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Principles-versus-rules-based accounting standards:The FASB's standard setting strategy

By Michael Bromwich, G.J Benston and Alfred Wagenhofer

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

Topics: HF5601 Accounting
Publisher: Wiley-Blackwell Publishing
Year: 2006
DOI identifier: 10.1111/j.1467-6281.2006.00196.x
OAI identifier: oai:eprints.lse.ac.uk:14847
Provided by: LSE Research Online
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