GENERALLY ACCEPTED ACCOUNTING

PRINCIPLES AND INTERNATIONAL By Kanishka Gupta

FINANCIAL REPORTING STANDARDS

GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(GAAP)
oThe rules that govern accounting are called Generally Accepted Accounting Principles (GAAP).
oGAAP (generally accepted accounting principles) is a collection of commonly-followed
accounting rules and standards for financial reporting.
oThe purpose of GAAP is to ensure that financial reporting is transparent and consistent from
one organization to another.
oThere is no universal GAAP standard and the specifics vary from one geographic location or
industry to another.
oThese principles provides with information about how item will be classified in profit and loss
account, balance sheet, cash flow etc.
oThese principles are necessary to follow because it helps a lot in making long term decisions,
financial decisions and maintaining records.
oIt is easy to compare financial statements of different companies.
o Third parties like creditors, banks, shareholder etc. must have to rely on reported
financial statements so it must be free of errors, inconsistencies and bias and it could
only be possible by following GAAP.

WHO ISSUE GAAP?

Bodies that issues accounting principles: Three main bodies
1. Financial Accounting Standards Board (FASB)
2. International Accounting Standard Board (IASB)
3. American Accounting Association (AAA)
oBasic principles of GAAP in accounting:

PRINCIPLE OF REGULARITY

PRINCIPLE OF CONSISTENCY

PRINCIPLE OF SINCERITY

PRINCIPLE OF PERMANENCE OF METHOD

PRINCIPLE OF NON-COMPENSATION

PRINCIPLE OF PRUDENCE

PRINCIPLE OF CONTINUITY

PRINCIPLE OF PERIODICITY

PRINCIPLE OF FULL DISCLOSURE

PRINCIPLE OF UTMOST GOOD FAITH

PRINCIPLE OF REGULARITY
oThe accountant has adhered to GAAP rules and regulations as a standard.
oBy law they are bound to follow it.

PRINCIPLE OF CONSISTENCY
oProfessionals commit to applying the same standard throughout the reporting
process to prevent errors or discrepancies.
oAccountants are expected to fully disclose and explain the reasons behind any
changed or updated standards.
PRINCIPLE OF SINCERITY
oAccountants are committed to accuracy and impartiality.
oAccountant attempts to provide an accurate depiction of a company’s financial position.
oThis means that while the accountant is preparing the report isn’t trying mislead anyone.
oAll financial information and analysis is presented fairly and as accurately as possible.

PRINCIPLE OF PERFORMANCE OF METHODS

oLike any other science, completed accounting should be replicable.
oAnother accountant looking at the books should reach the same conclusions.
oConsistent procedures are used in the preparation of all financial reports.
 PRINCIPLE OF NON-COMPENSATION
oOne should show the full details of the financial accounting information and not seek to
compensate a debt with an asset, a revenue with an expense.
o“Compensation” here refers to offsetting accounts.
oGAAP-compliant reporting shouldn’t try to cover up any accounting facts by hiding debts
behind assets or costs behind revenue.

PRINCIPLE OF PRUDENCE
o Accountants should only report facts.
oThere’s no room for speculation or prediction. Speculation does not influence the reporting of
financial data.
oSpeculation here means reporting anything without evidences.
oThis principle aims at showing the reality “as in”: one should not try to make things look prettier
than they are.
PRINCIPLE OF CONTINUITY
oWhen preparing reports, an accountant should assume that the company will continue to
operate as it has.
oWhen stating financial information, one should assume that the business will not be interrupted.
oThat means assumptions about the future should be in line with what’s actually happened in the
past.
oThis principle mitigates the principle of prudence: assets do not have to be accounted at their
disposable value, but itis accepted that they are at their historical value .

PRINCIPLE OF FULL DISCLOSURE

oAll information and values pertaining to the financial position of a business must be disclosed in
the records.
oThis principle is supposed to ensure that your accountant doesn’t skip accounts or debts, or
mislead readers by omitting information.
 PRINCIPLE OF PERIODICITY
oEach accounting entry should be allocated to a given period, and split accordingly if it covers
several periods.
oThis means that accountants should report financial data based on consistent and accepted time
intervals.
oDon’t compare this quarter to the final two weeks of last year, or make up a five-month period
to report against.
oKeep it simple and standard. Months, quarters, years—all good options to work with.

PRINCIPLE OF UTMOST GOOD FAITH

oEvery informative detail related to the company should be disclosed to the insurer before he
takes the policy.
oDon’t lie. It presupposes that parties remain honest in all transactions.
INTERNATIONAL FINANCIAL REPORTING
STANDARDS (IFRS)
oInternational financial reporting standards are designed as a common global language for
business affairs so that company accounts are understandable and comparable across
international bodies.
oThey are consequences of growing international shareholding and trade and are particularly
important for companies that have dealings in several countries.
oIFRS are issued by International Accounting Standards Committee (IASC), known as
International Accounting Standard Board (IASB).
oThese are single set of high quality, understandable and enforceable global accounting
standards. It is a principles based set of standards which are drafted intelligently and are
easy to understand and apply.
oKnowledge of IFRS is now essential for internationally active, growing business.
BENEFITS OF IFRS
1. Having one accounting system will make life a little less complicated for both the companies
and investors. One global set of high-quality accounting standards i.e., IFRS is best
positioned to fulfill that need.
2. One reporting standard will make it more efficient for investors to research and compare
financial statements globally and more effectively.
3. Consistency of global accounting policies and procedures.
4. Streamlined merger and acquisition activities.
5. Opens opportunities for professional to serve international clients.
6. Reduces the cost of compliance.
7. The job of tax authorities becomes easy.
 OBJECTIVES OF IFRS
oTo develop in the public interest, a single set of high quality, understandable,
enforceable and globally acceptable financial reporting standard.
oTo promote the use and strict application of those standards.
oTo ensure high quality, transparent and comparable information in the financial
statements and other financial reporting to help investors, other participates in the
world’s capital markets and other users of financial information make economic decisions.
oTo promote and facilitate the adoption of IFRS, being the standards and interpretations
issued by the IASB, through the convergence of national accounting standards and IFRS.
IMPLEMENTATION
 IFRS 1- First time
adoption of IFRS 2- Share-based IFRS 3- Business IFRS 4- Insurance
International Financial payment Combinations Contracts
Accounting Standards

IFRS 5- Non-current IFRS 6-Exploration for

Assets held for Sale IFRS 7- Financial IFRS 8-Operating
and Discontinued Evaluation for Mineral Instruments- Disclosure Segments
Resources
Operations

LIST OF IFRS
IFRS 9- Financial IFRS 10- IFRS 11- Joint IFRS 12- Disclosure of
Instruments Consolidated Arrangements Interest in other
Financial Statements entities

IFRS 13- Fair Value IFRS 14- Regulatory IFRS 15- Revenue
from Contracts with IFRS 16-Lease
Measurement Deferral Accounts customers

IFRS 17- Insurance

Contracts
CONCLUSION
oYet there is lack of understanding about impact of IFRS on financial statements. Hence it
is responsibility of educational faculty to come out with some writings to facilitate
information about IFRS.
oSeparate courses should be started in the universities and affiliated college on the
International Financial Reporting Standards.
oSeparate text books containing case studies along with some practical examples should
be prepared by the academicians.
oThere is need to undertake the projects for the research work on IFRS and universities,
UGC should give some funds on the research work of IFRS.
oAcademic institutes should organise the conferences, seminars, workshop son IFRS and
related issues along with interaction or with the coordination of ICAI.
oThere is huge need to train the accountancy teachers, students, and officials so, training
camps should be organised by the authority bodies.
oEducational material should be prepared focussing on important issues related to IFRS.