The Financial Accounting Standards Board has issued an exposure draft of a new chapter to Concepts Statement No. 8 (CON 8) on financial statement elements. The proposed Chapter 4 of CON 8, which would replace Concepts Statement No. 6 (Elements of Financial Statements), defines elements of financial statements for FASB to apply in future standard setting for businesses and not-for-profit organizations.
The intent is to provide a framework that enhances how financial information is used and understood by users.
The exposure draft is not changing the elements but, rather, clarifying the definitions of the elements in that statement for changes in practices and standards since CON 6 was issued in 1985 and eliminating language that is difficult to understand and apply. Although FASB Concepts Statements are not authoritative, they are used in accounting for events and transactions when GAAP standards are not specified.
Elements of financial statements are building blocks that determine their content and are broad classes rather than specific accounts. For an item to be recognized in financial statements, it must have the characteristics of one of the elements but also must meet recognition criteria.
There are 10 proposed elements of financial statements that are defined and whose characteristics are discussed in the proposed chapter: assets, liabilities, equity (net assets), revenues, expenses, gains, losses, investments by owners, distributions to owners, and comprehensive income. The chapter identifies rights that give rise to an asset and obligations that result in a liability, clarifies the distinctions between liabilities and equity and between revenues/gains and expenses/losses, and modifies distinctions in equity for not-for-profits compared with business entities.
The proposal is part of FASB’s ongoing conceptual framework project started in 2004 and reactivated in 2014. The exposure draft includes 11 questions FASB is particularly interested in and would like to hear comment on. For more information, FASB has provided an overview in “FASB In Focus” of the changes and next steps for the board.
The deadline for comments is Nov. 13.