The FASB's Cost/Benefit Constraint in Theory and Practice

The FASB in its Conceptual Framework has set high principles in the ethics of standard-setting in accounting. This paper concentrates on what the FASB calls the cost/benefit constraint, i.e., the commitment to setting an accounting standard only when the benefits of the standard exceeds the costs of that standard to all stakeholders. This constraint is supposed to take precedence over other concerns, such as neutrality (freedom from bias) of account information. The major conclusion of this paper is that a conflict exists between the FASB's commitment and its practice. There is no evidence that the FASB has always made a costs and benefits judgement with respect to proposed standards. In the cases when such a judgement is made, the FASB discounts social costs; therefore, it is not considering costs to all stakeholders. At the same time the FASB discounts social costs, it seems to have an undue concern for standards that do not increase the volatility of net income. The Conceptual Framework explicitly defines costs as the costs to society as a whole.