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  Sources of Accounting Rules

Introduction to Sources of Accounting Rules

In current years there have been increasing trends in the direction of the internationalisation of business and the integration of financial markets. These trends have assist to strengthen the case for the international harmonisation of accounting rules. While a general set of rules is followed, users of financial statements should be better located to compare the financial health of companies based in various countries. The presence of such types of rules should also relieve international companies of a few of the burden of ready financial statements because dissimilar financial statements will no longer have to be ready to comply along with the rules of various countries where a specific company operates.

IASB (The International Accounting Standards Board) is an independent body that is at the forefront of the move in the direction of harmonisation. The Board that is based in the UK (United Kingdom) is dedicated to developing a single set of high-quality, global accounting rules which give transparent and comparable information in financial statements. These rules that are termed as International Accounting Standards (IASs) or International Financial Reporting Standards (IFRSs), deal with main issues like:

  • What information should be disclosed;
  • How information should be presented;
  • How assets should be valued; and
  • How profit should be measured.

In current years, various important developments have very much increased the authority of the IASB. The first main boost came while the European Commission needed almost all companies that are listed on the stock exchanges of EU member states to adopt IFRSs for accounting periods that are commencing on the date or after 1 January 2005. The result, almost 7,000 companies in 25 dissimilar countries switched to IFRSs. This was followed in 2006 through the IASB and the US Financial Accounting Standards Board agreeing a roadmap for convergence among IFRSs and US accounting rules. In that similar year, China intimately aligned its financial reporting standards along with IFRSs. At last, in year 2007, Brazil, Canada, Chile, India, Japan and Korea all announced their purpose to adopt, or converge with, IFRSs.

The EU need to adopt IFRSs, as mentioned earlier, overrides any laws in force in member states which could either hinder or restrict compliance with them. The final intend is to get a single framework of accounting rules for companies from all member states. The EU identifies that this will be attained only if individual governments do not add to the needs imposed through the several IFRSs. So, it seems that accounting rules developed in individual EU member countries will ultimately disappear.  Though, for the time being the EU allows that the governments of member states might require impose additional disclosures for some corporate governance matters and regulatory needs. In the UK (United Kingdom), company law needs disclosure relating to various corporate governance issues. For instance there is a need to disclose details of remuneration of directors in the published financial statements that goes beyond anything required through IFRSs. Additionally, the Financial Services Authority (FSA), in its role like the UK (Stock Exchange) listing authority, imposes rules on Stock Exchange listed companies. These involve the need to publish a condensed set of interim (half-year) financial statements as well to the annual financial statements. (These statements are not needed through the IASB, even though there is a standard giving guidance on their form and content.)

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Figure: Sources of external accounting rules for UK public limited company listed on the London stock exchange

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