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Principles-versus-rules-based accounting standards:The FASB's standard setting strategy

Bromwich, Michael, Benston, G.J and Wagenhofer, Alfred (2006) Principles-versus-rules-based accounting standards:The FASB's standard setting strategy. Abacus, 42 (2). pp. 165-188. ISSN 0001-3072

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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.

Item Type: Article
Official URL: http://www.blackwellpublishing.com/journals/abacus
Additional Information: © 2006 Wiley-Blackwell
Library of Congress subject classification: H Social Sciences > HF Commerce > HF5601 Accounting
Sets: Departments > Accounting and Finance
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Date Deposited: 29 Jul 2008 14:18
URL: http://eprints.lse.ac.uk/14847/

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