Answered Essay: Can someone please summarize this from "the top 10 reasons to fix the FASB's conceptual framework"

Can someone please summarize this from “the top 10 reasons to fix the FASB’s conceptual framework”

9. Costs and Benefits

The FASB and IASB would do everyone a good turn by abandoning the timeworn notion that only statement preparers incur reporting costs and that only users reap the benefits. This chestnut isn’t true and never has been.

The costs of reporting aren’t borne by preparers but by their entities’ owners, who are also among the reports’ pri- mary users. Furthermore, managers benefit greatly from better public information that enables capital markets to establish more efficient security prices that reflect real risks.

There are no reasonable grounds for believing that markets respond to today’s inferior public information by bidding prices higher and accepting returns that are too low for their risk. In fact, the only rational response to incomplete and untrustworthy financial reports is lower security prices and higher capital costs.

The Boards’ discussions must articulate the point that management policies intended to reduce preparation costs diminish information quality and thus lead to higher information-gathering and processing costs. The seem- ingly economical practice of reporting only the bare min- imum is actually much more costly than just reporting what management already knows (or ought to know).

If users want to know assets’ market values not dis- closed by management, then all users must make deci- sions under uncertainty or elect to go through their own expensive estimation process. Adding to the total cost is the fact that the users’ self-generated data has question- able reliability and limited capacity to reduce uncertainty. If so, they demand higher returns, which, in turn, increase the reporting company’s cost of capital.

A decision to reduce accounting costs unavoidably caus- es total costs to go higher. Considered within the context that the highest objective of financial reporting is promot- ing economic productivity, it’s clear that overall savings can be achieved by mandating additional disclosures of useful information. (In fact, we’re confident that managers and owners can reap even greater savings by voluntarily disclos- ing useful information that isn’t required.)

These points are controversial, but we encourage the Boards to expand their discussion to include all costs and benefits, not just the simplistic idea that managers bear all costs and gain no benefits while users gain all benefits and bear no costs. In fact, both sides incur costs and gain benefits; once that relationship is clear, constructive progress is sure to follow.

Expert Answer

 

1. The cost of reporting financial statement is ultemately borne by entity’s owners (not management) who are also the primary users of financial reports.

2. Captal market cannot be fooled with low public information. Instead, an incomplete and untrustworthy financial report will lead to lower security prices and thus, higher capital cost.

3. In order to preven cost, management tends to report bare minimum (only the essentials). This leads to users estmating the maket value themselves which might not be correct. A wrong estimate by user will lead to higher expectation by user increasing the cost of capital. This causes the total cost to go higher

4. Since the highest objective of financial reporting is increasing eceonmic productivity, additional disclosures and useful informaio in reporting will help us acheive the same.

5. Thus, borad should include all costs and benifits (both for management and owners point of view) which will benifit all.

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