Question

Wayne Cooper has some questions regarding the theoretical framework in which GAAP is set. He knows that the FASB and other predecessor organizations have attempted to develop a conceptual framework for accounting theory formulation. Yet, Wayne’s supervisors have indicated that these theoretical frameworks have little value in the practical sense (i.e., in the real world). Wayne did notice that accounting rules seem to be established after the fact rather than before. He thought this indicated a lack of theory structure but never really questioned the process at school because he was too busy doing the homework. Wayne feels that some of his anxiety about accounting theory and accounting semantics could be alleviated by identifying the basic concepts and definitions accepted by the profession and considering them in light of his current work. By doing this, he hopes to develop an appropriate connection between theory and practice.

1.Help Wayne recognize the purpose of and benefit of a conceptual framework.

2.Identify any Statements of Financial Accounting Concepts issued by the FASB that may be helpful to Wayne in developing his theoretical background.

Answer 1

Requirement A:

A conceptual framework guides standard establishing boards like Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) in establishing a frame of reference useful in setting consistent accounting standards to resolve accounting issues. The conceptual framework established by the above boards has three levels namely objective of financial reporting, qualitative characteristics and elements of financial statements, and finally recognition, measurement, and disclosure guidelines. The following are the specific benefits:

• Conceptual frameworks help in developing coherent standards and rules
• Quick solutions to new and emerging accounting issues.
• Increases financial statement users’ confidence in financial reporting.
• Reduces divergence in financial statements of different companies

Requirement B:

Financial Accounting Standards Board (FASB) issued the following Statements of Financial Accounting Concepts (SFAC).

• Statement 5: Recognition and Measurement in Financial Statements.
• Statement 6: Elements of Financial Statements
• Statement 7: Using Cash Flow Information and Present Value in Accounting Measurements.
• Statement 8: The Objectives of General Purpose Financial Reporting.