Blindsided: How Concern for Second Tier Issues Mislead Standard Setters

There is a widespread and longstanding realization that the accounting standard setting process has failed to achieve its stated objective, that is, the production of accounting standards that provide decision-useful information to users of general purpose financial reports. Much of the literature surrounding this problem is concerned with the principles versus rules debate. This is important, however, a more immediate issue is whether or not standard setters are producing accounting rules that meet the objective of producing decision-useful information. Despite the political heat generated by Enron and other corporate collapses, there is some evidence that some standard setters continue to ignore the Conceptual Framework and are unduly swayed by second tier issues when developing and reviewing accounting rules. This paper contrasts the approach adopted by the standard setters in EITF 90-15, and EITF 96-16 with that adopted in FIN 46(R) to highlight some of the consequences of adopting a narrowly focused approach, compared to an approach that explicitly incorporates the decision-usefulness objective of the Conceptual Framework.