Question

which do you believe are better: Principle based accounting standards and regulations or rule based accounting standards and regulations ?

Defend/support your opinion with examples and references.

Answer 1

Principles based Accounting standards :

The standards generally issued by Financial Accounting Standards Board (FASB) are principle based accounting standards. Under such standards the accounting principles applicable to a transaction can be adjusted according to the transaction, only for the purpose of better reporting and accounting treatment purposes. There are no specific requirements for preperation of financial statements in the Principles based accounting standard but such standards encourage comparability and consistency in the financial statements.

Rule based Accounting standards :

These are the standardized guidelines that are mandatorily required to be followed by companies. Companies following such standards must follow the rules laid under the accounting standards. The Generally Accepted Accounting Principles (GAAP) are the rules based accounting standards followed in the United States. The organisations that come under Rules Based Accounting Standard can be legally challenged in the court of law if their accounting procedures and reportings are not similar to the rules laid under such standards.

Rules based VS Principles Based :

In my opinion, the rules based accounting standards will be better. The main advantage of Rules Based Accounting standard is that it encourages transparency in the reporting of financial statements. Since the rules that are to be followed for reporting are similar, it leads to accuracy and reduces ambiguity. The major example that supports rule based accounting standard is Enron case where the company overstated its revenue fradulently while not reporting its debts. The rules based accounting standard promotes comparability of different accounting standards and easy evaluation because of uniform reporting methods and formats.