Should the FASB Be Neutral or Responsive? Neutral
SHOULD THE FASB BE NEUTRAL OR RESPONSIVE? Standard setters solicit the opinions of constituents who have favored accounting methods for certain transactions. To what extent should the Financial Accounting Standards Board be responsive to the opinions presented? And to what extent should it base decisions on theoretical accounting considerations? In the following articles, the Journal introduces its new Point/Counterpoint feature. The purpose is to explore both sides of issues vital to accounting. NEUTRAL says Paul B. W. Miller Accounting standard setters often hear arguments that a proposal should be adopted or avoided because of what it would do to the "public interest." For example, respondents told the Financial Accounting Standards Board that capitalizing leases would make it difficult for lessees to obtain financing and would drive lessors out of business. It also was told U.S. companies would not innovate if they had to write off research and development expenditures. Many respondents argue the FASB's proposals on postretirement benefits other than pensions will cause employers to stop offering them and put a greater burden on Medicare. A July 1988 survey conducted by the Business Roundtable supplies the most direct evidence that influential individuals believe accounting standards should be used to accomplish non-accounting objectives. This question was posed: "Accounting rules can influence companies' actions, and sometimes accounting rules can discourage economic actions that are in the public interest. Some people think the FASB should take public policy considerations into account when setting accounting standards, while others think the FASB should only look at accounting considerations. In its rule-making decisions, do you think the FASB should * Ignore public policy concerns? * Consider public policy concerns?" Eighty-one percent of 133 responding chief executive officers and 81% of 142 chief financial officers said public policy concerns should be considered. THE OBJECTIVE OF FINANCIAL ACCOUNTING This evidence shows the fundamental issue is: "What should the objective of financial accounting and reporting be?" The FASB said in Concepts Statement no. 1, Objectives of Financial Reporting by Business Enterprises, the goal is to "provide information that is useful to present and potential investors, creditors and other users in making rational investment, credit and similar decisions." Those who raise arguments about economic consequences, however, seem to believe the purpose ought to be to provide information that's useful for leading present and potential investors, creditors and other users to reach desired investment, credit and similar decisions. It's not surprising neutrality is important to the FASB, which defined it in Concepts Statement no. 2, Qualitative Characteristics of Accounting Information, as the "absence in reported information of bias intended to attain a predetermined result or to induce a particular mode of behavior." Thus, the FASB rejected the idea that information should be employed to lead users to desired decisions. This article describes five factors that should be contemplated in assessing the need for neutral standard setting: * Ethics and effectiveness. * Financial statement contamination. * Need for feedback. * Constitutionality considerations. * Implications for efficient capital markets. I believe neutrality must not be forgotten. It's needed for effective standard setting and for effective financial statements. ETHICS AND EFFECTIVENESS One way governments promote the well-being of a society (or a particular part of it) is by trying to control decision making. Control can be exerted by manipulating decision makers' goals, resources or information. Goals are manipulated by creating new incentives or disincentives for certain actions. …