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ACCT101 - Assignment 3 - Verion 2

ACCT101 - Assignment 3 - Verion 2

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New York Institute of Technology
ACCT 101
 – 
Accounting ISummer I, 2012Assignment III
Reem M. AlzariDalal Al JalahmaAhmed TaqawiJuly 09, 2012
 
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Reem AlzariDr. Samy NathanAccounting 10114 October 2012
Rules vs. Principles-Based Accounting Standard
Rules and principles, which one works better? Our daily life routine dependson rules and principles in everything that we do, whether at home, at work or at atheatre we are always bounded by those two. To briefly define the terms, rules are likea guide or a manual which will tell you exactly how or what to do, whereas principleswill generally guide you but will give you the option to choose which way to handle aspecific situation. In the following paragraphs we will be discussing Gerui (Grace)
Kang and Jerry W. Lin’s article on rules
-based and principles-based accountingstandards and which one works more effectively for motivated management.The article examines whether the type of accounting standards influences themanagement accounting reporting behaviours with the presence of environmentalvariables and motivation. A study has been done with the participation of ninety-sixsenior accounting students to support the prediction that motivation has a major
impact and affect on management’s financial reporting decision. With motivation,
management tends to report aggressively with rules-based rather than principle-basedaccounting standards and that motivation becomes consistent and regular in the
management’
s accounting choice.Furthermore, this article mentions some studies that argue against theprediction. The studies state that accounting information develops under principles-
 based accounting standards through limiting management’s aggressive reporting.
Other studies state that choosing the appropriate accounting standards when reportingis more of an individual act by individuals themselves when basing their judgmentsand decisions. When managers have the motivation to produce aggressive reports,
 
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they will attempt to tailor those reports according to their motivation no matter whattype of accounting standards they use. In addition, applying rules-based accountingstandards makes it easier for a motivated management to produce reasonable justification than applying principles-based standards and get challenged by auditors.Simultaneously, the U.S. lease accounting standard (SFAS No. 13) was usedas an alternative for rules-based accounting standards and the InternationalAccounting Standards (IAS 17) was used as an alternative for principles-basedaccounting standards in the studies conducted for this paper. It was found that whenmanagement had motivation to produce aggressive reporting selection, theyaccomplished that by choosing the rule-based accounting standard instead of theprinciples-based accounting standards. The main finding showed that the accuracy of accounting standards causes the choice of aggressive reporting by management.Moreover, the study had three other important outcomes. First, the FASB hasbeen working with IASB to join the current U.S. GAAP with international financialreporting (IFRS) to make it more principle-based than rules-based standard. Second, itis necessary to enhance the current financial reporting method to manage thei
nfluence of motivation on the management’s decision to report aggressively. Third,aggressive reporting possibility is less when management’s decision is to choose
principles-based instead of rules-based accounting standards, and having a principles-based
accounting cannot entirely reduce or demolish the management’s aggressive
reporting as long as they have the motivation to do so.Obviously, and according to psychological theories motivation is consideredto play a major role in human behavioural change; in which the same relates to the
change in management’s behaviour. In the paper they examine what they have called“motivated reasoning theory”, which focuses on the effects of the motivation’s
interaction with the accuracy of accounting standards and how it later influences

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