Case Study XXXXXXXXXXwords) Revisiting the conceptual framework The FASB and IASB began a joint agenda project to revisit their conceptual frameworks for financial accounting and reporting in 2002....

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Case Study 1 (1000 words)

Revisiting the conceptual framework

The FASB and IASB began a joint agenda project to revisit their conceptual frameworks for financial accounting

and reporting in 2002. Each board bases its accounting standards decisions in large part on the foundation of

objectives, characteristics, definitions, and criteria set forth in their existing conceptual frameworks. The goals of

the new project are to build on the two boards' existing frameworks by refining, updating, completing, and

converging them into a common framework that both Boards can use in developing new and revised accounting

standards. A common goal of the FASB and IASB, shared by their constituents, is for their standards to be

'principles-based'. To be
principles-based, standards cannot be a collection of conventions but rather must be

rooted in fundamental concepts. For standards on various issues to result in coherent financial accounting and

reporting, the fundamental concepts need to constitute a framework that is sound, comprehensive, and

internally consistent.

Without the guidance provided by an agreed-upon framework, standard setting ends up being based on the

individual concepts developed by each member of the
body. Standard setting that is based on

the personal conceptual frameworks of individual standard setters can produce agreement on specific standardsetting

issues onf y when enough of those personal frameworks happen to intersect on that issue. However,

even those agreements may prove transitory because, as the membership of the standard-setting body changes

over time, the mix of personal conceptual frameworks changes as well. As a result, that standard-setting body

may reach significantly different conclusions about similar (or even identical) issues than it did previously, with

standards not being consistent with one another and past decisions not being indicative of future ones. That

concern is not merely hypothetical: substantial difficulties in reaching agreement in its first standards projects

was a major reason that the original FASB members decided to devote substantial effort to develop a conceptual


The IASB Framework is intended to assist not only standard setters but also preparers of financial statements (in

applying international financial reporting standards and in dealing with topics on which standards have not yet

been developed), auditors (in forming opinions about financial statements), and users (in interpreting information

contained in financial statements). Those purposes also are better served by concepts that are sound,

comprehensive, and internally consistent. (In contrast, the FASB Concepts Statements state that they do not

justify changing generally accepted accounting and reporting practices or interpreting existing standards based

on personal interpretations of the concepts, one of a number of differences between the two frameworks.)

Another common goal of the FASB and IASB is to converge their standards. The Boards have been pursuing a

number of projects that are aimed at achieving short-term convergence on specific issues, as well as several

major projects that are being conducted jointly or in tandem. Moreover, the Boards have aligned their agendas

more closely to achieve convergence in future standards. The Boards will encounter difficulties converging their

standards if they base their decisions on different frameworks.

The FASB's current Concepts Statements and the IASB's Framework, developed mainly during the 1970s and

1980s, articulate concepts that go a long way toward being an adequate foundation for principles-based

standards. Some constituents accept those concepts, but others do not. Although the current concepts

have been helpful, the IASB and FASS will not be able to
fully their goal of issuing a common set of

principles-based standards if those standards are based on the current FASS Concepts Statements and IASB

Framework. That is because those documents are in need of refinement, updating, completion, and


The planned approach in the joint project will identify troublesome issues that seem to reappear time and time

again in a variety of standard-setting projects and often in a variety of guises. That is, the focus will be on issues

that cut across a number of different projects. Because it is not possible to address those cross-cutting issues

comprehensively in the context of any one standards-level project, the conceptual framework project provides a

better way to consider their broader implications, thereby assisting the boards in developing standards-level



As noted in the chapter, the boards have issued and received comments on an exposure draft relating to Phase

A Objectives and Qualitative Characteristics. A discussion paper relating to Phase D Reporting Entity had been

issued and work is continuing on Phase B Elements and Recognition and Phase C Measurement.

Source: Excerpts from Halsey G. Bullen and Kimberley Crook, 'Revisiting the concepts: A new conceptual

framework project', M<1y 200'),="" fasb="" and="" 11sb,="""" or="">


1. Explain why principles-based standards require a conceptual framework.

2. Why is it important that the IASB and FASB share a common conceptual framework?

3. It is suggested that several parties can benefit from a conceptual framework. Do you consider that a

conceptual framework is more important for some parties than others? Explain your reasoning.

4. What is meant by a 'cross-cutting' issue? Suggest some possible examples of cross•cutting issues.

Case Study 2 (1000 words)

The trend toward fair value accounting

by J Russell Madray, CPA

The Debate

Critics contend that GAAP is seriously flawed. Some in the accounting profession go so far as to pronounce

financial statements almost completely irrelevant to the financial analyst community. The fact that the market

value of publicly traded firms on the New York Stock Exchange is an average of five times their asset values

serves to highlight this deficiency. Many reformers, including FASB chairman Robert Herz, believe that fair value

accounting must be part of the answer to making financial statements more relevant and useful.* Advocates of

fair value accounting say it would give users of financial statements a far clearer picture of the economic state of

a company.

But switching from historical cost to fair value requires enormous effort. Valuing assets in the absence of active

markets can be very subjective, making financial statements less reliable. In fact, disputes can arise over the

very definition of certain assets and liabilities.

The crux of the fair value debate is this: Each side agrees that relevance and reliability are
but fair

value advocates emphasize relevance, while historical cost advocates place greater weight on reliability.

Relevance versus Reliability

The pertinent conceptual guidance for making trade-offs between relevance and reliability is provided by FASB

Concepts Statement No. 2, Qualitative Characteristics of Accounting Information. It provides guidance for

making standard-setting decisions aimed at producing information useful to investors and creditors. Concepts

Statement No. 2 states:

The qualities that distinguish "better" (more useful) information from "inferior" (less useful) information are

primarily the qualities of relevance and reliability ... The objective of accounting policy decisions is to produce

accounting information that is relevant to the purposes to be served and is reliable.

Critics of fair value generally believe that reliability should be the dominant characteristic of financial statement

measures. But the FASB has required greater use of fair value measurements in financial statements because

it perceives that information as more relevant to investors and creditors than historical cost information. In that

regard, the FASB has not accepted the view that reliability should outweigh relevance for financial statement



Some critics also interpret reliability as having a meaning that differs in at least certain respects from how that

term is defined in the FASB's Conceptual Framework. Some critics equate reliability with precision, and others

view it principally in terms of verifiability. However, Concepts Statement No. 2 defines reliability as "the quality of

information that assures that information is reasonably free from error or bias and faithfully represents what it

purports to represent." With respect to measures, it states that "[t]he reliability of a measure rests on the

faithfulness with which it represents what it purports to represent, coupled with an assurance for the user, which

comes through verification, that it has that representational quality." Thus, the principal components of reliability

are representational faithfulness and verifiability.

Although there are reliability concerns associated with fair value measures, particularly when such measures

may not be able to be observed in active markets and greater reliance must be placed on estimates of those

measures, present-day financial statements are replete with estimates that are viewed as being sufficiently

reliable. Indeed, present day measures of many assets and liabilities (and changes in them) are based on

estimates, for example, the collectability of receivables, salability of inventories, useful lives of equipment,

amounts and timing of future cash
or likelihood of loss in tort or environmental litigation.

Even though the precision of calculated measures such as those in depreciation accounting is not open to

since they can be calculated down to the penny, the reliability of those measures
is open to question.

Precision, therefore, is not a component of reliability under Concepts Statement No. 2. In fact, Concepts

Statement No. 2 expressly states that reliability does not imply certainty or precision, and adds that any

pretension to those qualities
if they do not exist
is a negation of reliability.

* Robert H. Herz's remarks to the Financial Executives International Current Financial Reporting Issues

Conference, New York Hilton Hotel, November 4, 2002.

Source: Excerpts from ‘The trend toward fair value accounting', Journal of Financial Service Professionals, May

2001, pp. 16-113.


1. What you think is the fundamental problem with financial statements based upon the historic cost

measurement principle used under US

2. What do you think of the principle' ...
accounts must
reflect economic reality' as a core principle of

measurement in accounting?

3. How would you measure economic reality?

4. What is reliability in accounting?

Case Study 3 (1000 words)

Disclosure of environmental liability

by Lindene Patton C.l.H., Senior vice-president and counsel, Zurich


Around the world, companies are being required to meet higher levels of disclosure of environmental liability ... In

the United States, for example, the US Financial Accounting Standard Board (FASB) issued provisions in 2002

for accounting for environmental liabilities on assets being retired from service. The provision for accounting for

asset retirement obligations required companies to reserve environmental liabilities related to the eventual

retirement of an asset if its fair market value could be reasonably estimated.

The intent of the ruling was disclosure, but the conditional nature of estimating a fair market value caused

corporations to take the position that they could defer their liability indefinitely by 'mothballing' a contaminated

property. Companies effectively postponed the recognition of their environmental liabilities in the absence of

pending or anticipated litigation.

Earlier this year, FASB clarified its intention by providing an interpretation that said companies have a legal

to reserve for environmental and other liabilities associated with the eventual retirement of

manufacturing facilities or parts of facilities, even when the timing or method of settlement is uncertain. Among

by FASB:

• An asbestos-contaminated factory cannot simply be 'mothballed' without adequate reserves to cover

the eventual cost of removing the asbestos

• Reserves must be established today for the eventual disposal of still-in-use, creosote• soaked utility


As a result of what may seem like a minor technical re-interpretation, companies may have to

immediately millions of dollars in liabilities in their income
to comply with this change.

In Europe, regulators have also initiated efforts to promote disclosure. In 2001, the European Commission

promulgated tougher, non-binding guidance for disclosing environmental costs and liabilities, and various

countries in Europe have issued additional requirements related to environmental disclosure. In 2002, the

Canadian Institute of Chartered Accountants published voluntary guidance that stressed the importance of

disclosing all material risks, including environmental liabilities, in companies' annual reports.

Some financial institutions have also pledged to adhere to tenets of international initiatives such as the Equator

Principles, which factor environmental and social considerations into assessing the risk of a project. Also, a

group of pension funds, foundations, European investors and US state treasurers have endorsed UN efforts

to promote a minimum level of disclosure on environmental, social and governance issues.

Recognition of environmental liabilities may also soon emerge as an issue for companies in Asia. While

environmental issues may have taken a back seat to rapid economic development over the past 20 years, that

may change as legislation and regulation catch up with development.

The responsibility for disclosing future environmental liability is clearly a growing issue for companies around the

world. However, accurately estimating cleanup costs is not an easy task due to unknown contaminants, legacy

liabilities related to formerly operated property, regulatory changes or unexpected claims related to natural

resource damage.


1. The article states that the US standard setter FASB requires companies to record a provision in

relation to environmental costs of retiring an asset ('to reserve environmental liabilities') if its fair value

could be reasonably estimated. How do you think companies would go about estimating such a



2. What aspects of the requirements were used by U

Answered Same DayDec 10, 2019ACC307

Answer To: Case Study XXXXXXXXXXwords) Revisiting the conceptual framework The FASB and IASB began a joint...

David answered on Dec 24 2019
118 Votes
Part 1
Answer 1.
Principles – based standard require a conceptual framework due to the following reasons:
· It should be deeply analysis of the concept of the accounting standard; it should not only a collection of conventions. So this is done by the conceptual framework
· FASB and IASB are helped by the conceptual framework to get the logical and clear accounting system.
· Conceptual framework makes sure for the entity for their consistency among the different accounting standard, for instance IAS, IFRSs and ISA and there should be consistency between the ea
rlier, current and future decision making. So that different accounting boards come to similar results on same events.
· These standard should be based on the different concepts of the standard boards and this will not base on individual views, so that this could help on the basis of the same conceptual framework
· Representation of financial reporting, financial statement preparation, and the interpretation of the financial information would be consistent among all standard boards with the help of the conceptual framework.
· Conceptual framework would be applicable to all of the standard board and would become the rule for the standard boards among all of different boards.
· It would be help to different parties of the financial system, to make decision on the basis of the given information.
· Creative accounting would be minimized and fair accounting would be higher in the financial and accounting industry.
Due to all of these reasons principle based standard required in the financial system and every one must be follows that standard. So that it would be act like as rule for the everyone in the financial system
Answer 2.
Importance of the common conceptual framework for IASB and FASB:
There is highly important for the IASB and FASB should have on same page in the terms of the common conceptual framework, because without guidance and support of the both boards they will not agree on the framework, so that standard setting would be based on the single view point which developed by the members of the standard boards. There would be conflict of interest as per the requirement of the standard boards and it will resultant into the issues in the different boards on the same events. Investors or firms will use the loopholes of the policy between these two boards. The main objective of the conceptual framework is to provide correct financial statement about the reporting entity. And it should be useful for the potential investors, lenders or other creditors, who took their decision on the basis of the information provided by the reporting entity. If there are different conceptual frameworks, the result of the analysis would be different from the different framework and it will be resultant to the loss of the investors, creditors or lenders. There would be also conflict of the interest arose from different conceptual framework is some entity will use IASB and some will use FASB, and all would try to show their higher profit or losses as per their need and requirement. The main benefit of a common conceptual framework is that it explains the conceptual foundations of accounting standards and permits standard setters to progress accounting standards on a reliable basis. It also contributions in preparers, accountants, auditors and analyst of financial statements to comprehend the approach to standard setting, and the nature and purpose of the financial information described. So that it is so important for all of the financial reporting bodies to have a common conceptual framework.
Answer 3.
Conceptual framework importance on different parties:
There is a different party which uses the financial reporting and makes their decision on the basis of the financial reporting. However, conceptual framework is equally important for all of the parties, but it’s depend up on the use of the information by the different party. Like investors are mostly looking for the ROE, ROA and absolute valuations of the company, while the auditors are looking for the operational efficiency and reporting style of all accounts in the financial statement, Lenders and creditors are looking for the for the solvency ratios and debt service ratios of the company. So that conceptual framework would not be there, all parties would suffer from the different reporting style of the company. It is also depend upon the usage of the information available in the financial reporting of the company. However, this may lead to disadvantages for the reporting entity, which cook their accounting book through creative accounting system and show their profit extra ordinary. These help different parties on the different level, all parties have their own view for conceptual framework, but as the conceptual framework is act like as rule on the system, who want to cook their account books, they have an issue with the conceptual framework, but who want the information is similar and clear manner, they use the conceptual framework on other levels.
Answer 4.
Cross cutting issues:
Cross cutting issues are those issues are those issues, on which two boards have different view on single unit or event. There are many events and act on different boards, where their views are different, so that in the common conceptual framework creation in 2004, it was important to identify the cross cutting issues and make one view on that types of cross cutting issues. Examples of the cross cutting issues “are include the meaning and role of reliability; the definition of liability; the meaning of probable; the effect of conditions, contingencies, or other uncertainties; the unit of account; and accounting for...

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