Discuss on The Influence of Accounting Theory on the FASB Conceptual Framework

The Influence of Accounting Theory on the FASB Conceptual Framework

ABSTRACT: During the first half of the 20th century, ‘‘accounting theory’’ developed primarily by accounting scholars and academics provided the primary basis for the practice and teaching of financial accounting in the United States. Since the creation of the Financial Accounting Standards Board (FASB) in the early 1970s, the FASB Conceptual Framework has provided the primary basis for accounting standards-setting, as well as for the practice and teaching of financial accounting. While the purpose of creating a Conceptual Framework has been to develop an agreed-upon set of concepts and principles to guide accounting standards-setting, a related goal has been to reduce diversity in accounting practice and to move toward greater uniformity. This paper traces the influence of accounting theory on the Conceptual Framework and explores some of the consequences of this influence. Keywords: financial accounting; accounting theory; accounting standard-setting; Conceptual Framework. INTRODUCTION The purpose of this paper is to examine the influence of Accounting Theory on the FASB Conceptual Framework. Accounting Theory encompasses a wide variety of texts and treatises written by accounting scholars and academics over a period of approximately 100 years (from the late 19th century to the 1970s). In contrast, the FASB Conceptual Framework was specifically designed by the FASB during the 1970s and 1980s for the following purpose: The FASB Conceptual Framework is a coherent system of interrelated objectives and fundamentals that is expected to lead to consistent standards and that prescribes the nature, function, and limits of financial accounting and reporting. It is expected to serve the public interest by providing structure and direction to financial accounting and reporting to facilitate the provision of even handed financial and related information that is useful in assisting capital and other markets to function efficiently in allocating scarce resources in the economy. (FASB 1980, Concepts Statement No. 2) Thus, the distinction between Accounting Theory and the Conceptual Framework is that Accounting Theory was written by many different scholars and theorists, over a period of many years, and it addressed a number of different approaches to financial accounting and reporting, while the FASB Conceptual Framework is intended to be an official statement by the FASB regarding the purpose and objectives of financial accounting and reporting. Accounting theory during the first part of the 20th century was focused on answering persistent questions derived from accounting practice, such as: What is the purpose of financial accounting? (e.g., to reflect management’s stewardship of company assets or to provide information useful for investors and creditors in making financial decisions); From what perspective should financial statements be prepared? (e.g., the proprietor of the enterprise or the total entity); What is the best way to measure periodic income? (e.g., matching expenses against revenues or measuring the change in the value of net assets); What is the definition of an asset, liability, equity, revenue, or expense, and how should these items be measured? (e.g., historical cost, replacement cost, or fair value). These issues have been debated over many years and they continue to be debated today. The answers have often been motivated by the desire to establish an agreed-upon set of concepts and principles for financial accounting, but also by the desire to achieve uniformity in accounting practice. The scope of this paper spans the development of financial accounting from an initial period in which Accounting Theory played a significant role in both the practice and teaching of accounting, to more recent periods during which the FASB Conceptual Framework has become the primary basis for the promulgation of accounting standards, as well as the practice and teaching of accounting. Despite the apparent reduction in the role of Accounting Theory, the primary argument of this paper is Editor’s note: Accepted by Gloria Vollmers. Submitted: July 2016 Accepted: June 2017 Published Online: December 2017 109 that Accounting Theory has had an important influence on the creation of the Conceptual Framework and that, in many cases, the work of accounting scholars and academics has been the primary source of this influence. The paper will survey the contributions of several key accounting scholars, such as: Charles Sprague, Henry Rand Hatfield, William Paton, A. C. Littleton, Maurice Moonitz, George Sorter, and Robert Sprouse. In addition, certain accounting practitioners who demonstrated a scholarly perspective, such as George O. May, will also be included.