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As the FASB and the IASB con- verge U.S. GAAP and IFRS at the standard level, they are also achieving convergence at the conceptual level.
In September 2010, the U.S. Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) completed the first phase of a project that will influence global standards setting for many years to come. Specifically, the Boards converged key portions of their conceptual frameworks. This month's column will explain what the Boards have done and the significance of their accomplishment.
What's a Conceptual Framework?
A conceptual framework for a set of accounting standards is an explicit declaration of the fundamental concepts on which the set of standards is based. The concepts addressed by conceptual frameworks tend to be general in nature, broad in scope, and stable over time. For example, a conceptual framework typically will identify the kinds of financial statements that reporting entities should prepare (balance sheet, income statement, etc.) and define the basic elements of those financial statements (assets, liabilities, income, expenses, etc.).
Having a conceptual framework eliminates the need for a standards setter, such as the FASB or the IASB, to reestablish core concepts each time it develops or updates a standard. Additionally, by consistently referring to a stable conceptual framework, a standards setter is more likely to promulgate standards that are consistent with each other as well as with significant assumptions and constraints.
The conceptual framework of U.S. Generally Accepted Accounting Principles (GAAP) is documented in a series of Statements of Financial Accounting Concepts (SFACs) issued by the FASB. The IASB has documented the conceptual framework of International Financial Reporting Standards (IFRS) in its Framework for the Preparation and Presentation of Financial Statements. Though similar in some respects, the two frameworks have always been separate and distinct from each other-until recently. As part of their efforts to converge the specific standards that comprise U.S. GAAP and IFRS, the Boards have begun to converge their conceptual frameworks as well.
The FASB-IASB Conceptual Framework Project
In October 2004, the FASB and the IASB added a joint conceptual framework project to their agendas. The objective of the project is "to develop an improved common conceptual framework that provides a sound foundation for developing future accounting standards." In...