Table of Contents
What Is an Accounting Standard?
Let me explain directly: an accounting standard gives you a common structure that dictates how financial data gets classified, recorded, and presented in reports, making sure accounting methods stay consistent across different organizations.
Key Takeaways
- Accounting standards cover the entire financial picture of an entity, from assets and liabilities to revenue, expenses, and shareholders' equity.
- They promote consistency and comparability, so investors and stakeholders can base decisions on uniform financial info.
- Banks, investors, and regulators depend on these standards to get relevant and accurate details about any entity.
Understanding Accounting Standards
You should know that accounting standards boost transparency in financial reporting everywhere. In the U.S., we use generally accepted accounting principles, or GAAP, as the main standards for preparing financial statements. International firms go with International Financial Reporting Standards, IFRS, set by the International Accounting Standards Board, which guide non-U.S. GAAP companies.
GAAP is common for public and private entities here in the States, while the world mostly uses IFRS—multinationals have to follow it. The IASB handles establishing and interpreting these international standards for financial statements.
These standards touch every part of an entity's finances: assets, liabilities, revenue, expenses, equity. Think specifics like how to recognize revenue, classify assets, methods for depreciation, what's depreciable, lease types, and measuring outstanding shares.
Back in the 1930s, the American Institute of Accountants—now the American Institute of Certified Public Accountants—and the New York Stock Exchange tried launching the first standards. Then came the Securities Act of 1933 and the Securities Exchange Act of 1934, creating the Securities and Exchange Commission. The Governmental Accounting Standards Board sets principles for state and local governments too.
Standards tell you when and how to recognize, measure, and display economic events. External parties like banks, investors, and regulators rely on them for accurate info. These rules ensure transparent reporting and define financial reporting limits.
U.S. GAAP Accounting Standards
The American Institute of Certified Public Accountants originally developed and managed the first standards. In 1973, that shifted to the Financial Accounting Standards Board. The SEC requires all listed companies to use U.S. GAAP for financial statements to get on a U.S. exchange.
These standards make financial statements from different companies comparable since everyone follows the same rules, building credibility and supporting better economic decisions with consistent info.
Financial Accounting Standards Board (FASB)
The FASB is an independent nonprofit with authority to set and interpret GAAP in the U.S. for companies, nonprofits, and governments. GAAP is the set of standards for presenting financial statements.
Why Are Accounting Standards Useful?
They improve transparency in reporting worldwide by specifying recognition, measurement, and display of economic events. Banks, investors, and regulators count on them for relevant, accurate entity info, setting boundaries for transparent financial measures.
What Are Generally Accepted Accounting Principles (GAAP)?
In the U.S., GAAP is the accepted set for financial statements, aiming to enhance clarity, consistency, and comparability. It's issued by the FASB, and public companies must follow it when compiling statements.
What Are International Financial Reporting Standards (IFRS)?
International companies use IFRS, set by the IASB, as guidelines for non-U.S. GAAP reporting. They bring consistency to standards and practices across companies and countries. IFRS is more dynamic than GAAP, getting revised often for changing financial environments.
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