Principles-Based Accounting Standards

Abstract

Principles-based accounting standards (PBS) are imbued with high levels of flexibility that enable any company to apply accounting policies that suit its unique circumstances. The use of PBS necessarily leaves much room for extensive use of the ‘ingredients or elements of accounting flexibility' including, estimates, multiple measurement types, and professional judgments to select accounting policies and make decisions around ‘materiality'. By invoking these flexibilities, entities can manipulate financial numbers and perpetuate improper acts that significantly impact the fairness of published general-purpose financial statements particularly the financial position and financial performance. This chapter concluded that while flexibility embedded in PBS is inevitable and necessary in financial reporting, its unintended consequence is to facilitate aggressive optimistic or pessimistic (as opposed to neutral) reporting practices. The flexibilities inherently pervasive in PBS can constitute the slippery slope through which fraudulent actions and reporting could be perpetuated.