International Accounting Standards approved how various accounting transactions were to be recorded, presented and reported in an organization's financial statements. The intent was to reduce differences in the accounting for transactions and financial statement presentation around the world.
International Accounting Standards (IAS) were the first international accounting standards that were issued by the International Accounting Standards Committee (IASC), formed in 1973. The goal then, as it remains today, was to make it easier to compare businesses around the world, increase transparency and trust in financial reporting and foster global trade and investment.
PURPOSE OF INTERNATIONAL ACCOUNTING STANDARD
The purpose of accounting is to communicate the organization’s financial position to company managers, investors, banks, and the government. Accounting standards provide a system of rules and principles that prescribe the format and content of financial statements. Through this consistent reporting, a firm’s managers and investors can assess the financial health of the firm.
1. TO PREVENT MATERIAL MANIPULATION OR ERRORS IN FINANCIAL STATEMENT:
Many important economic decisions are regularly made on the basis of financial statements. However,financial information is open to manipulation or errors. In order to avoid manipulation of figures in the financial accounts, there needs to be a consistent way of deciding which elements are recorgnised and measured, and how information is presented in the financial statements.
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2. TO ENSURE THAT ITEMS ARE TREATED IN A CONSISTENT MANNER OR AN EXPLANATION IS GIVEN AS TO WHY NOT:
Accounting is not a subject where the results are always the same whoever does it For example, in mathematics, 2 plus 2 must always equal 4; but in accounts a figure for (say) profit or loss may vary sometimes vastly, depending upon the subjective judgement of the person doing the calculations. It is important that explanations are given to help the user of financial statements make correct decisions.
3. TO HELP IN GLOBAL HARMONIZATION:
The process of global harmonization leads to global accounting standards. Global standards will help global, trade and global economic growth as all users will be able to use the same standards to analyse the financial statements of any company.
BENEFITS OF INTERNATIONAL ACCOUNTING STANDARDS
Different countries and regions around the world boast very different cultures and norms, which manifest themselves in the prevailing business culture in the country. Some countries, for example, make bribery a rule of thumb in business, while others view it as highly taboo. International accounting standards set a unified code of accounting ethics to be followed across cultures.
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One major benefit of international standards is that they consider input from professionals and legal authorities around the world. This can create a set of ethical guidelines that do not favor one culture over another, as can be the case when a foreign company adheres to its own domestic ethical values.
2. IMPROVED FLOW OF CAPITAL
International Financial Reporting Standards, or IFRS, facilitates the convergence and transparency of accounting practices. This boosts the flow of capital across the international markets. Investors and other stakeholders find it more convenient to compare their business performance with other international companies. This makes it easier and cheaper for them to raise business capital from investors across the globe.
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3. GLOBALIZED ORIENTATION
Using IFRS frees a business from the restrictive scope of national-level accounting standards. Financial reports become automatically acceptable in IFRS-compliant countries, and companies don't need to prepare alternative sets of financial statements when pursuing business interests in these countries. This reduces a business's costs of preparing financial statements destined for international audiences.
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4. GENERALIZED STANDARD-SETTING
IFRS stipulations are flexible to both expected and unexpected changes in the global business environment because they are based on broad principles. The generalized stipulations are designed to be applicable and accommodating to varying jurisdictional circumstances and traditions, with minimal interventions of the IASB. For example, the IASB does not recommend any specific formats for preparing financial statements. This gives a business the discretion of choosing the presentation format that best suits it and users of its financial reports.
5. ENHANCED FINANCIAL REPORTING
The use of IFRS enhances the quality of financial reports because it leaves little room for undermining the objectives of the set standards. This is unlike country-specific accounting rules that are susceptible to circumventions. Quality financial reports boost investor confidence in a business.