Reporting Framework Systems
It is important that financial reports follow a regulatory format because this ensures they meet the needs of shareholders and other users of financial statements. Financial reports are regulated by authorised authorities, they set accounting standards that help and enforces understanding between users and producers of financial statements.
There are two systems that different countries adopt in order to regulate the reporting framework. These include:
- Principal-Based- Sets a list of laid down guidelines and theories. For example, the GAAP and IASB set broad guidelines to practical circumstances. However, it can become easily out of date as financial reporting goes through consistent changes.
- Rules-Based- A list of detailed rules. Regulation is developed as issues arise to try and address possible contingencies. The US adopts this and this leads to a large amount of regulatory measures which may not always detect or prevent financial irregularity. This system makes standards longer and more complex.