Question 22Q - Intermediate Accounting (Kieso)

Question

Some individuals have indicated that the FASB must be cognizant of the economic consequences of its pronouncements. What is meant by “economic consequences”? What dangers exist if politics play too much of role in the development of GAAP?

Step-by-Step Solution

Answer

Economic consequences imply the consequences of accounting reports on the financial positions of issuers and the decision-making behavior emerging from the consequence.

Politicians' involvement can manipulate GAAP rules and regulations, and so the standards may not be more reliable.

Meaning of economic consequences

The term economic consequences is defined as the impact of accounting reports on the wealth of the users of financial statements and decision-making occurring from the impact. Remunerative behavior has an adverse financial outcome for the users of financial statements.

Dangers occurring in case of involvement of politics in the development of GAAP

Generally Accepted Accounting Principles (GAAP) is considered a political product similar to any law. In case too many politicians are caught up in the advancement role of GAAP, financial standards will lose their credibility, and the financial reporting rules will stand up for rich and powerful companies.

Moreover, suppose the information is outlined in a way that shows that investing in a certain firm requires less risk than the actual, or is outlined in a way to encourage investment in a certain economic sector. In that case, financial reporting will suffer an unparallel loss of credibility.