The SEC submitted to Congress its Study Pursuant to Section 108(d) of the Sarbanes Oxley Act of 2002 on the Adoption by the United States Financial Reporting System of a Principles Based Accounting System in July 2003. A year later, FASB issued its reply, FASB Response to the SEC Study on the Adoption of a Principles Based Accounting System (July 2004). The SEC recommended that FASB when setting standards “avoid the use of percentage tests (‘bright lines’) that allow financial engineers to achieve technical compliance with the standard while evading the intent of the standard.”
Identify where bright lines currently exist in the statement of financial position, areas in which we might expect revisions in the future. What is the argument for use of brightline tests?