Economic consequences of accounting standard-setting means:
(a) standard-setters must give first priority to ensuring that companies do not suffer any adverse effect as a result of a new standard.
(b) standard-setters must ensure that no new costs are incurred when a new standard is issued.
(c) the objective of financial reporting should be politically motivated to ensure acceptance by the general public.
(d) accounting standards can have detrimental impacts on the wealth levels of the providers of financial information.
The correct answer and explanation is :
The correct answer is:
(d) Accounting standards can have detrimental impacts on the wealth levels of the providers of financial information.
Explanation:
The economic consequences of accounting standard-setting refer to the potential effects that new accounting standards can have on financial statement preparers, investors, creditors, and other stakeholders. These consequences may impact the wealth and financial well-being of companies and individuals associated with financial reporting.
When a new accounting standard is introduced, it can alter how financial information is measured, reported, and interpreted. This may lead to changes in stock prices, debt covenants, executive compensation, and tax obligations. If a new standard results in a company recognizing lower profits or higher liabilities, investors may react negatively, causing the company’s stock price to decline. This can reduce the wealth of shareholders and other financial statement users.
For example, the introduction of IFRS 16 – Leases required companies to bring most lease liabilities onto the balance sheet, which increased reported debt levels. This had an impact on companies’ financial ratios, potentially affecting their borrowing costs and investor perceptions. Similarly, the adoption of IFRS 9 – Financial Instruments changed how companies accounted for credit losses, leading to higher provisions and lower reported profits for financial institutions.
While accounting standard-setters, such as the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB), aim to improve financial transparency and comparability, they acknowledge that new standards may have unintended economic consequences. However, they do not prioritize protecting companies from adverse financial impacts, as financial reporting’s primary objective is to provide relevant and faithful representation of economic reality.
Therefore, among the given options, option (d) is correct because accounting standards can influence the wealth of financial information providers through their impact on reported earnings, financial ratios, and market perceptions.