Accounting 'rules'. How accounting theory and rules affect the strategic numbers

Accounting theory and rules affect the strategic numbers and therefore affect underlying tactics. This chapter explains the important principles that have to be followed and the concepts used by accountants that affect reporting (of strategies) but also may actually 'outlaw' some strategies or tactics.

Accounting standards affect balance sheet structures: the classification and amount of assets and liabilities. They also affect revenue recognition and the amount, timing and classification of other items in the income statement.

It is financial strategy that is particularly affected by accounting rules and standards. The FASB, IASB UK and other national and international standard-setting bodies aim to restrict poor, if not downright erroneous, accounting and bring consistency to accounting practice and financial reporting.

Thus, freedom to use some 'exotic', let us call them, accounting practices has been and will be further curtailed. The converse is that some 'standard' practices are seen by many accountants as being too 'exotic', in the sense that they are based on some airy economic theory rather than practical and straightforward sense.

Accountants' rules have evolved to form a generally sound and consistent base for financial reporting. Recent events raise the valid question: 'Has accounting (and auditing) let us down?' Accountants themselves disagree with some of the 'sophisticated' accounting that has emerged over the past 40 years - accounting has to a degree been hijacked by economists' thinking! I for one believe that aspects of 'fair value accounting' could encourage 'moral hazard'. For example, the concept that the amount of a liability should be reduced to a fair value which may possibly be a lower market value means that you could settle your liabilities for an amount less than you originally incurred. By luck or maybe even intentionally you may be able to reduce your liabilities. However, it may not be the accounting that is at fault but rather the fact that the markets have been possessed by powerful lobbies, by rent seekers.

This cautionary introduction aside, the vast majority of businesses and managers earnestly wish to run and grow successful, sustainable businesses, and expect a reliable accounting framework to exist to allow the financial side of the business to be planned and controlled.

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