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The IASB and the FASB are in a joint project to update, complete and converge their conceptual frameworks. The two standard-setters have not identified the merits of the asset-liability view as a cross-cutting issue. This paper suggests that the relationship between the objective of financial reporting and the asset-liability view is not substantiated, and that there is little evidence that the frameworks and the asset and liability definitions have been useful in establishing objective recognition criteria. Hence, there are reasons for the FASB and the IASB to challenge the asset-liability view.
The FASB initiated its conceptual framework project in 1973. The other leading standardsetters, commonly referred to as the G4 + 1 (the AcSB in Canada, the ASB in the UK, the AASB in Australia, the FRSB in New Zealand, and the IASB), have modelled their frameworks on that of the FASB (Gore 1992, 1995, Lennard 1994, FASB 2001, Monson 2001). One of the objectives of each of the conceptual frameworks is to guide the body responsible for setting accounting standards. The standard-setting bodies are believed to be the primary beneficiaries of these frameworks (introductory paragraph of the FASB Concepts Statements, IASB 1989).
The conceptual framework projects represented a shift from a descriptive and inductive approach, where accounting concepts and principles were induced from observations of accounting practices, to normative and deductive frameworks where accounting concepts and principles are deduced from normative objectives of financial reporting. Equally important, the conceptual frameworks represented a shift from the revenueexpense (R-E) view to the asset-liability (A-L) view (Petree 1993, Storey and Storey 1998, FASB 20043).1 At the time the shift was initiated, the accounting practices were not uniform, and revenue and expense recognition was claimed to be flexible to the extent that it was difficult to separate manipulation from proper application of the accounting rules (Hylton 1965, FASB 2004a). The FASB was concerned about the inability of the R-E view to give rise to objective recognition criteria, and tried to solve the recognition problem by introducing a conceptual framework with emphasis on asset and liability definitions (A-L definitions). The reliance on the A-L view is also common in the conceptual frameworks of the other leading standard-setters.
This paper serves three purposes. First, it examines the conceptual conflict...