International Accounting Standard

Examples of International Accounting Standard in the following topics:

• Defining the Statement of Cash Flows

  • A statement of cash flows is a financial statement showing how changes in balance sheet accounts and income affect cash & cash equivalents.
  • In financial accounting, a cash flow statement, also known as statement of cash flows or funds flow statement, is a financial statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents, and breaks the analysis down to operating, investing, and financing activities.
  • International Accounting Standard 7 (IAS 7), is the International Accounting Standard that deals with cash flow statements.
  • Improve the comparability of different firms' operating performance by eliminating the effects of different accounting methods; and
  • The cash flow statement has been adopted as a standard financial statement, because it eliminates allocations, which might be derived from different accounting methods, such as various timeframes for depreciating fixed assets.

• Introduction to IFRS

  • Many countries use or are moving towards using the International Financial Reporting Standards (IFRS), which were established and maintained by the International Accounting Standards Board (IASB).
  • They are progressively replacing the many different national accounting standards.
  • They are occasionally called by the original name of International Accounting Standards (IAS).
  • The IAS were issued between 1973 and 2001 by the Board of the International Accounting Standards Committee (IASC).
  • On April 1, 2001, the new IASB took over the responsibility for setting International Accounting Standards from the IASC.

• Objectives of Accounting

  • With these objectives in mind, financial accountants produce financial statements based on the accounting standards in a given jurisdiction.
  • These standards may be the generally accepted accounting principles of a respective country, which are typically issued by a national standard setter, or International Financial Reporting Standards, which are issued by the International Accounting Standards Board.
  • Generally Accepted Accounting Principles refer to the standard framework of guidelines for financial accounting used in any given jurisdiction; generally known as accounting standards or Standard accounting practice.
  • International Financial Reporting Standards (IFRS) are designed as a common global language for business affairs so that company accounts are understandable and comparable across international boundaries.
  • Describe the objectives of accounting, distinguishing between Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS)

• Expense Recognition

  • Expense recognition is an essential element in accounting because it helps define how profitable a business is in an accounting period.
  • In terms of the accounting equation, expenses reduce owners' equity.
  • The International Accounting Standards Board defines expenses as follows: "Expenses are decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrences of liabilities that result in decreases in equity, other than those relating to distributions to equity participants. "
  • Therefore, the accounting standards institute has established clear guidelines to minimize any subjective judgment regarding when to recognize expenses.
  • Generally, cash basis accounting is reserved for tax accounting, not for financial reports.

• Defining Liabilities

  • Probably the most accepted accounting definition of a liability is the one used by the International Accounting Standards Board (IASB).
  • The following is a quotation from the International Financial Reporting Standards (IFRS) Framework: "A liability is a present obligation of the enterprise arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits. "
  • Liabilities can also include deferred revenue accounts for monies received that may not be earned until a future accounting period.
  • An example of a deferred revenue account is an annual software license fee received on January 1 and earned over the course of a year.
  • For the current fiscal year, the company will earn 5/12 of the fee and the remaining amount (7/12) stays in a deferred revenue account until it is earned in the next accounting period.

• Financial Accounting

  • Financial accountancy is governed by both local and international accounting standards.
  • Note that financial accounting reports must be prepared in accordance with national and international accounting standards.
  • In the United States the Financial Accounting Standards Board (FASB) has been the designated independent entity for established accounting reporting standards since 1973.
  • Since so many organizations are global in scope, a relatively new entity, the International Accounting Standards Board (IASB) has risen to address the issue.
  • The reason for this is that there may be national standards for generally accepted standards that are, in some ways, unique to your country.

• Differences Between GAAP and IFRS and Implications of Potential Convergence

  • The convergence of accounting standards refers to the goal of establishing a single set of accounting standards that will be used internationally, and in particular the effort to reduce the differences between the US Generally Accepted Accounting Principles (US GAAP), and the International Financial Reporting Standards (IFRS).
  • Convergence in some form has been taking place for several decades, and efforts today include projects that aim to reduce the differences between accounting standards.
  • The goal of and various proposed steps to achieve convergence of accounting standards has been criticized by various individuals and organizations.
  • The growing acceptance of International Financial Reporting Standards (IFRS) as a basis for U.S.financial reporting represents a fundamental change for the U.S. accounting profession.
  • State the difference between Generally Accepted Accounting Principles and International Financial Reporting Standards

• Disadvantages of LIFO

  • LIFO is facing pressures from both the International Reporting Standards Board in cooperation with the SEC and the U.S.
  • On November 15, 2007, the Securities and Exchange Commission (SEC) exempted foreign firms from including reconciliation from International Financial Reporting Standards (IFRS) to U.S.
  • Generally Accepted Accounting Principles (U.S.
  • Foreign public firms are now permitted to file using the International Financial Reporting Standards (IFRS) without reconciliation to U.S.
  • On June, 18, 2008, the SEC issued a press release stating that the world’s securities regulators are uniting to increase their oversight of international accounting standards.

• Consumers of Accounting Information

  • Early accounts served mainly to assist the memory of the businessperson, and the audience for the account was the proprietor or record keeper alone.
  • This development resulted in a split of accounting systems for internal (i.e., management accounting) and external (i.e., financial accounting) purposes and, subsequently, also in accounting and disclosure regulations and a growing need for independent attestation of external accounts by auditors.
  • Because these users have different needs, the presentation of financial accounts is very structured and subject to many more rules than management accounting.
  • The body of rules that governs financial accounting in a given jurisdiction is the Generally Accepted Accounting Principles, or GAAP.
  • Other rules include International Financial Reporting Standards, or IFRS, or U.S.

• Advantages of LIFO

  • Using LIFO accounting for inventory, a company generally pays lower taxes in periods of inflation.
  • Since the 1970s, some U.S. companies shifted towards the use of LIFO, which reduces their income taxes in times of inflation, but with International Financial Reporting Standards banning the use of LIFO, more companies have gone back to FIFO.
  • Since the 1970s, some U.S. companies shifted towards the use of LIFO, which reduces their income taxes in times of inflation, but with International Financial Reporting Standards banning the use of LIFO, more companies have gone back to FIFO.
  • Which method an accountant selects can have a significant effect on net income and book value and, in turn, on taxation.
  • Due to LIFO's potential to skew inventory value, UK GAAP and IAS have effectively banned LIFO inventory accounting.