Principles- Versus Rules-Based Accounting Standards: The Fasb's Standard Setting Strategy

24 Pages Posted: 12 Jun 2006

See all articles by George J. Benston

George J. Benston

Emory University - Department of Accounting

Michael Bromwich

London School of Economics

Alfred Wagenhofer

University of Graz

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.

Suggested Citation

Benston, George J. and Bromwich, Michael and Wagenhofer, Alfred, Principles- Versus Rules-Based Accounting Standards: The Fasb's Standard Setting Strategy. Abacus, Vol. 42, No. 2, pp. 165-188, June 2006. Available at SSRN: https://ssrn.com/abstract=907367 or http://dx.doi.org/10.1111/j.1467-6281.2006.00196.x

George J. Benston (Contact Author)

Emory University - Department of Accounting ( email )

Goizueta Business School
1300 Clifton Road
Atlanta, GA 30322
United States
404-727-7831 (Phone)
404-727-5238 (Fax)

Michael Bromwich

London School of Economics ( email )

Houghton Street
Department of Accounting & Finance
London WC2A 2AE
United Kingdom
+44 7 1955 7323 (Phone)
+44 7 1955 7420 (Fax)

Alfred Wagenhofer

University of Graz ( email )

Austria
+43 316 380 3500 (Phone)
+43 316 380 9565 (Fax)

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
41
Abstract Views
9,088
PlumX Metrics