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 ae 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

Answer:
(a) FASB’s Conceptual Framework should provide benefits to the accounting community such as:
(1) guiding the FASB in establishing accounting standards on a consistent basis.
(2) determining bounds for judgment in preparing financial statements by prescribing the nature, functions and limits of financial accounting and reporting.
(3) increasing users’ understanding of and confidence in financial reporting.

(b) The most important quality for accounting information is usefulness for decision making. Relevance and faithful representation are the primary qualities leading to this decision usefulness. Usefulness is the most important quality because, without usefulness, there would be no benefits from information to set against its costs.

(c) There are a number of key characteristics or qualities that make accounting information desirable. The importance of three of these characteristics or qualities is discussed below.

(1) Understandability—information provided by financial reporting should be comprehensible to those who have a reasonable understanding of business and economic activities and are willing to study the information with reasonable diligence. Financial information is a tool and, like most tools, cannot be of much direct help to those who are unable or unwilling to use it, or who misuse it.

(2) Relevance—the accounting information is capable of making a difference in a decision by helping users to form predictions about the outcomes of past, present, and future events or to confirm or correct expectations (including is material).

(3) Faithful representation—the faithful representation of a measure rests on whether the numbers and descriptions matched what really existed or happened, including completeness, neutrality, and free from error.