Vicki Curtis, Jeremy Wei, Jordan Hill, Cody Rice
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Introductions
“Does the FASB’s Conceptual Framework Solve Real
Accounting Issues?”
 Purpose
 Benefits, Successes
 Opposition, Failures
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“Changing the Concepts to Justify the Standards”
“Relevance, Reliability, and the Earnings Quality
Debate”
 Relevance: “Accounting Loses Focus on Reality”
 Reliability: “Accounting Remains Patient”
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Group Activity
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Created the conceptual framework (1985)
 Considerable resources consumed
 Usefulness still in question
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Will shortly review the benefits, successes,
opposition, and failures
Explained by the FASB as follows:
“The existing Concepts Statements are intended
to serve the public interest by setting objectives,
qualitative characteristics, and other concepts
that guide selection of economic events to be
recognized and measured for financial reporting
and their display in financial statements or
related means of communicating information to
those who are interested.”
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A foundation that provides guidance for
standard setting
Synergies between interrelated standards
Streamlines the process to improve the
response time
No room for political pressure
Normative describing the goals and
underlying concepts of financial reporting
SFAC 2:
- Qualitative characteristics
to guide the FASB in making
decisions
SFAC 1:
- Provides the overall
objectives of Financial
Reporting
- Explicit cost/benefit
constraint when developing
standards
SFAC 1 & 2:
- Raised the
importance of users
of statements
- Critical to
continuation of selfregulation
SFAC 6: Lists and Defines
elements of financial statements
- Time saving
- Results in consistency
- Most-referenced
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Many scholars/academics feel there is no
reason to implement a framework to an 80year old profession
Some practitioners desire to keep the status
quo
 Mainly small-medium sized firms
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Hickok argues that it is not up to accountants
to be forward thinking, merely historians
 The author disagrees
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An opponent (Beresford) does believe that
there is some usefulness to the framework:
 Standardizes the method used to debate
accounting issues
 Allows more focus on the issues, although not
solving them
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Listing out a foundation would simply
describe the current situation
SFAC 5: Revenue Recognition and
Measurement
Many believe that the FASB failed on
this concept
Did not solve the issue;
simply described
present practice
Does not address what
choice of accounting
treatment should
SFAC 5: Revenue Recognition and
Measurement
FASB counsel
cannot reach an
agreement
More rulesbased
Exceptions to
case-specific
issues were
allowed;
contradicting
the framework’s
guidelines
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SFAS 96: Accounting For Income Taxes
 No recognition or measurement criteria (ie SFAS 6)
 Recognition of deferred taxes hinges on when the
deferred amount is recognized as an asset or liability
and how to measure it (i.e. to discounted or nondiscounted)
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SFAS 52: Foreign Currency Translation
 Arguers on both sides of the debate were able to
reference SFAC 2 as their reasoning, which undermines
the whole concept of the framework
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Discusses convergence of IASB and FASB
 Argues it is simply a shift towards fair valuation
and away from stewardship, reliability, and
earnings
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How investors analyze financial statements
 Chartists and Indexers
 Financial statements are inputs to valuation not
the valuation itself
 Earnings vs. financial position
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Heavy emphasis on historical costs while
neglecting the intangible aspects
 Brand equity – Coke $72.5B brand value
 R&D – Microsoft $3.8B R&D expense
 Human Capital – Citigroup its core is its people
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Stuck in a traditional way of operating (firms
invest, accountants expense) which loses sight
of the potential for the intangible
160%
140%
120%
100%
80%
60%
40%
20%
0%
Coke
Nike
Hertz
Adidas
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Heavy emphasis on historical costs while
neglecting the intangible aspects
 Brand equity – Coke $72.5B brand value
 R&D – Microsoft $3.8B R&D expense
 Human Capital – Citigroup its core is its people
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Stuck in a traditional way of operating (firms
invest, accountants expense) which loses sight
of the potential for the intangible
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“Future economic benefits”
 Definition of asset fits the value of brands, R&D,
and human capital
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Frozen preference for reliability over
relevancy
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Overcome past difficulty of valuing intangibles
(Boston Consulting & KPMG)
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Ongoing separation of the market value of a
company vs. the book value
 people believe that this is becoming an issue
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Article tries to answer the question as to
when intangible assets (e.g. R+D, Brand Value,
etc...) should be accounted for as assets
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Firstly, as per FASB - financial accounting is
NOT designed to measure the value of a
business enterprise
Secondly, irrational to use the stock market as
a basis of valuation, as many times the stock
market is based on non-sensical emotion
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When should these intangible assets be recorded
in the financial statements?
Thus, we will never record these intangible assets
on the balance sheet and only the resulting
“economic benefits” since:
 Coke isn’t in the “business” of building brand equity
 Microsoft isn’t in the “business” of building R+D
infrastructure
 McDonald's isn't in the “business” of enhancing
human capital
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We record these benefits when:
 we reliably confirm that the asset truly exists (i.e.
with each sale of a Big Mac)
 once accounting has proof (beyond a reasonable
doubt) of the existence of these assets
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Information is found everywhere, however,
reliable information is a rare commodity, and
it is worth waiting for
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10 minutes for discussion
5 minutes to debate
The future of financial
accounting rests with you!!!