A Study on the Nature of Accounting Standards

Introduction

A few years ago, “standards” in accounting literature were commonly referred to as “principles.” The term “standard” was coined by English people in England at the end of 1969, when they established their Accounting Steering Committee in place of “principles.” However, in America, the term was used and became popular following the establishment of the FASB in 1973, whereas in India, the term became popular following the formation of the ASB by the ICAI in 1977.

A standard is an agreed-upon set of criteria for what is proper practice in a given situation; it serves as a basis for comparison and judgement; and it serves as a departure point when variation is justified by the circumstances and noted as such.

Standards are not intended to constrain practice, but rather to serve as guideposts to truth, honesty, and fair dealing. They are not unintentional, but rather deliberate in origin: they are expected to express the carefully selected policies of the highest types of businessmen and most experienced accountants. They set a high but attainable standard of performance while allowing for justifiable deviations and variations in the procedures used.

Accounting Standards are primarily concerned with financial measurements and disclosures, and they can be viewed as a technical response to calls for improved financial accounting and reporting. Accounting standards aid in the attainment of uniformity in accounting practices.

Nature of Accounting Standards

 Based on the preceding discussion, we can conclude that accounting standards serve as a guide, dictator, service provider, and harmonizer in the accounting process.

• To serve as a guide for accountants

Accounting standards serve as a guide for accountants during the accounting process. They serve as the foundation for the preparation of financial statements. They, for example, provide a method for valuing inventories.

• Act as a dictator

In the field of accounting, accounting standards act as a dictator. In some areas, accountants have no choice but to follow practices other than those stated in accounting standards, much like a dictator. For example, a Cash Flow Statement should be prepared in accordance with accounting standards.

• Assist in the provision of services

Accounting standards define specific terms, present accounting issues, specify standards, explain numerous disclosures, and provide an implementation date. Accounting standards, as a result, are descriptive in nature and serve as a service provider.

• Act as a harmonizer

Accounting standards are not biased and help to ensure consistency in accounting methods. They neutralise the impact of various accounting practices and policies. Accounting standards frequently develop as well as provide solutions to specific accounting issues. As a result, whenever there is a conflict on accounting issues, accounting standards serve as a harmonizer, facilitating solutions for accountants.

The Purpose of Accounting Standards

Accounting standards enable accountants to provide data through financial statements in a way that management, the board of directors, investors, and stakeholders can understand. This information should be presented accurately such that key decisions based on it can be made correctly. Accounting standards that are well-designed boost investor confidence in the company.

Role in the company

Accounting standards provide accountants with day-to-day guidance to ensure the smooth operation of the business. An accountant’s responsibility would be to provide financial information that is relevant, reliable, neutral, and comparable – all of which can be accomplished by adhering to accounting standards. Having the ability to adhere to accounting standards instils trust in the marketplace. The company is perceived as transparent, which benefits the company’s financial position.

Comparability

Accounting professionals must be able to compare financial statements. Investors will compare the information provided by one company to that of another before deciding which one to use. Following accounting standards ensures that all businesses play by the same rules, making comparison easier. However, because standards differ by country, a situation may arise in which financial information from two businesses is compared but was compiled utilising different standards.

Harmonisation

As of June 2011, the United States has mandated generally accepted accounting principles, also known as U.S. GAAP, as its accounting standard. The Financial Accounting Standards Board is in charge of it (FASB). The International Accounting Standards Board (IASB) is in charge of the International Financial Reporting Standards (IFRS), which are used in over 120 countries. Both the FASB and the IASB are working to harmonise US GAAP and IFRS. One of the driving forces behind convergence is the adoption of a single accounting standard by all accountants worldwide.

Conclusion

Accounting standards are written statements containing rules and guidelines approved by accounting institutions for the preparation of coherent and consistent financial statements, as well as other disclosures affecting the various users of accounting information. Accounting standards establish the terms and conditions of accounting policies and practices through codes, guidelines, and adjustments to facilitate the interpretation of financial statement items and their treatment in the books of account.

We all know that the purpose of Generally Accepted Accounting Principles (GAAP) is to bring uniformity and comparability to financial statements. As can be seen, GAAP allows for a wide range of alternative accounting treatments for the same item in many places. Different methods for valuing stock, for example, produce different results in financial statements.

Such practices can sometimes mislead intended users when making decisions in their field. Considering the problems encountered by many accounting users, the need for the development of general accounting standards was identified.