ACCOUNTING FRAMEWORKS
By: Dhruv Dev Dubey, Content Writer, Graphic Designer, Research, Strategy & HR Consultant
These days no business house or organization can work without a proper accounts system. The audits are the summary of all and beyond of any business which spells out its status. The credits and debits of the company along with liabilities and assets are with other data base are brought together to be calculated. Therefore, the accounting framework is a published set of criteria that is used measure, recognize, present, and disclose the information appearing in an organizations' financial statements. It is very important because without which the auditors will not release a clean chit.
There are various types of accounting frameworks used.
GAAP- Generally Accepted Accounting Principles.
These are the commonly used rules and regulations. The main objective of GAAP is that there must be transparency in financial statements. Also known as US GAAP; as it is used by the entities in the US.
The specialty of GAAP is that it improves the transparency in the financial statements. But there is no guarantee in this framework that the company's financial statement are without faults, which can be misleading for the investors. As GAAP is not.
The specifications of GAAP, which is the standard adopted by the U.S. Securities and Exchange Commission (SEC), include definitions of concepts and principles, as well as industry-specific rules. SEC intends to move GAAP to IFRS -international financial reporting standards as it is used in most parts of the world. GAAP and IFRS can be pertinent to most businesses.
GAAP is not regularized by the government: it is not a must for companies to use it but SEC wants companies to follow GAAP for the need of financial reporting. Despite putting the compulsion SEC is not accountable for the standards related with GAAP. On the other hand, at the corporate level the variation, the changes in financial reporting standards are impacted by the Financial Accounting Standards Board. The FASB Advisory Council (FASAC) advises the FASB on all matters that may influence GAAP rules.
The business houses that release stock are held responsible by SE it demands annual audits by independent auditors. The companies who do not have outside investors are not mandated to follow this norm. The government concerns are under the influence by some norms which are managed by the Government Accounting Standards Board (GASB)- are a bit different from GAAP.
Other countries have different rules in the same concern., which vary from those in the United States. Each country's own version of the FASB, such as the Canadian Institute of Chartered Accountants (CICA), creates these rules.
IFRS- International Financial Reporting Standards. This accounting frame work is to maintain and report the financial data. This is derivative of the London-based International Accounting Standards Board -IASB. In more than 120 countries this framework is much used and involved. This shows the uniformity of rules being used in most countries to verify the financial situation, which make it less complicated to compare and contrast the financial results. The working of the IFRS is based on general principles, as compared to GAAP. This makes the functioning of the IFRS less complicated and diligent to understand than GAAP.
Topics covered by IFRS:
Financial statements
Revenue recognition
Employee benefits
Inventories
Income Tax
Business combinations
Foreign exchange
Employee benefits
Borrowing costs
Retirement benefit
Mineral resources
Agriculture
Developed by the International Accounting Standards Board (IASB), the primary intention of the IFRS is to make a set of standards that easy to understand, can be enforced, and of premium quality.
IFRS assists companies to formulate their financial statements, reveal information, and report their financial results. IFRS also provides investors with dependable and clear information about a company's financial strength, market position, and performance.
Major differences between: GAAP & IFRS
GAAP- rules based
Used only in the US
Comparison between companies becomes measurable due to strict rules.
IFRS- principle based approach
Used in 160 countries
Has different interpretations, therefore clarity in comparison is less.
OCBOA- Other Comprehensive Basis of Accounting
Initiated on a past proposal, The AICPA has allotted a draft comprising its Financial Reporting Framework for SMEs. It was issued with an intention to get remarks upon it. The OCBOA emphasizes on the 20 million trades and industries in the US which are not likely to follow GAAP, so subsequently this is to bring about a financial reporting system that is relevant, simple and reliable.
OCOBOA is not like the GAAP functional system. It functions more on cash basis, and the income tax basis of accounting. This can be used as simple disclosure method. OCBOA is a cheaper system of maintaining accounts. But in this system the data may not be so detailed. Also it include a legal basis of accounting such as that used by insurance companies to comply with the rules of a state insurance commission along with the accounts statements that are organized.
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Major differences between GAAP & OCBOA
GAAP-Principle based method
Fair value measurements required
Complex financial statements
Cash flow statements required
OCBOA-Non GAAP accounting protocol
cash basis financial statements incorporate measurements on the basis of cash receipt and cash payments.
Uncomplicated financial statements
Financial statements do not require cash flows details
In general, GAAP or IFRS, are considered to be the gold standard of financial reporting and often are required by statute or contractual arrangement with lenders or other stakeholders of a company. But when GAAP-based financial statements are not required, it might not be the best solution for a small to medium-sized business. Because of the inherent complexity that sometimes is required to fully implement GAAP, the preparation often can be overly complicated and resource-consuming, and it includes information that users of the financial statements often don't need or care about. In those cases, OCBOA may be a better alternative.
Historically, if a small or medium-sized business chose not to use GAAP, the business typically would report under the cash basis or income tax basis of accounting, both of which have been the most commonly used reporting options under OCBOA despite the inherent limitations associated with them. The newest framework, the FRF for SMEs, now is a very compelling OCBOA option to consider. The FRF for SMEs was designed to provide robust, accrual-based financial statements, including statements of financial position, operations, changes in equity and cash flow that closely resemble traditional GAAP financial statements. Informative, but not extraneous, note disclosures are required. The framework was constructed by the AICPA to be a more cost-effective alternative to GAAP. Historical cost is the primary measurement versus costly fair value measurements.
It does not include requirements for complicated and expensive accounting for matters such as variable interest entities, hedging, derivatives, fair value, asset impairment, stock compensation, reporting of comprehensive income, etc. It also provides simplification and more flexibility in options to account for income taxes, leases, goodwill and other intangible assets, and consolidation of related companies. The intended outcome is less cost, more simplified accounting, clearer disclosures and a more stable reporting environment without significant changes needing to be implemented on a regular basis, which generally is the norm with GAAP.
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