Value of Accounting Standards Term Paper

Pages: 9 (3077 words)  ·  Bibliography Sources: ≈ 13  ·  File: .docx  ·  Level: College Senior  ·  Topic: Accounting

The balance sheet is the primary financial statement that helps determine an enterprise's financial position, and provides crucial information for potential lenders. Information about financial structure, relative amounts of capital provided by investors and lenders, is useful in predicting future borrowing needs and how future profits and cash flows will be distributed among those interested in the enterprise. "Global consistency is needed for financial, as well as non-financial, information disseminated to investors in our markets. Moreover, there is a growing consensus around the world that financial reporting in any marketplace should be of high quality in order to serve the needs of investors."

Financial structure information also helps predict how successful the enterprise is likely to be in future financing transactions. Information about liquidity and solvency is useful for predicting an enterprise's ability to meet financial commitments. Liquidity relates to short-term availability of cash after taking into consideration short-term financial commitments. Solvency relates to long-term availability of cash to meet commitments as they become due.

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The primary financial statement that provides information about an enterprise's profitability is the income statement, also known as the profit and loss statement. Information about enterprise profitability is useful to assess likely changes in the enterprise's control of economic resources and the ability of the enterprise to generate cash flows from existing resources. Information about the variability of profits is also useful for predicting future cash flows. In addition, profitability information helps determine how effectively an enterprise might employ additional resources.

Term Paper on Value of Accounting Standards Accounting Assignment

A lender wants to obtain some confidence an enterprise can generate sufficient cash to meet scheduled debt payments; cash flow information helps determine this. The cash flow statement reports cash flows from investing, financing, or operating activities. Lenders are interested in the sources from which cash is generated, the timing and certainty of its generation, and how the cash is used. For example, an enterprise's long-term prospects depend on its ability to generate sufficient cash from profitable operations to provide returns to investors and other financing sources. If current cash requirements are instead generated by investing activities such as securities, or from financing activities such as long-term borrowing or the sale of stock, this information will be valuable to lenders.

The cash flow statement is not as universally required as the other statements. The EU, for example, does not require it. The cash flow statement is becoming increasing important, however, in judging management's performance and assessing an enterprise's ability to repay a loan. "Comparability assumes there is a common measuring yardstick by which to distinguish similarities and differences that informed users can rely upon in making decisions about providing resources, that companies can rely upon to conclude whether they have properly prepared financial statements, and that securities regulators can rely upon to adequately detect potential misinformation in a timely manner."

Accounting standards also specify supplementary information that accompanies financial statements. These items, called footnotes, should contain additional relevant information about items in the balance sheet and income statement. This information could relate to the risks and uncertainties affecting the enterprise, resources and obligations of the enterprise not recognized in the balance sheet, or breakdowns of figures by geographic area, customer type, or other category. Footnotes also contain detailed information about the accounting standards a firm employs, thereby lending transparency to the statements.

No one statement tells the whole story. The income statement, for example, provides an incomplete picture of performance without reference to the balance sheet or the cash flow statement. As a result, lenders and investors need information from each of the statements to make their decisions.

As more nations develop democratic, market-based economies, adopting standards based on GAAP is becoming increasingly important to the soundness of their financial systems. This policy of international harmonization is seen as a step towards achieving the long-term objective of a global set of accounting standards, which are applicable for domestic and international purposes. Such a set of standards should be generally accepted because of their quality and comprehensiveness, and complete and in sufficient detail to facilitate operational implementation, consistency, comparability and transparency. They must also be rigorously interpreted and applied. "Given the globalization of capital flows through capital markets, and the diversification and increasing sophistication of economic transactions, there is an urgent need to develop internationally-accepted corporate accounting standards that ensure the comparability of corporate financial statements."

The adoption of internationally recognized accounting standards could ease privatization efforts because of the confidence they provide individual shareholders. International harmonization has the potential to provide reductions in the cost of capital through the resolution of uncertainty relating to the interpretation and implementation of national standards, and administrative benefits arising from the ease of filing in multiple jurisdictions and the resultant simplicity in the development of common accounting systems in place of adjusting, reconciling and explaining different bases applied in different countries. It would also enhance comparability and transparency of financial reporting requirements and credibility of the reported information and facilitate cross-border investment and fund raising and the removal of an impediment to a more efficient allocation of resources. This would lower investment risk because it reduces an element of risk associated with understanding foreign financial reporting for investors and lenders. Without such standards, the ability of privately held enterprises to attract international capital from bankers and investors is seriously impaired.

Sound accounting standards support efficient financial management and reporting systems that provide vital information to creditors and equity investors so that they can make profitable investments. Investors provide much needed risk capital and are concerned with the risk inherent in, and return provided by, their investments. Investors need information that will help them determine if they should buy, hold, or sell an investment. Lenders, on the other hand, are interested in information that permits them to determine whether their loans, and the interest attaching to them, will be paid when due.

While a nation's choice of accounting standards is necessarily unique, some consistencies among various nations' standards make them useful to investors and creditors. The International Accounting Standards Committee (IASC) and the European Union (EU) both articulate accounting standards that are widely respected in the major capital markets. "While the debate is still on-going in other parts of the world, the European Union (EU) has now responded to the call. The European Commission (EC) has proposed that from 1 January 2005 all Europe's listed companies must use International Accounting Standards (IAS)."

Under these standards, transparency is achieved by requiring firms to issue financial statements along with footnotes that indicate the accounting techniques used for certain transactions. The financial statements also provide information about management's stewardship of enterprise resources and thus facilitate managerial control. The most common model regarding the issuance of financial statements calls for the statements to consist of a balance sheet, a profit and loss statement, and a cash flow statement. "The IASC has no independent authority to impose the IAS on any country, and each country would have to decide whether to adopt and implement the proposed international rules. Although many countries and their accounting regulatory agencies favor the adoption of such rules, the U.S. Securities and Exchange Commission, which has final regulatory authority in this area, has steadfastly refused to approve the proposed rules."

In conclusion, accounting standards are vital to the ability of business to attract capital. Without capital, there can be no growth. The value of accounting standards is that they provide the basis for lenders and investors to make intelligent decisions. In today's multinational environment, these standards must be promulgated internationally in order to adequately address the needs of international capital markets. Whether foreign regulators adopt U.S. GAAP or harmonize their standards with those of the FASB is an open question.


Hunt, Isaac C. "Speech by SEC Staff: Financial Reporting and the Global Capital Markets." March 23, 2000. June 7, 2005. .

Leisenring, James J. "FASB Perspectives on the Development of International Accounting Standards." March 9, 1998. Financial Accounting Standards Board. June 6, 2005. .

Murray, John C. "Cross-Border Real Estate Transactions: The Development and Implementation of International Accounting Standards." 2000. June 6, 2005. .

"Seeking International Collaboration on Accounting Standards." October 21, 2003. Japan Business Federation. June 7, 2005. .

Viall, Alex. "Strengthening the capital markets against financial fraud." May 13, 2005. June 6, 2005. .

Wright, Ian. "Towards Global Accounting Standards - A European Perspective." June 6, 2005. .

Alex Viall. "Strengthening the capital markets against financial fraud." May 13, 2005. June 6, 2005. .

James J. Leisenring. "FASB Perspectives on the Development of International Accounting Standards." March 9, 1998. Financial Accounting Standards Board. June 6, 2005. .

Isaac C. Hunt. "Speech by SEC Staff: Financial Reporting and the Global Capital Markets." March 23, 2000. June 7, 2005. .


"Seeking International Collaboration on Accounting Standards." October 21, 2003. Japan Business Federation. June 7, 2005. .

Ian Wright. "Towards Global Accounting Standards - A European Perspective." June 6, 2005. .

John C. Murray. "Cross-Border Real Estate Transactions: The Development and Implementation of International Accounting Standards." 2000.… [END OF PREVIEW] . . . READ MORE

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"Value of Accounting Standards."  June 10, 2005.  Accessed May 28, 2020.