Topic1ReviewofTopic

Rules & Principles

LO1 Know the difference between rules-based accounting and principles-based accounting

Rules-based gives clear black-and-white decision-making rules for accountants to

classify or report items, for example a 75% threshold

Principles-based gives a conceptual basis for items to be classified or reported, for

example substantially all of rather than 75%.

The difference between rules and principles based approaches is that the rule based
approach is more easily manipulated, for example a manager might request a
particular transaction be structured so that it is less than the 75% threshold, while
sustainably all of involves more judgement.

In general terms international accounting standards are said to be principles based (i.e.
what we have in Australia is international accounting standards) and US GAAP is
rules based. There are exceptions to these generalisations of course.

Note that where there are differences between the Podcast slides and the textbook
(and legacy slides) that the Podcast slides are the most up-to-date version and should
be followed in preference to the older materials. A new edition of the textbook will be
available in 2016.

A reading of the Framework is critical for the understanding of 1B concepts,

presentation and accounting methods.

LO2 Demonstrate principles, conventions, and assumptions that are consolidated in the
Framework for the Preparation of Financial Statements
Decision usefulness is a key component for information being useful.
Usefulness considers whether the decision makers would look at the firms valuation
differently as a result of the information for example would their invest or sell
shares.
Balance sheet is like a photograph it snap-shots the balances at the end of the period
(assets, liabilities and equity components are covered in topics 2, 3, 4, and 5)
Income Statement is like a video it shows the activity in the revenue and expense
accounts, for these accounts get closed off at the end of the period (more in topic 6)
Cash flow statement strips away the accruals such as payables, prepaid, etc. and just
shows cash inflows and outflows (more in topic 7 & 8).
Relevance can this number help decision makers now? Today? If a building is
recorded at historical cost and that is equal to the purchase price in 1971 then is it
relevant to investors in 2015?
Relevance can sometimes sacrifice other characteristics, such as revaluing an asset
might make the number less reliable
Materiality uses judgement you can supplement with a 5% rule if the item is worth
more than 5% of the balance of the relevant sub-category, and then is it relevant?