International accounting standards are rules that have been developed by accounting advisories, regulatory agencies, or boards as a basis of comparison for judging quality of accounting procedures on a global basis. The International Accounting Standards Committee (IASC) was formed in 1973 to address the differences between guidelines that were used in different countries. Providing standardized procedures relating to the preparation of financial statements and supporting accounting reports was the underlying goal of the committee.
The IASC was replaced in 2001 by the International Accounting Standards Board (IASB). This organization continued to develop and promote the use of international accounting standards. The goal of the IASB is to safeguard public interest by developing high-quality accounting regulation that would be understandable and enforceable across national boundaries.
One major objective of creating international accounting standards is to ensure that financial statements will provide consumers with an accurate view of the business affairs of companies and to enforce the comparability of companies throughout various nations. Underlying assumptions or ideals were adopted to meet this objective. Generally, underlying assumptions are accrual basis, going concern, and stable measuring unit.
When companies keep their records on an accrual basis, they tie both income and expenses to the accounting period in which the company is owed the income or owes payment of an expense. This method is in contrast to where a company ties income and expenses to the period in which the company receives the income or pays the expense. Expenses also include depreciation and amortization, which are procedures by which costs of assets and loans are divided over the years the asset is useful.
A second underlying assumption in international accounting standards is the going concern concept. The company exists and it is assumed that it will continue to exist in the future. This is a critical concern for people who have an interest in the company, whether they are owners, employees, customers, or investors.
The stable measuring unit assumption deals with the purchasing power of the monetary unit used by companies within any country. Monetary unit is assumed to be the most effective way of expressing the value of any asset, good, or service. Normal inflation is not considered when reporting the assets.
Regulation developed by the creation of international accounting standards covers the elements of financial statements, such as balance sheets and income statements. The basic accounting equation states that company assets will equal company liability plus company equity. Assets are what the company owns; liabilities are what the company owes; equity is the ownership value of the company. These elements are found on a company’s balance sheet.
Income statements or profit and loss statements will show the company’s financial health by displaying revenues and expenses and the calculation of profit or loss. The balance sheet describes a company at a moment in time. An income statement reflects the company over a period of time. International companies that follow the regulation set forth by the IASB assure comparability between companies.