Some accounting practitioners might be confused about what the FASB’s conceptual framework is actually used for, according to February 17, 2021, board discussions.
Some companies’ responses to the board’s July 2020 proposal on elements of financial statements revealed substantial misunderstanding about the framework, an internal guide the board uses to develop and amend accounting rules.
The board plans to do educational outreach that would also reference the plain English document on its webpage that explains the tool, the discussions indicated.
“I get the impression in reading through everything that maybe that education, that knowledge, that view of what the conceptual framework is isn’t quite as widely held and maybe it influenced some of the responses,” FASB member Harold Schroeder said. “The conceptual framework helps us develop standards that are consistent between themselves and for boards over time to develop consistent responses to similar questions, so as new board members come on it’s a tool,” he said.
Schroeder suggested that staff do outreach asking confused respondents “how do you view the conceptual framework; is it a tool? or do you view it as something else?”
Surprisingly, there’s a significant level of misunderstanding about the objective and purpose of the framework in terms of resolving day-to-day GAAP issues, according to the discussions.
“I found it surprising that some of them sent us lists of things that they want us to decide ‘yes’ or know ‘that was an asset or liability,’ knowing full well that any intelligent analysis of the list would require someone to understand the specifics of the arrangement,” James Leisenring, a retired board member of both the FASB and the IASB, said.
Leisenring, now part of the FASB’s conceptual framework team, said perhaps responses came from companies peeking ahead “or just anxiety, I don’t know.” He suggested that by clarifying some of the language around the element definitions the board might go a long way in improving the understanding of what the purpose of the concepts are.
More Responses Than Typical
The discussion was in response to a staff summary of the 55 comment letters to Proposed Statement of Financial Reporting Concepts No. 2020-500, Concepts Statement No. 8, Conceptual Framework for Financial Reporting Chapter 4: Elements of Financial. Comments were submitted from Eli Lilly and Co., Pfizer Inc., Cigna Corp., Ford Motor Co., Hydro-Quebec, Big Four and other accounting firms, state societies, academics, among others.
The proposal defines 10 elements of financial statements: assets, liabilities, equity (net assets), revenues, expenses, gains, losses, investments by owners, distributions to owners, and comprehensive income, to be applied in developing standards for both businesses and not-for-profit organizations.
Overall companies supported the board’s efforts to improve the concepts for elements, a staff member said. However, some respondents provided additional suggestions to further improve the usefulness and clarity of proposed Chapter 4.
A pervasive theme in the comment letters was “what was the board’s intent,” FASB member Susan Cosper said. “So I think those clarifications in the redeliberation period will be a positive thing.”
Cosper said she was pleased by the volume of thoughtful comment letters the board received. “I think it’s somewhat refreshing that so many of our stakeholders have a keen interest in the concepts. I do think that some are peeking ahead but I do think many are above board and recognize the value that they ultimately provide to the board in terms of a starting point,” she said.
Board Sets Redeliberation Plan
The board plans to begin redeliberations on the proposal in March or April with a focus on assets.
Some companies said the proposed changes to the definition of an asset would not resolve current issues surrounding identifying internally generated intangible assets. Respondents also disapproved removing the word “control” from the original definition. Others said that the phrase “present right” does not sufficiently capture the concept of control and, therefore, it should be explicitly included in the definition.
In addition, respondents said more items could potentially qualify as assets under the proposed definition compared with the definition of an asset in Concepts Statement (CON) No. 6, Elements of Financial Statements. Others said use of the word “probable” is critical in determining in-process research and development assets, specifically related to collaborative arrangements.
Internally generated intangible assets might be the hardest issue that the board has to tackle in the project, according to the discussions.
FASB Vice Chair James Kroeker said some good questions were raised by respondents, but wondered whether those would have to be resolved as the board sets standards as they are about word enhancements.
“Maybe at a standards level would you need some threshold to identify those that sort of clearly fall on one side or the other,” he said.
This article originally appeared in the February 19, 2021 edition of Accounting & Compliance Alert, available on Checkpoint.
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