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ACCA Applied Knowledge · Financial Accounting · Key principles and concepts of accounting

Which of the following is NOT a feature of a principles-based approach to standard setting, compared with a rules-based approach?

Extensive detailed bright-line tests are a feature of a rules-based approach, not a principles-based one. Principles-based standards use broad principles, professional judgement and economic substance, and are harder to avoid by structuring transactions around specific rules.

  1. AStandards rely on professional judgement in applying broad principles
  2. BStandards contain extensive detailed bright-line tests to cover specific situationsCorrect
  3. CStandards aim to reflect the economic substance of transactions
  4. DStandards are less likely to be avoided by structuring transactions around specific rules

Explanation

Extensive bright-line tests and detailed rules are characteristic of a rules-based approach, not a principles-based one. Principles-based standards depend on judgement and substance, and make it harder to structure transactions to avoid specific rules. The statement about detailed bright-line tests is therefore the one that does not describe a principles-based approach.

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