Rules-based or Principles-based Accounting Standards Discussion

There is an ongoing debate on which is better, rules-based or principles-based accounting standards. In financial accounting and reporting, a major goal in standards setting is to achieve an environment where financial statements accurately and faithfully reflect and communicate a company’s financial condition, and that financial reporting is comparable from one company to another. Is this best achieved with a comprehensive set of rules defining many situations and how to account for them? Would it be better to use objectives or principles as standards? Are too many rules overly complex or easily manipulated? Or is there more room for manipulation if applying principles is left up to management?

Refer to pages 17-18 in the textbook for an introduction to the topic, and then briefly research online further so you have a firm understanding of the differences between rules-based accounting standards and principles-based accounting standards.  (you will find many hits with a Google search).

After you have done your research, formulate an opinion on which you think might produce the most faithful financial statements, which is better for US companies, and why you think that. Then write a brief essay (2-3 short paragraphs) answering the following questions:

1. Briefly explain the differences between rules-based and principles-based accounting standards.

2. What is your opinion on which would produce the most faithful financial statements?

3. Provide at least two reasons to back up your opinion.

After  you have answered these questions clearly and in complete sentences, please comment on at least one classmate’s post. The best responses are thoughtful, show that you have considered the topic, relate your similar experience, provide advice or guidance, respectfully agree or disagree and explain why, or otherwise further the discussion in a constructive way.