Which Accounting Standard Applies?
Accounting has been at the core of business for centuries now. As business developed and the trading environment became more complex, the accounting principles have evolved. The past few years have seen many changes within business regulations and legislation. The past 10 years have seen its share of corporate failures, with financial disclosure at the middle of the controversy! These events sparked the transformation of accounting standards and pressure to apply good corporate governance. Just what accounting standards apply to each type of business entity?Firstly, it should be understood that applying international standards does not mean that everywhere those standards are applied are the same as in South Africa. Each country will have to elect to what extent to apply the international standard, and even when adopting the standard additional requirements (such as the US Sarbanes-Oxley, and SA Schedule 4 of the Companies Act and King Code) may be enforced. Also, most countries have local accounting standards as the international standard may not be usable or feasible to apply to all trading entities, typically the small to medium enterprises.
- Companies (including limited, private, public, external, and not for profit);
- Close Corporations;
- Sole-traders;
- Partnerships; and
- Trading/business trusts.
The companies and close corporations are governed by the Companies Act and Close Corporations Act; however, the other trading vehicles are not governed by equivalent commercial legislation. Trusts are governed to a great extent by its trust deed. The lack of governing commercial legislation and the usual absence of well structured contracts to manage the relationship and dispute resolution of partnerships lead to the inevitable frustrations and tears that have become associated with partnerships. Other associated legislations, such as the Income Tax Act and Value-Added Tax Act have been shaped and moulded to cater for the identification and taxing of sole-traders, partnerships, and trading trusts; and in doing so, we find legal substance and identification to such trading vehicles.
To understand which accounting standards need be applied to the various trading vehicles we would have to review what governing legislation, instruments and users require the financial statements!
Very importantly, the purpose of financial statements must also be understood. General purpose financial statements are directed towards the common information needs of a wide range of users, for example, shareholders, creditors, employees and the public at large. General purpose financial statements are intended to meet the needs of users that are not in a position to demand reports tailored to their particular information needs. IFRS/GAAP and GAAP for SME’s are designed to apply to the general purpose financial statements and other financial reporting of all profit-oriented entities.
In contrast special purpose financial statements are prepared in accordance to a framework that seeks to meet the needs of specific users such as the tax authorities, banks, and owners (if they are also involved in the management of the entity). The assumption is that these users have access to additional information, other than the financial statements, on which to base their decisions (additional information includes the accounting records of the entity and minutes of meetings).
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