FASB Report Entitled Selected Issues

¶ … FASB report entitled Selected Issues Relating to Assets and Liabilities with Uncertainties was based on a joint 2004 project between FASB and IASB with the purpose of improving the organization's conceptual framework. The areas of improvements generally focus on establishing objectives for better financial reporting by creating qualitative characteristics to be used when conducting financial reporting. The main area of interest in the report is assets and liabilities, primarily the role of probability and uncertainty in defining, recognizing and measuring assets and liabilities. Thus, the goal of the report is to establish an objective framework to be used when reporting on the financial issue of probability and uncertainty and its role in measuring assets and liabilities.

The reason FASB and IASB commenced on this conceptual framework development initiative is because it was felt that "existing frameworks do not adequately address either probability or uncertainty as they relate to assets and liabilities." Further, although both FASB and IASB both have a general standard used to report on assets and liabilities and their relationships with uncertainties, the two organizations' standards have many inconsistent differences on how they relate to the use of probability and uncertainty in recognizing an measuring assets and liabilities. More so, the FASB standard is also inconsistent with its own conceptual framework.

A further reason for the development of the conceptual framework is to update the standards used in treatment of probability and uncertainty that has occurred in recent time. FASB has begun using a fair value measurement in most of its standards. However, using a fair value measurement standard with the current conceptual framework is problematic in that the current framework only "considers the use of probability and uncertainty in measurement in the context of a present value calculation" and thus fails to assign a proper measurement role to probability and uncertainty.

According to the current conceptual frameworks, uncertainty is acknowledged as part of the proper definitions of both assets and liabilities. However, neither of the organization's frameworks impose a necessary "threshold level of probability or expectation of cash inflows or outflows in order for an item to satisfy the definition of an asset or liability." Further, the current IASB framework does include a probability threshold criterion as part of its recognition criteria, whereas no such criteria exist in the current FASB conceptual framework.

The proposed conceptual framework proposes numerous alterations to the current framework in order to bring coordination between both the FASB and ISAB conceptual frameworks and also to bring the individual organization's frameworks into line with their set standards. To accomplish this, the proposed conceptual frameworks recommend numerous changes. For example, it is proposed that the term "contingent asset" be deleted from the framework as a contingent asset is not a resource that is controlled but really only a possible asset whose control depends on the uncontrollable outcome of a future event and thus does not truly meet the definition of "asset." To explain its thinking, the exposure draft provides an insurance contract as means of example on its proposed thinking of the relation between unconditional and conditional rights. According to the example, an entity purchasing an insurance contract has two inherit rights: both an unconditional right to the insurance coverage and a conditional right to reimbursement if an insured loss occurs sometime in the future. The unconditional right is a present asset, whereas the conditional right to reimbursement is not a present asset as it becoming an asset is dependent on an uncontrollable and unpredictable future event.

Likewise, the proposed conceptual framework also proposes to delete the term "contingent liability" from is standards. Under the current definition, "contingent liability" refers to either a possible obligation whose existence depends on a future event or a yet unrecognized present obligation. The reasoning for the proposed elimination is similar to that used for the proposed elimination of the term "contingent asset" previously discussed. Namely, the board proposes the term's deletion because "a contractual liability often comprises both an unconditional obligation that meets the definition of a liability and a conditional obligation that may indicate the presence of the related unconditional obligation but is itself only a possible future liability that does not meet the definition of a liability."