Question

Standard Setting

Evidence shows that in some countries there is a preference for rules-based accounting standards whereas in other countries there is a preference for principle-based accounting standards. For example, U.S Generally Accepted Accounting Principles are said to be rulesbased, and German accounting principles form part of the German legal authoritative body in terms of which companies are required to conform with the German legal authoritative body.

Contrasting with the US and Germany, Australian accounting standards conforming with International Financial Reporting Standards are said to be principle-based. Additionally, in the European Union, conformity with principle-based International Financial Reporting Standards is mandatory for listed domestic companies.

Required

Evaluate and conclude the following two statements:

a) Accounting standard setters in countries having adopted principle-based International Financial Reporting Standards accounting standards are correct in believing that the advantages of principle-based accounting standards outweigh the disadvantages of principle-based accounting standards.

b) Accounting standard setters in countries maintaining rules-based accounting standards are correct in believing that the advantages of rules-based accounting standards outweigh the disadvantages of rules-based accounting standards.

Answer 1

a) Principle-based accounting standards outweigh the disadvantages of Principle-based accounting standards.

   It is a very flexible accounting standard. It is helpful to respond to rapid changes in a business environment. It can be applied to new types of transactions or financial instruments immediately. Even though the compatibility may be a hindrance but it's flexibility overpowers its lack of comparability as a flexible accounting standard is always more acceptable than a less comparative accounting standard.

    Principle-based accounting is not just a mechanical way of accounting, it requires an accountant to look deeper into the substance of any transaction. This helps to provide sound professional judgement in the profession and instils more of a sense of responsibility in an accountant, this has a disadvantage of being complex, expensive and time taking but if the method provides professional judgment and ensures accountability then it is at any point more beneficial despite a drawback.

b) Advantages of Rule-based accounting standards outweigh the disadvantages of Rule-based accounting standards

Rule-based accounting standard are very simplified standards consisting not more than a set of statements but at the same time provides expert system which are widely used in many fields. The knowledge of an expert system is encoded into their rule set. It is a relatively simple model that can be adapted to any number of problems, rule-based are very feasible for problem solving. Too many problems can be confusing and very difficult to maintain and can suffer from various drawbacks and effect the performance as a whole. It is still a very apt method of accounting and definetly worth more than its few drawbacks.