The Case for Principle-Based Accounting

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Recommended: Accounting standards in the business world

Samuel J. Ochieng
DQ Week 2
Discussion on whether to use rules or principles based accounting standards
Stakeholders in accounting include and are not limited to shareholders/investors in the company, regulators, lenders, customers and the accounting profession, just to mention a few. All the stakeholders have interest in high quality accounting reports that enable them to make a fair judgment whenever they need to make a decision on regarding a company.
Rules-based and principle-based accounting standards both have advantages and disadvantages. Advantages of rule-based accounting standards include clarity in application, reduction of risks when the rules are followed to the letter and the ease of comparing companies with the same industry using the same rules. Disadvantages of rule-based accounting standard include rigidity since a transaction must be accounted for under specified rule(s), inability to compare companies when the rules are different even if the transactions are similar and increased risks when the prescribed rules are not adhered to. Advantages of principle-based accounting standards include the option(s) left to those preparing the accounting statements to consider how to account for and report a transaction, ease of comparison of companies with similar transactions and the room to for accountants to defend their positions based on the principles followed. Disadvantages of the principle-based approach include the proliferation of too many accounting approaches with different principles, room to manipulate accounting statements and lack of precise rules on how to account for transactions.
Discussion on the accounting standard, whether rules-based or principle-based accounting, that best serves the needs of stakeh...

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... International Journal of accounting and Financial Reporting. Vol. 1 No. 1. Accessed from http://macrothink.org/journal/index.php/ijafr/article/viewFile/1096/905 on 29 March 2014.
Pitt, H. L. (2002) Testimony concerning legislative solutions to problems raised by events relating to Enron Corporation before the Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises of the United States House of Representatives. Accesses from http://fl1.findlaw.com/news.findlaw.com/hdocs/docs/enron/pitttstmny020402.pdf on 29 March 2014
Smith, P. A. & Hogan, M. V. (2004) Principle’s verses rule-based accounting standards and the application of the determination of control for consolidation. AICPA Professor/Practitioner Case Program, Case No. 2004-01. Accessed from http://www2.accaglobal.com/pdfs/int_newsletters/hongkong/080206-finreport.pdf on 29 March 2014

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