Question

What should the FASB-conceptual-framework look into next?

Answer 1

Solution:- The IASB and FASB conceptual frameworks have the following in common:

1) A purpose of the conceptual framework is to assist standard setters in developing and revising accounting standards.

2) The conceptual framework does not override accounting standards, and therefore in this respect it has a lower status than specific accounting standards.

There are also following differences:-

1) The IASB framework has a broader purpose than the FASB framework. The purpose of assisting the IASB in developing or revising accounting standards is one, but not the only, purpose of the framework. The IASB framework also has other purposes, including assisting preparers, auditors, and users of financial statements. The FASB conceptual framework places less emphasis on other purposes.

2) This difference in purpose also is reflected in the difference in status of the frameworks. The IASB framework resides at a higher level in its GAAP hierarchy than does the FASB framework in the U.S. GAAP hierarchy. For entities preparing financial statements under IFRS, management is expressly required to consider the IASB framework if there is no standard or interpretation that is specifically applicable or that deals with a similar and related issue. Under U.S. GAAP, the FASB Concepts Statements are ranked no higher than accounting textbooks, handbooks, and articles, and below widely recognized and prevalent general or industry practices.

Recent changes in U.S. law and regulation have removed responsibility for establishing the U.S. GAAP hierarchy from the AICPA but have not yet reassigned that responsibility. Once responsibility is clarified, the FASB or another party will be able to revise the hierarchy, possibly including the status of its framework.

Scope:- There are three main issues related to the scope of the frameworks:

1) Sectors:- The IASB framework applies to all business entities, whether in the private or public sector.1 The FASB framework applies to both business and not-for-profit entities in the private sector. The extent to which accounting standards apply to the various sectors differs from country to country. For example, in Australia and New Zealand, one set of accounting standards applies to all sectors. In the United Kingdom, the ASB sets accounting standards that apply to the private sector (both business and nonbusiness sectors) and some parts of the public sector (for example, local government) and that are used as the basis for accounting requirements for the rest of the public sector. In contrast, in the United States, the Governmental Accounting Standards Board and Federal Accounting Standards Advisory Board set standards for public sector entities. Those two Boards are separate from the FASB and from each other, and the three sets of standards are quite different. As noted earlier, the IASB and FASB have tentatively agreed that the project will initially focus on concepts applicable to business entities in the private sector. Later, the Boards will consider the applicability of those concepts to other sectors, beginning with not-for-profit entities in the private sector.

2) Entities:- The IASB and FASB frameworks do not establish a robust concept of the reporting entity, that is, the concept of what makes a legal or economic entity a “reporting entity” to which the framework applies. Such a concept would also define the boundaries of the reporting entity for financial reporting purposes. For example, consolidated financial statements are prepared on the basis that the parent entity and other entities under its control collectively represent a reporting entity.

3) Financial Reporting Boundaries:-Both the IASB and FASB frameworks apply to general-purpose financial statements/reports. Hence, both frameworks do not apply to special-purpose financial statements/reports, for example, those prepared for tax purposes. The IASB framework applies to general-purpose financial statements. That is, the primary financial statements (income statement, balance sheet, etc.) and the accompanying notes, but not additional financial or nonfinancial information, such as directors’ reports, management discussion and analysis, etc. The FASB framework applies to general-purpose external financial reporting. This includes not only the financial statements, but also other financial and nonfinancial information. Examples include other financial and nonfinancial information contained in company annual reports, company prospectuses, and service performance information in the annual reports of nonbusiness entities.