What are the main arguments for financial standards and disadvantages of it?
In the modern world, there are always arguments for and against standards. Standards mainly bring benefits in the way that it gives confidence to investors. As investors feel confident, it leads to an increase in investment into the company. Arguments in support of standards are Credibility, Discipline, and Comparability.
- Credibility: If accountants produce financial reports choosing their own accounting policies it will lead to the profession of the accountancy losing credibility. Having standards is essential to reveal the true and fair view of financial reports.
- Discipline: Directors try to influence any financial statistics such as Earnings per Share (EPS) to improve the market valuation of their company’s. Unclear Financial Reporting Practices become visible when there is a recession as companies did not report actual market value of their company’s.
- Comparability: Financial statements can help investors to predict future cash flows and analyze companies. Standards can help investors to compare trends and performance of companies in the market. Having different accounting policies will lead to making wrong investment decisions.
However, there are disadvantages of having a set of standards. Consensus-seeking and overload with IFRS exceeding 3000 pages.
Consensus-seeking: Companies fear that imposing new standards will lead to negative effects when reporting their financial position.
Overload of information: There are various standards setters with different requirements. For example: “The FRC in the UK with FRSs; the FASB in the US with the Accounting Standards Codification; the IASB with IFRSs and IFRICs; the EU with the separate endorsement of IFRS giving us EU-IFRS; and the EU with its Directives and national Stock Exchange listing requirements.” Different standards make it complicated to follow the rules and finding the correct accounting rules on a particular topic.