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CONCEPTUALFRAMEWORKS
James J. LeisenringIASB member
Standards Advisory Council meetingFebruary 2005
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CONCEPTUAL FRAMEWORKS
In the areas I want to discuss, there are only smalldifferences between the IASB and FASB framework
Focus on the elements of financial statements and on
recognition and not measurement as both frameworks arequite unresolved as to measurement
FASB Conceptual Framework more expansive and Ihave selected it to describe several points also made in
IASB Framework
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CONCEPTUAL FRAMEWORKS
Purposes of the two frameworks are quite similar
Both frameworks accept decision usefulness of
information to a broad group of outsiders as thepurpose of financial reporting (IAS paragraph 12)
More expansive use of IASB framework as aresult of IAS 8 hierarchy for establishing
accounting policies
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The FASB in Concepts Statement No. 1 concluded:
. . . Financial reporting should provide information to help
investors, creditors, and others assess the amount, timing,and uncertainty of prospective net cash inflows to the related
enterprise. (paragraph 39)
The IASB framework:
The economic decisions that are taken by users of financial
statements require an evaluation of the ability of an entity to
generate cash and cash equivalents and of the timing and
certainty of their generation. (paragraph 15)
CONCEPTUAL FRAMEWORKS
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The primary focus of financial reporting is
information about an enterprises
performance provided by measures of
earnings and its components. Investors,creditors, and others who are concerned with
assessing the prospects for enterprise net cash
inflows are especially interested in that
information. (Con 1, paragraph 43)
CONCEPTUAL FRAMEWORKS
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Furthermore, the Board said, Information about
enterprise earnings and its components measured by
accrual accounting generally provides a better
indication of enterprise performance than
information about current cash receipts and
payments. (Con 1, paragraph 44)
CONCEPTUAL FRAMEWORKS
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Information about the performance of an entity, in
particular its profitability, is required in order to
assess potential changes in the economic resources
that it is likely to control in the future. Information
about variability of performance is important in this
respect. Information about performance isuseful in
predicting the capacity of the entity to generate cash
flows from its existing resource base.
(IAS, paragraph 17)
CONCEPTUAL FRAMEWORKS
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Accepting these conclusions focuses the
debate on the items to be recognized in
accrual basis earnings (profit and loss) and themeasurement of those items.
The fundamental nature of most accounting
debates is that we dont agree on what shouldbe considered earnings or profit and loss.
CONCEPTUAL FRAMEWORKS
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Controversy sometimes over amount
Controversy usually over timing and uncontrolled
volatility
Controversy over classification and display of items
in earnings or profit and loss
CONCEPTUAL FRAMEWORKS
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Source of the Early Debates
Assets, liabilities, or what-you-may-call-its
Proper matching to avoid distortingperiodic income
Argument often used to avoid recognition of
an item is that the result will distort income
(earnings)
CONCEPTUAL FRAMEWORKS
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APB STATEMENT NO. 4ASSETS
Assetseconomic resources of an enterprise that are
recognized and measured in conformity with generally
accepted accounting principles. Assets also include
certain deferred charges that are not resources but that
are recognized and measured in conformity with
generally accepted accounting principles.
CONCEPTUAL FRAMEWORKS
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APB STATEMENT NO. 4LIABILITIES
Liabilitieseconomic obligations of an enterprise that
are recognized and measured in conformity with
generally accepted accounting principles. Liabilities
also include certain deferred credits that are not
obligations but that are recognized and measured in
conformity with generally accepted accountingprinciples.
CONCEPTUAL FRAMEWORKS
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Asset
Assets are probable future economic benefits obtained orcontrolled by a particular entity as a result of past
transactions or events. (Con 6, paragraph 25)
CONCEPTUAL FRAMEWORKS
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Liability
Liabilities are probable future sacrifices of economicbenefits arising from present obligations of a particular
entity to transfer assets or provide services to other entities
in the future as a result of past transactions or events.
(Con 6, paragraph 35)
CONCEPTUAL FRAMEWORKS
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Asset
An asset is a resource controlled by the entity as a result
of past events and from which future economic benefitsare expected to flow to the entity. (IAS, paragraph 49a)
CONCEPTUAL FRAMEWORKS
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Liability
A liability is a present obligation of the entity arising
from past events, the settlement of which is expected toresult in an outflow from the entity of resources
embodying economic benefits. (IAS, paragraph 49b)
CONCEPTUAL FRAMEWORKS
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Assets
Three essential characteristics: (Con 6, paragraph 26)
(a) It embodies a probable future benefit that involves a
capacity, singly or in combination with other assets,to contribute directly or indirectly to future net cash
inflows
(b) A particular entity can obtain the benefit and control
others access to it
(c) The transaction or other event giving rise to the
entitys right to or control of the benefit has already
occurred.
CONCEPTUAL FRAMEWORKS
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Liabilities
Three essential characteristics: (Con 6, paragraph 36)
(a) It embodies a present duty or responsibility to one or
more other entities that entails settlement by probablefuture transfer or use of assets at a specified or
determinable date, on occurrence of a specified event,
or on demand
(b) The duty or responsibility obligates a particular entity,leaving it little or no discretion to avoid the future
sacrifice
(c) The transaction or other event obligating the has
already happened.
CONCEPTUAL FRAMEWORKS
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Revenues are inflows or other enhancements of assets
of an entity or settlements of its liabilities (or acombination of both) from delivering or producing
goods, rendering services, or other activities that
constitute the entitys ongoing major or central
operations. (Con 6, paragraph 78)
Revenues
CONCEPTUAL FRAMEWORKS
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Expenses are outflows or other using up of assets or
incurrences of liabilities (or a combination of both)from delivering or producing goods, rendering
services, or carrying out other activities that constitute
the entitys ongoing major or central operations.
(Con 6, paragraph 80)
Expenses
CONCEPTUAL FRAMEWORKS
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Income is increases in economic benefits during the
accounting period in the form of inflows orenhancements of assets or decreases of liabilities that
result in increases in equity, other than those relating
to contributions from equity participants.
(IAS, paragraph 70a)
Income
CONCEPTUAL FRAMEWORKS
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Expenses are decreases in economic benefits during
the accounting period in the form of outflows ordepletions of assets or incurrences of liabilities that
result in decreases in equity, other than those relating
to distributions to equity participants.
(IAS, paragraph 70b)
Expenses
CONCEPTUAL FRAMEWORKS
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Basic conclusion as to the conceptual primacy of
assets and secondarily liabilities
Thought to be a balance sheet approach
Can there be an income statement view?
CONCEPTUAL FRAMEWORKS
IASB and FASB Framework
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Some individual frameworks are sharply defined and
firmly held; others are vague and weakly held; still
others are vague and firmly held.
(Chuck Horngren
Stanford University)
CONCEPTUAL FRAMEWORKS
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Accounting is more a process of allocating transactions
to accounting periods by reference to the established
conventions of matching and prudence. . . . Assets and
liabilities do not form a natural starting point fordevising recognition rules; the balance sheet is the result
of the accounting process, not the starting point.
(Ron PatersonErnst & YoungUK)
CONCEPTUAL FRAMEWORKS
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Patersons balance sheet [that] is the result of the
accounting process is commonly the result of debits and
credits that have been created as the necessary offsetting
entries to achieve the appropriate amount of revenue and
expense. Many of those debits and credits do not meet the
definitions of assets or liabilities but nevertheless are
identified as such on balance sheets. Would it be
acceptable to Paterson to accurately describe those items as
debit (or credit) necessary to get net income to theappropriate level? I doubt it.
(James J. LeisenringFASBUSA)
CONCEPTUAL FRAMEWORKS
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. . .The application of the matching concept under this
Frameworkdoes not allow the recognition of items in the
balance sheet which do not meet the definition of assets or
liabilities.
(IAS, paragraph 95)
CONCEPTUAL FRAMEWORKS
IASB Framework
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Income is recognised in the income statement when anincrease in future economic benefits related to an increase
in an asset or a decrease of a liability has arisen that can be
measured reliably.
(IAS, paragraph 92)
CONCEPTUAL FRAMEWORKS
IASB Framework
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Expenses are recognised in the income statement when a
decrease in future economic benefits related to a decrease
in an asset or an increase of a liability has arisen that can
be measured reliably.
(IAS, paragraph 94)
CONCEPTUAL FRAMEWORKS
IASB Framework
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Define revenue and expense without regard to assets andliabilities.
Accept that a balance sheet will contain a debit or credit
necessary to achieve the appropriate amount of net
income. Define or describe what is the appropriate amount of
net income
For the income statement view to have any intellectual
rigor, proponents must either:
CONCEPTUAL FRAMEWORKS
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Cant define revenues, expenses, gains, and losses
without reference to assets
Absent independent definition of revenues, expenses,
gains, and losses (not dependent on assets andliabilities), the income statement view is vacuous
Measuring net income by the change in net assets
provides an anchor for resolving difficult accounting
questions
CONCEPTUAL FRAMEWORKS
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Asking the Right Questions
What is the asset?
What is the liability?
Did an asset or liability or its value change?
Increase or decrease?
By how much?Did the change result from what we call:
Investment by owners?
Distribution to owners?
Comprehensive income?
Revenue?
Expense?
Gain?
Loss?
(Storey & Storey)
CONCEPTUAL FRAMEWORKS
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CONCEPTUALFRAMEWORKS
James J. LeisenringIASB member
Standards Advisory Council meetingFebruary 2005
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