FASB Proposes Changes to the Definitions of Financial Statement Elements

On July 16, the Financial Accounting Standards Board (FASB) issued exposure draft Concepts Statement No. 8, Conceptual Framework for Financial Reporting, Chapter 4: Elements of Financial Statements (CS 8), which will modify the existing definitions of elements of financial statements presently outlined in Concepts Statement 6 (CS 6). While such statements do not establish accounting principles generally accepted in the United States (U.S. GAAP), they are meant to provide structure and direction for financial accounting and reporting, thereby facilitating the provision of unbiased information. The standards serve to help the FASB develop new U.S. GAAP that is applicable to both businesses and not-for-profit entities, including colleges and universities.

The major distinction in CS 8 will be to simplify the wordy definition currently in place for assets and liabilities, a welcome update. Under CS 6, assets are defined as “probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events,” while liabilities are defined as “probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events.”

The proposed change in CS 8 would modify the definition of assets to “a present right of an entity to an economic benefit,” while a liability would be more simply defined as “a present obligation of an entity to transfer an economic benefit.” Both definitions are unquestionably more straightforward and much easier to understand.

One distinction in the new definition is a present right or obligation, which could have specific implications for not-for-profit entities. A present right would mean the right exists at the financial statement date, which could raise questions relating to possible changes to balance sheet accounts. CS 8 also provides further clarification on a number of unique accounting scenarios that could help entities assess the potential impact.

Entities are encouraged to read the draft and submit any questions or comments, which are due to the FASB by November 13. As past practice, the FASB will provide a transitional period for all entities once final changes are approved.