Standards of Accounting: History and Background

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Introduction

International accounting standards refer to internationally accepted guidelines that set a certain standard of practice on all accounting-related matters. The global body that is responsible for selecting and settings this accounting standard is referred to as International Accounting Standards Board (IASB). IASB is a financial body that is given the prerogative to determine which standards should be adopted and applied globally in the field of accounting (ICAEW.com, 2010). IASB is a recently enacted organization formed in 2001 that replaced its predecessor which previously undertook its current functions.

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IASB was formed to serve two important functions as far as accounting standards are concerned; one, is the development of a standardized approach of preparation of financial statements, which is referred to as the International Financial Reporting Standards (IFRS) (ICAEW.com, 2010). And two, promote and further the applications of these standards by strengthening relevant stakeholders in the field of accounting (ICAEW.com, 2010). Throughout this research paper, our focus will be on these IFRS guidelines that have been in place since 1973 when the then International Accounting Standards body was responsible for its development. Collectively these guidelines that outline the accounting standards for all global players in the field of accounting are referred to as IFRS.

Objective of IASB

IASB has four core objectives as summarized in the mission and vision of the organization which is based on the IFRS guidelines.

Top on the list is the development of “a single set of high quality, understandable and enforceable global accounting standards” that incorporates elements of transparency and other accounting ethics that are necessary for accurate financial statements that key decision-makers can rely on (IFRS.org, 2010). The other objective is to advocate for use of these standards in the field of accounting through capacity building of stakeholders (IFRS.org, 2010).

The third objective is to explore the flexibility of these accounting standards because of the small and medium-sized business establishments that might be challenged by the full extent of the present standards (IFRS.org, 2010). Finally, IASB has the objective of achieving a convergence of national accounting standards for various countries in accordance with IFRS guidelines (IFRS.org, 2010).

History of International Accounting Standards

The current IFRS guidelines that are widely used internationally in most Companies owe their development and subsequent enactment to what was then described as an International Standard Group in 1966 (Lord, 1989). At that time three regional bodies of accounting collaborated together to develop the first framework that would guide future efforts with similar vision of establishing one similar accounting standard for all the players in the region.

This first group was comprised of Chartered Accountants of England and Wales (ICAEW), Canadian Institute of Chartered Accountants (CICA) and the American Institute of Certified Public Accountants (AICPA) (Lord, 1989). One year later this early congregation of accounting bodies gave rise to Accountants International Study Group (AISG); it is this AISG that spearheaded the earliest efforts of reforming and standardizing accounting principles through its sister publication that started agitating for implementation of common international accounting standards (Lord, 1989).

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Indeed, these early efforts paid off six years later when International Accounting Standards Committee (IASC) was established with the sole purpose of developing international accounting standards (Lord, 1989; ICAEW.com, 2010). The IASC operated on the vision of enabling development of international accounting standards that must “be capable of rapid acceptance and implementation worldwide”, and for a long time IASC worked towards realization of this goal as the only accounting body of international relevance (Lord, 1989). During this duration, IASC released a total of 41 volumes of International Accounting Standards which it dubbed as IAS 1-IAS 41(Lord, 1989; ICAEW.com, 2010). That was until International Accounting Standards Board (IASB) was formed 27 years later in 2001 (Lord, 1989; ICAEW.com, 2010).

In 1997 however, the Standards Interpretations Committee (SIC) was formed to address and provide a common guideline to specific contentious accounting principles that had not yet been clarified by the then-existing international accounting standards. Its major mandate was to tame unethical accounting practices that would have continued unabated without the provision of common accounting standards in these areas (Lord, 1989; ICAEW.com, 2010). With most contentious issues having been clarified and further international standards in accounting being developed in the field of accounting, the ultimate realization of a single framework of accounting standards worldwide was inching closer by the day.

This realization became even more apparent in 2000 when the US Securities and Exchange Commission (SEC) made it clear in a concept release that they were willing to accept and support by any means adoption of any set of accounting standards that can be applied uniformly in all stock exchanges internationally (Lord, 1989; ICAEW.com, 2010). This appears to be the cue that ICAEW was waiting as the green light to accelerate the achievement of such a common standard of international accounting, which is described to be long overdue. In a press statement ICAEW stated, “We have long looked forward to the time when financial statements prepared by international accounting standards are recognized by stock exchanges throughout the world” (ICAEW.com, 2010).

With this statement the attainment of a common accounting standard applied globally become crystal clear following the flurry of activities that IASB was to undertake one year later in 2001; less than one year after this announcement. In the same year that ICAEW got the green light from SEC, it issued a policy statement that endorsed and outlined the enforcement protocol of International Accounting Standards throughout Europe contained in TECH 23/00 (Lord, 1989; ICAEW.com, 2010).

In 2001, IASC was restructured giving rise to IASB which adopted all the existing IASs that were already in force and dubbed its new international standards formulations as International Financial Reporting Standards series (IFRS), and here we are (Lord, 1989; ICAEW.com, 2010). Recent developments after enactment o IFRS in 2001 has taken place includes approval and adoption of IFRS guidelines by the European Council of Ministers throughout Europe which was an important milestone to IASB (Lord, 1989; ICAEW.com, 2010). In 2003, IASB published its first IFRS series; IFRS 1: First-time Adoption of International Financial Reporting Standards (Lord, 1989; ICAEW.com, 2010).

In 2005, the United Kingdom made it compulsory for all Companies to issue financial statements in accordance with the IFRS published regulations.

International Financial Reporting Standards

The need to have in place common standards of accounting such as IFRS that can be relied on in preparation of financial statements is because of the important role that such an effort would achieve. Generally, the importance of a financial statement cannot be overemphasized since it is the tool that summarizes the overall performance of an organization. This is because a financial statement provides vital information on the organization’s overall financial performance, its financial position and rate of cash flow which are very important indicators in accounting (IFRS.org, 2010).

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More specifically financial statements highlight the asset value of an organization, its liabilities, its rate of income and expenses (IFRS.org, 2010). For these reasons the importance of IFRS as an international benchmark of accounting standards are extremely important and it is why they have been referred to as “principle-based” standards because among other things they demand high level of integrity from accounting professionals plus the fact they require ethical principles (IFRS.org, 2010).

The structure of IFRS is comprised of five core areas that cover all the areas of every related accounting standard; they include International Accounting Standards (IAS), Standing Interpretation Committee (SIC), a subset of IFRS, interpretations of IFRIS and Framework of Preparation and Presentation Financial Statement (IFRS.org, 2010).

The IFRS guidelines incorporate two major types of accounting models; the Financial Capital Maintenance in nominal units which relies on the concept of historical cost accounting to be used in times of reduced inflation and the Financial Capital Maintenance in Units of constant purchasing power that utilizes Constant Item Purchasing Power Accounting (CIPPA) (IFRS.org, 2010). In order to fully appreciate the scope of IFRS, let us briefly review the major financial documents that organizations are required to prepare to be considered IFRS compliant.

Statements of Financial Position

In accounting there are four types of documents that are referred to as financial statements; they include balance sheet, income statement, statement of cash flow and statement of retained earnings (Stitle, 2004). According to IFRS, financial statements are more or less the same as those outlined above but with one additional statement; they specifically include a statement of financial position, statement of income, statement of changes in equity (SOCE), cash flow statement and a summary of accounting policies that the organization must adhere to (Stitle, 2004).

Statement of financial position is what is also commonly referred to as a balance sheet; it is a financial statement that lists all the liabilities and assets of a particular business establishment at a given moment in time (Stitle, 2004). It provides an important analysis of the Company and is described as a “snapshot of a Company financial position” because it keeps changing with each transaction that takes place (Stitle, 2004).

A statement of income is the other type of financial statement listed by IFRS which is a summary of Company’s income, expenses and resulting gross and net profit for a given duration of time (Stitle, 2004). For this reason this particular financial statement is usually referred to as a Profit and Loss statement and is very reliable in determining the profitability of a Company.

The IFRS requires SOCE to incorporate three major elements; total comprehensive income, reconciliation of closing operating amounts with that at the beginning, and description of changes in income when retrospective changes are made if any (Stitle, 2004). For SMEs establishment’s additional components to be included in the SOCE are owner’s investment, dividends, transactions on shares with treasury, and any withdrawal of capital by the owner (IFRS.org, 2010).

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Statement of cash flow is meant to provide a detailed summary of a Company’s cash flow patterns and activities for purposes of identifying a Company operating cash investment portfolio and financing activities (Stitle, 2004). Because a cash flow statement is very effective in capturing incoming and outgoing cash in a business it is one of the most reliable financial tools for assessing the short-term stability of a Company since it flags down any constraints in liquidity assets which is one of the indicators of a struggling business.

Finally, IFRS requires Companies to prepare a summary of financial policies that it relies on upon in their preparation of these financial statements as well as in their daily transactional activities. In preparation of all these financial statements, IFRS emphasizes five core values to be considered by accountants that mirror the integrity of accounting standards that are contained in the IFRS series; they include; reliability, relevance, comparability, understandability and fair representation (Stitle, 2004).

Integration of Ethical Standards in IFRS

An ethical program for IFRS should be designed in such a way that makes it compulsory for acceptable accounting practices to be integrated within the Company policies through raising and promoting ethical issues among accounting professionals by way of instilling core desirable values which are comprehensively listed in IASB values. An effective ethics program must have six important components; a code of ethics, communication channel, training program, reporting mechanism, investigation procedures and an audit system (Brooks and Dunn, 2010).

There are two major ways that an ethics program can be designed in this case; either as a fully integrated system that is exhaustively covered in the IFRS requirements or as a subcomponent of IFRS guidelines which can be enforced separately. I would suggest the first approach where ethical values are integrated with the entire IFRS guideline; the advantage of this approach would make it easier to enforce since it will make it impossible for any Company to develop IFRS-compliant financial statements without observing such ethical standards.

The integrated ethical program must take several orientations which should preferably be structured as a hybrid of compliant based, integrity-values based and satisfaction of external stakeholders based (Dunmon, 2004). The focus of an ethical program should emphasize the approach taken by Companies in preparation of the five financial statements that are central to the implementation of IFRS guidelines.

This is because as mentioned above a well-structured ethical program that is perfectly integrated into these financial statements will ensure that Company gets to adhere to accepted best practices in financial statements preparations as well as in its business operations. The goal of an ethical program in this case should be to ensure that acceptable standards of financial preparation are mutually exclusive with the core ethical values desired by such a program.

The integral components of the desirable ethical program should include six major considerations; ethic codes, communication structures, ethics committees, ethics officers, education programs, and an element of enforcement such as disciplinary procedures (Brooks and Dunn, 2010). The IFRS code of ethics can be designed in three different ways i.e. as a statement of standards and rules that Companies should adhere to, or as a statement of best business practices ideal Companies should strive to achieve or as a statement of corporate vision that should be integrated into any business establishment vision or mission statement. If I was to integrate an ethic program in IFRS I would opt to have it structured as a separate statement of regulations that Companies should observe in every step of financial statement preparation.

Finally, I will put in place an ethics committee to specifically address and strengthen the ethical accounting issues that are bound to come up. The role of the ethics committee will be to spearhead the process of developing and redesigning ethical codes in line with emerging trends and accounting standards that will keep changing with each production of an IFRS series. The ethics committee will also have the important role of ensuring that ethical issues are compatible with best practices in accounting standards and provide the best approach to their enforcement.

References

Brooks, J. & Dunn, K. (2008). Business and Professional Ethics for Directors, Executives & Accountants. Oklahama: South-Western Publishing.

Dunmon, C. (2004). Corporate Ethics Programs. Web.

ICAEW. (2010). Knowledge guide to International accounting standards. Web.

IFRS.org. (2010). Standards (IFRSs). Web.

Lord, B. (1989). The story of international accounting standards. Accountancy magazine, 87(995): 34-39.

Stitle, J. (2004). The reformation of European corporate reporting: Towards a model of convergence or confusion? European Business Review, 16(2): 145-157.

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