![]() The principles-based standards, unlike the RBS, can be adopted and implemented worldwide, in a variety of legal and cultural contexts, by companies that vary considerably in size, ownership structure, capital structure, political jurisdictions, and financial reporting sophistication (Schipper, 2005). The rule-based standards require strict compliance with specific accounting rules and detailed implementation guidance (Nelson, 2003) hence they (the RBS) may not be readily suitable for worldwide application. Principles-based standards (PBS) are epitomised by the International Financial Reporting Standards (IFRS) and the generally accepted accounting principles (GAAP) by the USA represent the rules-based standards (RBS). Relevant literature identifies two main types of accounting standards: principles- and rule-based standards (Agoglia et al., 2011 Cohen et al., 2011 Peytcheva & Wright, 2011 Jamal & Tan, 2010 Segovia et al., 2009). With the globalisation and internationalisation of financial and capital markets, there has been a need and call for the adoption of a single financial reporting language, i.e., a set of accounting standards, for use worldwide. ![]() The flexibilities inherently pervasive in PBS can constitute the slippery slope through which fraudulent actions and reporting could be perpetuated. 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. 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. 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'. AbstractPrinciples-based accounting standards (PBS) are imbued with high levels of flexibility that enable any company to apply accounting policies that suit its unique circumstances. ![]()
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