Essay: Risks of Applying Principle Based Standards

Sample Essay

The disadvantages or risks of applying principle based standards are outlined below.

• Extensive interpretation and guidance is required for specific accounting issues.
• Accountants, auditors and management may apply different personal judgment which could result in misrepresentation and significant deviation from original values.
• Similar standards may be applied differently at several points of time or in different accounting periods.
• Too much dependence and preference on personal judgment could result in generalization of specific valuation and financial statement preparation techniques.
• Principle based accounting standards could also lead to varying interpretations of similar accounting issues (Kivi, Smith and Wagner 2004).

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