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ACCA Applied Knowledge · Financial Accounting · The regulatory framework

Which of the following is an advantage claimed for a principles-based approach to accounting standards?

A claimed advantage of a principles-based approach is that it is harder for entities to avoid the intent of a standard by structuring transactions, because the focus is on substance and objectives rather than bright-line tests. It does still require professional judgement and does not guarantee identical treatment.

  1. AIt removes the need for any professional judgement by preparers or auditors
  2. BIt guarantees identical accounting treatment for all similar transactions in every entity
  3. CIt is harder for entities to avoid the intent of the standard by structuring transactionsCorrect
  4. DIt produces very long and detailed standards covering every possible scenario

Explanation

Because principles focus on substance and objectives, there are fewer bright lines to structure around. It does require judgement, so option one is wrong, and it cannot guarantee identical treatment. Long detailed standards characterise rules-based systems.

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