Accounting standards are authoritative standards for financial reporting and are the primary

source of generally accepted accounting principles (GAAP). Accounting standards specify

how transactions and other events are to be recognized, measured, presented and disclosed
in financial statements. Their objective is to provide financial information to investors,
lenders, creditors, contributors, and others that is useful in making decisions about
providing resources to the entity. The main objective of having accounting standards is to
achieve comparability between different organisations. There are two broad ideologies for
accounting standards namely – Prescriptive-based and Principles-based. Prescriptive based
approach are implemented as a regulation, while principles-based approach acts as
guidelines and relies on professional judgement. This essay seeks to discuss whether
accounting standards should be implemented as a regulation(i.e. Principles-based or
Prescriptive-based).

Accounting standards should be implemented as a regulation as doing so reduces ambiguity

of reporting standards and makes it a lot clearer how transactions or expenses should be
treated. For Instance, Development cost are treated as an expense under US GAAP which is
prescriptive in nature. However, under IFRS which is more inclined to a principles-based
approach, has broad based guidance that requires companies to capitalise development
expenditure, including internal costs, when certain criteria are met. Based on these criteria,
internally developed intangible assets (eg. Development expenses related to a prototype)
are generally capitalised and amortised under IFRS and expensed under US GAAP. Hence,
having accounting standards implemented as a regulation like that of US GAAP reduces such
possible conflicts.

Another reason why accounting standards should be implemented as a regulation is that it

increases the reliability of financial reports to investors. Without regulation, businesses have
the tendency to hide data which might be unfavourable to them. Accounting standards, lay
down accounting principles and methodologies that all entities must follow. One of the
outcome is that the management of the entity cannot manipulate with financial data. So
having accounting standards as regulations make it difficult to misrepresent any financial
information and commit fraud. Even in US where there are strict reporting standards by US
SEC, Wirecard, a payment processor and financial services provider, headquartered in
Munich Germany, was found guilty of fraud. Wirecard is suspected to have engaged in a
series of fraudulent activities to inflate its profit. Despite the allegations, Wirecard is
suspected to have engaged in a series of fraudulent accounting activities to inflate its profit.
Despite the allegations, Federal Financial Supervisory Authority took little action against the
company before its eventual collapse. This shows that a lack of strict regulation will result in
tendency of fraud, which will lead economic consequences.

However, having a rigid accounting standard, may be over-prescriptive. In the sense that, a
standardised accounting practice may not be applicable to companies across different
sectors. For instance, a company which invests in real estate may see appreciation of their
non-current asset. On the other hand, a manufacturing company will see depreciation and
amortisation of assets. Hence, having a strict regulation of depreciating assets may not be
applicable. In such cases, having a more flexible approach will be better in ensuring accuracy
of the financial reports.

All in all, I think that accounting standards implemented as a regulation is required to ensure
the reliability of financial reports to investors and to prevent possible economic
consequences. A lack of regulation may result in a repeat of the Financial crisis which will
lead to societal welfare loss. However, some flexibility should be granted. There could be
different standards for companies in different sectors. This will ensure maximum accuracy of
financial reports which will apply best to the company.