Introduction to IFRS
Currently, more than 100 countries requires or adopt IFRS and it is expected that by 2012, more than 150 countries will adopt IFRS. India has also taken the step towards convergence of Indian Accounting Standards with IFRS. This article details the need for harmonization of local GAAP with IFRS, challenges for Corporate India etc. 1.
Importance of Accounting Standards
Accounting Standards Across the world
Need of Harmonization
IFRS Applicability in India
Challenges for Corporate India
1. Importance of Accounting Standards
Accounting Standards are the authoritative documents issued by recognized accountancy bodies relating to various aspects of recognition, measurement and disclosure of accounting transactions and events. These are stated to be norms of accounting policies and practices by way of codes or guidelines to direct as to how the items, which go to make up the financial statements should be dealt with in accounts and presented in the annual accounts. The aim of setting standards is to bring about uniformity in financial reporting and to ensure consistency and comparability in the data published by enterprises.
A financial reporting system supported by strong governance, high quality standards, and sound regulatory frameworks is key to economic development. High quality standards of financial reporting, auditing, and ethics underpin the trust that investors place in financial and non-financial information and, thus, play an integral role in contributing to a country’s economic growth and financial stability.
GAAP (Generally Accepted Accounting Principles) is a collection of methods used to process, prepare, and present public accounting information. GAAP can be principlebased or rule based. US GAAP is rule based while IFRS is principle based. In principle based accounting standards, the management judgments and documentations plays a vital role.
GAAPs are varied but based on a few basic principles that must be upheld by all GAAP rules. These principles include consistency, relevance, reliability, and comparability. 1) Consistency means that all information should be gathered and presented the same across all periods. For example, a company cannot change the way they
account for inventory from one period to another without noting it in the financial statements and having a valid reason for the change.
Relevance means that the information presented in financial statements (and other public statements) should be appropriate and assist a person evaluating the statements to make educated guesses regarding the future financial state of a company.
Reliability means simply that the information presented in financial statements is reliable and verifiable by an independent party. Basically a company must confirm that if an independent auditor were to base their reports off of the same information that they would come up with the same results.
Comparability is one of the most important GAAP categories and one of the main reasons having something similar to GAAP is necessary. By ensuring comparability, a company’s financial statements and other documentation can be compared to similar businesses within its industry. The importance of this principle cannot be overstated, as without comparability investors would be unable to discern differences between companies within an industry to benchmark how a company is doing compared to its peers.
Accounting Standards are used as one of the main compulsory regulatory mechanisms for preparation of general-purpose financial reports and subsequent audit of the same, in almost all countries of the world. Accounting standards are devised to furnish useful information to different users of the financial statements, to such as shareholders, creditors, lenders, management, investors, suppliers, competitors, researchers, regulatory bodies and...