P10Standards-debate - Why Accounting Standards? Standards

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1 Why Accounting Standards? Standards uniform/comparable/objective F/S GAAP helps generate uniform or comparable F/S across different industry and for the same firm across different time; Standards info asymmetry Acctg standards also reduce the level of info asymmetry by setting the min amount of info firms need to disclose. Thus, outside investors can be protected and cost of capital for firms can be reduced; Standards Reduce agency conflicts by helping monitor compliance with contracts. For example, if managerial effort is unobservable, we need performance measure from F/S. So, when a firm issues debt, it needs info on various ratio in which the covenants in the contract are based. If no acct standard, managers can choose to do everything as long as they can justify it. (ie: how difficult & expensive it would be to define “assets”, “liability”…etc in each single contracts? GAAP give us a standard that every firm abide by and such cost Private contracting is costly.
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This note was uploaded on 05/06/2010 for the course COMM Comm 353 taught by Professor Zhang during the Spring '09 term at The University of British Columbia.

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P10Standards-debate - Why Accounting Standards? Standards

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