Accounting Standard
A Must To Boost Capital Market

By Dr. Puspa Kandel

ACCOUNTING is the process of identifying, measuring, and communicating the financial transactions. The objectives of accounts are to provide information for making decisions regarding the use of limited resources and determination of objectives and goals; directing and controlling an organisation’s human and material resources; maintaining and reporting about the resources and facilitating social functions like taxation, prevention of fraud, preparation of statistics on economic activity, obeying government regulations, maintaining management labour relationships and so forth.

There are external and internal parties who have interest in business organisation. Internal parties cover employees and management whereas external parties include investors, creditors, employees, stock exchanges, government units, customers, and others. Internal users have contacts with the entity and know many significant events. In contrast, external users do not have such access and therefore have to rely on accounting information. Among the external users, the investors and potential investors’ decision whether to buy or sale, or to retain their holding; suppliers’ decision about lines of credit to be made available to the firm; creditors’ decision whether to make loan or not to the firm, what security or terms to require or in case of existing one, whether to increase or not to increase the loan; stock exchange authority’s information for the guidance of investors to decide whether standards for admission to the stock exchange are met or not; government’s interest in financial and statistical information to assist in making policy decision; trade associations need for broad policy decisions and customer’s concern with the ability of a company depend on accounting information.

Accounting information is extremely useful to external users of business organisation because these parties should act under uncertainly. However, in providing information to these parties, the accountant does not know about the specific needs of the specific party. due to this reason, the information to be provided is prepared on the basis of certain standards to be followed by all the accountants. And the standards set in such way to provide the information to external users is called accounting standards.

Accounting standards are the measuring rods of the accounting regarding their usefulness. These standards become not only yardsticks against which current practice can be judged and recommendations for improvement can be made but also assist in establishing the scope of accounting. Accounting standards serve two purposes: first, helping in evaluating the adequacy of any accounting method and; second , providing a mechanism for determining the degree of compliance required for information related to a particular use. As there is importance of a standard language for communication in human life, there is need of accounting standards in financial arena too. They help in interpretation of the data for the purpose of making decisions regarding financial activities of external users like investors, creditors, employees, stock exchanges, government units, customers, and others. It aids to the members of the accounting profession too in satisfying its norms of competence, through the identification of preferred accounting practices and serving public interest.

In most of the countries, of the world, there are accounting bodies, which have set the accounting standards very early. In 1973, even the international accountancy bodies named International Federation of Accountants was established with a view of regularising the accountancy profession. The sister of organisation of this body name International Accounting Standards Committee has already made 39 accounting standards up to this date and is trying to promote their worldwide acceptance and observance, and harmonisation of regulations, accounting standards and procedures relating to the presentation of financial statements. Now such standards are working as a basis for national accounting requirements and in many cases working as an international benchmark used by stock exchanges and regulatory authorities that allow foreign or domestic companies to present financial statements and to produce results that meet the needs of the capital markets.

In Nepal, however, the accounting practice right how is running in laissez faire style where the balance sheets and income statements are basically the reflection of individual judgements and their value. Their interpretation too depends on the competence and honesty of the persons exercising the necessary judgements. There are no specific rules and regulations regarding the preparation and interpretation of financial statements. In most of the cases, there is lack of even the competent persons in this regard.

Poor status of the accounting profession in Nepal has many implications in the country. First, international investors do not believe in the statements prepared by Nepalese accountants and therefore they do not want to invest in Nepalese capital market. Second, the tax persons are not bound to accept the statements prepared by experts of accounting profession. Third, the professionals should depend on the mercy of the taxpayers for their work. They do not have bargaining power relating to the disclosure of accounting information and the tax related information. Fourth, the rogue investors showing fake and unaudited statements are cheating the severs of the country. Fifth, in collusion of incompetent professionals and corrupt bureaucracy, revenue of millions and millions rupees is leaked per year. In short, there is profound effect of this situation including decrease in the credibility of the accounting professionals and hindering the growth of national economy by creating difficulty in external and internal raising of capital and impairing the capacity to borrow. The main reason of being so in the country is the lack of accounting standards.

Till some years’ ago, there was not even a separate institution in Nepal related to accounting that had responsibility of making accounts related policies. However, Nepalese Institute of Chartered Accountants was established recently as per the Nepal Chartered Accountants Act, 2053. The institute, after then, is working to recover the deficiency of the accounting profession in Nepal and so is trying to make the profession as better as possible. It has taken responsibility of making accounting standards too. Foreign experts and institutions are also helping in this regard. The initiation is good. But there is no time to wait to get the desired result since it is already late to start. Because, unless and until, there is not the standards relating to accounting disclosures; the profession cannot be prestigious and in turn capital market cannot be developed in Nepal.

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