principlesbased

Principles-based refers to a regulatory or standard-setting approach that relies on broad, overarching principles rather than prescriptive rules. In a principles-based framework, standards articulate the objectives and outcomes that must be achieved, while leaving the means to comply to the judgment of the entities subject to them. This enables flexibility to accommodate new products, technologies, and business models, and encourages professional judgment and risk-based decision making.

Origins and use: The approach gained prominence in accounting, auditing, and financial regulation as a counterpoint to rules-based regimes that can become cluttered and brittle. IFRS and many modern financial regulations favor principles-based guidance; in contrast, some regimes, such as certain US GAAP practices in the past, have been viewed as more rules-based.

Key features: High-level objectives; emphasis on interpretation and application; risk-based focus; reliance on professional judgment; emphasis on outcomes and accountability; requirement for robust enforcement, guidance, and examples to reduce ambiguity.

Advantages and criticisms: Advantages include adaptability to new circumstances, reduced incentive to game the rules, and potentially more consistent outcomes across jurisdictions. Criticisms focus on subjectivity, potential inconsistency, enforcement challenges, and the need for strong professional ethics and expertise.

Applications: Accounting standards (e.g., IFRS), financial regulation (principles-based components in stress testing and risk management), corporate governance codes, and professional standards in law and auditing.

Examples: IFRS standards are often described as principle-based; Basel frameworks emphasize outcomes and risk management principles.

See also: rules-based regulation; risk management; professional judgment.