In this report, we will discuss the differences between rules-based and principles-based of revenue recognition standard. Then, we will discuss the recognition criteria for revenue in both the old and new standards. The consistency of the new standard with conceptual framework will also be discussed. This will be followed by discussing the implications of new standard implemented and consequences of the significant changes.
Rules-based standards as the name implies, provide sets of detailed rules that must be followed when preparing financial statements. Non-compliance of rules could cause a fine punishment or possible of lawsuits. With rules-based accounting standards, it will help to reduce the risk of misstatement of financial reports and increase the accuracy of financial information, given the explicit instructions for every situation as the Financial Accounting Standards Board (FASB) of the US may anticipate (DePamphilis 2012, 327). However, rules-based standards can be very complex too when preparing financial statements. Some people might look for loophole of rules and regulations to manipulate organisations’ financial figures. Principles-based standards are general guidelines that accountants must use as basis to prepare the financial statements. It is a simple way to apply and provide guidance for accountants to ensure good reporting. Under rules-based, there is less disclosure as what is required is to follow the rules required under a given standard. An example is different old standard on revenues where there is need to follow the requirement for a company is a specific industry to follow the industry specific requirement to recognize revenue.
The principles-based accounting standard will have less rules but much will depend on the professional judgement of the accountant who will prepare the financial statement as properly guided the principles of preparing the accounts.