When FASB returned to this
topic in 1993, it proposed exactly
what the APB had put for ward and
was hammered by bank managers
who didn’t want volatile reported
earnings. While both gains and
losses are now recognizable under
SFAS 115, they are still parked on
the balance sheet. Once again, this
debate is alive in a joint project involving both FASB and the IASB.
This convoluted history shows that
the standards were being developed and modified to please vocal
constituents, rather than provide
useful guidance in either principles
or rules.
We observe that those who use
political influence are satisfied with
rules filled with words like “if,” “
unless,” “in the case of,” and “except
for.” Such complex standards assuage the powerful, but are not
FROM PAGE 12
ers, protecting auditors, and assisting regulators in keeping the capital
markets humming along.
But what about those political
situations?
The best thing to do is get rid of
them by insisting that standard-
setters produce only what we call
“principles-based rules.” In its July
2003 report, the SEC called these
standards “objective-based” be-
See SPIRIT on 16
‘Do you need
a screwdriver
or a hammer?’
good for educating, casting a new
vision, protecting accountants, or
equipping regulators. Lost in the
discussion is any consideration of
what would be the best way to inform investors and creditors.
WHAT’S NEEDED?
It’s clear there is no simple answer
to the issue of whether standards
should be principles-based or rules-based. The contexts in which standards are applied are too distinct to
allow one set to serve all needs.
Specifically, today’s conceptual
frameworks actually consist of
principles-based standards that are
helpful for education and for helping standard-setters and others cast
visions for what could be done. In
contrast, the more common technical standards are fine for constraining what can be done. In fact, it’s
hard for us to envision an effective
system that doesn’t generate both
kinds. For example, recall the principle offered earlier: “Report assets
at fair value.” While we think it’s a
good concept, we acknowledge that
it’s inadequate for guiding prepar-
