Generally accepted accounting principles include a framework for financial accounting which is a guide for preparers and users as to what financial information is intended to provide. For instance, SFAC, Statements on Financial Accounting Concepts, indicate that financial information needs to provide decision usefulness for its users. This includes the concepts of relevance, or financial information that makes a difference to a user, and reliability, or the quality of the information.
Accounting principles aim to provide disclosure and to a certain extent, conservatism in financial reporting. While many companies may be intent on polishing the performance of their operations, SFAC at the very least alert investors that companies are required to abide by certain concepts which make it difficult for them to ignore the needs of outside users. Timing and presentation can often have a negative effect in and of itself on a public company’s stock price even if the company is very profitable.
With today’s convergence efforts between the FASB, Financial Accounting Standards Board, and IASB, International Accounting Standards Board, financial information is becoming more transparent and thus users can have greater confidence in the truth of what companies are reporting. For most users of the financial statements, typically outside investors, those statements are the direct link to what’s going on inside the company. Without regulation, investors would be unwilling to provide capital and thus would hinder many companies’ operating performance.
SFAC also provide for certain guidance on measurements of assets and liabilities. These include things like historical cost, current cost, and current market value. These are outlined specifically in SFAC No. 5, and also provides for when this type of information should be reported. It’s easy to see that the FASB has provided an excellent structure to financial reporting through the different SFAC’s, yet strict rules abound in the United States’ reporting system. International standards adopt many of the U.S. principles, yet also provide for more leeway in some cases. Nevertheless, the accounting principles have come a long way to provide outside users of financial information the necessary assurance that companies are adequately disclosing their performance, whether good or bad.
Source:
Financial Accounting Standards Board
http://www.fasb.org/jsp/FASB/Page/SectionPage&cid=1176156317989