Accounting Standards and its Application in a Public Company.

Topics: International Financial Reporting Standards, Financial statements, Balance sheet Pages: 5 (1753 words) Published: November 17, 2013
1. An explanation of the purpose of accounting standards. Accounting standards are authoritative statements according to which specific type of transaction or event should be displayed in the financial statement. (Collis, 2007) These rules request definitions of fundamental principles and terms, minimum levels of disclosure, and specifications of calculation methods. (Pieterzs, 2012) The purpose of this report is to discuss standardizing of accounting practices concentrating on FRS 18 example. There is no standardization of accounting standards nowadays as there are several sources of financial standards, which are: International Accounting Standard Board that issues International Financial Reporting Standards, national standard bodies such as Accounting Standard Board of UK, and legislation requirements. (Pieterzs, 2012) Essentially, the purpose of accounting standards is that complying with the standards financial statements should display the financial performance and cash flows of an organization fairly and consistently. Thus, “True and Fair” view is provided. (AASB, 2011) Variations in accounting practices are decreased, and a degree of uniformity is introduced. (Melvile, 2008) Accounting standards improve the quality and usefulness of the financial statements, as the specific procedures used in the production of consistent and functional reports are outlined. (Beke, 2011) Application of accounting standards allows users to compare the financial reports of an organization over time or, as well, to compare financial statements of different organizations in order to evaluate their strengths and weaknesses. (Melvile, 2008) International standards generate more clarity in the financial markets which results in more accurate information for investors. Thus, costs are reduced and investors’ confidence is enhanced. (Beke, 2011) Moreover, standards eliminate bias from the financial reporting, thus the information provided represents a complete and faithful illustration of company’s financial position. (Melvile, 2008) Standardization attempts to reduce subjectivity. As an example, manager can choose any of three methods of stock valuation (FIFO, LIFO, AVCO) that will benefit the business most. However, accounting standards introduce inflexible framework into organization’s practices that has to be followed by accountants. Every organization might face situations that demand unique solutions. Therefore, accountants will have to fit these precedents into standards. (Adams, 2011) In addition, implementation of accounting standards requires costs and action the company must take. Thereby, new procedures have to be designed which results in large financial investments. (Adams, 2011) 2. The nature of accounting policies and estimation techniques. In this work, FRS 18 will be used as a source of accounting policies and estimation techniques. Financial Reporting Standard outlines rules that have to be followed while choosing accounting policies and disclosures which allow users to understand the information provided by an entity. (ASB, 2000) Even though both accounting policies and estimation techniques require an accountant’s judgment, estimation techniques represent measurement aspects of transaction assessment, whereas accounting policies act as a theoretical guide. Therefore, distinction has to be outlined. Organizations use accounting policies as standards, rules, conventions and principles for specifying how the effects of transactions and other events should be displayed in its financial statement. (ASB, 2000) It is done through recognizing, presenting and selecting measurement bases for assets, liabilities, losses and changes to shareholders’ funds. (ASB, 2000) Adaptation of accounting policies allows entity representing a true and fair view. An example of accounting policy could be decision about inclusion of investments into balance sheet as either fixed or current assets. (ASB, 2000) Estimation techniques are...
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