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Rules Based Accounting Standards vs. Principle Based Standards

There are “rules based” and “principle based accounting standards; which do you think is most effective and why?

In my opinion, principle based accounting standards are more effective. Principle based standards, such as GAAP or IFRS, can be applied to a very broad range of situations.  Principles are much more flexible and efficient, and can be easily changed when necessary. The primary drawback of principle based standards is that some organizations my interpret the guidelines differently. This leads to a lack of consistency or comparability between organizations.

Rules based accounting standards are still valuable and play an important role in accountancy. Rules are able to reduce the ambiguity of principles and make it more difficult for companies to report aggressive earnings, which is a problem with publically traded companies. The most obvious drawback is that a complex rules system adds unnecessary complexity to financial reporting.

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