Unknown facets of accounting standards b.v.raghunandan
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Unknown facets of accounting standards b.v.raghunandan

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evolution of accounting concepts in the USA and packaging them as international accounting standards in the year 1973 by establishing International Accounting Standards Committee

evolution of accounting concepts in the USA and packaging them as international accounting standards in the year 1973 by establishing International Accounting Standards Committee

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Unknown facets of accounting standards b.v.raghunandan Unknown facets of accounting standards b.v.raghunandan Presentation Transcript

  • The Unknown Facets of Accounting Standards - B.V.Raghunandan, SVS College, Bantwal National Seminar on “Indian Accounting Standards” Sri Mahaveera College, Moodbidri August 16, 2013
  • Double Entry Book- Keeping • Luca Pacioli, an Italian Mathematician and a Collaborator of Lionardo Davinci created Double Entry Book-Keeping in 1494 • Double Entry Book-Keeping was a creation of the Renaissance Period • Newton’s Third Law of Motion was inspired by Pacioli’s creation • From 1494 to 2013, no other substitute for Double Entry System • The system was versatile enough for mechanised accounting or computerised accounting • It is simple, stable and a Final Say
  • Genesis of Accounting Standards • In 1966, the Chartered Accountants of England, Canada and the USA made a proposal to establish an international study group of accountants • In 1967, Accountants International Study Group (AISG) was formed and the group published many papers until 1973, not attempting an alternate system to double entry book- keeping, but to create standards • In June 1973, IASC was set up
  • Developments in the USA • 1934-35- Securities & Exchange Commission was established • Division of Corporate Finance (DCF) was created to ensure conformity with SEC requirement regarding proper accounting, full disclosure and comparison • SEC insisted on historical cost accounting to avoid questionable revaluation of assets • 1936-American Institute of Accountants introduced the phrase, “Generally Accepted Accounting Principles” • 1938-39-AIA through its Committee on Accounting Procedure (CAP) started publishing Accounting Research Bulletins (ARB).CAP comprised 18 practitioners and 3 academicians serving on part-time basis
  • SEC & Congress: Legal Authority • Accounting bodies did not have the legal authority to impose the accounting policies • Politics, lobbying and taxation had their influence on accounting policies • 1938-39-The US Congress permitted LIFO method of Issue for valuation of inventory • 1940: C.A. Paton and A.C.Littleton’s “An Introduction to Corporate Accounting Standards” emphasised Matching Concept and Historical Cost • 1947- CAP issued ARB 29 allowing FIFI, LIFO and Average Cost
  • Board Replaces Committee • 1958 – AICPA proposes setting up Accounting Research Board to replace Committee on Accounting Procedure (CAP) • The Board comprises 21 members from Big Eight Accounting Firms, Academicians • The APB is charged with “narrowing the differences in accounting practice,” which effectively means “stop allowing so many optional treatments.” • In 1967, APB issued Opinion 11 on Deferred Tax Liability and Statement 2 on Segment Reporting • 1971-72-AICPA recommends a full fledged accounting standards setting body • July 1, 1973-FASB was set up to supersede APB
  • Formation of IASC • 2013 is 40th Year of International Accounting Standards since IASC was formed in 1973 • Objectives: 1. Formulation and Publication of Accounting Standards 2. Promotion of the Worldwide Acceptance 3. Harmonisation of regulations, accounting standards and procedures relating to presentation of financial statements • It published 29 Academic Standards until 2001, when IASC was superseded by International Accounting Standards Board
  • How Accounting Standards Should be • Simple to make it a common man’s knowledge • A single option rather than a multiple option like Weighted Average Method for Inventory • Stable and Rigid on the assumption that Accounting is a passive discipline and not an active one like production and marketing • Less Number of Committees in framing and implementing • The Rationale for every standard or change from existing practice must be given • Change should address significant aspect and not minor aspects • In conformity with taxation
  • Reality Check………. AS were • Most Complicated • Changing very often • Each Country had its own AS • US overtook any other country or IAS in coming up with more than 150 Accounting Standards- IT Companies made US-GAAP most popular • AS for many other activity like Auditing Standards, Cost Accounting Standards
  • Between 1973-2001 • IAS sent an initial thrill, which died down quickly • Professional Managers emerged in Corporate America • Managerial Personnel increased in number • Auditing Firms helped these Professional Managers in carrying out Creative Accounting to maximise the wealth of the professional managers • Derivatives were allowed by many developing countries • Governments, Institutions and Individuals tried their luck in the derivatives markets • For creating a complex empire, setting up hundreds of subsidiaries by a single holding company • Seeking M&A for tax planning and transfer pricing benefits • Cross Holding of shares
  • End Result • Stakeholders Had No Voice • People Having Voice had no Stake • Managerial Accountability became nil • Minority Shareholders were silenced • Auditors became virtually part of Management • Executive Compensation hit the Roof • Institutions Started Board Activism and AGM Activism
  • Impact on Accounting and Auditing • The Big Eight Accounting Firms slowly became the Standard Setters • The controversy of industry Vs government was settled once and for all • Through M & A, they became Big Five • They Advised the Clients to resort to Proforma Reporting • The Accounting Scandals involved all the Big Five in 2001 • Arthur Anderson went into liquidation, but started unwinding in 2002 • IASC issued 41 AS till 2000 • IFRS were brought out subsequently • Current Cost to Replace Historical Cost
  • Price Waterhouse Coopers • Started Marketing IFRS • Started preparing XBRL • Brought Together Accounting Professionals from All Over the World • No longer financial reporters are manually readable
  • • 2004- Global Trust Bank’s Collapse-RBI to the rescue of depositors • 2009- Satyam Computers- Mahindra Group saved the Company • PWC were the auditors • Spot Exchange of India Ltd., in 2013
  • What must be done…….. • The solution is a long-term one • Develop academic practitioners of accounting • Auditors be appointed at random by the Government • Scrap Interim Financial Reports • Bring back the horizontal and simple format of final accounts • One method of issue of material, one method of depreciation and no provision for change of method • Strengthen the historical cost method • Scrap
  • THANK YOU