What Is an Accounting Standard?
An accounting standard is a common set of principles, standards and procedures that define the basis of financial accounting policies and practices.
• An accounting standard is a common set of principles, standards, and procedures that define the basis of financial accounting policies and practices.
• Accounting standards apply to the full breadth of an entity’s financial picture, including assets, liabilities, revenue, expenses and shareholders’ equity.
• Banks, investors, and regulatory agencies, count on accounting standards to ensure that information about a given entity is relevant and accurate.
Understanding Accounting Standard
Accounting standards improve the transparency of financial reporting in all countries. In Nigeria, the Generally Accepted Accounting Principles form the set of accounting standards widely accepted for preparing financial statements. International companies follow the International Financial Reporting Standards (IFRS), which are set by the International Accounting Standards Board and serve as the guidelines for reporting financial statements.
Generally Accepted Accounting Principles are heavily used among public and private entities. Most countries primarily use IFRS. Multinational companies are required to use these standards. The IASB establishes and interprets the
international communities’ accounting standards when preparing financial statements.
Accounting standards relate to all aspects of an entity’s finances, including assets, liabilities, revenue, expenses and shareholders’ equity. Specific examples of an accounting standard include revenue recognition, asset classification, allowable methods for depreciation, what is considered depreciable, lease classifications and outstanding share measurement.
Accounting standards specify when and how economic events are to be recognized, measured and displayed. External entities, such as banks, investors and regulatory agencies, rely on accounting standards to ensure that relevant and accurate information is provided about the entity. These technical pronouncements have ensured transparency in reporting and set the boundaries for financial reporting measures.
Frequently Asked Questions
Why Are Accounting Standards Useful?
Accounting standards improve the transparency of financial reporting in all countries. They specify when and how economic events are to be recognized, measured and displayed. External entities, such as banks, investors and regulatory agencies, rely on accounting standards to ensure that relevant and accurate information is provided about the entity. These technical pronouncements have ensured transparency in reporting and set the boundaries for financial reporting measures.
International Financial Reporting Standards (IFRS) – Description And Objective.
The language of business is accounting and Financial Reporting is the medium through which the language is communicated. Sovereign control is diminishing rapidly. Harmonized accounting standards have been eventually agreed on. There is need for a set of accounting and financial reporting standards if there should be comparability between and among firms.
International Financial Reporting Standards (IFRS) set common rules so that financial statements can be consistent, transparent, and comparable around the world. IFRS are issued by the International Accounting Standards Board (IASB). They specify how companies must maintain and report their accounts, defining types of transactions, and other events with financial impact. IFRS were established to create a common accounting language so that businesses and their financial statements can be consistent and reliable from company to company and country to country.
The goal of IFRS is to make international comparisons as easy as possible. That goal hasn’t fully been achieved. Synchronizing accounting standards across the globe is an ongoing process in the international accounting community.
What is IFRS and who uses it?
The International Financial Reporting Standards (IFRS), as set forth by the IASB, are a set of internationally-recognized accounting principles used by firms and accountants around the world.
History of IFRS
IFRS originated in the European Union, with the intention of making business affairs and accounts accessible across the continent. The idea quickly spread globally, as a common language allowed greater communication worldwide. Although the U.S. and some other countries don’t use IFRS, most do, and they are spread all over the world, making IFRS the most common global set of standards.
The IFRS website (http://www.ifrs.org) has more information on the rules and history of the IFRS.
Why is IFRS important?
IFRS creates a common accounting language so that businesses and their financial statements can be consistent and reliable from company to company and country to country. IFRS is important because it helps maintain transparency and trust in the global financial markets and the companies who list their shares on them. If not for IFRS, investors would be more reluctant to believe the financial statements and other information presented to them by companies because they would have less confidence in their integrity. Without that trust and standardized practices, we might see fewer transactions, potentially leading to higher transaction costs and a less robust economy. IFRS also helps investors analyze companies by making it easier to perform “apples to apples” comparisons between one company and another and for fundamental analysis.
• International Financial Reporting Standards (IFRS) were established to bring consistency to accounting standards and practices, regardless of the company or the country.
• They are issued by the Accounting Standards Board (IASB) and address record keeping, account reporting, and other aspects of financial reporting.
• IFRS benefit companies and individuals alike in fostering greater corporate transparency.
• The downside of IFRS are that they are not universal, with the United States using GAAP accounting, and a number of other countries using other methods.
Understanding International Financial Reporting Standards
IFRS are designed to bring consistency to accounting language, practices and statements, and to help businesses and investors make educated financial analyses and decisions. The IFRS Foundation sets the standards to “bring transparency, accountability, and efficiency to financial markets around the world… fostering trust, growth, and long-term financial stability in the global economy.” Companies benefit from the IFRS because investors are more likely to put money into a company if the company’s business practices are transparent.
IFRS are sometimes confused with International Accounting Standards (IAS), which are the older standards that IFRS replaced. IAS was issued from 1973 to 2000, and the International Accounting Standards Board (IASB) replaced the International Accounting Standards Committee (IASC) in 2001.
IFRS are used in at least 120 countries, as of 2020, including those in the European Union (EU) and many in Asia and South America, but the U.S. uses Generally Accepted Accounting Principles (GAAP).
Standard IFRS Requirements
IFRS covers a wide range of accounting activities. There are certain aspects of business practice for which IFRS set mandatory rules.
• Statement of Financial Position: This is also known as a balance sheet. IFRS influences the ways in which the components of a balance sheet are reported.
• Statement of Comprehensive Income: This can take the form of one statement, or it can be separated into a profit and loss statement and a statement of other income, including property and equipment.
• Statement of Changes in Equity: Also known as a statement of retained earnings, this documents the company’s change in earnings or profit for the given financial period.
• Statement of Cash Flows: This report summarizes the company’s financial transactions in the given period, separating cash flow into Operations, Investing, and Financing.
In addition to these basic reports, a company must also give a summary of its accounting policies. The full report is often seen side by side with the previous report, to show the changes in profit and loss. A parent company must create separate account reports for each of its subsidiary companies.
LIST OF IFRS
International Financial Reporting Standard
1. FRS 1 First-time adoption of International Financial Reporting Standards
2. IFRS 2 Share-based payment
3. IFRS 3 Business combinations
4. IFRS 4 Insurance contracts
5. IFRS 5 Non-current assets held for sale and discontinued operations
6. IFRS 6 Exploration for and evaluation of mineral resources
7. IFRS 7 Financial instruments: disclosures
8. IFRS 8 Operating segments
9. IFRS 9 Financial instruments
10. IFRS 10 Consolidated financial statements
11. IFRS 11 Joint arrangements
12. IFRS 12 Disclosure of interests in other entities
13. IFRS 13 Fair value measurement
14. IFRS 14 Regulatory deferral accounts
15. IFRS 15 Revenues from contracts with customers
16. IFRS 16 Leases
International Accounting Standards
1. IAS 1 Presentation of financial statements
2. IAS 2 Inventories
3. IAS 7 Statement of cash flows
4. IAS 8 Accounting policies, changes in accounting estimates and errors
5. IAS 10 Events after the reporting period
6. IAS 11 Construction contracts
7. IAS 12 Income taxes
8. IAS 16 Property, plant and equipment
9. IAS 17 Leases
10. IAS 18 Revenue
11. IAS 19 Employee benefits
12. IAS 20 Accounting for government grants and disclosure of government assistance
13. IAS 21 The effects of changes in foreign exchange rates
14. IAS 23 Borrowing costs
15. IAS 24 Related party disclosures
16. IAS 26 Accounting and reporting by retirement benefit plans
17. IAS 27 Consolidated and separate financial statements
18. IAS 28 Investments in associates and joint ventures
19. IAS 29 Financial reporting in hyperinflationary economies
20. IAS 31 Interest in joint ventures
21. IAS 32 Financial instruments: presentation
22. IAS 33 Earnings per share
23. IAS 34 Interim financial reporting
24. IAS 36 Impairment of assets
25. IAS 37 Provisions, contingent liabilities and contingent assets
26. IAS 38 Intangible assets
27. IAS 39 Financial instruments: recognition and measurement
28. IAS 40 Investment property
29. IAS 41 Agriculture
Difference between IFRS and IAS
International Accounting Standard (IAS) and International Financial Reporting Standard (IFRS) are the same. The difference between them is that IAS represents old accounting standard, such as IAS 17 Leases while, IFRS represents new accounting standard, such as IFRS 16 Leases.
1) IFRS 1- First-time Adoption of International Financial Reporting Standards
It sets out the procedures that an entity must follow when it adopts IFRSs for the first time as the basis for preparing its general purpose financial statements. This IFRS grants limited exemptions from the general requirement to comply with each IFRS effective at the end of its first IFRS reporting period. There are many benefits of implementing IFRS in India in terms of economy, industry, and investors.
2) IFRS 2- Share-Based Payment
It requires an entity to recognize share-based payment transactions (example: granted shares, share options, or share appreciation rights) in its financial statements, also including transactions with employees or other parties to be settled in cash, other assets, or equity instruments of the entity. Specific requirements are included for equity-settled and cash-settled share-based payment transactions, as well as those where the entity or supplier has a choice of cash or equity instruments.
3) IFRS 3- Business Combinations
It outlines the accounting when an acquirer obtains control of a business (example: an acquisition or merger). Such business combinations are accounted for using the ‘acquisition method’, which generally requires assets acquired and liabilities assumed to be measured at their fair values at the acquisition date. The main advantage of IFRS is it facilitates the easy comparison of different companies, as data is presented on the same basis.
4) IFRS 4- Insurance Contracts
It applies, with limited exceptions, to all insurance contracts (including reinsurance contracts) that an entity issues and to reinsurance contracts that it holds. In light of the International Accounting Standard Board’s comprehensive project on insurance
contracts, the standard provides a temporary exemption from the requirements of some other IFRSs, including the requirement to consider International Accounting Standard- 8 Accounting Policies, Changes in Accounting Estimates and Errors when selecting accounting policies for insurance contracts.
5) IFRS 5- Non-current Assets Held for Sale and Discontinued Operations
It outlines how to account for non-current assets held for sale (or for distribution to owners). In general terms, assets held for sale are not depreciated, are measured at the lower of carrying amount and fair value fewer costs to sell, and are presented separately in the statement of financial position. Specific disclosures are also required for discontinued operations and disposals of non-current assets.
6) IFRS 6- Exploration for and Evaluation of Mineral Resources
It has the effect of allowing entities to adopt the standard for the first time to use accounting policies for exploration and evaluation assets that were applied before adopting IFRSs. It also modifies impairment testing of exploration and evaluation assets by introducing different impairment indicators and allowing the carrying amount to be tested at an aggregate level (not greater than a segment).
7) IFRS 7- Financial Instruments: Disclosures
It requires disclosure of information about the significance of financial instruments to an entity, and the nature and extent of risks arising from those financial instruments, both in qualitative and quantitative terms. Specific disclosures are required in relation to transferred financial assets and a number of other matters.
8) IFRS 8- Operating Segments
It requires particular classes of entities (essentially those with publicly traded securities) to disclose information about their operating segments, products and services, the geographical areas in which they operate, and their major customers. Information is based on internal management reports, both in the identification of operating segments and measurement of disclosed segment information.
9) IFRS 9- Financial Instruments
It is the International Accounting Standard Board’s replacement of International Accounting Standard 39 Financial Instruments: Recognition and Measurement. It includes requirements for recognition and measurement, impairment, recognition, and general hedge accounting.
10) IFRS 10– Consolidated Financial Statements
It outlines the requirements for the preparation and presentation of consolidated financial statements, requiring entities to consolidate entities it controls. Control requires exposure or rights to variable returns and the ability to affect those returns through power over an investee.
11) IFRS 11– Joint Arrangements
It outlines the accounting by entities that jointly control an arrangement. Joint control involves the contractually agreed sharing of control and arrangements subject to joint control are classified as either a joint venture; representing a share of net assets and equity accounted or a joint operation; representing rights to assets and obligations for liabilities, accounted for accordingly.
12) IFRS 12- Disclosure of Interests in Other Entities
It is a consolidated disclosure standard requiring a wide range of disclosures about an entity’s interests in subsidiaries, joint arrangements, associates and unconsolidated ‘structured entities’. Disclosures are presented as a series of objectives, with detailed guidance on satisfying those objectives.
13) IFRS 13-Fair Value Measurement
It applies to IFRSs that require or permit fair value measurements or disclosures and provides a single IFRS framework for measuring fair value and requires disclosures about fair value measurement. The Standard defines fair value on the basis of an exit price notion and uses a fair value hierarchy, which results in a market-based rather than entity-specific measurement.
14) IFRS 14-Regulatory Deferral Accounts
It permits an entity which is a first-time adopter of International Financial Reporting Standards to continue to account, with some limited changes, for ‘regulatory deferral account balances’ in accordance with its previous GAAP, both on initial adoption of IFRS and in subsequent financial statements. Regulatory deferral account balances, and movements in them, are presented separately in the statement of financial position and statement of profit or loss and other comprehensive income, and specific disclosures are required.
15) IFRS 15 – Revenue From Contract
It specifies how and when an IFRS reporter will recognize revenue as well as requiring such entities to provide users of financial statements with more informative, relevant disclosures. The standard provides a single, principles-based five-step model to be applied to all contracts with customers. It applies to an annual reporting period beginning on or after 1 January 2018.
16) IFRS 16 – Lease Accounting
It specifies how an IFRS reporter will recognize, measure, present, and disclose leases. The standard provides a single lessee accounting model, requiring lessees to recognize assets and liabilities for all leases unless the lease term is 12 months or less or the underlying asset has a low value. Lessors continue to classify leases as operating or finance, with IFRS 16’s approach to lessor accounting substantially unchanged from its predecessor, International Accounting Standard- 17. It applies to annual reporting periods beginning on or after 1 January 2019.
17) IFRS 17: Insurance Contract
IFRS 17 is applicable for yearly reporting periods starting on or after 1st January 2021. This must be accommodated with IFRS 9 and IFRS 15 from the list of IFRS standards, permitted application earlier. The insurance contract consists of both a service and a financial instrument contracts. Many such insurance contracts will ultimately generate cash flow with considerable variability over a long span.
These were the IFRS (International Financial Reporting Standards) issued by IASB. And the International Accounting Standards (IAS) were issued by the predecessor body IASC between the years 1973 and 2001. In our country, Indian Accounting Standards (Ind AS) are issued by the Accounting Standard Board to converge Indian GAAP with International Financial Accounting Standards (IFRS). Both IFRS and IAS continue to form a force.
The listing of Generally Accepted Accounting Principles as of IAS is as follows:
IAS 1: Presentation of Financial Statements
IAS 1 is about the overall requirements for the arrangement of the structure of financial statements, guidelines, and the minimum requirements for their content. The elements consist of presenting the complete set of financial statements yearly and incorporating the amounts for the preceding year. This is another addition to the list of IFRS standards and IAS standards.
IAS 2: Inventories
The second IAS in the IAS and IFRS list is about the guidance for the determination of the cost formulas of inventories and subsequent recognizing the cost as an expense. This can include any write-down to any other realizable value.
IAS 7: Statement of Cash Flows
In the list of IFRS standards and IAS standards, the guidelines of how to present data in a cash flow statement are described in the IAS 7. The information about the cash flow is the unit’s cash and cash equivalents altered during this period.
IAS 8: The Accounting Policies, Changes in Accounting Estimates and Errors
The IAS 8 consists of the criteria for choosing and changing accounting policies along with the accounting treatment, changes in the estimates of the accounting, the disclosure of alterations in the accounting policies, and the correction of errors. So when an International Financial Reporting Standards interpretation specifically refers to a transaction, other event or condition, then an entity must use that standard.
IAS 10: Events after the Reporting Period
The IAS 10 in the list of IFRS standards suggest the situations when an enterprise should adjust its financial statements for after the reporting period events. And the other guideline as per IAS 10 is the disclosure the entity should provide about the time when the financial statements were authorized for issue and also about the events post reporting time.
IAS 11: Construction Contracts
In the list of IFRS standards, the IAS 11 suggests about the accounting regarding revenue treatment and the costs associated with construction contracts. The IAS 11 requires the outcome of a construction contract, reliable estimation, and the contract expenses about the stage of completion at the end of reporting time.
IAS 12: Income Taxes
The IAS 12 in the IFRS list prescribes the accounting solutions for income taxes that include all domestic and foreign taxes, which can be based on taxable profits. IAS 12 requirements include the step for an entity to recognize a deferred tax liability or a deferred tax asset for temporary differences with some exceptions.
IAS 16: Property, Plant, and Equipment
In the list of IFRS standards, the IAS 16 establishes principles about the recognition of property, plant, and equipment as assets of an entity to measure the carrying amounts and the measuring of the depreciation charges and impairment losses related to them.
IAS 17: Leases
IAS 16 is superseded by IFRS 15 from the list of IFRS standards. The IAS 17 is classified into two types, a finance lease and an operating lease. The Finance lease is for if the contract transfers considerably, then all the risks and rewards are to be incidental to ownership. And the operating lease is for if the lease does not transfer significantly, then also all the risks and rewards are incidental to ownership.
IAS 18: Revenue
The IAS 18 is superseded by IFRS 15 of the International Financial Reporting Standards list. IAS 18 addresses the right moment and how to recognize and measure revenue. What is Revenue? It is the gross inflow of economic benefits acquired by ordinary activities of an entity during an estimated period. IAS 18 applies to the revenues from the events of sales of goods, the rendering of services, and the use of entity assets yielding interests, royalties, dividends, by others.
IAS 19: Employee Benefits
In the list of IFRS standards and IAS standards, the IAS 19 applies for all types of employee benefits except for the share-based payment type, for IFRS 2 applies to share-based payment types of employee benefits. IAS 19 in the list of IFRS standards requires the enterprise to recognize a contract when an employee has provided service in trade for future employee benefits and the recognition for an expense when the entity acquires economic benefits arising for the services offered by the employees in exchange for employee perks.
IAS 20: Accounting for Government grants and the Disclosure of Government Assistance
The IAS 20 in the IAS and IFRS list is about the grants provided by the government, which are transfers of resources given to an enterprise in return for past or future agreement with specific conditions relating to the operating activities of the enterprise. The economic benefit specifically provided to an entity or range of entities qualifying under specific criteria is called government support.
IAS 21: Effects of the Changes in Foreign Exchange Rates
The IAS 21 prescribes how an entity should carry on foreign activities in two ways. This may consist of transactions using foreign currencies, or it may include some international business operations. The principles issued by the IAS 21 in the IFRS standards list are used by the exchange rate/s to report the effects of the changes in it for financial statements.
IAS 23: Borrowing Costs
In the IAS and IFRS list, IAS 23 provides guidance on the process for the enterprises to measure borrowing costs, particularly the cost of acquisition and construction or production that are funded by an entity’s general borrowings.