The Role and Purpose of International Accounting Standards
International Accounting Standards (IAS) refers to a certain level of quality that should be adhered to while drawing financial statements.
The older set of standards, issued by the International Accounting Standards Committee (IASC), was formulated in 1973 through a consensus of the professional accountancy bodies from Australia, Canada, France, Germany, Japan, Mexico, Netherlands, United Kingdom, Ireland and the United States of America.
The IASC passed a substantial number of standards, interpretations and other guidelines which were adopted by many companies in coming up with national accounting standards.
The organisational structure of the IASC was changed in 2001, leading to the formation of the International Accounting Standards Board (IASB). The changes came into play on 1st April in the same year
In a memorandum of understanding between IASB and the International Federation of Accountants, the objectives of the board include coming up with financial reporting standards with an aim to advance financial reporting and monitor the strict implementation of these standards. The setting of these standards will aid in decision-making by investors and other players in the global capital market.
International Accounting Standards (IAS) are usually agreed upon by the IASB and are applied by member countries, while International Financial Reporting Standards (IFRS) are generally designed to be the global standard, and do not specifically differentiate between countries. Some member countries, such as the United Kingdom and Australia, use a combined reporting framework of both IAS and IFRS.
Role of International Accounting Standards
The role of IAS/IFRS is to provide a framework for financial reporting that is transparent, comparable, and reliable. This means that the financial statements of companies that use IAS/IFRS should be understandable and easy to compare, regardless of where the company is located or what industry it operates in.
Key Features of IAS
Here are some of the key features of IAS/IFRS:
- They are principles-based, rather than rules-based. This means that they focus on the underlying principles of accounting, rather than on specific rules.
- They are comprehensive, covering all aspects of financial reporting.
- They are flexible, allowing companies to adapt them to their specific circumstances.
- They are constantly evolving, as new standards are developed and existing standards are revised.
The adoption of IAS/IFRS can be a complex and challenging process. However, the benefits of doing so are significant. By adopting IAS/IFRS, companies can improve the quality and transparency of their financial reporting, which can lead to increased investor confidence and improved access to capital.
Importance of International Accounting Standards
The importance of International Accounting Standards (IAS), also known as International Financial Reporting Standards (IFRS), can be summarized as follows:
Promoting transparency and comparability of financial information across companies and countries.
This is important for investors, creditors, and other stakeholders who need to make informed decisions about where to invest their money or lend their credit. By using a common set of standards, financial statements can be more easily compared, regardless of where the company is located or what industry it operates in.
Reducing the risk of financial misstatements.
IAS/IFRS are designed to be comprehensive and clear, which helps to reduce the risk of errors and omissions in financial statements. This is important for investors and creditors who need to rely on the accuracy of financial information to make decisions.
Improving the efficiency of capital markets.
By providing a common framework for financial reporting, IAS/IFRS can help to reduce the cost of capital for companies. This is because investors and creditors can more easily compare the financial statements of different companies, which makes it easier for them to assess the risk and return of an investment.
Increasing the accountability of companies to their stakeholders.
IAS/IFRS require companies to disclose more information about their financial performance and position. This information can be used by stakeholders to assess the company’s performance and make decisions about whether to continue to do business with the company.
Conclusion
As previously mentioned, International Accounting Standards are developed by the International Accounting Standards Board (IASB). International Accounting Standards are generally considered to be more rigorous than International Financial Reporting Standards, as they deal with accounting rules. It is possible to have International Financial Reporting Standards and International Accounting Standards, however, International Financial Reporting Standards are generally designed to make reports more accessible and to allow for easier and cheaper reporting.