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Accounting principles is very important to prepare financial statements. According to Dopuch and Sunder (1980), accounting principles is important to increase employment of accountants, auditors, and teachers of accounting. It is because it can build a lot of career opportunities. Accounting principles can also help companies market their securities and investors. The most important thing is it can increase the wealth of the current owners of the companies. Every company needs it. To increase the productivity of a company, accounting principles is crucial to record, classify and report the data and amount systematically. Then, accounting principles help in enforcing anti- trust laws.
Rules- based accounting can be defined as specific accounting rules that must be followed in order to follow with Generally Accepted Accounting Principles (GAAP). Principles- based accounting standard can be defined as a system of financial reporting that is
based primarily on the fundamentals of accounting. For instance, true and fair view included in principles- based accounting standard.
The main features of U.S' rules- based accounting standards is rules- based in US is under GAAP (Generally Accepted Accounting Principles). Then, rules- based is very strict in professional judgement. About the inventory, U.S can choose either use LIFO or FIFO.
One of the major differences between two based accounting is GAAP (Generally Accepted Accounting Principles) is rule- based that used in US. On the other hand, IFRS (International Financial Reporting Standards) is principles- based.
One of the difference between U.S's rules- based accounting and Malaysia's Principles- based accounting standard is professional judgement. Rules- based accounting standards are very strict and it only involves strict application with limited professional judgement. On the other hand, principles- based accounting standard are soft and leaving much room for professional judgement.
Besides, Rules and principles based accounting standards can be differentiate to system. Rules based accounting principles system provide specific dictates for reporting financial information. All accountants must follow the rules or the accountant face penalties for break rules. On the other hand, principles- based accounting standard provide opinion on how to apply GAAP to complex financial transactions.
The fourth differences between U.S' rules and principles based accounting standards are consolidation. Refer to Forgeas (2008), IFRS privileges a control model while GAAP privileges a risks and rewards model. Some entities consolidated in accordance with FIN 46(R) shown separately under IFRS.
Then, statement become differences between these based accounting standards. Special items are not separated in the income statement under IFRS. On the other hand, those special items are shown below net income under US GAAP. It shows a big differences between rules- based accounting standards and principles- based accounting standards.
These based accounting standards shown the differences which are inventory. In IFRS, LIFO cannot be used, while companies in GAAP, U.S can choose either use LIFO or FIFO. According to the Jean Murray (2012), LIFO can be defined as an inventory costing method which anticipates that the first sold are the last items placed in inventory are during an accounting year. LIFO is one way used to investigate cost of goods sold for a company. In the mean time, FIFO is anticipates that the old items should be sold first.
Furthermore, Forgeas (2012) states the difference between these two based accounting standards is the methodology to assess an accounting treatment. In IFRS, the research is more sharpened. In contrast, the review of the facts pattern GAAP is more common.
Forgeas (2012) study showed that development costs is the difference between these two based accounting standards. In principles- based accounting principles, development costs that met some criteria can be capitalized under IFRS. On the other hand, in rules- based accounting standards, development cost is listed as expenses.
According to Jermakowicz & Mcguire (2002), the main recent issue is this will be a biggest change to financial reporting in Europe and it will be affect over 7000 listed EU companies. The accounting profession is facing difficult conceptual and practical issues. It has resulted in an increased demand for high- quality, internationally comparable financial information. It causes the increasing of the demand for an asset of high- standard that could be used as a basis for financial reporting worldwide. On 7 June 2002, all EU companies on a constant market will be demanded to prepare their consolidated accounts in accordance with IFRS. Principles- based accounting standard is under IFRS. Then, seven EU nations such as Austria, Belgium, Germany, France, Finland, Italy and Luxembourg agreed to use IFRS system. International Accounting standards board (IASB) emphasis the fundamental importance of standards that focus on principle. Those believing the US GAAP claim that IFRS leaves too much rendering, while those defending IFRS note the Financial Accounting Standards Board's (FASB) multitudinous guidance didn't avoid Enron from circumventing accounting rules. By using IFRS, Enron's special partnerships would have to be consolidated. Convergence between IFRS and US GAAP is more probable after US GAAP facing uncomfortable investigation.