Examining Often-Heard Allegations : Is U.S. GAAP More Rules-based than IFRS?

Following the massive wave of high-profile accounting scandals at the beginning of this millennium, there has been an apparent consensus within the U.S. policy-making circles that the existing U.S. accounting standards are the main reason for these failures. Many assert that U.S. GAAP is rules-based, with a main focus on meeting the form rather than the substance of accounting transactions. Consequently, the United States of America has witnessed increasing calls to abandon the current allegedly “rules-based” accounting system in favor of a principles-based system. As a result, the U.S. FASB adopted a best efforts convergence approach with the IASB (widely known as a provider of principles-based accounting standards) in September 2002. However, no prior research examines the extent to which rules-based characteristics exist in U.S. GAAP or IFRS. The objective of our study is to investigate if there is a significant difference in rules-based characteristics between U.S. GAAP and IFRS. To address this research question, we develop our own principles-versus-rules continuum instrument to quantitatively measure the extent to which rules-based characteristics exist in U.S. GAAP and IFRS. We find that inconsistent with the often-heard allegations, U.S. GAAP is less rules-based (more principles-based) than IFRS. For robustness, we confirm our results using the rules-based instrument developed by Mergenthaler (2009). Our empirical results will provide significant inputs to regulators and standard setters in their ongoing deliberations on how to improve the standard-setting process