Financial statements are trying to do too much.

• Author: Cunningham, Colleen

What is the purpose of "general purpose" financial statements? The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) are undergoing a joint project on the Conceptual Framework, arguably the most important project on the boards' agendas. The reconstituted framework will impact all future (and likely, many past) accounting standards and will be a barometer for decision-making.

FASB's current framework has seven Concepts statements, the first being "Objectives of Financial Reporting by Business Enterprises" (CON 1). CON 1 acknowledges that financial statements are a central feature of financial reporting. The broader concept of financial reporting includes not only the financial statements but also other means of communicating information that relates, directly or indirectly, to the financial statements.

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I think it is important that in this joint project, the boards differentiate between the purpose of the financial statements and the purpose of financial reporting. A lot of issues related to the complexity in accounting standards come from the desire for the financial statements themselves to be everything to everybody, seemingly ignoring the ability to communicate to the user through disclosure. The body of users, as currently defined in CON 1, is exhaustive.

In a letter to the IASB last June, FEI's Committee on Private Companies' Standards Subcommittee notes that in the current conceptual framework, the definition of users is broad and includes "potential investors" and the "capital markets as a whole. This view results in an existing framework that focuses the purpose of financial statements prospectively on potential investment and credit decision-makers." Even for public companies, it becomes very difficult presenting financial statements for both existing investors and creditors, as well as potential investors.

This is unique to the U.S. In fact, in most other countries, the primary purpose of financial statements is stewardship: How efficiently has the company used its resources to run its business? (For those interested in an analysis of the differences between the U.S. and other countries, I highly recommend an excellent paper, Divided by Common Language, written by Tim Bush of Hermes Pensions Management, published by the Institute of Chartered Accountants in England and Wales).

Attempting to provide a company's value to both existing and potential investors...