Why accounting standards are needed and important

Meaning. Accounting standards codify the generally accepted accounting principles. They lay down the norms of accounting policies and practices, as codes or guidelines, on how the items in the financial statements should be dealt with in the books and shown in the statements. In India they are issued by the ICAI, which takes international standards into account in the light of Indian conditions.

Why they are needed

1. Diversity of practice: the same transaction can be accounted for in several acceptable ways (stock valuation, depreciation methods); without standards, figures of different firms, or of one firm over years, are not comparable, and comparing them may mislead.
2. Many users rely on published statements: shareholders, investors, creditors, employees, government and researchers need reliable data, and their interests can conflict with management's.
3. To limit manipulation: a standard must reduce significantly the room to manipulate reported data.

Why they are important (their utility)

1. Uniformity, consistency and comparability of the assumptions, rules and policies used in financial reporting.
2. Reliability and credibility: investors make better-informed decisions; government can plan with confidence; researchers can draw sounder conclusions.
3. Disclosure of the basis of preparation: users know on what basis the accounts were prepared.
4. Easier audit: auditors can refuse treatments that do not conform to the standards.
5. International acceptance: standards converged with IFRS help firms raise capital and report across borders.