The Institute of Chartered Accountants
of Scotland (ICAS) has been pursuing a campaign in support of
principles-based financial reporting standards since the publication of Principles not Rules: A Question of Judgement in 2006. According to the ICAS,
principles-based standards provide a framework within which the economic
substance of transactions can be faithfully presented and better serve the
needs of business and markets, and the public interest.
The key to the effective
functioning of a principles-based framework is the ability of preparers and
auditors to exercise professional judgment in the application of principles to
the circumstances of a particular transaction or accounting issue. The basis of
such judgments needs to be properly documented, so that regulators (who also
need to have the experience and expertise to consider and challenge such judgments)
can assess the reasonableness of the judgments based on the facts and knowledge
available at the time of the judgments.
In an effective principles-based
environment, each party plays a key role in making their own judgments and challenging
others’ judgments, building up trust that all the parties have sufficient
experience and expertise and that they approach their different roles in a
proportionate and sensible manner. In the light of comments received on earlier
work and involvement in similar work undertaken by the Global Accounting
Alliance (GAA), there is a need for guidance on how to make judgments,
especially in jurisdictions which are first time adopters of International
Financial Reporting Standards (IFRS) or which are used to operating in a
prescriptive or rules-based environment.
The ICAS has therefore developed A Professional
Judgement Framework for Financial Reporting: An international guide for
preparers, auditors, regulators and standard setters which offers guidance that may be
useful around the globe. Other postings regarding a “professional
judgment framework” may also be useful.
