FASB Final Framework Wraps, Launching a New Era in Accounting

The Financial Accounting Standards Board accomplished two critical milestones when it adopted the final chapter of its conceptual framework on July 12—creating a baseline and clearing its agenda.

The chapter focuses on measurement factors for board members to consider as they set standards. It might seem odd that accountants must define measurement in 2024 when it is core to the profession. But practitioners should resist labeling this project inside baseball, as it will prove crucial for a profession adapting to changing technological and staffing landscapes.

This framework, while not spelling out journal entries or footnotes, provides the fundamental definitions, assumptions, and characteristics of financial reporting.

Creating a Baseline

The final chapter sets a baseline that “measurement is anchored in prices—both entry and exit prices.” When faced with an emerging fact pattern around a transaction, the FASB will begin by considering which of these two measurement systems is appropriate.

For example, as companies adapt to generative artificial intelligence, questions around measuring software and intangible assets could take center stage. Not surprisingly, both are already on the FASB’s agenda, and the measurement chapter provides a roadmap to help the board select one system over the other.

The measurement chapter might have new labels, but don’t be fooled. The FASB remains committed to a mixed measurement model that includes historical cost and fair value while respecting the cost constraint of financial reporting. Two measurement systems are characterized as a feature, not a bug, by allowing standard setters flexibility when considering measurement questions in the context of specific standard-setting projects.

The entry price measurement system is what accountants call historical cost—it’s rooted in the price to acquire an asset, or the consideration received that created a liability. The entry and exit price measurements are equal on day one of the asset or liability but diverge as the exit price increases or decreases over time when the expected benefits from the asset or value of an obligation change.

The exit price system includes fair value measurement. Accountants, investors, academics, and regulators have debated the costs and benefits of fair value accounting since its introduction in the early 2000s. The FASB concluded two systems were necessary to balance the benefits and costs of financial reports.

Clearing the Agenda

The final measurement chapter is a turning point for the board. It’s the first time since 2006 that it hasn’t had a conceptual framework project on its agenda. This isn’t to suggest that the FASB agenda only focused on the framework or to ignore that the FASB periodically put framework projects on hold to focus on more pressing standards.

Instead, the conclusion of this project opens up bandwidth for the board, and time will tell whether future standard-setting projects will benefit from the guidance of a fully revised framework.

The FASB has 12 active standard-setting projects and seven research projects on its agenda. The topics are wide-ranging, from software costs and intangible assets to commodities, government grants, and environmental credit programs. Now we know the baseline for any measurement discussions will be two measurement systems rooted in prices.

As I tell my students, look to the comment letters submitted to the FASB if you want to know the implications for the profession and broader business community. The board outlined an upper and lower boundary for measuring assets and liabilities, recommending that assets not be more than what is recoverable and liabilities not be more than what is settleable.

Comment letters from auditors and academics question whether these boundaries imply accounting for liabilities below settlement value, as occurs in current practice for zero-interest bonds and other liabilities, will need to change.

Answers to measurement challenges may result in unintended consequences for businesses. Because the measurement chapter isn’t authoritative and defers to board judgment on a specific accounting standard, it isn’t yet clear whether such concerns require standard setter action.

In the meantime, the FASB has closed nearly two decades of work and can shift toward tackling the accounting questions necessary to navigate the next two decades.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Amanda M. Convery is an associate professor in the department of accounting and MIS and a women’s leadership initiative fellow at the Lerner College of Business & Economics at University of Delaware.

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