Chapter 7: The FASB’s Conceptual Framework Instructor Manual
Accounting Theory (9
th
edition) Page 1 of 10
CHAPTER HIGHLIGHTS
While the FASB’s conceptual framework may not be all that we would like it to be, the fact is
that it is “there” and has been used by the board members—though perhaps not as much as we
would like. Despite its shortcomings, the FASB’s conceptual framework has served as a model
for several other nations as well as the International Accounting Standards Committee. A minor,
but important point is that the FASB’s framework is intended to be used when setting standards ;
the IASB’s is used for setting standards and used by practice when the standards are unclear.
Another important point, the conceptual framework is a non-authorative source of U.S. GAAP.
It is not in the FASB Financial Accounting Codification
TM.
SFAC No. 2, in effect, created a structure of the qualitative characteristics of financial
accounting information. There are many difficult trade-offs that must eventually be made among
the hierarchy of concepts if operating standards are to be implemented on a viable basis. SFAC
No. 3 presented the definitions of ten “elements” of financial statements. These constitute a
considerable advance over previous definitions, though several other important issues have not
as yet been addressed.
Two particularly interesting issues that are presented in the chapter are (1) the question of
representational faithfulness versus economic consequences and (2) an examination of the type
of instrument that the conceptual framework is. The first question lies at the heart of accounting:
Chapter 7: The FASB’s Conceptual Framework Instructor Manual
Accounting Theory (9
th
edition) Page 2 of 10
can we actually come up with representationally faithful numbers, or is accounting basically a
log-rolling exercise where groups vie for the standards that they perceive will benefit them? The
second question, concerning the type of document the conceptual framework is, leads to issues
such as whether and how the framework could be changed or whether it is a completed document
that is basically historical in nature.
QUESTIONS
Q-1 Of what importance in a conceptual framework or metatheory are definitions of such
basic terms as assets, liabilities, revenues, and expenses?
Definitions can be helpful in a theoretical structure after higher parts of a conceptual framework
are formulated in order to help specify what qualifies (and does not qualify) as an asset, liability,
Q-2 What is the relationship between the economic consequences of accounting standards
and the quality of neutrality presented in SFAC No. 8?
Accounting information must have distributional effects: it favors some parties at the expense of
others. That is the nature of economic consequences. Neutrality refers to a “let the chips fall
Q-3 Why must objectives be at the topmost level of a conceptual framework of accounting?
A conceptual framework is basically a normative and deductive type of undertaking. The main
thrust of the operating standards, while they may be affected by various types of constraints and
Q-4 How does the freedom from bias mentioned in ASOBAT compare to the quality of
neutrality mentioned in SFAC No. 8?
The concepts are quite similar. Neutrality, however, refers to standard setters, whereas freedom
Q-5 How does earnings as discussed in SFAC No. 5 differ from net income?
Earnings excludes the effect on prior years of any changes in accounting principles. These
Accounting Theory (9
th
edition) Page 3 of 10
Q-6 What is comprehensive income?
Comprehensive income includes all changes in owners’ equity except for transactions with
owners. Included would be cumulative changes in accounting principles, foreign currency
Q-7 Is neutrality consistent with the external user primary orientation of SFAC No. 1 and
the pervasive constraint (benefits > costs) of SFAC No. 8?
Rather than being inconsistent, the problem lies more in the nature of maintaining a delicate
balancing act. User primacy and the benefits > cost constraint both involve economic
consequences as well as providing information that is useful for decision making. Neutrality
means attempting to provide the most meaningful information for external users given the
Q-8 SFAC No. 6 is largely a repetition of SFAC No. 3. Discuss two possible reasons why
this repetition occurred.
One reason is that the failure of SFAC No. 5 created a desire to end on a happy note. One way to
accomplish this was to repeat a prior success, which is exactly what occurred since the
definitions of SFAC No. 3 were a marked improvement over those of APB Statement 4.
The second view is that of Paul Miller (1990), who saw SFAC No. 6 as an attempt to reassert the
primacy of SFAC Nos. 1-3, hence the maintenance of progress of those parts of the framework
Chapter 7: The FASB’s Conceptual Framework Instructor Manual
Accounting Theory (9
th
edition) Page 4 of 10
Q-9 Very carefully explain why conflicts can exist between prediction of cash flows and
accountability. Can these conflicts be resolved?
Pensions provide a classic example of this problem. In order to determine pension expense,
future salaries must be estimated. While current management would estimate these, the future
salaries themselves are entirely executory. These future salaries, which would be higher than
Q-10 How does feedback value relate to predictive ability and accountability?
Feedback relates to comparing actual results against expectations. Even if the numbers involved
do not attempt to specifically predict future cash flows (see question 10 above), the numbers
Q-11 Is there a similarity between the codificational approach (Gaa) to standard setting and
the jurisprudential approach?
There is a similarity, but there are also differences. Both viewpoints are evolutionary but the
codificational approach is grounded more in terms of developing a rational process for arriving
at a conceptual framework and the resulting standards. This process will involve arriving at a
Q-12 Verifiability is part of reliability in SFAC No. 2, but is now an enhancing qualitative
characteristic in SFAC No. 8. What effect does this reclassification have on the
importance of verifiability in the framework?
Verifiability involves the statistical concept of the degree of consensus among measurers,
Q-13 Conservatism is discussed in paragraphs 91–97 of SFAC No. 2. Why is its role in
SFAC No. 2 rather ambiguous? Why is conservatism absent from SFAC No. 8?
Conservatism is banished from the qualitative characteristics but appears outside of this
framework as a “convention.” Conservatism can easily be in conflict with important
Chapter 7: The FASB’s Conceptual Framework Instructor Manual
Accounting Theory (9
th
edition) Page 5 of 10
characteristics such as representational faithfulness if, for example, cost is below market. If it
Q-14 A study (discussed in the chapter) found a heavier emphasis placed on relevance rather
than reliability in disclosure standards by the FASB. Why do you think this is the case?
A heavier emphasis placed on relevance would most likely be the case because being outside the
Q-15 Samuelson would use a property rights definition of assets (discussed in the chapter).
Do you think that SFAS No. 2 requiring immediate expensing of research and
development costs is an example of Samuelson’s property rights approach? Discuss.
While Samuelson’s view on assets is grounded in property rights, SFAS No. 2 is grounded in
verifiability issues rather than property rights. Property rights would indeed attach to research
Q-16 Would changing the asset definition in the conceptual framework to one concerned
with property rights have any other ramifications? Discuss.
In our opinion, Samuelson’s definition may lead to an exit value orientation for assets because it
Q-17 Is capital maintenance oriented toward proprietary theory or entity theory?
Capital maintenance is geared to both but it might be measured differently. Under proprietary
theory, capital maintenance might be geared to a broader definition of wealth for the owners of
the firm. Hence capital maintenance might be utilized using a general price level adjusted
Chapter 7: The FASB’s Conceptual Framework Instructor Manual
Accounting Theory (9
th
edition) Page 6 of 10
Q-18 Do you see any inconsistency in SFAC No. 1, which sees financial statements as
general purpose but geared primarily toward investors and creditors?
Yes, there is an inconsistency. Using a broader user base might have led to primacy of
Q-19 Do you see any inconsistency between the present value of assets and liabilities in
SFAC No. 7 since the latter is based on a firm-specific discount rate and the former
does not use a firm-specific rate? Discuss.
No, there is no inconsistency here. Assets have a value independent of the firm. Liability
Q-20 Stewardship is absent from SFAC No. 8; why?
BC1.28 The Board decided not to use the term stewardship in this chapter because there would
CASES, PROBLEMS, AND WRITING ASSIGNMENTS
1. Discuss as many of the potential trade-offs among the qualities mentioned in SFAC
No. 8 as you can and give either a general or a concrete example of each one.
The first trade-off concerns the possibility of different information needs of different user
groups. The benefits versus costs issue likewise involves a trade-off. There are several trade-off
2. Analyze three accounting standards promulgated by the FASB and show how
economic consequences (rather than representational faithfulness) influenced the
shaping of the standard (your professor may suggest particular standards for this case).
SFAS No. 15, on troubled debt restructuring (now superseded by SFAS No. 114), is a classic
example of economic consequences prevailing over representational faithfulness. In cases of
restructuring, no loss is recognized as long as the undiscounted amount of the restructured debt
Chapter 7: The FASB’s Conceptual Framework Instructor Manual
Accounting Theory (9
th
edition) Page 7 of 10
3. One of the principal problems of SFAC No. 2 and 8 is whether representational
faithfulness should predominate over economic consequences or the reverse relative to
drafting accounting standards. State the case as carefully as you can for each of the two
possibilities.
This is an interesting and challenging writing assignment concerning the articles discussed in the
chapter in the section on neutrality versus representational faithfulness. If the position is taken
that representational faithfulness does not exist (Daley and Tranter), then economic
consequences is preeminent and a standard-setting agency is simply mediating among competing
groups in a political fashion. This position is, we believe, overstated. An interesting possibility
might be to go with representational faithfulness where it can be measured with a high degree of
Chapter 7: The FASB’s Conceptual Framework Instructor Manual
Accounting Theory (9
th
edition) Page 8 of 10
4. Part 1. Tucker Company has an asset in the form of a cash flow that it expects to
collect in three years. However, the amount of the cash flow is not certain. These are
the probabilities underlying the cash flow.
Amount Probability
$3,000 .30
$4,000 .30
$5,200 .40
The discount rate is 10%.
Required:
a. How should the asset be valued according to SFAC No. 7?
b. What other valuation is possible?
c. Which valuation do you prefer?
Part 2. Donahoe Company has a liability of $10,000 which is due in three years. The
discount rate applicable to the firm is 10%. Assume that the firm’s credit standing is
adversely affected by an untoward economic event. As a result, the discount rate
applicable to the firm goes up to 12%.
Required:
a. How does the value of the liability change?
b. If the firm’s financial condition worsens, does it make sense for the value of the
liabilities to decline? Explain.
Part 1:
a. $3,000 x.7513 x .3 = $ 676
4,000 x .7513 x .3 = 902
5. In examining recognition and measurement, Sterling believes that measurement should
precede recognition whereas Archer believes that it is “logical” for recognition to
precede measurement. What is your position?
This is a “which came first,” the chicken or the egg, question. Do you recognize an economic
activity and then measure it or do you measure an activity and then recognize it when measured
Chapter 7: The FASB’s Conceptual Framework Instructor Manual
Accounting Theory (9
th
edition) Page 9 of 10
CRITICAL THINKING AND ANALYSIS
1. Murphy, et al (2013) argue “living law” applies to conceptual frameworks. How does
this perspective affect current frameworks?
Murphy, Tim, Vincent O’Connell, and Ciarán Ó hÓgartaigh (January 2013). “Discourses
surrounding the evolution of the IASB/FASB Conceptual Framework: What they reveal about
the ‘living law’ of accounting,” Accounting, Organizations, and Society, 72-91.
The authors argue age-old stewardship (accountability) should not have been dropped from the
IASB-FASB’s financial reporting objective of the joint project revising the respective
2. In SFAC No. 8, the objectives of financial reporting clearly take an entity perspective
rather than a proprietary one. If the FASB had taken the proprietary perspective, what
effect, if any, does it have on the resultant conceptual framework?
We argue that the resultant framework would not differ significantly. Those qualitative
3. Bradbury and Harrison (2015) study dissenting opinions in Financial Accounting
Standards Board (FASB) standards. What changes, if any, do these opinions suggest
need to be made in the conceptual framework?
Bradbury, Michael E. and Julie A. Harrison (June 2015). “The FASB’s Dissenting Opinions,”
Accounting Horizons, 363-375
This paper uses content analysis from qualitative research that is infrequently used by accounting
researchers. By grouping specific text, themes can then be counted (building quantitative
Chapter 7: The FASB’s Conceptual Framework Instructor Manual
Accounting Theory (9
th
edition) Page 10 of 10