Standards
A Converging Framework
Creating a consistent framework is a giant step toward establishing a single set of financial reporting standards.
FROM: MAY-JUNE 2006 ISSUE | BY STEPHEN SPECTOR
As part of the initiative for the International Accounting Standards Board (IASB) and the U.S. Financial Accounting Standards Board (FASB) to converge standards, the two bodies have embarked on a joint project to revisit the conceptual framework developed in the mid-'70s. Why revisit the framework? One reason is that it was created without an over-arching structure in place, which has resulted in a lack of consistency. Another is that the framework has not kept pace with changes in the world of accounting and finance and it is time for an extensive update.
Why is a framework so important? The FASB said it best: "the conceptual framework is a coherent system of interrelated objectives and fundamentals that prescribes the nature, function, and limitations of financial reporting."
The objectives identify the goals and purposes of financial reporting, and the fundamentals are the underlying concepts of financial accounting and reporting. The concepts provide guidance in selecting the transactions, events, and circumstances to be accounted for, how they should be recognized and measured, and how they should be summarized and reported. Without the guidance provided by a framework, standards wind up being inconsistent and standard-setters' past decisions are not indicative of future ones.
Action Plan
The IASB and FASB project will focus on troublesome concepts that reappear time and time again in standard-setting projects. Issues will be prioritized based on how often they are likely to arise, inter-dependencies among issues, and fostering convergence of the two frameworks. The project is not expected to be completed before 2010; however, parts of the new framework will be exposed for comment as they are developed. The first part, which deals with the objectives of financial reporting, is expected to be released for publication shortly.
One issue needing attention is what is meant by the term probable, which appears in the FASB's definitions of assets and liabilities, the IASB's recognition criteria, as well as Canadian Handbook sections. The definition of a liability also requires clarification. Specifically, how does the definition tie into contractual rights and obligations? How should we account for both fully executory and partially executed contracts? Issues relating to measurement in accounting and relevance versus reliability are also key concerns.
"Fair value" is a critical topic these days as users and preparers struggle with the soon-to-be effective Handbook sections on the recognition and measurement of financial instruments. Consider this: paragraph 3855.02(b) states that fair value is the most relevant measure for financial instruments and the only relevant measure for derivative financial instruments. Given the emphasis placed on fair value, one would expect that the concept is clearly defined, or at least referenced in the conceptual framework. Unfortunately, it is not. Historical cost was the rule for recognition and recording on the balance sheet at the time the framework was constructed. Currently, we have a balance sheet that is a mix of historical and fair values.
Although not directly involved with the project, Canada's Accounting Standards Board is closely monitoring developments to ensure that Canadian GAAP remains consistent with the emerging global framework.
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Stephen Spector, MA, FCGA, owns Spector and Associates and teaches Financial and Managerial Accounting at Simon Fraser University. He also serves on CGA-BC’s board of governors. E-mail shspector@shaw.ca.