Question

Consider the following statement: Many people believe that the U.S. Generally Accepted Accounting Principles (GAAP) are a rules-based approach to setting standards, while the International Financial Reporting Standards (IFRS) are a principles-based approach.

For your initial post, discuss the validity of this statement and give examples with academic support to justify your opinion.

Answer 1

Rules-based accounting is a systematic Financial Statements reporting process.The rules based accounting system usedIn the United States is the Commonly Accepted Accounting Principles (GAAP) method.

When reviewing the financial statements, corporations and their accountants must stick to the rules. These allow customers to easily compare different company's financial information

below are the10 principles of the rulesbased GAAP Accounting system:

a.Regularity

b.Consistency

c.Sincerity with an accurate representation of the company's financial situation

d.Permanence of methods

e.No expectation of compensation

f.Prudence with no semblance of speculation

g.Continuity

h.Dividing entries across appropriate periods of time

i.Full disclosure in all financial reporting

k.Good faith and honesty in all transactions.

The basic advantage of principles-based accounting is that its wider norms may be practical for a variety of situation. Precise requirements can sometimes compel managers to manipulate the statements to fit what is compulsory.

In the other hand, where there are strict guidelines to be followed, as in the U.S. GAAP scheme, the chances for litigation are decreased.

Having a set of guidelines will increase precision and decrease the uncertainty that can cause management's aggressive reporting decisions.

Example

In the 1990s, Enron was a major energy firm.In 2001, after the company's executives used deceptive accounting techniques to overstate sales while hiding debt in their subsidiaries, Enron shareholders lost almost $75 billion in value.

Enron declared bankruptcy – and with $63 billion in assets –

It was the biggest bankruptcy in the U.S. at the time.The fall of a business sent shockwaves through the financial markets leading to a surge of new regulations.