International Accounting Standards: A Comprehensive Overview
International Accounting Standards
The International Accounting Standards Committee (IASC) was formed in 1973 to work for the improvement and harmonization of International Financial Reporting Standards (IFRS). The IASC develops international standards of accounting that involve the accounting profession worldwide.
Objectives of the IASC
The objectives of the IASC are:
- Formulate and publish accounting standards to be observed in the presentation of financial statements.
- Work for the improvement of regulations, accounting standards, and procedures relating to the submission of financial statements.
Accounting Standards
A set of basic concepts and rules that determine the technical validity of the accounting process and financial statements.
Accounting standards are issued by professional accountancy bodies in some countries and by the state itself through special laws.
Changes in Accounting Standards
In America, one of the first significant changes in U.S. history occurred in 1949, marking the beginning of an important movement across the Americas. In Puerto Rico, the completion of the First Inter-American Accounting Congress, eventually followed by successive congresses organized by the body known as the Inter-American Accounting Association, played a key role in this movement.
Development Procedure for International Accounting Standards (IAS)
Steering Committee
- Prepare a draft statement of principles.
- This draft is sent to each member to give their comments.
- The committee reviews the comments and writes a final statement to the Board for approval.
- The committee prepares a draft for public drive, which is reviewed, and a vote of 2/3 is required for publication. This, in turn, may be open for comments for up to 6 months after publication.
- The steering committee reviews each comment and prepares the draft IAS.
- The IASC committee reviews it again and, subject to a ¾ majority vote, grants final approval and publication.
Use and Application of Accounting Standards
- As national requirements, often after due process of national adoption.
- As the basis for all or some of the national requirements.
- As an international reference point for countries developing their own standards.
- For regulators.
- For the companies themselves.
Publication of International Accounting Standards
The prefaces generally include national publications and other materials explaining the application of accounting standards in the country in question.
Improvements to International Accounting Standards
- Review the rules for the changes outlined in the statement.
- Ensure that the standards are detailed and complete.
- Check each rule in the context of the conceptual framework.
- Review the requirements for the assessment.
- Check the format of each rule.
Objective of Financial Statements
- Promote information about the financial position, results, and changes in a company.
- Meet the common needs of most users.
- Show the results obtained by the management staff or their responsibility in the management of resources.
Accrual Basis
In order to achieve its objectives, financial statements are prepared on the accrual basis. This sets the standard as the basis of information. That is, when you make a payment of an account receivable, it is called accrual accounting.
Going Concern
The financial statements are normally prepared on the basis that a company is a going concern and will, therefore, continue in operation in the near future.
Qualitative Characteristics of Financial Statements
Understandability
An essential quality in financial statements is that they are understandable to the users of this financial information.
Relevance
To be useful, information must be relevant to the decision-making process of users. Information has the quality of relevance when it affects decision-making.
Materiality
The relevance of information is affected by its nature and importance.
Reliability
For information to be considered useful, it must also be reliable. Information has the characteristic of reliability when it is free of errors.
Faithful Representation
To be reliable, information must represent faithfully the transactions and other events they represent.
Economic Substance
It is that important business is the economy or profit.
Neutrality
To be reliable, accounting information contained in the IFRS should be neutral, that is, risk-free.
Prudence
The preparers of IFRS should exercise prudence, caution, and disclose or report as needed.
Comparability
Users should be able to compare the IFRS of a company over time to identify its results.
Cost-Benefit Constraint
It is a limitation, rather than a qualitative characteristic. The benefits of information should exceed the cost of obtaining it.
Balance Between Qualitative Characteristics
In practice, a balance or trade-off between qualitative characteristics is continuously needed. The purpose is to achieve a proper balance to achieve the objectives of the IFRS.
Elements of Financial Statements
Assets
A resource controlled by the company as a result of past events and whose future economic benefits are expected to flow to the company.
Liabilities
A present obligation of the enterprise arising from past events, the payment of which is expected to result in an outflow of resources from the company that involves economic benefits.
Equity
The residual interest in the assets of the company, after deducting all its liabilities.