The Financial Accounting Standards Board continued making progress on its Conceptual Framework Project by issuing a new concept statement earlier this week. The Conceptual Framework Project is a joint effort with the IASB, aimed at producing a signal framework that both Boards could use in developing (ideally converged) standards.

This new concept statement, SFAC 8, deals with the objectives of financial reporting and the qualitative characteristics of accounting information and so is a replacement of SFAC 1 and 2, respectively. The new statement is available on the FASB’s website here.

Having now read through both chapters and the basis for conclusions, I have to say that my first impression is that chapters are refreshingly succinct, especially as compared to Concept Statements 1 and 2.

Noteworthy items in the Objectives chapter:

  • Although the word “stewardship” does not show up in the statement on objectives, the Board clearly indicates that one purpose of financial reporting is to provide information that allows users to assess how efficiently and effectively management has been in using the reporting entity’s resources.
  • In the basis, they also indicate that there was never an intention to subjugate stewardship decisions to investment and credit decisions. However, they also note that information designed for resource allocation will also generally be useful for assessing management performance.
  • In reaffirming that investors and creditors are the primary user group for general purpose financial statements, the Board (not surprisingly) discusses the push that was made during the recent financial crisis to make maintaining financial stability an objective of financial reporting.

Noteworthy items in the Characteristics chapter:

  • Reliability has been replaced by faithful representation; timeliness and verifiability are now enhancing characteristics, rather than components of relevance and reliability, respectively; and the Board provides a clear priority when applying the fundamental characteristics – saying, essentially, first identify a relevant economic phenomenon and then consider whether it can be faithfully represented in the financial statements.
  • The components of faithful representation are: completeness, neutrality, and freedom from error.
  • Freedom from error does NOT mean the same thing as “accurate” or “precise”. Instead, it is described as meaning that “there are no errors or omissions in the description of the phenomenon, and the process used to produce the reported information has been selected and applied with no errors in the process.” Honestly, I found this point to be a little subtle and, given the inclusion of the other two components (completeness and neutrality), I’m not sure how much the notion of free from error adds, especially given the likelihood that it will be misinterpreted by lay readers as implying accuracy or precision.

Overall, I think the new hierarchy of information characteristics is significant improvement over the previous hierarchy…but that’s just my opinion.