The Financial Accounting Standards Board (FASB) conceptual framework is a comprehensive set of objectives and fundamental concepts that guide the development of accounting and reporting standards. Its purpose is to ensure that financial statements provide useful information to investors, creditors, and other users in making informed decisions.
Key Facts
- Purpose: The FASB conceptual framework aims to establish a coherent system of objectives and fundamental concepts that govern financial accounting and reporting.
- Objectives: The framework identifies the goals and purposes of financial reporting, which include providing financial information that is useful to existing and potential investors, lenders, and other creditors in making decisions about providing resources to the entity.
- Fundamental characteristics: The framework outlines the fundamental characteristics of useful accounting information, which are relevance and faithful representation. Relevant information is capable of making a difference in decision-making, while faithful representation means there is agreement between the measurement and the economic activity or item being measured.
- Measurement systems: The proposed new chapter of the FASB conceptual framework introduces two relevant and representationally faithful measurement systems: the entry price system and the exit price system. These systems provide concepts for selecting a measurement system for assets or liabilities recognized in financial statements.
Objectives of Financial Reporting
The FASB conceptual framework identifies the primary objectives of financial reporting as follows:
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Usefulness
Financial reporting should provide information that is useful to existing and potential investors, lenders, and other creditors in making decisions about providing resources to the entity.
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Understandability
Financial statements should be presented in a manner that is understandable to users with a reasonable knowledge of business and accounting.
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Relevance
Financial information should be relevant to the decisions that users are making. Relevant information is capable of making a difference in decision-making.
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Reliability
Financial information should be reliable, meaning it is free from material error and bias.
Fundamental Characteristics of Useful Accounting Information
The FASB conceptual framework outlines two fundamental characteristics of useful accounting information:
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Relevance
Relevant information is capable of making a difference in decision-making. Qualities of relevant information include predictive value and confirmatory value.
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Faithful Representation
Faithful representation means that there is agreement between the measurement and the economic activity or item being measured. Qualities of information exhibiting faithful representation include completeness, neutrality, and freedom from error.
Measurement Systems
The proposed new chapter of the FASB conceptual framework introduces two relevant and representationally faithful measurement systems:
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Entry Price System
The entry price system measures assets and liabilities at their historical cost, which is the amount paid to acquire the asset or incur the liability.
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Exit Price System
The exit price system measures assets and liabilities at their fair value, which is the amount that could be obtained by selling the asset or settling the liability in an orderly transaction.
Conclusion
The FASB conceptual framework is a valuable resource for accountants and other professionals involved in financial reporting. It provides a comprehensive set of objectives and fundamental concepts that guide the development of accounting and reporting standards. By understanding the framework, accountants can ensure that the financial statements they prepare are useful, understandable, relevant, and reliable.
References
- FASB. (n.d.). Conceptual Framework for Financial Reporting. Retrieved from https://www.fasb.org/page/PageContent?pageId=/projects/recentlycompleted/concframeelements.html&isstaticpage=true
- MyEducator. (n.d.). A Conceptual Framework of Accounting. Retrieved from https://app.myeducator.com/reader/web/1560e/chapter01/c241s/
- Brewer, K. (2023, December 8). FASB seeks input on new chapter of conceptual framework. Journal of Accountancy. Retrieved from https://www.journalofaccountancy.com/news/2023/dec/fasb-seeks-input-on-new-chapter-of-conceptual-framework.html
FAQs
What is the FASB conceptual framework?
The FASB conceptual framework is a comprehensive set of objectives and fundamental concepts that guide the development of accounting and reporting standards.
What are the objectives of financial reporting according to the FASB conceptual framework?
The FASB conceptual framework identifies four objectives of financial reporting: usefulness, understandability, relevance, and reliability.
What are the fundamental characteristics of useful accounting information?
The FASB conceptual framework outlines two fundamental characteristics of useful accounting information: relevance and faithful representation.
What are the two measurement systems introduced in the proposed new chapter of the FASB conceptual framework?
The proposed new chapter of the FASB conceptual framework introduces two relevant and representationally faithful measurement systems: the entry price system and the exit price system.
What is the entry price system?
The entry price system measures assets and liabilities at their historical cost, which is the amount paid to acquire the asset or incur the liability.
What is the exit price system?
The exit price system measures assets and liabilities at their fair value, which is the amount that could be obtained by selling the asset or settling the liability in an orderly transaction.
How does the FASB conceptual framework help accountants?
The FASB conceptual framework provides accountants with a comprehensive set of objectives and fundamental concepts to guide the preparation of financial statements. By understanding the framework, accountants can ensure that the financial statements they prepare are useful, understandable, relevant, and reliable.
What are some of the benefits of using the FASB conceptual framework?
The FASB conceptual framework helps to ensure that financial statements are:
– Useful to investors, creditors, and other users
– Understandable to users with a reasonable knowledge of business and accounting
– Relevant to the decisions that users are making
– Reliable, meaning they are free from material error and bias