Introduction

Accounting has been rightly termed as business language. Its main purpose is to ascertain income or loss during the specified period for showing business financial condition on a particular date and have control over the property of a firm. Financial accounting is the way of reporting the business activity as well as the financial information to the creditors, investors, and the other people who are outside of the organization. Further, a common form of the financial information issued by the external users by the entities is GPFS.

Along with financial accounting standards, the financial statements should be apprehended to the strict set of rules, so that financial statements will be of higher quality and useful. GAAP oversees the standards and the principles of financial accounting. It involves the information of accounting that is required to be consistent, reliable, and relevant among the other things (Gaynor et al. 2016). This report aims to analyze the FASB conceptual framework, quality of accounting information, the role of SEC, and lastly, analysis on the relationship between SEC and FASB.

Discussion

FASB Conceptual Framework

The conceptual framework is a set of the interrelated fundamentals and objectives. It is referred to as the system of ideas and objectives, which leads towards the creation of a consistent set of standards and rules. Specifically, in the accounting, standards and rule set limits, function, as well as the nature of the financial statements and accounting (Fasb.org. 2020). The application of this framework can be done to various disciplines; however, when specifically linked with the financial reporting, a conceptual framework can be regarded as the GAAP statement, which form a frame of the reference for evaluating current practices and development of the new ones (The Conceptual Framework. 2020).

Benefits Expected from CF

The conceptual framework of FASB helps the board in setting comprehensive standards of financing accounting and assists members of a constituency of the Board for not only applying and understanding those standards but also contributing significantly towards their development. It is intended to assist in solving complex reporting issues or financial accounting with the help of providing set of the common premises as the basis for the dialogue, providing accurate terminology, encouraging to ask the right questions, restricting judgement areas and option apart from the consideration of potential explanations, which are in conflict with it, as well as imposing intellectual discipline on what was historically ad hoc and subjective process of reasoning (The Conceptual Framework. 2020).

Weaknesses of Framework

There is no doubt that CF establishes standards for the main accounting conventions and practices. However, this useful framework helps in presenting some limitations. The first limitation is that its biggest weaknesses is rigidity, which creeps into standard practices of accounting because of the framework implementation. This makes it quite impossible for the introduction of a new set of ideas into the system. Moreover, it is likely that the opportunity offered by CF is not acceptable to all the parties, but acceptable to only some of the interested groups of the individuals. The same framework may not be useful for all the parties (Fasb.org. 2020).

Recommendations for Enhancing CF

The recommendations for enhancing the conceptual framework are selection of suitable framework, and establishing and maintaining the community stakeholders’ engagement and partnership. The first recommendation states that the process for selecting the framework of implementation for a particular effort of implementation should consider framework purposes, levels included in the framework, depth of analysis and degree of inclusion, orientation of framework that includes types and setting of invention for which framework was designed originally. A framework should be evaluated against these criteria for seeing whether they fit the purpose of implementation effort. Further, the second recommendation states that the stakeholders should be included across multiple levels of the framework implementation process because the engagement of stakeholders is an integral component of the implementation.

Qualities of Useful Accounting Information

The two major qualities, which make accounting information valuable for making decision are relevance and the reliability. For being relevant, the information should be timely as well as should have feedback value or the predictive value or both (Fitrios, 2016). The relevant information of accounting is having the capability of making the difference in the decision by assisting the users for forming predictions regarding outcomes of the future, present, and past events or to correct or confirm previous expectations (Christensen, Nikolaev & Wittenberg‐Moerman, 2016). For being reliable, the information should have representational faithfulness, and it should be neutral and verifiable. The reliability of the measure depends on faithfulness with which it helps in representing what it aims to represent, in addition to the assurance for the user, which have the quality of representation. These two qualities of the accounting information are important because it helps in making the decision-making useful (The Conceptual Framework. 2020).

Recommendation of Additional Primary Quality

The recommendation of additional primary quality for enhancing accounting information is materiality. The concept of materiality infers that not all the financial information requirement needs to be communicated in the reports of accounting, rather only the material information needs to be reported. One of the factors in materiality judgment is the level of precision, which is possible in estimating judgment item. Further, deviation amount is considered as immaterial. It may increase, with the reduction in the attainable level of precision. For instance, generally, the estimation of accounts payable can be done in a more accurate way compared to contingent liabilities that are arising from threats of it, and any deviation is known to be material in first case may be insignificant in the second case. The next example is losses from the bad debts, which could be shrugged off as a routine by the large business. It may threaten continued existence of the small business. Further, any mistake in the valuation of inventory may be material in the small firm for which it cut half of its earnings, but immaterial in the firm for which it makes hardly traceable ripple in the incomes.

Role of SEC

The Securities and Exchange Commission also abbreviated as SEC is the independent federal regulatory agency of the US government that is responsible for protecting the investors, facilitating the formation of capital, and maintaining orderly and fair functioning of the securities market. The primary role of SEC is the enforcement of the regulation for the self-regulatory bodies are created to supervise the work of different organizations, such as public utility entities, publicly-held entities, stockbrokers, and investment advisors (Satin & Huffman, 2015). It plays major role in maintaining transparent, effective, and efficient markets. It oversees operations and involvement of the individual investors and operations of the organization. It monitors stock markets, self-regulatory entities, and securities companies. Further, SEC purposes to establish more strong regulations for over-the-counter derivatives, and the credit bureaus. It aims at developing better accounting as well as regulatory standards (Investor.gov. 2020).

In the US, there exists a close relationship between SEC and FASB. The SEC assists FASB in setting the accounting standards for public entities in the US. SEC is a government agency that is legally responsible for setting the standards of accounting, and FASB is a private sector body to whom responsibility is delegated by the SEC. The SEC designated FASB as an organization that holds the responsibility of setting the accounting standards for public entities in the US. The FASB is having the power of setting the accounting standards for the public entities, but not to enforce it. The SEC is always on the front line of the financial reporting and most probably is among the first to identify the emerging problems or issues of the areas of accounting, which require attention. The issues requiring attention, most often can be attributed towards new and the unique transactions, which arises in the marketplace; however, they may also arise from an authoritative literature. Further, SEC refers these issues or concerns to the FASB as well as its interpretative bodies for the suitable guidance, such as SEC urged FASB to provide the consolidation guidance relating to special purpose entities. It is in this way, both SEC and FASB work together for development and establishment of the financial theory and practices (Edel Lemus, 2014).

Recommendations for Improving Relationship Between the SEC and FASB

In order to improve the relationship between the SEC and FASB, it is recommended that while setting, updating, reviewing, and implementation of any accounting standard and principles, both SEC and FASB should work together so as to get best the outcome from it. Secondly, FASB should take suggestions from the stakeholders regarding any issue related to the accounting standard and work along with the SEC to remove any kind of issues in the future.

Conclusion

Therefore, it can be concluded from the analysis that financial reporting’s credibility can be enhanced, when concepts and objectives are used for providing structure as well as direction to financial reporting and accounting. CF assists through development of the standards that is not only consistent internally, but also consistent with each other. Further, it has been analyzed that the relevance and the reliability are known as the two major qualities of the accounting information that is helpful in the decision-making. Lastly, it can be said that SEC aims at protecting the investors, facilitating the formation of capital, and maintaining orderly, fair, and efficient markets.

Reference

Christensen, H. B., Nikolaev, V. V., & Wittenberg‐Moerman, R. (2016). Accounting information in financial contracting: The incomplete contract theory perspective. Journal of accounting research, 54(2), 397-435.

Edel Lemus, M. I. B. A. (2014). The similarities and differences between the financial reporting standards under United States. GAAP versus IFRS. Global Journal of Management And Business Research.

Fasb.org. (2020). Concepts Statement No. 8—Conceptual Framework for Financial Reporting—Chapter 1, The Objective of General Purpose Financial Reporting, and Chapter 3, Qualitative Characteristics of Useful Financial Information (a replacement of FASB Concepts Statements No. 1 and No. 2). Retrieved 25 August 2020, from https://www.fasb.org/jsp/FASB/Document_C/DocumentPage?cid=1176157498129

Fasb.org. (2020). Conceptual Framework for Financial Reporting: Objective of Financial Reporting and Qualitative Characteristics of Decision-Useful Financial Reporting Information. Retrieved 25 August 2020, from https://www.fasb.org/pv_conceptual_framework.pdf

Fitrios, R. (2016). Factors that influence accounting information system implementation and accounting information quality. International Journal Of Scientific & Technology Research, 5(4), 192-198.

Gaynor, L. M., Kelton, A. S., Mercer, M., & Yohn, T. L. (2016). Understanding the relation between financial reporting quality and audit quality. Auditing: A Journal of Practice & Theory, 35(4), 1-22.

Investor.gov. (2020). The Role of the SEC | Retrieved 25 August 2020, from https://www.investor.gov/introduction-investing/investing-basics/role-sec

Satin, D., & Huffman, T. (2015). FASB and IASB convergence: asymptotic relationship or transmogrification?. Academy of Accounting and Financial Studies Journal, 19(2), 239.

The Conceptual Framework. (2020). Retrieved 25 August 2020, from https://www.fasb.org/jsp/FASB/Page/BridgePage&cid=1176168367774#:~:text=The%20Conceptual%20Framework%20(or%20%E2%80%9CConcepts,of%20interrelated%20objectives%20and%20fundamentals.&text=Those%20concepts%20provide%20guidance%20in,should%20be%20summarized%20and%20reported.

The Conceptual Framework. (2020). Retrieved 25 August 2020, from https://www.fasb.org/jsp/FASB/Page/BridgePage&cid=1176168367774&pf=true