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Economic Consequence Consideration

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Economic Consequence Consideration
ATG 563 - Advanced Accounting Theory
February 14,2012

Should economic consequences be considered by the FASB in the accounting standard setting process? Yes, the FASB should consider economic consequences in the accounting standard setting process. Ever since the creation of the FASB in 1973, it was charged with establishing standards of financial accounting and reporting in the most efficient and complete manner possible. The goal of the FASB is to maintain a neutral stance and set standards that will be helpful in predicting cash flows and in assessing managerial performance. The objectives as stated in FASB Statement of Concepts 1 stem primarily from the needs of external users who lack the authority to prescribe the information they want and must rely on information management communicates to them.

Standards have the ability to impact earnings which can adversely affect management compensation, debt covenants, financial ratios, bond ratings, analyst recommendations, and stock price. Because of the impact standards can have, the accounting standard setting process has been the target of self-serving groups. The FASB rule making process has been criticized for passing standards that benefit one group at the expense of another. The criticism comes from the ability of lobbying, special interest groups and government institutions to affect the accounting standard setting process. The accounting standard setting process should be insulated from politics however should still be able to consider economic consequences without being influenced.
Economic consequences are defined as the impact of accounting reports on business, government, unions, investors, and creditors. The potential impact standards can have, make economic consequences relevant in the accounting standard setting process. Until now, the FASB has only considered...

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