The recent issuance of CON8 provides some fascinating insights into the the FASB and IASB think about the economic consequences of their standards.

In 2008, the FASB and IASB wrote the exposure draft of what would become CON8 (“Exposure Draft of Conceptual Framework for Financial Reporting: The Objective of Financial Reporting and Qualitative Characteristics and Constraints of Decision-Useful Financial Reporting Information.”).  That document proposed that the mandate of the Boards is as follows:

The Boards’ mandate is to assist in the efficient functioning of economies and the efficient allocation of resources in capital markets by developing high-quality financial reporting standards. (Para. OB3)

The final version of the Conceptual Framework No. 8 (CON8) did not include this statement, and explicitly rejected expanding the objective of financial reporting to include maintaining financial stability:

OB2. The objective of general purpose 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. Those decisions involve buying, selling, or holding equity and debt instruments and providing or settling loans and other forms of credit.

OB10. Other parties, such as regulators and members of the public other than investors, lenders, and other creditors, also may find general purpose financial reports useful. However, those reports are not primarily directed to these other groups.

Why the change?  From the Basis For Conclusions: CON8, BC 1.23-27):

…[S]ome may take the view that the best way to maintain financial stability is to require entities not to report or to delay reporting some changes in asset or liability values.

That requirement almost certainly would result in depriving investors, lenders, and other creditors of information that they need.

The only way to avoid conflicts would be to eliminate or deemphasize the existing objective of providing information to investors, lenders, and other creditors.

The Board concluded that eliminating that objective would be inconsistent with its basic mission, which is to serve the information needs of participants in capital markets.

The Board also noted that providing relevant and faithfully represented financial information can improve users’ confidence in the information and, thus, contribute to promoting financial stability.

I think we can better understand these tensions if we explicitly define three distinct ways of assessing whether a standard “works”:

  • Conceptual Approach. Reporting standards should result in financial statements that are with a Conceptual Framework that defines the desirable characteristics of financial reports, the nature financial statement elements and the appropriate methods of recognition, measurement and disclosure.
  • Decision-Usefulness Approach. Reporting standards should result in better economic decisions by individual users of financial statements.
  • Economic Consequences Approach. Reporting standards should result in better aggregate outcomes, such as higher rates of economic growth, greater economic stability and more desirable distributions of wealth and income.

These are all normative judgments, but they suggest some interesting positive questions:

  1. Do standards that are conceptually appealing also result in better decisions and economic consequences?
  2. Do better individual decisions also result in favorable economic consequences?
  3. Do favorable economic consequences necessarily reflect more decision-useful or conceptually appropriate standards?

What research addresses these questions?