Financial Accounting Standards Committee Research Articles

'Trading Places': A UK (and IFRS) Comment

The other papers in this set focus on the US and the respective roles of the FASB and of accounting academics, considering how far they 'traded places' around the 1970s such that the standard setters (previously 'positive', i.e. starting from current 'generally accepted' practices) became 'normative' (i.e. starting from some theory or Conceptual Framework ('CF') of what would be 'the best' financial accounting and reporting) while the academics (previously normative) became positive — and thereby retreated from their earlier focus on advising standard setters how best to 'narrow the areas of difference in accounting practice' (Zeff, 2013b, p.3). As individual researchers, academics have aspired to become 'social scientists' rather than 'social engineers' (Glover, 2013, p.4) although the AAA’s Financial Accounting Standards Committee has continued to offer collective opinions on the merits of proposed FASB standards (Zeff, 2013b, p.2). Rather than give my own version of what happened and what the consequences have been in the US, I aim here to add a contrasting perspective from other countries (primarily the UK and the rest of Europe) that incorporates a variety of other actors and differing uses (or 'objectives') of financial accounting and reporting. I consider briefly in turn: the major actors; major external uses of financial reports; the 'rational institutional myths' that sustain the role of accounting standards; and the potential contributions both of research and of university accounting education.

Does Balance Sheet Classification Matter? Evidence from Trust Preferred Stock

The Financial Accounting Standards Board (FASB) continues to debate the accounting for financial instruments and the distinction between liabilities and equity. A trend toward shifting items to the liability category is ongoing; for example in 2003 FASB Statement No. 150 required several items, including mandatorily redeemable shares, to be re-classified as liabilities. The AAA Financial Accounting Standards Committee (2001) voiced its concern over the increasing heterogeneity of the liability category and called for quasi-equity categories to improve the representational faithfulness of individual categories. We address the question of whether financial statement categorization of trust preferred stock (TPS) influences its market valuation. We exploit FASB Statement No. 150 as an opportunity for quasi-experimentation. Statement No. 150 required TPS, a mandatorily redeemable financial instrument, to be re-classified from the mezzanine to the liability section of the balance sheet. We empirically test whether the balance sheet label affects market valuation of TPS. Using a sample of 105 firm-year observations from 2001-2004, we find that when TPS is re-classified as a liability the market values TPS more like a liability than when it was reported in the mezzanine. Our evidence adds support to the AAA Committee's contention that financial statement users depend on balances sheet categories, and that additional heterogeneity in the liability section may lead to confusion and miss-interpretation.

A Perspective on the Joint IASB/FASB Exposure Draft on Accounting for Leases

The International Accounting Standards Board (IASB) and The Financial Accounting Standards Board (FASB) recently issued a joint exposure draft on accounting for leases. This exposure draft seeks to shift lease accounting from an “ownership” model to a “right-to-use” model. Under the current ownership model, leases can be reported on balance sheet (finance leases) if certain tests are met, or off balance sheet (operating leases) if those tests are not met. The new model seeks to report all leases on the balance sheet based on the present value of lease obligations without any bright line tests, and no sharp on or off the balance sheet classifications.We are sympathetic to the standard setters concern that the current lease standard is being manipulated improperly by managers resulting in large amount of debt being reported off balance sheet. We provide a discussion of current lease accounting and the proposed exposure draft. We also comment on five key issues covered by the exposure draft: the definition of a lease, the initial measurement and eventual reassessment at fair values, the accounting for lessors, the impact of lease accounting on recognition and income measurement, and classification of lease accounting elements and their impact on accounting ratios.This comment was developed by the Financial Accounting Standards Committee of the American Accounting Association and does not represent an official position of the American Accounting Association.

Proposed Financial Statement Changes: Reactions To The FASB-IASB Discussion Paper

<p class="MsoNormal" style="text-align: justify; line-height: normal; margin: 0in 0.5in 0pt;"><span style="font-family: "Times New Roman","serif"; color: black; font-size: 10pt; mso-themecolor: text1;">The purpose of this study was to obtain the opinions of future users of the financial statements: current undergraduate and graduate students in accounting and academia.<span style="mso-spacerun: yes;">  </span>We found that the students show greater agreement with the proposed model than do the CPA’s.<span style="mso-spacerun: yes;">  </span>In addition, we found that academia, as represented by the Financial Accounting Standards Committee of the American Accounting Association has a number of concerns regarding timing, user learning issues and impediments to learning, objectives and terminology and categorizing activities and assets and liabilities.</span></p>

Financial Reporting in the UK: A History of the Financial Accounting Standards Committee, 1969‐1990

Financial Reporting in the UK: A History of the Financial Accounting Standards Committee, 1969‐1990

Comments on Canadian Accounting Standards Board Exposure Draft on Generally Accepted Accounting Principles for Private Enterprises

The Canadian Accounting Standards Board (AcSB) issued an exposure draft on a proposal to adopt a separate 'Made in Canada' GAAP for private enterprises. This new GAAP is justified as being consistent with the current FASB/IASB conceptual framework, but as being responsive to the different cost/benefit considerations facing private entities vis-a-vis public entities. We viewed this proposal as being innovative and responsive to the differential financial reporting needs of private entities. We proposed that the AcSB should develop a separate conceptual framework to guide the future evolution of this new GAAP and not rely only on cost-benefit considerations. We sketched a preliminary conceptual framework that could be used to develop and justify the type of changes proposed in this exposure draft. We then responded to the specific questions asked in the exposure draft and were very supportive of the concepts proposed. First, we support the proposed GAAP which is based on historical cost with very minimal reliance on fair values. Second, we expressed agreement with the proposal to reduce the amount of required disclosures for private enterprises given their significant economic differences from public companies. Third, we agreed with the proposal to drop provision of significant guidance and especially (ex-post) emerging issues committee interpretations (EIC’s). We are in favour of a principles based GAAP and the provision of detailed authoritative guidance is not conducive to professional judgment. We also suggested a series of transition issues that the AcSB should consider including the mechanism for financing the standard setting board, the need to ensure compatibility between accounting and auditing standards, and a process for adjusting the education system (both in Universities and professional exams) to support this new private enterprise GAAP. This comment was developed by the Financial Accounting Standards Committee of the American Accounting Association and does not represent an official position of the American Accounting Association.

Response to the Financial Accounting Standards Board’s and the International Accounting Standards Board’s Joint Discussion Paper Entitled Preliminary Views on Revenue Recognition in Contracts with Customers

SYNOPSIS: The FASB and the IASB recently issued a joint discussion paper entitled, Preliminary Views on Revenue Recognition in Contracts with Customers. The boards requested comments on whether their proposed model for revenue recognition would improve the usefulness of the financial statement information for financial decision makers. This paper summarizes the AAA’s Financial Accounting Standards Committee’s responses to several of the boards’ specific questions. We support the boards’ proposed comprehensive revenue recognition standard based on the following options: (1) the customer consideration approach (based on initial contract price measurement); (2) no recognition of revenue at contract inception (by assigning the initial contract price to performance obligations); and (3) allocation of the transaction price to multiple performance obligations based on the relative stand-alone prices of each performance obligation. We also recommend that the boards carefully consider the following clarifications as they develop the final exposure draft. The formal definition should specify that the contract be an “enforceable” agreement. The measurement of a performance obligation must be verifiable. While the transfer of an asset to the customer or the acceptance of a service by the customer normally signals the recognition of revenue, we encourage the boards to carefully consider situations (like long-term construction or mining) when the completion of intermediate performance obligations could trigger revenue recognition prior to the transfer of title. Absent special consideration of these situations, companies may be influenced to write contracts in suboptimal ways in an effort to recognize revenue continuously throughout a long-term construction project or in the process of mining or farming. Finally, we highlight difficulties that may arise in allocating the initial transaction price to multiple performance obligation contracts when the individual performance obligations are not normally sold on a stand-alone basis.

Response to the Financial Accounting Standards Board's and the International Accounting Standard Board's Joint Discussion Paper Entitled, 'Preliminary Views on Revenue Recognition in Contracts with Customers'

The FASB and the IASB recently issued a joint discussion paper entitled, Preliminary Views on Revenue Recognition in Contracts with Customers. The Boards requested comments on whether their proposed model for revenue recognition would improve the usefulness of the financial statement information for financial decision makers. This paper sets forth the AAA's Financial Accounting Standards Committee's responses to several of the Boards' specific questions. In summary, we support the Boards' proposed comprehensive revenue recognition standard based on the following options: (1) the customer consideration approach (based on initial contract price measurement); (2) no recognition of revenue at contract inception (by assigning the initial contract price to performance obligations); (3) allocation of the transaction price to multiple performance obligations based on the relative stand-alone prices of each performance obligation. We also recommend that the Boards carefully consider the following clarifications as they develop the final exposure draft. The definition of a contract should include the words legally enforceable to describe the contract. A performance obligation must be verifiable. While the transfer of an asset to the customer or the acceptance of a service by the customer normally signals the recognition of revenue, we encourage the Boards to carefully consider situations (like long-term construction or mining) when the completion of intermediate performance obligations could trigger revenue recognition prior to the transfer of title. Absent special consideration of these situations, companies may be forced to re-write contracts in sub-optimal ways in an effort to recognize revenue continuously throughout a long-term construction project or in the process of mining or farming. Consider the difficulties that may arise in allocating the initial transaction price to multiple performance obligation contracts when the individual performance obligations are not normally sold on a stand-alone basis.

Response to the Financial Accounting Standards Board’s and the International Accounting Standard Board’s Joint Discussion Paper Entitled Preliminary Views on Financial Statement Presentation

SYNOPSIS: The Financial Accounting Standards Board (hereafter, FASB) and the International Accounting Standard Board (hereafter, IASB) issued a joint discussion paper titled Preliminary Views on Financial Statement Presentation. The Boards are seeking comments on whether their proposed model for financial statement presentation would improve the usefulness of the financial statement information for financial decision makers. This paper sets forth the American Accounting Association Financial Accounting Standards Committee (hereafter, the committee) summary comments as well as responses to several of the FASB’s and IASB’s (hereafter, jointly mentioned, the Boards) specific objectives and principles-related questions. Overall, the committee believes that the model has several appealing features, but also has several potential problems. Many of the problems discussed related to potential learning impediments for users to adapt to the new presentation format.

Response to the Financial Accounting Standards Board's and the International Accounting Standard Board's Joint Discussion Paper Entitled, 'Preliminary Views on Financial Statement Presentation'

The Financial Accounting Standards Board's (FASB's) and the International Accounting Standard Board's (IASB's) issued a joint Discussion Paper entitled, Preliminary Views on Financial Statement Presentation. The Boards are seeking comments on whether their proposed model for financial statement presentation would improve the usefulness of the financial statement information for financial decision makers. This paper sets forth the AAA's Financial Accounting Standards Committee's summary comments as well as responses to several of the Boards' specific objectives and principles-related questions. Overall, we believe that the model has several appealing qualities, but also has several potential problems. Many of the problems that we discuss related to potential learning impediments for users to adapt to the new presentation format.

Response to the FASB's Preliminary Views on Financial Instruments with Characteristics of Equity

The Financial Accounting Standards Committee of the American Accounting Association (the Committee) is charged with responding to requests for comments from standard-setters on issues related to financial reporting. The Financial Accounting Standards Board (FASB) recently requested comments on its Preliminary Views on Financial Instruments with Characteristics of Equity (PV). The committee believes that the PV introduces concepts and definitions involving financial statement elements that more properly would be considered at the conceptual framework level. Therefore, the committee respectfully requests that FASB take no further action regarding the proposed standard exposed in the Preliminary Views on Financial Instruments with Characteristics of Equity until the conceptual and definitional issues are resolved at the conceptual framework level.

A Research Based Perspective on SEC’s Proposed Rule on ROADMAP FOR Potential Use of Financial Statements Prepared in Accordance With International Financial Reporting Standards (IFRS) by U.S. Issuers

The Securities and Exchange Commission (SEC) issued a call for comment on a proposal to adopt a Roadmap for potential use of international financial reporting standards (IFRS) by U.S. Companies. We comment on five key issues raised by the SEC proposal. First, we propose that the need for a global regulator is overstated. A global regulator is unlikely to help achieve the stated goals of comparability and consistency of financial reporting on a global basis. We favor allowing U.S. companies to choose use of U.S. GAAP or IFRS rather than mandating one global monopoly set of standards. Second, we agree that the focus on auditing is a very relevant issue that deserves more attention from standard setters. Gains from adopting principles based accounting standards such as IFRS are likely to be realized only if auditors are also principles based. Third, while we have serious concerns about governance and financing mechanisms of IASB, we recommend that all regulatory actions cannot be held to a standstill while structural changes are made to the IASB. Fourth, we are not in favor of requiring reconciliation schedules from U.S. companies using IFRS. We view such reconciliations as being costly and unnecessary. Fifth, we recommend that the SEC pay more explicit attention to the educational and professional judgment consequences of its proposals.This comment was developed by the Financial Accounting Standards Committee of the American Accounting Association and does not represent an official position of the American Accounting Association.

Response to FAF exposure draft, “Proposed changes to oversight, structure, and operations of the FAF, FASB, and GASB”

The Financial Accounting Standards Committee of the American Accounting Association (the Committee) is charged with responding to requests for comments from standard-setters on issues related to financial reporting. The Financial Accounting Foundation (FAF) released for public comment on December 18, 2007 with a response period ending on February 10, 2008, “Proposed Changes to Oversight, Structure, and Operations of the FAF, FASB, and GASB” (the proposal). This commentary concerns four important public policy issues in the proposal with the most relevance for accounting standard setting: 1. Reduce the size of the FASB from seven members to five; 2. Retain the FASB simple majority voting requirement; 3. Realign the FASB composition; and 4. Provide the FASB Chair with decision making authority to set the FASB technical agenda. On February 26, 2008, the FAF accepted all four proposals that we commented on. Despite their approval by the FAF, we maintain that each of these proposals not only does not improve, but potentially weakens the standard setting model. We encourage the FAF to renew its commitment to a member selection model designed to create an independent standard setting board. The four proposals put forth by the FAF can only increase the political nature of the FASB, further concentrate decision making power, and create higher barriers to achieve general acceptance of accounting standards. We maintain that the FAF should move in the opposite direction. In particular, we recommend that the FAF not reduce the FASB size and adopt a supermajority requirement not a simple voting requirement. If the majority cannot convince other members of the FASB about their views, how can we expect general acceptance of accounting standards in society? We also want a FASB that is open to more diverse views and more democratic. We urge the FAF to renew its commitment to openness and engagement with the accounting community instead of becoming more elitist and further concentrating power in the hands of a powerful chairman and a smaller standard setting board.

Response to FAF Exposure Draft on Proposed Changes to Oversight, Structure, and Operations of the FAF, FASB, and GASB

The Financial Accounting Standards Committee of the American Accounting Association (the Committee) is charged with responding to requests for comments from standard-setters on issues related to financial reporting. The Financial Accounting Foundation (FAF) recently released for public comment, Proposed Changes to Oversight, Structure, and Operations of the FAF, FASB, and GASB (the proposal). Our commentary concerns four issues in the proposal which have the most relevance for accounting standard setting: 1. Reduce the size of the FASB from seven members to five; 2. Retain the FASB simple majority voting requirement; 3. Realign the FASB composition; and 4. Provide the FASB Chair with decision-making authority to set the FASB technical agenda.We disagree with all four of these proposals. The current FASB is set up consistent with a political appointment model rather than a model designed to create an independent standard setting board. The four proposals put forth by the FAF increase the political nature of the FASB, further concentrate decision making power, and make it difficult to get general acceptance of accounting standards. We propose that the FAF move in the opposite direction. In particular, we recommend that the FAF not reduce the FASB size, and adopt a supermajority requirement not a simple voting requirement. If the majority cannot convince other members of the FASB about their views, how can we attain general acceptance of accounting standards in society? We also want a FASB that is open to more diverse views and more democratic. We urge the FAF to increase its engagement with the accounting community instead of becoming more elitist and further concentrating power in the hands of a powerful chairman and a small standard setting board.

Comments by the American Accounting Association's Financial Accounting Standards Committee on the Fasb's 'Conceptual Framework for Financial Reporting (Hereafter Cf)', Call for Preliminary Views, July 6, 2006

The American Accounting Association's Financial Accounting Standards Committee is pleased to have an opportunity to express its views on the FASB's Call for Preliminary Views on its Conceptual Framework. We applaud the decision of the FASB to develop a Conceptual Framework and seek comments on its preliminary views and hope the financial reporting community will participate enthusiastically in this important activity.While we understand the importance of a Conceptual Framework, especially for accounting standard setting, we have deep reservations about the current document. In our response we explain why we think that the Preliminary Conceptual Framework is unlikely to be helpful in setting conceptually sound accounting standards. In particular, as you will see, we have reservations about the following key points: 1. We believe the Preliminary Conceptual framework is too focused on an investment role of accounting, and neglects the more important stewardship role of accounting. 2. The reliance on fair values that are not grounded on actual relevant market transactions (such as mark to model numbers) are not trustworthy. We believe that provision of soft accounting numbers will be harmful to the relevance and usefulness of accounting numbers. 3. We agree with the FASB's desire for neutral accounting numbers. However, given management's upward bias in reporting, we feel that conservative standards are required to produce neutral accounting numbers, and 4. We believe the FASB's standards should not be determined based only on a conceptual framework. Concepts such as relevance are too broad to be useful in determining a specific standard. A more rigorous field-performance-testing model is needed before conducting real world experiments with new accounting standards. We recommend allowing companies more flexibility in their reporting choices to allow market forces a greater role in setting accounting standards.In closing, despite our reservations about the Conceptual Framework, we applaud the FASB's desire to seek views on its preliminary effort and hope to participate again as this important activity progresses further.

Comments on the FASB's Proposals on Consolidating Special-Purpose Entities and Related Standard-Setting Issues

Views Icon Views Article contents Figures & tables Video Audio Supplementary Data Peer Review Share Icon Share Twitter LinkedIn Tools Icon Tools Get Permissions Cite Icon Cite Search Site Citation Laureen A. Maines, Eli Bartov, Anne L. Beatty, Christine A. Botosan, Patricia M. Fairfield, D. Eric Hirst, Teresa E. Iannaconi, Russell Mallett, Mohan Venkatachalam, Linda Vincent; Comments on the FASB's Proposals on Consolidating Special‐Purpose Entities and Related Standard‐Setting Issues. Accounting Horizons 1 June 2003; 17 (2): 161–173. doi: https://doi.org/10.2308/acch.2003.17.2.161 Download citation file: Ris (Zotero) Reference Manager EasyBib Bookends Mendeley Papers EndNote RefWorks BibTex toolbar search Search Dropdown Menu toolbar search search input Search input auto suggest Search

Implications of Accounting Research for the FASB's Initiatives on Disclosure of Information about Intangible Assets

AAA Financial Accounting Standards Committee INTRODUCTION On January 9, 2002, the Financial Accounting Standards Board (FASB) added a project to its technical agenda titled Disclosure of Information about Intangible Assets Not Recognized in Financial Statements. The FASB undertook this action based on constituents' responses to the August 17, 2001 request for comments on the FASB's Proposal for a Project on Disclosure about Intangibles. Since adding the project to its technical agenda, the FASB decided to restrict the scope of the project to intangible assets that currently are not recognized in the balance sheet, but would be recognized if acquired in a business combination under Statement of Financial Accounting Standards (SFAS) No. 141, Business Combinations (FASB 200la). Such intangibles encompass those grounded in contracts or other legal rights and those that are separable from the business. The project's scope also includes in-process research and development (R&D) costs that are written off to expense on the day they are acquired under FASB Interpretation No. 4, Applicability of FASB Statement No. 2 to Business Combinations Accounted for by the Purchase Method. Although deliberations on the project have been temporarily suspended to allow the FASB's staff to work on higher priority projects, the FASB plans to resume the project at some point in the future. The Financial Accounting Standards Committee of the American Accounting Association (hereafter, the Committee) responded to the FASB's request for comments on a Proposal for a Project on Disclosure about Intangibles. Additionally, based on the FASB's request for information about academic research related to intangibles, the Committee prepared a document summarizing this research and its implications for the FASB's project on intangibles. The Committee and the FASB discussed this document at a meeting at the FASB offices in May 2002. This paper contains the Committee's summary of research related to intangibles and the Committee's evaluation of the implications of the research for disclosure related to and recognition of intangible assets, (1) We expand the discussion of intangibles beyond that contained in the FASB's project on intangibles in two ways. First, we discuss research that has implications for intangibles not included in the restricted scope of the FASB's project described above. Second, we examine implications of research for recognition of intangibles, in addition to implications for disclosure of information related to intangibles. RESEARCH RELATED TO INTANGIBLE ASSETS We categorize research on intangibles into three areas that we discuss in turn: (1) research related to current financial reporting for intangible assets, (2) research related to disclosures about intangible assets, and (3) research related to recognition of intangible assets. Most of this research is empirical-archival in nature and focuses on R&D-related intangibles. Overview of the Nature of Intangibles Research For pragmatic reasons, most research on intangibles focuses on those intangibles generated by R&D expenditures. Data on R&D spending are widely available because R&D expenditures must be disclosed separately under SFAS No. 2, Accounting for Research and Development Costs. Because there is no such requirement for other types of intangibles expenditures, Lev (2001, 54-55) notes that empirical-archival research on intangibles is hindered. The focus on R&D raises the question of whether the results of this research generalize to other types of intangibles. It seems to us that the answer to this question depends on whether R&D assets are economically similar to other intangibles and on how familiar investors are with information about other types of intangibles. If the economic process involved in developing these other intangibles is different from that of R&D intangibles, it is not clear that evidence based on R&D has direct implications for other types of intangibles. …

Evaluation of the FASB's Proposed Accounting and Disclosure Requirements for Guarantors

INTRODUCTION The May 22, 2002 FASB Exposure Draft, Guarantor's Accounting and Disclosure Requirements, Including Indirect Guarantees of Indebtedness of Others (hereafter ED), addresses initial recognition, initial measurement, and disclosure issues related to guarantees. Although it undertook the guarantee project in conjunction with its project on consolidation guidance related to special-purpose entities (SPEs), the FASB addressed guarantees in a separate project because guarantees also arise in situations other than those associated with SPEs. The ED calls for recognition and increased disclosure of the liability associated with a guarantor's obligations under guarantees. It takes the position that a guarantee obligates the guarantor in two respects: (1) the guarantor undertakes a noncontingent obligation to stand ready to perform over the term of the guarantee in the event that the specified triggering events or conditions occur and (2) the guarantor undertakes a contingent obligation to make future payments those triggering events or conditions occur. The noncontingent obligation occurs when the guarantor commits to the guarantee, while the contingent obligation occurs only when certain future conditions arise; for example, the entity whose debt is guaranteed defaults on payments. While the ED is not explicit on the nature of the noncontingent liability, we believe it is best characterized as deferred revenue for most guarantees. An example in the ED sets the stage for this interpretation: if a seller-guarantor issues to its customer's bank a guarantee of the customer's loan whose proceeds are used to pay the seller for the assets being purchased, the failure to recognize a liability for the issuance of the guarantee overstates the profit on the sale. (1) Just as an insurer charges a premium as compensation for its exposure to losses, the guarantor in this example must be compensated for its guarantee commitment and resulting exposure under the guarantee--the noncontingent element. (2) This example suggests that a portion of the proceeds from the sale be deferred, and recognized over the period of time covered by the guarantee. The ED calls for the guarantor to recognize as a liability the fair value of the noncontingent element of the guarantee, (3) and confirms the applicability of FASB Statement No. 5, Accounting for Contingencies, to the contingent element of the guarantee. The ED also identities four disclosure items to be provided by the guarantor. These include: * the nature of the guarantee, including how it arose and the circumstances that require the guarantor to perform under the guarantee, * the maximum potential amount of (undiscounted) payments the guarantor could be required to make under the guarantee, * the current carrying amount of the liability, and * the nature of (1) any recourse provisions that enable the guarantor to recover from third parties any of the amounts paid under the guarantee, and (2) any assets held either as collateral or by third parties that the guarantor can obtain and liquidate to recover all or a portion of the amounts paid under the guarantee. The ED raises issues related to valuation of contingent liabilities, financial statement recognition vs. footnote disclosure, and effects of increased footnote disclosure. This article examines academic research relevant to the issues raised in the ED and presents the views of the AAA Financial Accounting Standards Committee (FASC) (hereafter the Committee) on the ED. The Committee based these views on inferences from existing research findings, an understanding of the Conceptual Framework, and views expressed in previous Committees' communications with the FASB and IASC on guarantees related to transfers of financial assets and contingent liabilities. (4) REVIEW OF RELATED ACADEMIC LITERATURE Capital Markets (Archival) Research Valuation Implications of Contingent Liabilities Capital markets research provides evidence that contingent liabilities are relevant to capital market participants' valuation decisions. …

Evaluating Concepts-Based vs. Rules-Based Approaches to Standard Setting

INTRODUCTION In its new project on Codification and Simplification, the FASB indicates its intent to evaluate the feasibility of issuing concepts-based standards rather than issuing detailed, rule-based standards with exceptions and alternatives.' Related to this project, members of the FASB board and staff asked the Financial Accounting Standards Committee of the American Accounting Association (hereafter, the Committee) to provide comments on concepts-based standards and to recast two standards as concepts-based. (2) This article summarizes comments of the Committee on issues related to concepts-based vs. rules-based standards. Comments in this article reflect the views of the individuals on the Committee and not those of the American Accounting Association. The Committee strongly supports the commitment by the FASB to evaluate the feasibility of concepts-based standards. (3) We believe that the economic substance, not the form, of any given transaction should guide financial reporting and standard setting, and that concepts-based standards represent the best approach for achieving this objective. Rules-based standards provide companies the opportunity to structure transactions to meet the requirements for particular accounting treatments, even if such treatments don't reflect the true economic substance of the transaction. We recognize, however, that the current plethora of detailed rules has been demand-driven, suggesting that companies may request more guidance than that provided by concepts-based standards. Additionally, a change from rules-based to concepts-based standards magnifies the importance of informed professional judgment and expertise for implementation of standards. Overall, however, we believe that concepts-based standards, if applied properly, b etter support the FASB's stated mission of improving the usefulness of financial reporting by focusing on the primary characteristics of relevance and reliability.... RULES-BASED VS. CONCEPTS-BASED STANDARDS An Illustration of Rules-Based and Concepts-Based Standards In order to make our discussion of concepts-based vs. rules-based standards more concrete, we characterize the accounting standard-setting process and its products as a continuum ranging from unequivocally rigid standards on one end to general definitions of economics-based concepts on the other end. An example of the extreme left (rigid) end of the continuum is: Annual depreciation expense for all fixed assets is to be 10 percent of the original cost of the asset until the asset is fully depreciated. Such a rule leaves no room for judgment or disagreement about the amount of depreciation expense to be recognized. Comparability and consistency across firms and through time is virtually assured under such a rule. However, such a standard lacks relevance due its inability to reflect the underlying economics of the reporting entity, which differ across firms and through time. At the opposite (right) end of the continuum is a provision or rule such as the following: Depreciation expense for the reporting period should reflect the decline in the economic value of the asset over the period. (4) Such a standard requires the application of judgment and expertise by both managers and auditors. The goal is to record economic depreciation of the asset, something about which the manager arguably has more information than anyone else. Many might agree that such a rule reflects the underlying purpose of financial reporting, but argue that it is too costly to implement and would likely lead to results that are neither comparable across firms nor consistent through time. Benefits and Costs of Rules-Based vs. Concepts-Based Standards Rules-Based Standards Evidence abounds that detailed standards cannot meet the challenges of a complex and rapidly changing financial world, and that they frequently provide a benchmark for determining compliance in form but not in substance (Finnerty 1988). …

Recommendations on Disclosure of Nonfinancial Performance Measures

Views Icon Views Article contents Figures & tables Video Audio Supplementary Data Peer Review Share Icon Share Twitter LinkedIn Tools Icon Tools Get Permissions Cite Icon Cite Search Site Citation Laureen A. Maines, Eli Bartov, Patricia M. Fairfield, D. Eric Hirst, Teresa E. Iannaconi, Russell Mallett, Catherine M. Schrand, Douglas J. Skinner, Linda Vincent; Recommendations on Disclosure of Nonfinancial Performance Measures. Accounting Horizons 1 December 2002; 16 (4): 353–362. doi: https://doi.org/10.2308/acch.2002.16.4.353 Download citation file: Ris (Zotero) Reference Manager EasyBib Bookends Mendeley Papers EndNote RefWorks BibTex toolbar search Search Dropdown Menu nav search search input Search input auto suggest Search