The Standard-Setters' Toolkit: Can Principles Prevail over Bright Lines?

54 Pages Posted: 16 Jan 2012 Last revised: 10 Mar 2017

See all articles by Darren Henderson

Darren Henderson

Wilfrid Laurier University

Patricia C. O'Brien

University of Waterloo

Date Written: March 8, 2017


We study lease accounting in an international panel data set to examine how accounting outcomes vary with two features of accounting standards: the emphasis on using professional judgement to apply principles and the presence or absence of bright-line tests. We study four countries—Australia, Canada, the UK, and the US—and companies in two lease-intensive industries—retail and transportation. Our primary study period spans the time when Australia and the UK switched from domestic to international accounting standards, and in one test, we also consider Canada’s transition to international standards. We find that neither an explicit requirement to apply a principle nor omitting bright-line tests materially increases the use of capital lease treatment among these firms. Overall, we conclude that this financial reporting outcome is relatively insensitive to these standard-setting tools.

Keywords: principles-based standards, rules-based standards, lease accounting, bright lines, IFRS

JEL Classification: M41, M48

Suggested Citation

Henderson, Darren and O'Brien, Patricia C., The Standard-Setters' Toolkit: Can Principles Prevail over Bright Lines? (March 8, 2017). Review of Accounting Studies, Forthcoming. Available at SSRN: or

Darren Henderson

Wilfrid Laurier University ( email )

75 University Ave W
waterloo, ontario N2L 3C5

Patricia C. O'Brien (Contact Author)

University of Waterloo ( email )

200 University Avenue, West
Waterloo, Ontario N2L 3G1
1-519-888-4567 (Phone)
1-519-888-7562 (Fax)

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