Over the course of my career, I have to admit that I’ve paid little attention to the scope paragrahs of financial accounting standards. Lately, I’ve been thinking that this might be the best place to look for a conceptual framework. In other words, how broad a (principles-based) framework would we need to alleviate the need for these exceptions that run through virtually all standards.

For example, among many other items, the currently circulating exposure draft on revenue recognition “scopes out” any revenue recognized by a lessor (par. 6); and the currently circulating exposure draft on leases “scopes out” any valuation and revenue recognition issues related to investment properties (par. BC55-58). A separate project that hasn’t reached exposure draft stage deals with investment properties.  With a broad enough conceptual framework, perhaps one principles-based standard could cover revenue recognition, leases and investment properties. 

For example, if we had a standard that said revenue is recognized when the right of use and associated risks pass to the other party to the transaction, and assets with contractually identified future cash flows should be recorded at the discounted present value of expected future cash flows, it seems to me that this could cover construction projects, leases and investment properties under one umbrella. The challenge is to write a standard that creates a big enough umbrella to cover all three types of transactions.

The conceptual framework is moving through the standard setting process more slowly than individual projects on leasing, revenue recognition, investment properties, and many other issues. Perhaps this is an example of putting the cart before the horse. If the horse had broad enough shoulders, perhaps there would be less need for the amount of “scoping out” that we see in current exposure drafts. What do others think?