Academic journal article Academy of Accounting and Financial Studies Journal

An Evaluation of the FASB's Conceptual Framework from a User's Perspective

Academic journal article Academy of Accounting and Financial Studies Journal

An Evaluation of the FASB's Conceptual Framework from a User's Perspective

Article excerpt


The Financial Accounting Standards Board (FASB) has been criticized for not requiring firms to report information that is interpretable and useful for financial statement users (CICA, 1980). The FASB's conceptual framework is the foundation from which accounting standards are derived. Therefore, any accounting conceptual framework, if it is properly followed, must embody a set of qualitative characteristics that ensures financial reporting provides users with adequate information for decision making. The U.S. financial accounting conceptual framework was established in the late 1970's and early 1980's. Statement of Financial Accounting Concepts (SFAC) No. 2 (1980) indicates that there are five main qualitative characteristics of accounting information: understandability, relevance, reliability, comparability, and consistency.

The conceptual framework was formed with the intention of providing the backbone for principles-based accounting standards (Nobes, 2005). Despite these intentions, the Securities and Exchange Commission (SEC) has criticized the accounting standards setting board for becoming overly rules-based, which paves the way for the structuring of transactions in the company's favor (SEC, 2003). Moreover, critics of the framework have stressed that the movement towards rules-based standards is a consequence of inadequacies in the accounting conceptual foundation. Nobes (2005) argues that the need for rules-based accounting standards is a direct result of the FASB trying to force a fit between accounting standards and a conceptual framework that is not fully developed.

The need for a strong conceptual framework is not only necessary for the establishment of principles-based accounting standards but also for the development of international accounting standards. Most industrialized countries have seen the need and benefits for adopting International Financial Reporting Standards (IFRS). Nevertheless, the United States, in particular the FASB and SEC, has been reluctant to move toward full adoption of IFRS (SEC, 2002; Tweedie, 2004). Instead, the U.S. has opted to tackle the task of achieving convergence between U.S. GAAP and IFRS. Thus, since IFRS is primarily principles based, the accounting conceptual framework within the U.S. must provide an adequate foundation that will facilitate the convergence with IFRS (Nobes, 2005). Interestingly, the FASB has even depicted its conceptual framework as 'incomplete, internally inconsistent, and ambiguous' (FASB, 2002).

A coherent and strong conceptual framework is vital for the development of principles-based accounting standards and their convergence with the international accounting standards. Furthermore, the FASB's current conceptual framework has been criticized as being inadequate for guiding standard setting. However, we are unaware of any empirical evidence that supports the criticisms of the current conceptual framework. Additionally, none of the critics have looked at the conceptual framework from the most important viewpoint, the user's perspective. Therefore, the purpose of this paper is to empirically analyze the adequacy of the conceptual framework in influencing an individual's intention or propensity to use/rely on financial statements. Our study contributes to the accounting literature by being the first to provide empirical evidence to evaluate the previous criticisms of the FASB's conceptual framework, doing so from a user's perspective. The results of our study have the potential to provide the FASB and other accounting policymakers with further evidence supporting the need to develop a principles-based conceptual framework. In addition, our study helps pave the way for additional research that aids in developing an improved conceptual framework that enhances the standard setting process.

We developed a survey instrument to analyze individuals' intentions to rely on financial statements using Ajzen's (1991) Theory of Planned Behavior. …

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