1. Financial Accounting Standards Board
The Conceptual
Framework Project
Robert H. Herz
FASB Chairman
2005 FARS Luncheon
The views expressed in this presentation are my own and do not represent positions of the Financial Accounting Standards Board. Positions of the FASB are arrived at only after extensive due process procedures and deliberations.

2. Overview of Presentation
Why have a Conceptual Framework?
Why have a joint FASB-IASB conceptual framework project?
What kinds of issues will be addressed?
What are the implications of the project for academics?

3. What is the FASB’s Conceptual Framework?
Concepts Statements
A system of objectives and fundamentals
Provides guidance for:
Selecting the transactions, events, & circumstances to be accounted for
Identifying whether they should be recognized & how they should be measured
Identifying how they should be summarized & reported
1 & 2 6
5 & 7 5

4. Existing FASB (& IASB) Frameworks
Basic structure of both frameworks
-Objectives of financial reporting
-Qualitative characteristics
-Elements of financial statements
-Recognition
-Measurement
-Display and disclosure

5. Why is a Framework Needed?
Without a Framework, standard-setting is based only on the individual concepts held by each member of the standard-setting body.
Agreement on issues would require intersection of personal frameworks
Concepts & resulting standards would be transitory, changing as Board membership changes.
Different conclusions on identical issues, as Board membership changes
Standards would become ad hoc and rule-based
Financial reports would become inconsistent, harder to understand, & generally less useful.

6. Why Do We Need a Common Framework with the IASB?
To guide standard setters to similar conclusions on accounting issues
To promote converged and improved global accounting standards
The IASB & FASB frameworks are similar but also contain important differences, for example:
The FASB framework includes ‘relevance’ as a recognition criterion; the IASB does not
The role of “probable” in recognition (IASB) and definition (FASB)

7. Why Do We Need to Improve the Framework: Issues Involving the Objectives
The purpose & role of financial statements & financial reporting
Decision usefulness vs. accountability & stewardship
Whether information needs differ for:
-Large, publicly traded companies
-Smaller, privately held companies
-Not-for-profit organizations
-Public sector bodies
The interaction between financial reporting and management’s perspective
The impact of new technologies (XBRL)
Calls for expanded business, environmental & social information
Is the purpose of financial reporting to provide information to a wide range of users or to existing common shareholders only?
Is the role of financial reporting to assist in decision-making or to compile past transactions?
What is the role of accountability or stewardship?
What is (or should be) the interaction between financial reporting and management’s perspective?
What is the objective of the balance sheet (or other individual financial statements), in particular, can/should it be used to assess solvency?
Does XBRL make obsolete general purpose financial statements? Should there be different financial reporting packages for different types of users instead of one general purpose package?
Should financial reporting include environmental and social information?

8. Why Do We Need to Improve the Framework?
Examples of improvements needed:
Distinguishing better between liabilities & equity
Resolving the ‘unit of account’ (aggregation, linkage, segregation)
Clarifying ‘control’ in the assets definition
Determining which measurement attribute(s) to use
Defining the reporting entity
Disclosure and display

9. Issues Involving the Qualitative Characteristics
Balancing relevance & reliability of fair value vs. historical cost
-Preparers & auditors emphasize reliability
-Investors emphasize relevance
Misunderstandings or disagreements about the meaning of reliability
Faithful representation of real-world economic phenomena is an essential qualitative characteristic. Verifiability is a key aspect of faithful representation.
Conflict of neutrality and conservatism

10. Issues Involving the Elements Definitions
Control in assets definition
When two parties seem to have some control over the same asset
Obligating event in liabilities definition
When obligations result from a series of events, which event is the obligating event
Probable
In the FASB’s definitions of assets and liabilities
In the IASB’s recognition criteria, where the meaning is different

11. Issues Involving Recognition
Derecognition
Removal of previously recognized item from financial statements
Not discussed in either the IASB’s or the FASB’s conceptual frameworks
Conflicting guidance at the standards level (IAS 39 & FAS 140)
Both standards require other things to occur for financial assets to be derecognized
Standards require different other things to occur before liabilities can be derecognized

12. Issues Involving Measurement
Two aspects of measurement:
Selection of the monetary unit
FASB adopted nominal units of money
IASB did not select between nominal units and units of constant purchasing power
Choice of measurement attribute
Most underdeveloped & most difficult aspect of frameworks

13. Existing FASB & IASB Measurement Attributes
Historical cost
Current cost
Current market value
Net realizable value
Realisable value
Present value
Observation: Neither framework includes fair value

14. Issues Involving the Reporting Entity
FASB attempted to develop reporting entity concept in 1980’s & 1990’s
Proposed “economic unit” concept rather than “parent company” concept
Unable to complete a Concepts Statement
IASB Framework defines a reporting enterprise, but does not choose between those concepts
Gaps & inconsistencies (e.g., SPEs)

15. Issues Involving Display and Disclosure
Little or no guidance on issues like:
Basic objectives of disclosure
Classification in statement of financial position
Level of detail & appropriateness of subtotals in income statement (whether operating earnings, net income, OCI, etc. & what should be included in them)
EPS or other summary indicators

16. Implications for Academics
The revised Conceptual Framework will be:
More complete
Up-to-date
More consistent
Less repetitive
Therefore: A better teaching tool and a better foundation for research

17. Implications for Academics
Certain fundamentals of the existing Conceptual Framework are expected to be confirmed
Standard setting will continue to be based on definitions of elements, not matching
Unlikely that conservatism will be included as a qualitative characteristic
A goal of the project: Curriculum development & teaching should focus on the Conceptual Framework

18. Implications for Academics
But the Conceptual Framework project may well develop new concepts in several areas
Measurement
Defining the reporting entity
Control
Disclosure and display
A goal of the project: Use evidence from academic research when it is available and pertinent