The debate on principles-based accounting standards marks a shift in the U.S. accounting landscape. The issue concerns the possible transition of FASB accounting standards from one that is rules-based to another that would be principles-based, which is the characteristic shared by other major international institutions that set standards such as the Accounting Standards Board (ASB) of the U.K…
Note an early definition of the term "principles" by the American Institute of Certified Public Accountants (AICPA, 1953, p. 9) as "a general law or rule adopted or professed as a guide to action; a settled ground or basis of conduct or practice." This means that principles are more general than rules and therefore do not prescribe exactly how each event occurring in an organisation should be recorded.
The obvious reason is that there are many issues, events, and matters in accounting practice that differ from one organisation to another. Since a single detailed set of rules could not conceivably apply to every organisation, good accounting practice in the U.S. developed initially into what came to be collectively described as "Generally Accepted Accounting Principles" or GAAP.
The core principles of U.S. GAAP were drafted by the Accounting Principles Board (APB) and, later, by the Committee on Accounting Research (CAR), two pre-war professional institutions established to set standards for the accounting profession. In 1973, the Financial Accounting Standards Board (FASB) was created as a non-governmental organisation financed by contributions from business firms and the accounting profession to take over these standards-setting bodies, and accepted the previous pronouncements of its two predecessor organisations, the Opinions of the APB and the Accounting Research Bulletins of the CAR.
The FASB, whose accounting standards apply only in the U.S., coordinates with other accounting boards overseas such as the Accounting Standards Committee (ASC) which sets standards for the U.K. and the International ASC (IASC) which sets standards for the rest of the world. In 1985, the ASB took over ASC; the IASB took over IASC in 2001. Both are U.K.-based and their standards have been and continue to be principles-based (Anthony et al. 2005).
Whilst the ASB and IASB manage to sustain an environment of principles-based accounting standards, it seems the U.S. failed to do so. In the wake of the financial reporting scandals that brought down several high-profile companies in the U.S. in 2001, then- Securities and Exchange Commission (SEC) Chairman Harvey L. Pitt testified in the U.S. Congress that much of FASB's guidance has become "rule-driven and complex", giving as examples the FASB's guidance on issues like derivatives and securitisation (FASB, 2002, p.2).
How did it happen
Over the thirty years since its beginning, the FASB, SEC, and American companies were caught in a cycle of games triggered by companies interpreting GAAP too liberally (e.g., on the treatment of derivatives, revenues recognition, etc.), eliciting shareholder complaints. Investigations by the SEC or Attorneys-General on these practices pressured the FASB to interpret the principles in greater detail by coming out with rules. ...
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Accounting Standards 1 Politics have a lot of influences when setting the acceptable accounting standards. People who have their economic personal interests have used politics to set accounting standards, which are beneficial to them. For example, the political difference between the Republic of China and the United States of America has seen different accounting standards in the two countries.
For a long time, accountants in various countries around the world have deemed it necessary to bridge the gap between different aspects of accounting; this can only be achieved through harmonization of the different accounting standards around the world. Despite this, there are still some variants of accounting practices that are very independent and strong, and therefore they act as obstacles to harmonization.
The generally accepted accounting principles are applicable to all industries in the business in order to produce meaningful information through financial statements and reports. Due to implementation of standards accounting procedures, the accounting standards enable comparative analysis between industries of different sectors.
In addition, Section 108 of the Sarbanes-Oxley Act of 2002 instructs the Securities and Exchange Commission to conduct a study on the adoption of a principles-based accounting system. The study is to have four elements:Two themes emerge from these discussions.
From 1983 China has started to adopt international accounting standards, practices and terminologies. The early adoption was implemented in its joint ventures with foreign investments  and . In 1993, PRC MOF has outlined new accounting regulations, which were on the lines of IFRS standards.
So, these reports need to be meaningful, transparent and comparable in their content.
Since 2001-2002, several US and other countries' corporate accounting scandals have shaken the confidence of the investors on the financial reporting process and it has reflected in the market value if corporate equity securities.
However most of the European countries had already embarked on their convergence towards the international standards for financial reporting. The United States' standards setting body, FASB is consistently working towards the convergence of US GAAP to the international accounting standards in response to international pressures.
Also the role of professional judgment became unimportant and rules took over the professionalism. So, the debate started whether the current financial reporting system in the U.S. is undesirable or inappropriate because it is rule based.In order to address the issues with rule based standards the Sarbanes-Oxley Act of 2002
The following piece of information would be useful for companies presently engaged in traditional budgeting but willing to switch over to other types of budgeting.
One of the functions of management is “planning”.
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