Answered Essay: Can you please summarize what this is saying? It is part of the "TheTop 10 reasons to Fix the FASB's Conceptual Framework"

Can you please summarize what this is saying? It is part of the “TheTop 10 reasons to Fix the FASB’s Conceptual Framework”

Expenses Redefined
The FASB’s struggle over expensing employee stock options was prolonged in part because the CFW’s definition of expense doesn’t clearly include equity-based payments.

The existing definition says an expense involves a decrease in assets and/or an increase in liabilities, but the FASB didn’t anticipate situations in which companies might pay for goods or services by issuing equity instru- ments. The definition can be easily modified to add share-

based payments. We’d simply strike one word and add the italicized words to the original definition from SFAC 6:

“Expenses are outflows or other using up of assets or incurrences of liabilities or issuances of equity-based finan- cial instruments (or combinations of both these events) from delivering or producing goods, rendering services, or other activities that constitute the entity’s ongoing major or central operations.”

Would this have prevented the Options War that broke out when the FASB first proposed reporting an expense for options granted to employees? Probably not, but it would’ve given the Board more resources for resisting opponents who used the definition’s omission of equity to buttress their arguments that options don’t create expenses.

Expert Answer


The writing provided with this question puts forward reasons on why the U.S. Financial Accounting Standards Board (FASB) should amend its Conceptual Framework. The framework has to be broadened to make it more principle based and make it more consistent with international accounting requirements. The sacred idea being held by FASB was that expenses are outflows that should involve a decrease in assets and/or an increase in liabilities. Principle based framework will consider different situations like issue of equity instruments in a more rational manner.

This relates to the sixth reason of the 10 top reasons. The sixth reason is that of expenses being redefined. Thus the definition of expenses has to be amended to remove the shortcomings of FASB in this regard and develop a better framework for financial reporting that will be highly useful and relevant in future. Reconsidering the theoretical foundations of the FASB framework will only help it to augment and strengthen the framework more effectively.

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