An Overview of Financial Reporting Standards

Posted on Oct 11, 2023 at 11:10 PM

Over hundreds of years, as the international economy has evolved, financial reporting standards have gone through many developments, preparing modern business models.

What are these standards in detail, and what is their purpose?

The following guide discusses financial reporting standards.

What are the Financial Reporting Standards?

Financial reporting standards define general principles for preparing financial reports by international and global considerations. 

Preparing such reports aims to ensure financial databases that inform users in their decision-making on providing resources to the institution or reporting entity.

Past decisions relate to many factors, such as property rights, debt instruments, loans, and other forms of credit. as well as influence management procedures that affect an enterprise's economic resources and accounting career usage.

Financial reporting standards also determine the quantity and type of accounts and financial statements that allow submission to users of financial statements. 

The most prominent are the International Financial Reporting Standards (IFRS) and generally accepted accounting principles (GAAP).

For users of financial statements, using financial reporting standards, companies can compare themselves to ease the analysis of individual companies' work. 

Each standard must have enough flexibility to recognise differences in the leading economy between companies.

The financial transactions companies seek to disclose are difficult and complex and need estimates and accruals. Both things need judgment, so standards must be flexible enough to achieve consistency.

The first company to include the sale in the income statement is the imposition of two commercial companies that purchased similar equipment for long-term usage. In contrast, the other company had it in the balance sheet, which poses a significant challenge for financial analysts when comparing the two companies.

The difference in accounting treatment will result in two completely different statements for both companies: the income statement and the balance sheet. The importance of financial reporting standards lies. 

They address such challenges by establishing accounting standards and ensuring companies register similar transactions.

For example, both companies may need to create an asset in their balance sheet.

On the assumption that the first company uses such equipment while the second company uses such equipment only in some cases, how do the criteria justify that difference?

The reporting criteria need more flexibility to allow companies to estimate an asset's estimated productive life, thereby apportioning equipment expenses over the estimated production life as operating expenses, known as consumption.

GAAP's financial reporting standards and generally accepted accounting principles allow companies to record different quantities of consumables during each construction period over the use of equipment; for example, a company that uses equipment will show higher consumption rates each year than the other.

Who handles establishing and enforcing financial reporting standards?

The task of establishing financial reporting standards is entrusted to some official bodies and private sector institutions that assist in the development of such measures, which are the bodies responsible for setting standards:

• Financial Accounting Standards Board (FASB): is a non-profit organisation aiming to prepare and develop GAAP within the United States of America.

• International Accounting Standards Board (IASB): an independent non-profit organisation developing the International Financial Reporting Standards Set.
  
  

Both bodies set standards of high quality, understandable, simple, and applicable but have no right to impose the use of those standards.

The task of enforcing the use of these lists and standards is assumed by several regulatory authorities, which may be governmental or non-governmental organisations but have the legal authority to enforce any decision, such as:

• United States Securities and Exchange Commission (SEC): the authority responsible for applying those standards within the territory of the United States.

• Financial Services Authority (FSA): a non-governmental organisation that regulates the work of all financial service providers in the United Kingdom.

These executive authorities also regulate the functioning of financial markets within their spheres of influence.

Other organisations responsible for regulating global financial markets are the International Organization of Securities Bodies-IOSCO.

They are not an executive authority but responsible for regulating global financial markets, protecting investors, ensuring a fair, transparent, efficient market, and reducing risks.

What is the framework of IFRS?

Financial reporting standards bodies have established a framework for IFRS to include some key points to consider in the Accounting Career Path. 

The goal of the financial statements is:

As mentioned in the definition, the financial statements aim to secure financial information about the institution that prepares the report to assist current and potential investors, lenders, and other creditors in making financial decisions that will provide resources to the institution.

The IFRS framework assists standard-setters in their development and review, assists financial data developers in applying the standards, and how to deal with issues not covered by the means. 

As well as to assist auditors in forming an opinion on those statements and assist data users in interpreting the information in the lists.

• Qualitative Characteristics (Quality):

The goal is surrounded by a set of primary and complementary characteristics that must exist to complement the framework for the essential elements:

• Relevance: The financial statements must be helpful and detailed, and not overlook any essential facts.

• Honest representation: Financial statements must be neutral, integrated, and fault-free.

• The complementary characteristics are:

• Comparability: Financial statements must be consistent between companies and, over time to comparisons.

• Verifiability: Observers must be able to verify that financial statements reflect actual economic reality.

• Timing: Financial statements must be available on time.

• Understandability: Data must be presented in a simplified manner so that all users, whatever their level of understanding of the business, can understand it.
  

Elements of financial statements:

The qualitative characteristics of the reporting elements used to provide information for those elements that relate to the measurement of financial position are assets, liabilities, and common shares. Those elements that relate to the size of economic performance are profit and expenditure.

Financial reporting faces a range of constraints:

• The trade-off between reliability and timeliness: When a company tries to produce reliable, error-free lists, it needs a lot of time. When it tries to release lists in record time, it is prone to making many mistakes, and the lists will be less reliable.

• Cost: The benefits of using the lists should be more than their preparation costs.

• Intangible aspects: Financial lists cannot be used to obtain immaterial information such as workers' loyalty and brand names. Financial rosters make a range of assumptions during their preparation of accounting reports, such as:

• Accrual basis: Income must be recognised when earned, and expenses recognised when incurred regardless of when cash is paid.

• Continuity: You must understand and assume that the company will continue to operate for the foreseeable future.

Concluding, 

Awareness of financial reporting standards helps in the correct financial analysis and evaluation of companies and organisations, enhances business productivity, and improves performance, so you need to stay current on the latest changes in the standards and their evolution.