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Rules-Based Accounting Analysis Gp Essay Help

The purpose of this study is to investigate critically the assertion that rules-based accounting adds additional complexity, fosters financial engineering, and does not necessarily lead to a "true and fair view" or "fair presentation." This article argues that the International Accounting Standard (IAS), which essentially employs a principles-based approach to establishing accounting standards, will assist in achieving the goal of presenting a truthful and fair view or 'fair presentation'


According to critics, the current US GAAP guidelines are rules-based rather than principles-based, and their application has not produced a "true and fair view" or "fair presentation." This is despite assertions in the usual independent auditor's report that the audited company's financial statements portray the operation and financial results accurately. 1 To achieve the desired purpose in financial reporting, it is argued here that the International Accounting Standard, which is founded on principles, should be implemented as an alternative. In reality, the Sarbanes-Oxley Act of 2002 recognized the necessity to implement accounting standards based on principles. 2



The report by The Institute of Chartered Accountants of Scotland (ICAS) on its Report on Proceedings of Financial Instrument Workshops in 2006 concerning the group examination of IAS 39, which refers to financial instruments: recognition and measurement, provides evidence that the international accounting standard has adopted a principles-based standard rather than a rules-based standard.



3 The group was especially concerned with establishing standards for cash and cash contracts.



The group has also explored the distinction between a principle and a rule, concluding that nomenclature is unimportant and that what is required is a clear hierarchy of overarching principles, as in the case of a conceptual framework, followed by supporting guidance for these principles.



4 Despite the fact that the group did not explicitly define what constitutes a principle and what constitutes a rule, it can be inferred from their work that they recognised the need to employ principles and supporting information. This scholar considers direction to be synonymous with regulations. Therefore, the use of rules cannot be eliminated entirely from the standard-setting process.



However, there is a distinction between rule-based and principle-based standard-setting. To use a rules-based approach would entail stating the standards first in terms of rules and then possibly qualifying them with principles, which is an inverted way of attempting to have a standard that is conceptually broad enough to cover every transaction while allowing exceptions through the use of rules.



The ICAS group highlighted the need for a written standard that satisfies the high-level principles described in the applicable Framework or Concept Statement. It is easier to agree that a concept is written in principle as a matter of broad statement as opposed to stating it as a specific statement that may be equated to a rule and which may only be relevant in certain circumstances. In logic, presenting an argument deductively is more compelling than inductively. 5 Such a logical approach, when applied to standard-setting, would be analogous to using general statements or concept statements as the basis for proposing possible exceptions to rules when circumstances warrant.



The ICAS working group was tasked with resolving the Principles versus Rules controversy within international accounting standard-setting, and their final report favored the use of principles-based rather than rules-based accounting standards. In underlining the significance of the findings, the working group's report reached a conclusion regarding the appropriateness of a principles-based approach to standard-setting, which was deemed essential in order to meet the needs of industry and the public interest. In addition, the panel came to the conclusion that worldwide convergence of accounting standards is unattainable under a rules-driven, thorough approach. 6 The latter result may be contested on the basis of simple cultural differences between nations.



The working group did actually remark that "rules-based accounting adds unnecessary complexity, encourages financial engineering, and does not necessarily lead to a true and fair view or fair presentation." The group demonstrated this by exploring an alternate model for financial instruments if the same were to be developed from scratch. This researcher could only concur, as rules-based accounting standards would be focused on mere compliance with the "letter" of the rules, rather than the "spirit" or concepts of the standard that should provide its broad adoption and applications, regardless of cultural differences, life. The letter of the law is considered to kill, but the spirit gives life. 7 The same might be implemented in regular environments.



It can be concluded that rules-based accounting would add necessary complexity because accounting professionals or individuals preparing financial statements would always assert that they have complied with accounting rules, which would lead them to believe that they have met the 'fair presentation' requirement. However, there is reason to believe that the same would be essentially acts of financial engineering that are designed to comply with the "letter" of the standard, but not its principles or spirit. Further, it may be stated that only through utilizing and applying IAS could a principles-based accounting standard be implemented.



Sources Cited



Eighty Sketches of Sermons: Together with an Introductory Essay, by Francis Close, 1861, original from Oxford University, digitized in 2006.



Terrell, Dailey Burnham. Logic: A Modern Introduction to Deductive Reasoning.



Principles not Rules: Report on Proceedings of Financial Instrument Workshops, The Institute of Chartered Accountants in Scotland (2006a). Web.



The Institute of Chartered Accountants of Scotland, Accounting Standards Based on Principles or Rules? A Matter of Opinion (2006b). Web.



1995. Whittington & Pany, Principles of Auditing, IRWIN, London, United Kingdom, United States.



Footnotes

1995. Whittington & Pany, Principles of Auditing, IRWIN, London, United Kingdom, United States. The Institute of Chartered Accountants of Scotland, Accounting Standards Based on Principles or Rules? A Matter of Opinion (2006b). The Institute of Chartered Accountants of Scotland, Principles not Rules: Report on Proceedings of Financial Instrument Workshops, available on the World Wide Web (2006a). Web. Ibid. Terrell, Dailey Burnham Terrell Logic: A Contemporary Introduction to Inferential Reasoning Holt, Rinehart and Winston, 1967. Principles not Rules: Report on Proceedings of Financial Instrument Workshops, The Institute of Chartered Accountants in Scotland (2006a). Close, Francis. Together with an Introductory Essay, Eighty Sketches of Sermons, 1861, Original from Oxford University, Digitized in 2006.

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The purpose of this study is to investigate critically the assertion that rules-based accounting adds additional complexity, fosters financial engineering, and does not necessarily lead to a "true and fair view" or "fair presentation." This article argues that the International Accounting Standard (IAS), which essentially employs a principles-based approach to establishing accounting standards, will assist in achieving the goal of presenting a truthful and fair view or 'fair presentation'



According to critics, the current US GAAP guidelines are rules-based rather than principles-based, and their application has not produced a "true and fair view" or "fair presentation." This is despite assertions in the usual independent auditor's report that the audited company's financial statements portray the operation and financial results accurately. 1 To achieve the desired purpose in financial reporting, it is argued here that the International Accounting Standard, which is founded on principles, should be implemented as an alternative. In reality, the Sarbanes-Oxley Act of 2002 recognized the necessity to implement accounting standards based on principles. 2



The report by The Institute of Chartered Accountants of Scotland (ICAS) on its Report on Proceedings of Financial Instrument Workshops in 2006 concerning the group examination of IAS 39, which refers to financial instruments: recognition and measurement, provides evidence that the international accounting standard has adopted a principles-based standard rather than a rules-based standard.



3 The group was especially concerned with establishing standards for cash and cash contracts.



The group has also explored the distinction between a principle and a rule, concluding that nomenclature is unimportant and that what is required is a clear hierarchy of overarching principles, as in the case of a conceptual framework, followed by supporting guidance for these principles.



4 Despite the fact that the group did not explicitly define what constitutes a principle and what constitutes a rule, it can be inferred from their work that they recognised the need to employ principles and supporting information. This scholar considers direction to be synonymous with regulations. Therefore, the use of rules cannot be eliminated entirely from the standard-setting process.



However, there is a distinction between rule-based and principle-based standard-setting. To use a rules-based approach would entail stating the standards first in terms of rules and then possibly qualifying them with principles, which is an inverted way of attempting to have a standard that is conceptually broad enough to cover every transaction while allowing exceptions through the use of rules.



The ICAS group highlighted the need for a written standard that satisfies the high-level principles described in the applicable Framework or Concept Statement. It is easier to agree that a concept is written in principle as a matter of broad statement as opposed to stating it as a specific statement that may be equated to a rule and which may only be relevant in certain circumstances. In logic, presenting an argument deductively is more compelling than inductively. 5 Such a logical approach, when applied to standard-setting, would be analogous to using general statements or concept statements as the basis for proposing possible exceptions to rules when circumstances warrant.



The ICAS working group was tasked with resolving the Principles versus Rules controversy within international accounting standard-setting, and their final report favored the use of principles-based rather than rules-based accounting standards. In underlining the significance of the findings, the working group's report reached a conclusion regarding the appropriateness of a principles-based approach to standard-setting, which was deemed essential in order to meet the needs of industry and the public interest. In addition, the panel came to the conclusion that worldwide convergence of accounting standards is unattainable under a rules-driven, thorough approach. 6 The latter result may be contested on the basis of simple cultural differences between nations.



The working group did actually remark that "rules-based accounting adds unnecessary complexity, encourages financial engineering, and does not necessarily lead to a true and fair view or fair presentation." The group demonstrated this by exploring an alternate model for financial instruments if the same were to be developed from scratch. This researcher could only concur, as rules-based accounting standards would be focused on mere compliance with the "letter" of the rules, rather than the "spirit" or concepts of the standard that should provide its broad adoption and applications, regardless of cultural differences, life. The letter of the law is considered to kill, but the spirit gives life. 7 The same might be implemented in regular environments.



It can be concluded that rules-based accounting would add necessary complexity because accounting professionals or individuals preparing financial statements would always assert that they have complied with accounting rules, which would lead them to believe that they have met the 'fair presentation' requirement. However, there is reason to believe that the same would be essentially acts of financial engineering that are designed to comply with the "letter" of the standard, but not its principles or spirit. Further, it may be stated that only through utilizing and applying IAS could a principles-based accounting standard be implemented.



Sources Cited



Eighty Sketches of Sermons: Together with an Introductory Essay, by Francis Close, 1861, original from Oxford University, digitized in 2006.



Terrell, Dailey Burnham. Logic: A Modern Introduction to Deductive Reasoning.



Principles not Rules: Report on Proceedings of Financial Instrument Workshops, The Institute of Chartered Accountants in Scotland (2006a). Web.



The Institute of Chartered Accountants of Scotland, Accounting Standards Based on Principles or Rules? A Matter of Opinion (2006b). Web.



1995. Whittington & Pany, Principles of Auditing, IRWIN, London, United Kingdom, United States.



Footnotes

1995. Whittington & Pany, Principles of Auditing, IRWIN, London, United Kingdom, United States. The Institute of Chartered Accountants of Scotland, Accounting Standards Based on Principles or Rules? A Matter of Opinion (2006b). The Institute of Chartered Accountants of Scotland, Principles not Rules: Report on Proceedings of Financial Instrument Workshops, available on the World Wide Web (2006a). Web. Ibid. Terrell, Dailey Burnham Terrell Logic: A Contemporary Introduction to Inferential Reasoning Holt, Rinehart and Winston, 1967. Principles not Rules: Report on Proceedings of Financial Instrument Workshops, The Institute of Chartered Accountants in Scotland (2006a). Close, Francis. Together with an Introductory Essay, Eighty Sketches of Sermons, 1861, Original from Oxford University, Digitized in 2006.

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