Accounting standards confusion and clarification

¶ … Accounting Standards?

Over time, quite a number of accounting guidelines and rules have been developed by bodies like FASB and IASB. Do these standards serve any meaningful purpose? In this text, I concern myself with accounting standards and their relevance. In so doing, I will amongst other things discuss why we need accounting standards.

Wahlen, Jones, and Pagach (2012, p.1-20) point out that "the FASB and the IASB operate so that they can develop new accounting standards in a thorough, thoughtful, and efficient manner, with due process, and in open public forums." To begin with, it is important to note that accounting standards play a critical role when it comes to the enhancement of the comparability of financial statements. National, regional, and international boundaries no longer exist when it comes to trade and commerce. Indeed, the world has effectively become a global village. For this reason, there exists a need to ensure that when it comes to financial reporting, some uniformity is observed. In the opinion of Fischer, Taylor, and Cheng (2011), life would be much simpler if things were to become uniform and consistent. To drive their point home, the authors in this case wonder why South America and the United States do not use standard power plugs so as to make things easier for travelers wishing to charge their phones. Similarly, the authors also wonder why two different countries would choose to give two economic transactions, which happen to be identical, different accounting treatment. Accounting standards bring the much needed uniformity to the financial reporting field. Ideally, when an economic transaction in America is identical to that in Japan, the two transactions should be subjected to the same accounting treatment. This would make the financial statements of business entities in different countries comparable. In such a case, an international investor in Japan would be able to undertake a comparison (side by side) of the financial statements of two companies -- one in the United States and another one in Japan -- and based on that comparison make sound investment decisions. Other users of financial statements who may be in need of comparable financial statements as a basis for their decisions include but they are not limited to customers and suppliers (Fischer, Taylor, and Cheng, 2011).

Accounting standards also help multinational companies manage their global operations in an easy and professional way. Indeed, multinationals as Fischer, Taylor, and Cheng (2011, p.504) note "must have comparable accounting standards with which to measure the effectiveness and efficiency of their various international subsidiaries, branches, and/or other equity investments." Without the ability to seamlessly undertake such comparisons, the said entities would find it rather challenging to prepare consolidated financial statements. It can also be noted that thanks to accounting standards, businesses can easily compare their performance with those of other businesses in an attempt to determine how competitive they are in the marketplace. In the absence of accounting standards, each business would present its financial statements in a different format, thus making such comparisons impossible.

Next, it should also be noted that accounting standards enhance not only the credibility but also the reliability of financial statements. In a way, when there is inexactness and ambiguity in the interpretation of financial statements, scandals and inappropriate accounting practices are likely to crop up. Accounting procedures that could bring about the said ambiguity include depreciation methods, stock valuation, etc. As Arner (2007) points out, the credibility of an entity's accounting systems is critical when it comes to the provision of financial information to be relied upon by stakeholders as they seek to evaluate not only such an entity's financial strength and past performance but also its ability to perform well going forward. A significant number of stakeholders rely on financial statements to make decisions that are expected to be economically sound. These stakeholders include creditors, employees, investors, suppliers, regulatory agencies, and other interested parties. Accounting standards present a framework for the presentation of credible, accurate, and complete financial statements. Indeed, "the best assurance that financial statements contain understandable information is if they are prepared and presented in accordance with accounting standards and principles that are generally acceptable internationally" (Arner, 2007, p.172). Creditors need to rely on financial statements that present a true picture of the financial condition of firms. On the other hand, investors and employees (both existing and potential) also need to make informed decisions on which companies to associate with going forward. Similarly, regulatory bodies such as tax authorities must rely on accurate financial records so as to accurately compute tax liability amongst other things. It should also be noted that when business entities make use of similar accounting standards, it becomes relatively easy for the relevant regulatory bodies as well as audit departments to spot inconsistencies and inadequacies. By issuing recommendations on how specific economic transactions should be recognized, accounting standards effectively protect the interests of a wide range of stakeholders.