Principles-based versus Rules-based Accounting Standards
In business, things are always changing, so it is no surprise this is true also for accountants and accounting in general. As a result, questions may be as old as time would arise the examined the nature of businesses and their policies and as of more recent this asked which is better - principles or rules. First and foremost what is principles-based and rules-based accounting? According to Scott (2015), Principles-based Accounting is where “considerations require that consolidation is necessary when failure to do would be misleading” whereas Rules-based Accounting “attempted to lay down detailed rules for how to account” (pg. 20).
Enron and Worldcom were US run companies who use rules-based
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Thus, their stakeholder can make informed decisions about a company and execute investment strategies; however, these reports have been highly criticized as of late due to scandals surrounding Enron and Worldcom, so it is not unusual that companies want to find out which of these approaches is best for their organizations.
This paper objective is to examine the pros and cons of both principles-based standards and rules-based standards and decide on which of these approaches is the better for the ever-evolving nature of accounting. Ultimately, the better of the two approach should take into account reliability and
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pg. 3). On the other hand, it suggests that rules-based standards lead to a 'show me where it says I can’t ' attitude, which, in turn, can lead to dysfunctional financial reporting behavior. This approach tends to encourage those to play games with the rules, to find loopholes and ways around the practices. As it has been evidenced in both Canada and the USA by our political leaders shortly after passing new, .restrictive, campaign fundraising rules (Agoglia, Doupnik, and Tsakumis, 2011, pg.
Many Republicans and industry lobbyists have insisted that the financial meltdown would not have been nearly as bad if not for the deadly Fair-Value Accounting (FVA) standard. It is, however, my stand that accounting is not the root cause of the financial crisis. I argue that the mixed-attribute model prompted considerable accounting-motivated structures. And due to the selective application of FVA, it did not in practice; contribute to the pro-cyclicality of the financial system. Nor would the meltdown have otherwise been avoided under a different accounting scheme. I note that the crisis has had standard-setting implications, and the prompt reshaping of current standards plays an important role in its resolution.
One of the most debatable topics in the accounting industry today is the extent in which we should make the financial statements understandable to the general population. The FASB currently gears its reporting standards toward...
Hines, R. D. (1991). The FASB’s conceptual framework, financial accounting and the maintenance of the social world. Accounting organizations and society, 16(4), 313-331.
In 2008, the Securities and Exchange Commission (SEC) issued a road map for the United States (US) to implement International Financial Reporting Standards (IFRS) that would eventually lead to the dissolution of US Generally Accepted Accounting Principles (US GAAP) (Cox 2008). US GAAP is rules based system of accounting that contains over 25,000 detailed pages of guidance, whereas IFRS is a principles based system of accounting that contains 2,500 pages of guidance. IFRS allows accountants to exercise professional judgment when making many decisions. This paper will compare and contrast US GAAP with IFRS on Intermediate Accounting Topics.
The IASC Board approved the IASB (International Accounting Standards Board) Framework ( in April, 1989) which was a successor of the IASC Board, and it accepted its Framework in April 2001 (Wells, 2011)[ Wells, M J. C., (2011). Framework-based Approach to Teaching Principle-based Accounting Standards., Accounting Education: an international journal., 20(4), 303-316.]. International standards are developed by IASB which are named International Financial Reporting Standards (IFRS). Although IASB took the place of IASC with its accounting standards, its IAS (International Accounting Standards) is enforced by IASB until now. The conceptual framework is helpful when it is used to develop the setting of International accounting standards. First of
To conclude their will always be talks and debates about weather or not the convergence of international Financial Reporting Standards and Generally Accepted Accounting Principles will happen. Through out the world IFRS is being used except in the U.S. In the U.S., GAAP is a more common method for accounting. In this paper, I analyzed which form of accounting is preferable, from principle based (IFRS) vs. Rules based (GAAP). My research conducted of the similarities and differences in the accounting field, between the two. Also, mentioned the benefits and disadvantages of using one method over the
In conclusion, appropriate principles could lead to clearer interaction and more comparable financial reporting standards without the need of the current rules. The NZ Framework has provided parts of clear and appropriate underlying principles to lead the application of NZ GAAP and other financial reporting standards. However the standards setting movement from ‘rule-driven’ approach to ‘principle-based’ approach is still half-way in New Zealand. How could principles be sufficiently clearly portrayed and put into practice require the profession to think and support. Just as Tweedie (2007, p.7) states, a principle based system will only work if preparers, auditors, users and regulators wish to make it work.
IFRS are developed and published to promote the use of those IFRS in universal purpose financial statements and other financial reporting. General purpose financial statements are directed towards the common data needs of wide range of users. As it turns out, have different national accounting system is expensive for companies and investors. Companies need to keep a copy of the accounting system, and investors will be cautious about buying shares in the Corporation accounts they do not understand. This problem arises because accounting guidelines have developed over the centuries in which there are different needs from one another, the economy and the means of regulating.
Professional judgement is a necessary skill for preparers, auditors and regulators of financial statements to have. A professional accountant with good judgement will be able to serve the needs of businesses, the public and investors in the best way possible. Principle-based accounting will help preparers and auditors make and document significant accounting judgement. Guidance is also provided for regulators involved in assessing key judgements, and recommendations are made for standard setters in maintaining and producing principle-based standards which provide the scope for professional judgement. The framework is intended for different sized companies. The audit committees have a key role in challenging initial judgements. They speak to the auditors and make recommendations to approve key judgements. As business transactions become more complex, the validity and usefulness of financial reporting relies on good judgement to be made. We believe that a professional judgement reinforces the quality and integrity of the judgements made and also trust in the operation of principle-based financial
Judgement is a notion of relevance and reliability in developing and applying accounting policies. It is a requirement of management that they exercise a high degree of professional judgement when selecting appropriate accounting policies in the preparation of financial statements that is relevant to decision-making and assessment needs of users. Management should also consider the applicability of IFRS and AASB in dealing with similar and related issues and then the definitions, recognition criteria in the Conceptual Framework when there is no IFRS standard or interpretation in certain circumstances that are specifically applicable. Management may also consider the most current pronouncements of other standard-setting bodies to the extent that do not conflict with IFRS and AASB in developing accounting standards and accepted industry practices by using a similar conceptual framework.
According to Pounder (2007), though GAAP was considered as the best set of principles used for financial reports previously, its importance is decreasing because of the business becoming more complex and global. In addition to that, he argued that single set of accounting standards will not only help to maintain the stability of financial statements and make the global market more efficient but will also help to reduce costs of capital and encourage economic growth. Furthermore, financial reports are prepared according to the accounting principles of the home country and later on the reports are translated as per the principles of foreign country which is very expensive. Etnyre and Singhal (2011) argues that preparing reports as per the principles of foreign countries after preparing in the home country, translating language and currency will be costly for the firms, therefore, adopting common set of reporting standards prepared with the principles of International Financial Reporting Standards will help to reduce cost of translation and increase
The aim of this paper is to provide the framework of the current professional accounting code of ethics. What are the ethics and how we define them? In this report we try to determine the main ethical principles that will establish the right and
Accounting principles are main consideration , certain standards like rules of operations are pillar characteristicis to built accounting statements. Accounting principles can be presented in many ways, sometimes its create confusion for readers mainly for beginners, but still acoounting principles are main tool to obtained financial statements. Its hold the whole acoounting process together.
Watts, R & Zimmerman, J 1978, ‘Towards a Positive Theory of the Determination of Accounting Standards’, The Accounting Review, Vol LIII, No 1, pp 112-134.
The success of a company is very dependent upon its financial accounting. In accounting there are numerous Regulatory bodies that govern the accounting world. These companies are extremely important to a company because they set the standards when it comes to the language and decision making of a company. These regulatory bodies can be structured as agencies, associations, commissions, and boards. Without companies like the Security and Exchange Commission (SEC), The Financial Accounting Standards Board (FASB), the Governmental Accounting Standards Board (GASB), Internal Accounting Standards Board (IASB), Internal Revenue Service (IRS), and other regulatory bodies a company could not make well informed decisions. In this paper the author will look at only four of them.