The significance of accounting standards in a changing global environment

The theme. As business, trade and capital markets become global, financial statements are read by investors, lenders, regulators and governments far beyond the country in which they are prepared. Accounting standards give these users confidence that the statements are prepared on a known, uniform and reliable basis. In a changing environment (new kinds of transactions, global investors, cross-border groups, regulatory scrutiny) their significance grows.

What accounting standards are. They 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 are to be recognised, measured, presented and disclosed. In India the ICAI issues them, giving due consideration to international standards and integrating them in the light of Indian conditions.

Why they are of great significance

1. Uniformity and comparability. The same transaction can be accounted for in several ways; standards bring uniformity of assumptions, rules and policies, so that the statements of different enterprises, and of one enterprise over time, are consistent and comparable; without them comparison may mislead.
2. Reliability and credibility. A standard must reduce significantly the scope for manipulating reported data; investors and lenders can then rely on published figures.
3. Better decisions by every user. Investors make better-informed decisions, governments can plan with confidence, researchers draw sounder conclusions, and auditors can refuse treatments that do not conform.
4. Disclosure of the basis of preparation: users learn the policies on which the accounts rest.
5. Global capital markets. Cross-border investment and listings need statements prepared on internationally understood standards; convergence with IFRS (Ind AS in India) lowers the cost of capital and eases foreign listing.
6. Multinational groups can report on one basis, reducing the cost of reconciling different national GAAPs.
7. New and complex transactions (leases, financial instruments, intangibles, revenue from contracts) need common rules if they are to be reported consistently; standards are revised as business changes.
8. Reducing conflicts of interest between management, shareholders, creditors and government, whose interests in reported figures differ, by setting neutral rules.

Limitations. Standards leave room for judgement and choice among alternatives; they cannot override the law; they add to the cost of compliance, particularly for small enterprises; and they need constant revision to keep pace with the environment.

Conclusion. In the changing global environment, accounting standards are the common language that makes financial information understandable, comparable and credible across firms and borders; hence the move to converge national standards with IFRS.