The FASB Conceptual Framework – A Case of the Emperor’s New Clothes

Abstract

All introductory economics textbooks proffer essentially the same definition of economics. “Economics is the study of the allocation of scarce resources…” (Worstall, 2015; Yuille, 2015). The methods and fora for allocating limited or scarce resources are determined and constrained by the legal structure of society (Banner, 2011). The Financial Accounting Standards Board (“FASB”) exploits this basic definition of economics in its “Conceptual Framework,” the stated purpose of which is to provide guidance for developing accounting standards: “…the Statements [of Financial Accounting Concepts]…will guide the Board in developing accounting and reporting standards by providing the Board with a common foundation …Concepts Statements describe concepts that will underlie guidance on future financial accounting practices and in due course will serve as a basis for evaluating existing guidance and practices” (FASB, 2018). Whether lauded or criticized the FASB Conceptual Framework is treated as legitimate. It is not. This paper challenges the legitimacy of the FASB Conceptual Framework as a “coherent system of interrelated objectives and fundamental concepts.” Far from being a “coherent system,” the FASB Conceptual Framework is neither coherent nor a system. I argue that the FASB’s Conceptual Framework is illogical and based on autocratic declarations, faulty assumptions, fallacious conclusions, contradictory assertions, internal inconsistencies, erroneous identification of resources, ignorance of securities laws, and circularity of reasoning and therefore cannot be used as guidance in developing standards of accounting, or provide structure or direction to financial accounting and reporting. To paraphrase an old fable, the FASB Conceptual Framework has no clothes.