The Importance Of Accounting Standards

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Accounting standards are an integral part of the accounting process. If properly implemented, they can create business expansion and facilitate the flow of user-friendly information to several different users including investors, banks, regulators and the public. This is a cyclical process and if accounts of a business are properly prepared in accordance with accounting standards, it encourages confidence in the business and this in turn boosts trade. In order to allow investors to make informed decisions in relation to global investments, the International Financial Reporting Standards (IFRS) are used in over 100 countries worldwide. IFRS are a set of rules, developed by the International Accounting Standards Board (IASB), which standardise…show more content…
Elliot and Elliot note that “one of the fundamental characteristics of financial information is that it faithfully represents the transactions reported within it.” In this way, financial information by its nature has economic consequences in the way in which it influences investment decisions globally. Economic consequences can be described as “the impact of accounting reports on the decision-making behaviour of business, government, unions, investors and creditors.” ( Zeff 1978) There are several influences involved in dominating the process of accounting standard setting such as governments and corporations as well as boards and regulatory bodies. In the past, it is apparent that any party who influenced the changes in economic ways, experienced benefits. Several large corporations also actively lobby for changes in accounting standards. In this way, political interference in the process of the adoption of accounting standards has always been evident and has had far reaching…show more content…
The issuing of this standard was accelerated by the financial crisis where the existing requirements of IAS 39 came under intense scrutiny. IAS 39 defined fair value as the amount for which an asset could be exchanged or a liability settled, between knowledgeable and willing parties in an arm’s length transaction. This method of accounting implied that firms should value assets according to the price at which the assets could be sold on the market at that time. Prior to the introduction of IFRS 9 there was concern about the way this fair value measurement impacted the way in which gains and losses on financial liabilities were presented in the financial statements. The fair value of a liability can fluctuate depending on interest rates or the credit risk of the firm. During the financial crisis, many businesses would have had increases in their credit risk causing a corresponding decrease in the fair value of liabilities. If a business was recognising financial liabilities at fair value through profit and loss, a gain would be recognised in income. Therefore, the business would essentially be generating profit as a result of their increasing credit risk. Elliot and Elliot describe this process as “counter-intuitive and potentially misleading”. While the debate between historical costing versus fair value was in
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