Question

Some individuals have indicated that the FASB must be cognizant of the economic consequences of its pronoucements. What is meant by "economic consequences"? What danger exist if politics ppay too much of a role in the development of GAAP?

Answer 1

The term economic consequences is to mean the impact of the accounting reports on the wealth of the users of the financial statements and the decision making that is a result of the impact. The resulting behavior is seen to have detrimental financial effects on the providers of the financial statements.

GAAP is seen as much as a political product as any other law or pronouncement. If there is too much politics in to play in the role of development of GAAP, the accounting standards will loose their credibility and financial reporting rules will favor the rich and powerful companies. Having politics in GAAP may see erosion in the fundamental use of the GAAP and can result in financial reporting that may serve the purpose that it was designed for.