© 2003 American Accounting Association Accounting Horizons
Vol. 17 No. 1March 2003
pp. 61–72
COMMENTARY
Principles-Based
Accounting Standards
Katherine Schipper
Katherine Schipper is a member of the Financial Accounting Standards Board.
INTRODUCTION Some recent discussions of U.S. financial reporting include implicit or explicit rec-ommendations that the U.S. abandon the current allegedly “rules-based” system in favor of a “principles-based” system, with the implication that some or all of the current difficulties facing U.S. financial reporting would be alleviated or even eliminated by such a shift.1 In addition, Section 108 of the Sarbane
s-Oxley Act of 2002 instructs the Securities and Exchange Commission (SEC) to conduct a study on the adoption of a principles-based accounting system. The study is to have four elements:
•The extent to which a principles-based accounting system exists in the U.S.;•The time required to change to such a system;•The feasibility of such a system (and how it might be implemented); and •An economic analysis of the implementation of a principles-based system.
Two themes emerge from these discussions. The first theme is that the current finan-cial reporting system in the U.S. is undesirable or inappropriate because it is rules-based,fostering an alleged current “check-box” or compliance mentality that is, in the view of some, an open invitation to financial structuring and other activities that subvert high-quality financial reporting. The second theme is that moving to a principles-based system is desirable, because such a system allows (or requires) the appropriate exercise of profes-sional judgment. As part of these discussions, the Financial Account ing Standards Board The views expressed in this commentary are my own, and do not represent positions of the Financial Ac-counting Standards Board. Positions of the Financial Accounting Standards Board are arrived at only after extensive due process and deliberation. This commentary is based on a presentation at the 2002 American Accounting Association Annual Meeting; I thank Joel Demski for giving me the opportunity to make that presentation. I appreciate comments from Robert Freeman, Ja
mes Largay, and Robert Lipe.
1Examples include Joseph Berardino, former CEO of Arthur Andersen Worldwide (Business Week , August 12,2002, page 56); Walter Wriston, former CEO of Citicorp, which is now part of Citigroup (see “The Solution to Accounting Scandals? Simpler Rules,” The Wall Street Journal , August 5, 2002); Sir David Tweedie, current chairman of the International Accounting Standards Board (February 14, 2002, testimony before the U.S.Senate Committee on Banking, Housing and Urban Affairs); Harvey Pitt, then-chairman of the U.S. Securities Exchange Commission (March 21, 2002 testimony before the same Senate committee).
62Accounting Horizons/March 2003 (FASB) developed a “Proposal for a Principles-Based Approach to U.S. Standard Set-ting,” available at , and has held a public roundtable discussion. Relative to this commentary, the perspective of the FASB’s proposal is that of standard setting, while I take a combined standard-setting and accounting-research perspective. In addition, the FASB’s proposal considers several matters that I do not discuss, such as the possibility of a “true and fair override,” and changes to the roles, composition, and processes of other standard setters such as the Emerging Issues Task Force.
This commentary is intended to raise several empirical questions that might be asked in discussions about the attributes, desirability, and effects of “principle-based accounting standards.” I begin with an argument that U.S. GAAP is based on a recog-nizable set of principles derived from the FASB’s Conceptual Framework, but nonethe-less contains elements that cause some commentators to conclude that U.S. accounting is “rules-based.” I discuss these “rules-based” elements and raise questions about how they affect the comparability, relevance, and reliability of reported numbers. I also consider the potential attributes of “principle-based standards” and, given the specifics of the current reporting system, some potential consequences if U.S. financial reporting standards were to shift so as to exhibit those attributes.
IS U.S. FINANCIAL REPORTING BASED ON PRINCIPLES?
The FASB’s standard-setting activities are guided by its Conceptual Framework, as laid out in its Concepts Statements.2 One important source of guidance is the defini-tions of financial statement elements in Concepts Statement No. 6. Only items that meet the definition of an element, such as asset, liability, revenue, and expense, are to be reported, and as an additional source of standard-setting discipline, the income state-ment elements are defined in terms of the balance sheet elements.3 I note that, from a standard-setting perspective, it is taken for granted that an item that mee
ts the defini-tion of a financial reporting element is relevant to investors.
Recognition and measurement requirements of accounting standards are to be based on the qualitative characteristics of accounting information laid out in Concepts State-ment No. 2. The overarching concept is decision usefulness, supported by relevance, reliability, and comparability.4 I interpret these concepts as follows. The desire to achieve comparability and its over-time counterpart, consistency, is the reason to have report-ing standards. That is, if similar things are accounted for the same way, either across firms or over time, it becomes possible to assess financial reports of different entities, or the same entity at different points in time, so as to discern the underlying economic events. If little value is attached to having the same accounting treatment applied to identified classes of similar items, then preparers of financial reports could reasonably
2Some might argue that the FASB does not consistently follow its own Concepts Statements, by pointing to examples such as SFAS No. 2, which rejects internally developed intangibles as assets, or SFAS No. 13 and SFAS No. 66, which provide a series of bright lines and numerical thresholds for lease accounting and sales of real estate, respectively.
3As described by Storey and Storey (1998), part of the intent of using definitions of financial statement
elements was to eliminate the recording of miscellaneous debits and credits on the balance sheet. Ex-amples include the recording of “deferred losses” as assets and the recording of “deferred revenues” as liabilities even though the “deferred revenues” do not constitute an obligation.
4Both relevance and reliability are, in turn, supported by other subconcepts, as discussed in Concepts Statement No. 2.
Principles-Based Accounting Standards63 be left to choose the reporting that best suited their own communication strategies.5 Once it is agreed that comparability is desirable, relevance and reliability assist in de-ciding which standards to have—that is, what the requirements for recognition, mea-surement, and disclosure should be. To the extent U.S. GAAP is aimed at providing comparable, relevant, and reliable financial reporting, it is principles-based.
Finally, the Conceptual Framework contains criteria for recognition and measure-ment in Concepts Statement No. 5. However, much of this Statement “merely describes [what was then] current practice and some of the reasons that have been used to sup-port or explain it but provides little or no conceptual basis for analyzing and attempting to resolve…issues of recognition and measurement….” (Storey and Storey 1998, 158.) That is, Concepts Statement No. 5 has not proved to be useful in resolving key stan-dard-setting issues.
Some of the standard-setting difficulties in resolving recognition and measurement issues would be eliminated or at least mitigated if Concepts Statement No. 5 were thor-oughly overhauled. Some of the Concepts Statement No. 5 recognition principles—the descriptions of what was then current practice—conflict with the elements definitions in Concepts Statement No. 6. For example, the application of the “completion of the earnings process” criterion for revenue recognition from Concepts Statement No. 5 some-times causes the recording of deferred revenues that are not liabilities. In addition, the use of “earnings process” as a standard-setting concept implies that each distinct earn-ings process might have its own revenue recognition standard, causing the volume of accounting guidance for revenue recognition to grow almost without limit as new busi-ness models, with their attendant earnings processes, are created. One goal of the FASB’s current project on revenue recognition is to eliminate the conflict between the “earn-ings process” principle from Concepts Statement No. 5 and the definitions of assets and liabilities in Concepts Statement No. 6.
Examples of the Use of Principles in Setting Accounting Standards To illustrate how principles are used in standard setting, I describe two instances involving an actual standard and a hypothetical standard. These descriptions focus on the issues faced by the standard setter in developing the principle on which a standard is to be based. I then pose several questions: Having provided a principl
e that clearly states the intent of the standard, how much additional explanation should be provided? How many terms should be defined, and at what level of detail? How much prescriptive explanation about how to apply the standard, such as numerical examples, should be included? My intent is to illustrate the ways in which a standard that is clearly grounded in a recognizable principle can become detailed and complex, with numerous rules, so that it appears to be rules-based and not principles-based.
5For example, Healy and Palepu (1993) discuss the value of managerially contrived disclosure strategies based on managers’ superior information. U.S. GAAP contains some examples of intentional noncomparability, in the sense that reporting treatment is based on management intent; one such ex-ample is SFAS No. 131 in which segment definitions are to be based on firm-specific organizational struc-tures. To the extent such firm-specific decisions enhance predictive ability, even at the cost of sacrificing considerable comparability, they are not inconsistent with the Conceptual Framework, which puts for-ward predictive ability as an element of relevance.
64Accounting Horizons/March 2003 Business Combinations
In the accounting for business combinations, a key question is how to treat the difference between the
purchase consideration and the book value of the acquired en-tity. Purchase accounting records this amount and pooling-of-interests accounting (here-after, pooling) suppresses this amount. Comparability implies that unless there are multiple economically distinct types of business combinations, there should be only one permissible treatment. Thus, the existence of both pooling treatment and purchase treatment could be justified only if it could be shown that “pooling” combinations differ from “purchase” combinations such that the same accounting treatment could not be representationally faithful for both. Grounding its analysis in academic research, the American Accounting Association’s Financial Accounting Standards Committee exam-ined the description of a pooling of interests in Accounting Principles Board Opinion No. 16, and concluded that “although business combinations are heterogeneous trans-actions, none appears to have the characteristics implied by the conceptual arguments that support pooling-of-interests accounting.” (AAA Financial Accounting Standards Committee 1999.)
Relevance, particularly its feedback element,implies that the accounting for busi-ness combinations should provide information that assists in evaluating the success of the business combination. Relevance supports the use of the purchase method, because the pooling method suppresses the amount of consideration paid by the acquirer. Rel-evance also implies that the acquired assets and liabilities should be recorded at their fair values on the date of acquisition.
Once the purchase method of accounting is established as the only accounting treat-ment, and the fair value measurement attribute for acquired assets and liabilities is required, a remaining question is the accounting treatment of acquisition goodwill, the difference between the purchase consideration and the fair values of the identifiable net assets, including identifiable intangibles. Academic research (e.g., Vincent 1997) finds that investors view acquisition goodwill as an asset, in that there is a statistically reliable association with share values, but investors do not appear to view the periodic amortization of acquisition goodwill as an expense. Applying the definition of an asset from Concepts Statement No. 6, the FASB concluded that acquisition goodwill meets the definition of an asset. Combining the conceptual analysis with the empirical re-search evidence, we reach the conclusion in Statements of Financial Accounting Stan-dard (SFAS) Nos. 141 and 142: acquisition goodwill is an asset with an indefinite (i.e., unidentifiable) service life. Therefore, goodwill should be recorded at the date of the business combination, not amortized, and subjected to periodic impairment testing.
SFAS Nos. 141 and 142 are based on the concepts of comparability and relevance combined with empirical research evidence. They are principles-based in that they re-quire a single accounting treatment for all business combinations; they require fair value measurements of acquired tangible and intangible net assets; they require the recognition of acquisition goodwill as an asset that is to be subject to impairment test-ing and not to periodic amortization.
Having provided a principles-based standard, what more should the standard set-ter include? Application of the standard requires decisions about the workings of the goodwill impairment test; for example, at what level in the organization should good-will be tested for impairment, and how often? Since goodwill cannot be separately mea-sured, how should the impairment test be carried out? If goodwill is found to be impaired, how should it be remeasured? The standard-setting issue is: How many of these questions
Principles-Based Accounting Standards65 should be answered in the standard, and at what level of detail. More generally, what are the costs and benefits of detailed guidance in accounting standards, and is there a level of prescriptive detail that converts a principles-based standard to a rules-based standard?
Measuring Financial Instruments at Fair Values
SFAS No. 133 states the FASB’s conclusion that fair value is the most relevant measurement attribute for financial instruments. Suppose, for the moment, that the FASB wished to promulgate a principles-based standard that would require all finan-cial instruments to be measured at fair value. Setting aside the complex issue of how to report changes in fair values, and focusing only on the measurement issu
e, the stan-dard setter confronts a number of decisions. For each such issue, I describe the nature of the question, and then explain the relation between that question and the idea of principles-based standards.
Scope. As a practical matter, a threshold issue in standard setting is definitions—describing unambiguously the class of arrangements to be accounted for and the ele-ments of the class (if any) to be excluded.6 Definitional issues can be exceptionally complex; the definition of “derivative” in paragraph 6 of Statement No. 133 contains three specific elements, which are explained (defined) at length in the three succeeding paragraphs; there are at least 22 Derivatives Implementation Group Issues that re-quest clarification of the definition in SFAS No. 133 (the FASB is proposing to amend the definition). Similar issues arise in defining almost any complex commercial arrange-ment, such as a “lease” or a “special purpose entity.”
A principles-based standard that requires all financial instruments to be measured at fair value first must define the term “financial instruments,” and describe which instruments (if any) meeting this definition are to be excluded from the standard. For example, the Joint Working Group of Standard Setters’ Recommendations on Account-ing for Financial Instruments and Similar Items (2000) contains a four-element defini-tion of financial instrument and lists seven classes of exceptions. More generally,
a financial reporting standard must define the class of arrangements—events and trans-actions—that is covered by the standard. Whenever an exception is allowed, the stan-dard must also define the criteria that must be met to qualify as an exception and, possibly, explain the accounting treatment for each exception.
Definition of measurement attribute. For any measurement attribute, the stan-dard must describe and define the empirical construct that is intended. The term “fair value” is defined as an exit amount (for assets) or settlement amount (for liabilities) in U.S. GAAP, but fair value might also be taken to mean entry value (replacement cost), net realizable value, value-in-use, or deprival value.7
6In the discussion of accounting for business combinations, I ignored the question of defining the transac-tion or arrangement to be accounted for—in this case, a business combination. Emerging Issues Task Force (EITF) Consensus 98-3 attempts such a definition, in the context of distinguishing a business com-bination from a nonmonetary exchange.
7Deprival value is arrived at by asking how much worse off would the entity be without the asset in question. This approach to fair value measurement has been adopted by the U.K. Accounting Standards Board, under the label of “value to the business.”
66Accounting Horizons/March 2003 Measurement.If the empirical construct is exit value and observable market prices are available, questions can still arise about which price to choose. Should the fair value be the bid, the ask, or somewhere between? How should sparse trading and/or stale prices be handled? What about discounts for large blocks of the instrument? In the absence of observable market prices, accountants must measure fair values using mod-els, estimates and assumptions. The standard setter must choose the amount of pre-scriptive detail to include in the standard, such as:
•which of several possible prices is to be chosen;
•when should there be adjustments to observed prices and what should those adjustments be;
•which of the population of possible models are permitted; and
•which kinds of assumptions are acceptable.
WHY ARE U.S. FINANCIAL REPORTING STANDARDS
VIEWED AS “RULES-BASED”?
Based on the preceding discussion, I lay out some possible reasons why commenta-tors might find U.S. GAAP to be “rules-based,” not “principles-based.” Specifically, I discuss how scope exceptions, treatment exceptions, and the presence of detailed imple-mentation guidance can be viewed as making U.S. GAAP “rules-based” even if the stan-dard itself is discernibly based on a recognizable principle. I describe how each “rules-based” attribute of U.S. GAAP adds to the length and complexity of the stan-dards, and how each attribute relates to one or more of the three basic elements of the Conceptual Framework: relevance, reliability, and comparability. In this discussion, I note the possibility of trade-offs among these concepts. For example, some believe there is an inherent trade-off between relevance, such as more timely reporting, which re-quires more estimates and judgments, and reliability, where reporting is based on trans-action amounts, with little or no estimation. There may also be a trade-off between comparability, which facilitates interfirm comparisons, and predictive ability, which facilitates calculations of intrinsic value. Predictive ability may require firm-specific reporting choices to reflect the idiosyncrasies of business models.
Scope exceptions and alternative treatments are often provided by standard setters to meet constituent concerns or, particularly in the case of scope exceptions, to avoid a conflict with a large and established body of standards; for example, insurance con-tracts are usually excluded from otherextensive check
wise applicable standards and most employee benefit arrangements are excluded from the scope of a standard on financial instru-ments. SFAS No. 133 lists nine exceptions to the definition of a derivative, several of which are clearly intended to reduce costs to preparers. An example is the scope excep-tion for normal purchases and sales.
A scope exception requires a description of the class of arrangements to be excluded. The scope exceptions in SFAS No. 133 have led to 19 Derivatives Implementation Group Issues, all of them attempting to clarify the applicability of the exceptions. Even if a stan-dard is firmly grounded in a principle, scope exceptions add to the volume and complexity of both the standard and, in many cases, subsequent implementation guidance.
U.S. standards also sometimes provide for treatment exceptions to reduce income volatility or to achieve a specific accounting outcome for a specified class of arrange-ments. In some cases, exceptions and alternatives are provided in response to explicit and strongly worded constituent concerns. Examples of treatment exceptions included because of constituent concerns appear in:

版权声明：本站内容均来自互联网，仅供演示用，请勿用于商业和其他非法用途。如果侵犯了您的权益请与我们联系QQ:729038198，我们将在24小时内删除。