Pindi Yulinar Rosita

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Current Debates on Accounting Issues
Principles vs. Rules

 Principles : System requires companies to report and auditors to audit the substance
of the transaction; not merely whether they can qualify as acceptable under incredibly
complex or overly technical rules.
 Rules : Systems encourage creativity (and not the good kind) in financial reporting.
They allow some to stretch the limits of what is permissible under the law, even
though it may not be ethically or morally acceptable.

Introduction
“ Rules Based Standards ” were reinforced by the expressed commitment on the part
of Financial Accounting Standards Board (FASB) and the Securities and Exchange
Commission (SEC) to work towards a convergence of Generally Accepted
Accounting Principles (GAAP) with the standards promulgated by the International
Accounting Standard Board (IASB), generally referred to as IFRS (International
Financial Reporting Standards). The IFRS are founded on a “ principles - based ”
approach to standard setting. These twin factors, the aftermath of the accounting
scandals at the beginning of the decade and the move to establish greater harmony
between GAAP and IFRS, has led to reflections on the advantages and disadvantages
of a principles - based approach to standard setting.
Isn ’t GAAP Already Principles Based?
In spite of most people believing that GAAP is a rules - based approach, the SEC
maintains that at least in part it is already a “ principles based ” approach. The
Conceptual Framework elevates decision usefulness as the chief purpose of fi nancial
reporting. 28 Decision usefulness is determined by the relevance, reliability and
comparability of the information presented in the fi nancial statement.
Argument for a Rules Based Approach
Defenders of the rules - based approach argue that it encourages consistency and
comparability. “ That is, if similar things are accounted for in the same way, either across
fi rms or over time, it becomes possible to assess fi nancial reports of different entities, or
the same entity at different points in time, so as to discern the underlying economic
events.
• The concern is that the adoption of a more principles - based framework may make it
difficult for end - users of financial information.
• A second concern revolves around the difficulties of verifying the accuracy of
financial reports and sanctioning enforcement preparers who deviate from the rules.
• A third concern is that deviation from a rules - based approach may place a heavier
burden on preparers, particularly auditors.