Rules- or Principles-based Accounting Frameworks? A text analysis of the K2 and K3 frameworks

Abstract

Background and research problem: Accounting quality and accounting scandals may both be affected by the formulation of standards. Recently, the international debate regarding classification of frameworks has received major focus in Sweden as a result of the implementation of K2 and K3. BFN refers to K2 as being a rules-based framework, meanwhile K3 is stated to be principles-based. Several researchers have criticized BFN’s statement about K2 being rules-based and K3 being principles-based. The debate requires clear definitions of rules- and principles-based characteristics. Therefore, seeking to classify accounting frameworks may increase the understanding of the most suitable adoption of frameworks. Purpose: The primary purpose of this study is to investigate the rules-and principles-based characteristics within K2 and K3 in order to enable classification. Also, the study contributes by the development of an index model that can be used in the classification of accounting frameworks. Index model: Seven parameters are identified from literature and used as a tool to collect data in terms of indications of rules- and principles-based characteristics. The parameters serves as a base for the construction of an index used to define the frameworks as rules- or principles-based. Methodology/method: The study includes elements of both quantitative and qualitative methods, combining the development of a numerical index with a text analysis of the frameworks in order to attain increased understanding. The empirical data is gathered with respect to literature and thereafter analyzed in order to receive the results. Findings and conclusion: The study shows contradictory results in terms of providing different results depending on the investigated parameter. The fact that different results are given with respect to different parameters indicates that K2 is not being entirely rules-based and K3 not entirely principles-based. Therefore, the results of this study show that the classification of K2 and K3 as either rules- or principles-based is complex and not as straightforward as stated by BFN. Future research: Suggestions for future research involves further investigation of defining accounting frameworks as rules- or principles-based by using the developed index model. We suggest future studies to include investigation of other accounting frameworks such as IFRS and US GAAP.