Accounting Standard-Setters

Accounting standard-setters endure an arithmetic mean that the readers of general purpose fiscal reports bring on a reasonable knowledge of bill. Specifically, the IASB Framework states that users are pass judgment to have a reasonable knowledge of business and economic activities and business relationship and a willingness to study the information with reasonable diligence. Hence, at that place is an expectation that financial statements are not tailored to meet the needs of passel who have not, in some way, studied financial accounting system. Students should be boost to consider whether this expectation is in itself reasonable.As Chapter 2 states, there is an expectation held by accounting standard-setters that users of financial statements have a more or less sound knowledge of financial accounting. For example, within the IASB Framework (which is as well as the Australian Accounting Standards Board (AASB) Framework) reference is do to users who are expected to hav e a reasonable knowledge of business and economic activities and accounting and a willingness to study the information with reasonable diligence. Within the United States abstract Framework Project, reference is made to the informed reader.Hence, a envision has been adopted by the regulators that users of financial statements should have a certain aim of knowledge, and when accounting standards are being developed, this level of knowledge is assumed. In defence force of this position, we could probably argue that if such an assumption was not made and then the development of accounting standards would be much more difficult and succession consuming wedded that the standard-setters would need to consider how uninformed users energy act to the particular standards. The position adopted is also consistent with other professions which also typically assume a certain level of expertise when evolution guidance for their professions members (however, we need to be careful with j ustifications like thisjust because others do a certain thing does not mean it is the right thing).If users receive it necessary, there are many experts who would be available to provide advice on how particular numbers were derived. Of course, such advice will generally be at a cost which does raise the issue that it can be dear(p) for some individuals to gain an understanding about the operations of organisations that perhaps have an impact on their ongoing existence. Hence, while there is arguably a right-to-know, for great deal without an accounting knowledge this right can only be exercised at some cost.In making this judgement, students should consider the various articles that often appear in newspapers, and various discussions that occur on television and piano tuner in relation to an organisations lolly. Rarely is any describe made of the accounting methods used, even though the gelts ultimately describe are directly a product of the many decisions that would have been made regarding how particular items should be accounted for (if possible, direct reference should be made to a number of articles which discuss organisations inform profits). Hence, it does appear as if profits are often held out as some form of hard, impersonal measure of organisational performance.In considering why the media might behave in this manner, atomic number 53 possibility is that those responsible for writing the stories are ignorant that financial accounting relies upon a great deal of professional judgement and they might conceptualize that every decision made by accountants is clearly mapped out by a comprehensive system of rules. Alternatively, the writers might consider that people but do not want to be bogged down in the o.k. detail. As another possibility the accounting profession, through such vehicles as conceptual frameworks, may have successfully cultivated an impression (with the people in the media, and others) that the practice of accounting is objective, and the output of the accounting system is extremely comparable between different entitiesmeaning that one organisations profits can appropriately be compared to another.The implications of this approach to reporting profits in the media is that one entitys performance as represented by its profit might simply be compared to another, and that the entity with the higher reported profit might be considered to be more successful, and therefore to represent a better investment. Its management might also be considered in a more favourable light than the management of the entity with the lower reported profits. Implications such as this, however, assume that readers and media listeners do not appreciate that profits are directly related to the various accounting choices made.Advocates of an efficient market perspective, however, might argue that as long as the information about accounting method selection is made public somewhere, such as in the annual report, then the market (for example, the capital market), on average, will be able to understand how the adoption of particular accounting methods affected reported profits, and hence the market will not simply fixate on the final numbers reported. There are differences in opinion about the efficiency of markets, such as the capital market.A further loony toons that could be raised in relation to this question is that accounting profits are not a comprehensive measure of organisational performance given that accounting profits typically disregard many of the social and environmental implications of a reporting entity.