Recently,[1] the Financial Accounting Standards Board (“FASB” or the “Board”) completed a comprehensive update to its Conceptual Framework for Financial Reporting (“Conceptual Framework”).[2] Now that it has finalized this significant project, it is important that the Board actively consider the objectives and fundamentals in the updated Conceptual Framework throughout all of its standard-setting activities, to guide the Board in developing improved accounting principles to enhance the accuracy and effectiveness of financial reporting and the protection of investors in the public interest.[3]
The Conceptual Framework is a body of interrelated objectives and fundamental concepts that provides guidance on the nature, function, elements, measurement approaches, and disclosure objectives of financial accounting and reporting.[4] The FASB issued its first financial reporting concepts statement in 1978 and subsequently issued a total of seven concept statements through 2000. In 2014, in response to stakeholder feedback, the FASB decided to more comprehensively revisit its Conceptual Framework to provide a sound foundation for developing future accounting standards. The issuance of Chapter 6, Measurement, of Concepts Statement No. 8 on July 12, 2024, represents the culmination of that project by Board members and FASB staff.
Now that the updates to the Conceptual Framework are complete, it is important that the Board use it to guide its agenda-setting process and standard-setting deliberations, including to assist Board members in asking the right questions and objectively evaluating whether their views are consistent with the principles laid out in the Conceptual Framework.
In 1938, the Commission issued ASR No. 4, warning that “financial statements . . . prepared in accordance with accounting principles for which there is no substantial authoritative support . . . will be presumed to be misleading or inaccurate despite disclosures . . . provided the matters involved are material.”[5] To interpret that message for today’s environment: accounting is important, and disclosure is not a substitute for getting the accounting right on difficult or complex issues. The Conceptual Framework includes foundational concepts, including concepts on recognition and measurement of financial statement elements (e.g., assets, liabilities, equity, revenue, expense) and disclosures that are consistent with the words the Commission used in 1938 in ASR No. 4. Accordingly, a focus on application of the Conceptual Framework should improve the FASB’s ability to set accounting and financial reporting standards that result in better financial information for the benefit of investors—that is, information that is relevant and that faithfully represents the economics of an issuer’s commercial arrangements.
As the FASB embarks on its agenda consultation process later this year and considers its standard-setting agenda, application of the Conceptual Framework will be a critically important component of the Board’s process. For example, the Conceptual Framework can assist the Board both in prioritizing potential projects to revise and improve accounting requirements and in determining:
- Whether a potential project is consistent with the objectives of general purpose financial reporting;
- How to scope a potential project, including whether a potential project should focus on disclosures-only or rather should address recognition and measurement of financial statement elements, in light of the Board’s stated concept that “disclosure of an amount . . . is not a substitution for recognition”;[6] and
- Whether the resulting financial reporting is expected to have the qualitative characteristics of useful financial information for users.
Stakeholders may also benefit. Because the Conceptual Framework provides a common set of principles on which to base standard setting, public FASB deliberations on the application of the Conceptual Framework to each of the Board’s standard-setting projects may help stakeholders better understand the basis of the Board’s decisions. For example, using the Conceptual Framework as a starting point, the Board may be better able to articulate in the basis for conclusions of Accounting Standards Updates (“ASU”) whether and how amendments included in an ASU are consistent with the Conceptual Framework. Additionally, to the extent the Board deviates from the principles laid out in the Conceptual Framework, a discussion of the rationale for any such deviations may help stakeholders to better understand both the standard in question and its application. Likewise, stakeholder feedback to the Board on active projects may be more informative to the Board’s deliberations when it is grounded in the principles of the Conceptual Framework.
The strength of our capital markets relies upon a commitment by all stakeholders, including standard setters, to quality in every aspect of financial reporting, to be able to provide investors with timely and accurate information. With the Conceptual Framework complete, the FASB’s focus on the guiding principles described in the Conceptual Framework can help it continue to develop high-quality accounting standards coupled with robust disclosures to best serve the needs of investors and protect the public interest.
[1] This statement is provided in the author’s official capacity as the Commission’s Chief Accountant but does not necessarily reflect the views of the Commission, the Commissioners, or other members of the staff. It is not a rule, regulation, or statement of the Commission. The Commission has neither approved nor disapproved its content. This statement, like all staff statements, has no legal force or effect. It does not alter or amend applicable law, and it creates no new or additional obligations for any person.
[2] See FASB, FASB Issues New and Final Chapter of Its Conceptual Framework: Measurement (dated July 12, 2024).
[3] See FASB, Non-Authoritative Concepts Statements.
[4] See FASB, The Conceptual Framework.
[5] See U.S. Securities and Exchange Commission, Accounting Series Release (“ASR”) No. 4 (April 25, 1938).
[6] See FASB, Concepts Statement No. 8—Conceptual Framework for Financial Reporting—Chapter 5, Recognition and Derecognition, at RD3 (stating that, “Because recognition means the depiction of an item in both words and numbers, with the amount included in the totals of financial statements, disclosure of an amount by any other means is not a substitution for recognition.”).
