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Accounting Standards: Why they’re Important

Accounting standards require companies to use consistent accounting practices that benefit businesses globally

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More than half of Zoomers do not have a bank account: survey. Source: depositphotos.com

Introduction

Accounting is an important part of business operations that manages and reports the financial activities of a company. 

Without a common set of accounting standards, a company would be on its own to prove to its investors or shareholders that it is correctly reporting income and expenses or losses. 

This standard provides specific guidelines that accountants must follow to avoid being audited or fined by government agencies.

This article will help you understand the importance of accounting standards better. Additionally, we shall provide you with an in-depth idea of these regulations and summaries of some of the most important accounting standards.

One of the ways companies can benefit from tax relief is through the Eis or the Enterprise Investment Scheme, which can be a valuable consideration when looking to adhere to accounting standards.

Important Terms And Facts You Must Know

Before proceeding further with the importance of accounting standards, let us understand the related terminologies and facts first—

FASB

The Financial Accounting Standards Board (FASB), a private, independent organization with its headquarters in Norwalk, Connecticut, was founded in 1973. The U.S. Securities and Exchange Commission has designated the FASB as the official accounting standard-setter for public corporations. 

To give investors and other consumers of financial reports valuable information, it aims to define and enhance financial accounting and reporting standards.

GAAP

The U.S. Securities and Exchange Commission mandates that publicly listed corporations in the country submit GAAP (Generally Accepted Accounting Principles)-compliant financial statements regularly. 

The main objective of GAAP is to guarantee the accuracy, consistency, and comparability of financial accounts for businesses. In addition, the goal of GAAP is to make financial information more understandable, consistent, and comparable to other financial information.

IFRS

A set of accounting guidelines for public corporations called the International Financial Reporting Standards (IFRS) aims to make them consistent, open, and simple to compare globally. 

They were developed to provide a universally recognized accounting language for investors, auditors, government regulators, and other interested parties.

Some important Accounting Standards—

Lease Accounting Standard

 A lease is a transaction in which the lessor agrees with the lessee to grant the lessee the right to use an asset in exchange for a payment or series of payments over a predetermined period of time. 

Companies that lease assets must now recognize the rights and duties established by the leases, according to a new lease accounting standards update (ASU). The new lease accounting standards, in contrast to earlier GAAP, require both forms of leases to be reported on the balance sheet.

Goodwill Accounting Standard

This Statement is concerned with the financial accounting and reporting of acquired goodwill and other intangible assets. It is the successor of APB Opinion No. 17, Intangible Assets. 

It discusses how intangible assets bought separately or in conjunction with other assets (but not in a business combination) should be accounted for in financial statements.

Business Combination Accounting Standard

A transaction or other event in which an acquirer gains control of one or more firms is referred to as a business combination. A business combination should not be accounted for when an asset or collection of assets is acquired that is not a business. 

Structures or transactions not accounting for joint ventures are frequently referred to as joint ventures. ASC 805 does not apply to the financial assets and liabilities of a consolidated VIE, a collateralized financing business.

Importance Of Accounting Standards

Companies can interpret financial information in any way they see fit. People outside the company are more interested in financial statements. 

However, accounting standards require companies to use consistent accounting practices over time. In addition, like many local governments, nonprofit and state governments follow certain accounting standards.

This serves as an advantage to businesses globally. Given below are three great benefits of accounting standards that you must know—

Allows Fair And Accurate Evaluations

All accounting standards address the subject of fair presentation, which must be made using reasonable estimates and judgments. This applies to inventory valuation methods and registration procedures that can give companies a comparative advantage. 

Overestimating revenues or waiting to record expenses until the next year can benefit a company’s financial statements. However, this is a shortcut to the failure of traditional audits and negative decision-making.

Accurate financial reports give managers the information they need to monitor their organization. If managers can access up-to-date, true and accurate financial statements, they can compare them and identify discrepancies. This also increases the risk of getting caught and prevents employees from stealing.

Consistency In Accounting And Auditing

Accounting standards are the principles and rules that govern accountants’ work and support their work’s integrity and comparability. 

Accounting and auditing standards give investors confidence that comparisons between companies are based on comparable standards. According to the American Institute of CPAs (AICPA), professional standards serve the highest public good when experts set them without political considerations or self-interest. 

The AICPA’s Auditing Standards Board (ASB) sets standards for private auditing companies, governments, not-for-profit organizations, and non-public organizations, such as employee benefit plans.

Auditing standards for the US publicly traded companies are set by the Public Company Oversight Board (PCAOB). Standard setters are generally transparent about their work and welcome input from various stakeholders.

Preventing Fraud

Fraud is a global problem that burdens public and private organizations heavily. Implementing and maintaining good accounting principles can help organizations prevent fraud. 

Knowing what assets an organization has, their values, and how they are used makes it much more difficult for management, employees, or contractors to embezzle an employer’s assets. 

Accounting principles create a system of checks and balances that check the behavior of employees. According to the report, 14.4% of fraud cases are initially disclosed through internal and 3.3% through external audits. 

Internal auditors are an important part of an organization’s internal control system. Their job is to ensure that internal controls are implemented, properly implemented, and monitored.

What Is The Most Widely Accepted Accounting Standard?

GAAP is the most widely accepted accounting standard in the global financial world.

GAAP compliance makes the financial reporting process transparent and standardizes assumptions, terms, definitions, and methods. 

Third parties can compare financial statements generated by GAAP-compliant organizations. GAP standards produce transparency and continuity, allowing investors and interested parties to make firm, evidence-based decisions. 

Additionally, GAAP compliance coherence makes it easier for companies to evaluate strategic business options.



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