Final answer:
The FASB adopted the principles-based approach, requiring companies to use professional judgment in accounting for financial transactions and analyze their economic substance.
Step-by-step explanation:
The FASB, which stands for the Financial Accounting Standards Board, adopted the principles-based approach, requiring companies to use professional judgment when accounting for their financial transactions. This approach allows for flexibility and interpretation, as opposed to the rules-based approach which provides specific guidelines for accounting treatments.
Under the principles-based approach, companies are required to analyze the substance of transactions and make informed decisions based on the economic reality of the situation. For example, if a company enters into a lease arrangement that transfers the risks and rewards of ownership, it would be treated as a finance lease and recognized on the balance sheet.
This approach aims to capture the economic substance of transactions and provide useful information to users of financial statements. It promotes transparency and allows for the incorporation of evolving business practices and transactions.