Principles not Rules: where are we now?

Is the principles not rules debate still valid in today’s corporate reporting landscape? What are the challenges in implementing principles-based standards? These were some of the questions for debate at an ICAS event to mark the 10 year anniversary of the publication of 'Principles not Rules: A question of judgement'.

The breakfast debate, hosted by Deloitte in London, was chaired by Mike McKeon, ICAS Council member and a former FTSE 100 CFO. The 2006 ICAS publication found a general consensus that principles in financial reporting are the necessary underpinning of the true and fair view. But the world has changed in the past ten years, with the financial crisis of 2008/9 having a significant impact on the work of standard-setters and regulators, raising the question of whether principles are still relevant.

David Wood, Executive Director, Technical Policy at ICAS, and a member of the working group which produced ‘Principles not Rules’, explained the work ICAS has undertaken in recent years to promote the principles agenda, and summarised the results of a recent survey of ICAS members. This found that whilst 90% of respondents supported principles-based financial reporting standards, over 60% thought that IFRS are currently rules-based. The vast majority, however, believed that the accountancy profession is capable of operating within a principles-based environment.

The practicalities of developing principles-based standards were discussed by IASB Vice-chairman, Ian Mackintosh. The IASB’s constitution states that its standards should be based on ‘clearly articulated principles’ - currently, the IASB is driving this via work on the conceptual framework and principles of disclosure project. Ian noted that there is continual pressure on standard-setters from constituents to clarify and explain standards, and that an important part of their work is encouraging consistent application via education.

Ian Mackintosh was joined for a panel discussion by: Patrick de Cambourg, president of the Autorite de Normes Comptables (ANC), the French national accounting standard-setter, Jane Fuller, Co-Director, Centre for the Study of Financial Innovation, and Veronica Poole, Senior Accounting Technical Partner, Deloitte.

Jane Fuller pointed out that the exercise of professional judgment is key to the operation of principles-based standards, and there should be a greater emphasis on explaining key judgements, both by preparers and auditors. This should involve setting out the range of possible outcomes and explaining how changes in the key assumptions impact these. One important lesson since the publication of ‘Principles not rules’ is that self-regulation is no longer an option: regulators ‘need teeth’ to ensure that principles are properly enforced.

This view was echoed by Veronica Poole, who also highlighted the importance of trust in a principles-based system. Trust in business today is not just about the quality of financial reports, but is also about business being able to demonstrate accountability for broader resources and explain its long-term value proposition.

The complexity of transactions and the business environment means that it is difficult to apply principles; as many transactions cannot be summarised succinctly. Business is global, but regulators and legislators are not, so principles need to be widely applicable. Different regulators may have different judgements on the same issue.

Patrick de Cambourg said that whilst there is a level of criticism of IFRS, its globalisation would not have been possible if it was not based on principles. The challenge, he said, is how to be principles-based when we are not bound by those principles? It is something of a paradox that IFRS is principles-based but the principles in the framework do not override individual standards.

Another key issue is the process for development of interpretations of IFRS – a system of national standard-setters developing local interpretations to address specific legislative and regulatory differences may be more effective and help avoid the proliferation of rules.

This tension between global standards on the one hand, and local regulation on the other, was a topic which surfaced again during the Q&A session with the panel and audience, with the example given of identical contracts being considered as equity by one regulator, and as a liability by another. This poses a real practical problem in the financial reports of multi-national groups.

Another key tension in the principles debate and in corporate reporting more generally, is that between the desire for consistency and comparability, and the view that reporting should enable companies to ‘tell their story.’ Principles-based reporting standards assist a communication objective, while rules tend to support a more compliance-based mentality.

The discussion identified the following pivotal themes for the future development of principles:

  • The need to think about corporate reporting in a more holistic sense, as performance can no longer be summed up in a single measure, and reporting on broader issues is crucial to re-building trust in business;
  • The challenge of promoting consistent application of IFRS – there are currently varying degrees of adoption, which will take many years to harmonise, via education, interpretations and enforcement.
  • The importance of materiality, professional judgment and disclosure in improving the way that IFRS is currently applied.
  • The emphasis on professional judgement that is needed to support a principles based approach in an ever more complex world will require some thought: how should professional education evolve so that accountants have the knowledge, practical experience and courage to exercise judgement?

Ian Mackintosh summed up by re-iterating that the IASB remains committed to principles-based reporting, and called for all stakeholders to get involved and help them with this objective.


  • Corporate and financial reporting

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