Conclusion In reviewing the foregoing, one can see from Robert Herz’ testimony, that the divide between the FASB rule-based approach, and the IASB principles-based standard are not opposite sides of a coin, but rather different ways of looking at the same side of a coin. Herz10 continued that the principles-based IASB approach does employ the use of rules, however that the intent does not rest upon the providing of specific examples (and or rules) for all potential situations. An understanding of the principles-based IASB method is provided by the chairman of the FASB, Robert Herz, in his speech before the United States Subcommittee on Capital Markets stated that the principles-based approach is based on setting forth what the key and critical objectives are in good reporting in the various subject areas, then providing the guidance that explains the objective, along with relating the preceding to a few common examples. Under the IASB principles-based accounting standard, a conceptual framework is utilized for accountants to adhere to as opposed to using the detailed rules listing of the FASB9. Both Nelson et al7 and Shortridge and Myring8 agree that the rules-based approach creates an environment that is conducive to transaction structuring, a negative application, whereby the accounting outcome that is desired is achieved, as opposed to operating within the spirit of the standard. companies the latitude to structure their transactions so that unfavorable reporting can be avoided6. This makes the FASB standards highly complex, along with being longer, thereby creating the situation whereby arbitrary criteria is used for accounting treatments5. The rules-based accounting standard is based upon the utilization of specific details that address “…address as many potential contingencies as possible”4. The difference between these two approaches is as follows.
The preceding represents the ‘rules-based’ foundation and framework for accounting standards as utilized by the Financial Accounting Standards Board and the ‘principles-based’ accounting foundation that is used by the International Accounting Standards Board3. In working toward convergence, there are a broad number of issues involved, however, the most important is finding a solution to the two conceptual differences that separate the two accounting systems. The Norwalk Agreement2, which is the name given to the convergence undertaking, as it was set forth in Norwalk, Connecticut in the United States, represents the commitment for both accounting systems to seek solutions to arrive at accounting standards that are compatible in domestic as well as cross border financial reporting. Accounting Principles Board (APB) dissolved in 1973 and the FASB took over the responsibility setting up the standards.In looking into bringing the differences between FASB and IASB into a common based accounting standards framework, there is a multitude of areas that are being addressed. Governmental Accounting Standards Board (GASB).Financial Accounting Standards Board (FASB).American Institute of Certified Public Accountants (AICPA).Securities and Exchange Commission (SEC).Those organizations influence developing GAAP in the United States. Information disclosed should be enough to make judgement while keeping costs reasonable. Amount and kinds of information disclosed should be decided based on trade-off analysis as larger amount of information costs more to prepare and use it.
#U.s.generally accepted accounting principles full#
The last principle is called the full disclosure principle. Expenses have to be matched with revenues as long as it is reasonable doing so. The third principle is the matching principle. The way of accounting is called accrual basis accounting. The revenue recognition principle requires to record when revenue is realized or realizable and earned, not when cash is received. The historical cost principle requires companies to account and report based on acquisition costs rather than fair market value for most assets and liabilities.
In the United States, as well as other countries practicing English common law system, the government does not set accounting standard by the belief the private sector has better knowledge and resources. Generally accepted accounting principles ( GAAP) are the accounting rules used to prepare financial statements for publicly traded companies and many private companies in the United States.
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