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. 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

a. Following are the benefits of FASB conceptual framework to accounting community:

1. Provide a guide to FASB in establishing & maintaining the 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 the understanding of users and their confidence in financial reporting.

b. The most important quality 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.