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From the historical perspective, the construction of a financial accounting conceptual framework is to improve the quality of accounting standards system. As the accounting profession entered the 1970s, the standard setters have found it difficult to resolve particular accounting issues, "So they have sought to construct a conceptual framework which could be used to underpin accounting standards and to provide guidance to practitioners in areas where no accounting standard exists."(Richard Lewis David Pendrill, p6)The FASB CF
The earliest research about the CF was created in the USA. In 1973, the Financial Accounting Standards Board (FASB) replaced the much-criticized Accounting Principles Board (APB) and made a comprehensive summary of the previous accounting standard-setting bodies' experiences and deficiencies. The CF is supposed to embody "a coherent system of interrelated objectives and fundamentals that can lead to consistent standards and that prescribes the nature, function, and limits of financial accounting and financial statements." (FASB 1976b, p.2) During the late 1970s and the early 1980s the FASB "began a series of Statements of Financial Accounting Concepts (SFAC) which were intended to be the building blocks of the Board's conceptual framework." (Stephen A. Zeef Thomas F. Keller, p77-79) Includes: No.1 Objectives of Financial Reporting by Business Enterprises (November 1978), No.2 Qualitative Characteristics of Accounting Information (May 1980), No.6 (Replaced SFAC No.3) Elements of Financial Statements (December 1985), No.5 Recognition and Measurement in Financial Statements of Business Enterprises (December 1984) and No.7 Using Cash Flow Information and Present Value in Accounting Measurement (February 2000). So FASB is an important driving force of the emergence of CF in a series of inevitable and accidental factors. Compare with the government agencies, FASB is still a part of the accounting profession. Thus, the U.S. accounting profession plays an important role in promoting CF. Though it's not a perfect document, it is capable of being improved and plays an important role in more consistency and comparability standards setting.The IASC framework
The IASC, with members drawn from some 100 countries, published its Framework for the Preparation and Presentation of Financial Statements in July 1989. Compared with the FASB's SFAC, there are two addition sections on 'Underlying Assumptions' and 'Concepts of Capital and Capital Maintenance'. However, this framework is not the useful one, since there's no guidance on which should be selected for any given element recognized.The ASB Statement of Principles
The ASB has been committed to the development of Statement of Principles for Financial Reporting since its formation in 1990 and issued Financial Reporting Standards (FRSs) based upon the Statement of Principles in June 1993. "The objective of this Statement of Principles is to provide a framework for the consistent and logical formulation of individual accounting standards. The framework also provides a basis on which others can exercise judgment in resolving accounting issues."(Richard Lewis David Pendrill, p12) The ASB also issued fifteen FRSs in absence of such an agreed Statement of Principles.Other countries' CF
In Australia and New Zealand the CF has also been developed following the FASB CF closely. Obviously, there will be many advantages after setting a CF. It was said that "While the quest for a conceptual framework or general theory is important in identifying questions that need to be answered, it would be idle to hope that such a framework could be developed that would give explicit guidance on practical problems." (Richard Macve, 1981.) We can conclude that the emergence of CF is an institutional changing process and there exit imposed constrains by law when preparing accounting standards.
The relationship between the current IASB/FASB approach and concepts of valuation and economic income
The FASB and IASB's joint project is primary to converging the two Boards' existing frameworks into a common framework that they can use in developing new and revised accounting standards. Their frameworks focus on 'enterprise resources, claims to those resources, and changes in them' (p.3) and the definitions of the elements of Financial Statement are consistent with an "asset and liability view," in which income is a measure of the increase in the net resources of the enterprise during a period, defined primarily in terms of increases in assets and decreases in liabilities. So the assets becomes the 'conceptual primacy' that all other elements can be derived from it. To promote consistency within accounts, avoid 'mismatch' problems and improve comparability across entities, the joint project attempted to identify the single measurement basis which conforms to the CF's criteria such as relevance and reliability. The bases are 'pure' bases of measurement such as historical cost, replacement cost, value in use or fair value.
The most important aspects related to valuation and economic income are fair value and Hicks 'income' which are discussed in the following paragraphs.Fair Value
It was said that "FV is the most relevant measurement basis for financial instruments and measuring all financial instruments at fair value is on of its long-term goals." (FASB 1999) Nowadays, the FV measurements had been regarded as a tough issue in world-wide financial reporting. In September 2006, FASB issued SFAS No. 157 Fair Value Measurements in which redefines FV as 'the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date' and establishes a new measurement framework. IASB also published its two key standards on FV: IAS 32 and IAS 39 which are similar to SFAS No.107, No.109 and SFAS No.115 and No.133. Also IFRS 2 is very similar to SFAS No.123 (2004).
The measurement method is based on the market which is complete and in perfectly competitive equilibrium, so it will be the most relevant and reliable. However, the market is actually imperfect and incomplete, it exits asymmetry between seller and buyer conceptions of current or fair valuation and the ideal information will not be available. In addition, the Deprival Value which is a measurement of current or fair value "might also be subject to deliberate overstatement or understatement if managers desired to manipulate their holding gains and losses on asset dispositions." (Nair and Weygandt (1981, p. 100)) What's more, after the crisis, markets for many financial instruments have become very illiquid even non-existent, leading the FASB and the IASB to relax their FV reporting requirements. As Mary Barth indicates, the two Boards' recent deliberations have considered a new approach which might allow mixed measurements.Hicks's income
The FASB/IASB joint project on the conceptual framework grounds its approach on the famous Hicks's definition of income. At a joint FASB/IASB meeting in October 2007, it was tentatively decided a working definition for the new joint framework that "an asset of an entity is a present economic resource to which, through an enforceable right or other means, the entity has access or can limit the access of others" (IASB October, 2007, p.5). At this point, the framework purports to be grounded in a theory prevalent in economics which Hicks was cited "that an entity's income can be objectively determined from the change in its wealth plus what it consumed during a period".
However, the Hicks's concepts as the underpinning do not support the particular structure that the Boards wish to construct. Since the real world markets are neither complete nor perfect, and some argue that 'bygones are bygones' so there can have no relevance to present decision. The relevant Hicks observation (Hicks No.1 ex post) was taken out of context.
Reporting comprehensive income
In FASB Concepts Statement No.3, the board defined comprehensive income as the net effect of all recognizable events and transactions that change owners' equity during a period other than transactions with the owners. In SFAS No. 130, there are three methods of reporting comprehensive income: (1) in a combined statement of financial performance, (2) in a separate statement of comprehensive income, which would begin with net income, and (3) reported within a statement of changes in equity. (Harry I. Wolk, James L. Dood, John J. Rozycki, p393) FASB encourages reporting entities to use the first format above.The most appropriate manner
The IASB worked on the project of reporting comprehensive income on its own from 2001 to 2004. The FASB was also working on a similar project. In April 2004 the boards agreed that a project on this topic should be conducted jointly on the purpose of convergence and had a 'fresh start' later. When discussed at the April 2005 Joint IASB-FASB Meeting, it gave three alternatives for presenting information with regard to the Statement of Earnings and Comprehensive income. Then a vote was taken after the debate and the result is the modified single statement approach which is "a single statement with a total for non-owners' changes in financial position and a required subtotal called net income or profit or loss. " (Ganesh M. Pandit and Jeffrey J. Phillips)
I agreed with the staff's opinion that the modified single statement approach provides the best layout of information for users and is a positive step to improved financial reporting. As stated, the Boards' objective to develop a single standard is to apply broadly to all entities. "They should first develop a standard that can apply to entities other than financial institutions, and then consider the application of such a standard to financial institutions." (IASB Agenda Project) The IASB's performance reporting is to abandon the compromise which does not want to abandon the revenue realization rule, but also to reflect changes in value, to comprehensively and transparently reflect the business' economic activities and to eliminate the opportunities of manipulating the income reporting by means of amortization and etc.Problems
However, as the core of the project, the comprehensive income's ideal content is facing many difficulties: First, to achieve a single statement for reporting comprehensive income requirements, there will have a need of significant changes for accounting practice. It's not easy to accomplish the evolution of the present basic principles and even the basic concepts of accounting very soon. Second, the ideal content of comprehensive income is to discard the principle of income realization and expense matching. So the corresponding historical cost principle will collapse as well. Not to mention that these principles have long been accept, it can not be easy to make classification of the income statement which can express as the specific impact factors of changes of what happened on the assets, liabilities and the FV between the different date of statement. For example, "according to the 'G4 +1', the report of comprehensive income includes results of operations, finance and other financial activities and the results of other losses and profits." (Discussion about Comprehensive Income) So when a series of the realization principles are abandoned, if the concept of realization would continue to survival? Third, the usefulness of the information provided in the statement of Comprehensive Income must exceed the Statement of profit and loss in order to get the support of the users and be able to exist. Furthermore, there are still more problems should be resolved before implement of the single statement of comprehensive income, for example, whether to re-define the element of the current financial statements and whether the "revenue and expenses view" should continue to exist, etc.
As discussed above, the CF and its relevant aspects are now being as a ground of debating issues. The IASB/FASB joint project did provide some better choices and solutions, but due to the dynamic economic environment and incomplete imperfect market, it is still difficult to achieve convergence. Among the different approaches and opinions, more improvements should be made based on the concepts and conventions to provide more useful information to a wide range of users in the long run.
- Discussion about Comprehensive Income, viewed 7th December, 2009, <http://www.docin.com/p-13418949.html#documentinfo>
- Financial Accounting Standards Board (1976b), FASB Discussion Memorandum, Conceptual Framework, Scope and Implications of the Conceptual Framework Project, p.2
- Financial Accounting Standards Board (1979), Statement of Financial Accounting Standards No. 89, Financial Reporting and Changing Prices, FA
- Financial Accounting Standards Board (FASB). 1999. Preliminary Views on Major Issues Related to Reporting Financial Instruments and Certain Related Assets and Liabilities at Fair Value. Norwalk, CT: FASB.
- Ganesh M. Pandit and Jeffrey J. Phillips, Comprehensive Income: Reporting Preferences of Public Companies, viewed5thDecember,2009, <http://www.nysscpa.org/cpajournal/2004/1104/essentials/p40.htm>
- Harry I. Wolk, James L. Dood, John J. Rozycki, Accounting Theory, Conceptual Issues in a Political and Economic Environment, p393
- IASB Agenda Project, Reporting Comprehensive Income (Performance Reporting), viewed5thDecember,2009, <http://www.iasplus.com/agenda/perform.htm>
- Nair, R.D., and Jerry J.Weygandt (November 1981). "Let's Fix Differed Taxes," Journal of Accountancy, pp.87-102
- Richard Lewis David Pendrill, Advanced Financial Accounting (sixth edition), p6, p12
- Richard Macve, A Conceptual Framework for Financial Reporting:The Possibilities of an Agreed Structure, ICAEW, London, 1981
- Stephen A. Zeef Thomas F. Keller, Financial Accounting Theory, p77-79
- Zeff, S. A., Forging Accounting Principles in Five Countries. Journal of Accountancy (December 1978), pp. 57-59