LECTURE NOTE 1

BASIC ACCOUNTING STANDARDS

Accounting is a vital part of business operations that involves managing and reporting the
financial operations of companies. Accounting standards allow accounting departments nationally
and internationally to use similar practices and produce similar quality accounting. If you work or
plan to work in the accounting field, it may be helpful to learn about accounting standards and
why they matter. In this article, we explain ‘what accounting standards are, discuss why they're
important and describe how organizations use them.
What are accounting standards?
Accounting standards are a set of procedures and measures that inform how businesses conduct
their accounting activities. They contain best practices for recording, measuring and disclosing
financial transactions. They apply to all parts of a company's activities, including revenue,
expenses, noncash expenses, assets, liabilities, equity and reporting. The primary purpose of
accounting standards is to provide accurate financial information that banks, government agencies
and investors can use when interacting with private companies.
Why are accounting standards important?
Accounting standards allow multiple companies and institutions to operate as part of the same
financial system. Let us see the main objectives of forming these standards.
a. The main aim is to improve the reliability of financial statements. Now because the
financial statements have to be made following the standards the users can rely on them.
They know that not conforming to these standards can have serious consequences for the
companies.
b. Then there is comparability. Following these standards will allow for inter-firm and intra-
firm comparisons. This allows us to check the progress of the firm and its position in the
market.
c. It also looks to provide one set of accounting policies that include the necessary
disclosure requirements and the valuation methods of various financial transactions.
Benefits of accounting standards:
a. Transparency: Accounting standards ensure organizations report their assets and
transactions in an understandable way. This can provide transparency to banks and
investors, government regulators and the public.
b. Uniformity: Accounting Standards provides rules for standard treatment and recording of
transactions. They even have a standard format for financial statements. The use of
accounting standards provides a uniform method of reporting for all institutions. This can
facilitate transactions between businesses and allow comparisons between companies
nationally or internationally.
c. Reliability: Accounting standards help ensure that companies, nonprofit organizations and
government agencies provide accurate analysis of their financial operations. There are
many stakeholders of a company and they rely on the financial statements for their

1|Page
 information. This stake holders may include shake holders, suppliers, investors,
government and customers, to make well-informed decisions when interacting with these
organizations. Many of these stakeholders base their decisions on the data provided by
these financial statements. Hence, it is essential these statements present a true and fair
picture of the financial situation of the company for reliability and cogency.
d. Comparability: This is another major objective of accounting standards. Since all entities
of the country follow the same set of standards their financial accounts become
comparable to some extent. The users of the financial statements can analyze and compare
the financial performances of various companies before taking any decisions. Also, two
statements of the same company from different years can be compared. This will show the
growth curve of the company to the users.
e. Fraud prevention and Accounting Manipulations: A uniform set of accounting standards
can help ensure that all companies use the same methods of reporting. Accounting
Standards laylop.;, down the accounting principles and methodologies that all entities must
follow. One outcome of this is that the management of an entity cannot manipulate its
financial data. This can allow accounting practices to remain transparent and free of fraud.
f. Assists Auditors: Now the accounting standards lay down all the accounting policies,
rules, regulations, etc in a written format. These policies have to be followed. So if an
auditor checks that the policies have been correctly followed he can be assured that the
financial statements are true and fair, so as to issue an unqualified audit opinion.
g. Determining Managerial Accountability: The accounting standards help measure the
performance of the management of an entity. It can help measure the management’s ability
to increase profitability, maintain the solvency of the firm, and other such important
financial duties of the management.

Limitations of Accounting Standards

There are a few limitations of Accounting Standards as well. The regulatory bodies keep updating
the standards to restrict these limitations.
1] Difficulty between Choosing Alternatives
There are alternatives for certain accounting treatments or valuations. Like for example, stocks
can be valued by LIFO, FIFO, weighted average method, etc. So choosing between these
alternatives is a tough decision for the management. The AS does not provide guidelines for the
appropriate choice.
2] Restricted Scope
Accounting Standards cannot override the laws or the statutes. They have to be framed within the
confines of the laws prevailing at the time. That can limit their scope to provide the best policies
for the situation.
There are different accounting standards that apply to institutions within the U.S. and
internationally, including:

2|Page
GAAP
GAAP stands for generally accepted accounting principles and is the primary set of accounting
standards that public and private organizations use within the U.S. GAAP compliance is
mandatory for all publicly traded companies. These standards help create clarity in financial
reporting and allow for comparison between the financial situations of different companies.
GAAP standards also ensure that regulatory bodies can effectively monitor private companies and
that investors and banks can make informed decisions about their business interactions.
GAAP has 10 primary principles that guide companies in their accounting practices:
a. The principle of consistency: This principle requires accountants to use the same method
in preparing all financial records. It also requires them to use these methods from one
period to the next and to disclose and explain any changes in standards.
b. The principle of regularity: The principle of regularity requires that all accountants who
work in GAAP-compliant organizations follow GAAP principles and regulations.
c. The principle of sincerity: This principle emphasizes the need for accurate financial
information in reporting by requiring accountants to report all relevant information
accurately, including transactions, gains, losses, debt and noncash expenses.
d. The principle of permanent methods: The principle of permanent methods requires that
businesses use the same method for all their accounting procedures in every period. This
allows for the comparison between different periods and organizations.
e. The principle of prudence: This principle requires accountants to present only factual
information in their financial reports. It emphasizes the importance of only reporting
verifiable items while avoiding speculation.
f. The principle of non-compensation: The principle of non-compensation requires
accountants to provide both negative and positive data concerning their companies'
financial situation. It ensures that companies report their debt instead of offsetting it with
assets.
g. The principle of periodicity: Accountants often report finances at set times during the year,
and the principle of periodicity emphasizes the importance of these divisions. It requires
accountants to confine their reports to a given period and to submit records according to
common practice, both quarterly and annually.
h. The principle of materiality: The principle of materiality sets standards for accurate
disclosure by requiring institutions to disclose all financial information relating to revenue,
assets, liabilities, equity and expenses.
i. The principle of continuity: This principle sets a standard for the valuation of company
assets. It requires accountants to assume a business' continued operation when determining
valuations.
j. The principle of good faith: The principle of good faith or utmost faith assumes that all
parties involved in accounting operations are acting honestly in their disclosures.
IFRS

3|Page
IFRS stands for international financial reporting standards and is the primary set of accounting
standards that international companies use. They aim to provide consistency in accounting and
reporting processes throughout a variety of countries.
The International Accounting Standards Board (IASB) is an independent, private-sector body
that develops and approves International Financial Reporting Standards (IFRSs). The IFRS
Foundation publishes 17 standards that apply to different aspects of accounting:
IFRS 1: First-time adoption of international financial reporting standards
IFRS 2: Share-based payment
IFRS 3: Business combinations
IFRS 4: Insurance contracts
IFRS 5: Noncurrent assets held for sale and discontinued operations
IFRS 6: Exploration for and evaluation of mineral resources
IFRS 7: Financial instruments: disclosures
IFRS 8: Operating segments
IFRS 9: Financial instruments
IFRS 10: Consolidated financial statements
IFRS 11: Joint arrangements
IFRS 12: Disclosure of interests in other entities
IFRS 13: Fair value measurement
IFRS 14: Regulatory deferral accounts
IFRS 15: Revenue from contracts with customers
IFRS 16: Leases
IFRS 17: Insurance contracts
IFRS-compliant entities also use the following 25 international accounting standards (IAS)
issued by the International Accounting Standards Board (IASB):
IAS 1: Presentation of financial statements
IAS 2: Inventories
IAS 7: Statement of cash flows
IAS 8: Accounting policies, changes in accounting estimates and errors
IAS 10: Events after the reporting period
IAS 12: Income taxes

4|Page
IAS 16: Property, plant and equipment
IAS 19: Employee benefits
IAS 20: Accounting for government grants and disclosure of government assistance
IAS 21: The effects of changes in foreign exchange rates
IAS 23: Borrowing costs
IAS 24: Related party disclosures
IAS 26: Accounting and reporting by retirement benefit plans
IAS 27: Separate financial statements
IAS 28: Investments in associates and joint ventures
IAS 29: Financial reporting in hyperinflationary countries
IAS 32: Financial instruments: presentation
IAS 33: Earnings per share
IAS 34: Interim financial reporting
IAS 36: Impairment of assets
IAS 37: Provisions contingent liabilities and contingent assets
IAS 38: Intangible assets
IAS 39: Financial instruments: recognition and measurement
IAS 40: Investment properties
IAS 41: Agriculture
Related: 5 Types of Accounts in Accounting (With Examples)
Who determines accounting standards?
There are several bodies that set accounting standards for different regions. These are the primary
organizations that set U.S. and international accounting standards:
FASB
The Financial Accounting Systems Board (FASB) is an independent, nonprofit body and the
primary developer of accounting standards for companies in the U.S. The FASB formulates
standards based on GAAP principles that apply to private companies and nonprofit organizations.
The FASB maintains a record of its standards online as the FASB Accounting Standards
Codification.
IFRS Foundation

5|Page
The International Financial Reporting Standards Foundation (IFRS) is a nonprofit organization
based in London. The primary goals of the IFRS Foundation include developing, maintaining,
updating and interpreting accounting standards for companies throughout the world. This
foundation also oversees another international accounting organization called the IASB. The IFRS
Foundation's standards include IFRS standards, IAS standards and interpretations of these
standards from different committees.
IASB
The IASB is an accounting standards organization that forms part of the IFRS Foundation. They're
a nonprofit organization that's independent of any national government. The primary goal of the
IASB is to provide uniform standards for accounting in different countries.
SEC
The Security and Exchange Commission (SEC) is a Nigerian government agency that regulates
the stock market. Its primary task is to enforce financial law, protect investors and prevent market
manipulation. All publicly traded companies in Nigeria. submit their annual reports to the SEC,
which delegates the setting of accounting standards to the FASB. The two organizations work to
ensure that clear and uniform financial information is available to the public. NGX

6|Page