What are the two main purposes uses of the FASB concepts statements?

Summaries / Status

Summary of Concepts Statement No. 6 Measurement of Elements of Financial Statements (Issued 03/14)

Summary

This Concepts Statement is one of a series that the GASB has issued or will issue. Concepts Statements are intended to provide a conceptual framework of interrelated objectives and fundamental principles that can be used as a basis for establishing consistent accounting and financial reporting standards.

Concepts Statements identify the objectives and fundamental principles of financial reporting that can be applied to solve numerous accounting and financial reporting issues. They provide the GASB with the basic conceptual foundation for considering the merits of alternative approaches to financial reporting and help the GASB develop well-reasoned accounting and financial reporting standards. These Concepts Statements also assist preparers, auditors, and users in better understanding the fundamental concepts underlying accounting and financial reporting standards. Concepts Statements do not prescribe the accounting and financial reporting standards that apply to a particular item or event.

This Concepts Statement establishes concepts for measurement of elements of financial statements. The Concepts Statement addresses both measurement approaches and measurement attributes. The measurement approach identifies the point in time to which the amount reported for an element of financial statements directly refers. The choice of a measurement approach determines whether an asset or liability presented in a financial statement should (1) be reported at an amount that reflects a value at the date the asset was acquired or the liability was incurred or (2) be remeasured and reported at an amount that reflects a value at the financial statement date. A measurement attribute is the feature or characteristic of the asset or liability that is measured.

This Concepts Statement establishes the two measurement approaches that are used in financial statements, as follows:

• Initial-Transaction-Date-Based Measurement (Initial Amount)—The transaction price or amount assigned when an asset was acquired or a liability was incurred, including subsequent modifications to that price or amount that are derived from the amount at which the asset or liability was initially reported.
• Current-Financial-Statement-Date-Based Measurement (Remeasured Amount)—The amount assigned when an asset or liability is remeasured as of the financial statement date.

This Concepts Statement identifies circumstances in which one measurement attribute is more appropriate than the other. Initial amounts are more appropriate for assets that are used directly in providing services. Remeasured amounts are more appropriate for assets that will be converted to cash (financial assets). Remeasured amounts also are more appropriate for liabilities for which there is uncertainty about the timing and amount of payments.

This Concepts Statement also establishes the four measurement attributes that are used in financial statements, as follows:

• Historical cost is the price paid to acquire an asset or the amount received pursuant to the incurrence of a liability in an actual exchange transaction.
• Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
• Replacement cost is the price that would be paid to acquire an asset with equivalent service potential in an orderly market transaction at the measurement date.
• Settlement amount is the amount at which an asset could be realized or a liability could be liquidated with the counterparty, other than in an active market.

How This Concepts Statement Improves Financial Reporting

This Concepts Statement improves financial reporting by augmenting the framework through which the Board maintains consistency in standards setting. These concepts address measurement, which is a necessary component of a complete framework for reporting in traditional financial statements. These concepts also may benefit preparers and auditors when evaluating transactions for which there are no existing standards or in implementing existing standards.

Overview

The Financial Accounting Standards Board (FASB) on July 16, 2020, issued for public comment a proposed chapter of the FASB’s Conceptual Framework for Financial Reporting defining elements of financial statements. This chapter defines 10 elements of financial statements:  assets, liabilities, equity (net assets), revenues, expenses, gains, losses, investments by owners, distributions to owners, and comprehensive income. This proposed chapter is intended to replace Concepts Statement 6, Elements of Financial Statements.

The objective of financial reporting is to provide financial information about the reporting entity that is useful to existing and potential investors, lenders, and other creditors in making decisions about providing resources to the entity.  This chapter provides the means for carrying out that objective; it defines elements of financial statements to be applied in developing standards for both businesses and not-for-profit organizations.  These elements provide a foundation for information that is relevant to the objective of financial reporting.  When finalized, these elements will become a basis for the Board when creating requirements in future standards. Stakeholders are encouraged to review and provide comments on the proposed chapter by November 13, 2020.

Why Is the FASB (the Board) Issuing This Exposure Draft?

The Board concluded that the discussion of elements in Concepts Statement 6 could be further developed and improved with the objective of providing a foundation for future standards.  Many of the decisions reflect changes in practices and standards since Concepts Statement 6 was issued and are based on the Board’s experience in using those concepts in setting standards.

What Are the Main Components of the Proposal?

Definitions of elements of financial statements are a significant determinant of the content of financial statements.  Possessing the essential characteristics of one of the elements is a necessary but not sufficient condition for an item to be recognized in an entity’s financial statements. To be recognized in financial statements, an item must meet the fundamental recognition criteria as well as a cost-benefit constraint.

The decisions discussed in this Exposure Draft would principally clarify the elements definitions in Concepts Statement 6 by:

1. Clearly identifying the right or obligation that gives rise to an asset or a liability
2. Eliminating terminology that makes the definitions of assets and liabilities difficult to understand and apply
3. Clarifying the distinction between liabilities and equity and between revenues and gains and expenses and losses
4. Modifying the distinctions in equity for not-for-profit entities.

How Would the Board Use the Chapter Once It Is Final?

This chapter of Concepts Statement 8 would be similar to the rest of the framework in that it establishes concepts that the Board would use in developing standards of financial accounting and reporting. This particular chapter would provide the Board with a framework for developing standards by identifying elements of financial statements that could be appropriate for recognition in the financial statements and relevant to the users of those financial statements. This chapter would provide the Board with a framework for developing standards that meet the objective of financial reporting to enhance the understandability of information to existing and potential investors, lenders, donors, and other resource providers of a reporting entity.

Paragraph 105-10-05-3 of the FASB Accounting Standards Codification® states that FASB Concepts Statements are not authoritative. Some standards are inconsistent with the Concepts Statements. This Concepts Statement and other Concepts Statements do not override authoritative standards. If accounting for a transaction or event is not specified in authoritative generally accepted accounting principles (GAAP), an entity first must consider accounting principles for similar transactions or events within authoritative GAAP and then consider nonauthoritative guidance from other sources (including Concepts Statements).

What Are the Next Steps in the Process?

Stakeholders are encouraged to review and provide comment on the Exposure Draft by November 13, 2020. The proposal and instructions on how to provide comments are available at www.fasb.org.

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