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ACCA Applied Knowledge · Financial Accounting · The regulatory framework

Which statement best describes a principles-based approach to financial reporting standards, as followed by IFRS Accounting Standards?

A principles-based approach sets broad objectives and requires preparers to use judgement so that transactions are reported according to their economic substance. It differs from a rules-based approach, which relies on detailed thresholds and mechanical tests. IFRS Accounting Standards are generally described as principles-based.

  1. AStandards set broad objectives and require judgement, supported by guidance, so that transactions are reported according to their substanceCorrect
  2. BStandards set detailed numerical thresholds and bright-line tests that must be applied mechanically
  3. CStandards are issued separately by each country's tax authority to ensure consistent tax treatment
  4. DStandards prohibit preparers from using professional judgement in any circumstances

Explanation

A principles-based approach states broad objectives and relies on professional judgement to reflect the substance of transactions. Detailed bright-line tests describe a rules-based approach, which is the opposite. Tax authorities do not issue IFRS, and judgement is not prohibited.

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