Benefits > Costs

The first and largest constraint that standards must adhere to is that benefits > costs (benefits are greater than costs). Costs constrain the accounting choices we make. The benefits of the financial information must exceed the costs to gather the information. It's a fairly simple idea but also a very important one. A standard must provide more benefits than the cost of providing such information. If this cannot be done, then it simply is not worth forcing companies to abide by such a rule. Let's think about inventory as an example. If FASB mandated that specific identification be implemented by all companies, this would be a huge burden on most companies and especially those with large inventories. Is it really worth forcing a company with the inventory of the size of say Walmart, Target, etc. to keep track of the exact cost of goods (COGS) when any of the other measures (FIFO, LIFO, or average cost) will ultimately give very similar results? We will cover inventory valuation methods in a later lesson. Thus, a standard like this would not be put in place. The costs of providing this information far outweigh the benefits to the users of said information.