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Accounting is
one of the most important parts of any successful business. As there is
currently much doubt in the economy, the use of this information is becoming
increasingly important for businesses if they want to survive and thrive.
Without this information, businesses would be unable to predict future inflows
and outflows through the firm which would mean they cannot plan appropriately, potentially
leading to business failure. The information obtained from these financial reports
can aid the users in making more informed business-related decisions. Also, the
availability of this information will allow the financial position and
performance of the business to be easily observed, which reduces the
uncertainty in the business for stakeholders as they are aware of the precise
business details. For this information to be useful to its users, it must
possess the two important qualities of “relevance” and being “faithfully
represented”. For the information to be relevant, it should impact the decision-making of someone pursuing
the information. Therefore, it should be able to aid in the prediction of
future events and in confirming past events, which will influence the decision
of the user. Accounting information that is faithfully represented should be;
complete and no information should be left out, error free to avoid any
complications and unbiased to present an honest view of the business. Having
both qualities is the only way for this information to be useful.

 

The International Accounting Standards Board (IASB) is
an independent body dedicated to developing a single set of globally accepted
accounting rules. Accounting standards reduce the variations in accounting
practices, as having a set of rules that are globally followed will allow the
users of financial statements to compare the financial position of companies in
different countries. Therefore, there will be no complications whilst
interpreting financial statements internationally as they would all be similar.

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Also, firms located in countries where there is are
lack of accounting standards may be incorrectly recording their accounting
information to make their businesses look more appealing to potential investors
even though the business may not actually be as successful as the financial
statements make it seem. This would lead to an increase in future net cash flow
for the firm, however poor economic decision making may arise as these
investors may potentially lose large amounts of money. In 2009, the founder of
Satyam, an Indian IT services and back-office accounting firm, falsely boosted
revenue by $1.5 billion. He did this by falsifying revenues, margins and cash
balances, making himself 50 billion rupees in process. Therefore, having
standards in place will ensure that all information is in the financial reports
and that it is relevant and faithfully represented so that the users of this
information can make informed decisions.

IAS 1 states that the main objective of financial
statements is “to provide information about the financial position, financial
performance and cash flows of an entity that is useful to a wide range of users
in making economic decisions”. It also provides information used in assessing
how well the business is being managed, how well resources are being allocated
and how business operations are running. Without financial statements, many
businesses would be unable to predict the future of the business. Therefore, they
wouldn’t be able to consider expanding as they would not be sure on the future
cash inflow, which may lead to the firm falling behind its competitors and
struggling.

However, implementing these standards may hinder the
development of new and improved procedures. A business may find a way of
reporting its finances in a more efficient way due to innovation or
advancements in technology. Yet, if they must follow a standard they would not
be allowed to implement this into their business as it would go against the
rules. This could be detrimental to a firm in the long term, as if they unable
to implement ways to increase efficiency and accuracy of their financial
reports then accounting standards may become irrelevant and outdated.

As accounting standards are becoming increasingly
important, many businesses are heavily invested in complying with them. This
can be very costly for the business as if the costs to the business were to
increase, this reduces the profit which will lead to lower dividends for
shareholders. If shareholders are incurring the cost of these standards, then
they will look to invest elsewhere to earn a greater return on their
investments, which would have a negative on future net cash flow into the
business. Therefore, the implementation of generalised accounting standards may
not be beneficial for all businesses.

No two businesses are the same, so having a common
standard may lead to important aspects of a business being overlooked and not
taken into consideration. So therefore, the standards may benefit one firm, but
to another they could be problematic to another. The costs and benefits of
implementing these standards should be considered as it is hard for them to be
generalised to work for every business.

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