Critical Review of Principles-Based Accounting Standards

Topics: Enron, International Financial Reporting Standards, Financial statements Pages: 4 (1324 words) Published: November 10, 2012
Introduction
Schipper (2003) who is a member of FASB conducted a study on the rules-based and principles-based accounting standards. The aim of this article is to discuss the attributes and potential effects of transferring from rules-based standards to principles-based standards. To some extent this article is critical, but several limitations need to be discussed, such as implementation guidance. Summary

Schipper (2003) demonstrated that there was a long-running debate on whether U.S. GAAP should be shifted to principles-based system instead of rules-based system. To measure its applicability, SEC and FASB had conducted a study and developed a proposal respectively. Schipper (2003) argued that U.S. GAAP was based on principles guided by FASB Conceptual Framework. He used examples to explain how U.S. GAAP achieved relevance, reliability and comparability. In addition, Schipper (2003) illustrated why a recognisable principle became complex and detailed by giving instances. In situations, a recognisable principle needs additional guidance and explanation to support. Schipper (2003) showed that scope exceptions, treatment exceptions and detailed implementation guidance made U.S. GAAP appeared to be rules-based standards and stressed on implementation guidance. Furthermore, Schipper (2003) discussed potential consequences of adopting principles-based standards. Generally, Schipper (2003) held the point that shifting U.S. GAAP to principles-based standards and abandoning rules-based standards were not appropriate. Critique

Some key points stated were highly reasonable. Schipper (2003) mentioned that detailed implementation guidance could increase comparability as it reduced the effects of differences in professional judgment. Principles-based standards have insufficient guidance, which need accountants and auditors to apply professional judgments and may lead to variable decisions cross periods and entities. Shortridge & Myring (2004) claimed that...
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