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 On these estimates, an outdated unit can be valued more than the crown jewels.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 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
- meaningful and
- understandable to the readers, and
- 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 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.