What Are the Financial Reporting Standards?
Accurate reporting of finances is an important condition for a fair and competitive marketplace. Inaccurate or falsified reports can have detrimental effects on businesses and consumers alike. Thus, agencies and boards have been established globally and in the United States to ensure businesses are reporting their finances accurately and similarly.
The International Accounting Standards Board (IASB) issues international financial reporting standards (IFRS) for public-interest entities. Most countries mandate IFRS for financial statements.
The Financial Accounting Standards Board (FASB) is the primary body in the United States that sets accounting standards. The FASB publishes and maintains the Generally Accepted Accounting Principles (GAAP), which guide publicly traded companies in documenting financial transactions and creating standardized reports.
Standardization and Regulation
Due to the alluring nature of money, it becomes difficult at times for people involved in the processes of handling and accounting for it to stay honest and ethical. There have been numerous financial scandals in the past. These scandals created a need for regulations and oversight of any financial activity in public markets and exchanges.
The Securities and Exchange Commission (SEC), FASB, Public Accounting Oversight Board (PCAOB), and various state accounting boards were all established to provide oversight and attempt to prevent financial scandals.
The SEC is the authority in the U.S. for regulating trade and markets, overseeing and auditing corporate financial reporting, and regulating investment. The SEC also has the authority to enforce the regulations they publish. The SEC appoints members to the PCAOB, which determines auditing standards and reviews auditing boards.
Financial Accounting Standards Board (FASB) is the board that sets the accounting standards for firms in the U.S. This board is a private, not-for-profit group that works to ensure GAAP is updated to reflect current legislation and accounting practices.
The IASB is the international equivalent of the FASB. It has established guidelines for financial practices globally.
Generally Accepted Accounting Principles are a set of rules and practices having substantial authoritative support. GAAP is the standard that companies use to compile their financial statements such as the income statement, balance sheet, and statement of cash flows.
Financial statements are compiled using GAAP for the benefit of investors and regulators. These financial statements are the balance sheet, income statement, and statement of cash flows.
The PCAOB was established to ensure accountants used as auditors for publicly traded companies are complying with guidance and regulations for auditing finances. The purpose of this private entity is to ensure accounting scandals do not occur.
Accounting firms that conduct audits must be registered with the PCAOB in order to conduct business.
Publicly traded companies are mandated by the SEC to follow GAAP. While this is not law, it is enforceable. The SEC has filed cease and desist orders (with fines) to companies that report non-GAAP measures, but do not present an equivalent GAAP measure (required by the SEC).
Non-GAAP measures are numerical measures (values on financial statements, such as earnings before interest, taxes, depreciation, and amortization, or EBITDA) that are not specifically outlined in GAAP.
If you own a publicly traded business, then the standards are something worth ensuring your business is following. You are not required to follow GAAP if you are a private entity, but it might be worth considering if you think you might offer shares publicly at some point.