Todd Johnson's first article is entitled "Understanding the Conceptual Framework." In this paper, Mr. Johnson reminds us that the conceptual framework consists of the objectives of general purpose financial reporting and the concepts and ideas that flow from these objectives. The objectives are anchored to ideas of wealth and changes in wealth for investors, both equity investors and creditors.

He then provides an example concerning two views about what focus to adopt when preparing and displaying a set of financial statements. One viewpoint focuses on assets and liabilities, while the other perspective favors an emphasis on revenues and expenses. Johnson says that the board has focused on the asset-and-liability approach because it can easily define revenues and expenses upon a foundation that defines assets and liabilities; but, the board could not go the other direction. A revenue-and-expense approach did not provide useful definitions of assets and liabilities. What he misses, however, is that these are not the only two approaches possible (e.g., one might make cash flows the foundation concept), and it would be nice to have some arguments that support one method on something more than mere pragmatism. While Johnson correctly points out some deficiencies of the revenue-and-expense approach (e.g., it produced all sorts of dangling debits and credits that don't seem relevant or reliable in any sense), he has not demonstrated that the asset-and-liability approach will not create its own nonsense. He merely implies such a state of affairs.

In "The Project to Revisit the Conceptual Framework," Todd Johnson reveals that the International Accounting Standards Board will be working on a similar project with the FASB. There are obvious advantages to that cooperation. He also indicates some reasons for a new look at the conceptual framework. First, the framework has not kept up with various changes. I haven't the slightest idea of which changes he means, so it would prove helpful if he would enlighten us. Which changes in business or economics or politics or whatever have rendered some or all of the conceptual framework less useful? And why do these changes enervate the conceptual framework? If he or others at the FASB would fill in the details, we would have a better sense about the force of this argument.

A second reason for re-examining the conceptual, according to Johnson, is that "inconsistencies need to be eliminated." I agree with this statement completely. Here, too, it would have been advantageous if he would have told us which inconsistencies the board thinks exists. We might want to augment its list.

Johnson's third motivation for revisiting the framework comes from the FASB's not completing various segments of the conceptual framework. This appeals to one's common sense, of course, so let's hope the board completes the project on this second try.

Johnson sums up by appealing to the principles-based approach to standards setting. The old conceptual framework worked well under a rules-based approach, but a principles-based approach will require a new conceptual framework. This motivation is specious, for neither the SEC nor the FASB has provided any clear distinction between the two approaches, nor have they provided any rationale for why we need a principles-based approach. Indeed, to the extent that there is any difference between the two approaches, I feel that the principles-based approach is a license to commit future accounting scandals. The board should stop and consider whether it really desires to aid and abet corporate managers in such endeavors.

Johnson unfortunately missed the biggest problem of all with the extant conceptual framework—at times the board ignores it. After providing a good, tight definition of assets, the board allows some resources to be omitted if accounted for as operating leases. And it admits goodwill to the balance sheet, even though goodwill is merely a plug figure to make debits equal credits. Similarly, the board provides an excellent definition of liabilities and then proceeds to allow a bunch of liabilities to escape recognition on the balance sheet, such as lease obligations, pension obligations, and obligations held by special purpose entities. If the board is going to ignore its own constitution, why should it bother to engage in these efforts? Is the board actually planning to adhere to the conceptual framework in the future?

J. EDWARD KETZ is accounting professor at The Pennsylvania State University. Dr. Ketz's teaching and research interests focus on financial accounting, accounting information systems, and accounting ethics. He is the author of Hidden Financial Risk, which explores the causes of recent accounting scandals, and columnist of The Accounting Cycle for SmartPros.com.