The main purpose of this study was to explain and describe he two approaches of preparing accounting standards and compare them in order to identify a better approach to standard setting. The paper covers the description of rule based approach and its process with advantages and disadvantages in the context of standard setting. The rule based approach as analyzed is based on rigid rules and regulations which control the methods and valuation techniques applied by accountants and dictate how values should be calculated and disclosed. This leaves no room for personal judgment on part of accountants and renders standards inflexible which cannot be implemented differently with changes in different scenarios. This is the major disadvantage of rule based standards and affects the transparency of information contained in financial statements adversely.
The process of setting standards under this approach was described with several advantages and disadvantages. This is the second approach of organizing standards by applying principles or concepts where standards are formulated based primarily on general accounting concepts and principles. The evaluation of this approach reflects the ease in interpretation, rapid preparation of standards and implementation of these standards and increased transparency of financial statements. The use of this approach has been recommended due to several advantages over rule based standards with heavy reliance on transparency, reliability, easy interpretation, time saving and flexibility.
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