In this article we will discuss about the advantages and limitations of formulating accounting objectives.

Advantages of Formulating Accounting Objectives:

Following are the advantages associated with having an agreed set of accounting objectives:

(1) The proper evaluation of current practice requires a set of objectives. In the absence of objectives, policy makers may be forced to apply inadequate and unsatisfactory criteria to the evaluation of practice. For example, practice may be judged against existing regulations or standards.

Such an evaluation merely establishes how far existing regulations or standards are being applied not whether existing regulations or standards are achieving their objectives.


(2) The evaluation of proposed changes in accounting regulations or standards require the establishment of stated objectives if a rational choice is to be made between alternatives. This merely extends a tenet of the classic economic decision model to accounting regulation.

(3) The need to respond appropriately to changing circumstances implies objectives against which responses may be evaluated. In the absence of articulated objectives, accounting regulations or standards may become dogmatic and ends in themselves, rather than means to ends.

Problems in Formulating Accounting Objectives:

Despite the importance of developing accounting objectives there are serious problems in formulating objectives:

(1) Ignorance about user needs:


The objective selected should inevitably reflect knowledge or perceptions of the needs of those who are thought to use financial reports. However, this is not found in practice.

Stamp comments:

“One of the great difficulties in producing standards and financial statements that are truly free of bias is our general ignorance of the nature and variety of user decision models, so that it may be difficult to be sure whether information is biased or not.”

(2) Different users have different needs:


Each user group will make its own decisions and different decisions will require different information. Moreover, within each user groups the value of information will vary between individuals depending, amongst other things, upon their level of understanding and access to other information sources. Therefore, if user needs were known their variety would impose its own problem on the establishment of agreed objectives.

(3) Conflicts of interest:

The interests of various groups are likely to be in conflict, formulating objectives for accounting depends upon resolving such conflicts. Cyert and Ijiri consider the interaction between the three groups, users, company and the accounting profession. Their analysis is contained in Figure 10.4.

Conflicts of Interest

Figure 10.4 represents information sets for the three groups. Circle U represents information useful to users of accounts, circle F information which the management of firms agree to disclose, and circle P information which the accounting profession is capable of producing and verifying.


Area I is the feasible set acceptable to all groups. That is, such information is perceived as relevant by users, is disclosed by firms, and can be produced and verified by accountants. Areas II to VII inclusive represent areas of conflict.

Given these conflicts Cyert and Ijiri suggest three approaches to the formulation of accounting objectives. First consider the set of information—which firms are willing to disclose and attempt to find the best means of measuring and verifying it.

Thus, circle F is kept fixed and circles P and U are moved towards it. The second approach takes circle P as fixed and attempts to accommodate users and firms through various accounting options. This involves moving circles F and U towards P.


Finally, the information considered relevant by users, circle U, is considered central and accountants and firms are encouraged to produce and verify that information. It is clear the first approach is firm-oriented, the second profession-oriented, and the third user-oriented. At the present time the user-oriented approach is in the ascendancy.

The UK Corporate Report (ASC, 1975), the True-blood Report (American Institutes of Certified Public Accountants, 1973), the Canadian Stamp Report and the US FASB’s Concept No. 1 have adopted such an approach in determining the accounting objectives.