Characteristics and Limitations of a Financial Report

Accounting standards seek to describe the accounting principles, the valuation techniques and the methods of applying the accounting principles in the preparation and presentation of financial statements so that they may give a true and fair view. By setting the accounting standards the accountant has following benefits:

  • Standards reduce to a reasonable extent or eliminate altogether confusing variations in the accounting treatments used to prepare financial statements.
  • There are certain areas where important information are not statutorily required to be disclosed. Standards may call for disclosure beyond that required by law.
  • The application of accounting standards would, to a limited extent, facilitate comparison of financial statements of companies situated in different parts of the world and also of different companies situated in the same country. However, it should be noted in this respect that differences in the institutions, traditions and legal systems from one country to another give rise to differences in accounting standards adopted in different countries.

However, there are some limitations of setting of accounting standards:

  • Alternative solutions to certain accounting issues may each have arguments to recommend them. Therefore, the choice between different alternative accounting treatments may become complicated.
  • A trend may occur towards rigidity and digress from flexibility in utilizing the accounting standards.
  • Accounting standards cannot countermand the statute. The standards are required to be structured within the field of current statutes.

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