Advantages Of Having Appropriate Accounting Standards Accounting Essay

Category: Accounting

This report provides a review about the importance and the advantages of having appropriate accounting standards and in which extend accounting standards are vital in today's economical world. For instance, accounting standards is useful for a variety of organization, from federal government to nonprofit organization to small businesses to corporations. Also the report will refer some accounting standards drawbacks, framework and principles based on accounting standards.

Fundamentally, that mean adjusting new accounting standards has become a necessity to do business smoothly. However, accounting standards can be defined as Specific accounting policies concerning particular topics or industries, providing descriptions of acceptable methods of treating elements of accounting. (1)

Moreover, as we know the main objective of Accounting Standards is to standardize the diverse accounting policies and practices with a view to eliminate to the extent possible the non-comparability of financial statements and the reliability to the financial statements.

WHAT IS THE NEED FOR ACCOUNTING STANDARDS

There is a strong need for adopting accounting standards within the organization .In such details, let's assumes that you have received a copy of the published financial statement of a company. And you want to be sure that you can rely on the methods it selected to calculate its revenues, expenditure and balance sheet value .without this assurance you would not be able to have any confidence at the all figures, and could not sensibly take any decision concerning your relationship with the company. Which mean that having appropriate accounting standards enable the firms to take the right decision related to their business.

Also accounting standards are very helpful for all investors .People invest in organizations of all types and they would all like to have faith and true in the figures reported in their financial statement .(2)

1.2 OBJECTIVES AND IMPACT OF ACCOUNTING

STANDARDS

The main purpose of accounting standards is to facilitate the provision of financial information about entities to enable investors, analysts, creditors and the entities themselves to make informed decisions about the allocation of resources. Accounting standards are essentially about disclosure and, in many respects, are at the heart of market efficiency.

Clearly, while accounting standards assist preparers of financial statements by providing a framework within which to construct the statements, their prime importance is to assist users of the statements to make meaningful assessments about the financial position of an entity. Users of financial statements range from directors to investors, through to credit rating agencies.

Effective financial reporting, which is essential to investor confidence, can only be achieved if it is underpinned by relevant and well designed accounting standards. As the detail of financial reporting requirements is increasingly being left by legislation to be filled in by accounting standards, the importance of accounting standards is becoming accentuated.

Accounting standards facilitate both the efficient day-to-day operations of individual business entities and contribute to the efficient operation of capital markets.

At the firm level, accounting standards improve the accountability of individual business enterprises and their managements to investors and creditors. By promoting accurate reporting, entity and to put in place effective and efficient corporate governance arrangements.

At a broader level, accounting standards are central to the provision of accurate, transparent and reliable information to the market as a whole. In this regard, a well informed market will generally be an efficient one.

Accounting standards that result in the provision of accurate and comparable information about the true financial performance and position of business entities promote investor confidence and market integrity, thereby ultimately reducing the costs of capital throughout the economy. Public confidence in the integrity of the financial reporting framework is central to maintaining and expanding a sophisticated domestic capital market.(3)

2. THE DRAWBACKS OF ACCOUNTING STANDARDS

In the next following lines, negative effects of accounting standards can be displayed in several fields in the business environment. The key disadvantage of adopting new accounting standards will be the cost to businesses. For some years into the future, accountants will have to understand both their own country's "traditional" GAAP (Generally Accepted Accounting Principles) rules, as well as the IFRS (International Financial Reporting Standards). Having to understand two different sets of rules requires extra time and work on the part of accountants, and that costs money

In addition, accounting standards causes some inefficiency. For instance, the cost of changing historical audited financial statements prepared under the old rules, just for the sake of comparability with later year financial results. And resulting extra expense .For example, those accountants have to be paid for all that extra work for the company whose financial statements will have to be restated. (4)

2.1 A PROPOSED FRAMEWORK FOR ESTABLISHING PRICIPLES-BASED ACCOUNTING STANDARDS

Framework is the foundation for accounting standards. In such an instance, establishing high-quality, principles-based accounting standards first requires establishing a set of universally agreed upon characteristics for what constitutes such a standard. However, if the organization wants to have high quality principles based on accounting standards the following six characteristics should be met:

1. Faithful presentation of economic reality.

2. Responsive to users' needs for clarity and transparency.

3. Consistency with a clear Conceptual Framework.

4. Based on an appropriately-defined scope that addresses a broad area of accounting.

5. Written in clear, concise and plain language.

6. Allows for the use of reasonable judgment

The above six characteristics are meant to serve as a framework upon which it will be possible to begin the long process of building out principles-based standards.

While each of the following six characteristics is fundamental to the success of any principles-based system, it is worth noting that the first two characteristics discussed below are "first among equals." These two characteristics speak to the critical importance of ensuring that any future principles-based system promotes financial reports that:

(a) Faithfully present the economic reality of transactions; and

(b) Are responsive to users' need for clarity and transparency.

These two characteristics should be self-evident. Indeed, the whole purpose of requiring companies to publish audited financial statements is to provide investors a tool to gauge economic performance and prospects. Yet, the reality is that under today's rules-based accounting standards this basic goal is often not met. (5)

3. CONCLUSION:

To sum up, I would like to say that following appropriate accounting standards is the best way for the all corporation to achieve their business objectives. And at the country level, the major advantages for adopting appropriate accounting standards can be notice that country becomes stronger economically. In addition to that, using high quality accounting standards makes the country recognized internationally. On the other side, they may some disadvantages for using accounting standards that firms should be aware about it and try to overcome.