Critical Review of Principles-Based Accounting Standards

Pologeorgis (2012) stated that the diversity of accounting principle has an essential impact on the stock markets, corporate management, and financial reporting. He pointed that when people seeking for international capitals, varies of dissimilar accounting principles create discrepancies in their financial reporting. If people cannot understand the differences between IFRS and GAAP, they may have the chance to make the wrong decisions and loss money in the capital markets. Pologeorgis (2012) also mentioned that international investors have to relearn the new principal in order to be more familiar with the international standards. Based on above, there is a keen motivation for people to understand the differences and similarities of GAAP and IFRS. This research will show business people the main similarities and differences of GAAP and IFRS.

The purpose of this report is to look at the advantages and disadvantages that would occur if the United States were to switch their financial reporting standards from U.S GAAP

Differentiate between the Generally Accepted Accounting Principles and the International Financial Reporting Standards for their impact on financial

SFAC No. 8 addresses the cost constraint on useful financial reporting, “Cost is a pervasive constraint that standard setters, as well as providers and users of financial information, should keep in mind when considering the benefits of a financial reporting requirement.” (SFAC No. 8 BC 3.47) However, the ability to place a dollar value and fully enumerate a cost or benefit is almost an impossible task for standard-setters. Additionally, there is no way to successfully identify and measure all of the economic consequences associated with a new standard. The FASB should be applauded though for advancing uniformity in accounting standards, however; uniform financial reporting suggests a one size fits all approach. “Smaller, non-publicly listed firms (and their auditors) argue that accounting standards are formulated mainly for larger, publicly traded firms” and that “compliance costs are disproportionately higher and the

The field of accounting is constantly evolving. This is true not only for the theory of accounting itself but also the entities that govern its theory and practice. Presently, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) are faced with some of the biggest challenges to date. To understand the significance of these two boards, it is necessary to understand their histories, relations between the boards, and the standards that they set. Also how the knowledge of these boards and the field they lead, gained through the masters of science in accountancy

Although the International Financial Reporting Standards (IFRS) and Generally Accepted Accounting Principles (GAAP) have a lot of similar guidelines and expectations, they also differ in many ways. The IFRS employs more of a “principles based” accounting standards whereas GAAP utilizes more of a “rules based” approach. Even though there are differences between terminology, revenue recognition, gains and/or losses, and statement presentation, both standards do follow the same conceptual guidelines. With the Sarbanes-Oxley Act (SOX) of 2002, the standards expected of foreign countries are significantly less than those that reside as publically

However, this Statement maintains the scope of Interpretation 46(R) with the previous additional entities treated as special qualifying entities for purposes. The concept of these entities was eliminated in Statement No. 166. Therefore, the statement No. 167 also superseded the risks of quantitative-based and calculation of rewards to determine which enterprise, if any, provided a financial interest that controls an entity variable interest because the expectation of an access of the basic qualitative will be more efficient to identify which company has a financial interest of controlling in an entity variable interest. However, this is the way the FASB admitted to upgrade the financial reporting standards. Other additional necessity is an additional review event when deciding whether a company is a variable entity interest when there are any occurring circumstances and changes in facts. For instinct, the owner of the equity investment at risk, as a group, lose the power from voting rights to direct the activities of the entity that some characteristic impacts the economic entity’s performance. There will also be ongoing assessments of whether an enterprise is the key beneficiary of a variable interest entity.

As accountants and auditors we are held to, and must comply with, two standards of professional conduct. Those standards are generally accepted accounting principles (GAAP) and generally accepted auditing standards (GAAS). GAAP enforces the uniform standards for preparing and presenting financial statements. GAAS governs the ways and means are used by public accountants when conducting an audit. GAAS establishes the standards for field work and mandates that sufficient evidence be found to provide reasonable assurance for issuing an audit opinion.

This difference is also tied to the movement of globalization by way of the internal customs from around the world. Based on these practices the account standards around the world are created from a different basis. In the U.S, accounting standards are based on “bright lined rules.” Whereas, in most of the world accounting standards are based off of principles, with the emphasis on principles the international rules focus on the heart of the law. Rather than in the U.S these “bright lined rules” have been created as a result of the multitude of industries located here. The rules however, do not reflect the heart of the law; rather they create a line to be maintained.

While generally accepted accounting principles include wide guidelines of general application, the standards also include comprehensive practices and procedures that offer the standard for evaluating financial presentations. As a result, these principles in financial recording and reporting tend to imply a substantial and significant authoritative support. Notably, GAAP standards are not a series of specific tailor-made guidelines that can be easily accessible in a single convenient range of rules. This is primarily because they originate from several sources and within a developed hierarchy. Generally, the standards range from the guidelines established by the Financial Accounting Standards Board, financial reporting literature from the AIPCA, and some financial

The U.S. GAAP represents the set of accounting principles that strictly abide by the laws and regulations. The U.S. GAAP, also known as, Generally Accepted Accounting Principles, encompass the legal norms, complex mechanisms and through details for corporate accounting. The U.S. GAAP standards are often perceived as building blocks for the decisions taken by FASB, also known as, Financial Accounting Standards Board. GAAP served as a legal and regulatory standard for the companies operational and listed on the stock exchanges in the United States.

GAAP (Generally Accepted Accounting Principles) determine the content and format of financial statements. SEC (Securities and Exchange Commission) requires publicly traded companies to issue annual audit. Concerns are about adequacy of disclosure; and behavioral implications are secondary.

Rule based accounting standards are difference from principle based standards in that rule based standards are just that – rules. For instance, the Internal Revenue code is rule based. There are things you can do and things you can’t. When rules are broken,

GAAP is exceptionally useful because it attempts to regulate and normalize accounting definitions, assumptions, and methods. Because of generally accepted accounting principles one is able to presuppose that there is uniformity from year to year in the methods that are used to prepare a

The principles are the result from the accounting practice that has been used and improved over the time. The deeper explanation about the statement is that, accounting standard such as IFRS is created based on the previous accounting practice itself rather the theories. The theories are useful in guiding the other field like finance and economics. There is also evidence that the accounting theory exists after standard has been practiced (Cluskey, Ehlen and Rivers 2007). The father of accounting, Luca Pacioli explained about double-entry booking in one of his studies. The study described the practice and explained to the readers the logic behind it. The research had given birth to dozens of studies made by theorist to further discuss about the accounting practice. By this evidence, the readers can also conclude that not only the standard that exist from accounting practice but in fact, accounting theory also exist to explain the nature of the practice. Back to the purpose of this paper, accounting theory plays no role in the setting of accounting standard is approved by two points: the process of setting accounting standard itself is a political activity and the development of accounting standard is influence by the existing accounting practice not accounting