Question

It is often argued that the accounting standards of the FASB are ruled-based, whereas the accounting standards issued by the IASB are principle-based. Rules based standards by their nature can be quite complex, particularly if they seek to cover as many situations as possible. Do you think it would be easier to circumvent the requirements of rule-based or principle-based accounting standards for developing countries?

Answer 1

In accounting, a principles-based on approach is the most popular accounting method globally because it is usually better to adjust accounting principles to a company’s transactions, rather than adjusting a company’s operations to accounting rules. The international financial reporting standards (IFRS) system the most common international accounting standard is a principles-based approach, which states that a company’s financial statements must be understandable, readable, comparable and relevant to current financial transactions. By contrast, rules based accounting involves a list of detailed rules that companies and their accountants must follow when preparing financial statements. The major example of rule-based accounting is the Generally Accepted Accounting Principles (GAAP), which is a system broadly used in the U.S. Rules-based accounting involves as the name implies that users follow a list of strict and specific rules that accountants must apply when creating financial statements and other financial documents. The rules-based accounting standard tend to established rules of the accounting standards for the direction, and it also established the more specific. In the absence of rules accountants could be brought to court if their judgments of the financial statements were incorrect. When there are strict rules that need to be followed, the possibility of lawsuits is diminished. It has a set of rules can increase accuracy and reduce the ambiguity that can trigger aggressive reporting decisions by management. However, the complexity of rules can result unnecessary complexity in the preparation of financial statements. The principles-based accounting standards tend to the accounting standards formulated based on the principle for the direction. The advantage of principles-based accounting is that its broad guidelines can be practical for a variety of circumstances. Precise requirements can sometimes compel managers to manipulate the statements to fit what is compulsory. On the other hand, the problem with principles-based guidelines is that lack of guidelines can produce unreliable and inconsistent information, which makes it difficult to compare one organization to another. By working together they are able to eliminate issues within accounting standards. The FASB and IASB are working together to achieve a common goal. They are working together to draw on the best of the U.S GAAP, IFRS’s and other national standards to set global set of accounting standards that investors can trust. They are focusing their resources on providing significant improvements in financial reporting.