Publicly traded companies typically are subject to rigorous standards. Small and midsized businesses often follow more simplified standards, plus any specific disclosures required by their specific lenders and shareholders. Some firms operate on the cash method of accounting which can often be simple and straightforward. Larger firms most often operate on an accrual basis. Accrual basis is one of the fundamental accounting assumptions and if it is followed by the company while preparing the Financial statements then no further disclosure is required. Accounting standards prescribe in considerable detail what accruals must be made, how the financial statements are to be presented, and what additional disclosures are required.

Some important elements that accounting standards cover include identifying the exact entity which is reporting, discussing any "going concern" questions, specifying monetary units, and reporting time frames.[1]

In the public sector, 30% of 165 governments surveyed used accrual accounting, rather than cash accounting, in 2020.[2]

Limitations

The notable limitations of accounting standards are their inflexibility, time-consuming process to create them, the difficulty of choosing between alternative treatments and their restrictive scope.[3] Accounting standards were largely written in the early 21st century. Massive accounting irregularities at large firms such as Worldcom and Enron illustrate that, despite all these efforts, widespread fraud can still occur, and even be missed by the outside auditors.

Benefits of accounting standards

The lack of transparent accounting standards in some nations has been cited as increasing the difficulty of doing business in them. In particular, the Asian financial meltdown in the late 1990s has been partially attributed to the lack of detailed accounting standards. Giant firms in some Asian countries were able to take advantage of their poorly devised accounting standards to cover up immense debts and losses, which yielded a collective effect that eventually led the whole region into financial crisis.

Common accounting standards around the globe

This standard is adopted in whole, or in large part, by many countries. It is acceptable in the U.S. (for a firm located outside of the U.S.) to report in this widely accepted format.

Accounting standards by nation

Global standardization and IFRS

Many countries use or are converging on the International Financial Reporting Standards (IFRS) that were established and are maintained by the International Accounting Standards Board. In some countries, local accounting principles are applied for regular companies but listed or large companies must conform to IFRS, so statutory reporting is comparable internationally.

All listed and grouped EU companies have been required to use IFRS since 2005, Canada moved in 2009,[5] Taiwan in 2013,[6] and other countries are adopting local versions.[7][8]

In the United States, while "... the SEC published a statement of continued support for a single set of high-quality, globally accepted accounting standards, and acknowledged that IFRS is best positioned to serve this role..."[9] progress is less evident.[9][10]

See also

References

Further reading

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