Evaluating Concepts-Based vs. Rules-Based Approaches to Standard Setting

This article discusses the feasibility of issuing concepts-based standards, as part of the Codification and Simplification project of the U.S. Financial Accounting Standards Board. This article summarizes comments of the Committee on issues related to concepts-based versus rules-based standards. Comments in this article reflect the views of the individuals on the Committee and not those of the American Accounting Association. Evidence abounds that detailed standards cannot meet the challenges of a complex and rapidly changing financial world, and that they frequently provide a benchmark for determining compliance in form but not in substance. The Committee offers two examples of these problems associated with rules-based standards. The first example is accounting for leases. The second example is pooling versus purchase accounting for business combinations. In highlighting these problems, the Committee turns to the Internal Revenue Service (IRS) for analogy as to the effects of bright line rules. The IRS relies on the Internal Revenue Code, Treasury Regulations, rulings and case law to establish whether taxpayers have violated the rules--a negative standard of conduct.