Financial Accounting
Standards Board
Why Concepts?
Robert H. Herz
FASB Chairman
2007 Baruch Financial Reporting Conference
May 3, 2007
The views expressed in this presentation are my own and do not
represent positions of the Financial Accounting Standards Board.
Positions of the FASB are arrived at only after extensive due process
procedures and deliberations.
5-3-07 Baruch Financial Reporting Conference-(1)
1
Topics for Discussion



The Joint Framework Project
Potential Payoffs from the Project
“Cross-Cutting Issues”
5-3-07 Baruch Financial Reporting Conference-(1)
2
Joint FASB-IASB
Conceptual Framework Project






Improve & refine existing concepts
Reflect contemporary thinking
Fill voids in existing framework
Converge FASB & IASB Frameworks
Conduct project in “phases”
Focus on “cross-cutting issues”
5-3-07 Baruch Financial Reporting Conference-(1)
3
Phases of the Project








Objectives
Qualitative Characteristics
Reporting Entity
Elements Definitions
Recognition & Derecognition
Measurement
Financial Statement Presentation
Disclosures (& boundaries of financial
reporting)
5-3-07 Baruch Financial Reporting Conference-(1)
4
What’s the Payoff from
Having a Framework?

Provides a common ground for reasoning
the issues




(As opposed to the personal frameworks of
individual Board members or constituents)
Consistent conclusions on similar issues
more likely despite changes in Board
membership
Standards = more principles based &
more durable
Financial reports = more comparable,
more consistent, easier to understand &
more useful
5-3-07 Baruch Financial Reporting Conference-(1)
5
What’s the Payoff from
Improving the Framework?



Will help reduce complexity by creating
greater consistency between standards
that are based on it
Will improve standards by providing a
sound foundation for reasoning that
better reflects the underlying economics
By better reflecting the economics, the
resulting standards should be more
intuitive
5-3-07 Baruch Financial Reporting Conference-(1)
6
What’s the Payoff from
Converging the Framework?



Eliminate differences in the existing
FASB & IASB frameworks
Guide the Boards toward consistent
conclusions on issues in standards
Promote converged and improved
global accounting standards
5-3-07 Baruch Financial Reporting Conference-(1)
7
Some Cross-Cutting Issues Involving
the Objective of Financial Reporting



o
Broad range of users vs. only
existing common shareholders?
Decision usefulness vs.
stewardship?
Entity vs. owner (or counterparty)
perspective?
Interaction between financial
reporting and management’s
perspective?
5-3-07 Baruch Financial Reporting Conference-(1)
8
Some Cross-Cutting Issues Involving
the Objective of Financial Reporting
(continued)

Do user information needs differ
for:



Large, publicly-traded corporations?
Smaller, privately-held companies?
Not-for-profit organizations?
5-3-07 Baruch Financial Reporting Conference-(1)
9
Some Cross-Cutting Issues Involving
the Qualitative Characteristics

Relevance vs. Reliability






Ex.- Assessing fair value vs. historical cost
Preparers & auditors seem to emphasize
reliability
Investors seem to emphasize relevance
Confusion about meaning of reliability
Faithful representation of real-world
economic phenomena
Verifiability contributes to faithful
representation
5-3-07 Baruch Financial Reporting Conference-(1)
10
Some Cross-Cutting Issues Involving
the Reporting Entity


When is a legal entity or an economic unit
a reporting entity?
When should aggregation or
disaggregation occur?



When should a legal entity be divided into
several reporting units?
When should several legal entities be combined
into a reporting unit?
Is there a difference between control over
an entity and control over assets?
5-3-07 Baruch Financial Reporting Conference-(1)
11
Some Cross-Cutting Issues Involving
the Definitions of Elements

What is role of uncertainty
(“probable” or “expected”)?


Is there a role?
If so, where does it belong?
In the definitions?
 In recognition?
 In measurement?

5-3-07 Baruch Financial Reporting Conference-(1)
12
Some Cross-Cutting Issues Involving
the Definitions of Elements
(continued)

“Probable” in assets and liabilities definitions



“Obligating event” in liabilities definition


Likely vs. not certain
Existence vs. ultimate outcome
Which in a series of events is the obligating event?
Can “economic compulsion” create a liability?
5-3-07 Baruch Financial Reporting Conference-(1)
13
Some Cross-Cutting Issues Involving
the Definitions of Elements
(continued)
Liabilities vs. Equity




How to distinguish between them?
Can there be a bright line distinction?
Must there be a bright line distinction?
Wholly executory contracts


Can they give rise to assets &
liabilities?
If so, when should they be netted?
5-3-07 Baruch Financial Reporting Conference-(1)
14
Some Cross-Cutting Issues Involving
Recognition & Derecognition

Should the recognition criteria differ
for different measurement bases?


Ex.- Is “probability” criterion necessary
for historical cost basis but not for fair
value basis?
What is the recognition event?

If asset or liability does not meet
recognition criteria when obtained or
incurred, what event causes it to be
recognized at a later date?
5-3-07 Baruch Financial Reporting Conference-(1)
15
Some Cross-Cutting Issues Involving
Recognition & Derecognition
(continued)

Is derecognition the opposite of
recognition? Or does history matter?


Not discussed in either FASB or IASB
conceptual frameworks
Ex.- Conflicting guidance in standards
Both FAS 140 & IAS 39 require other things
to occur for financial assets to be
derecognized
 Standards require different other things to
occur before liabilities can be derecognized

5-3-07 Baruch Financial Reporting Conference-(1)
16
Some Cross-Cutting Issues Involving
Measurement

How should a measurement basis be selected?

Little current guidance on which basis to use & when
to use it



Should one basis or different bases be used?




Result: mixed bag of bases in financial statements
What do totals & subtotals really mean? (Like
adding & subtracting apples & oranges)
Initial vs. subsequent measurement
Assets vs. liabilities
Different types of assets and liabilities
Unit of Account—Should measurement reflect
synergies, volume discounts, blockage, portfolio?
5-3-07 Baruch Financial Reporting Conference-(1)
17
Some Cross-Cutting Issues Involving
Financial Statement Presentation
& Disclosure
Little or no guidance on issues like:
 What are objectives of disclosure?
 How to classify in statement of
financial position?
 What level of detail & subtotals in
income statement (operating
earnings, net income, OCI, etc. &
what should be included in them)?
 EPS or other summary indicators
5-3-07 Baruch Financial Reporting Conference-(1)
18
Summing Up

The lack of answers to those cross-cutting issues
has resulted in suboptimal financial reporting




But imagine a world where we have good, sound,
conceptual answers to those issues
Those answers would go a long way toward
providing all of us with the tools we need to:



Suboptimal for preparers & auditors
Suboptimal for investors & creditors
Decrease complexity and
Increase the transparency and general usefulness of
financial reporting
That is why a developing an improved &
converged Conceptual Framework is a key to our
being able to move forward
5-3-07 Baruch Financial Reporting Conference-(1)
19