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ACCA Applied Knowledge · Financial Accounting · The regulatory framework

A critic argues that a rules-based system of accounting standards has a particular weakness compared with a principles-based system. Which weakness is most closely linked to rules-based standards?

The weakness linked to rules-based standards is that bright-line thresholds can be avoided by structuring transactions to fall just outside them, achieving a desired presentation. Reliance on judgement and possible reduced comparability are instead criticisms normally made of principles-based systems.

  1. ATransactions can be structured to fall just outside a bright-line threshold and so achieve a desired presentationCorrect
  2. BPreparers must exercise significant judgement, so comparability may be reduced
  3. CStandards are too short to cover new types of transaction in any way
  4. DAuditors have no basis on which to challenge management's accounting treatment

Explanation

Bright-line rules invite structuring of transactions to sit just beyond a threshold, which is a recognised weakness of rules-based systems. Greater reliance on judgement and reduced comparability are criticisms of principles-based systems, so option B is wrongly attributed to rules-based standards.

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