In most cases financial auditing institutions have adopted various accounting standards which are neither transparent nor simple. This has made most of investors, companies and creditors not to access adequate financial reports that effectively enhance their investment opportunities. Therefore, most countries, such as the U.S, have established institutions that primarily harmonize the domestic accounting standards with the international accounting standards in order to provide investors with financial reports across the borders. In such cases accounting standards are developed not only to create transparency in transaction process, but also to create public confidence. The write up discusses how economic consequences have influenced the shaping up of three accounting standards promulgated by the FASB. It also critically analyzes initiatives identified by the FASB aimed at improving the quality and transparency of standard-setting processes.
According to Shailaja (2008), accounting standards are the defined and recognized accounting policies either issued by the government or financial expert institute. He notes that these standards are provided in order to bring coherence and harmonization in executing and following up of the accounting policies. For instance, the U.S Congress has authorized the Securities and Exchange Commission to establish accounting standards, a role the commission has delegated to the Financial Accounting Standards Board (FASB). Shailaja (2008) notes that through such authorization the FASB has promulgated and initiated a number of accounting standards in order to allow it not only to harmonize but also to improve the quality and transparency of accounting standard setting-process. These are intended to provide investors and other stakeholders with decisive and useful financial reports of nongovernmental entities so as to enhance accountability and public trust.
Influence of Economic Consequences in Shaping up of Accounting Standards
As pointed out by Pounder (2008), economic consequences denote the impact of accounting and financial reports on the decision making processes of organizations, investors and creditors. He notes that the consequence of adopting such reports can adversely affect other parties in investment opportunities hence require accounting standard setters. Carmichael & Graham (2010) point out that the increase of both the global economy and transnational businesses have presented investors and other users of financial statements with the need for standardized financial information that emulate global accounting standards. They point out that this has enabled the FASB to develop and issue high-quality and compatible accounting standards that provide clients and stakeholders with both domestic and cross-border financial reports. These accounting standards are intended to counter the effect of increasing global economy which has adversely affected the investment opportunities in creating healthy global capital markets.
According to Pounder (2010), the economic consequence has created the need to combine business with a view of counting the globalization effect. This has prompted the FASB to promulgate accounting standards that create transparency during collaboration of various businesses. The FABS’s (2012) notes that the institution enacted the “Business Combination” accounting standards that required the disclosure of the employer’s participation in the multi-employer plan. He points out that this accounting standard provides users with adequate financial information of employers contributing to the multi-employer plan which helps them to develop better funding procedure for the unfunded obligations of the plan. Additionally, it does not only increase other employees’ awareness of commitments and risks involved in various investment schemes, but it also counters the monopolistic characteristics that would affect the effectiveness of the plan.
On the other hand, economic consequences have resulted into offsetting of assets and liabilities that are no longer able to meet standards of international market. According to the FASB’s official website, it enacted the accounting standards for disclosures about offsetting assets and liabilities so as to create a harmonization process in offsetting requirements between the domestic and international financial entities. It notes that this accounting standard requires financial entities to prepare their financial statements based on the International Financial Report Standards (IFRS), in order to reduce financial invariance which may affect investment processes. It therefore provides the user of financial statement with adequate information of assets and transactions that are eligible for offset due to increase effect of economy.
Unlike in the past, where accounting standard setters, such as the Committee of Accounting Procedures (CAP), enacted accounting standards that made it difficult for corporations to sustain stock dividends out of their earnings, the FASB promulgated better accounting standards. Carmichael & Graham (2010) point out that the FASB promulgated the “Fair Value Measurement” and disclosure standards in accordance with the U.S GAAP and IFRS so as to develop common requirements for market value and disclosure of important information. This would allow corporations to capitalize on their fair market value based on their stock dividends in countering economic consequences.
Standard-Setting Processes Initiatives
According to McCarthy, Phelmon & Mattie (2009), the FASB initiated adoption of the principles-based approach, rather than the traditional rule-based approach to standard setting process. This was intended to simplify and improve effectiveness of the accounting literature. These authors note that the FASB’s principles-based approach to the U.S standard setting initiative provided it with recommendable standard settings that promoted the public participations. For instance, they point out that the initiative provided the FASB’s staff with substantial conceptual framework of coordinating with International Accounting Standards Board (IASB) in adopting standard-setting processes. Additionally, this initiative enabled the FASB to deploy the use of similar wording in its standard-setting processes as proposed by the IASB. This has not only improved the interpretation and implementation of accounting policies, but also the accessibility of the accounting literature.
As pointed out by Duis (2009), the FASB addresses American Institute of Certified Public Accounts (AICPA), Emerging Issues Task Force (EITF) and SEC sources in initiating projects that enhance standard-setting processes. For instance, Duis points out that the FASB’s board adopted accounting pronouncement process relating to Hierarchy of the U.S GAAP based on AICPA standards. According to him, this initiative required the FASB’s staff to provide interpretation and implementation guidelines based on the public inquiry. This is in line with the FASB’s technical inquiry services that are being deployed to make it easier for users to implement and understand the accounting standards. Duis notes that this initiative includes the use of web-based links in providing answers to questions pertaining to accounting reports and standards.
Financial Accounting Standard Board is thus an essential financial body which has promoted better accounting standards. However, there is still the need for accounting standards setters to develop effective decision-making procedures that can adequately promote investment opportunities and create public confidence. Moreover, it is important for policy-making organizations to incorporate and initiate various methodologies that educate the public on policy framework and implementation processes.