Rule Based Accounting

RULE VS PRINCIPLE BASED CONVERGENCE VS ADOPTION IFRS Assignment1, Group Section 1 Characteristic Additional Comment Criteria Disadvantage Advantage
• Provide specific dictates for reporting financial information
• Unavoidable. (Accountants must follow these rules or face penalties for noncompliance. )
• Effective rules-based standards require active participation of the financial reporting community to evaluate the resulting quality. Real life practice issues should be brought to the attention of the appropriate ruled based standards-setting bodies
• Provides basic guidelines for accountants to follow. Principles-based can be effective where precise rules and ongoing guidance have been the norm, also Financial markets need to be more sophisticated
• More standardized accounting statements
• May produce more consistent and comparable financial reports across entities
• Provides specific answer accounts are looking for and is reliable
• May improve the representational faithfulness of financial statements.

• Accountants can use their principles and judgment to come to conclusions.
• While accountants may not arrive at the same specific answer, they will be close enough that being in the same ballpark is acceptable.

Makes it easy for accountants in different countries to review and interpret one another’s information.
• Lack of flexibility.
• According to lack of flexibility, as it focuses on “checking the boxes” more than portraying an underlying economic reality, rules-based accounting has not worked in practice.
• Make standards longer and more complex
• Too complex and technical for nonaccountants, such as investors, to understand.
• the quest for bright-line accounting rules has shifted the goal of professional judgment from consideration of the best accounting treatment to concern for parsing the letter of the rule.

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A lack of precise guidelines could create inconsistencies in the application of standards across organizations.
• Difficult to compare companies because accounting statement will vary in style.
• A principles-based standard often becomes a rules-based standard in an effort to increase comparability and consistency.
• Financial statements rely on individual judgment to interpret and implement the standards.
• Allows too much leeway for companies
• Puts more responsibility on the company.
• Unprincipled people can exploit the system and make unethical decisions. Critic argued that principles-based standards would have no exceptions. For example; principles-based standards may require that there be no exceptions to fair value rules for financial instruments, even if used in hedging transactions; all leases over one year might be capitalized; and all stock options might be valued at market. Principle Based Rule Based
• Financial managers in a rules-based setting are more likely to use transaction decisions, selling ‘available for sale’ securities.
• Financial managers in the principles-based setting more often se their impairment loss (accounting) decision to engage in earnings management compared to in the rules-based setting. “Rules-Based and Principles-Based Accounting Standards and Earnings Management Research” By Ferdy van Beest*, Radboud University Nijmegen Section 2 Convergence VS. Adoption Convergence
• the Accounting Standard Board of the Country applying IFRS would work together with IASB to develop high quality compatible Accounting Standards over time. Adoption
• Implementing IFRS in the same manner as issued by the IASB Covergence

Convergence
• Cannot eliminate all of differences in both of accounting standards Adoption
• Increase cost from changing into IFRS
• Lack of staff to adopt into IFRS
• Not support special accounting problems in some area Convergence
• US GAAP & IFRS
• Japan
• China Example Adoption
• European Union
• Australia
• Singapore RESOURCES ?http://www. ehow. co. uk/info_8333888_difference-principles-rulesbasedaccountingstandards. html#ixzz1PKRmdfl4 ? http://www. ehow. com/info_8370701_advantages-disadvantagesprinciplesbasedaccounting. html#ixzz1PNz3gSeA ? http://www. picpa. org/Content/40856. aspx ? http://www. ventureline. om/accounting-glossary/R/rulesbased-accounting-definition/ ?http://www. ventureline. com/accounting-glossary/p/principlesbased-accounting/ ? http://www. ehow. com/info_8529579_rulesvs-principlesbasedaccounting. html#ixzz1PO0T5xPC ? http://www. nysscpa. org/cpajournal/2004/804/essentials/p34. htm ? http://findarticles. com/p/articles/mi_m0ICC/is_3_71/ai_91967442/ ? http://basiccollegeaccounting. com/understand-the-difference-between-principle-basedversus-rule-based-accounting-standards/ ? http://www. facebook. com/l. php? u=http%3A%2F%2Fwww. ru. nl%2Fpublish%2Fpages%2F 516298%2Fnice_09114. pdf=0de7a ? http://www. harteredclub. com/difference-between-ifrs-conversion-and-ifrs-adoption/ ? http://www. transtutors. com/accounting-homework/IAS-IFRS-and-US-GAAP/benefits-ofachieving-convergence-with-ifrs. aspx ? http://blog. ifrs. com/2009/05/ifrs-convergence-or-adoption. html ? http://www. transtutors. com/accounting-homework/IAS-IFRS-and-US-GAAP/benefits-ofachieving-convergence-with-ifrs. aspx ? http://blog. ifrs. com/2009/05/ifrs-convergence-or-adoption. html Q
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