Evolution of FABS's Conceptual Framework Essay

Introduction

The accounting conceptual framework has in the past remained to face critic for not offering enough basis for a standard setting. the inadequacy is identified to be evidenced through the FASB's standards that have turned out to become more and more rule based. However, in the past research, no empirical evidence has been collected to so as to offer support to the general criticisms that is raised on the general conceptual framework (Warren, & Jones, 2018). Based on the past research, it is important to note that not only does the conceptual framework need to incorporate some changes, it is also possible to come up with principle-based standards of accounting that are significant to individuals, regardless of their general background.

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On the other hand, Financial Accounting standards Board(FASB) has in the past faced serious criticism for not requiring various companies to report various information that is useful and interpretable for various financial statements (Palmrose, & Kinney,2018). The FASB's conceptual framework forms the pillar in which all the accounting standards are derived from. Hence the accounting conceptual framework must demonstrate a set of qualitative characteristics that ensure that the financial statement have enough information to facilitate the general decision making.

Evolution of the FASBs Conceptual Framework

FASB conceptual framework is a set of the interrelated body that provides fundamental procedures and objectives used for guidance in the accounting ( Baker, 2017). It provides the basis upon which the events, transactions are recognized, measured and the way they are summarized and reported. Baker, (2017) points out that over the years, the conceptual framework for accounting has suffered criticism due to its inadequacy in setting standards as they are more of rule-based hence not complete in addressing some of the issues useful to people from the diverse sectors. For instance, the FASB's conceptual framework condemnation on its inability to make firms provide financial reports that is crucial and can easily be interpreted by the investors and shareholders.

Towards late 1970's, the U.S established the conceptual framework for financial accounting which emphasized that accounting information should be relevant, reliable, understandable, consistent and comparable (Merkl-Davies & Brennan, 2017). Despite the few inconsistencies, the conceptual framework is indeed a necessity when reporting the financial information because it is on this basis that investors and shareholders make a judgment on the financial health of an entity.

The FASB being a private entity, it provides the principles and oversees that the set accounting standards are complied with by both the private entities and the public sector to avoid operation interference by the U.S Internal Revenue Service audits and the imposition of fines from the Securities and Exchange Commission. There are lots of benefits and demerits that are seen with the adoption of the FASB conceptual framework in accounting and reporting of the financial information. Some of the benefits include; problem identification, private regulation, standardized accounting and promotion of the international accounting standards. The benefits are as discussed below;

Problem Identification

Challenges are also there in the accounting and reporting of the financial information; they vary from the type of business entity and the nature of the transactions involved. The FASB provides the framework and the standards that ensure the accounting problems are spotted and changes made with ease. Since all businesses in the U.S uses the same principle and procedure for accounting, it is easy to communicate any problems that may be experienced in the accounting process for fixation by the FASB. The body on receiving the problem does an investigation with the aim of modifying or improving some of the rules to incorporate the inadequacies reported. For example, currently on the airline industry, the time measurement when revenue is recognized especially for the travel vouchers issued by the airline companies and the how air ticket breakage has a significant impact when reporting the financial performance in the industry.Due to these problems, various proposals have been tabled for FASB adoption to help improve the standards set.

Private Regulation

Since FASB is a non-governmental organization, it has no interference from the U.S government. However, the Securities and Exchange Commission always depend on the accounting rules set by FASB for compliance by all the businesses in the U.S.With its capacity; SEC has the potential to establish a government agency to formulate the accounting rules but normally prefers using the FASB set standards, because it reduces the workload on the government. Therefore, allows the private sector come up with the rules independently. Due to this, the FASB enjoys the autonomy in regulating the private entities in the U.S and also performs an oversight role on the government institutions for compliance.

Standardized Accounting

FASB has contributed significantly in harmonizing the accounting standards for use by all the businesses to ensure conformity with the accounting principles. It sets the procedure that all the entities must follow when reporting accounting and financial information. For example, it sets the method for accounting for all the transactions in the fiscal year. The standards help businesses to report financial information that is consistent and meaningful to the users and the investors since they show the accurate financial data.

International Accounting Standards

With the increased globalization and trade liberalization, FASB has been beneficial in providing the accounting standards are recognized internationally. As part of its core objectives, foreign financial markets are connected globally, and FASB aims to establish standards that make reporting of financial information more fair and accurate among the trading countries. With the cooperation of IASB, FASB aims to make financial reports more similar globally.

Despite FASB efforts in streamlining the accounting and financial information, it has faced some challenges with includes:

Licensing and Enforcement

According to Contreras, (2017) FASB cannot enforce compliance with the set accounting principles globally since it has no institution that ensures that individual accountants, tax lawyers, and the CPAs are licensed as per the international set standards. It makes prosecution of the culprits a challenge. Additionally, issues normally arise from businesses based on the U.S perspective for forced compliance.

Integration Problems

Japan, England, Canada and the United States have refused to fully comply with the International Accounting Standards because of the complexity. For instance, the Securities and Exchange Commission in the U.S requires all public companies to follow the GAAP standards. Adoption of harmonized accounting systems requires some countries to change for example their accounting systems for tax.

Negative Effects on the small businesses in the U.S

Multinational companies enjoy the economies of scale when it comes to complying with the set standards as opposed to small businesses in the U.S who incurs huge expenses in the regulatory compliance, a factor that affects the businesses growth. The FASB is deemed suitable for mostly well-established entities (Bartik, 2010).

International Sovereignty Issues

Almost all countries in the world have different laws, securities, financial and banking regulations that dictate the accounting principles. For instance, in the United States, each state has own laws that regulate the banking, insurance and other business activities. Therefore, the imposition of the international standards for accounting and financial information would conflict with both the constitutional law of the individual states and the U.S statute law.

The FASB conceptual framework is not autonomous in setting standards. This is the challenge currently being encountered by various accountants who have pointed out some of the key inconsistencies in dealing with specific problems. Various concerns have been presented that shows accounting principles are barriers that cushions experts in the sector, consequently chances are they may use their conceptual framework to compromise some important details when reporting, hence negating the core mandate of using the accounting principles as a tool.

The integration process for the universal adoption is very important. However, the process is complex since it requires a collaborative approach and participation for all the private sector boards, the public sectors, and the governments' intervention. The diverse nature of the countries' economies and the type of business entities are some of the factors that hinder the roll-out and full compliance with the regulatory principles and the enforcement.

Conclusion and recommendation

Generally, accounting involves a systematic information science. The general function is to make satisfaction with the demand to make sure that information is particularized within a specific environment. Operating as the recognized global accounting standards, it is important to note that the International Financial Reporting Standards (IFRS) is now in full operation and have implemented more than one hundred jurisdictions globally. As reported by in every Jurisdiction that where IFRS have been implemented, IFRS should be compulsory for the unlisted and listed companies. In accounting, revenue recognition is identified to be the point when one is in a level of recording a sale in any financial statements. In most cases reporting inconsistencies in the area of accounting normally arise since there exist no comprehensive accounting standards that are taking the general cover of revenue recognition, this should be taken into consideration for every company to maintain its general efficiency.

References

Baker, C. R. (2017). The Influence of Accounting Theory on the FASB Conceptual Framework. Accounting Historians Journal, 44(2), 109-124.

Bartik, T. (2010). Small Business Start-Ups in the United States: Estimates of the Effects of Characteristics of States (pp. 155-169). We up john Institute for Employment Research.

Contreras, J. L. (2017). From Private Ordering to Public Law: The Legal Frameworks Governing Standards-Essential Patents.

Merkl-Davies, D. M., & Brennan, N. M. (2017). A theoretical framework of external accounting communication: Research perspectives, traditions, and theories. Accounting, Auditing & Accountability Journal, 30(2), 433-469.

Palmrose, Z. V., & Kinney, Jr, W. R. (2018). Auditor and FASB Responsibilities for Representing Underlying Economics-What US Standards Actually Say. Accounting Horizons.

Warren, C. S., & Jones, J. (2018). Corporate financial accounting. Cengage Learning.