Sunday, August 25, 2019

Principles based accounting as an accounting method which is used as a Essay

Principles based accounting as an accounting method which is used as a conceptual basis by accountants - Essay Example This system follows principles. The term â€Å"principles† can be used simply to refer to general rules, or also to suggest that these rules are implicitly higher in the implicit or explicit hierarchy of norms than more detailed rules: they express the fundamental obligations that all should observe (Black et al, 2007). Some of the rules set out are mandatory to follow but many other rules are used as a mere guidance and are not applicable to every situation. For instance, many countries have adopted the International Financial Reporting Standards governed by the IASB. According to Securities and Exchange Commission of US, â€Å"†¦the optimal principles-based accounting standard involves a concise statement of substantive accounting principle where the accounting objective has been incorporated as an integral part of the standard and where few, if any, exceptions or internal inconsistencies are included in the standard† (2002). Rule-based accounting is a set of det ailed rules which must be followed when financial statements are prepared. An example of such system is Generally Accepted Accounting Principles (GAAP). In US, GAAP is used as a standard framework of guidelines for financial accounting. CPA firms and corporations in US prepare and present their business incomes and expenses, assets and liabilities in their financial statements following GAAP. ... The financial statements are prepared for the users who have reasonable knowledge of business, accounting and economic activities and a willingness to study the financial statements (IASB Framework, Para 25). The users of financial statements are of various types and their needs are different which are required to be catered efficiently because they have to make crucial economic decisions on the basis of financial statements. IFRS requires the financial statements to present a â€Å"true and fair view† of the financial state and economic activities of an entity. When a set of given rules is followed uniformly by all the entities in each financial year, comparability increases. A user may compare an entity’s financial standing with that of another entity or even with that of its own in the preceding years. In order to attain this uniformity, the rules are required to be followed but there are cases where following the rules becomes very difficult. For instance, the IFRS itself admits in the Framework that there is a trade-off between relevance and reliability. One must be forgone to avail the benefit of another. In a given case, preferring relevance over reliability might be useful for specific set of users but might not be useful for another set of users. The Framework has emphasized that the preparer or auditor of financial statements must exercise his professional judgment in such cases so that the information becomes more synchronized with the objectives of IFRS. One of the worst economic crises in history has been faced by the world recently. There are many studies and professional opinions that the fair value system is responsible for it. This system is more

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