Consistency of Accounting Standards - Essay Example

International Accounting AF42001 Matriculation No: Topic: Why Consistency of Accounting Standards matters: A Contribution to the Rules Versus-Principles Debate in Financial Reporting. SUMMARY The author in this article discusses the importance of the consistency of the accounting standards as the need of the hour because of the fact that the reliance placed on the principles has been, thus far, unable to ensure its application consistently and the management tends to use dissimilar treatment to cases which is, in all, identical and same. Today, after the world gained globalization, this issue has been eradicated and guidance materials such as the International Financial Reporting Standards and the Generally Accepted Accounting Principles have been established which have removed the ambiguity to a great extent. Consistency can only be maintained in the companies throughout, if the accounting standards are itself consistent. Even though the establishment of the accounting standards has eradicated the ambiguity to some extent but it does not provide much uniformity in the judgmental matters. The rules and principles must be given much importance in this regard as well as their application, in order to maintain the coherence of the application of the accounting standards. In addition, judgmental matters must also be dealt with great regard such that the basis is not distorted. Only the internal consistency cannot assure the consistency of the accounting standards which is because the principles do not guide the managers in judgmental matters which in the end becomes a hurdle in the coherency of the accounting standards. IMPORTANCE OF ISSUE DISCUSSED: There is vast importance of the consistency of the Accounting standards used all over the globe. The rapid change is also resulting is ambiguity on part of the investors and other users of the financial statements which must be eradicated. “The boards have also acknowledged the need of coherence of the accounting standards as well as the accounting policies which would benefit the creditors, investors and other users of the financial statements.” (Helium, 2010) It is very necessary that all the financial statements give a familiar representation of the policies and procedures applied as well as the results reached, which would lead to the user of the financial statement to reach a better conclusion. “There is an immense need for the consistency of the accounting standard’s application in areas of revenue and expenses through internal consistency.” (Mourik) The IASB has also taken a vast initiative in this regard in order to urge the makers of the financial statements to invoke consistency in their financial statements. IFRS 8, in this regard has stated “All the entities should consistently apply, for similar transactions, the accounting policies unless specifically advised by the International Financial Reporting Standards” (IASB, 2008) it also adds that the change will only be permitted, once the concerned IFRS allows the change of the accounting policy or standard. Different countries use different accounting method, and the main reason behind this is the difference in the source of finance, the legal systems of the countries as well as the link between accounting and tax treatments. APPROPRIATENESS OF THE METHODS USED: Firstly, the author has used some old references to analyze the issue which range from the mid 19th century. The author has tried to compare the accounting methods adopted by different countries such as Germany, Japan, and United States etc where the basic principles adopted by these countries are slightly different. On the other hand, the author has used the debate of contrasting rules with principles is very relevant. In the beginning, they have addresses the problems which have raised due to the traditional application of the accounting standards from the past and then they have compared it with the modern standards such as the IFRS and the GAAP, as to how they have taken steps towards internal consistency and gaining coherency in their application. They have also stated several examples from the court cases which have resulted in a better definition of the accounting standards that they are not a natural science rather a phenomenon. The author has also highlighted the issue of the judgmental matters that arise in accounting, many related to the accounting of expenses and revenue, where the management takes the relevant decision either to maximize the profit or to minimize it (as per their motives). This is when consistency becomes a genuine issue because at many places even the IFRS has given liberty to the management over relevant application of the standards. It is well understood that “once an accounting method has been adopted, it should be consistently followed throughout.” (Basic College Accounting) ERRORS OR INCONSISTENCIES: In the beginning, the writer starts by stating that internal consistency is the most necessary for ensuring consistent accounting application but ends up saying that internal consistency alone cannot provide the basis of the consistent accounting applications. The writer has also mentioned the use of IFRS for accounting consistency, where it should be noted that “IFRS has not become compulsory in all the countries throughout the globe yet.” (Chicago Booth) QUALITY OF AUTHOR’S CONCLUSION: The author has nicely projected the issue when he analyzes the fact that the inconsistencies of the accounting standards is resulting in vague and ambiguous application of the standards. He has highlighted the issue by comparing the standards used in various countries all over the globe especially United States, Germany, Japan etc and the inconsistencies therein. The author has considered the sufficiency of the accounting standards to ensure the coherent application of the accounting procedures. Along with this, he has highlighted the fact that ‘absolute’ consistency of the application of accounting standards is not possible, especially in areas where judgments are required to take a decision. CONCLUSION: In my view, the issue is very relevant for today’s era as the accounting is spreading into new dimensions. The author has used relevant examples and theories to explain the need of accounting consistency and it is getting very necessary for the accounting standards to gain consistency so that the users of the financial statements can truly get the true and fair view of the financial statements. BIBLIOGRAPHY Basic College Accounting. (n.d.). Retrieved from http://basiccollegeaccounting.com/consistency-concept/ Chicago Booth. (n.d.). Retrieved from faculty.chicagobooth.edu/brian.barry/igm/GPS_Proposal.pdf Helium. (2010). Retrieved from http://www.helium.com/items/1879068-understanding-the-importance-of-international-accounting IASB. (2008). International Financial Reporting Standards. Mourik, C. M. Globalisation and the role of financial accounting information. In C. M. Mourik. Read More