The IFRS and the Accounting Standards - Assignment Example

The IFRS and the Accounting Standards The International Financial Reporting Standards (IFRS) is a set of framework that aims to standardize the reporting system for the accounting profession. It was established just recently, and accordingly, many countries have adopted it due to its purported aim of “improved transparency of financial reporting” (KPMG). The IFRS uses and recommends the use of a standard set of framework, sort of a new language to communicate financial reporting, as explained by KPMG. KPMG said that IFRS “represents a complete change in the language of financial reporting”. IFRS aims to provide a set of standards in financial reporting that is accurate, truthful, and a fair representation of the financial operations of an organization in terms that are comprehensible to any stakeholder to a financial transaction. KPMG described it as financial reporting with “financial information that has enhanced transparency and consistency, as well as global comparability”. The IFRS Foundation is the organization behind the IFRS development, promotion, adoption, and oversight. It is a private, not-for-profit organization whose functions are being governed by a board of trustees. The accounting standards are set and determined by IFRS Foundation through International Accounting Standard Board (IASB), an independent board working under the Foundation. The trustees of the Foundation ensures the independence of the IASB, and are accountable to the public while being answerable to the Monitoring Board composed of public authorities. According to the IFRS Foundation website, the main objectives of IFRS are as follows: to develop a single set of high quality, understandable, enforceable and globally accepted international financial reporting standards (IFRSs) through its standard-setting body, the IASB; to promote the use and rigorous application of those standards; to take account of the financial reporting needs of emerging economies and small and medium-sized entities (SMEs); and to bring about convergence of national accounting standards and IFRSs to high quality solutions (About the IFRS). These objectives give the public an important insight on the purpose and function of the IFRS especially in harmonizing the reporting requirements of various organizations and bringing them to an acceptable and credible level of international standards. The IASB is the standard-setting body within the IFRS Foundation. The members of the IASB is said to be the people responsible for the setting of the standards to be promoted by IFRS. According to the IFRS website, the IASB is composed of 15 full-time members and are “responsible for the development and publication of IFRSs, including the IFRS for SMEs and for approving interpretations of IFRSs as developed by the IFRS Interpretation Committee”. The IASB can be said as the heart of the IFRS, as IASB is the one responsible for the crafting of the standards to be adopted and promoted, in consultation with the various stakeholders in the accountancy profession throughout the world. The highly globalized operations of business and even public firms and not-for-profit organizations in today’s world have further emphasized the need for uniform and transparent accounting standards. Comparability and credibility of reports across businesses and organizations will ensure the protection of the interests of the stakeholders and the public in general. The cases of giant companies Enron and Worldcom, and the Asian Financial Crisis, have been among the recent financial controversies attributed to a “lack of accounting standards” which could have been avoided if a more open and transparent reporting systems were in place (Standard Accounting Practice). Accounting standards are defined by Investopedia as a set of “principle(s) that guides and standardizes accounting practices” (Accounting Standard). A group of accounting standards referred to as the Generally Accepted Accounting Principles (GAAP) make up the widely accepted practices in the accounting profession in most countries to date. They serve as a guideline on how financial reporting is conducted. However, GAAP is now poised to be replaced by the IFRS as developed by the IASB as discussed above. As mentioned, the IFRS is fast gaining adherence in the international community to come up with a credible and transparent reporting procedure for financial operations of organizations, replacing the GAAP. Among the common accounting standards are explained below: 1. Historical cost Financial reports must be based on historical cost as against the fair market value of assets and liabilities. This is because historical cost is based on facts rather than the fair market value which is subject to speculation and bias, and where an opportunity to manipulate the figures can present itself. 2. Revenue recognition Revenue recognition is also known as accrual basis accounting, as against cash basis accounting. Financial reporting requires revenues to be recognized as soon as they are rendered or as soon as they are realized, and not when cash as payment is received. 3. Matching Financial reporting requires that expenses are matched with revenues, as much as possible. Expenses will have to be recognized as such when it contributes to the realization of revenue. When no connection to revenue can be established, only then is the expense charged against current operations. 4. Disclosure All relevant information to the financial report must be declared publicly. The information can be indicated in the main body of the financial statements, in the footnotes, or as supplementary information. 5. Going concern All financial reports are assuming that the business will continue to operate over a period of time. There is continuity in operation and no disruption is being anticipated or being considered. 6. Accounting entity Financial reports are made on the assumption that the business entity is separate from the personal business of the owner/s. It is a stand-alone report indicating the financial performance of only one particular business under consideration. 7. Monetary unit The financial reports will be prepared using a stable unit of currency as a “monetary unit of record unadjusted for inflation” (GAAP). 8. Consistency Accounting system must use a consistent method of measuring the financial performance of the business through the year, from year to year. Any deviation must be fully disclosed. For example, if one method of depreciation is being used by the company, this method is presumed to have been in use all throughout the fiscal year to determine depreciation expenses. 9. Materiality The significance of a particular incidence or an item in the financial reports must be disclosed if by so doing it will alter the result of the assessment or the measure of performance of the business. 10. Conservatism Accountants must choose measures that, when given a range of options, will be on the side of avoiding the tendency to have an overstated value of assets and income. It must avoid overstating the value of assets and income in order to have a conservative estimate of the financial performance of the business in a given year. Works Cited KPMG: Cutting Through Complexity. International Financial Reporting Standards (IFRS). 03 March 2012. Web. 19 May 2012. International Financial Reporting Standards Foundation. About the IFRS Foundation and the IASB. 2012. Web. 19 May 2012. Wikimedia Foundation, Inc. Standard Accounting Practice. 09 March 2012. Web. 19 May 2012. Investopedia. Accounting Standard. 2012. Web. 19 May 2012. Wikimedia Foundation, Inc. Generally Accepted Accounting Principles. 19 March 2012. Web. 19 May 2012. Read More