)
International financial reporting Standards (IFRS) are the accounting standards that are employed in several countries across the world. The IFRSs have some key differences from the Generally Accepted Accounting Principles (GAAP) of the United States of America.
As a business person or business owner, one ought to understand the key variations between the GAAP and IFRSs in order to run and manage his/her business with success.
A major distinction between IFRS and GAAP is that GAAP is rule-based whereas IFRS relies on principles.
Following are some of the variations between GAAP and IFRSs.
Locally vs. globally
GAAP is completely employed in the United States of America whereas IFRSs is employed quite in a hundred and ten countries of this world.
Under the GAAP the inventory is allowed to be measured on last in first out (LIFO) whereas under IFRSs the inventory ought to be solely valued under the strategies of First in First out (FIFO) and weighted average price only as LIFO is not allowed under the IFRSs.
There is additionally a key distinction between the GAAP and IFRSs on the problem of inventory reversal. Under the GAAP if the market price of the inventory rises subsequently then the written down value of the inventory can't be reversed. GAAP is therefore cautious concerning the inventory reversal and doesn't replicate any positive changes within the market place whereas under the IFRSs the reversal of inventory is reversed if the market costs of the inventory rise subsequently.
Under the GAAP the development costs should be expensed out and can't be capitalized whereas under the IFRSs, the development cost should be capitalized if it met certain criteria as laid down in IAS 38.
For detailed differences between the IFRSs and GAAP, please refer to the differences between IFRSs and GAAP.
WHICH COUNTRY ADOPTED GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP) AND INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS)
Generally accepted accounting principles are adopted in the United States of America only whereas the international financial reporting standards are adopted in the UK and across several European countries. The IFRSs adopted in nearly quite a hundred and ten countries of the world. However, several countries have not yet adopted IFRSs and have their own GAAPs.
Examples of some countries that have their own GAAPs are as under:
China - Chinese Accounting Standards
Canada - Generally Accepted Accounting Principles
France - Generally Accepted Accounting Principles (French)
Germany - Generally Accepted Accounting Principles (German)
India – local Indian accounting standards, International Accounting Standards and IFRS
Nepal - Nepali local financial reporting standards
Russia - Russian local accounting standards
United Kingdom - Generally Accepted Accounting Principles (UK Version)
The United Kingdom of Great Britain and Northern Ireland uses their own GAAP in the preparation of the financial statements. However, additionally, the UK and Ireland also use IFRSs to increase the credibility of the financial statements to ensure that should be free from any flaws and limitations.
COMPANIES IN DIFFERENT COUNTRIES MAY FOLLOW THEIR OWN COUNTRY LAWS AND REGULATIONS OR INTERNATIONAL ACCOUNTING STANDARDS?
Every country around the world has its own laws to implement across their countries. Similarly, the law and regulation implementation bodies of the country have the responsibility to oversight the affairs of the corporate to make sure that it's in line with the laws of the countries which is within the public interest.
If there's conflict arises between international accounting standards and native laws then the corporates are needed to follow their owner‘s country's laws and regulations, not international accounting standards. It implies that the country's own laws have the first important for the businesses and firms and they should divert from the country's own laws and regulations at any price.
Setting IFRS is a great achievement of the accounting standard board which brings uniformity in the reporting of the financial statements and still the process is continued to make the financial statements more understandable and clear to its users. The business professionals and students should really be well versed in the accounting standards should have in-depth knowledge of the relevant accounting standards to perform their duties smoothly and to get success in the professional examinations.