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Fasb Standard Setting and Economic Consequences

Autor:   •  March 9, 2013  •  Research Paper  •  1,503 Words (7 Pages)  •  1,001 Views

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The FASB should consider economic consequences in the standard setting process; “The Board cannot cease to be concerned about the cost-effectiveness of its standards. To do so would be a dereliction of its duty and a disservice to its constituents”. (SFAC No.2 P. 144) FASB member Victor H. Brown identified the economic costs to consider:

“The costs of introducing a new standard, of course, include the out of pocket costs of converting to the new standard, the costs of processing and reporting the information required, and possible increases in audit cost…..But costs may also include disclosure costs, measured in terms of lost competitive advantage. Even harder to assess are the costs incurred by all parties in attempting to understand, digest, and adapt to new rules. The new rules can have an impact on existing and prospective contractual relationships, and internal management and organizational adjustments must often be made to understand and relate to new ways of measuring entity performance. External users of financial reports also must adjust to and interpret reported information produced in accordance with the changed standards”.

The FASB considers the economic consequences of a standard during the normal course of its political “due process”. According to FASB’s The Structure of Establishing Accounting Standards, “The process of setting accounting standards can be described as democratic because like all rule-making bodies the board’s right to make rules depends ultimately on the consent of the ruled”. One of the advantages of the process is that external parties are invited to comment on exposure drafts or present testimony during roundtable discussions. The history behind SFAS No. 123 provides us with a prime example of external parties influencing Board decision in order to avoid detrimental economic consequences on reported earnings and finally influencing to regulate because of the economic consequences. The 1993 Exposure Draft was extremely controversial and the Board received over 1,700 comment letters objecting to the recognition of compensation costs for employee share options. The Board held six days of public hearings and representatives from 73 organizations presented testimony. Amazingly, legislative proposals addressing this accounting issue were introduced before Congress both opposing and supporting proposals in the 1993 exposure draft. “A Sense of the Senate resolution was passed that the FASB should not at this time change the current generally accepted accounting treatment of stock options and stock purchase plans”. However, a second resolution was passed stating, “Congress should not impair the objectivity or integrity of the FASB’s decision making process by legislating accounting rules”. In light of the extraordinary controversy surrounding the 1993 Exposure Draft, the Board decided to encourage, rather than require, recognition of compensation cost based on a

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