In recent years, accounting rules have seen significant updates, particularly in the areas of revenue recognition, leases, and credit losses. While these changes can be frustrating for business owners and managers due to their complexity, they serve a vital purpose beyond compliance. Standardized financial reporting promotes investor confidence and supports the efficient functioning of capital markets. Here’s a look at the importance of standardized financial reporting and how it has evolved over the last century.
The Need for Financial Guidance
The stock market crash of 1929 and the Great Depression led to the creation of the U.S. Securities and Exchange Commission (SEC) to regulate the securities industry and enforce standardized financial reporting. Around the same time, the American Institute of Certified Public Accountants (AICPA) was formed to develop accounting principles.
In the mid-20th century, the AICPA issued a series of guidelines that laid the foundation for U.S. Generally Accepted Accounting Principles (GAAP). These principles ensure consistency and comparability in financial reporting across U.S. companies. The Financial Accounting Standards Board (FASB), established in 1973, took over the standard-setting responsibilities from the AICPA’s Accounting Principles Board (APB). Since then, the FASB has been responsible for maintaining and updating GAAP.
GAAP provides guidance on how businesses should report historical financial results, promoting transparency and consistency. This allows business owners and investors to compare financial performance across companies and industries. Public companies in the U.S. are required to follow GAAP, and many private companies voluntarily adhere to these standards as well.
Emergence of Global Standards
As international trade expanded, the need for globally accepted financial reporting standards became clear. In 1973, the International Accounting Standards Committee (IASC) was created to establish a common set of accounting rules. This led to the development of International Accounting Standards (IAS).
In 2001, the International Accounting Standards Board (IASB) replaced the IASC, with the goal of creating a single set of high-quality international standards. These standards, known as International Financial Reporting Standards (IFRS), are now used globally.
Convergence Efforts
In the early 2000s, the FASB and IASB launched a joint effort to harmonize U.S. GAAP and IFRS, aiming to improve the comparability of financial statements worldwide.
One notable success of this collaboration was the alignment of revenue recognition standards. The FASB’s Accounting Standards Update (ASU) No. 2014-09 and IFRS 15 created a principles-based approach for recognizing revenue, replacing roughly 180 specific guidelines under GAAP. These standards were introduced in 2014 and became effective for publicly traded companies in 2017, and for private companies in 2018.
Efforts to converge lease accounting standards were less successful. After a decade of debate, the FASB and IASB issued separate standards — ASU 2016-02 for GAAP and IFRS 16 for international reporting — which narrowed some differences but left others in place.
Though progress has been made, GAAP remains more prescriptive, while IFRS tends to be more principles-based. The United States has not yet adopted IFRS, but both the FASB and IASB continue to work toward greater global comparability. For example, the FASB participates in the IASB’s Accounting Standards Advisory Forum (ASAF), and regularly collaborates with other standard-setting bodies to improve financial reporting globally.
The Future of Financial Reporting
Accounting standards continue to evolve to address new challenges, including sustainability and environmental, social, and governance (ESG) reporting. There is increasing focus on developing frameworks for non-financial reporting to provide stakeholders with a broader view of a company’s performance and overall impact.
From the unregulated reporting practices of the early 20th century to the development of GAAP and IFRS, accounting standards have played a pivotal role in the financial markets.
Keeping up with these evolving standards can be challenging for businesses. Contact your team at Accavallo & Company LLC to ensure your financial reporting is in compliance and that you’re prepared for upcoming changes. We can be reached at (203) 925-9600 or email [email protected] for immediate assistance.
