ACC 6050 Module 3 Written Assignment: Decision Usefulness or Stewardship? Example

Prediction or Accountability? The Objectives of Financial Reporting and Why the Choice Matters

Student Name

Master of Science in Accounting, Thomas Edison State University

ACC-6050: Fundamentals of Accounting II

Mentor Name

Month Day, Year

Prediction or Accountability? The Objectives of Financial Reporting and Why the Choice Matters

Introduction

A conceptual framework begins with an objective, because the qualities, elements and measurement bases that follow are chosen to serve it. Wolk et al. (2017) describe two traditions. In the stewardship tradition, accounts exist so owners can see how managers used the resources entrusted to them. In the decision usefulness tradition, accounts exist to help investors and creditors make decisions about providing resources, chiefly by assessing future cash flows.

The Two Objectives

The traditions often agree, but they diverge when current values move for reasons outside management's control. A rise in interest rates that lowers bond values says little about management's skill but a great deal about the company's current economic position.

The FASB's 2010 Framework

When the FASB and IASB revised the first chapter of their frameworks together in 2010, they adopted decision usefulness as the objective and treated stewardship not as a separate objective but as part of it: information about how efficiently management discharged its responsibilities is useful for decisions about providing resources (Financial Accounting Standards Board [FASB], 2010). Critics, especially in Europe, argued that folding stewardship into decision usefulness downgraded accountability and tilted standards toward fair value.

The IASB's 2018 Framework

The IASB's revised framework of 2018 kept decision usefulness as the objective but gave stewardship more prominence, stating that users need information to assess management's stewardship of the entity's resources as well as to assess prospects for future cash flows. It also emphasized prudence, caution in judgments under uncertainty, which the 2010 version had dropped. The FASB has not made the same changes, so the two frameworks now differ in emphasis even though their wording on the objective remains close.

The FASB has not followed the IASB in raising stewardship's profile, so the two frameworks now differ slightly in emphasis even though their objective chapters were written together. In practice, the difference shows up in debates about recycling and about when current values belong in profit rather than in other comprehensive income.

Application: Cape Atlantic Mutual Insurance

Cape Atlantic Mutual, a composite New Jersey property insurer, holds a $900 million bond portfolio to pay future claims. Rising interest rates in the past year reduced its fair value by $68 million. The company intends to hold most bonds to maturity.

From a decision usefulness view, fair value is informative: it shows the current economic resources available to pay claims and the company's exposure to interest rates, information that helps investors and regulators assess solvency. From a stewardship view, the $68 million decline mostly reflects market rates, not management's choices, and including it in performance could obscure how well managers priced policies and controlled claims. A stewardship-oriented user might prefer amortized cost in income with fair value disclosed. Current U.S. standards reflect a compromise: debt securities classified as available for sale are carried at fair value with changes in other comprehensive income, so the balance sheet shows current value while net income stays closer to management's operating performance. Research suggests both kinds of information are used; Song et al. (2010) found that investors priced fair value estimates for financial instruments, with less weight on the least observable estimates, especially where governance was weak.

A stewardship reading points the other way: management did not cause the rate rise and plans to hold the bonds until claims are paid, so a large unrealized loss in income would say little about how well the insurer was run.

Conclusion

The objective of financial reporting is not a technicality. Decision usefulness favors current values that help forecasting; stewardship favors measures that reveal management's performance. The boards' frameworks have diverged in emphasis since 2010, and compromises such as presenting fair value changes in other comprehensive income show how standard setters try to serve both. The Cape Atlantic case shows why: the same bond portfolio supports different numbers depending on the question the report is meant to answer.

References

Financial Accounting Standards Board. (2010). Conceptual framework for financial reporting: Chapter 1, the objective of general purpose financial reporting (Statement of Financial Accounting Concepts No. 8).

Song, C. J., Thomas, W. B., & Yi, H. (2010). Value relevance of FAS No. 157 fair value hierarchy information and the impact of corporate governance mechanisms. The Accounting Review, 85(4), 1375-1410. https://doi.org/10.2308/accr.2010.85.4.1375

Wolk, H. I., Dodd, J. L., & Rozycki, J. J. (2017). Accounting theory: Conceptual issues in a political and economic environment (9th ed.). Sage Publications.