Introduction: I am being pragmatic in citing that Accounting Standards are the pre requisite for carrying on the business efficiently in the globalized economy. Accounting Standards are defined as the principles that standardize and regulate accounting definitions, assumptions, and methods. Adoption of accounting standards assures that there is consistency from year to year in the methods used to prepare a company's financial statements. Although variations may exist, we can make reasonably confident conclusions when comparing one company to another, or comparing one company's financial statements to the financial statements for the industry as a whole. Accounting Standards are very helpful for the external stakeholder’s viz. Bankers, Creditors, Investors of the company since they assure the stakeholders that the financial statements are prepared following a set of rules which helps them in making investment decisions. Last but not the least, adoption of country specific accounting standards is mandatory when the domestic company enters a foreign market or a domestic company wants to get its shares listed in foreign stock exchanges.
All of us, being in the field of accounting are aware of the importance of Accounting Standards and Accounting Standards Board of India. But when we are confronted with the terms FASB, IASC, IASB, IFRS, IFRIC we blink. In this backdrop let us see how Accounting Standards evolved over a period of time in different parts of the world and let’s decode the above mentioned terminologies.
In the United States, Generally Accepted Accounting Principles are accounting rules used to prepare, present and report financial statements for a wide variety of entities, including publicly traded and privately held companies, non-profit organizations, and government authorities. The term is usually confined to the United States, where it is commonly abbreviated as US GAAP or simply GAAP. With the passing of the Securities Act of 1934, the Securities and Exchange Commission (SEC) was created and given the power to establish standards for financial reporting of US companies. Later they felt that this work would be accomplished effectively by the private sector where professionals would be able to provide input and guidance, and thus the power to establish financial reporting standards was moved to the American Institute of Certified Public Accountants (AICPA). AICPA formed two different committees which took part in the process of setting the standards viz. Committee on Accounting Procedure from 1936 to 1959 and the Accounting Principles Board from 1959 to 1973. The two committees of the AICPA worked to provide standards that would be beneficial to users and preparers of financial statements. In 1973 Financial Accounting Standards Board (FASB) was formed to utilize a broader spectrum of participation in order to develop unbiased standards. The mission of the FASB “is to establish and improve standards of financial accounting and reporting for the guidance and education of the public, including issuers, auditors, and users of financial information. The work of the FASB is an integral part of the United States economy as it demands that financial information put forth by companies is “credible, transparent, and comparable”.
STANDARD SETTING PROCESS OF FASB:
1. The Board identifies financial reporting issues based on requests/recommendations from stakeholders or through other means.
2. The FASB Chairman decides whether to add a project to the technical agenda, after consultation with FASB Members and others as appropriate, and subject to oversight by the Foundation's Board of Trustees.
3. The Board deliberates at one or more public meetings the various reporting issues identified and analyzed by the staff.
4. The Board issues an Exposure Draft to solicit broad stakeholder input. (In some projects, the Board may issue a Discussion Paper to obtain input in the early stages of a project)
5. The Board holds a public roundtable meeting on the Exposure Draft, if necessary.
6. The staff analyzes comment letters, public roundtable discussion, and any other information obtained through due process activities. The Board redeliberates the proposed provisions, carefully considering the stakeholder input received, at one or more public meetings.
7. The Board issues an Accounting Standards Update describing amendments to the Accounting Standards Codification.
IAS and IFRS:
International Accounting Standards Committee (IASC) was formed in 1973 in London, the same year when FASB was developed in the United States. As international trade had grown during the 1960s, it had been quickly decided that the world needed centralized guidance for accounting standards. From its very inception, the IASC focused on collaboration among the major players in the global marketplace, and thus input from the United States has always been crucial to the success of the IASC. Without a strong perceived need for international accounting standards, IASC did not receive much support or credit for its work, as many countries continued to use their own accounting standards. Until the mid-1980s, the IASC worked mainly to harmonize accounting standards and was “often criticized that it was seeking the lowest common denominator with respect to standards”. Many argued that quality of the standards was not given enough attention. In 1987, following its own internal direction and under pressure from the International Organization of Securities Commission to create a set of high quality international standards, the IASC made the decision to move toward more conceptually-based standards that could be more widely-used. As time continued from the mid-1980s to the early 2000s, the world economy became much more global and many companies began to realize the benefits that could result from utilizing a single set of international accounting standards. Many European companies had begun using a modified version of US GAAP for the preparation of their financial statements in order to participate in the global economy, as the historical view has been that US GAAP is the premier set of accounting standards. The use of US GAAP around the world prompted the IASC to further promote the use of International Accounting Standards (IASs) as opposed to using US GAAP. Soon after the IASC increased its promotion efforts for IASs, standard setting authority for these international standards was relinquished to the International Accounting Standards Board (IASB) in 2001. The 41 IASs established by the IASC and 33 SICs remain in effect until reviewed by the IASB. The stated objective of the IASB is “to develop a single set of high quality, understandable and enforceable accounting standards to help participants in the world’s capital markets and other users make economic decisions”. The main goal of creating IFRSs is to provide enhanced comparability among companies’ financial statements around the world. By utilizing a single set of standards, financial information will be more understandable to more people in different countries. IFRSs are principals-based, generally requiring increased use of judgment among practitioners when compared to US GAAP which has many detailed rules. The way in which the IASB develops its standards is similar to the way in which standards are produced in the United States. Extensive research is performed on certain topics and input is accepted from all possible stakeholders of the proposed standard. Proposals are released, followed by a period of time for public comment. An exposure draft will be released, followed by another comment period, which will ultimately result in the publishing of a new or revised standard, along with a statement of feedback. Once published, the standard is subject to a jurisdictional adoption process and a post-implementation review period by the IASB of two year. This public involvement in setting standards is similar to that of the FASB. Because the IASB is responsible for writing standards that are to be used internationally, it is critical that the Board not only receives input from people around the world, but is able to retain an international focus among its members. The IASB is made up of 14 members, representing nine countries, including the United States. Till date 41 IASs, 33 SICs, 13 IFRSs and 20 IFRICs are issued.
SIC: The board of the International Accounting Standards Committee (IASC) formed the Standing Interpretations Committee (SIC) in 1997. It was founded with the objective of developing interpretations of International Accounting Standards (IASs) to be applied where the standards are silent or unclear.
IFRIC: IFRIC is the interpretative body of the IASB, the entity that develops, maintains and issues IFRS. IFRIC is designed to help the IASB improve financial reporting through timely identification, discussion and resolution of financial reporting issues within the framework of IFRS. Following a process detailed in the “Due Process Handbook for the IFRIC”, the committee develops authoritative interpretations of existing IFRS. IFRIC refers its interpretations to the IASB for discussion and approval, and once they are approved by the IASB, the IFRIC interpretations (IFRICs) become part of IFRS. To be in compliance with IFRS, an entity must comply with all aspects of IFRS, including IFRICs.
ACCOUNTING STANDARDS IN INDIA:
The Institute of Chartered Accountants of India (ICAI) being a member body of the IASC, constituted the Accounting Standards Board (ASB) on 21st April, 1977, with a view to harmonise the diverse accounting policies and practices in use in India. Due to adoption of liberalisation and globalisation as the corner stones of Indian economic policies in early ‘90s, and the growing concern about the need of effective corporate governance, the Accounting Standards have increasingly assumed importance. While formulating accounting standards, the ASB takes into consideration the applicable laws, customs, usages and business environment prevailing in the country. The ASB also gives due consideration to International Financial Reporting Standards (IFRSs)/ International Accounting Standards (IASs) issued by IASB and tries to integrate them, to the extent possible, in the light of conditions and practices prevailing in India.
Accounting Standards Setting Process:
The accounting standard setting, by its very nature, involves reaching an optimal balance of the requirements of financial information for various interest-groups having a stake in financial reporting. With a view to reach consensus, to the extent possible, as to the requirements of the relevant interest-groups and thereby bringing about general acceptance of the Accounting Standards among such groups, considerable research, consultations and discussions with the representatives of the relevant interest-groups at different stages of standard formulation becomes necessary. The standard-setting procedure of the ASB, as briefly outlined below, is designed in such a way so as to ensure such consultation and discussions:
a. Identification of the broad areas by the ASB for formulating the Accounting Standards.
b. Constitution of the study groups by the ASB for preparing the preliminary drafts of the proposed Accounting Standards.
c. Consideration of the preliminary draft prepared by the study group by the ASB and revision, if any, of the draft on the basis of deliberations at the ASB.
d. Circulation of the draft, so revised, among the Council members of the ICAI and 12 specified outside bodies such as Standing Conference of Public Enterprises (SCOPE), Indian Bank’s Association, Confederation of Indian Industry (CII), Securities and Exchange Board of India (SEBI), Comptroller and Auditor General of India (C& AG), and Department of Company Affairs, for comments.
e. Meeting with the representatives of specified outside bodies to ascertain their views on the draft of the proposed Accounting Standard.
f. Finalisation of the Exposure Draft of the proposed Accounting Standard on the basis of comments received and discussion with the representatives of specified outside bodies.
g. Issuance of the Exposure Draft inviting public comments.
h. Consideration of the comments received on the Exposure Draft and finalisation of the draft Accounting Standard by the ASB for submission to the Council of the ICAI for its consideration and approval for issuance.
i. Consideration of the draft Accounting Standard by the Council of the Institute, and if found necessary, modification of the draft in consultation with the ASB.
j. The Accounting Standard, so finalised, is issued under the authority of the Council.
CONVERGENCE OF ACCOUNTING STANDARDS:
In the Norwalk Agreement of 2002, FASB and IASB showed their acceptance for the convergence of Accounting Standards. In 2006 they entered into Memorandum of Understanding to converge the accounting standards and term them as IFRS. The idea behind developing IFRS is to smoothen the financial reporting practices and to enhance the comparability of financial statements. IFRS are used in many parts of the world, including the European Union, Hong Kong, Australia, Malaysia, Pakistan, GCC countries, Russia, South Africa, Singapore and Turkey.
Indian Accounting Standards, (abbreviated as Ind AS) are a set of accounting standards notified by the Ministry of Corporate Affairs which are converged with International Financial Reporting Standards (IFRS). These accounting standards are formulated by Accounting Standards Board of Institute of Chartered Accountants of India. Now India will have two sets of accounting standards viz. existing accounting standards under Companies (Accounting Standard) Rules, 2006 and IFRS converged Indian Accounting Standards (Ind AS). The Ind AS are named and numbered in the same way as the corresponding IFRS. NACAS recommend these standards to the Ministry of Corporate Affairs. The Ministry of Corporate Affairs has to spell out the accounting standards applicable for companies in India. As on date the Ministry of Corporate Affairs has notified 35 Indian Accounting Standards (Ind AS) and the date of implementation of Ind AS is expected from 1st April 2013.
Conclusion: From the above discussion one can observe the long trail in the development of Accounting Standards, which form the backbone of the financial reporting practices. Though each country follows their own set of standards, every standard aims at portraying true and fair view of the financial statements. But in the era of cross border trade it is always better to have a single set of standards. IFRS is a conscious move in this regard and let's hope every country converge with IFRS as early as possible.