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FROM: NOV-DEC 2008 ISSUE | BY STEPHEN SPECTOR
In May 2008, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) jointly published an exposure draft of two chapters of an improved Conceptual Framework for Financial Reporting. Chapter 1 focuses on the Objective of Financial Reporting while chapter 2 deals with Qualitative Characteristics and Constraints of Decision-Useful Financial Reporting Information.
The boards emphasize that standards must be based on consistent principles rooted in fundamental concepts rather than a collection of conventions. Moreover, if consistently useful financial reporting is to be achieved, the body of standards as a whole and the application of those standards must be based on a sound, comprehensive, and internally consistent framework.
There is a common foundation to the boards’ frameworks. The FASB’s Concepts Statements and the IASB’s Framework for the Preparation and Presentation of Financial Statements articulate concepts that go a long way towards being an adequate foundation for consistent standards. But neither framework was developed as a cohesive whole. Recognizing this inherent weakness, the boards have undertaken a joint project to develop a common and improved conceptual framework. The goals for the project include updating and refining existing concepts to reflect changes in markets, business practices, and the economic environment.
The boards concluded that a comprehensive reconsideration of all concepts would not be an efficient use of their resources. Many aspects of their frameworks are consistent with each other and do not need fundamental revision. Instead, the focus is on improving the existing frameworks, achieving convergence, and giving priority to issues that are likely to yield standard-setting benefits in the near term. It is expected that the common framework will be a single document rather than a series of concepts statements (FASB’s current approach).
So what are the changes in the first two chapters? The biggest change relates to chapter 1 and the objective of financial reporting; specifically, for whom should the statements be prepared? The exposure draft proposes that an entity’s financial reports should be prepared from the perspective of the entity rather than the perspective of its owners or a particular class of owners. Nevertheless, the exposure draft identifies present and potential capital providers as the primary user group for general purpose financial reporting. However, the exposure draft also recognizes that the objective of financial reporting has to be broad enough to encompass all the decisions that equity investors, lenders, and other creditors make in their capacity as capital providers, including resource allocation decisions and decisions made to protect and enhance their investments.
Chapter 2 is less evolutionary. The exposure draft makes the point that the qualitative characteristics are complementary concepts; it argues they can be classified as either fundamental or enhancing based on how they affect the usefulness of information. Providing financial reporting information is also subject to two pervasive constraints – materiality and cost. Thus, the boards are seeking feedback as to whether the distinctions are helpful in understanding how the qualitative characteristics interact and are applied. It is expected that the revised material will be issued as the various chapters are completed. Look for an update in 2009.
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