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What is an 'Accounting Standard'

An accounting standard is a common set of principles, standards and procedures that define the basis of financial accounting policies and practices. Accounting standards improve the transparency of financial reporting in all countries. In the United States, the Generally Accepted Accounting Principles (GAAP) form the set of accounting standards widely accepted as appropriate accounting for preparing financial statements. International companies follow the International Financial Reporting Standards (IFRS), which are set by the International Accounting Standards Board (IASB) and serve as the guideline for non-U.S. GAAP companies reporting financial statements.

BREAKING DOWN 'Accounting Standard'

Accounting standards relate to all aspects of an entity’s finances including assets, liabilities, revenue, expenses and shareholders' equity. Specific examples of an accounting standard include revenue recognition, asset classification, allowable methods for depreciation, what is considered depreciable, lease classifications and outstanding share measurement.

History of Accounting Standards and Purpose

The first accounting standards were developed in the 1930s. They were established for public entities and included in multiple securities acts that followed the Great Depression. The initial regulations established were included in the Securities Act of 1933 and the Securities Exchange Act of 1934. Accounting standards have also been established by the Governmental Accounting Standards Board (GASB) for accounting principles for all state and local governments.

Accounting standards specify when and how economic events are to be recognized, measured and displayed. External entities such as banks, investors and regulatory agencies rely on accounting standards to ensure relevant and accurate information is provided about the entity. These technical pronouncements have ensured transparency in reporting and set the boundaries for financial reporting measures.

U.S. GAAP Accounting Standards

The American Institute of Certified Public Accountants (AICPA) developed, managed and enacted the first set of accounting standards. In 1973, these responsibilities were given to the Financial Accounting Standards Board (FASB). The Securities and Exchange Commission (SEC) requires all listed companies to adhere to U.S. GAAP accounting standards in the preparation of their financial statements to be listed on a U.S. securities exchange. Accounting standards ensure the financial statements from multiple companies are comparable. Because all entities follow the same rules, accounting standards make the financial statements credible and allow for more economic decisions based on accurate and concise information.

IFRS Accounting Standards

Generally Accepted Accounting Principles are heavily used among public and private entities in the United States. The rest of the world primarily uses International Financial Reporting Standards (IFRS). These standards are required to be used for multinational entities. The International Accounting Standards Board (IASB) establishes and interprets the international communities' accounting standards when preparing financial statements.

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