The Financial Accounting Standards Board (FASB) has developed a conceptual framework for financial accounting and reporting. FASB has issued eight Statements of Financial Accounting Concepts (SFAC) as of August, 2013. These statements establish objectives and fundamentals that will be the basis for developing financial accounting and reporting standards.

QUESTION

The Financial Accounting Standards Board (FASB) has developed a conceptual framework for financial accounting and reporting. FASB has issued eight Statements of Financial Accounting Concepts (SFAC) as of August, 2013. These statements establish objectives and fundamentals that will be the basis for developing financial accounting and reporting standards.

The purpose of SFAC No. 6, “Elements of Financial Statements—a replacement of FASB Concepts Statement No. 3 (incorporating an amendment of FASB Concepts Statement No. 2)” was to examine the characteristics that make accounting information useful. The characteristics or qualities of information discussed in SFAC No. 6 are the ingredients that make information useful and are the qualities to be sought when accounting choices are made.

SFAC # 6 is one of a series of publications in the FASB conceptual framework for financial accounting and reporting. Statements in the series are intended to establish objectives and fundamentals that will be the basis for development of financial accounting and reporting standards. The objectives identify the goals and purposes of financial reporting. The fundamentals are the underlying concepts of financial accounting — concepts that guide the selection of transactions, events, and circumstances to be accounted for; their recognition and measurement; and the means of summarizing and communicating them to interested parties. Concepts of that type are fundamental in the sense that other concepts flow from them and repeated reference to them will be necessary in establishing, interpreting, and applying accounting and reporting standards.

Concepts Statement No. 8 – Conceptual Framework for Financial Reporting —Chapter 1: “The Objective of General Purpose Financial Reporting,” and Chapter 3, “Qualitative Characteristics of Useful Financial Information (a replacement of FASB Concepts Statements No. 1 and No. 2).” This Concepts Statement, which includes two chapters of that new conceptual framework, supersedes FASB Concepts Statements No. 1, Objectives of Financial Reporting by Business Enterprises, and No. 2, Qualitative Characteristics of Accounting Information. As the Board and the IASB complete additional phases of their joint project, new chapters will be added to this Concepts Statement, and other Concepts Statements will be superseded.

ANSWER

 Understanding the FASB Conceptual Framework for Financial Accounting and Reporting

Introduction

The Financial Accounting Standards Board (FASB) plays a vital role in establishing guidelines and standards for financial accounting and reporting in the United States. To ensure consistency and effectiveness in financial reporting, the FASB has developed a conceptual framework consisting of several Statements of Financial Accounting Concepts (SFAC). These statements outline the objectives, fundamentals, and qualitative characteristics that underpin financial accounting and reporting standards. One important component of this framework is SFAC No. 6, which examines the qualities that make accounting information useful. Additionally, Concepts Statement No. 8 represents a significant update to the conceptual framework, superseding earlier statements and providing a comprehensive framework for financial reporting. This essay aims to explore the key aspects of SFAC No. 6 and Concepts Statement No. 8, emphasizing their relevance and implications for financial reporting.

SFAC No. 6: Elements of Financial Statements

SFAC No. 6, titled “Elements of Financial Statements—a replacement of FASB Concepts Statement No. 3 (incorporating an amendment of FASB Concepts Statement No. 2),” focuses on identifying the characteristics that render accounting information useful (Mamamia, 2018). This statement serves as a guideline for accounting professionals in making informed choices regarding financial reporting. By examining the qualities of information, SFAC No. 6 provides a framework for ensuring the usefulness and relevance of financial data.

The Qualitative Characteristics of Useful Financial Information

The qualitative characteristics discussed in SFAC No. 6 are integral to accounting information’s usefulness. They serve as the ingredients that enable financial data to be informative, reliable, and decision-useful for various stakeholders. Some key qualitative characteristics include:

Relevance: Information must have predictive value and be capable of influencing users’ decisions. It should also possess confirmatory value, ensuring the accuracy and reliability of previous assessments.

Faithful representation: Accounting information should faithfully represent the underlying economic events and transactions. This requires information to be complete, neutral, and free from material error or bias.

Comparability: Financial statements should be comparable both over time and across different entities. This allows users to identify trends, similarities, and differences in financial performance, facilitating informed decision-making.

Verifiability: Information should be capable of being verified by independent parties, ensuring its reliability and reducing the risk of manipulation or misrepresentation.

Understandability: Financial information should be presented in a clear and concise manner, enabling users to comprehend its significance without undue effort. This quality is particularly crucial for non-expert users of financial statements.

Concepts Statement No. 8: Conceptual Framework for Financial Reporting

Concepts Statement No. 8 represents a significant update to the FASB’s conceptual framework. It consists of two chapters: Chapter 1, “The Objective of General Purpose Financial Reporting,” and Chapter 3, “Qualitative Characteristics of Useful Financial Information.” This statement supersedes FASB Concepts Statements No. 1 and No. 2, providing a comprehensive framework for financial reporting (Concepts Statements, n.d.).

The Objective of General Purpose Financial Reporting

Chapter 1 of Concepts Statement No. 8 establishes the objective of general-purpose financial reporting. It emphasizes the need for financial statements to provide information that is useful for present and potential investors, lenders, and other creditors. The objective is to assist users in making informed economic decisions by providing relevant, reliable, and timely financial information.

Qualitative Characteristics of Useful Financial Information

Chapter 3 of Concepts Statement No. 8 further expands upon the qualitative characteristics discussed in SFAC No. 6. It reiterates the importance of relevance, faithful representation, comparability, verifiability, and understandability (Birt et al., 2017). Additionally, it introduces the notion of materiality, which considers the significance of information in influencing users’ decisions. Materiality aids in determining the level of detail required in financial reporting.

Conclusion

The FASB’s conceptual framework for financial accounting and reporting provides a solid foundation for establishing standards and principles in the field. SFAC No. 6 and Concepts Statement No. 8 play crucial roles in defining the characteristics and objectives of financial reporting. By emphasizing qualities such as relevance, faithful representation, comparability, verifiability, and understandability, these statements guide accounting professionals in producing informative and decision-useful financial information. It is important for accounting practitioners, stakeholders, and users of financial statements to familiarize themselves with these concepts to ensure the integrity and effectiveness of financial reporting.

References

Birt, J., Muthusamy, K., & Bir, P. (2017). XBRL and the qualitative characteristics of useful financial information. Accounting Research Journal, 30(01), 107–126. https://doi.org/10.1108/arj-11-2014-0105 

Concepts Statements. (n.d.). https://www.fasb.org/page/PageContent?pageId=/standards/concepts-statements.html

Mamamia, R. (2018). Statement of Financial Accounting Concepts No. 6 ORIGINAL PRONOUNCEMENTS AS AMENDED. Uark. https://www.academia.edu/36778978/Statement_of_Financial_Accounting_Concepts_No_6_ORIGINAL_PRONOUNCEMENTS_AS_AMENDED