Accounting Principles Board and Regulatory Systems

Introduction

As with every credible language, Accountancy also has its own rules and syntax which comprises the principles on which the system is based, known as the Generally Accepted Principles (GAAP), International Accounting Standards, and US GAAP, etc. forming the theoretical base of Accountancy, and the Double Entry bookkeeping for recording the transactions providing the Practical Base of the system (ICFAI Center for Management Research ICMR, 2004).

In today’s modern world, no business can afford to remain secretive because various parties such as creditors, employees, taxation authorities, investors, public and government, etc, are interested in knowing about the business affairs (C. Horngren’s et. al.., 2000). These kinds of basics which have ample acceptance give consistency and creditability to the financial statements that are prepared by the accountants. The need for ‘Generally Accepted Accounting Principles (GAAP)’ arises for two reasons:

  • First, to be logical and consistent in recording the transactions, and
  • Second, to conform to the established practices and procedures

There are a variety of accounting policies that are being practiced even about the same subject. Because the task of construing financial statements has become a complex affair as a result of the adoption of various policies in numerous areas of accounting, in devising GAAP the three conventions of significance, impartiality, and viability are followed (Discussion on empirical research on accounting choice, 2001). Accounting policies consider all the various principles, bases, conventions, regulations, and procedures adopted by management in organizing and presenting their financial statements (Ormiston, 2004).

Accounting – Background

The primary motive of accounting was to ascertain the result of the business activities, be it whether profit gained or loss incurred, during a financial year and to portray the financial position of the business entity as on a particular date. However, with the lapse of time, the expectations from accounting have increased drastically (Nobles, 2009). Compared with the published APB16 and APB17 period in 1970, goodwill set a large proportion in a merger, so the goodwill will create more negative impaction to the net income. That means every year the company must write off large amount goodwill and will affect the income statement.

Currently, accounting is obliged to adhere strictly to the requirements of taxation authorities, investors, regulations imposed by the government, management, and also the owners. This has resulted in the widened scope of accounting and the same may be elaborated as under:

“Accounting is the art of recording, classifying and summarising, in a significant manner, and in terms of money transactions and events which are, in part at least, of a financial character, and interpreting the results thereof (C. Mohan Juneja, 1982).”

Simply put, science establishes the connection of cause and effect while art is the relevance of knowledge encompassing certain accepted theories, doctrines, and rules. Since accounting does not establish a cause and effect relationship it only provides us with the procedure by which objectives of accounting can be achieved, therefore accounting is an art and not a science. Accounting, simply explained, is an art of recording financial dealings in relevant books by categorizing them in desired categories and briefing the information for presentation in a succinct manner to all people who may need it (C. Mohan Juneja, 1982).

The structure of reporting should be developed in such a way that at a successively higher level of the organizational hierarchy, the management reports become broader in terms of scope but simultaneously more summarized in nature.

Likewise, the reports that are prepared for the lower level of the organizational hierarchy are supposed to be fairly detailed and needless to say, limited in scope. For the middle-level management, the management reports that are prepared are to be more condensed and broader in scope. In a nutshell, there has to be “pecking-order” in the structure of reporting (The ICFAI University, 2004).

The procedures and norms that are used in accounting may also affect the future financial decisions taken by companies in the prior accounting period including their results. Rules and principles of accounting are essentially planned in such a way that they endow with certain standardized frameworks that further assist in the evaluation of the financial position of an organization or a government. That is why there is, in most cases, always a difference from one country to another in the accounting practices followed by the respective nations.

To ascertain the current position of a business, the most important instruments are the Financial Statements of the firm. They are primarily the Income Statement and the Position Statement which are popular as “Trading and Profit & Loss Account” and the “Balance Sheet” respectively.

The Balance Sheet shows the financial status of a business at a given point in time. That is the reason, the heading of the Balance Sheet reads as “Balance Sheet of Xxx Company as on 31st March, 20xx.” The balance sheet shows the number of funds the owner has in the business. To determine this amount, the assets owned are listed and a value is placed on them. Liabilities and their values also are listed. “The difference between assets and liabilities is equal to the net worth, or the owner’s equity in the business (Klinefelter, 2000).”

The income statement on the contrary depicts the performance of the entry over a specific period and therefore it is given a heading as “Income Statement of Xxx Company for the year ended 31st March, 20xx.”

The fundamental purposes of financial reporting are:

  • Giving the shareholders and other users of financial statements, information which eventually becomes the basis for implementing decisions and actions by the appropriate people,
  • Replicate the financial progress and present scenario of the business,
  • Aid in the framing of policies and procedures for the efficient functioning of the business,
  • facilitate the management to exonerate their obligations and stewardship functions successfully (ICFAI Center for Management Research ICMR, 2004)

A financial statement is a compilation of data, which is logically and consistently organized according to accounting principles. Its purpose is to communicate a perceptive of some financial issues of a business entity (Managing Stakeholders, 2002). Financial statements, as already stated above, portray the organization’s position at a moment in time (balance sheet) (Klinefelter, 2000), or may reveal a series of activities over a given period (income statement) (ICFAI Center for Management Research ICMR, 2004).

Financial Reporting

Experts however feel that in this process of summarization, the true meaning and content of vital financial information may be diluted or lost. Because of the lack of well laid out procedures, rules, and regulations for financial reporting, experts felt that the accompanying graphs, pie charts, etc, tend to overplay the accomplishment of the company for the year in respect of which the annual report is prepared and downplay things which have not gone on very well during that period. This has paved way for Financial Accounting Standard Board (FASB) to issue a series of statements on financial reporting concepts.

In the view of FASB, there are two core aims of financial reporting and the same are stated below:

  • Information about venture earnings and its various mechanisms that may be measured by accrual accounting offers an enhanced clue of enterprise performance rather than information about receipts and payments related to current cash.
  • It is also essential to obtain information through financial reporting about a business entities’ economic resources, commitments, and owners’ equity, liquidity, and the stewardship of the management along with management’s explanations and interpretations of information given therein (Strada Capital Corporation, 1999).”

FASB has issued several statements for improving the information provided in financial reporting. Taken independently each recent disclosure requirement provides some supplementary useful information to the users of financial statements. However, needless to say, financial statements, cross-reference, supplementary statements, etc. obscure the entire process of financial reporting.

Several users of financial statements argue that a more concise presentation may result in ineffectual communication of financial information. Précis reporting is something less than the full text of current annual reports to shareholders but something more than the brief presentation of financial highlights and summary indicators that generally appear in the forepart of annual reports. However, there is a need to understand clearly that summary reporting would not do away with the statements that are to be incorporated in the filing or annual report. The summary reporting would just serve as primary data for the normal or non-financial user of financial statements.

The impact of globalization has to lead to many new developments in the field of finance and global stock markets. One such interesting development that has recently taken place is the convergence of the Generally Accepted Accounting Principles (GAAP) and the International Financial Reporting Standards (IFRS) (Measuring convergence of National Accounting Standards with International Financial Reporting Standards, 2005, vol: 29) (The Rationale and impact of the adoption of IFRS: The case of the United Arab Emirates, 2006). This convergence is viewed by many as a measure to maintain sound financial health and stability globally in most of the capital markets (“Are we approaching a universal accounting language in Five Years?”, 2004).

Advantages of financial Reporting

Let us consider the entry of equipment leasing.

If a company leases out some property, then according to the FASB requirements, such leases can be structured for the “off-balance-sheet” treatment of accounting (Strada Capital Corporation, 1999).

Regulatory Framework

In today’s modern world, no business can afford to remain secretive because various parties such as creditors, employees, taxation authorities, investors, public and government, etc, are interested in knowing about the business affairs (C. Horngren’s et. al.., 2000).

Affairs of the business can be studied, mainly, by consulting the final accounts and the balance sheet of the particular business entity.

Because of the importance of these statements it became necessary for the accountants to develop some principles, concepts, and conventions which may be regarded as fundamentals of accounting.

Such fundamentals having wide acceptance give reliability and creditability to the financial statements prepared by the accountants. The need for ‘Generally Accepted Accounting Principles (GAAP)’ arises for two reasons:

  • First, to be logical and consistent in recording the transactions, and
  • Second, to conform to the established practices and procedures

Difference from one country to another

To regulate the accounting information, every organization would have to institute certain accounting policies based on GAAP (The boundaries of financial reporting and how to extend them, 1999).

Accounting policies consider all the numerous guidelines, bases, conventions, regulations, and policies as adopted by the management of the business entity in preparing their financial statements (Ormiston, 2004).

There are a variety of accounting policies that are being practiced even about the same subject. Because the task of construing financial statements has become a complex affair as a result of the adoption of various policies in numerous areas of accounting, in devising GAAP the three conventions of significance, impartiality, and viability are followed.

Corporate investment and financing decisions are circumscribed by a governmental regulatory framework that seeks to

  • Define avenues of investment available to business enterprises in different categories, ownership-wise and size-wise;
  • Induce investments along certain lines by providing incentives, concessions, and reliefs; and
  • Specify the procedure for raising funds from the financial markets.

Conclusion

Though it is a well known and widely accepted fact that countries apart and outside the developed world have led the path for adoption of IFRS, there is not much information available about how to implement the new set of accounting standards into regulatory systems which are completely unaware of the new system (The true nature of the World Bank, 2005, Vol: 15)).

Financial statements and reports which are prepared by the IFRS though are similar to the ones prepared by GAAP, but with a little higher value addition. The value addition that is spoken about here is in terms of the time that is saved by investors to reconcile financial information as they usually do by comparing different companies’ stocks from different places of the world.

Reference List

Annisette, M. 2005, Vol: 15. The true nature of the World Bank. Critical Perspectives on Accounting, pp. 303 – 323.

Fontes, A., Rodrigues, L. L., and Craig, R.,. 2005, vol: 29. Measuring convergence of National Accounting Standards with International Financial Reporting Standards., Accounting Forum, pp. 415-436.

Horngren’s. C. et. al.. 2000. Accounting 4th edition. New Jersey : Prentice Hall.

ICFAI Center for Management Research ICMR. 2004. Financial Accounting & Financial Statement Analysis. Hyderabad : ICFAI Center for Management Research.

J, Francis. 2001. Discussion on empirical research on accounting choice. Journal of Accounting & Economics, 31, Vol. 08, pp. pp. 309-319.

Jacob, R. A. and Madu, C. N. 2004. “Are we approaching a universal accounting language in Five Years?”. Foresight, Vol: 6, pp. 353 – 356.

Klinefelter, Larry N. Langemeier and Danny. 2000. Balance Sheet – A Financial Management Tool. Texas : Agricultural Communications, The Texas A&M University System.

Lucas, Helen Irvine and Natalie. 2006. The Rationale and impact of the adoption of IFRS: The case of the United Arab Emirates. Maui Hawaii : University of Wollongong, 2006. Asia-Pacific Conference on International Accounting Issues. pp. 3-18.

Mohan, Juneja C., R.C. Chawla & K.K. Saxena. 1982. Double Entry Book-Keeping. Ludhiana: New Delhi : Kalyani Publishers.

Nobles, D. Alexander & C. 2009. Financial Accounting – An International Introduction. Harlow : Pearson Education.

Ormiston, L. Fraser & A. 2004. Understanding Financial Statements. New Jersey : Pearson – Prentice Hall.

p., Lev B. and Zarowin. 1999. The boundaries of financial reporting and how to extend them. Journal of Accounting Research, 37 , pp. 353-385.

Slovensky, Dr. 2002. Managing Stakeholders. Healthcare Management Review, pp. 1-2.

Strada Capital Corporation. 1999. Financial Reporting Advantages. Strada Capital Corporation. Strada Capital Corporation.

The ICFAI University. 2004. Management Accounting & Control Systems (Ref. No. MA&CS – 04200406). Hyderabad : The ICFAI University.

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