Financial Accounting Concepts

What are Accounting Standards? | Benefits and Limitations

Accounting Standards (ASs) are the written statements of the code of practice of the regulatory accounting bodies that are to be observed in the preparation and presentation of financial statements.

In simple terms, accounting standards are the written documents issued by the expert institutes or other regulatory bodies covering various aspects of treatment, measurement, presentation and disclosure of accounting transactions.

The basic objective of ASs is to remove variations in the treatment of several accounting aspects and to bring about standardisation in the presentation. Various countries have their own local ASs.

They intended to harmonise the diverse accounting policies followed in the preparation and presentation of financial statements by different reporting enterprises so as to facilitate intra-firm and inter-firm comparisons.

On the international level Accounting standards are known as IFRS (International Financial Reporting Standards). It is expected that soon all the countries will start following IFRS in place of ASs.

Accounting standards deal with the issues of:

  1. Recognition of events and transactions in the financial statements
  2. Measurement of these events and transactions
  3. Presentation of these transactions and events in the financial statements in a manner that is meaningful and understandable to the reader
  4. Disclosure requirements should be there to enable the public at large, stakeholders and prospective investors etc.

Objectives of Accounting Standards

The entire idea of ASs is centred around the harmonisation of accounting policies and practices by different business entities so that the diverse accounting practices adopted for various aspects of accounting can be standardised. ASs standardise diverse accounting policies with a view to:

  1. Eliminate the non-comparability of financial statements and thereby improving the reliability of financial statements and
  2. Provide a set of standard accounting policies, principles of valuation and disclosure requirements.
  3. Providing guidance notes in dealing with certain matters not covered in main standards.
  4. Bringing uniformity in the way and presentation of financial records prepared by different subsidiaries of the same company.

AS reduces the accounting alternative in the preparation and presentation of the financial statement within boundaries of nationalities, hence improving the quality of financial information.

Benefits and Limitations of Accounting Standards

Accounting standards seek to describe the accounting principles, the techniques of evaluation and the methods of applying the accounting principles in the preparation and presentation of financial statements so that they may give a true and fair view of the picture of the enterprise. Following are the main advantages of the accounting standards:

  1. Standards reduce to a reasonable extent the variations in the preparation and presentation of financial statements. Probably this is the most genuine reason and benefit of ASs.
  2. In many areas of accounting, there are no set procedures to deal with transactions and situations. Accounting standards provide a suitable solution in this case.
  3. The application of accounting standards would to a limited extent, facilitate the comparison of financial statements prepared by different companies located within the same country.
  4. Sometimes accounting standards are used to remove inconsistency with accounting treatment followed by other countries.

Limitations of Accounting Standards

  1. Alternative solutions to certain accounting problems may have different arguments to recommend them. Therefore, the choice between various accounting policies may become difficult.
  2. There may be a trend towards rigidity and away from flexibility in applying the accounting standard.
  3. Accounting standards cannot override the statute. The standards need to be framed within the limits of prevailing statutes.
  4. Accounting rules are not universally uniform, to conclude. Accounting rules vary by country, making it difficult for investors to compare the financial statements of firms in different nations.
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