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Exhibit 3-1: Comparison of Rules-Based Standards and Principles-Based Standards

Conceptual framewor Professional !ud"ment of pttparer #e$el of detailed "uidance %mount of industr&specific "uidance

Rules-Based Standards
#ess reliance #ess reliance 'ore Extensi $e

Principles-Based Standards
'ore reliance 'ore reliance #e ss #it tle s (e
r 0


)n summar&*


rules-based standards, percei$ed to be the dominant approach of the +%SB* attempt to
anticipate all or most of the application issues and prescribe solutions. %s a result* ,.S. -%%P as codified b& the +%SB runs into approximatel& 1.*/// pa"es.


principles-based standards, stated as the dominant approach of the )%SB* are less
prescripti$e and rel& on broad statements of ob!ecti$es and principles to be followed. Conse0uentl&* )+RS are contained in about 1*2// pa"es* or about 12 percent the len"th of the ,.S. -%%P document. -reater reliance is placed on the preparees !ud"ment to ali"n the financial reportin" with the conceptual framewor .

Percei$ed differences in the two approaches are shown in Exhibit 3 1. Proponents of the +%SB approach ar"ue that the standards are rooted in the conceptual framewor and that preparers demand "uidance in specific situations. ,.S. -%SP are older than )+RS and o$er time ha$e de$eloped a detailed prescription. )n time* the )%SB will face pressure from preparers and auditors to pro$ide more "uidance. Critics of rules-based standards ar"ue that companies structure a"reements and transactions to achie$e particular ob!ecti$es and ma& not reflect the underl&in" substance. 3he& ar"ue that pure rulesbased standards

4 4 4 4 4 4 4

ma& not relate to the conceptual framewor but to more specific* prescripti$e rules( ha$e excessi$e exceptions on the scope( ha$e inconsistencies between standards( pro$ide detailed* interpreti$e "uidance to address the application for e$er& possible transaction( place little to no reliance on the professional !ud"ment of the preparer( result in acts of compliance as opposed to means of communicatin" information( can be circum$ented and can o$erride the intent of the standard.

+urther* the& ar"ue that principles-based standards 4 4 4 4 are consistent with and deri$ed from a conceptual framewor (

present a concise explanation of the accountin" ob!ecti$e and the inte"ration of the ob!ecti$e
into the standard( ha$e few* if an&* exceptions( contain no bri"ht-line tests(

)nternational +inancial Reportin" Standards 5)+RS6: %n )ntroduction