Inflation, Exchange Rates, and the Conceptual Framework: The FASB's Debates from 1973 to 1984

Abstract

SYNOPSIS In this article, I explain how two economic forces of the 1970s and 1980s, volatile exchange rates and inflation, provided a constant and compelling backdrop to the FASB's debates on its conceptual framework. While it has been acknowledged that rising prices contributed to a move towards greater flexibility in measurement, the role of fluctuating exchange rates has not been addressed so far. When, in 1976, a first foreign currency translation standard became effective, it sparked considerable controversy such that the FASB reconsidered the statement, embracing an exception to the all-inclusive income concept. This seemingly ad hoc exclusion, which is now described as other comprehensive income (OCI), was to be addressed conceptually in the further course of the conceptual framework project. However, the Board was not able to agree on its recognition and measurement project, issuing a descriptive Concepts Statement No. 5. By abandoning further work on reporting income, the FASB included an insufficient ex post justification of OCI in SFAC No. 5. Without conceptual guidance on when to use the concept, the Board's subsequent OCI decisions became vulnerable to political forces.