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The FASB on Dec. 22, 2021, issued two new chapters to flesh out its Conceptual Framework, a tool it uses to frame its standard-setting decisions. The chapters provide concepts for financial statement elements and presentation.

The framework is not authoritative and does not establish or change U.S. GAAP – an important note in the chapters as some companies misunderstood proposals that were issued last year in relation to them. Specifically, some companies that submitted comment letters thought they were reacting to potential rule changes, and pushed back strongly.

Concepts Statements “guide the Board in developing sound accounting principles and provide the Board and its constituents with an understanding of the appropriate content and inherent limitations of financial reporting,” according to an explanatory summary.

“The new chapters of the FASB’s Conceptual Framework address two important areas of financial reporting: financial statement elements and presentation,” FASB Chair Richard Jones said in a statement. “They enhance our Conceptual Framework, which is a tool for the Board to use in setting standards that improve the understandability of information entities provide to existing and potential investors, lenders, donors and other resource providers.”

The chapters were endorsed by six of the seven-member board.

FASB member Christine Botosan, the academic on the board, dissented, citing various concerns.

Botosan, among reasons, said that in her view certain aspects of the elements chapter would “fail to enhance, and could potentially reduce, the usefulness of the Conceptual Framework.”

Specifically, Botosan disagreed with the removal of the term “control” from the definition of an asset, the “retention of the existing prescriptive definitions of equity and comprehensive income,” and “the definitions of revenue, gain, expense and loss.”

For the presentation chapter, Botosan said she does not agree with its issuance because she “views it as incomplete because of the omission of principles related to the structure of financial statements and gross presentation versus net presentation.”

Also, the lack of a conceptual basis for other comprehensive income (OCI) “is inconsistent with a framework that is a coherent system of interrelated objectives and fundamental concepts,” she said, among other reasons.

The chapters:
  • FASB Concepts Statement (CON) No. 8, Conceptual Framework for Financial Reporting—Chapter 4, Elements of Financial Statements, defines the following 10 elements of financial statements: assets, liabilities, equity (net assets), investments by owners, distributions to owners, comprehensive income, revenues, expenses, gains, losses.

Definitions of elements of financial statements help the board to determine the content of financial statements. The chapter identifies the right or obligation that gives rise to an asset or liability; eliminates terminology that is difficult to understand; clarifies the distinction between liabilities and equity, and between revenues/gains and expenses/losses; and modifies the distinctions in equity for not-for-profit entities.

Chapter 4 supersedes CON 6, Elements of Financial Statements.
  • FASB Concepts Statement (CON) No. 8, Conceptual Framework for Financial Reporting—Chapter 7, Presentation, identifies “factors for the Board to consider when deciding how items should be displayed on the financial statements.”

The chapter describes the information that is provided by a full set of financial statements and how the display of that information on the face of the financial statements best meets the objective of financial reporting. It identifies criteria the board can consider and prioritize in determining how recognized items should be displayed on the face of the financial statements to best meet the objective of financial reporting.

Chapter 7 supersedes portions of CON 5, Recognition and Measurement in Financial Statements of Business Enterprises.

The two new chapters will add to three others that are already in CON 8: Chapter 1, The Objective of General Purpose Financial Reporting, Chapter 3, Qualitative Characteristics of Useful Financial Information, and Chapter 8, Notes to Financial Statements.

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