A new document outlining where the Financial Accounting Standards Board and the International Accounting Standards Board plan to take accounting parts ways with at least one of SEC Chairman Christopher Cox’s priorities. The document, posted on the FASB’s website last Thursday, outlines “preliminary views” of the two boards’ conceptual framework for financial reporting and sets out what the boards call the “objective of financial reporting and qualitative characteristics of decision-useful financial reporting information.” While it represents only an initial step in their standard-setting process before they issue a proposal for the conceptual framework known as an exposure draft, the document establishes a clear path to that goal and as such reflects the boards’ thinking at this point in the process.
That thinking turns out not to be in exact accord with Cox’s views on transparency. In remarks before the annual conference of the American Institute of Certified Public Accountants in Washington, D.C., last December, the SEC chairman stated that “we’re looking for recommendations on how to make the rules and their application much more clear, straightforward and transparent. From an investor protection standpoint, the need for greater clarity and transparency is obvious.”
Not exactly, say the boards in the “preliminary views” document. In essence, they contend that transparency is required of the information that companies report, not the rules those companies must observe when supplying that information. “Accountants, regulators, and others have used ‘transparency’ in different ways,” the report notes. “To some,” it adds, “transparency is a quality of financial reporting information. The FASB and the IASB use the term in that sense. Others have used the term to refer to a quality of accounting standards.” The report then cites Cox’s remarks to the AICPA conference.
It goes on to say that “the boards concluded that ‘transparency’ should not be added as a qualitative characteristic of decision-useful financial reporting information because to do so would be redundant. Rather, transparent information results from applying several qualitative characteristics that the framework already incorporates, including ‘faithful representation’ and its components of ‘neutrality’ and ‘completeness.’ ” The report adds that enhancing understandability also improves transparency.
The distinction being drawn by the standards-setting boards is more than a narrow dispute over semantics. Indeed, it may play no small a part in their ability to obtain their stated objective of an accounting system that focuses on assets and liabilities rather than income and for the most part measures their value based on current market price rather than historical cost, a project advanced by the on-going work on the conceptual framework. While some critics warn that the effort will make current accounting standards more complex, the FASB’s chairman, Robert Herz, has deflected such complaints by pointing out that complexity facing preparers — companies and auditors — in using the standards to prepare financial statements may not necessarily mean complexity facing users — investors and creditors — when trying to understand them.
Echoing that distinction, the boards’ apparent hair-splitting over the meaning of transparency in the new document could be a critical marker in the larger debate.