Naomi Rumondang Panjaitan

1802111992

Chapter 5

ACCOUNTING STANDARDS

A. ACCOUNTING PRINCIPLES

In business practice it is often encountered that financial statements must be prepared and
presented accordingly with generally accepted accounting (Generally accepted accounting
principles) or GAAP. Principle Basically, it will determine the quality of the information
presented in the financial statements. Grady (1965) states that various accounting methods are
widely used in financial reports published. This shows that companies are free to use accounting
methods as long as the method is accepted in business practice. So that GAAP can be defined as
a selected set of concepts, standards, methods, conversions, habits and practices generally
accepted so that it is used as general guidelines in preparing, presenting and interpret financial
statements in a specific environment.

General acceptance (general acceptance) is to describe the conditions that are underlie the
financial accounting method so that it is generally accepted. Skinner (1972) stated that the
accounting method must meet the following conditions:

1) The method can be applied in various cases according to environmental conditions

2) This method is supported, in the form of pronouncements.

3) This method has received support from various thinkers and academics in the field of
accounting, in written form.

The history of accounting development shows that various literatures are related to
GAAP is growing. This can be seen from various official statements, opinions and
announcements issued by a competent authority. Other sources of GAAP are:

1. Guidelines for accounting and industry auditing and accounting interpretations issued
by the AICPA
 2. Other FASB publications such as technical bulletin, and statements issued by APB

3. Capital market publications, such as the Acounting Series Release

4. Recognized practices as demonstrated in the AICPA's annual publication

called Trends and Techniques

5. Papers discussing certain issues issued by the AICPA, FASB concept statements, text
books, and other articles.

B. ACCOUNTING STANDARDS

Accounting standards can be said as general guidelines for the preparation of financial
statements is an official statement regarding a certain accounting issue, issued by a competent
authority and applies in certain environments. Accounting standards usually contain definitions,
measurement / assessment, recognition, and disclosure of financial statement elements.
Accounting standards is part of generally accepted accounting principles. Accounting standards
provide rules general practice to help accountants work.

Standard setting has an important role in the presentation of financial statements, because

1. Provide accounting information to users regarding financial position, results of

operations, and matters relating to the company. The information is assumed to be clear,
consistent, and can be trustworthy, and comparable.
2. Provide guidelines and rules for public accountants to carry out audit activities and test
the validity of financial statements.
3. Provide basic data for the government on various variables that are considered important
in support taxation, regulation, economic planning and improvement efficiency and other
social goals.
4. Generates principles and theories for those interested in the accounting discipline.

C. APPROACH TO STANDARD DEVELOPMENT

The need for accounting standards is still something that is controversial. Some researchers
argue that in the market mechanism, there are already efficient media in provide financial
information needed by users, so that accounting standards are not required again in order to
improve the quality of information in the decision-making process. Others argue that the market
mechanism fails to provide that information required by users of financial statements, especially
information that is balanced / fair (equitable) and efficient. As a result, accounting standards are
needed to regulate the types of information that need to be presented in financial reports
(Rahman, Perera and Tower, 1992)

Proponents of regulation use the public interest argument market failure or the need to
achieve social goals will force regulation accounting. Failure can occur due to the following
factors:

1. The company's reluctance to disclose information because the company is suppliers who
monopolize information.
2. The existence of deliberate error / fraud
3. Accounting information is not produced in sufficient quantities as public property
4. The existence of this market failure ultimately leads to information asymmetry, where it
exists parties who have a lot of information, while other parties do not have certain
information

The need to achieve social goals also supports the need for accounting regulations.
Destination this includes fairness of reporting, symmetry of information, and protection of
investors.

1. Free market approach

The free market approach is based on the basic assumption that accounting information is
a commodity economy similar to other goods or services.
2. Regulatory approach
Proponents of the regulatory approach argue that market failure or information
asymmetry, relating to the presentation of financial information for interested parties, it
can decrease investor confidence. This problem can possibly be overcome through
regulation.

D. REGULATORY THEORY
 Based on the inherent weaknesses of the free market approach as well as the various crises in
setting standards encourages the emergence of accounting regulation policies. There are several
arguments in support of the need for regulation in the provision of information, namely abuse,
externalities, information asymmetry, and management reluctance (von Alberti-Alhtaybat et al.,
2012, Beyer et al., 2010, Suwardjono, 2008)

a. Abuse. Regulation is directed to prevent abuse and fraud by capital market players,
especially in matters of disclosure. Government intervention is needed to ensure
efficiency and equity in information through regulation.
b. Externalities. Externalities occur if one party's actions (disclosure of information)
influence the other party who benefits without interfering with the cost or being
disadvantaged without compensated.
c. Information asymmetry. Information asymmetry encourages investors to search for
information nonpublic individually which results in investors not having accurate
information the same, because the technical and economic capabilities are not the same
among investors.
d. Management Reluctance. Because of their own interests (self-interest), management
tends to reluctant to disclose information that could increase his ability to fulfill their
personal interests at the expense of the public interest (public interest).Regulation can
balance these interests.

FORM OF REGULATION

Belkaoui (1985) says that regulation is generally assumed to be designed and operated in the
interest of the existing industry. According to Stiglar (1971) and Posner (1974) there are two
categories of regulatory theory in industry, namely:

1. Public Interest Theory

Public interest theory states that accounting regulation is a consequence of public demand
to address market failures. There is a public request to make accounting regulations
which generally reduce the loss of public information thus maximize social welfare. This
theory assumes that regulation is considered as a cost-benefit analysis, especially between
regulatory costs and social benefits in form improved market operations.
 2. Group Interest Theory
Group interest theory is the second form of regulatory theory and complements the public
interest theory. This theory suggests that individuals make up groups, referred to as
interest groups, to protect and maximize their own interests by lobbying for the number
and type of regulation.

WHO SHOULD ARRANGE?

There are two arguments to answer the question who should set the standard accounting,
namely arguments in support of private sector regulation and public sector regulation.

Arguments in favor of private sector regulation

1. Private sector regulation is closely related to the accounting profession. This condition
automatically will encourage the involvement of parties who have extensive knowledge
and experience in the standard-setting process
2. An agency formed by the private sector has its own prestige or pride and acceptable to
the business community. If the agency is formed by the government, there is tendency to
be under pressure from the government to achieve social goals government economy
3. Government agencies consist of bureaucrats, so there is a tendency for effectiveness
additional disclosure requirements become insensitive. The cost of meeting regulations
government tends to be higher than private regulation
4. There is a tendency for the government involved to act to protect public interest or take
actions that are detrimental to the accounting profession
5. The legislative process and government authorities are easily influenced by lobbying and
political pressure from certain party
6. Government-generated standards are likely to overlap, and they can raises a variety of
judgments from the wearer.

Arguments in favor of public sector regulation

1. Public sector regulatory bodies have stronger legitimacy and power in terms of standard
imposition
 2. Government agencies tend to be difficult to influence by corporate and office
management so that major public accountants can work to produce better disclosure for
consumers
3. Government agencies can be catalysts for change
4. Public sector regulation arises because of the motivation to protect the public interest
5. The private sector must always be monitored and controlled because its objectives are
often conflicting with the public interest
6. The accounting sector has legal influence and involves conflicts of interest of various
kinds parties, so it must be implemented in accordance with general rules and procedures

OVERLOAD THE ACCOUNTING STANDARDS

The more complex business activities makes the accounting standards issued become
increasingly complex, which reflects the complexity of transactions and events related to
accounting. As a result, there were complaints that accounting standards encourage increased
expenses in the presentation of financial statements, especially for small company. This
condition drives the accounting standard overload.

Conditions that reflect overload include (Belkaoui, 1993)

1. Too many standards

2. The standards are too detailed
3. There are no rigid standards so that choices are difficult to make
4. General purpose accounting standards fail to distinguish between the needs of compilers,
users and public accountant
5. Generally accepted accounting standards fail to distinguish between:

- Public and non-public entities

- Annual and interim reports

- Companies large and small

- Audited and non-audited financial reports

6. Excessive disclosure, complicated measurements, or both

 Factors that cause an overload of accounting standards include:

1. With the emergence of questions what should be expressed and what is not disclosed,
accountants began to issue so many standards that they tend to ignore judgment
(judgment) and reduce problems involving accounting principles
2. The reasons for protecting the public interest and helping investors generate a variety
regulation and professional and governance disclosures
3. The desire to include the needs of various users who require more standards detail

Various parties have tried to discuss the standard overload and find a solution. Committee
specifically established by the AICPA (American Institute of Certified Public Accountants)
performs evaluation of the following approaches in relation to standard overloads:

1. There is no change (maintaining the status quo)

2. Make changes to the GAAP concept, for example GAAP specifically for large companies
and GAAP specifically for small companies
3. Make changes to GAAP to simplify its application for all companies
4. Determine different disclosures and measurements
5. Make changes to public accounting standards for reporting financial information
6. Provide an alternative to GAAP as the basis of choice in the presentation of financial
statements