US and International Financial Regulations
Why do countries create rules and regulations for financial reporting? Web sites like www.learnacctgonline.com offer a variety of articles, blogs and books (Accounting for Non-Accountants, 2nd edition, by Dr. Wayne Label, CPA) to non-accountants. They are very good and reliable guides for grasping the concept of financial regulations.
In the United States, GAAP (generally accepted accounting principles) is the guide that all companies must follow. Especially publicly traded ones; small business accounting is very similar, but has its own specifics, that we are not going to discuss here. They are taught in every basic accounting course.
There are three major assumptions under the US GAAP that are used to create the financial statements. First, business is a separate entity, not connected to other’s or the owner’s finances. Second, business will be in operations for an unlimited amount of time, it justifies depreciation of assets over their useful life; and third, business transactions are quantifiable.
There are several concepts that have to be followed in order to make sure users get accurate financial statements. Loop holes have caused some of the major accounting fraud cases to be launched against the companies, accusing them of unethical accounting practices. These concepts are as follows:
Information has to be relevant; it has to help users in their estimations and predictions.
Information has to be reliable; it has to be based on evidence and be unbiased.
Verifiable information; there has to be a sufficient evidence for the figures on the financial statement. This does not eliminate estimation; depreciation is largely based on it.
Users have to be able to understand information; they need to compare it to other company’s reporting and the ones from the previous reporting periods. To accomplish this task, accounting practices must be the same for everybody. It is called concept of consistency.
Information has to be reported in numbers. If it cannot be accomplished, usually footnotes to the financial statements are used.
Information has to be easily obtainable in a timely manner.
Financial statements have to be prepared for each economic entity. Example can be General Electric. It has to create separate sets of documents for each of its subsidiaries.
Going concern is an assumption that business will continue to operate indefinitely.
Assets must be reported in their realizable value or historical cost but not higher than that. If a significant loss occurs in the value of an asset, it has to be written down to reflect the change.
Materiality concept demands to report events that will make a difference. Usually it is compared to 10% of the net income.
Conservatism is a rule that demands accountants in the case when two different rules can be used, to use the one with the most conservative result; the lowest revenue and the highest expense.
Financial regulations have been a growing concern all over the world. International financial reporting standards (IFRS) have been created as a response to the globalization. It creates an even playing field and makes it easier for the international companies to enter the markets.
Finally let’s see, what the difference between the GAAP and IFRS is. The difference is in the concept of regulation. IFRS encourages hones reporting and gives more flexibility in technical aspects while focusing or accounting concepts, while GAAP has a rule for almost every situation possible. In my view, any financial regulation has to be focused on the concept to make sure financial statements are accurate.
I hope this article gave you an idea of who accounting regulators are and what they are trying to accomplish.