Question

In: Accounting

B. Globally, accounting standards are developed based on different methods. It is generally agreed that the...

B. Globally, accounting standards are developed based on different methods. It is generally agreed that the
nature of accounting standards depends on the systems of regulation. It has been argued that there are two
main systems of regulation.

Required:
Identify and explain the difference between the two systems of regulation, stating clearly which system
you believe describes the International Financial Reporting Standards (IFRS)

Solutions

Expert Solution

Explanation :

The accounting standard used worldwide are based basically two systems of regulation

  • Principles based.
  • Rules based.


1. Principle based accounting standard.

The accounting standards formed using principle based system of regulation are used as international accounting standard which explains how to record a particular transaction or event in financial statement.
These accounting standards are generally issued by international accounting standard board (ISAB). These accounting standards are developed using common accounting language.
The financial statements prepared using accounting standards are similar in nature and can be easily compared with companies of different countries.

2. Rule based accounting standards

The accounting standards formed under rules based system of regulation guides accountants of company while compiling the financial statements of a company about accounting principles and accounting standards to be used for preparation of financial statements rule based accounting standards adrress item classification, revenue recognisation etc.
It helps the investors in understanding the position of a company in better manner and make investment decisions.

IFRS falls under principle based accounting system regulation method and is used worldwide.


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