SFAS No. 12 And The Conceptual Framework

Statement of Financial Accounting Standard (SFAS) 12 is intended to reduce the diversity that existed in the accounting treatment of marketable equity securities. Progress now has been made in formulation of a conceptual framework capable of providing a basis for the resolution of many issues. Several of the Statements of Financial Accounting Concepts (SFAC) that have been adopted point to the fact that generally accepted accounting principles (GAAP) deviate significantly from the objectives, elements, qualitative characteristics, and recognition and measurement criteria of financial information set forth in the SFACs. The deviation involving SFAS 12 involves the use of the market value method of measurement of marketable equity securities instead of the lower of cost or market (LCM) advocated by the Financial Accounting Standards Board (FASB). A review of this problem in light of several of the SFACs illustrates that the FASB needs to: 1. implement its SFACs by reviewing and amending the current accounting treatment in the area of marketable equity securities, and 2. make GAAP consistent with the SFAC characteristics of financial reporting.