Having gotten down to the building blocks of the federal books, the Federal Accounting Standards Advisory Board has issued a concepts statement exposure draft on the definitions and recognition of the elements of accrual-basis financial statements.The 16-year-old developer of federal accounting standards abides by the four fundamental concepts that are covered in the proposed statement: asset, liability, net position and revenue/expense.

FASAB chairman David Mosso said that most of these elements have never been defined by the board. "We've looked at all the definitions of standard-setters around the world, and have come up with one that we think fits the federal environment very well," he said. "We think it eliminates some problems that the other standard-setters have had with their concepts statements. It's about as sharp as you can get a broad concept."

The ED document is part of a comprehensive conceptual framework that will be under construction for well beyond the foreseeable future. The board is also in the process of reviewing federal Financial Accounting Concepts No. 1: Objectives of Federal Financial Reporting, which was issued in 1993, and Concepts Statement No. 2, on entity and display, issued in 1995. Other issues are still in the research phase. No timetable has been established for the overall project, though Mosso said that a final concepts statement on elements might be issued next year.

Liability has already been defined in an existing FASAB standard, but neither that term nor the others have been formalized in a conceptual statement. The proposed statement would redefine liability.

The concepts in liability will relate directly to a standard on social insurance, such as Social Security, that FASAB is working on. The conceptual definition and the consequent standard could change the effects of any congressional legislation that changed the liability that may or may not be implied by Social Security obligations.

Edward Mazur, a member of the Governmental Accounting Standards Board, found the law and liability issue to be one of the most intriguing in the document.

"Paragraph 44 makes a strong statement that if the government has established its commitment in a law and can otherwise project what its obligations are in a future based on that, the mere fact that that law could change should not interfere with the calculation today of that estimated obligation," Mazur said, speaking for himself, rather than for GASB. "That's a strong statement, because the community of people who are involved in these concepts - not just FASAB and GASB - will have opinions about that. Some may say that the liability should never extend beyond the current year."

Citizens as entities

Related to that issue is the question of whether the FASAB concept should include citizens as entities, which could imply that the federal government could recognize a liability - and a given financial commitment - to the American people.

GASB is also working on a concepts statement on elements, though it does not discuss recognition or measurement. While federal accounting standards are different from those of governments reporting under GASB standards, FASAB and GASB tap each other's concepts and standards.

Mosso said that the definitions of asset and liability are very similar to those of the Financial Accounting Standards Board's Conceptual Framework, but with a few crucial differences. One big difference is FASAB's avoidance of the concept of probability within the definition.

In the draft, three of the board's members express an alternative view on the definitions of asset and liability, calling for the inclusion of a probability concept.

Mosso himself feels that, while FASB defines an asset as having "probable future benefit," the notion of probability could be simply assumed.

"We're saying that you have to be pretty sure that you have an asset or a liability, and that takes some judgment, which is a probability notion," Mosso said. "And then we say that before you can put it on the balance sheet, it has to be measurable, and measurable implies probability."

The dissenting opinions want to go beyond mere implication.

"Board members [Robert] Dacey, [James] Patton and [Danny] Werfel," the alternative viewpoint states, "believe that the concepts statement should explicitly state that: (1) the probability that an item meets the definition and essential characteristics of an element should be assessed as part of determining whether an item meets the definition of an element (existence probability), and (2) there exists a threshold where such probability is so low that an item would not meet the definition of an element and, thus, the item should not be recognized."

The draft presents several questions about issues that reach to the depths of accounting philosophy - the characteristics of assets and liabilities, the validity of deriving the definitions of revenue and expense from those definitions, the effect of changing laws, and the uncertainty related to existence, measurement and recognition criteria.

Comments on the draft are requested by Aug. 5, 2006. Copies of the draft can be downloaded at www.fasab.gov/exposure.htm.

Register or login for access to this item and much more

All Accounting Today content is archived after seven days.

Community members receive:
  • All recent and archived articles
  • Conference offers and updates
  • A full menu of enewsletter options
  • Web seminars, white papers, ebooks

Don't have an account? Register for Free Unlimited Access