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Accounting standards one of the most prominent sources of GAAP is accounting standards, which are formulated by professional bodies in different counties to provide guidance on a best accounting practice. (Edwards, 1994) Some such bodies are the financial accounting standards board (FASB), which issues statement of financial accounting standards for companies in the USA; and the accounting standards board (ASB), the issues of financial reporting standards in UK. With professional bodies in different countries issuing their own standards, there is a risk of inconsistency in the global market with respect to accounting rules. Also, companies operating and raising capital in multiple countries face additional cost of compliance with accounting rules in diffident countries. In an attempt to harmonies accounting standards, international standards have become a major source of accounting regulation in a number of countries. While international standards are required to be applied only by companies, such standards embody current best accounting practices and there is no reason why they should not be applied by sole proprietorship and partnership business also.
These figure shows, three main constituents of UK's accounting standards
Financial Reporting Council
Umbrella body that supervises five boards regulating
Accounting, accountants, and auditing
Auditing Practices Boards
Sets standards for independence, objectivity and integrity of audits
Accounting Standards Board
Sets UK national accounting standards not mandatory for UK listed companies governed by the International Financial Reporting Standards
Financial Reporting and Review Panel
Monitors quality of UK financial reporting proactive rather than reactive
Investigation and Discipline Board
Provides a forum for significant public interest cases e.g. high-level accounting scandals
Professional Oversight Board
Monitors the audit of listed companies and the regulatory activities of the accounting profession in areas such as education, professional standards and discipline
Urgent Issues Task Force
Monitors interpretation of standards and provides interim guidance
(Source: Edwards, 1994)
Accounting Standards control the evaluation of assets and liabilities reported in company has published accounts to a considerable extent. It is therefore important for users of accounting information. To be aware of the scope and limitations of a standards so that they can make a rational assessment of the validity of the published accounts on which they are based. Different accounting standards are reducing the improvement in much the same way as diverse languages are an inconvenience. It is become reality creating one set of standards which will help to open up a wider investment audience. Mandatory standards are needed to define the way in which accounting numbers are presented in financial statements, so that their measurement and presentation are less subjective. It had been through that the accountancy profession could obtain uniformity of disclosure by persuasion but, in reality, the profession found it difficult to resist management pressures. The effects of the standards vary from statue to anther depending on accounting entity under the VAT legislation. The term "trader" appears in the legislation and is the terminology for a business entity. The "traders" or companies, as would normally refer to them, Registered trader, Non-registered or exempt trader, and partially exempt trader.
The Accounting Standards Board (ASB)
Is the engine of the accounting standards process. The function of the ASB is to issue new accounting standards and withdraw any which are considered out of date. It is therefore the successor of the accounting standards committee. The ASB is assisted by the Urgent Issues Task Force to deal with conflicts between accounting standards and statutory provision, which possibly lead to different interpretations (Mellett, 1995)
International Accounting Standards Board (IASB)
The IASB merely codified the world's standards. After this initial step, the IASB began to work towards the improvement of standards. The IASB set out a restricted number of options within an accounting standard from which companies could then choose. A threefold differentiation in the IASB's impact is possible: lesser developed countries, European countries and capital market countries.
At the heart of high-quality principles- based system is an overarching internally consistent conceptual framework. This conceptual framework must be designed to provide preparers, auditors and investor a clear understanding of the board approach underpinning the various standards. This consistently must be reflected in the basis for conclusion for each standard, which should clearly and plainly describe how the standard complies with the conceptual framework.
The framework is not an accounting standards, and its main function is to assist the LASB in the
1 Development of future LASs and the review of existing ones; and
2 promotion of harmonization of regulations, standards and procedures relating to the presentation of financial statement
Advantage of Accounting Standards
Financial statement helps the user to make prediction of future cash flows, make comparisons with other companies and evaluate the management's performance. Investment decision makers must be supplied with relevant. If the companies were permitted to select accounting policies at random or, even worse, with the intention of disguising changes in performance and trends.
Financial reports are use to disclose a true and fair view
The process of formulating standards has encouraged a constructive appraisal of the policies being proposed for individual reporting problems and has stimulated the development of a conceptual framework. e.g., the standard on leasing introduced the idea in UK standards of considering the commercial substance of a transaction rather than simply the legal position.
There is a tension between the desire that standards should not be a comprehensive code of rigid rules and the desire to regulate accounting practices that are imaginatively devised by directors and their financial advisers to create a picture that they may consider true and fair. The Financial Reporting Council showed awareness of the need to impose discipline that the company failures in the then recession, some of which were associated with obscure financial reporting.
Disadvantage of Accounting standards
Adverse allocative effects could occur if standard setters did not take account of the economic consequences flowing from the standards they issued. e.g., suboptimal managerial decision might be taken to avoid any reduction. Beside that the adverse effects might be felt by people who did not use the accounts, e.g.; a leasing standard that caused a fall in the lessee's reported profit.
Accounting standards are mandatory in that accountants are expected to observe them. They cover specific technical accounting issues such as stock, depreciation, and research and development. These standards essentially aim to improve the quality of accounting in the UK. They narrow the areas of difference and variety in accounting practice, set out minimum disclosure standards and disclose the accounting principles upon which the accounts are based. Overall, accounting standards provide a comprehensive set of guidelines which preparers and auditors can use when drawing up the financial statement.