Accounting standards are a common set of principles, standards and procedures that define the basis of financial accounting policies and practices in an effort to improve the transparency of financial reporting.
Generally Accepted Accounting Principles (GAAP) are the commonly accepted accounting standards in the U.S.
Developed by the Financial Accounting Standards Board (FASB) to standardize financial reporting, GAAP created guidelines for item recognition, measurement, presentation, and disclosure. and serves as a uniform set of rules/formats to allow for analysis by investors, creditors, stakeholders, and any other interested parties outside the company.
International Financial Reporting Standards (IFRS) are the commonly accepted accounting standards outside the U.S.
Developed by the International Accounting Standards Board (IASB), these standards were set in place to create a common accounting language and make it so that financial statements are consistent, transparent, and comparable around the world. IFRS outline how companies around the world maintain and report their accounts, and how they define transactions and other events with financial impact.
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U.S. companies that list overseas are still permitted to use GAAP, and foreign companies listed on U.S. exchanges are permitted to use IFRS. |
Why is it important to have commonly accepted accounting standards?
Bringing uniformity and objectivity to accounting improves the credibility and stability of corporate financial reporting, which is necessary for capital markets to function optimally.
Following standardized rules allows for companies to be compared against one another, results to be verified by reputable auditors, and investors to be assured that the reports are reflective of a company's true standing. Accounting principles were established and adapted largely to protect investors from misleading reporting.
In the U.S., there are three organizations involved with the development of accounting standards (GAAP):
Securities and Exchange Commission (SEC)
The SEC is an independent federal agency that was formed in 1934, after the 1929 stock market crash had called for increased government regulation of businesses and financial institutions. Most publicly-traded companies (those that issue stock to the public or are listed on a stock exchange) are required to file audited financial statements with the SEC. While the SEC relies on FASB to develop accounting standards, it has broad powers to govern the accounting practices and standards of the companies that fall within its jurisdiction. In addition, the SEC also administers and enforces various securities laws and brings civil enforcement actions against firms and individuals that violate those laws.
American Institute of Certified Public Accountants (AICPA)
The AICPA is the non-profit professional organization of practicing Certified Public Accountants (CPAs) in the U.S., and one of its main roles is to create and grade the Certified Public Accountant (CPA) examinations. The AICPA was the first organization to create the original financial accounting standards under GAAP before handing over the role to the Financial Accounting Standards Board (FASB).
Financial Accounting Standards Board (FASB)
FASB is an independent, private-sector, and not-for-profit organization that was formed in 1973 to establish financial accounting and reporting standards for all U.S. companies and not-for-profit organizations that follow GAAP. The SEC recognizes FASB has the designated accounting standard setter for public companies, and it is also recognized by state accounting boards, the AICPA, other organizations in the field.
Other regulators:
Public Company Accounting Oversight Board (PCAOB) – a nonprofit established by Congress to oversee public companies’ financial audits
Financial Industry Regulatory Authority (FINRA) – the largest independent regulator (i.e., a private corporation acting as a self-regulatory organization) of U.S. securities firms doing business with the public
Governmental Accounting Standards Board (GASB) – an independent, private-sector organization that establishes accounting and financial reporting standards for U.S. state and local governments that follow GAAP
Municipal Securities Rulemaking Board (MSRB) – another self-regulatory organization, this one created under the Securities Acts Amendments of 1975 to oversee the banks, brokers, and dealers that issue bonds and other debt securities on behalf of state and local governments and their municipal entities (such as schools and public libraries)
U.S. Commodity Futures Trading Commission (CFTC) – an independent agency with authority to regulate U.S. commodity futures and option markets
Financial Accounting Foundation (FAF) – an independent, private-sector organization that oversees both the Governmental Accounting Standards Board (GASB), and the Financial Accounting Standards Board
Globally, there is one primary organization that oversees international accounting standards:
International Accounting Standards Board (IASB)
Part of the not-for-profit, international organization International Financial Reporting Standards Foundation, IASB sets the global accounting standards known as International Financial Reporting Standards (IFRS). Meant to bring transparency, accountability, and efficiency to international financial markets, these standards are followed by companies around the world are now required in more than 140 jurisdictions.
Other regulators:
Accounting Standards Advisory Forum (ASAF)
Group of Latin American Standard Setters (GLASS)
European Financial Reporting Advisory Group (EFRAG)
Accounting Standards Board of Japan (ASBJ)
Financial Reporting and Assurance Standards Canada (FRASC)
