Rules-Based Standards and the Lack of Principles in Accounting

One of the reasons why standards on several topics need to contain rules is that the standards are inconsistent with the conceptual frameworks of the standard setters. For several topics, the use of the appropriate principle could lead to clearer communication and to more precision without the need for the current rules. That is, before asking how rules-based a particular standard should be, onee should ask whether the standard is based on the most appropriate principle. This paper identifies six topics on which the accounting standards have detailed technical rules. In each case, it suggests that part of the need for rules is caused by a lack of principle or by the use of an inappropriate principle (i.e., one that does not fit with higher-level principles). The lack of clear and appropriate principles can also lead to optional accounting methods in standards because no one policy is obviously the correct one; this leads to lack of comparability. It is not suggested that the use of appropriate principles would lead inexorably to standards with no optional methods but that, on some topics, optional methods could be eliminated.