The first line in Concepts Statement No. 1 (CON1)--issued by the Financial Accounting Standards Board (FASB) in 1978--that forms the underpinning for FASB's Conceptual Framework (CF), reads: "Financial reporting is not an end in itself, but is intended to provide information that is useful in making business and economic decisions."
However, seven Concepts Statements, over 150 Statements of Financial Accounting Standards (FAS) and over 500 Emerging Issues Task Force (EITF) consensuses, FASB Interpretations, Technical Bulletins, FASB Staff Positions (FSP) later--besides additional guidance from the American Institute of Certified Public Accountants (AICPA) and regulatory accounting pronouncements (RAP)--one may wonder if financial reporting has become an end in itself. It's also worth pondering whether the litany (some would say "cacophony") of financial reporting information required by current standards has outlived its usefulness.
FASB Chairman Robert Herz acknowledged in the November issue of Financial Executive that "complexity impedes transparency." He also noted it is everyone's job--the FASB's, as well as preparers and auditors--to "get this beast under control." Part of such a taming effort will likely be the joint CF project of the FASB and the International Accounting Standards Board (IASB).
Insights from standard-setters and CFO-preparers follow.
Purpose and Goal of the Joint Conceptual Framework Project
The CF's of the FASB and IASB, initially developed over 20 years ago, are still helpful to standard-setters, but "are not good enough," says Halsey Bullen, FASB senior project manager for the CF project. He notes the CF is "very thin" in the areas of recognition criteria, measurement and disclosure, and adds that changes in the business world have to be reflected. Also, says Bullen, "the two frameworks [FASB and IASB], while very similar, aren't the same," and the two boards are working on joint standards projects as part of the effort toward international convergence. Having a converged CF would facilitate writing converged standards.
Early on, the joint project team found "cross-cutting issues" or systemic problems in various standard-setting projects that reflected limitations of the current CFs. Bullen emphasized the team is not trying to reinvent the wheel, and that a fair number of concepts will carry forward. For example, he says, FASB and IASB have agreed on the objectives of financial reporting, which will be similar to CON1, The Objectives of Financial Reporting.
Bullen makes reference to the Invitation to Comment, Selected Issues Relating to Assets/Liabilities with Uncertainties," posted on FASB's website since September 30, with comments due Jan. 3, 2006, as being a good example of a cross-cutting issue. "We ran into problems about uncertainties on a number of standard setting projects and knew this would come into play as we discuss definitions of assets and liabilities, recognition criteria and measurement," observes Bullen. There are a variety of opinions on how to deal with uncertainties, he says.
Overall, the joint project team is working toward issuing the first two chapters of a joint CF covering objectives and qualitative...
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