In this article, the authors present a comparison of the rules based approach with the principles based approach and identify the costs and benefits of both the approaches. The authors highlight that maintenance of consistency, accuracy and reliability is the primary sought purpose of financial reporting. They justify rules based approach on the ground that the need to ensure consistency would not arise in situations where specific rules are followed for reporting purposes, because the rules would be internally consistent themselves and adhering to the same for financial reporting would automatically ensure consistency. The authors also highlight that the presence of subjectivity in the process would create inconsistencies.
The authors conclude that the system must be based on principles and should not solely depend on principles. The authors call for a mechanism in which high level principles exist, but specific guidelines are derived from time to time to ensure that consistency in financial reporting is maintained and the application of professional judgment is restricted. This approach seems to be plausible instead of focusing on a rules based approach only as it helps to derive the benefits of both the accounting approaches.