Accounting research has shown that the distinction between rules-based and principles-based standards is not well defined and is subject to a variety of interpretations. Nonetheless, there is a commonly-held view that accounting standards in the United States are rules-based and International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB) are principles-based.
A research paper published in 2006 identifies the basis of this distinction. For research and development, the paper compares the US standard issued by the Financial Accounting Standards Board (FASB) with two principles-based standards. For each standard, the researchers identify and classify rules and judgments, and observe the level of justifications for the rules and assistance to support the judgments. The three standards have rules, are based on principles, and require the exercise of professional judgment; the less conservative standard requires more judgments and, unexpectedly, more rules.
The results suggest that the rules-based versus principles-based distinction is not meaningful, except in relative terms. The paper concludes that a relatively more principles-based standards regime requires professional judgment at both the transaction level (substance over form) and at the financial statement level (‘true and fair view’ override). Furthermore, it suggests that any IASB and FASB convergence will require agreement on the weightings given to the qualitative characteristics.
Read the SSRN abstract and the full research article “Rules, Principles and Judgments in Accounting Standards” by Bruce Bennett (General Manager Admissions/Standards and Quality Assurance at the New Zealand Institute of Chartered Accountants), Michael Bradbury (Professor, School of Accountancy, Law and Finance, UNITEC Institute of Technology in Auckland, New Zealand, and a member of the International Financial Reporting Interpretations Committee of the IASB and the Financial Reporting Standards Board of the Institute of Chartered Accountants of New Zealand) and Helen Prangnell (a Senior Lecturer in the School of Accountancy, Law and Finance, UNITEC New Zealand, and a member of the Professional Practices Board of the Institute of Chartered Accountants of New Zealand).
This 16-page article and other articles on this debate were published in ABACUS, Vol. 42, No. 2, June 2006. For more information and different perspectives regarding this ongoing debate, refer to Part 1 of this three-part posting and previous postings during the past year.
