FASB and IASB further explain that these users are interested in the cash flows of the entity so they can assess the potential returns and the potential variability of those returns (e.g., in paragraph OB.23). I wish they had drawn the logical conclusion that financial reporting ought to exclude income smoothing. Income smoothing leads the user to assess a smaller variance of earnings than warranted by the underlying economics; income smoothing biases downward the actual variability of the earnings and thus the returns.

Later, in the basis of conclusions, the document addresses the reporting of comprehensive income and its components (see BC1.28-31). Currently, FASB has four items that enter other comprehensive income: gains and losses on available-for-sale investments, losses when incurring additional amounts to recognize a minimum pension liability, exchange gains and losses from a foreign subsidiary under the all-current method, and gains and losses from derivatives that hedge cash flows.

The purported reason for this demarcation between earnings and other comprehensive income rests with the purported low reliability of measurements of these four items; however, the real reason for these other comprehensive items seems to be political. For example, FASB capitulated in Statement No. 115 when a number of managers objected to reporting gains and losses on available-for-sale securities because that would create volatility in earnings. (I find it curious how FASB caters to the whims of managers but claims that the primary rationale for financial reporting is to serve the investment community.) Because one has a hard time reconciling other comprehensive income with the needs of investors and creditors, it would serve the investment community better if the boards eliminate this notion of comprehensive income.

Two IASB members think that an objective for financial reporting should encompass the stewardship function (see AV1.1-7). Stewardship seems to be a subset of economic usefulness, so this objection is pointless. It behooves these two IASB members to explain the consequences of adopting a stewardship objective and how these consequences differ from the usefulness objective before we can entertain their protestation seriously.

Sections BC1.42 and 43 ask whether management intent should be a part of the financial reporting process. Given management intent during the last decade, I think decidedly not. Management intent is merely a license to massage accounting numbers as managers please. Fortunately, the Justice Department calls such tactics fraud.

Chapter 2 of this document concerns qualitative characteristics. For the most part, this presentation is similar to that in Concepts Statement No. 2, though arranged somewhat differently. Concepts 2 had as its overarching qualitative characteristics relevance and reliability. This Preliminary Views expounds relevance, faithful representation, comparability, and understandability as the qualitative characteristics.

The discussion on faithful representation is interesting (QC.16-19) inasmuch as they distinguish between accounts that depict real world phenomena and accounts that are constructs with no real world referents. They explain that deferred debits and credits do not possess faithful representation because they are merely the creation of accountants. I hope that analysis applies to deferred income tax debits and credits.

Verifiability implies similar measures by different measurers (QC.23-26). I wish FASB and IASB to include auditability as an aspect of verifiability; after all, if you cannot audit something, it is hardly verifiable. Yet, the soon to be released standard on fair value measurements includes a variety of items that will prove difficult if not impossible to audit.

Understandability is obvious, though the two boards feel that users with a "reasonable knowledge of business and economic activities" can understand financial statements. I no longer agree. Such a person might employ a profit analysis model or ratio analysis on a set of financial statements and mis-analyze a firm's condition because he or she did not make analytical adjustments for off-balance sheet items and other fanciful tricks by managers. This includes so many of Enron's investors and creditors. No, to understand financial reporting today, you must be an expert in accounting and finance.

Benefits-that-justify-costs acts as a constraint on financial reporting. While this criterion is acceptable, too often the boards view costs only from the perspective of the preparers. I wish the boards explicitly acknowledged the fact that not reporting on some things adds costs to users. When a business enterprise engages in aggressive accounting, the expert user needs to employ analytical adjustments to correct this overzealousness. These adjustments consume the investor's economic resources and thus involve costs to the investment community.

In the basis-for-conclusions section, FASB and IASB explain that the concept of substance over form is included in the concept of faithful representation (see paragraphs BC2.17 and 18). While I don't have a problem with that, I think they should at least emphasize this point in Chapter 2 rather than bury it in this section. Substance over form is a critically important doctrine, especially as it relates to business combinations and leases, so it deserves greater stress.

On balance, the document is well written and contains a good clarification of the objective of financial reporting and the qualitative characteristics of decision-useful financial reporting information. I offer the criticisms above as a hope to strengthen and improve the Preliminary Views.

My most important comment, however, does not address any particular aspects within the document itself. Instead, I worry about the usefulness of this objective and these qualitative characteristics to FASB and IASB. To enjoy coherent financial reporting, there not only is need for a sound, comprehensive, and internally consistent framework, we also must have a board with the political will to utilize the conceptual framework. FASB ignored its own conceptual framework in its issuance of standards on:

• Leases (Aren't the financial commitments of the lessee a liability?)
• Pensions (How can the pension intangible asset really be an asset as it has no real world referent?)
• Stock options (Why did the board not require the expensing of stock options in the 1990s when stock options clearly involve real costs to the firm?), and
• Special purpose entities (Why did the board wait for the collapse of Enron before dealing with this issue?).