In a significant step toward more solid and relevant accounting standards around the world, the International Accounting Standards Board and the Financial Accounting Standards Board have rolled out two joint discussion documents that may indicate where the boards are going in their project to improve and converge their conceptual frameworks.One document, The Objective of Financial Reporting and Qualitative Characteristics and Constraints of Decision-Useful Financial Reporting Information, is a proposal for the first two chapters of the framework. The other is a preliminary views document that suggests directions the board might take on defining the reporting entity.

FASB project manager Jeffrey Johnson said that a cohesive framework is essential to setting comprehensive accounting standards. “Standards set across a double body of standard-setting aren’t going to have integrity unless we have a cohesive framework that we can base them on,” he said, “So we think the first two chapters of the framework — particularly the objectives — set the tone [for the entire framework].”

Johnson said that the two boards approved the proposal unanimously, though Tony Cope, a former member of both boards and now on the corporate disclosure policy council of the CFA Institute Centre, said that within the nuances of the documents are some subtle tugs toward the American and European ways of doing business.

The first chapter of the proposal establishes that an entity’s reporting should be prepared from the entity’s perspective, rather than that of the owners. It declared that the primary user group for general-purpose financial reporting is the present and potential capital providers, though the objective of financial reporting should be “broad enough to encompass all the decisions that equity investors, lenders and other creditors make in their capacity as capital providers, including resource allocation decisions, as well as decisions made to protect and enhance their investments.”

The proposal has elevated the role that stewardship plays in financial reporting, referring to it numerous times in the discussion of the objectives of financial reporting. The change nudges the framework a bit toward the European sense of that responsibility that corporate governors have to stockholders.

“There’s a certain element surrounding these corporate governance issues and how they relate to accounting that has become a little controversial,” Cope said.

In a paragraph titled “Usefulness of Financial Reporting in Assessing Stewardship,” the ED stated that, “Management is accountable to the entity’s capital providers for the custody and safekeeping of the entity’s economic resources and for their efficient and profitable use.”

The second chapter of the proposal describes the qualitative characteristics that make financial information useful.

It distinguishes two groups of complementary concepts: the fundamental concepts of relevance and faithful representation, and the enhancing concepts of comparability, verifiability, timeliness and understandability. The characteristics also include two pervasive constraints: materiality and cost.

In a change from a preliminary views document that was issued in July of 2006, the boards decided that verifiability should be a distinct characteristic, rather than an element of faithful representation. Reacting to comments received from constituents, they agreed that information could be faithfully represented without being verified.


The second document that FASB and the IASB issued is a preliminary views document on the nature of the reporting entity. One big question it broaches is whether “reporting entity” should be defined precisely. Another is whether a reporting entity needs to be, by definition, a legal entity.

The boards’ preliminary views lean a bit toward Europe’s tendency to use principles, rather than the prescriptive rules preferred by the Securities and Exchange Commission. They tentatively suggested a broad description of the reporting entity, rather than a precise definition, and that description would not be restricted to business activities that are legal entities.

The questions become especially difficult when they relate to groups of entities and the boundaries and relationships between them. Control seems to be the underlying issue, and the boards have considered three models of control: controlling entity, common control, and risk and rewards. The boards are leaning toward using the controlling entity as the primary basis for determining the composition of a group of entities. They also tend to believe that consolidated financial statements should be presented from the perspective of the group reporting entity, not that of the parent company’s shareholders.

Cope believes that any controversies over the documents will be over nuances, though later in the project, discussions over measurement and fair value versus historic cost promise to become more heated.

Predicted Cope, “The battles will come when we get further into the potential framework and start dealing with the more contentious issues, particularly where there are gaps in the frameworks.”

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