What Are the FASB Concepts Statements?

The Financial Accounting Standards Board (FASB) Concepts Statements form the theoretical foundation for financial accounting and reporting in the United States. This conceptual framework acts as a constitution for the FASB, guiding its process for developing new accounting standards. It provides a coherent system of interrelated objectives and fundamentals that helps ensure the consistent and logical development of accounting rules over time. The framework has been consolidated into a single document, Concepts Statement No. 8 (CON 8).

The Concepts Statements themselves are not Generally Accepted Accounting Principles (GAAP). They do not establish enforceable accounting rules and cannot override any specific guidance found within the FASB’s Accounting Standards Codification (ASC), which is the single source of authoritative GAAP. Instead, the Concepts Statements are the blueprint the FASB uses to construct the detailed rules that companies must follow, ensuring that standard-setting is based on established principles.

Objective and Qualitative Characteristics of Financial Reporting

The primary objective of general purpose financial reporting is to provide financial information about a company that is useful to its existing and potential investors, lenders, and other creditors. These users rely on financial reports to make decisions, such as whether to buy, sell, or hold a company’s stock, or whether to extend a loan. The framework is built to serve the needs of these external decision-makers who lack the ability to demand information directly from the company.

To be useful, financial information must possess certain qualitative characteristics, divided into fundamental and enhancing characteristics. The two fundamental qualities are relevance and faithful representation. Relevance means the information is capable of making a difference in a user’s decision. The information has predictive value if it helps users forecast future outcomes, or confirmatory value if it provides feedback about previous evaluations. Materiality is an aspect of relevance; information is material if omitting or misstating it could influence a user’s decision.

Faithful representation requires that the financial information depicts the economic reality of what it purports to represent. This means the information must be complete, including all data necessary for a user to understand the phenomenon being depicted. It must also be neutral, free from bias in its selection or presentation, and free from error.

Beyond the fundamental traits, there are four enhancing qualitative characteristics that improve the usefulness of information:

• Comparability allows users to identify similarities and differences between two sets of economic data, either for the same company over time or between different companies.
• Verifiability means that different knowledgeable and independent observers could reach a consensus that a particular depiction is a faithful representation.
• Timeliness signifies that information is available to decision-makers before it loses its capacity to influence their decisions.
• Understandability requires that information is classified, characterized, and presented clearly and concisely.

The Elements of Financial Statements

The fundamental elements that structure financial statements are the distinct building blocks used to classify transactions and other events, creating a shared language for financial reporting.

• Assets are economic benefits obtained or controlled by a particular entity as a result of past transactions or events.
• Liabilities are a present obligation of an entity to transfer an economic benefit as a result of past transactions or events.
• Equity, or net assets, represents the residual interest in the assets of an entity that remains after deducting its liabilities.
• Investments by owners are increases in the equity of a business resulting from transfers of something valuable from other entities to obtain or increase ownership interests.
• Distributions to owners are decreases in the equity of a business resulting from transferring assets, rendering services, or incurring liabilities to owners.
• Comprehensive income is the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources.
• Revenues are inflows or other enhancements of assets or settlements of liabilities from delivering or producing goods, rendering services, or other activities.
• Expenses are outflows or other using up of assets or incurrences of liabilities from delivering or producing goods, rendering services, or carrying out other activities.
• Gains are increases in equity from an entity’s transactions.
• Losses are decreases in equity from an entity’s transactions.

Recognition and Measurement

The conceptual framework also provides guidance on when to record an item in the financial statements and how to assign a monetary value to it.

Recognition and Derecognition

Recognition is the process of formally recording an item in the financial statements. An item should be recognized if it meets three criteria. First, it must meet the definition of one of the elements of financial statements. Second, the item must be measurable and have a relevant measurement attribute. Third, the item can be depicted and measured with faithful representation.

Measurement

Once an item is recognized, a company must determine how to measure it. The framework provides for two primary systems: the entry price system and the exit price system. An entry price refers to the value used to acquire an asset or incur a liability, such as historical cost or current replacement cost. An exit price refers to the value that would be received to sell an asset or be paid to settle a liability, such as fair value. The selection of a measurement system depends on which approach provides the most relevant information to financial statement users.

Presentation and Disclosure Concepts

After financial information is recognized and measured, it must be effectively communicated to users. Presentation refers to the display of information in the main body of the financial statements, such as the balance sheet, income statement, and statement of cash flows. These statements are the primary vehicle for communicating a company’s financial position and performance. Grouping similar items together into classified formats, such as separating current assets from non-current assets on the balance sheet, helps users analyze a company’s liquidity and financial flexibility.

Disclosure provides additional information through the notes to the financial statements. These notes offer context and detail that cannot be conveyed in the statements themselves. For example, the notes will describe the specific accounting policies a company has chosen, such as the method used to depreciate its assets or value its inventory. The notes also provide supplementary information about unrecognized items, risks, and uncertainties. Disclosures might include details about a pending lawsuit, the terms of a major debt agreement, or a breakdown of revenues by geographic region.