Discussion:Principles based versus rules based accounting
From TaxAlmanac, A Free Online Resource
Note: You are using this website at your own risk, subject to our Disclaimer and Website Use and Contribution Terms.
From TaxAlmanac
Discussion Forum Index --> Accounting Questions --> Principles based versus rules based accounting
| 3 November 2006 | |
| There is a current debate over the advantages and disadvantages of principles-based vs. rules-based accounting. To the extent that FASB issues standards based on a conceptual framework, U.S. standards can be considered principles-based. But the FASB also issues volumes of detailed rules supporting those standards. Some accountants favor this approach because it clearly defines the boundaries. Others think the current rules-based system is too complex and not transparent enough for users of financial statements. They support a principles-based approach, which would provide minimal guidance and greater use of professional judgement. The principles-based approach is also supported by the International Accounting Standards Board and proponents of the principles-based approach believe a change is necessary in a global economy. Please offer your opionions either way. | |
| 28 November 2006 | |
My thoughts:
Personally, I favor relying more on principles. Without principles the rules are meaningless. However, I am sure that no one is suggesting throwing out the rules, as satisfying as that might be in times of frustration! Since we have differences of opinion, we need rules to guide interpretation of the underlying principles. That being said, any approach that would reduce the complexity of the volumes of regulations would be greatly appreciated. The question is, then, how do we do it? | |
| 5 November 2007 | |
| I think this is one of the most misunderstood areas for people. We had principle based rules up until the APB/FASB was created (1959 - APB and 1973 - FASB). The more specific rules or guidance was issued following lawsuits against CPAs questioning their professional judgment. The profession felt that to issue specific rules would reduce the likelihood of lawsuits against the accountants professional judgment. Interesting that we are now coming full circle and looking to simplify how accounting is interpreted. We will make this switch and then in another 20-30 years another accounting scandal will arise and everyone will yell for more rules. I also find it interesting that people think IFRS is the answer. While they have less pages of material, they are still rules based. Only difference is their rules are more vague. When international practioners look for guidance, they rely upon the US GAAP rules to assist in establishing a barometer for their professional judgment. In the end we will do away with a rules based environment for more principles, rely more heavily on an international flavor, and revert back to where the profession was in the 1940's and 1950's. While we are simplifying the process because of the fallout from Enron and WorldCom, is that really better? It really comes down to having an ethical backbone and doing what's right when dealing with companies who try to push the envelope. No matter if we have rules or principles, someone will always try to push the bar into the gray area to manipulate and make things look better. Call me skeptical, but if you don't learn from history, history will repeat itself. | |
To join in on this discussion, you must first
log in.
