FASB completes conceptual framework, but differences with IASB remain

The FASB has finally completed its Conceptual Framework, a guiding document for developing accounting standards. However, despite similarities with the International Accounting Standards Board's (IASB) framework, significant differences remain, dashing the hopes of multinational companies that want both merged, practitioners said on Sept. 3, 2024.

The FASB's framework is designed to guide the development of accounting standards, while the IASB's framework serves as a guide for preparers of financial statements, said Scott Ehrlich, President of Mind the GAAP LLC. "Even if the two frameworks were identical and equally authoritative, I don't think that it would move the bar in any way towards convergence of the two sets of accounting standards," he said. "The U.S. operates very differently than most other jurisdictions," he said. "We Americans crave detailed guidance and, in my view, favor consistency versus the application of judgment."

This disparity will therefore continue to pose challenges for multinational companies seeking greater harmonization, as each framework is shaped by the needs of its constituents.

"One could argue that financial reporting, both the specific guidance in the standards and the underlying conceptual frameworks of any jurisdiction are a product of what is needed in the capital and other markets in a given jurisdiction," said Ray Pfeiffer, a professor in accounting at Simmons University.

The Conceptual Framework is a guiding document that outlines the underlying principles and concepts for developing and applying accounting standards. The IASB's framework was completed in 2018 after a long process of development, which started in 2005. The FASB first issued its financial reporting concepts in 1978 and revisited them comprehensively starting in 2014, culminating in the issuance of Chapter 6, Measurement, of Concepts Statement (CON) No. 8 in July 2024.

Christine Smith, senior professor at Tulane's A.B. Freeman School of Business, noted that "in comparing FASB's and IASB's standard setting processes, most would agree the FASB has historically taken a more 'rules-based' approach versus IASB's 'principles-based' approach."

SEC taking note

The completion of FASB's Conceptual Framework has not gone unnoticed by regulatory bodies. SEC Chief Accountant Paul Munter recently commented on its significance, emphasizing the framework's crucial role in guiding the FASB's standard-setting process.

"As the FASB embarks on its agenda consultation process later this year and considers its standard-setting agenda, application of the Conceptual Framework will be a critically important component of the Board's process," said Munter in a statement on Aug. 12 . "For example, the Conceptual Framework can assist the Board... in determining: Whether a potential project is consistent with the objectives of general-purpose financial reporting; and Whether the resulting financial reporting is expected to have the qualitative characteristics of useful financial information for users."

A shared goal

Both the FASB's and the IASB's frameworks aim to provide useful financial information to investors, lenders, and other creditors to aid in decision-making. They emphasize the importance of information about economic resources, claims, and changes in those resources and claims. The frameworks also identify relevance and faithful representation as fundamental qualitative characteristics of useful financial information, with enhancing characteristics including comparability, verifiability, timeliness, and understandability.

In terms of elements of financial statements, both frameworks define similar elements: assets, liabilities, equity, income, and expenses. They provide criteria for recognizing and derecognizing these elements in financial statements. Measurement bases, including historical cost and current value (fair value), are also discussed in both frameworks.

Differences in approach

One key difference - as alluded to by practitioners - lies in the status and purpose of the frameworks. The FASB concepts chapters are non-authoritative and do not establish Generally Accepted Accounting Principles (GAAP), while the IASB's framework, although also non-authoritative, assists in developing consistent International Financial Reporting Standards (IFRS) and aids preparers in developing consistent accounting policies.

The structure and issuance of the frameworks also differ. The FASB's Concepts Statement No. 8 is divided into multiple chapters, each addressing different aspects of the conceptual framework, including the objective of general-purpose financial reporting. In contrast, the IASB's framework is a single comprehensive document revised as a whole in 2018.

Capital maintenance: a key difference

Also notable is that the IASB's framework introduces concepts of capital and capital maintenance, distinguishing between financial capital maintenance and physical capital maintenance. However, the FASB's framework does not explicitly introduce the concept of capital maintenance. Instead, it focuses on the accrual accounting model, which emphasizes matching revenues and expenses to determine net income.

These differences in approach can lead to variations in financial reporting and accounting treatments between IFRS and U.S. GAAP. For example, the IASB's framework might lead to more emphasis on maintaining a company's financial capital, which could result in different depreciation and amortization policies compared to U.S. GAAP.

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