Question

The Financial Accounting Standards Board (FASB) has been working on a conceptual framework for financial accounting and reporting and has issued seven Statements of Financial Accounting Concepts (SFAC).These SFACs are intended to set forth objectives and fundamentals that will be the basis for developing financial accounting and reporting standards. The objectives identify the goals and purpose of financial reporting. The fundamentals are the underlying concepts of financial accounting-concepts that guide the selection of transactions, events and circumstances to be accounted for; their recognition and measurement; and the means of summarizing and communicating them to interested parties.

       The purpose of SFAC No. 2. “Qualitative Characteristics of Accounting Information,” is to examine the characteristics that make accounting information useful. The characteristics or qualities of information discussed in SFAC No. 2 are the ingredients that make information useful and the qualities to be sought when accounting choices are made.

Required:

a)      Discuss the 4 goals and 4 objectives of the Conceptual Framework Project.

b)      Identify and discuss the 5 benefits that can be expected to be derived from the FASB’s conceptual framework study.

c)      What is the most important quality for accounting information as identified in SFAC No. 2? Explain why it is the most important.

Answer 1

a) These are the four goals of the Conceptual Framework project-:

(i) To build a common premises on the basis of which discussions can be made.

(ii) To explain the subject manner in succinct manner

(iii) Accountants can ask the right questions

(iv) Accounting judgement can be limited to a certain extent

These are the four objectives of Conceptual Framewok project-:
(i) Sound decisions can be made by stakeholders such as investors and creditors

(ii) To project the correct net cash inflows for the businesses

(iii) Potential economic impact on different assets and liabilities of the businesses

(iv) Using of more sound accounting judgement and estimates

b) These are the benefits that can be expected to derived from the Conceptual Framework-:

(i) Complex questions revolving around the accounting can be now be easily solved. Complex questions means critical issues in financial reporting process Since FASB is responsible for setting up of standards.

(ii) Decision making process will improve as a result of conceptual framework. Stakeholders such as investors have more reliable financial information.

(iii) Use of accounting estimates and judgement can be reduces to a certain extent. Personal biases are reduced as a result of reduction in less accounting estimates.

(iv) Credibility of the financial information can be improved by having robust accounting standards.

(v) Understandability of the financial statements is further improved for accountants as well as the management.

c) Reliability is one of the most important accounting information used in the conceptual framework.

Reliability is the most factor because financial information is the only source of information for stakeholders for decision making. The practical and correct application of accounting standards will improve quality of financial reporting. Further it should also be free from material misstatements and present a true and fair view. It should free from biasness that arises from use of accounting estimates and judgement.