1. What are rules-based and principles-based standards and how do they differ in
ID: 2486751 • Letter: 1
Question
1. What are rules-based and principles-based standards and how do they differ in application across the four attributes of Conceptual framework, professional judgement, level of detailed guidance and amount of industry specific guidance?
2. Why do some critics use the Lehman case as a critique of the U.S. GAAP approach to standard setting?
3. Why do some critics use the reliance on judgment as a critique of the IFRS approach to standard setting?
4. How do U.S. GAAP and IFRS differ in their implementation of accrual accounting?
5. How does the IFRS balance sheet approach to revenue recognition differ for the U.S. GAAP approach?
Explanation / Answer
1.
Financial Accounting Standards Board (FASB) has laid down the principles of accounting which are necessarily to be followed by most of the companies. This is principle-based accounting, since it is followed by standards.
There are certain rules which are to be followed while preparing accounts. This is known as rule-based accounting.
In case of conceptual framework the principle-based standards are more favored than rule-based standards, because principle gives the required concept.
In case of professional judgment, rules come first, since whatever done through principle-based should be evaluated through rule. Therefore the rule-based standards are important here.
In case of level of detailed guidance, principle-based standards should be followed, since it gives the basic ideas.
In case of industry specific guidance, rule-based standards should be followed, because it deals with complex situation. In a complex situation rule says what to do.
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