Principles Based vs Rules Based Accounting Standards

-The early 2000s, concern about the quality and

transparency of accounting information.
- one of the main concern was the increasing complexity of
FASB standards and the development of rule-based
accounting standards.
-Sarbanes-Oxley Act of 2002 ,SEC to examine the feasibility
of a principles-based accounting standards.
- in 2003, SEC published its study on adoption of a principle
based standards.
-The difference between between rule-based and
principles-based standards , Continuum ranging from
highly rigid standards on one end to to general definitions
of economics-based concepts on the other end



Principle based
Better able to cope
with speed of change of
business environment
Less Voluminous
Encourages use of
professional judgment
with focus on what is right
Seen as possibly
discouraging financial
engineering

Rule based
More workable in large,
complex economies &
countries
Less room for
interpretation
Provides more guidance
for practical
implementation
Less need for explanation
in financial statements

The FASB issued an invitation to comment
about this issue
The AAA Committee was appointed to
comment. The committee listed the
characteristics that concept-based should
possess.
In 2003, SEC submitted study to congress
about this issue that included the
recommendations to FASB.
In July 2004,FASB responded to the studys
recommendations and noted that some of it
were already being implemented
The FASBs spesific responses to the
recommendations :
1. Issuing Objectives-Oriented Standards
2. Conceptual Framework
3. One U.S. Standard Setter
4. GAAP Hierarchy
5. Access to Authoritative Literature
6. Comprehensive Review of Literature

International Convergence
Sept 18, 2002 Norwalk Agreement (Achieve
compatibility,Maintain compatibility)
3 Major aspects:
1. Financial Statements Presentation Project
2. Conceptual Framework Project
3. Standards Update Project
In April 2004, FASB and IASB fiancial statement presentation
project. Has 3 phases :
phase A : What constitutes complete set of statements?
Phase B : Fundamental issues for presentation of
information
Phase C : Presentation of interim financial information in
U.S. GAAP




Feb 2006, Memorandum of understanding of FASB and
IASB
Convergence will progress : Boards to reach conclusion on
major differences in focused areas (2008 goal) and FASB &
IASB seek to make continued progress in other areas
November 2009, published progress report : Milestone
targets for each project, Commitment to reporting
quarterly on progress, Host monthly joint board meetings
FASB issued four new statements to bring U.S GAAP into
IFRS :
- 4 New SFASs(SFAS No. 151 (Superseded), SFAS No. 153
(Superseded),SFAS No. 154,SFAS No. 163)
- SFAS No. 141 revised
- IASB new standards on borrowing costs & segment
reporting



October 2004, FASB and IASB conceptual framework
project
The eight phases of CFP
-Objectives and qualitative characteristics
-Definitions of elements, recognition and recognition
-Measurement
-Reporting entity concept
-Boundaries of financial reporting, and presentation and disclosure
-Purpose and status of framework
-Application of framework to not-for-profit entities
-Remaining issues, if any
IASB and FASB also working on a numeral of individual
standard issues

Conceptual Framework
a coherent system of interrelated objectives and
fundamentals that is expected to lead to
consistent standards and that prescribes the
nature, function and limits of financial accounting
and reporting.
The role of conceptual Framework :
- A structured theory of accounting
-States the scope and objective of financial
reporting
-Identifies and defines qualitative characteristics
of financial information and the basic elements of
accounting
-Deals with principles and rules of recognition and
measurement, and report disclosures





The Role of Conceptual Framework
Issues:
Do we need a general
theory of accounting?
Is current accounting too
permissive?
Are current accounting
practices too
inconsistent?
Is there too much
political interference in
the neutrality of
accounting reports?

Benefits
consistent, logical
reporting requirements
greater compliance
enhanced accountability
fewer specific standards
enhanced understanding
of reporting
requirements
more economical
standard setting

Objectives of conceptual framework
Financial reporting should provide information that
is useful to present and potential investors and
creditors and other users in making rational
investment, credit and similar decisions. Information
should be
useful in making economic decisions
useful in assessing cash flow prospects
about enterprise resources, claims to those
resources and changes in them