Accounting Standard - Explained
What is an Accounting Standard?
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Table of ContentsWhat is an Accounting Standard?How is an Accounting Standard Used?History of Accounting Standards and PurposeU.S. GAAP Accounting StandardsInternational Financial Reporting Standards Accounting StandardsAcademic Research on Accounting Standard
What is an Accounting Standard?
An accounting standard refers to a set of guidelines, rules and principles set up by a regulatory board or the government that serves as framework for accounting policies and practices. In the United States, generally accepted accounting principles (GAAP) is an accounting standard that must be followed when preparing and presenting a company's financial statements. Typically, accounting standards are established to ensure transparency of accounting professionals and consistency in accounting practices. All countries have accounting standards set up by a regulatory body or the government. These standards can however vary from one country to another.
Back to: ACCOUNTING, TAX, & REPORTING
How is an Accounting Standard Used?
All aspects of a company which are included in financial statements and reports are bound by the accounting standards for the state in which the company operates. While international companies follow International Financial Reporting Standards, non-international companies adhere to the accounting standards of their respective states. All aspects pertaining to a company's finance are regulated by accounting standards, these include; the company's assets, liabilities, revenue, equity, among others. There are different accounting standards to suit different forms of finance. Allowable methods for depreciation, asset classification and revenue recognition are some examples of accounting standards.
History of Accounting Standards and Purpose
Generally, accounting standards are set of principles and guidelines created to serve as a bedrock for financial accounting practices. The first attempt to launch accounting standards was in the 1930s, this was when the American Institute of Accountants, and the New York Stock Exchange made their first attempt to launch accounting standards. Afterwards, the Securities and Exchange Commission was created after the 1933 and 1934 attempts to launch accounting standards by the Securities Act of 1933 and Securities and Exchange Act of 1934. Accounting standards are basis for which accounting practices are to be measured or examined. Accounting professionals, banks and regulatory agencies perform accounting tasks based on the principles outlined by accounting standards.
U.S. GAAP Accounting Standards
The first set of accounting standards were developed by the American Institute of Certified Public Accountants and was enacted in 1973. The accounting standard used in the United States is generally accepted accounting principles (GAAP). The Securities and Exchange Commission ensure that all listed companies as well as certified accounting professionals adhere to these principles when preparing financial statements. Financial statements compiled by professionals for publicly listed companies in the U. S are listed on the securities exchange. Since all financial statements or reports must adhere to the rules of GAAP, it aids credibility of financial statements of listed companies.
International Financial Reporting Standards Accounting Standards
Different states have different names given to accounting stages used in the state. For example, GAAP is the accounting standard used in the United States. However, there are rules and guidelines set up by governing bodies, like FASB and IASB, to ensure consistency and credibility of accounting practices in all companies and industries. The International Accounting Standards Board (IASB) set up accounting standards for international businesses or multilateral entities. IASB ensures the adherence to accounting standards by international or multilateral entities when compiling or filing their financial statements.
Academic Research on Accounting Standard
- The relevance of the value relevance literature for financial accounting standard setting: another view, Barth, M. E., Beaver, W. H., & Landsman, W. R. (2001). The relevance of the value relevance literature for financial accounting standard setting: another view. Journal of accounting and economics, 31(1-3), 77-104. This paper explains that value relevance research assesses how well accounting amounts reflect information used by equity investors, and provides insights into questions of interest to standard setters. A primary focus of financial statements is equity investment. Other uses of financial statement information, such as contracting, do not diminish the importance of value relevance research. Value relevance questions can be addressed using extant valuation models. Value relevance studies address econometric issues that otherwise could limit inferences, and can accommodate and be used to study the implications of accounting conservatism.
- The relevance of the value-relevance literature for financial accounting standard setting, Holthausen, R. W., & Watts, R. L. (2001). The relevance of the value-relevance literature for financial accounting standard setting. Journal of accounting and economics, 31(1-3), 3-75. In this paper we critically evaluate the standard-setting inferences that can be drawn from value relevance research studies that are motivated by standard setting. Our evaluation concentrates on the theories of accounting, standard setting and valuation that underlie those inferences. Unless those underlying theories are descriptive of accounting, standard setting and valuation, the value-relevance literature's reported associations between accounting numbers and common equity valuations have limited implications or inferences for standard setting; they are mere associations. We argue that the underlying theories are not descriptive and hence drawing standard-setting inferences is difficult.
- Non-US firms' accounting standard choices, Ashbaugh, H. (2001). Non-US firms' accounting standard choices. Journal of accounting and public policy, 20(2), 129-153. My study investigates the factors associated with non-US firms voluntarily reporting financial information prepared in accordance with International Accounting Standards (IAS) or United States (US) Generally Accepted Accounting Principles (US-GAAP). Documenting the factors associated with non-US firms' disclosures of IAS or US-GAAP financial information is important in that many equity market regulators are now allowing, or considering allowing, registrants to report under alternative sets of accounting standards. The annual reports of 211 non-US firms listed with the London Exchange are examined to determine firms' disclosure of IAS or US-GAAP financial information. Using multivariate logit regression, I found systematic differences in firm characteristics associated with non-US firms disclosing IAS or US-GAAP financial information rather than or in addition to financial information prepared in accordance with their domestic generally accepted accounting principles (domestic-GAAP). The results are consistent with the hypotheses that non-US firms are more likely to disclose IAS or US-GAAP financial information as their shares trade in more equity markets. In addition, I found that firms are more likely to disclose IAS or US-GAAP financial information when by doing so they can provide more standardized financial information relative to the information generated via their domestic-GAAP. I also found that firms are more likely to report IAS financial information when they participate in seasoned equity offerings and when US-GAAP requires more accounting policy changes relative to what is required under firms' domestic-GAAPs. These results suggest that non-US firms report IAS financial information to receive some benefits of providing more standardized financial information at costs less than what are incurred to implement US-GAAP.
- An income strategy approach to the positive theory of accounting standard setting/choice, Zmijewski, M. E., & Hagerman, R. L. (1981). An income strategy approach to the positive theory of accounting standard setting/choice. Journal of accounting and Economics, 3(2), 129-149. This paper is designed to provide additional evidence on the positive theory of accounting policy choice by combining individual accounting principles into firm income strategies. These strategies were the dependent variable in a probit analysis where the independent variables were size, management compensation, industry concentration ratio, systematic risk, capital intensity and the total debt to total asset ratio. The results indicate that four of these factors (size, management compensation, concentration ratio, and the total debt to total asset ratio) have a significant association with the choice of a firm's income strategy. This test provides strong evidence consistent with the positive theory of accounting standard setting/choice. We also present evidence that smaller firms and/or firms in less concentrated industries do not appear to make accounting policy choice decisions that are consistent with this theory.
- Lobbying of accounting standard-setting bodies in the UK and the USA: a Downsian analysis, Sutton, T. G. (1984). Lobbying of accounting standard-setting bodies in the UK and the USA: a Downsian analysis. Accounting, Organizations and Society, 9(1), 81-95. This paper examines the response of those affected by financial accounting standards to new accounting rules. The efforts of individuals and organizations to promote or obstruct such rules are described collectively as lobbying. The Downsian voting model provides the framework for the discussion of important aspects of lobbying, namely the characteristics of lobbyists, the timing of their lobbying and the methods they are likely to employ. The analysis is illustrated with examples drawn from U.K. and U.S. experience of standard-setting.
- The impact of national influence on accounting estimates: Implications for international accounting standard-setters, Schultz Jr, J. J., & Lopez, T. J. (2001). The impact of national influence on accounting estimates: Implications for international accounting standard-setters. The International Journal of Accounting, 36(3), 271-290. The results of prior research suggest that national accounting systems are significantly associated with differences in market valuations and various other macromeasures. These results, however, rely heavily on the analysis of archival data or survey evidence directed at national system differences. As Pownall and Schipper [Accounting Horizons (1999) 259] note, archival research necessarily depends on the information in the financial reports and cannot explain the process linking the underlying standards to the reported information. This study examines this process by investigating judgments made by accountants in France, Germany, and the United States. To facilitate a comparison of this process across international boundaries, our experiment presents these accountants with the same economic facts that are governed by similar financial reporting rules. Our results indicate that, even given similar facts and rules, judgments among the three nations' accountants vary significantly. They also suggest that national culture interacts with findings accepted as general within behavioral decision research.