Generally Accepted Accounting Principles (GAAP) are the accounting standards used in the US, while the International Financial Reporting Standards (IFRS) are the accounting standards used in over 110 countries around the world. GAAP is considered a more “rules based” system of accounting, while IFRS is more “principles based". Originally, the U.S. Securities and Exchange Commission was looking to switch to IFRS by 2015. It now seems that this conversion deadline has been pushed out many years.
Both GAAP and IFRS aim to provide relevant information to a wide range of users. However, GAAP provides separate objectives for business entities and non-business entities, while the IFRS only has one objective for all types of entities.
Regardless of the overriding system of accounting principles, the application of these principles must be well understood and applied. To properly apply the accounting principles, it is important to understand the importance of documented accounting policies and procedures.
Like other organizational policies and rules, finance and accounting policies serve to improve organizational performance in myriad ways. By understanding the benefit of having well-designed accounting policies, you can design and implement accounting policy in your business to improve both the quality and efficiency of your financial reporting function.
Consistency of Application
Accounting policies help employees evaluate accounting transactions in a standardized manner. In larger companies, many accountants may be examining financial activity and, due to the judgment required in accounting decisions, these accountants may determine different accounting treatments for the same transaction. Accounting policy acts as a roadmap for the application of generally accepted accounting principles and removes variance in employee judgment.
Correct Accounting Treatment
For complex accounting issues, such as revenue recognition or classification of securities, accounting policies provide a way for employees to arrive at the correct accounting treatment, even if they do not have specialized knowledge in the complex area. Accounting supervisors should be careful. While accounting policies can help guide competent employees to the right decision, policy should not be a substitute for competence. Accounting staff should know how to apply the accounting policy but also be able to recognize when a transaction does not exactly fall under the guidelines of the policy and more analysis should be conducted.
By streamlining decision processes, accounting policies can make the bookkeeping process more efficient. For simple transactions, accounting policies can be used to automate financial transactions in a company's accounting system. While the work of automated accounting systems still needs to be reviewed by accounting personnel, this process should still be less time-consuming than performing the work manually. An additional benefit to the automation of accounting processes is a reduction in error. In general, automated accounting systems do not make typographical errors. Human intervention, and thus human error is significantly reduced. While automated accounting system mistakes can be made, they are generally more systematic and easier to spot.
For companies with audit requirements, accounting policy serves an additional purpose. The Sarbanes-Oxley Act of 2002 requires companies to assess internal control systems and render an opinion on internal control over financial reporting. Accounting policies serve as evidence that accounting transactions are evaluated in a systematic manner, and adherence to these policies shows that transactions are processed in the same way. Accountants examining internal control can use accounting policies to help follow transactions throughout the accounting system. Independent auditors experience a much easier and more efficient audit process where accounting policies are clearly defined and followed.
What Are Accounting Procedures?
Accounting procedures dictate how companies record and report their financial information. Whether GAAP or IFRS, these principles provide companies with basic understanding of how to record information for internal and external business use. Because these principles are based on a conceptual framework, business owners have some ability to develop accounting policies for applying GAAP or IFRS to their business.
Accounting procedures should be documented. Further, they should be customized to fit the needs of a specific company in a specific industry.
Accounting procedures are designed to offer increased clarity, guidance and transparency. There are many types of procedures that should be documented; accounting is just one aspect on which businesses of all sizes must focus. Documenting accounting procedures is essential to ensure that consistency is maintained and that applicable accounting principles and policies are appropriately followed.
In summary, businesses are required to account for their business for both internal and external financial reporting. Accounting principles have been established, whether GAAP or IFRS which must be followed, depending on their geographic presence. Interpretation of the principles should be documented in clear accounting policies that are consistent with those principles, but focused upon the industry and the individual business practices of the company. And finally, accounting procedures for applying these policies should be clearly defined, documented and followed. In order to help you understand the relationship between each of these areas, we have prepared a short ebook, "Accounting Policy, Procedures and Controls Hierarchy" which you can get by clicking the button below.
Carrtegra is a Houston, Texas based management consulting firm specializing in Compliance, Controls and Ethics; Internal Controls; Financial Advisory; Technology Services; Risk and Security; and Financial Talent. We work closely with your company to provide carefully tailored high-value solutions.
Our professionals are subject matter experts in the financial regulatory environment and provide guidance by leveraging our experience, industry knowledge, familiarity with laws and regulations and creativity. Carrtegra brings years of experience in designing and reviewing processes, evaluating controls and system risks, and making critical recommendations that increase process efficiency, reduce risks and enhance system security. While you are managing your business, we can dedicate full time to designing and helping you implement solutions. We do the work; you own the solution.
Sam H. Carr is the Managing Partner of Carrtegra, LLC. Sam has over 30 years of experience in accounting, auditing, financial management and consulting. Sam has focused much of his career on process improvement and redesign. Sam holds an MBA and is a CPA, CIA, CISA and a Certified Compliance and Ethics Professional (CCEP). Sam is a finance and operations executive with broad-based experience that includes 12 years as a CFO or Chief Accounting Officer in both public corporations and private entities, and fourteen years with an international public accounting firm. Sam orchestrated an Initial Public Offering of a consolidation of dental practices throughout the United States. In addition to his IPO experience, he owns a powerful track record of demonstrated skills in a wide range of business environments including designing financing, mergers and acquisitions and growth companies. Sam has been the Chief Executive of a management consulting firm for the most recent 10 years. Sam’s focus has been substantially on quality of services and valued solutions as well as client and employee retention.