I have been spending most of 2011 immersed in managerial accounting as I completely rework my course on that topic from the ground up.  This has led me to rethink the Conceptual Framework as well.  One of the most striking differences between the managerial accountant’s and financial accountant’s approaches seems to be that the former are far more focused on causality.  For example, the Balanced Scorecard requires firms to identify key objectives and tie each one to a measure, a targeted level of performance, and an initiative to help the firm hit the target).  But the BSC also requires firms to link the objectives together in a causal map: e.g., better employee training causes more predictable product yields, which causes greater customer retention, which causes higher revenue and ROA.

As far as I can tell, financial statements have no such causal connections.  It might be tempting to say that “revenue causes a firm’s wealth to rise”, but I would view that as a misinterpretation.  Instead, revenue (just like any other item on the income statement or statement of changes in shareholder equity) is just a way of classifying a change in wealth according to its type. The change in wealth is in fact caused by an event that is external to the financial statements, and results in the simultaneous recording of an increase in assets and an increase in revenue.

Why do I bring it up?  When I put on my managerial accountant’s hat and ask “what do I want to know about a business”, the answer isn’t “I want to know how events were classified on the financial statements.”  Instead it is “I want to know the causal model that leads to future increases in wealth.” Financial statements don’t seem to shed much light on that causal model.  Neither do most of the disclosures discussed as possibilities for the Disclosure Framework; those simply shed more light on the financial statements.

Put another way:  The Conceptual Framework emphasizes the user’s need to predict future cash flows.  If you really wanted to predict future cash flows, would your first step be to create financial statements as you see them today?  Or would you want a balanced scorecard?  If the latter, does the existing Conceptual Framework misstate the goal of financial reporting?