The definitions of revenues and expenses may be due for a makeover.
The FASB on Oct. 11, 2017, started working on an update to the chapter in its Conceptual Framework that includes definitions for fundamental elements of financial reporting, including revenues, expenses, gains and losses.
The board agreed to consider whether revenues should be defined as inflows or other enhancements of assets of an entity or settlements of its liabilities, or a combination of both, from delivering or producing goods, rendering services or other activities. The definition of expenses could be updated to be described as outflows or “other using up of assets,” an incurrence of liabilities, or a combination of both, from delivering or producing goods, rendering services or other activities.
The board stopped short of deleting a phrase in both definitions — “ongoing, major, or central,” in reference to an entity’s continuing operations — that the board’s staff said is sometimes too strict a requirement and precludes items from being characterized as revenues or expenses.
“We wanted to expand what is revenue; particularly we want to correct the fact that sales of products, goods, and services are now not revenues or expenses if they’re not major or central,” said James Leisenring, a former FASB member who remains a senior advisor to the board and its staff. “You could have enormous revenues and expenses flow through an entity that might not be... what people think of when they think of major or central.”
A majority of the board, however, said it would consider keeping the phrase in. Members of the FASB’s research staff also said they would come back later with guidance to distinguish between gains and losses.
“Since none of those paths have been flushed out yet, I’m fine with us going forward, continuing to explore this approach, but it comes with a big caveat,” FASB member Christine Botosan said. “That is, until we see the explanatory language, until we see these other paths, and have a better sense of if this definition is going to scope down, so not everything becomes a revenue and everything on other side becomes an expense.”
FASB member Harold Monk said he also needed to see more of the revisions to the Conceptual Framework before proceeding. He said the proposed new definitions may not even help distinguish between transactions in all scenarios. He offered the example of a used car dealership and a liquor store owned by the same entity.
“If the liquor store sells their delivery truck, is that going to be different from the sale of the used car next door? It’s obviously different characteristics, but it’s the same transaction,” Monk said. “Clearly, whatever language is put around this, it is going to be absolutely critical to find a way to describe any number of situations.”
The discussion was part of the FASB’s ongoing effort to update its Conceptual Framework, the guide the board uses to help it set consistent accounting standards.
Statements of Financial Accounting Concepts (CON) No. 6, Elements of Financial Statements: a Replacement of FASB Concepts Statement No. 3 — Incorporating an Amendment of FASB Concepts Statement No. 2, was published in 1985 and includes definitions for revenues, expenses, gains and losses, as well as a discussion of how the elements differ from each other. But some financial professionals view the chapter as being too limited in its discussion of many important financial statement elements. The discussion is “tenuous and inconclusive” about how to distinguish between the elements, and the chapter itself acknowledges that there could be shortcomings in the definitions, a FASB staff member said.
Further, the definitions of revenues and expenses use similar language. Revenues are defined as inflows or other enhancements of assets of an entity or settlements of its liabilities from delivering or producing goods, rendering services or other activities that constitute the entity’s major or central operations. Expenses are defined as outflows or use of assets or an incurrence of liabilities from delivering or producing goods, rendering services, or carrying out other activities that constitute the entity’s ongoing major or central operations.
In both descriptions, the phrase “other activities” is considered vague. The phrase “ongoing major or central operations” is also unclear, the FASB’s staff said.
Gains and losses are described as the result of peripheral or incidental transactions — all other transactions and events that are not considered revenues, expenses or investments by or distributions to owners.
As part of the broader Conceptual Framework project, the FASB also is considering an update to the chapter on financial statement disclosures. At the board’s Oct. 4 meeting, a majority of FASB members agreed that employee benefit plans will not be assessed the same way as other organizations and businesses when the FASB decides whether they should have to disclose certain information.
Botosan was the lone dissenter to this provision on Oct. 4 because she said she believed it did not make sense in the context of the broader effort to complete the Conceptual Framework. If the FASB voted to exclude employee benefit plans from the disclosure chapter, it would have to be consistent and decide whether to exclude them from the framework’s other chapters, she said.
When she brought this up again on Oct. 11, the discussion became uncharacteristically tense for a topic that may, to outsiders, seem esoteric and with little practical importance for financial reporting.
“The problem is, [with] the Conceptual Framework, you’re supposed to be able to read the words, and they are supposed to mean something,” Botosan said.
FASB Vice Chairman James Kroeker expressed frustration at revisiting the debate.
“If we’re going to bring this back again, I’m going to start insisting when I lose 6-1 that we bring back things three and four and five times,” Kroeker said. “This has been voted on. Christine, that’s not how the process works.”
“It applies to every chapter; it’s a system,” Botosan said.
Board members proceeded to debate whether the framework should be silent about how employee benefit plans should be assessed in the scheme of the chapter on elements or the Conceptual Framework as a whole but did not come to a conclusion.
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