The purpose of accounting standards can be answered by first looking at the purpose of accounting. The accounting profession is looked upon to provide analysis of assets, financial stability, financial performance, record-keeping and more. To provide accurate and reliable information, the accounting profession requires rules and guidelines on how to report information. That is the purpose of accounting standards – to provide guidance to the accounting profession.
Accounting standards allow accountants to provide information through financial statements in a manner that can be understood by people important to the organization – management, board of directors, investors and stakeholders. This information must be presented accurately so that key decisions based off the information are made appropriately. Well-designed accounting standards enhance investor confidence in the business.
Accounting standards provide day-to-day guidance to accountants to ensure the steady operation of the business. It is the duty of an accountant to provide financial information that is relevant, reliable, neutral and comparable – all of which is achievable by following accounting standards. Showing the ability to adhere to accounting standards creates confidence in the marketplace. The company is viewed as being transparent, which positively impacts the financial position of the company.
The ability to compare financial statements is paramount to the accounting profession. Investors will compare one company’s information to another's and choose which one to go with. Following accounting standards ensures businesses are playing by the same rules, making comparability easier. However, standards vary by country, so the situation can arise where financial information of two businesses is being compared, yet was compiled using different standards.
As of June 2011, the United States mandates generally accepted accounting principles, commonly referred to as U.S. GAAP, as its accounting standard. It is governed by the Financial Accounting Standards Board (FASB). The International Accounting Standards Board (IASB) governs International Financial Reporting Standards (IFRS), which are used by over 120 countries. Both the FASB and IASB are in talks to converge U.S. GAAP and IFRS. One of the driving factors for convergence is to have one accounting standard used by all accountants around the world.