WHY DO WE NEED ACCOUNTING STANDARDS?

ccounting as a 'language of business' communicates the financial results of an enterprise to various stakeholders by means of financial statements (Income statement, balance sheet etc.). If the financial reporting process is not regulated, there is possibility of financial statements being misleading and providing a distorted picture of the business, rather than the true state of affairs. The concept of "accountability" and "trusteeship" is paramount in corporate governance and therefore credibility of financial statements cannot be over-emphasized. Financial statements of company need to contain information which is relevant, reliable and comparable prepared on a consistent and uniform basis. Hence the need for documented accounting standards for companies in any country. What is an accounting standard? Accounting Standards are written policy documents issued by expert accounting body or by government or other regulatory body covering the aspects of recognition, measurement, presentation and disclosure of accounting transactions in the financial statements. The ostensible purpose of the standard setting bodies is to promote the dissemination of timely and useful financial information to investors and other stakeholders having an interest in the company's economic performance. The Accounting Standards reduce the accounting alternatives in the preparation of financial statements within the bounds of rationality, thereby ensuring comparability of financial statements of different enterprises. The Accounting Standards usually deal with the following areas: a) When to recognise a transactions in the financial statements, b) How to measure these transactions, c) How/where to present these transactions in the financial statements in a manner that is meaningful and understandable to the reader, and d) the disclosure requirements which should be there to enable the user especially shareholders and the potential investors to get an insight into what these financial statements are trying to reflect and thereby helping them to take prudent and informed business decisions. Accounting standards seek to describe the accounting principles, the valuation techniques and the methods of applying the accounting principles in the preparation and presentation of financial statements so that they may give a true and fair view. By setting the accounting standards the accountant has following benefits: Standards reduce to a reasonable extent or eliminate altogether confusing variations in the accounting treatments used to prepare financial statements. Accounting standards restrict the number of choices in the methods used to prepare financial statements and therefore reduce the risk of creative accounting. This should help the users of accounts to compare the financial performance of different organisations.

Companies are obliged to disclose the accounting policies they have used in the preparation of accounts. This should help the users of accounts better understand the information presented. Accounting standards should increase the credibility of accounts by increasing uniformity of accounting treatment between companies. Example when do you recognise sale in construction contract. Accounting standards require companies to disclose information which they might not want to disclose if the standards did not exist. These are the disclosures beyond the legal framework. For example related party transaction disclosures. Accounting standards provide a focal point for discussion about accounting practice. Application of standard accounting could attract foreign investors as valid comparable financial statement could be analyse with confident.

Standard setting in the sphere of the rapidly advancing accountancy techniques is admittedly a time consuming, costly and laborious process. The development of acceptable standards could be difficult particular with limited resource. Above all standards are important for the user of financial statement especially for protection of investors, financiers, regulatory bodies and other stakeholders; so as to bring about qualitative improvement in professional approach, harmonisation of recognised accounting principles and financial discipline. Ebrima B Sawaneh (Chartered Accountant) Tallinding