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O BJECTIVES After reading this chapter, you will be able to: 1 Explain the FASB conceptual framework. 2 Understand the relationship among the objectives of financial reporting. 3 Identify the general objective of financial reporting. 4 Describe the three specific objectives of financial reporting. 5 Discuss the types of useful information for investment and credit decision making. 6 Explain the qualities of useful accounting information. 7 Understand the accounting assumptions and principles that influence GAAP. 8 Define the elements of financial statements. 9 List the qualitative characteristics of useful information in the tentative FASB and IASB joint conceptual framework (Appendix). Financial Reporting: Its Conceptual Framework Image Source/Getty Images 2 CHAPTER 00980_03_ch02_p0036-0073.qxd 11/17/08 4:50 PM Page 36
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37 Number One Head If It’s Broken . . . Fix It! U.S. GAAP is widely considered the most complete and well-developed set of accounting standards in the world. However, U.S. accounting standards recently have come under increasing criticism as being too rules-based. U.S. accounting standards are viewed as having become too long and com- plex, containing too many percentage tests (bright lines), and allowing numerous excep- tions to the principles underlying the stan- dards. Together, the rules-based nature of the standards is seen to have fostered a “check-the-box mentality” that allowed financial “engineers” to comply with the let- ter of the standards while not always showing the underlying reality of the transactions. In its review of U.S. accounting standards, the Securities and Exchange Commission (SEC) noted that the lease accounting rules are made up of approximately 16 FASB State- ments and Interpretations, 9 Technical Bul- letins, and more than 30 EITF Abstracts. Also, there are more than 800 pages of accounting guidance relating to derivatives. One promi- nent controller described recently issued accounting guidance as a mistake that was so complicated that organizations are uncer- tain if they can even follow the rules. What is the solution? The SEC has recommended that future accounting standards should not follow a rules-based, nor principles-only approach, but should be “objectives-oriented.” This principles-based standard setting approach should be built on an improved and consis- tently applied conceptual framework. This approach should clearly state the accounting objective of the standard, provide sufficient detail and structure so that the standard can be applied consistently, minimize exceptions to the standard, and avoid the use of bright- line tests. The development of objectives- oriented standards should improve the relevance, reliability, and comparability of financial information resulting in more mean- ingful and informative financial statements.
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