The Importance Of Accounting Standards

Register to read the introduction… According to FASB’s The Structure of Establishing Accounting Standards, “The process of setting accounting standards can be described as democratic because like all rule-making bodies the board’s right to make rules depends ultimately on the consent of the ruled”. One of the advantages of the process is that external parties are invited to comment on exposure drafts or present testimony during roundtable discussions. The history behind SFAS No. 123 provides us with a prime example of external parties influencing Board decision in order to avoid detrimental economic consequences on reported earnings and finally influencing to regulate because of the economic consequences. The 1993 Exposure Draft was extremely controversial and the Board received over 1,700 comment letters objecting to the recognition of compensation costs for employee share options. The Board held six days of public hearings and representatives from 73 organizations presented testimony. Amazingly, legislative proposals addressing this accounting issue were introduced before Congress both opposing and supporting proposals in the 1993 exposure draft. “A Sense of the Senate resolution was passed that the FASB should not at this time change the current generally accepted accounting treatment of stock options and stock purchase plans”. However, a second resolution was passed stating, “Congress should …show more content…
Those decisions involve buying, selling, or holding equity and debt instruments and providing or settling loans and other forms of credit.” Since the objectives of general-purpose financial reports focus on the user, a new standard must therefore enhance the usefulness of the financial information. However, once again, the FASB encounters difficulty in measuring the economic consequences pertaining to usefulness to investors, creditors, managers, labor unions, government regulatory agencies, suppliers and the general-public’s utilization of the general purpose financial reports for decision-making. Finally, there is the impact of a new standard on the preparer of financial information. Managerial accounting has taught us that direct costs are more easily measured than indirect costs. Preparer direct costs include amounts associated with the education of staff and management, audit costs, and most importantly the financial consequences on reported earnings resulting from the standard, (ex: SFAS 123R). Earnings management would be considered an indirect cost if a new standard tempted management to behave in a self-serving manner in order to increase compensation or positively reflect the entity for