The Committee on Accounting Procedure (CAP) was the first accounting standard board that issued the Accounting Research Bulletins (ARBs) which started what the Committee on Accounting Procedure believed generally accepted accounting principle should be. Nonetheless, the Accounting Research Bulletins only made recommendations and preparers of accounting information along with auditors did not have to hold to them. Though the Committee on Accounting Procedure played an important part in the development of accounting standards, it was only part time and really could not devote the necessary time required to formulate accounting standards. As a result the committee became dormant. Consequently, during the year 1959 the American Institute of Certified Public Accountant (AICPA) put in place the Accounting Principles Board (APB) to develop statement of accounting concepts and issue pronouncement on existing accounting problems. The Accounting Principles Board delegated its pronouncements to an Accounting Principles Board Opinions and 31 were issued.
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At first the Opinions and the Accounting Research Bulletins mainly depended on general acceptance by the accounting users and preparers. The Opinions and the Accounting Research Bulletins tried to get preparers of accounting information and Certified Public Accountants to accept the recommendations by persuading them that it was the best way to solve accounting problems. But by 1964, the accountants and auditors were convinced that persuasion only could not reduce the many different methods people and business worldwide use to prepare the accounts.
During the 1960s to the early 1970s, a lot of complaints were made about the process used for the development of accounting standards. Because of that, in the early 1970s the American Institute of Certified Public Accountant and other interested parties saw it fit to create the Study Group on Establishment of Accounting Principles to find out if there is any possibility of improving the accounting standard-setting process. The Study Group on Establishment of Accounting Principles gave the idea that there should be a new and more independent standard setting organisation to replace the Accounting Principles Board and it was approved. Hence, in 1973 the International Accounting Standards Board/Committee was created. Since then the International Accounting Standards Board/Committee for the most part has been responsible for establishing the accounting standards that is comprised of the generally accepted accounting principles.
In today’s global market, with company investing in company and country investing in country, accounting information has to have the characteristics of being comparable, reliable and transparent for the smooth operating in the capital market. If businesses do not prepare and report their accounting information according to the international accounting standards, there will be negative repercussion for that business.
At some point in the 1960s, businesses worldwide were using a variety of methods in the reporting and preparation of their business financial statements. As a result of this, investors and prospective buyers were blindsided about the actual financial position of the organisation. For instance, in the UK, the company GEC Ltd took over the company AEI Ltd because the financial statements were overstated and they thought the business was profitable when it really was not. As such, company financial statements would give different figures for different method of accounting, in consequence the international accounting standards had to come in place.
Accounting is used worldwide by all type and form of businesses and organisation. International accounting standards along with other accounting standards bodies regulate guidelines and rules to provide a single set of high quality global accounting principles. This creates uniformity among accounting users and the accounting principles that are used by companies, as financial statements of companies are either identical in format or close to it. Companies do not have to prepare different financial statements for the different countries their business are established in.
Another importance of the financial accounting standards is that it will aid in the elimination of barriers to cross border trading in securities by ensuring that company accounts are more reliable and understandable as well as more easily interpreted and compared. As a result, there would be an increase in market efficiency and a reduction in the cost of raising capital for companies, eventually improving competitiveness and assisting in the growth of the economy.
An additional importance is that the international accounting standards lend protection to companies against malpractice. Therefore, investors along with the various stakeholders will be able to interpret and compare financial statements of other companies. This helps companies to compete effectively on equal terms. And also enable investors and others to make more strategical decisions.
It is important for businesses to prepare and report financial statements under the international accounting standards as it makes investment decisions more compatible for foreign investors. Financial statements would be easier to interpret and analyse, and this may result in an increase in foreign investment for the business and country.
Furthermore, companies that prepare and report financial statements under the international accounting standard, tend to have less or no discrepancies in their financial statements and accounting information. In return this result in companies having more reliable and valid financial statement. As a result, there is a reduction in the likelihood of the users of financial information misinterpreting published financial statements and reducing opportunities for bias, ambiguity and inexactness. As well as reducing uncertainty of both local and international investment.
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Moreover, companies should follow the guidelines of the international accounting standards as it helps them in the preparation of the financial statements in a given time period and give guidelines as to what information the business or organisation are liable to publish. This means that companies should publish their financial statements on a timely basis; this usually depends on the type of business being operated. Large companies tend to publish their financial statements on a yearly period while small companies may publish their information quarterly. And stakeholders cannot demand or expect certain information of the business or organisation to be publicly published. If a company prepare and report its information too early or late, then the company’s statements would either show that the business is highly profitable or not profitable at all. So timing is very important when publishing financial statements of an organisation or business.
Moreover, with businesses preparing and reporting financial information under the international accounting standards, managers are better able to analyse the performance of their business. This is so because businesses are using standardize accounting procedures and they are able to compare and contrast their growth with that of their competitors. Comparison of competitors’ financial statements enables managers and investors to recognize the strengths and weaknesses of the business. Also, using the international accounting standards as a guideline for the preparation and reporting of financial information allow managers to compare past and present performance of the business. This will in turn, aid managers with the evaluation of their business growth and measure the achievement of their business.
Overall, businesses that use the international accounting standards as a basis of preparing and reporting financial information tend to have a lot more benefits than consequences.
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