Question

The Case The FASB has been working on a conceptual framework for financial accounting and reporting and has issued several statements of financial accounting concepts. 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 guide the selection of transactions, events, and circumstances to be accounted for; their recognition and measurement; and the mean 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 accounting information and the qualities to be sought when accounting choices are made. During the past, several years, the FASB has attempted to strengthen the theoretical foundation for the development of accounting principles. Two of the most important results of this attempt are the Conceptual Framework Project and Emerging Issues Task Force. During this same period the FASB has been criticized for imposing too many standards on the financial reporting process the so-called standards overload problem.

Required:

a)Identify and discuss the benefits that can be expected to be derived from the FASBs conceptual framework study.

b)What is the most important quality for accounting information as identified in SFAC No. 2?

Explain why it is the most important SFAC.

c)Evaluate the goals and objectives of:

i)The Conceptual Framework Project

ii)The Emerging Issues Task Force.

d) Analyse the standards overload problem.

Answer 1

1.The advantages of having a conceptual framework are as follows:
​-It clarifies the conceptual underpinnings of accounting standards and helps the develpoment of accounting standards on a consistent basis.

- It also assists preparers and auditors along with the users of financial statements to understand the approach to standard setting, and the nature and function of financial information reported.

2. The most important qualitative characteristic as mentioned in SFAC2 is relevance and reliability.If either of these qualities is missing, the information shall not be useful. Relevant accounting information is capable of making a difference in the decision making capacity of the users. Timeliness is an important aspect of relevance. If information is not provided when it is needed, it becomes useless.

3.Goals and objectives:

A.The conceptual framework project:

Having a conceptual framework, gives a direction to the standard setting and it is not done in a haphazard manner.It is a coherent system of interrelated objectives which leads to the development of refined standards. Benefits of a conceptual framework include consistent and logical reporting, increased compazrability and economic development of accounting.

b)The emerging issues task force:

The emrging issues task force issues a consensus position on the implementation of accounting standards. Accounting are standards are not exactly rigid in nature. Their application might change in reaction to the changing economy and varying conditions in different countries. The FASB seeks to provided updated guidelines about burning economic issues through the emerging issue task force.

4. To a non technical person, it may seem that everyday in the accounting field there is a new standard to comply with. The problems and issues which arise while conducting business has made it necessary to issue several standards and interpretative guidelines.Businessmen are spending a lot of time to ensure that their financial statements comply with all relevant standard and thus they have begun to feel overloaded. It is a little unfair to blame the FASB in inducing this overload as they are just responding to changing economic conditions.