Conceptual Framework

Date recorded:

The Board was joined in London by a member of the FASB staff and a member of the Canadian AcSB staff, and via video link by several members of the FASB staff team.

Objectives of Financial Reporting - Stewardship and Accountability

The discussion was in response to a request made in April 2005 by both the IASB and the FASB that the staff investigate the meaning of the terms stewardship and accountability and the implications of having such objectives in the IASB and FASB conceptual frameworks. The IASB discussed these objectives within the context of providing decision-useful information. Most members agreed with the staff recommendation that providing the information needed to assess stewardship or accountability should not be added as an explicit objective of financial reporting by business entities (11 in favour; 3 opposed).

In reaching that determination, one Board member expressed a strongly-held view that stewardship remains an objective of financial reporting, especially in separate financial statements. While admitting that there was overlap, those who supported having stewardship as a separate objective did not want to see the concept subsumed in 'useful for economic decision-making.' Some also mentioned stewardship in relation to small and medium-sized entities, but it was noted that in many circumstances this would not be the case since management and owners were the same. Accountability was also defended, particularly as the concept was interrelated to reporting performance. There needed to be a way of holding management accountable for growing the business at a rate faster than the cost of capital. Analysts expected this, but preparers were less accepting of this.

It was accepted that part of the problem was that there were different notions of stewardship and accountability embedded in financial reporting. What was accepted by all was that the conceptual frameworks needed a better discussion of the two notions, probably in the Basis for Conclusions. It was suggested that this discussion might differentiate the two, perhaps relating stewardship as reporting to owners and accountability as reporting to a wider constituency.

One Board member noted the link between these concepts and the notion of 'chief economic decision-maker' in IAS 14. The Board agreed a staff recommendation that the conceptual frameworks should retain a discussion that acknowledges that financial information is useful for other purposes, which include assessing management's stewardship and compliance with laws, regulations, and contractual provisions. Specifically:


  • (a) Information about the economic resources of an entity, the claims to those resources, and the changes in them also is useful for purposes other than making investment, credit, or similar resource allocation decisions.
  • (b) Financial reporting information may be useful in assessing how management of an entity has discharged its stewardship responsibility to owners (stockholders) for the use of resources entrusted to it.
  • (c) Financial reporting information may be useful in assessing management's performance. However, financial reporting usually cannot and does not separate management performance from entity performance.
  • (d) Financial reporting information may be useful in assessing an entity's compliance with laws, regulations, and contractual provisions.


Several Board members wanted to see stronger language in (b) and (c), while another cautioned that (d) needed to be rephrased so that expectations were not raised unduly. In particular without qualification, 'compliance with laws…' could be read to include 'did my delivery drivers always obey the speed limit?', etc!

Conceptual Framework - relationships between the qualitative characteristics

The Board discussed an approach to describing the relationship between qualitative characteristics, basing their discussion on the flowchart reproduced in the Observer notes. Board members generally supported the flowchart (or schematic, as one preferred to call it) but raised concerns about the placement of timeliness and materiality. For example, the fact that financial information is 'stale' would not be a reason for not reporting it, as was suggested by the schematic. This led to the realisation that the flowchart used the same terms to communicate different things.

Board members seemed to think that the schematic was preferable to the hierarchy currently contained in the FASB Statement of Financial Accounting Concepts. However, the schematic needed further work to show that the characteristics were inter-related rather than linear. In addition, the operation of the characteristics of comparability ('to what?') and consistency (across items within the entity? or across entities?) needed to be resolved.

The Board agreed that the schematic was worth developing and asked the staff to do so, taking into account their comments.

Definitions of 'understandability' and 'materiality'

The Board approved definitions of understandability and materiality as follows:


Understandability is the quality of information that enables users to comprehend its meaning. Financial statement users are expected to have a reasonable knowledge of business and economic activities and accounting, and a willingness to study the information with reasonable diligence. Understandability is enhanced when information is aggregated, classified, characterized, and presented in a clear and concise manner. Relevant information should not be excluded because it is too complex or difficult for certain users to understand.


Information is material if its omission or misstatement could influence the economic decisions of users taken on the basis of the financial statements. Materiality depends on the nature and amount of the item judged in the particular circumstances of its omission or misstatement. Given the pervasive nature of materiality, it is difficult to consider the concept except as it relates to the qualitative characteristics of relevance and faithful representation. Thus, materiality is a screen or filter used to determine whether information is sufficiently significant to influence the decisions of users in the context of the entity, rather than as a qualitative characteristic of decision useful financial information.

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