Filling Gaps: Why Consistency of Accounting Standards Matters - Normative Evidence from the U.S. and Germany as Related to IFRS

Abstract

Many accounting regimes, such as U. S. GAAP, IFRS, German GAAP (GoB) and Japanese GAAP, pursue internal consistency. One central methodical and practical problem in all regimes is how management shall develop and apply accounting policies when specific guidance relating to particular transactions and events does not exist. With regard to the so-called filling of gaps, we show that in an internally consistent regime management is required to choose and apply consistent accounting policies to comparable accounting issues in the absence of specific guidance. According to our analysis, the present IFRS regime fails to ensure this because IFRS dealing with comparable issues are partly inconsistent. We also find that the complete elimination of rules and the reliance on principles only − as requested by many in accounting theory − is not an adequate solution since broad principles do not provide a sufficient structure to frame management's judgment in the choice of accounting policies. We propose that accounting regimes should consist of principles as well as of rules and that the rules shall be consistently derived from high-level principles. Due to the required consistency between standards addressing comparable issues, management's discretion in the choice of adequate accounting policies would be, from a normative perspective, ideally limited to one acceptable accounting treatment. Our assessment includes arguments and propositions from the international discussion in accounting theory and also refers to other related fields of research, such as legal theory.

Keywords: United States, Germany, IFRS, US GAAP, German GAAP, Grundsätze ordnungsmäßiger Buchführung, accounting theory, fair value, conceptual framework, comparability and con-sistency of accounting systems, standard setting, principles vs. rules debate, accounting policies, accounting choices

JEL Classification: K22, M40, M41