Definition of Accounting Standard
An Accounting Standard is a definitive guideline issued by standard-setters to govern how financial accounting and reporting should be done. It encompasses rules and procedures surrounding the measurement, valuation, and disclosure of accounting transactions. These standards ensure consistency, transparency, and reliability in the financial statements produced by entities.
Issuing Bodies and Relevant Standards
- United Kingdom: Financial Reporting Standards (FRSs) issued by the Financial Reporting Council (FRC)
- International: International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB)
- United States: Statements of Financial Accounting Standards (SFAS) by the Financial Accounting Standards Board (FASB)
Key Features
- Measurement: Defines how to quantify financial transactions.
- Valuation: Provides guidelines on valuing different assets and liabilities.
- Disclosure: Specifies what details must be publicly disclosed within financial reports.
Examples
- IFRS 16 - Leases: Guides the accounting treatment of lease agreements.
- FASB ASC 606 - Revenue from Contracts with Customers: Sets standards for revenue recognition in the U.S.
- FRS 102 - The Financial Reporting Standard applicable in the UK and Republic of Ireland: Pertains to financial reporting for small to medium-sized entities in the UK and Ireland.
Frequently Asked Questions
Q1: What is the purpose of accounting standards?
- A: The purpose is to ensure consistency, reliability, and transparency in financial reporting across different entities and jurisdictions.
Q2: Are accounting standards legally binding?
- A: In many jurisdictions, compliance with accounting standards is required by law for certain types of entities, such as publicly traded companies.
Q3: What’s the difference between GAAP and IFRS?
- A: GAAP refers to Generally Accepted Accounting Principles, primarily used in the U.S., while IFRS is a global standard used in many other countries.
Q4: How often are accounting standards updated?
- A: Updates can vary; most standard-setting bodies subject their standards to periodic reviews and make amendments as necessary.
Q5: Can companies choose which standards to follow?
- A: Companies must follow the accounting standards that apply to their jurisdiction or regulatory requirements.
Related Terms
- Generally Accepted Accounting Principles (GAAP): U.S.-based standards issued by FASB.
- Financial Reporting Council (FRC): The UK’s independent regulator for financial reporting.
- International Financial Reporting Standards (IFRS): Global standards set by IASB.
- Financial Accounting Standards Board (FASB): U.S. organization responsible for establishing accounting standards.
- Revenue Recognition: A principle governing how and when revenue is recognized in financial statements.
- Asset Valuation: The process of estimating the value of assets, as guided by various accounting standards.
Online Resources
Suggested Books for Further Studies
- “Wiley IFRS 2021: Interpretation and Application of IFRS Standards” by PKF International Ltd
- “Intermediate Accounting” by Donald E. Kieso, Jerry J. Weygandt, and Terry D. Warfield
- “UK GAAP 2019: Generally Accepted Accounting Practice in the UK” by Ernst & Young LLP
- “IFRS: A Practical Guide” by Hennie van Greuning
- “Accounting Standards: True or False?” by Robert Folsom
Accounting Basics: “Accounting Standard” Fundamentals Quiz
### Who is responsible for issuing the Statements of Financial Accounting Standards in the U.S.?
- [ ] International Accounting Standards Board (IASB)
- [ ] Audit firms
- [x] Financial Accounting Standards Board (FASB)
- [ ] Securities and Exchange Commission (SEC)
> **Explanation:** The Financial Accounting Standards Board (FASB) is responsible for issuing Statements of Financial Accounting Standards in the United States.
### What is the IFRS framework used for?
- [x] Internationally accepted accounting standards
- [ ] U.S. tax reporting
- [ ] Auditing standards
- [ ] Internal financial control guidelines
> **Explanation:** IFRS, or International Financial Reporting Standards, provides internationally accepted accounting guidelines for the preparation and presentation of financial statements.
### Which standard mainly governs revenue recognition in the U.S.?
- [ ] IFRS 15
- [ ] FRS 102
- [x] ASC 606
- [ ] SFAS 54
> **Explanation:** ASC 606, issued by FASB, governs revenue recognition in the U.S.
### Which body issues accounting standards that are used in the UK?
- [x] Financial Reporting Council (FRC)
- [ ] Securities and Exchange Commission (SEC)
- [ ] Public Company Accounting Oversight Board (PCAOB)
- [ ] International Monetary Fund (IMF)
> **Explanation:** The Financial Reporting Council (FRC) issues accounting standards that are used in the UK.
### GAAP is primarily utilized in which country?
- [x] United States
- [ ] France
- [ ] Germany
- [ ] Australia
> **Explanation:** GAAP, or Generally Accepted Accounting Principles, is primarily utilized in the United States.
### What is a primary aim of accounting standards?
- [ ] Enhance tax revenues
- [x] Ensure consistency and transparency in financial reporting
- [ ] Simplify auditing processes
- [ ] Reduce accounting costs
> **Explanation:** The primary aim of accounting standards is to ensure consistency, transparency, and reliability in financial reporting.
### How often are accounting standards updated?
- [ ] Every year
- [x] Periodically based on reviews
- [ ] Never
- [ ] Daily
> **Explanation:** Accounting standards are updated periodically, reflecting the need for regular reviews and amendments.
### To comply with accounting standards, how should financial transactions be treated?
- [x] As per prescribed rules for measurement, valuation, and disclosure
- [ ] Independently as per the company's discretion
- [ ] Only audited annually
- [ ] Verified by external reviewers
> **Explanation:** Companies must treat financial transactions according to the rules set for measurement, valuation, and disclosure prescribed by the relevant accounting standards.
### What is financial transparency?
- [x] Clear and accurate reflection of a company's financial performance and position
- [ ] Concealment of financial weaknesses
- [ ] Exaggeration of profitability
- [ ] Limited disclosure to shareholders
> **Explanation:** Financial transparency refers to the clear and accurate reflection of a company's financial performance and position, facilitated by the adherence to accounting standards.
### Why would countries adopt IFRS?
- [ ] To control internal financial policies
- [x] To standardize financial reporting internationally
- [ ] To replace auditing requirements
- [ ] To diversify tax systems
> **Explanation:** Countries adopt IFRS to standardize financial reporting internationally, promoting consistency and comparability between entities across borders.
Thank you for embarking on this journey through our comprehensive accounting lexicon and tackling our challenging sample quiz questions. Keep striving for excellence in your financial knowledge!
