As we know, the need of an agreed international conceptual framework is very important and had been discussed above. But the problem is about which standard are more acceptable to the global user. First of all, the worldwide accounting is governed by one of two governing bodies: International Accounting Standard Board (IASB) or Financial Accounting Standard Board (FASB) (Vitez, 2010).
IASB governs accounting in 150 countries worldwide including England and the members of European Union, according to official website of IASB. IFRS are a set of accounting standards for formal financial reporting are developed by the International Accounting Standards Board (Vitez, 2010).
Beside it, in 1973, The US Securities and Exchange Commission (SEC) set-up FASB as an organization that responsible for develop the accounting standard for the company in US. FASB is a non-organization whose primary purpose is to develop, adopt, issue the US GAAP (Generally Accepted Accounting Principles) (Trusty, 2011). US GAAP cover all accounting in the US.
Get your grade
or your money back
using our Essay Writing Service!
In an article from the Wharton Business School at the University of Pennsylvania state that "For example, while U.S. GAAP is based on rules and specific details, International Financial Reporting Standards tend to be more broadly based on principles." This sentence simply means that US GAAP is largely rule-based while the IFRS are principles-based international accounting standards (Adam, 2007).
US FASB's rules-based standards are referring to a system of financial reporting. Rule-based accounting require accountants follow a listed of specific rules when preparing the financial statement. For example, if a factory leases a machine, the company must follow the specific rules to determine if the transaction is an operating lease or a capital lease. Rule-based accounting standard have very widely and intact detailed explain concerning what is or is not allowed (Alexander and Jermakowicz, 2006).
Characteristics of rule based accounting standard including bright-line thresholds, scope and legacy exceptions, large number of implementation guidance, and a high level in detail (Mergenthaler 2009). In case, many accountants are favour in using the rule based financial reporting system. This is because if there is not rule, accountants need to judge and prepare the financial statement by his perceptive. And if their judgment of financial statement is wrong, they might be brought to court. When there are strict rules need to be followed, the possibility of lawsuit was decrease or even didn't exist (Togeeze, 2008).
Advantages of this standard are generally considered easier to audit for compliance purposes, and may produce more consistent and comparable financial reports across entities. Because of the rule, the format of financial statement of the all public companies is the same, hence the financial report of them are more comparability (Schipper, 2003). For example, the director or other user can compare the financial report with other companies easily.
The disadvantage of this standard is frequently easier to. "Game", as entities may search for loopholes that meet the literal wording of the standard but violate the intent of the standard. A "bright-lines" tests which is provided by rule based accounting standard can easily be avoided. Hence, accountants can play around the rule, and manipulated the result.
Another disadvantage is a lack of flexibility with regard to changing conditions, trend and new products. And it also limited the use of judgement; flexibility of accountants in their implementation, just because of this standard had a rule to follow.
Besides, it will require almost continual maintenance at times. Because the rule was fixed but the real-world environment is keep changing so the bodies need to keep continual maintenance, develop, and adopted the accounting standard in order to meet the demands (Basiccollegeaccounting.com, 2006).
On the other hand, IASB's principles-based international accounting standards is based on the conceptual framawork of accounting which includes decision usefulness, true and fair view, going concern, substance over form. This standard takes the form of general principles, and requires largely interpretation and judgment by the accountants before they can be implemented. The principles based accounting not only increases the potential for different interpretation, but also provides guidance in more areas (Adam, 2007). Although some of the rule is unavoidable, but the guidelines and rules set are not meant to be applied in every situation (Togeeze, 2008).
Always on Time
Marked to Standard
The characteristics of principles based accounting standard including faithful presentation of economic reality, responsive to user's needs for clarity and transparency, based on an appropriately-defined scope that addresses a broad area of accounting and the use of reasonable judgment (A. DiPiazza, Jr., 2008).
The advantage of principles based accounting is that its broad guidelines can be practical and applied to variety circumstances. Broad principles avoid the pitfalls associated with precise requirements that allow contracts to be written specifically to manipulate their intent. A relevant case is 'A 1981 study sponsored by FASB found evidence that accountants purposefully try to structure leases as operating leases to avoid incurring additional liabilities.' Hence, providing broad guidelines may improve the representational faithfulness of financial statements.Â
Another advantage of this accounting standard is that it would result in simple and clear standards. The principles based accounting system would lead to standard that would be less than 12 pages, rather than over 100 pages (Herz, 2002). The principles would be easy to understand and can be implement to a broad range of transactions. Harvey Pitt, who is a former SEC chairman, claimed that 'Because standards are developed based on rules ... they are insufficiently flexible to accommodate future developments in the marketplace. This has resulted in accounting for unanticipated transactions that is less transparent' (Pitt, 2002).
In addition, principles based accounting standard allow the accountants to apply professional judgement in assessing the substance of a transaction. Chairman of FASB (Herz) stated that the professionalism of financial statements would be enhanced if accountants are required to using their judgment rather than relying on detailed rules (Herz, 2002).
Furthermore, this type of accounting standard reflects the actual performance of company's financial statement accurately. In case, Australian Securities and Investments Commission Chairman David Knott has stated, an increase in principles-based accounting standards would reduce manipulations of the rules (Nationwide News, 2002).Â
The disadvantages of principles based accounting standard including lack of precise guidelines which could lead to inconsistencies in the application of standards across organizations. For example, companies are required to recognize both an expense and a liability for a contingent liability that is probable and estimable. On the other hand, a contingent liability that is reasonably possible is only reported in the footnotes. With no precise guidelines, how should companies determine if liabilities are probable or only reasonably possible? The lack of bright-light standards may reduce comparability and consistency which is basic perceptive of financial accounting (Trogulj, 2008).
Another disadvantage of this accounting standard is because of the extent that they rely on individual judgment to interpret and implement the standards. It produces the unreliable and inconsistent information that make it difficult to compare (Basiccollegeaccounting.com, 2006).
There are the explanation and advantage, disadvantage of two systems. And the two systems are purely different. There are some examples between the two system of impacts on the financial statements and therefore on the conduct of businesses.
First one is Consolidation. IFRS favors a control model whereas U.S. GAAP prefers a risks-and-rewards model. Some entities consolidated in accordance with FIN 46(R) may have to be shown separately under IFRS.
Second is Measurement of Inventory. Under IFRS, LIFO cannot be used while under U.S. GAAP, companies have the choice between LIFO and FIFO.
Third is Income statement. Under IFRS, extraordinary items are not segregated in the income statement, while, under US GAAP, they are shown below the net income.
Fourth is Improvement costs. The improvement costs can be capitalized under IFRS if certain criteria are met, however the development, improvement cost is recognised as 'expenses 'under U.S. GAAP (Forgeas, 2008).
Without principles the rules are meaningless (Estiben, 2006). We think that the IASB's principles-based accounting standard was more acceptable for global users of financial statements because a principle is more open to interpretation than a rule. The current rules-based system is too complex and not transparent enough for users of financial statements. The principles-based approach is also supported by the International Accounting Standards Board and proponents of the principles-based approach believe a change is necessary in a global economy. The global users of financial statement are always tried to see the company actual performance and other relevant information of company. The principles based accounting standard provided more minimal guidance, greater use of professional judgments and other advantages which are global users of financial statement want (Sdriscoll, 2006). Therefore, the global users of financial statement will be more acceptable principles based system instead of rule based system.
This Essay is
a Student's Work
This essay has been submitted by a student. This is not an example of the work written by our professional essay writers.Examples of our work