25 FASB’SConceptualFramework 1.1 FASB’S CONCEPTUAL FRAMEWORK The Financial Accounting Standards Board (FASB) began the process of developing a conceptual framework for financial reporting in 1976, a process that continues to the present. The much-needed objective of providing a basis for standard setting and controversy resolution has, as expected, proved to be challenging. The statements of concepts issued to date are summarized in Illustration 1-5. The reader should be aware that the FASB and the IASB are working on a joint project to converge their conceptual frameworks. The first phase has been completed with the issuance of Statement of Financial Accounting Concepts (SFAC) No. 8: Conceptual Framework for Financial Reporting—Chapter 1, The Objective of General Purpose Financial Reporting, and Chapter 3, Qualitative Characteristics of Useful Financial Information (a replacement of FASB Concepts Statements Nos. 1 and 2). New chapters and concepts are expected to be added. Concepts Statements are not part of the FASB Accounting Standards Codification, which is the source of authoritative GAAP recognized by the FASB to be applied by nongovernmental entities. The Board recognizes that in certain respects current generally accepted accounting principles may be inconsistent with those that may derive from the objectives and fundamental concepts set forth in Concepts Statements. However, a Concepts Statement does not (a) require a change in existing U.S. GAAP; (b) amend, modify, or interpret the Accounting Standards Codification; or (c) justify either changing existing generally accepted accounting and reporting practices or interpreting the Accounting Standards Codification based on personal interpretations of the objectives and concepts in the Concepts Statements. ILLUSTRATION 1-5 Conceptual rame ork for inancial Accountin and Reportin SFAC Nos. 8 & 4 Objectives OBJECTIVES Provide information useful for decision making by present and prospective investors and creditors. SFAC No. 8 Qualitative Characteristics FUNDAMENTAL SFAC No. 6 Elements of Financial Statements 1. Relevance 2. Faithful representation Also: Comparability, Timeliness, Verifiability Understandability Provides definitions of key components of financial statements SFAC Nos. 5 & 7 Recognition and Measurement OPERATIONAL Assumptions Principles Constraints 1. Economic entity 2. Going concern 3. Monetary unit 4. Periodicity 1. Measurement: cost vs FV 2. Revenue recognition 3. Expense recognition 4. Full disclosure Cost-benefit SFAC No. 7: Using future cash flows & present values in accounting measures Adapted from “Accounting for Financial Analysis,” by W.C. Norby, Financial Analysts Journal, March–April 1982, p. 22.
