Accounting Standards- Objectives, Benefits, Limitations

Financial statements have incredible importance for both internal and external stakeholders.
They are a report card for the company. So, it is important that they are regulated and do not
report misleading information. And the Accounting Standards (AS) provide us with a framework
for this regulation. Let us take a look.
Accounting Standards (AS)
Accounting Standards (AS) are basic policy documents. Their main aim is to ensure
transparency, reliability, consistency, and comparability of the financial statements. They do so
by standardizing accounting policies and principles of a nation/economy. So the transactions of
all companies will be recorded similarly if they follow these accounting standards.
These Accounting Standards (AS) are issued by an accounting body or a regulatory board or
sometimes by the government directly. For example in India, the Indian Accounting
Standards are issued by the Institute of Chartered Accountants of India (ICAI).
Accounting Standards mainly deal with four major issues of accounting, namely
i. Recognition of financial events
ii. Measurement of financial transactions
iii. Presentation of financial statements in a fair manner
iv. Disclosure requirement of companies to ensure stakeholders are not misinformed
Objectives of Accounting Standards
Accounting is often considered the language of business, as it communicates to others the
company's financial position. And like every language has certain syntax and grammar rules the
same is true here. These rules in the case of accounting are the Accounting Standards (AS). They
are the framework of rules and regulations for accounting and reporting in a country. Let us see
the main objectives of forming these standards.
1. The main aim is to improve the reliability of financial statements. Now because the
financial statements have to be made following the standards the users can rely on them.
They know that not conforming to these standards can seriously affect the companies.
2. Then there is comparability. Following these standards will allow for inter-firm and intra-
firm comparisons. This allows us to check the progress of the firm and its position in the
market.
 3. It also provides one set of accounting policies that include the necessary disclosure
requirements and the valuation methods of various financial transactions.

Benefits of Accounting Standards

Accounting Standards are the ruling authority in the world of accounting. It makes sure that the
information provided to potential investors is not misleading in any way. Let us take a look at the
benefits of AS.

1 Attains Uniformity in Accounting

Accounting Standards provides rules for standard treatment and recording of transactions. They
even have a standard format for financial statements. These are steps in achieving uniformity
in accounting methods.

2 Improves Reliability of Financial Statements

There are many stakeholders of a company and they rely on the financial statements for their
information. Many of these stakeholders base their decisions on the data provided by these financial
statements. Then some potential investors make their investment decisions based on such financial
statements.

So these statements must present a true and fair picture of the financial situation of the company.
The Accounting Standards (AS) ensure this. They make sure the statements are reliable and
trustworthy.

3 Prevents Fraud and Accounting Manipulations

Accounting Standards (AS) lay down the accounting principles and methodologies that all entities
must follow. One outcome of this is that the management of an entity cannot manipulate financial
data. Following these standards is not optional, it is compulsory.

So these standards make it difficult for the management to misrepresent any financial information. It
even makes it harder for them to commit any fraud.

4 Assists Auditors
Now the accounting standards lay down all the accounting policies, rules, regulations, etc in a
written format. These policies have to be followed. So if an auditor checks that the policies have
been correctly followed he can be assured that the financial statements are true and fair.

5 Comparability

This is another major objective of accounting standards. Since all entities of the country follow the
same set of standards their financial accounts become comparable to some extent. The users of the
financial statements can analyze and compare the financial performances of various companies
before making any decisions.

Also, two statements of the same company from different years can be compared. This will show
the growth curve of the company to the users.

6 Determining Managerial Accountability

The accounting standards help measure the performance of the management of an entity. It can help
measure the management’s ability to increase profitability, maintain the solvency of the firm, and
other important financial duties of the management.

Management also must wisely choose their accounting policies. Constant changes in the accounting
policies lead to confusion for the users of these financial statements. Also, the principles of
consistency and comparability are lost.

Limitations of Accounting Standards

There are a few limitations of Accounting Standards as well. The regulatory bodies keep updating
the standards to restrict these limitations.

1] Difficulty between Choosing Alternatives

There are alternatives for certain accounting treatments or valuations. Like for example, stocks can
be valued by LIFO, FIFO, weighted average method, etc. So choosing between these alternatives is
a tough decision for the management. The AS does not provide guidelines for the appropriate
choice.

2] Restricted Scope
Accounting Standards cannot override the laws or the statutes. They have to be framed within the
confines of the laws prevailing at the time. That can limit their scope to provide the best policies for
the situation.
Importance of Accounting Standards for Investors
Investors are one of the primary stakeholders of a company, and they rely heavily on financial
statements to make informed investment decisions.
Accounting standards ensure that financial statements are prepared in a standardized and
consistent manner, providing investors with reliable and comparable information.
By adhering to accounting standards, companies are required to disclose all relevant financial
information, including assets, liabilities, revenues, and expenses.
This information is crucial for investors to analyze the financial health of a company and make
informed economic decisions.
For instance, if a company follows accounting standards, it is required to disclose any contingent
liabilities, which are potential obligations that may arise in the future. This information is crucial
for investors to assess the financial risks associated with investing in a particular company.
Moreover, accounting standards ensure that financial statements are audited by independent
auditors, providing investors with additional assurance that the financial statements are accurate
and reliable.
This is especially important for investors who may not have the expertise to analyze financial
statements themselves.

1. Briefly explain the need/ significance of international accounting standards.?

 Standardise the diverse accounting policies and practices
 Eliminating the non-comparability of financial statements to the extent possible
 Ensuring reliability of financial statements
 A standard must provide a generally understood and accepted measure of the phenomena of
concern
 A standard should significantly reduce the amount of manipulation of the reported numbers that
is likely to occur in the absence
 They lay down uniform accounting policies and practices that should be followed by all
business organizations, in respect of particular transaction
 It enables easy comparability of financial statements of various business organizations as
uniform accounting standards Board are more accurate and more reliable
 As accounting standards are formulated and issued by the ape expert accounting body in the
country, they are very scientific and rational
 They increase and improve the credibility and reliability of the accounting information
 They curb the unlimited flexibility in the adoption of accounting policies and practices
 The financial statements prepared as per Accounting Standards would be useful to investors in
judging the yield and risk involved in alternative investments in different companies
 Accounting reports prepared as per Accounting Standards are regulated by Government
Officials, Income Tax authorities, etc., as quite reliable and acceptable
What is Net Realizable Value (NRV)?
Net realizable value (NRV) is the value for which an asset can be sold, minus the estimated costs
of selling or discarding the asset. The NRV is commonly used in the estimation of the value of
ending inventory or accounts receivable.
The net realizable value is an essential measure in inventory accounting under the Generally
Accepted Accounting Principles (GAAP) and the International Financing Reporting Standards
(IFRS). The calculation of NRV is critical because it prevents the overstatement of the assets’
valuation.
The NRV complies with a more conservatism approach to accounting. The conservatism
approach directs accountants to use valuation methods that generate a smaller profit and do not
overstate the value of the assets in situations when professional judgment is required for the
evaluation of the transactions.
Net realizable value is an important metric that is used in the lower cost or market method of
accounting reporting. Under the market method reporting approach, the company’s inventory
must be reported on the balance sheet at a lower value than either the historical cost or the
market value. If the market value of the inventory is unknown, the net realizable value can be
used as an approximation of the market value.