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

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Unknown facets of accounting standards b.v.raghunandan

  1. 1. 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
  2. 2. 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
  3. 3. 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
  4. 4. 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
  5. 5. 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
  6. 6. 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
  7. 7. 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
  8. 8. 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
  9. 9. 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
  10. 10. 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
  11. 11. 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
  12. 12. 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
  13. 13. 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
  14. 14. • 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
  15. 15. 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
  16. 16. THANK YOU