Pros and Cons of Principles-Based Accounting

Accounting standards can either be rules-based or principles-based. In principles-based accounting standards, providers of accounting services in Singapore follow the spirit of an accounting concept rather than specific rules.

Singapore is not alien to the ever lively debate on which is the better standard to follow. Adherents of principles-based accounting often cite that it’s a more flexible approach that encourages professional judgment. However, the approach is said to be ambiguous, difficult to comply with and enforce.

Either side of the divide has a fair share of its ups and downs. However, rather than get muddled up in the debate, here’s an objective view of the pros and cons of principle-based accounting.

The Pros

Flexibility

Starting off is the most apparent benefit of principles-based accounting, flexibility. Following principles often enables accountants to provide customised services to unique business entities in an accurate way. It also helps providers of accounting services in Singapore to respond better to changes in a rapidly changing marketplace.

It Encourages Professional Judgment

Unlike rules-based accounting approach, which often tends to seem mechanical, encouraging accountants to look at the letter of the law rather than the spirit of the law, principles-based accounting encourages accountants to dig deeper and look into the substance of a transaction.

Not only is the accounting services provider able to get a better appreciation of the transaction but they are also able to offer sound and professional judgment.

It Promotes Simpler Standards

With principles-based accounting standards, bodies like Accounting Standards Council (ASC) or the Accounting and Corporate Regulatory Authority (ACRA) have less of a job specifying the standards that providers of accounting services in Singapore should adhere to. Instead, they give general principles and direction for professionals to follow. It encourages more transparent transactions and accounting.

The Cons

Infringes on the Comparability Concept

One of the key concepts of accounting services in Singapore is the concept of comparability. This concept postulates that accounting information of one entity has to be comparable to other similar entities (for it to be useful). However, by following principles-based standards, principles are used rather than rules. Opponents of this approach assert that it will blur the comparability aspect of accounting information since two accountants can look at the same data and derive completely different meanings concerning what the data means.

For instance, two entities with the same assets could present them differently on the balance sheet.

Compliance is Difficult

When it comes to principles-based accounting standards, compliance is much more difficult to attain than rules-based standards. In a company with an elaborate staff structure in the finance department, such challenges may delay service delivery or even amount to losses. For instance, although a lower-level accountant may interpret a transaction in the best way that he or she understands, a superior accountant may reverse it all together and request for a re-evaluation. This means that the company will have to have a larger pool of experienced accountants (who are also very familiar with the industry) to oversee the junior accountants. Thus, compliance takes longer and is more expensive.

Enforcement Is Difficult

Although Singapore companies are not notorious for financial misconduct, it doesn’t mean that the Accounting and Corporate Regulatory Authority (ACRA) should loosen its stance over compliance. However, pointing out compliance issues by providers of accounting services in Singapore becomes more difficult since divergent views of principles wouldn’t be uncommon.

To conclude, an objective understanding of the pros and cons of principles-based accounting will help you apply the best approach to your business.

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