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FASB to propose amendments in June to concepts that guide creation of GAAP

U.S. accounting rulemakers plan to issue a proposal early June that revises the concepts for elements of financial statements, definitions for items such as revenue and expenses.

The Financial Accounting Standards Board (FASB) on Jan. 22, 2020, voted 6 to 1 to issue revisions to chapter six in its conceptual framework, the nonauthoritative guide of objectives it uses to determine how financial information is measured and displayed in financial statements.

Board member Christine Botosan, the academic on the FASB, dissented on the proposal. Among reasons, Botosan said she did not think the revisions would be an improvement to what was currently there.

“I did not support the decision to retain the current rules-based definition of comprehensive income in equity, and then secondly, I don’t agree with the path we decided to go down today [on definitions of revenues, expense, gains and losses],” Botosan said. “I don’t view these definitions as an improvement over the current definitions, so if our choice was this or nothing, I would have preferred that we kept what we had,” she said.

Companies will get 120 days to comment on the proposal, according to board discussions.

The board vote means proposed revisions to definitions of revenues, expense, gains and losses under Concepts Statement (CON) No. 6, Elements of Financial Statements. Definitions of investments by and distributions to owners would remain the same.

The board’s forthcoming proposal is part of its effort to flesh out its conceptual framework, a living document that guides the development of GAAP. Understanding the objectives of concepts the board uses enables companies to better understand the accounting principles they have to implement. The board in recent years has worked on concepts chapters for presentation, measurement and disclosures.

CON 6 addresses the element definitions of revenues, expenses, gains and losses (together the comprehensive income components), and includes a discussion of how those elements differ from each other. It was first published in 1980 and modified in 1985 to include several elements for not-for-profit accounting.

CON 6 as it stands has shortcomings caused by certain problematic terms and phrases in the existing definitions, board discussions indicate. Problematic phrases in definitions of revenue and expenses for example are “the entity’s ongoing major or central operations” and “other activities.”

The proposal would define revenues as “inflows or other enhancements of assets of an entity or settlements of its liabilities (or a combination of both) from delivering or producing goods, rendering services or carrying out other activities.”

Expenses would be defined as “outflows or other using up of assets of an entity or incurrences of its liabilities (or a combination of both) from delivering or producing goods, rending services or carrying out other activities.”

Proposes definitions of gains and losses are built from the definitions of revenues and expenses, according to a staff analysis.

Gains would be defined as “increases in equity (net assets from transactions and other events and circumstances affecting the entity except those that result from revenues or investments by owners.” Losses are “decreases in equity (net assets) from transactions and other events and circumstances affecting the entity except those that result from expenses or distributions to owners.”

The board agreed to retain the current definitions of investments by and distributions to owners under CON 6.

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