In: Accounting
Regarding the rules-based and principles-based standard setting approaches (1) Which approach leads to more comparable results, and why? (2) Which approach leads to more verifiable results, and why? (3) If you were an auditor, under which approach would you likely be in a more comfortable position facing a client attempting aggressive accounting, and why?
Your answer
Aproach lead to more comparable :- Principles-based accounting seems to be the most popular accounting method around the globe. Most countries opt for a principles-based system, as it is often 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 not a rules-based system. The IFRS states that a company’s financial statements must be understandable, readable, comparable, and relevant to current financial transactions.
As the most of the country across the glope have adopted or converged with IFRS standard which principal based hence Princiapl based accounting is more comparable as most of company of various country have adopted the princiapal based accounting.
Verifiable: Verifiability means that the accounting information presented in financial statements must be verifiable by independent accountants. hence whatever the approach is followed the information should be verifiable. In case of princiaple based accounting the information is more verifiable because under this approach we follow the forward looking approach.
Auditor: Being a auditor we would be more comfortable in principal based accounting which required comprehensive disclosure keeping in mind the forward looking approach and varioud professional judgement.