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ACCA Applied Knowledge · Financial Accounting · The regulatory framework

Which of the following is a commonly cited disadvantage of a rules-based approach to setting accounting standards?

A commonly cited disadvantage of a rules-based approach is that entities can structure transactions to fall just either side of a bright-line test, achieving a desired presentation that does not reflect the economic substance. Excess flexibility and judgement-driven inconsistency are criticisms of principles-based systems.

  1. AIt gives preparers too much freedom to choose any treatment they like
  2. BIt can be structured around to achieve a desired result, even if that does not reflect the substance of the transactionCorrect
  3. CIt reduces comparability because every entity applies different judgements
  4. DIt cannot be applied in a multinational group

Explanation

Detailed bright-line rules allow transactions to be structured to fall just inside or outside a threshold, so the reported result may not reflect substance. Excess freedom and varying judgement are criticisms of principles-based systems instead.

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