Economic Consequence Consideration
ATG 563 - Advanced Accounting Theory
Should economic consequences be considered by the FASB in the accounting standard setting process? Yes, the FASB should consider economic consequences in the accounting standard setting process. Ever since the creation of the FASB in 1973, it was charged with establishing standards of financial accounting and reporting in the most efficient and complete manner possible. The goal of the FASB is to maintain a neutral stance and set standards that will be helpful in predicting cash flows and in assessing managerial performance. The objectives as stated in FASB Statement of Concepts 1 stem primarily ...view middle of the document...
FASB Concept 1 states financial reporting should provide information that is useful to present and potential investors and creditors and other users in making rational investment, credit, and similar decisions. Because the audience using and relying on financial reporting is growing, economic consequences affecting them should also be considered.
An advantage that standards can provide is more and better information for external users. The benefits come with a short term increase in costs due to a learning curve. The advantage would be that users would have more and better information and thus better equipped to assess the amounts, timing, and uncertainty of prospective net cash inflows to the related enterprise. Investors and creditors want standards to mandate more disclosures than corporations are willing to supply. While a standard requiring more disclosure is an advantage for external users, it’s a disadvantage for organizations and auditors because of the increase in costs to prepare the more comprehensive financial reports. The FASB only considers costs in the narrowest of senses, producer costs, and benefits are thought of primarily in terms of the information needs of the stock market. The FASB’s primary objective is providing useful information for external users subject to the benefits and or costs constraint. Not all economic event considerations will be a zero sum game, in some cases management will have the advantage and in some cases the external user will have the advantage. Information can both be useful for decision making and also involve economic consequences. Unfortunately, the FASB does not have any reliable information on costs and benefits. The Board can only make informed judgments based on what it knows at the time. The affect a proposed standard will have on companies is not known. The only measurable costs are the ones borne the preparers and auditors.
Standards can positively or negatively impact the U.S economy. The economic consequences related to how pension benefits and health care costs after retirement are accounted for on the balance sheet and income statement is yet another example of how standards can have an impact. Economic consequences have to be considered in this example because of the implication to so many.
In August 17,2010 the FASB and IASB issued an exposure draft proposing a new lease accounting paradigm. The proposed changes would simplify lease accounting and improve transparency. FASB’s objective is to ensure consistent lease accounting across sectors and industries and thus, improving the quality and comparability of financial reporting. According to the World Leasing Yearbook 2010, leasing activities in 2008 totaled $640 billion. The economic consequence of the proposal is an increase in assets and liabilities on the balance sheet for all leases previously account for as operating leases. The income statement would no longer reflect straight line rent expense, but amortization of...