Keep an Eye on Concepts Statements

“Future Cash Flow Measurements” (JofA, Oct.01, page 57) provides an excellent summary of the detailed guidance provided by FASB Concepts Statement no. 7, Using Cash Flow Information and Present Value in Accounting Measurements. However, JofA readers should be aware this statement could have a distinctive impact on the continuing development of U.S. GAAP.

The FASB series of concepts statements forms what is usually referred to as the “conceptual framework.” As most CPAs know, this body of objectives of financial reporting, qualitative characteristics of accounting information, definitions of elements of financial statements and criteria for recognizing and measuring those elements does not affect the practice of accounting directly—that is, it is not part of GAAP. The purpose of the conceptual framework is to set forth principles on which financial accounting and reporting standards are based.

Nevertheless, Concepts Statement no. 7 is important for practitioners for at least two reasons:

It is the first change in the conceptual framework since 1985. (As most auditors would attest, a change in something that rarely, if ever, changes is usually worthy of special examination.)

The focus of Statement no. 7 is measurement. Unlike Concepts Statement no. 5, which simply notes that multiple attributes are measured in accounting, Statement no. 7 provides very specific guidance regarding fair value measurement of both assets and liabilities.

Much ado about nothing? I think not. In contrast to the case of comprehensive income, included in the conceptual framework in 1980 but not part of GAAP until 1997, FASB has already used Concepts Statement no. 7 principles in two exposure drafts—one on impairment or disposal of long-lived assets and the other exposure draft on obligations associated with the retirement of long-lived assets.

I believe CPAs should prepare themselves for extensive involvement with fair values and that we should find a place on our radar screens for FASB concepts statements—they may become a much more important part of keeping up with the current trends in accounting and financial reporting.

John P. McAllister, CPA
Chairman and professor of accounting
Coles College of Business
Kennesaw State University
Atlanta