Question

The conceptual framework for Financial accounting and reporting plays an important role in the decisions of parties responsible for preparing General Purpose Financial Reports (GPFR) and in the development of financial reporting and accounting generally.

To some extent this question asks about the difference between US GAAP and IFRS. US GAAP is more heavily based on rules and tends to have more requirements spelled out in standards, with less reliance on the conceptual framework. However, all accounting systems combine rules and principles, and all accounting systems have standards that do not conform completely with their conceptual frameworks. You are to answer how important you think principles are and how important you think rules are.（600-800 words）

Answer 1

All the companies are suppose to prepare the financial statement as per the guidelines determined by the Financial Accounting Standards Board which has published a principle based standard.

However, there is a never ending discussion that whether rule based accounting is good or principle based, particularly after various scandal in international market.

However, before going into details let us first understand the difference between rule based accounting and principle based accounting.

Rule Based Accounting:

Under rule based accounting there is pre-defined rule which are published by the regulatory authority and which the company which are making the financial statement are supposed to follow. Many a times various companies prefer rule based accounting because under rule based accounting all the parameters are defined beforehand, thus without putting much effort company will be able to determine what is the specific treatment of this item, which is very unlikely in the principle based accounting. It also give the advantage to various stock holders, as all the company is required to follow a specific rule thus there wont be any ambiguity in respect to a particular item. However, under principle based each company may follow its own policy which may not be suitable for the purpose of comparison.

There are some principles of the rule based GAAP accounting system:

1. Uniformity

2. Consistent

3. accurate representation

4. Appropriate disclosure

5. comparable

Principle based accounting

This specific method of accounting is more popular across the globe. Most of the countries is moving towards principle based accounting because is give more scope to the companies to present the data of the organization as per the requirement and the condition of the company and the industry. IFRS which is most common accounting standard is a principle based standard.

Advantages

The basic advantage of principle based standard that it only provides the guideline to the company within the company is required to act applying their own skills .

On the other hand under rule based accounting everything is already defined which decreases the possibility of manipulation and it increases the basic quality i.e. it makes the data more comparable.

Complication with both the system.

The basic problem is that there is no one set of standard which is being followed, USA is using US GAAP whereas more than 100 countries is using IFRS which makes the data complex there is no comparision.

Critics of Rule based accounting put forward the view that under rule based accounting data presented is much more complex as the accountant is required to follow the complex rule. whereas for principle based accounting it is said that the it give companies more freedom to work on.

I have given my view on the question, if you have any doubt give a comment, if you are satisfied give thumbs up.