Debate on Global Accounting Standards: Rules Versus Principles

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Harmonizing accounting standards among the United States and 95 other countries means agreeing to a common language for financial reporting.

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The task has been understandably daunting, made even more so because of differing opinions about whether to focus on principles, as promoted by the International Accounting Standards Board (IASB), or rules, used in the U.S., Reuters reported. Accounting rule-makers will meet next month to discuss the issue.

"We're about to discuss with the United States how to write future standards. If we're writing joint standards we have to have a model," Sir David Tweedie, chairman of the IASB, told Reuters.

The IASB is pushing for global adoption of its standards, with the U.S. set to come on board by 2007. Global standards would make it easier for companies who are listed in both Europe and the United States to create one set of financial reports, rather than two. Investors could also benefit from the the new, consistent International Financial Reporting Standards (IFRS).

Rules provide certainty - it's clear whether companies are following the law. The U.S. Financial Accounting Standards Board (FASB) points out that its rules are based on principles.

"Our Chairman, Robert Herz is an American but also an English Chartered accountant who, as well documented, is a big supporter of the principles-based approach," said Gerard Carney, FASB spokesman.

Coming to agreement on the approach is one thing; implementing new rules is also difficult. The IASB's standards have already been adopted in the European Union, and countries in Central and South America, Africa, the Middle East and the former Soviet Union.

Insurance giant Aviva, for example, released interim results under IFRS last month. In the first phase, accounting treatment changed for 17 percent of its life insurance business and none of its general insurance business. Implementing the second phase will be a huge task for the insurance industry, Accountancy Age reported.

“We don't yet know what the standard will look like, but it could be considerably different from current accounting practice and require significant work and change,” said John Breckenridge, acting head of taxation and accounting at the Association of British Insurers.

Accountancy Age is producing briefings on IFRS conversion:

  • IFRS update - a management briefing produced in conjunction with PricewaterhouseCoopers, the briefing details implementation of the standards across Europe.
  • Internal controls - a management briefing produced in conjunction with KPMG, the briefing describes the potential of internal control.
  • IFRS update 2 - a management briefing produced in conjunction with PricewaterhouseCoopers, the briefing offers the latest updates.

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