Lesson Summary and Quiz
Accounting provides an important service to decision makers. Like any consumer, decision makers demand certain qualities in the service they are getting. To ensure quality and usefulness of information, accounting observes certain standards. 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. A summary of the major points is presented below.
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This is a summary of the salient points in each lesson. Be sure to complete the main lessons before proceeding to this unit.
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 it useful. In accounting, standards are of primary importance because there are many ways that financial information is prepared, presented, and interpreted. 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.
They provide a measure of certainty and clarity that makes comparison and evaluation more reliable for decision making. In situations with accounting significance for which there is yet no authoritative literature or pronouncement, standards provide a guide to the proper evaluation of the situation that would result in achieving the objective of financial reporting.
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 organizations or standard setting authorities also develop accounting standards for local applications.
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.
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