Principles‐ versus rules‐based accounting standards: the FASB's standard setting strategy
- 1 June 2006
- Vol. 42 (2) , 165-188
- https://doi.org/10.1111/j.1467-6281.2006.00196.x
Abstract
In response to criticism of rules‐based accounting standards and Section 108(d) of the Sarbanes‐Oxley Act of 2002, the SEC proposed principles‐based (or ‘objectives‐oriented’) standards. We identify several shortcomings with this approach and focus on two of them. First, the format (type) of a standard is dependent on the contents of what the standard regulates. Given the asset/liability approach combined with fair values, we argue that the combination of this measurement concept with principles‐based standards is inconsistent because it requires significant guidance for management judgment. Second, we propose the inclusion of a true‐and‐fair override as a necessary requirement for any format that is more than ‘principles‐only’ to deal with inconsistencies between principles and guidance. We discuss the benefits of this override and present evidence from the United Kingdom's experience.Keywords
This publication has 17 references indexed in Scilit:
- Fair value accountingPublished by Taylor & Francis ,2007
- Evidence from Auditors about Managers' and Auditors' Earnings-Management DecisionsSSRN Electronic Journal, 2001
- Why Not Allow FASB and IASB Standards to Compete in the U.S.?Accounting Horizons, 2001
- Why Not Allow the FASB and IASB Standards to Compete in the U.S.?SSRN Electronic Journal, 2001
- Intangible Assets and Stock Prices in the Pre-SEC EraJournal of Accounting Research, 1999
- Intangible Assets and Equity Valuation in the Pre-SEC EraSSRN Electronic Journal, 1999
- GermanyEuropean Accounting Review, 1993
- Introduction: the true and fair view in British accountingEuropean Accounting Review, 1993
- The SEC's Ban on Upward Asset Revaluations and the Disclosure of Current ValuesAbacus, 1992
- A true and fair view of position and results: the historical backgroundAccounting, Business & Financial History, 1991