Importance of Accounting Standards

Good financial reporting promotes healthy financial markets. Accounting Standards aim to promote comparability, consistency and transparency in the interest of the users of Financial Statements.

Brings Expertise into the Financial Statements: Accounting standards are policy documents issued by recognized expert accountancy bodies which have been evolved gradually their pooling expertise. These standards relate to various aspects of the Financial reporting process such as measurement, treatment, presentation and disclosure of transactions, and events which help companies to bring out quality financial statements.

Facilitates Comparability:  Traditionally, a number of alternative treatments are provided for the purpose of flexibility in several areas of financial accounting. These diverse accounting policies diminish and sometimes even distort the comparability of relevant information in the financial statements. Accounting standards standardize (reduce alternative treatments) these diverse accounting policies with a view to facilitate comparability.

Leads to Consistency: The existence of Standards, which minimize the number of alternative practices and their application over time leads to consistency in reporting. This is important for companies whose performance over a period of time becomes comparable and meaningful.

More Information due to Increased Disclosure: In the absence of Standards, companies have a tendency to shy away from disclosing complete information to the external users. Accounting Standards provide guidelines to companies in respect of disclosure requirements which are mandatory. These increased disclosure requirements means more relevant information to users of financial statements.

Relevant and Reliable: For credible financial reporting, standards which provide a neutral platform with the objective of reliability and relevance are to be developed. The absence of such standards may lead to purposeful manipulation of financial statements.

Standards differ from country to country for many reasons such as different legal systems, different political environment, levels of inflation, degree of sophistication and use of capital markets. In the Indian contexts, most prominent among these are the International Accounting Standards (IAS) issued by the International Accounting Standards Committee (IASC) and Statements of Financial Accounting Standards (SFAS) and other pronouncements issued by Financial Accounting Standards Board (FASB) and Accounting Standards (AS) issued by Accounting Standards Board (ASB).

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