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Rules, principles and judgments in accounting standards

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  • Bruce Bennett
  • Michael Bradbury
  • Helen Prangnell

Abstract

The distinction between rules‐based and principles‐based standards is not well defined and is subject to a variety of interpretations (SEC, 2003, p. 5). Yet there is a commonly held view that the FASB's standards are rules‐based and the IASB's standards are principles‐based. This article identifies the basis of this distinction. For research and development, the article compares the FASB standard with two principles‐based standards. For each standard we 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. We conclude 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 is suggested that any FASB and IASB convergence will require agreement on the weightings given to the qualitative characteristics.

Suggested Citation

  • Bruce Bennett & Michael Bradbury & Helen Prangnell, 2006. "Rules, principles and judgments in accounting standards," Abacus, Accounting Foundation, University of Sydney, vol. 42(2), pages 189-204, June.
    • Handle: RePEc:bla:abacus:v:42:y:2006:i:2:p:189-204
    DOI: 10.1111/j.1467-6281.2006.00197.x
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    Cited by:

    1. Marton, Jan & Runesson, Emmeli, 2017. "The predictive ability of loan loss provisions in banks – Effects of accounting standards, enforcement and incentives," The British Accounting Review, Elsevier, vol. 49(2), pages 162-180.
    2. Khushbu Agrawal & Chanchal Chatterjee, 2015. "Earnings Management and Financial Distress: Evidence from India," Global Business Review, International Management Institute, vol. 16(5_suppl), pages 140-154, October.
    3. Tanja Lakovic & Jayne Fuglister, 2013. "The International Accounting Standards Board’s Progress in Promoting Judgement Through Objectives-Oriented Accounting Standards," International Journal of Business and Social Research, MIR Center for Socio-Economic Research, vol. 3(7), pages 28-42, July.
    4. Teng Zhou & Jacqueline Birt & Michaela Rankin, 2015. "The value relevance of exploration and evaluation expenditures," Accounting Research Journal, Emerald Group Publishing Limited, vol. 28(3), pages 228-250, November.
    5. Chen, Anthony & Gong, James (Jianxin) & Lu, Richard (Hung-Yuan), 2020. "The effect of principles-based standards on financial statement comparability: The case of SFAS-142," Advances in accounting, Elsevier, vol. 49(C).
    6. Mark Penno, 2022. "Concepts‐based Accounting Standards," Abacus, Accounting Foundation, University of Sydney, vol. 58(2), pages 209-232, June.
    7. Anna-Maija Lantto, 2014. "Business Involvement in Accounting: A Case Study of International Financial Reporting Standards Adoption and the Work of Accountants," European Accounting Review, Taylor & Francis Journals, vol. 23(2), pages 335-356, June.
    8. Carnegie, Garry D. & O’Connell, Brendan T., 2014. "A longitudinal study of the interplay of corporate collapse, accounting failure and governance change in Australia: Early 1890s to early 2000s," CRITICAL PERSPECTIVES ON ACCOUNTING, Elsevier, vol. 25(6), pages 446-468.
    9. Braun, Gary P. & Haynes, Christine M. & Lewis, Tom D. & Taylor, Mark H., 2015. "Principles-based vs. rules-based accounting standards: The effects of auditee proposed accounting treatment and regulatory enforcement on auditor judgments and confidence," Research in Accounting Regulation, Elsevier, vol. 27(1), pages 45-50.
    10. Kohler, Hervé & Pochet, Christine & Le Manh, Anne, 2021. "Auditors as intermediaries in the endogenization of an accounting standard: The case of IFRS 15 within the telecom industry," Accounting, Organizations and Society, Elsevier, vol. 91(C).
    11. Tanja Lakovic & Jayne Fuglister, 2013. "The International Accounting Standards Board’s Progress in Promoting Judgement Through Objectives-Oriented Accounting Standards," International Journal of Business and Social Research, LAR Center Press, vol. 3(7), pages 28-42, July.
    12. Rolf Uwe Fülbier & Joerg‐Markus Hitz & Thorsten Sellhorn, 2009. "Relevance of Academic Research and Researchers' Role in the IASB's Financial Reporting Standard Setting," Abacus, Accounting Foundation, University of Sydney, vol. 45(4), pages 455-492, December.
    13. Hervé Kohler & Christine Pochet & Anne Le Manh, 2021. "Auditors as intermediaries in the endogenization of an accounting standard: The case of IFRS 15 within the telecom industry," Post-Print hal-03337420, HAL.
    14. Peipei Pan & Chris Patel, 2018. "The Influence of Native Versus Foreign Language on Chinese Subjects’ Aggressive Financial Reporting Judgments," Journal of Business Ethics, Springer, vol. 150(3), pages 863-878, July.
    15. Amitav Saha & Sudipta Bose, 2021. "Do IFRS disclosure requirements reduce the cost of capital? Evidence from Australia," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 61(3), pages 4669-4701, September.
    16. Dennis, Ian, 2008. "A conceptual enquiry into the concept of a ‘principles-based’ accounting standard," The British Accounting Review, Elsevier, vol. 40(3), pages 260-271.
    17. Jens Wüstemann & Sonja Wüstemann, 2010. "Why Consistency of Accounting Standards Matters: A Contribution to the Rules‐Versus‐Principles Debate in Financial Reporting," Abacus, Accounting Foundation, University of Sydney, vol. 46(1), pages 1-27, March.
    18. Michael E. Bradbury & Tom Scott, 2021. "What accounting standards were the cause of enforcement actions following IFRS adoption?," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 61(S1), pages 2247-2268, April.
    19. Guilherme Belloque & Martina K Linnenluecke & Mauricio Marrone & Abhay K Singh & Rui Xue, 2021. "55 years of Abacus: Evolution of Research Streams and Future Research Directions," Abacus, Accounting Foundation, University of Sydney, vol. 57(3), pages 593-618, September.
    20. Bradbury, Michael E. & Schröder, Laura B., 2012. "The content of accounting standards: Principles versus rules," The British Accounting Review, Elsevier, vol. 44(1), pages 1-10.
    21. Anna Samsonova-Taddei, 2013. "Social Relations and the Differential Local Impact of Global Standards: The Case of International Standards on Auditing," Abacus, Accounting Foundation, University of Sydney, vol. 49(4), pages 506-538, December.
    22. Hodges, Ron & Mellett, Howard, 2012. "The U.K. private finance initiative: An accounting retrospective," The British Accounting Review, Elsevier, vol. 44(4), pages 235-247.

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