Financial Reporting Standards: Frameworks, Importance, and Global Practices

In the globalised world of the present-day, the standards of financial reporting have transformed themselves as the key for achieving transparency, accuracy and credibility of the financial reports provided and used by businesses globally. These standards enable the presentation of financial statements in good standing as the position of the company and facilitate the ability of investors, regulators and other users in making decisions on financial performance. 

This article discovers What financial reporting standards are, GAAP vs IFRS, who set them and why they are significant in worldwide finance.

What are Financial Reporting Standards?

‘Financial reporting standards are defined as the principles, procedures and rules used by firms for disseminating information in their financial reports’.

These standards help set up high comparability standards that make it easy for users of financial statements like investors, creditors, and regulators to have confidence in the accuracy, make cross-company comparisons, and have a sound outlook on the financial health of business organisations. Conformity with these standards provides a high level of transparency, which is highly preferable in the international financial environment.

IFRS that is International Financial Reporting Standards, which was developed by (IASB) International Accounting Standards Board, and GAAP that is Generally Accepted Accounting Principles, set by the (FASB) Financial Accounting Standards Board in the US are the two most commonly recognised standards in financial reporting. Both frameworks are based on the goals oriented to depicting a fair and accurate view of the financial state of the company, but as mentioned earlier, IFRS is more principles-based and implemented by over 140 countries which strengthens its positions of the preferential international standard.

Importance of Financial Reporting Standards

The application of the standards of financial reporting is advantageous to businesses and their stakeholders because it facilitates reliability, comparability as well as transparency of the presented information. These standards are very important in a company and their investors, creditors and regulatory agencies relationships.

• Reliability: The figures presented when financial statements are prepared following laid down standards are usually more reliable and less likely to deceive the stakeholder.

• Comparability: When standards are set out consistently, it is easy for investors, analysts, as well as other related parties to compare the financial performance of different organisations and even ventures globally.

• Transparency: Implementation of these standards makes it hard for fraud and other economic irregularities to occur, hence improving stakeholders’ confidence.

IFRS vs GAAP: A Comparative Look

The comparison between IFRS and GAAP highlights the current struggle towards creating financial statement standards across the world. While both frameworks target to present a fair perspective of a company's financial status, they have some differences too:

1. Principles vs Rules-Based Approach: 

IFRS of course is seen as a more principles-focused approach, highlighting general principles instead of specific. GAAP is more of a rules-based system, which gives a more specific framework for recognising each transaction.

2. Inventory Valuation: 

While following GAAP, companies can use Last In, First Out (LIFO) method which is not granted under IFRS, requiring only the use of First In, First Out (FIFO) or weighted average method.

3. Revenue Recognition: 

IFRS also has five steps to recognise revenue and doesn’t have as many specific rules for each industry as GAAP.

These differences influence the flow of the business and its overall figures such as earnings, assets and liabilities through financial statements and consequently the derived financial ratios.

4 Frameworks of IFRS

IFRS frameworks are made up of standards and guidelines, which are to be followed by businesses when presenting their financial statements. The frameworks are a guideline in the handling of accounting problems and standardisation across different financial reports. Key elements in the IFRS framework include:

1. Recognition and Measurement: 

IFRS describes how assets, liabilities, revenues and expenses should be recognised. These items are rated according to the detailed specifications of the framework that has a section dedicated to the measurement and documentation of these elements.

2. Presentation and Disclosure: 

The standards define how precise financial information should be in statements, making it explicit on how the financial data about an organisation and all the related risks must be disclosed.

3. Objective of Financial Reporting: 

IFRS is intended to facilitate knowledge for decisions that affect the economy in order to assist investors and other stakeholders.

4. Qualitative Characteristics: 

IFRS encourages qualitative aspects such as relevance, reliability and comparability in the preparation of financial statements, that will help the stakeholders to assess the performance of the organisation and its future outlooks.

Who Establishes and Uses Financial Reporting Standards?

The set of finance reporting standards is developed to regulate reporting by separate institutions, which focus on fairness and balanced financial reporting. The two primary bodies responsible for creating and maintaining these standards are:

1. The International Accounting Standards Board (IASB): This organisation prepares IFRS, which is applied in more than 140 countries such as the European Union, some countries in Asia, Africa and South America.

2. The Financial Accounting Standards Board (FASB): Founded in the US, FASB is responsible for the issuance of, and amendments to, GAAP. Companies in the U.S. that have gone public need to follow the GAAP due to requirements set down by the Securities and Exchange Commission (SEC).

Aside from these, there are many other international regulatory authorities, like the European Financial Reporting Advisory Group and AASB that is Australian Accounting Standards Board who endorse the use of IFRS across their regions.

Conclusion

To sum up, the standards of financial reporting are the key to the development of worldwide finance credibility. Both IFRS and GAAP dictate the methods used in preparing reliable financial statements that stakeholders use in making their decisions. With the global economy integrating, the call for one set of international financial standards becomes louder, offering a positive impact to businesses and shareholders around the world.

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Frequently Asked Questions (FAQs)

What are the basic financial reporting standards?
General Finance Reporting Standards contain rules for presenting financial statements. The most universally accepted standards are International Financial Reporting Standards, produced by IASB, and the Generally Accepted Accounting Principles, created by the FASB in the United States.

What are the 4 types of financial reporting?
The four main types of financial reporting are:

1. Balance Sheet: Reveals the property owned by a company, debts owed, and stocks held at a particular moment, which indicates the financial situation of a business.

2. Income Statement: An account that records the company’s sales, cost or expenditure incurred and the company’s profits or losses within a given timeline.

3. Cash Flow Statement: Livered with the flow of money in and out of the company and depicts the liquidity situation and cash position of the company.

4. Statement of Changes in Equity: Illustrates the fluctuations of the preserved earnings, share capital, and reserves of the company.