Lesson Summary-Financial Statements
Accounting provides an important service to decision makers. Like any consumer, decision makers demand certain qualities in the service they are getting. These standards are in the form of principles and pronouncements promulgated by standard setting bodies, following rigorous practices that include carefully selected agendas, public consultations, discussions, approval, and post implementation review. Standards provide guidance so that information will have the fundamental and enhancing characteristics to make it useful to decision makers.
General purpose financial reporting provides useful information about the reporting entity that is useful to existing and potential investors, lenders, and other creditors in deciding whether to provide resources to an enterprise. General purpose reports do not provide all the information but serve the common information needs of most users. It is the most cost-effective alternative to detailed and individual reports for providing useful information to primary users. To ensure that these reports meet the requirements of usefulness they must be prepared according to certain standards.
Standards seek to find a balance between uniformity and practicality. Many users use accounting information for different decisions. They will have conflicting, albeit valid, preferences as to how information should be presented. They take special interest in the development of standards that affect the preparation and presentation of accounting information. It will be impractical to prepare different reports for different users with different preferences. Instead, accounting prepares a set of general-purpose statements that contain most of the information needs for a broad range of users. These statements will have limited information on certain specific items which some users may be interested in. Separate special reports and supplementary information may be prepared to provide the information desired.
Standards provide assurance that information has the characteristics to make it useful. In accounting, standards are useful for consistency because financial information can be prepared, presented, and interpreted in many ways. Comparability of methods and results will be impossible without standards. While accounting standards do not have the exactness and accuracy of physical standards, they are acknowledged and accepted as authoritative benchmarks by the accounting professions, especially since they are established by authoritative bodies through a rigorous and thorough process.
Two of the most influential organizations that develop, and issue accounting standards are the International Accounting Standards Board, or IASB, based in London, and the Financial Accounting Standards Board, or FASB, in the United States. The IASB issues International Financial Reporting Standards or IFRS. The FASB’s standards are referred to as generally accepted accounting principles, or GAAP. Other sources of standards include government regulators such as the Securities and Exchange Commission. Within local jurisdictions, recognized professional organization or standard setting authorities also develop accounting standards for local application.
The standard setting process consists of several important steps starting with the formulation of a development agenda, research, consultations, review, and issuance. The published standard is subjected to a post implementation review to determine if this requires narrow interpretation or limited scope application and minor amendments.
The characteristics of useful financial information determine quality. For information to be useful, the fundamental characteristics of relevance and faithful representation must be present. These have the attributes of materiality and completeness. The information is also free from errors. If either relevance or faithful representation is not present, information is useless even if it has other desirable characteristics. Usefulness is improved further by the enhancing characteristics of understandability, comparability, verifiability, and timeliness. Enhancing characteristics cannot offset the absence of fundamental characteristics and will not make the information without such fundamental ones any more useful.
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