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Module: 4 International Accounting Standards and Harmonisation Generally Accepted Accounting Principles (GAAP) and Accounting Standards General purpose financial statements prepared by the business enterprises communicate the results of the business operations during the financial year and the state of financial affairs as at the end of the financial year. These financial statements are used by the investors, lenders and others in taking their economic and business decisions connected with the dealings with such enterprises. The phrase "Generally Accepted Accounting Principles" (GAAP) is a technical accounting term that encompasses the conventions, rules and procedures necessary to define accepted accounting practices at a particular point in time. It includes not only broad guidelines of general application, but also detailed practices and procedures. Those conventions, rules, and procedures provide a standard by which to measure presentations in the financial statements. GAAP are the ground rules for financial reporting. These principles provide the general framework in determining what information is presented in the financial statements and how the information is to be presented. The phrase "GAAP" encompasses the basic objectives of financial reporting as well as numerous broad concepts and many detailed rules. A need for accounting standards arises mainly due to the following factors:-
Accounting Standards can be described as a vehicle whereby the wisdom and experience of the profession emerges as a consensus in a complex and changing economic and business situation in preference to the views of individual compilers of financial statements. Accounting as a "language of business" communicates the financial results and health of an enterprise to various interested parties by means of periodical financial statements. Like any other language, accounting should have its grammar (set of rules) and that is Accounting Standards. Harmonization of Different National Accounting Standards Why do national Accounting Standards in different countries differ? Gertrude Stein once said that a rose, is a rose, is a rose. But for financial statements prepared in different countries, it cannot be said so. Financial statements prepared in one country are often not acceptable in other countries. The reason is that the accounting standards are derived from the process that involves legal, economic, social and cultural considerations. Business practices, legal and fiscal framework, economic and social conditions differ in different countries and these differences impact on national accounting standards. Sometimes, even the basic philosophy and principles adopted in preparing the financial statements differ. For instance,-
Globalisation of trade and commerce has removed the barriers between the different countries. Political boundaries are becoming irrelevant for the flow of business transactions and movement of capital and funds. Information Technology, Developments in Communication facilities and E-Commerce have accelerated the process of globalisation of trade and commerce. These developments have created an urgent need for harmonization of accounting and auditing standards and practices. The compilers of financial statements are required to issue financial statements in conformity with standards established in their country of origin. At the same time, auditors in reporting on the fairness of presentation of financial statements do so within a national framework of auditing standards. Whilst most involved in the financial reporting process would say that like motherhood, international harmonization of accounting standards is a "good thing" and if achieved it would help in the development of international capital markets, there are many road blocks on the way to its achievement. National standards setters are naturally and indeed by their constitution concerned with and limited to the accounting standards subject to laws of their country. The standard setters have to serve the needs of their nation, and their standards therefore develop out of the economic, legal and cultural history and environment, which differ widely in different countries. There are many possible answers and the task is to find the one that best meets all the competing needs. Many standard setters have more than their hands full dealing with domestic issues. For obvious reasons, no individual country has focussed attention on meeting the needs of providers of finance in other countries - their focus has mainly been on meeting national needs. It is against this background of issuers and auditors operating within national frameworks that the international financial and business community needs to look at the requirements of an increasingly large group - the cross border users of financial statements. Recently, the Asian crisis has raised questions about the quality of accounting and auditing in the affected countries. The absence of transparency, harmonized standards and reliable financial information is a particular issue in respect of developing countries but is also an issue in many of the developed countries. The current position, where there is divergence in accounting standards between countries, impairs the quality and efficiency of capital markets and hampers international trade and commerce and puts obstacles in the path of a globalised economy. In the recent past, International Forum on Accounting Development (IFAD) has been established for raising Reporting and Auditing practices worldwide. Such change requires a major role to be played by many different parties including reporting entities, accounting profession, regulators, Government and investors. Each of these parties must be an active and a willing participant in the analysis of the problems and the implementation of the solutions. It is not merely the question of accounting and reporting standards, but inherent in the vision is a generally accepted framework for corporate governance, for the accounting and auditing profession, for regulation and for education (to create awareness on the part of all the players including investors). The ultimate objective is that all general-purpose financial statements are prepared using a single worldwide framework using common measurement criteria and fair and comprehensive disclosure. This cannot be achieved overnight and will require significant long-term efforts. The process should include the following steps.
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