Accounting is a language in itself. It communicates the financial statements of an enterprise. It speaks its financial status. But, as common with any other language, this language also suffers from ambiguity. Words and figures can be interpreted differently from what the author of such report intends to express. It is not different to errors that use of words such as “unreported loan” instead of “cash theft” can mean.
Any financial statement is simply a report authored by an accountant. And as each accountant is a distinct person, so does his report.
Accounting is full of estimates. And each estimate can differ on views taken by Accountants making such estimates. Different estimates lead to different interpretation. A useless formula to develop junk product can be estimated as a precious asset. On these estimates, an outdated unit can be valued more than the crown jewels. It will not just affect the owners but also shareholders, investors and creditors. After all, they all have stakes in a company.
It is this differences that need financial reporting to be regulated. Unless there are regulations, financial statements of different enterprises cannot become comparable. If the financial accounting process is not regulated, the scope of financial statements being misleading will be wide. It can be tendentious and provide a distorted picture of the business, rather than the true state of affairs. To cut such discrepancies and establish transparency, there have to be certain standards. A financial statement is not meant to be mere another report, it has to be reliable, comparable as well as reflect the true state of affairs. It is with this view that there are accounting standards attached to the process of financial accounting.
Accounting Standards provide the framework and standard accounting policies. This makes the financial statements of different enterprises become comparable. They reduce the alternatives and thereby establish the feature of comparability.
Accounting Standards deal with the issue of –
recognition of events and transactions in the financial statements,
measurement of these transactions and events,
presentation of these transactions and events in the financial statements in a manner that is
the disclosure requirements which should be there to enable the public at large and the stakeholders as well as to the potential investors in particular, to get an insight into these financial statements which helps the users to take prudent and informed business decisions.
The aim of Accounting Standards is to standardize diverse accounting policies with a view to cut, to the greatest possible extent,
the non-comparability of financial statements and thereby improving the reliability of financial statements, and
to provide a set of standard accounting policies, valuation norms and disclosure requirements.
These objectives are not just luxury features but the necessity of modern time. It creates the trust of readers on the profession of accountancy. By establishing comparability, it reduces the scope of ambiguity. Ease of doing global business due to comparability of financial reporting of different enterprises is an added bonus to it.