For the complete Conceptual Framework project chronology, please go to our Conceptual Framework Project Overview page.

Timetable

• Click for IASB Project Timetable

Background

At their joint meeting in October 2004, the IASB and the US FASB decided to add to their respective agendas a joint project to develop a common conceptual framework, based on and built on both the existing IASB Framework and the FASB Conceptual Framework, that both Boards would use as a basis for their accounting standards.

The two boards reached the following tentative decisions about the approach to the project:

• The project should initially focus on concepts applicable to business entities in the private sector. Later, the boards should consider the applicability of those concepts to other sectors, beginning with not-for-profit organizations in the private sector.
• The project should be divided into phases, with the initial focus being on achieving the convergence of the frameworks and improving particular aspects of the frameworks dealing with objectives, qualitative characteristics, elements, recognition, and measurement. Furthermore, as the frameworks converge and are improved, priority should be given to addressing issues that are likely to yield benefits to the boards in the short term, that is, cross-cutting issues that affect a number of their projects for new or revised standards.
• The converged framework should be in the form of a single document. It should include a summary and a basis for conclusions.

Project Is Being Conducted in Eight Phases

The Conceptual Framework project is being conducted in eight phases. We have organised our project notes on IAS Plus with a separate web page for each phase plus a page on the overall approach to the project (click below to go to the relevant page):

• Overall Approach to the Project
• Phase A: Objective and Qualitative Characteristics – This Page
• Phase B: Elements and Recognition
• Phase C: Measurement
• Phase D: Reporting Entity
• Phase E: Presentation and Disclosure
• Phase F: Purpose and Status
• Phase G: Application to Not-for-profit Entities
• Phase H: Remaining Issues

Discussion at the April 2005 IASB-FASB Joint Meeting - Objective

The Boards considered a number of issues in relation to the objective of financial reporting.

The first issue considered was whether the objective of financial reporting should be to provide information to a wide range of users or only to existing common shareholders. It was noted that the existing frameworks of both Boards, and all others that had come to the attention of the staff defined users very broadly. The staff proposed that the existing understanding of 'users' should be retained, and noted that a limitation to common shareholders would be inappropriate in some countries depending on their corporate governance requirements. It was noted that users are generally those who make risky investments (in whatever form) in an entity, and are not always classified as equity holders for accounting purposes. The Boards agreed that users should be a wide group of people, and noted that information that certain user groups may require that others do not might become apparent later in the project.

The Boards noted that there is an important distinction of those who can and cannot demand financial information from the entity suited specifically to their information needs. However, it was noted that some entities must prepare GAAP accounts because certain of their users who are in a position to demand information for their own needs demand GAAP accounts. It was noted that while these users are part of the broad definition of 'users' no requirements should be put in place specifically in respect of such users (as should they require anything, they may demand it of a specific entity themselves.)

The next discussion was whether the role of financial reporting is to assist users in decision-making or to compile past transactions and it was agreed that the role of financial reporting is to assist with decision-making. The Boards then discussed whether, having agreed the primary objective is to assist decision-making, a sub-objective in relationship to the role of accountability and stewardship should be incorporated. Such an objective is included in most existing frameworks. The Boards had an extensive discussion around the meaning of the term 'stewardship', as there were a number of different interpretations of the term around the table, and it was noted that it does not translate well. A number of Board members believed this objective should not be included, however this was not a majority. Accordingly staff were asked to prepare a paper for the Boards to consider individually articulating the intended interpretation of 'stewardship'.

The Boards agreed that in general purpose financial reports should not seek to provide information useful to management - if management finds it useful this is a positive but not required as management are able to demand their own reports. The Boards considered a question as to whether management's expectations of viewpoint should be reflected in the information that is presented in the financial reports. The Boards agreed that it was impossible to say 'no' to this as management expectations are an essential part of financial reporting - for example in assessing the useful lives of assets, given the use to which a particular entity is putting them (for example the useful life of a plane operating a shuttle service that takes off and lands regularly throughout the day is not the same as that of a plane which is used on longer flights.) The Boards also considered whether financial reports should include management commentary. It was noted that the IASB's preface does note that management commentary is in their remit. The Boards agreed they should not conclude on this point until the boundaries of financial reporting under the frameworks had been better defined.

The Boards considered whether the individual financial statements should provide information to assist users in assessing solvency. The Boards agreed that while such an objective seemed reasonable, it should only be as part of the overall objective of providing useful information for decision making, which includes but is not limited to an assessment of solvency.

The Boards considered whether developments such as XBRL had eliminated the need for general purpose financial reports, as users are able to extract the information that they require from such reporting formats. The Boards agreed that at this time general purpose financial reports are not obsolete, and should continue to be the type of reporting to which the conceptual frameworks are directed. At this time reporting formats such as XBRL are an excellent analysis tool, but do not represent a comprehensive reporting framework. Therefore the Boards would continue to use general purpose financial reports as the reporting format they mandate and would endeavour to ensure they kept the information needs of users foremost in their mind. The staff also posed a question as to whether financial reports should contain environmental and social information. The Boards were not asked to make a decision, but did observe that it would be hard to leave this out of financial reporting and still be claiming to fulfil a 'stewardship' objective. The Boards noted that there are a number of European projects on such topics at the moment covering issues such as environmental reporting and human resource accounting. The Boards will further consider this issue at a later date.

Discussion at the May 2005 IASB Meeting - Qualitative Characteristics

The Board discussed 'cross-cutting issues' relating to relevance and reliability and their component characteristics that were identified during the series of meetings held in November and December 2004 with small groups of Board members and staff. The Board also discussed some 'non-issues' related to the same qualitative characteristics.

Relevance

The staff asked the Board to consider the question: What does relevance mean, and of what does it consist? Predictive value, confirmatory or feedback value, materiality, timeliness?

The Board seemed to agree generally with the staff although some Board members expressed concern about the use and context of the 'predictive value' notion. The Board seemed to suggest that better words could be used to describe the predictive value notion although the intention being to retain the current meaning attached to the term.

Reliability

Faithful representation, including completeness and substance over form

The staff recommended that faithful representation continue to be identified as a key quality (or subquality) of accounting information, a quality that includes completeness and leaves no room for representations that subordinate substance to form. The Board generally expressed support for the direction taken by the staff on this issue. A number of Board members expressed their support to eliminate the term 'substance over legal form' from the Framework as it has the same meaning as 'faithful representation' therefore it cannot be a subset thereof. An explanation will be added, together with examples, to the Basis for Conclusions in order for constituents to follow the Board's thinking on this issue - that is, the notion of 'substance over legal form' is subsumed within the notion of 'faithful representation'.

Verifiability, including precision and uncertainty

The staff expressed agreement with the IASB Framework on the need for financial information to be free from material error in order that it can be relied on by users. The staff also agrees with the FASB Concepts Statements and others that the way to assure users that they can rely on the information is for it to be verifiable, preferably by direct verification. The staff therefore recommended that verifiability be included as a quality or sub-quality, with an explanation that emphasizes that being verifiable is necessary to provide assurance to users that the information is free from material error, as well as representationally faithful, complete, and neutral.

The Board agreed with the staff that the characteristic of verifiability is required in the framework. The Board also suggested clarifying that the notion of being able to 'vouch' is a subset of 'verifiability'.

Neutrality, including freedom from bias, prudence, and conservatism

The staff expressed reluctance to continue to include conservatism or prudence in a list of qualitative characteristics of accounting information together with neutrality. The clash of concepts is glaring. The Board agreed that the notion of conservatism should be eliminated but some guidance should be included in the Framework that requires the careful consideration and use of caution when faced by uncertainty (e.g. estimates).

On the issue of reliability, the staff pointed out that among accountants, usage of the notion varies. Many seem to equate reliability with verifiability, not representational faithfulness. In addition, different Standards have different hurdles for what represents 'reliable' measurement - is this because different meanings of reliable are applied (depending on desired outcome)? Or is it because of different trade-offs between relevance and reliability? Or is it the influence of conservatism? Why is some information 'sufficiently' reliable for balance sheet recognition but not for income statement (for example, valuation changes recognised directly in equity)? These issues will be discussed by the Board at a future meeting.

Discussion at the June 2005 IASB Meeting - Qualitative Characteristics

Qualitative Characteristics

The Board discussed the second of three expected papers considering issues related to qualitative characteristics. In May, the Boards considered the qualitative characteristics of relevance and reliability (faithful representation). The Board discussed qualitative characteristics other than relevance and faithful representation.

Comparability

The staff made the following recommendations:

• Comparability is an important characteristic of decision-useful information and should be included as a qualitative characteristic in the converged conceptual framework.

The Board deferred a decision on this issue to the next meeting.

• Comparability and consistency should be separately defined.

The Board agreed.

• Relevance and faithful representation should have primacy compared to comparability and consistency.

The Board asked the Staff to rephrase this issue so that relevance and faithful representation would not be seen as 'trumping' comparability.

• Disclosures can help to compensate when comparability or consistency is overridden by a greater need for relevance or faithful representation.

The Board agreed.

In addition to the above, Board members made the following points:

• In practice, too much emphasis is placed on comparability, sometimes leading to incorrect accounting for the sake of comparability. In Japan, comparability is subsumed with faithful representation so as to de-emphasise it. Consequently, care should be taken to avoid 'contrived uniformity' as this is not comparability.
• The staff were asked to strengthen the wording around comparability to bring a focus on structuring schemes. The message would be that, regardless of how transactions are designed, if the economic phenomenon is the same, the accounting should be comparable.
• Consistency will be subsumed within comparability.

Understandability

The staff made the following recommendations:

• Users (including non-professionals as well as professionals) are assumed to have a reasonable knowledge of business and economic activities and accounting and a willingness to study the information with reasonable diligence.

While the Board agreed, the staff was asked to further explain who the intended user of IFRS is meant to be as this would assist the Board in determining the detail and sophistication of its literature.

• Understandability is the quality of information that enables users to perceive its significance.

The Board agreed and added that information should be "capable of being understood."

• Relevant information should not be excluded because it is too complex or difficult for certain users to understand.

The Board agreed.

• Understandability is enhanced by the characterisation, aggregation, classification and presentation of financial information.

The Board agreed.

Materiality

The staff made the following recommendations, which the Board agreed with:

• Materiality relates to faithful representation, in addition to relevance.

• Materiality should be considered as a screen or filter to determine whether information is sufficiently significant to influence decisions of users in the context of the entity, rather than a qualitative characteristic itself.

Other candidates for qualitative characteristics

Having discussed the qualitative characteristics that presently exist in the IASB and FASB frameworks, the Board discussed whether other characteristics should be added. Two characteristics were identified by the Staff and discussed by the Board:

Transparency

In spite of its high profile use, the term transparent, is not a qualitative characteristic presently used or defined in any major accounting framework. The Board discussed this characteristic using the word 'succinctness' and concluded that this is subsumed within representational faithfulness therefore should not be a separate characteristic in itself.

True and fair

The staff recommended that true and fair should be considered as a component of representational faithfulness. The Board agreed.

Discussion at the July 2005 IASB Meeting - Objective and Qualitative Characteristics

The Board was joined in London by a member of the FASB staff and a member of the Canadian AcSB staff, and via video link by several members of the FASB staff team.

Objective of Financial Reporting – Stewardship and Accountability

The discussion was in response to a request made in April 2005 by both the IASB and the FASB that the staff investigate the meaning of the terms stewardship and accountability and the implications of having such objectives in the IASB and FASB conceptual frameworks. The IASB discussed these objectives within the context of providing decision-useful information. Most members agreed with the staff recommendation that providing the information needed to assess stewardship or accountability should not be added as an explicit objective of financial reporting by business entities (11 in favour; 3 opposed).

In reaching that determination, one Board member expressed a strongly-held view that stewardship remains an objective of financial reporting, especially in separate financial statements. While admitting that there was overlap, those who supported having stewardship as a separate objective did not want to see the concept subsumed in 'useful for economic decision-making.' Some also mentioned stewardship in relation to small and medium-sized entities, but it was noted that in many circumstances this would not be the case since management and owners were the same. Accountability was also defended, particularly as the concept was interrelated to reporting performance. There needed to be a way of holding management accountable for growing the business at a rate faster than the cost of capital. Analysts expected this, but preparers were less accepting of this.

It was accepted that part of the problem was that there were different notions of stewardship and accountability embedded in financial reporting. What was accepted by all was that the conceptual frameworks needed a better discussion of the two notions, probably in the Basis for Conclusions. It was suggested that this discussion might differentiate the two, perhaps relating stewardship as reporting to owners and accountability as reporting to a wider constituency.

One Board member noted the link between these concepts and the notion of 'chief economic decision-maker' in IAS 14. The Board agreed a staff recommendation that the conceptual frameworks should retain a discussion that acknowledges that financial information is useful for other purposes, which include assessing management's stewardship and compliance with laws, regulations, and contractual provisions. Specifically:

• (a) Information about the economic resources of an entity, the claims to those resources, and the changes in them also is useful for purposes other than making investment, credit, or similar resource allocation decisions.
• (b) Financial reporting information may be useful in assessing how management of an entity has discharged its stewardship responsibility to owners (stockholders) for the use of resources entrusted to it.
• (c) Financial reporting information may be useful in assessing management's performance. However, financial reporting usually cannot and does not separate management performance from entity performance.
• (d) Financial reporting information may be useful in assessing an entity's compliance with laws, regulations, and contractual provisions.

Several Board members wanted to see stronger language in (b) and (c), while another cautioned that (d) needed to be rephrased so that expectations were not raised unduly. In particular without qualification, 'compliance with laws' could be read to include 'did my delivery drivers always obey the speed limit?', etc!

Conceptual Framework – relationships between the qualitative characteristics

The Board discussed an approach to describing the relationship between qualitative characteristics, basing their discussion on the flowchart reproduced in the Observer notes. Board members generally supported the flowchart (or schematic, as one preferred to call it) but raised concerns about the placement of timeliness and materiality. For example, the fact that financial information is 'stale' would not be a reason for not reporting it, as was suggested by the schematic. This led to the realisation that the flowchart used the same terms to communicate different things.

Board members seemed to think that the schematic was preferable to the hierarchy currently contained in the FASB Statement of Financial Accounting Concepts. However, the schematic needed further work to show that the characteristics were inter-related rather than linear. In addition, the operation of the characteristics of comparability ('to what?') and consistency (across items within the entity? or across entities?) needed to be resolved.

The Board agreed that the schematic was worth developing and asked the staff to do so, taking into account their comments.

Definitions of 'understandability' and 'materiality'

The Board approved definitions of understandability and materiality as follows:

Discussion at the October 2005 IASB Meeting - Qualitative Characteristics

Process for assessing qualitative characteristics

The Board continued its discussion of a staff proposal on the process for assessing the qualitative characteristics of financial statements. A revised schematic of the process was presented and discussed. Some Board members were critical of the revised schematic and challenged various assertions made in the supporting material. At least one Board member preferred a hierarchical approach to the assessment of the characteristics, fearing that the process approach would become a means to achieve an excuse to avoid the consequences of the process (such as reporting assets or liabilities at fair value). Another Board member saw the process as an aid for standard-setters in setting accounting standards rather than preparers in developing accounting policies in the absence of an accounting standard.

The staff will develop their thoughts further as a result of the Board's input and reactions.

Will one set of objectives and qualitative characteristics meet the needs of all entities?

The Board discussed whether the objectives of financial reporting and the qualitative characteristics of financial statements were (or should be) the same for all types of entities. For example, should they be the same for both publicly-listed entities and SMEs?

Board members noted that the staff seemed to have confused comparability and consistency in some places and suggested that these areas be clarified. In addition, stewardship was (perhaps) more noticeable in the SME context than in the publicly-listed entity context.

Objective of financial reporting

The Board held a brief discussion on the objective of financial reporting. Much of the paper was not reproduced in the Observer Notes as it represents the draft Basis for Conclusions. Board members were asked whether they had any serious concerns with the material presented as the staff would prefer to be prepared for these when the topic is discussed at the joint IASB-FASB meeting next week.

Project status and plan

The Board held a brief discussion of the proposed project plan.

No decisions on the Conceptual Framework documents were made at this meeting, which was essentially a preparatory session for the joint IASB/FASB meeting 24-25 October 2005.

Discussion at the December 2005 IASB Meeting - Qualitative Characteristics

Qualitative Characteristics - Costs and Benefits

This paper considers whether the benefits of an accounting standard justify the costs involved. In particular, does the cost-benefit balance differ for different entities (for instance, small or unlisted companies). The paper considers what the current IASB Framework and FASB Concepts Statement 2 say on cost-benefit analysis. Both Frameworks acknowledge that for accounting standard setting, rigorous cost-benefit analysis is too difficult to apply and that the evaluation is judgemental. The paper then briefly considers other standard setters that have considered cost-benefit concepts. Finally, the paper considers the Board's alternatives, which are:

• A. Do very little;
• B. Commit to requesting more information; or
• C. Commit to conduct actual cost-benefit analysis.

Staff recommended option B - namely, that the discussion of cost-benefit analysis is enhanced. This option involves requesting information and reviewing it, but not verifying that information or developing it in the absence of it being available. Option A was rejected as it was felt this would not be accepted by many of the Board's constituents. Option C was rejected as it might not be achievable and would extend the timetable of every standards project.

The majority of the Board agreed with the staff's proposal for option B, although a couple of Board members were unsure of the difference between a well explained option A and option B.

In addition, many of the Board felt that a fuller discussion of costs and benefits should be provided. This should clarify that costs are not the same as consequences. Further, benefits are not just to shareholders or owners of a business, but can be much wider. For example, they can benefit society by resulting in greater capital markets efficiency. This discussion should consider more fully what the costs are and who bears them, and what the benefits are and who gets them.

It was further agreed that there was no need for a different approach for different types of entity. However the application will result in different results for different types of entity.

The intention is to produce an exposure draft on the objective and qualitative characteristics to present to the Board in January.

July 2006: Discussion Paper on Objective and Qualitative Characteristics

On 6 July 2006, as a first step in their joint project on the Conceptual Framework of financial reporting, the US Financial Accounting Standards Board (FASB) and the IASB have each published and invited comment on a discussion paper setting out their preliminary views on:

• the objective of financial reporting, and
• the qualitative characteristics of decision-useful financial information.

We have published a Special Edition of our IAS Plus Newsletter (PDF 56k) explaining the IASB's Discussion Paper: Preliminary Views on an improved Conceptual Framework for Financial Reporting: The Objective of Financial Reporting and Qualitative Characteristics of Decision-useful Financial Reporting Information.

Discussion at the February 2007 IASB Meeting - Objective and Qualitative Characteristics

Phase A: Objective and Qualitative Characteristics

Comment Letter Analysis

The IASB staff introduced their analysis of comments received on the IASB's Discussion Paper Preliminary Views on an Improved Conceptual Framework for Financial Reporting: The objective of financial reporting and the qualitative characteristics of decision-useful financial reporting information. The staff suggested that the Board defer debating the issues raised in the comment letters until future meetings. The staff analysis is available in the Observer Notes section of the IASB's website.

Objective of financial reporting: Stewardship

This was one of the most contentious aspects of the Discussion Paper, and 86% of respondents who commented on this aspect of the DP did not support the Board's proposals. There was general agreement among Board Members that they had not expressed themselves well: Stewardship is important in that management is responsible for the resources committed to it. How well management has used those resources is important when making decisions about future resource allocations. However, Board Members noted also that there was no consensus among commentators on what 'stewardship' means; respondents clearly had different notions in mind. It was important to some Board Members that the notion of stewardship being equated with 'things under the control of management' ('operating' performance) be rejected.

Later in the session, the staff suggested that, in addition to informal discussions with individual respondents aimed at understanding their comments, there might be an opportunity to hold a public meeting to discuss this issue. This might be held either (a) after the Boards redeliberate the issue, but before exposure, or (b) during the exposure phase of this part of the Framework. No decision was made.

Users

Some commentators had asked that internal users be identified as potential users of general purpose financial reporting. Board Members noted that, in large corporate groups, some managers relied heavily on the external reporting, because to develop special internal reporting systems would be too costly. Board Members acknowledged this, but did not think that this changed the objective of general purpose financial reporting, nor the primary focus on external users.

The Board acknowledged that it had probably contributed to respondents' confusion by issuing its Discussion Paper at about the same time as the CFA Institute's Comprehensive Business Reporting Model: Financial Reporting for Investors. The two documents defined their user groups differently, although both concentrated on the information needs of the residual equity holders as being the class of users most reliant on general purpose financial statements.

The comment letter analysis discussed various other issues raised on the Objective section of the Discussion Paper, but these issues were not discussed at this session. They will be addressed when the Board redeliberates this section.

Qualitative characteristics

Relevance. The Board noted that a substantial proportion of respondents had criticised as vague the proposed description of relevance – something 'capable of making a difference'. The respondents suggested that the vagueness might inappropriately broaden the definition. However, Board Members noted that the phrase was used by securities regulators, which is why the Board had used it.

Faithful representation. Again, a substantial majority of commentators had opposed the Boards' proposals to use the term 'faithful representation' instead of 'reliable' as a principal qualitative characteristic. Board Members took note, but also thought that some commentators might have been thinking of 'reliability' in terms of a recognition principle. The Board asked the staff to undertake further analysis of how commentators understood 'reliable', so that they might respond to the criticisms in a more informed way.

Understandability. A significant proportion of commentators had argued that the 'understandability' characteristic should require making financial statements understandable for the common user and should place less emphasis on sophisticated users. Board members noted that the word can be used to mean 'understandability of a Standard', 'understandability of the accounting it produces', and 'understandability of the financial reporting'. The Board appeared to have sympathy for these issues and would look at them in more detail when it redeliberated the topic.

Constraints in financial reporting

There was a brief discussion of the analysis of comments on the constraints on financial reporting and whether additional qualitative characteristics should be added.

Next steps

The staff intends to return to the Board with issues for redeliberation on at least three occasions:

• at the Joint IASB/FASB meeting in April 2007, when issues such as the authority and place in the [IAS 8] hierarchy will be discussed;
• at the separate Board meetings to be held in April 2007, at which matters in Chapter 2 (Qualitative Characteristics) will be discussed
• at the separate Board meetings in May/June 2007, at which Chapter 1 issues (Objectives, etc) will be discussed.

The staff is still hopeful that an Exposure Draft of the two chapters will be issued in the third quarter of 2007, but is aware that the timetable might slip a bit.

Discussion at the April 2007 IASB Meeting - Qualitative Characteristics

Redeliberations: Qualitative characteristics of decision-useful financial reporting information

Following the analysis of comments received related to the Discussion Paper (DP) Preliminary Views on an Improved Conceptual Framework for Financial Reporting: The Objective of Financial Reporting and Qualitative Characteristics of Decision-Useful Financial Reporting Information, the staff presented four issues requiring decisions by the Board.

Faithful representation

The following issues were raised by respondents:

• Some objected to the Board's decision to replace reliability with faithful representation
• It was noted that substance over form should be included as a component of faithful representation
• Some respondents suggested that verifiability should not be a component of faithful representation

The Board unanimously made the following decisions:

• Retain faithful representation as a primary qualitative characteristic

  The Board noted that the characteristics of reliability outlined in the current Framework are fully covered by faithful representation and that this should be clarified.

  Additionally, some Board members assumed that some constituents might see the term faithful representation as a back door to full fair value measurement and therefore object to it. It was decided to make explicit that this is not the intention of the Board.

• Clarify the description of faithful representation to make clear that faithful representation requires depiction of the economic substance of the underlying phenomenon regardless of its form and that neutrality and completeness are necessary but not sufficient to achieve faithful representation.

  Board members were of the opinion that the paragraphs BC2.17 and BC2.18 in the Basis for Conclusion already appropriately addressed this issue and that reference should be made to this guidance.

• Separate verifiability from faithful representation and describe it as a primary enhancing qualitative characteristic.

Understandability

Some respondents noted that there is incongruence between the primary user group identified in the DP and the discussion of understandability as a qualitative characteristic.

The Board acknowledged that they should be more explicit in linking this qualitative characteristic to the objective outlined in chapter 1 of the DP, particularly, the primary user group identified in the objective. In addition, the material in the DP should be expanded to address the role of advisors in understanding financial reporting.

Constraints on financial reporting

Some constituents thought it illogical to consider timeliness to be a component of relevance while materiality is considered a pervasive constraint.

The staff recommended that timeliness be separated from relevance and identified instead as a pervasive constraint since it is much more closely related to materiality than it is to the components of relevance with which it has been associated in the DP.

The Board had a lengthy discussion and mixed views were expressed whether timeliness should be a constraint or a separate 'enhancing qualitative characteristic'.

Tentatively a majority of 10 Board members was in favour of having a separate enhancing qualitative characteristic. However, the issue was pushed back to the staff for further investigation.

Prudence/Conservatism

Many constituents argued that prudence, or conservatism, should be included as a qualitative characteristic or as component of the qualitative characteristic of faithful representation.

The Board affirmed its decision that conservatism is incompatible with neutrality and therefore should not be included in the qualitative characteristics.

For clarification one Board member pointed out that the exclusion of prudence as a qualitative characteristic does not mean that uncertainty is not considered. Rather uncertainty should be addressed on a balanced basis in the measurement process.

Redeliberations on issues related to the conceptual framework project in general: Applicability of the framework to not-for-profit and public sector entities

Some respondents criticised the Boards' plan to address not-for-profit and public sector entities toward the end of the conceptual framework project as there would be the risk that adequate consideration of not-for-profit and public sector issues would not be provided; or that amendments to the Framework established for profit-seeking entities necessary to fully reflect the needs of the not-for-profit and public sectors might be more difficult to accommodate.

The Board affirmed its decision to defer consideration of not-for-profit and public sector entity issues and continue to focus currently available resources on the first four phases of the project. No decisions were made regarding the starting point of deliberations for not-for-profit and public sector entities.

One Board member raised the concern that particularly in the governmental area there may be numerous issues that have never been contemplated before by the Board, for example, the accounting for potential stand-ready obligations of NATO member countries to defend certain other countries. Therefore, the Board should not promise to cover all issues related to public sector entities within this project.

Discussion at the June 2007 IASB Meeting - Objective

Redeliberations: The objective of financial reporting

Following the analysis of comments received related to the Discussion Paper (DP) Preliminary Views on an Improved Conceptual Framework for Financial Reporting: The Objective of Financial Reporting and Qualitative Characteristics of Decision-Useful Financial Reporting Information, the staff presented issues requiring decisions by the Board.

Scope of financial reporting

The following issues were raised by respondents:

• Many respondents suggested that the framework should be limited to financial statements until the Boards have determined what constitutes financial reporting. It was also noted that, in many jurisdictions, there are other bodies charged with responsibility for regulating the many types of reports included in the DP.
• Some constituents suggested that the Boards define the components of financial reporting, such as business reporting, corporate governance reporting, and financial statements in Phase A of the project.

Some Board members acknowledged that a 'preliminary definition' of the boundaries of financial reporting would be helpful at this stage. They raised the concern that 'reporting' is a very broad term and could be misleading if not defined at all; for example, the term could suggest that management reporting is included.

In reply one Board member noted that the term 'external' in general purpose external financial reporting (GPEFR) already narrows the scope of financial reporting. Other Board members stated that defining the boundaries of financial reporting is not an easy exercise and therefore would require significant resources.

The staff noted that in the education sessions the FASB has worked out a general description of what financial reporting means.

Finally, the Board unanimously affirmed to focus in phase A on financial reporting rather than only financial statements and to address in phase E the scope of financial reporting. There seemed to be a consensus to include a general description of financial reporting in the phase A exposure draft.

Entity perspective vs. proprietary perspective

Some respondents stated that the Boards appear to have decided that the entity theory of the reporting entity is superior to the proprietary theory without deliberating the relevant issues for that matter. In addition, it was noted that a proprietary approach would be more consistent with the Boards' chosen focus on a primary user group (present and potential investors and creditors).

The Board was of the view that the responses mainly related to the definition of the reporting entity rather than who is reporting.

The Board unanimously agreed that phase A of the project should merely explain that an entity is subject of GPEFR, i.e. that an entity has substance of its own. All issues regarding the reporting entity should be addressed in phase D.

The primary user group

The staff noted that there was considerable diversity among respondents as to how to define the primary user group. Among those who disagreed with the Boards' identified primary user group, the majority preferred a focus on present common shareholders.

The Board acknowledged that there is information that is relevant for current shareholders only but decided not to change the composition of the primary user group and to retain the guidance in the DP.

Based on the comments received the staff suggested to change the terminology by using the term 'capital providers' to represent both investors and creditors, as this term may be less ambiguous across the many jurisdictions of the Boards' constituencies.

The Board discussed the following definitions for the primary user group:

• (a) Present and potential investors and creditors (which is the term currently used)
• (b) Present and potential capital providers
• (c) Present and potential resource providers

The Board had a thorough discussion and mixed views were expressed. It was noted that all three definitions could be misleading without additional explanation, for example the following statements were made:

• The term resource is very broad and also employees could be considered to be resource providers
• The term capital is not defined and could also relate to assets.
• The term capital might not work for some non-profit entities
• The term creditors is often associated with suppliers (short-term creditors)

Seven Board members were in favour of definition a), six supported definition b) and one Board member preferred definition (c). Finally, the Board decided not to change the terminology.

Government and regulatory bodies as potential user

Three respondents stated governments and regulatory bodies should not be identified as potential user groups. They argued that governments and regulatory bodies are not a user group of general purpose financial reporting because they typically can dictate the information and presentation of that information that best suits their needs.

The Board acknowledged that the argument may be valid for certain authorities such as tax authorities but that governments and regulatory bodies also play other roles in addition to direct regulation.

Therefore, the Board unanimously decided to continue to include governments and regulatory bodies as potential users.

Redeliberations: Qualitative characteristics of decision-useful financial reporting information - sweep issue

At the April 2007 meeting the question whether timeliness should be characterised as a constraint on financial reporting or a qualitative characteristic remained unresolved.

The Board reaffirmed its tentative decision that timeliness should not be characterised as a constraint on financial reporting and agreed to describe timeliness as a separate enhancing qualitative characteristic. The Board noted that timeliness actually enhances the decision-usefulness of information that is relevant and faithfully represented whereas the constraints on financial reporting (materiality and benefit and costs) do not.

Discussion at the October 2007 IASB Meeting – Phase A: Objective and Qualitative Characteristics

The Board discussed the following issues:

How will new chapters fit with the existing Framework?

The Board considered the issue that when the Objective and Qualitative Characteristics phase of the Framework Project is completed, Chapters 1 and 2 of the new Framework will be finished. Consequently, paragraphs 9-46 in the existing Framework – that is, the paragraphs of the existing Framework dealing with the objective and qualitative characteristics of financial statements – will be out of date. The Board discussed whether to:

• Leave the existing Framework as it is, or
• Withdraw paragraphs 9-46 in the Framework and make consequential amendments.

The Board decided for Phase A that withdrawal of paragraphs 9-46 would be preferable, with consequential amendments as needed.

Amendments to other parts of the Framework

The Board considered whether to replace the term 'reliability' in the recognition criteria in the existing Framework. The Board discussed at length arguments in favour and against updating the recognition criteria. The Board tentatively agreed not to update the recognition criteria. Staff were asked to conduct further analysis on paragraph 86 of the Framework to determine how the term 'faithful representation' may be applied.

Consequential amendments to existing IFRSs

The Board noted that when both Chapters 1 and 2 of the new Framework are finalised, there would be some inconsistencies between IFRSs and the new Framework. However, the Board decided not to amend IFRSs. Consequently, supporting materials from the Framework on 'reliability' will not be available. This approach follows the principle that the Framework should not override pronouncements.

Effective date

The Board discussed whether an effective date for the new Framework is necessary for the Board and constituents.

The Board concluded that, for its own use, an effective date is not needed when Chapters of the new Framework are completed. This is because the Board will want to start using the new Framework in standard-setting as soon as possible. The Board concluded, however, that for constituents an effective date for Chapters 1 and 2 would be useful. The Board did not specify a proposed effective date; however, the Board tentatively concluded that one year from the issue of the chapters would be a reasonable timeframe, with early adoption permitted.

The Objective of Financial Reporting

At the September meeting, the Board tentatively decided that the objective of general purpose external financial reporting is:

To provide financial information about the reporting entities that is useful to current and potential investors and creditors and others in making decisions in their capacity as capital providers.

Discussion at the September 2007 IASB Meeting – Objective and Qualitative Characteristics

The staff presented a revised objective of financial reporting for the forthcoming exposure draft in order to address constituents' concerns about the role of stewardship in financial reporting:

The objective of general purpose external financial reporting is to provide financial information about the reporting entity that is useful to present and potential investors and creditors in making decisions in their capacity as capital providers.

Discussion at the December 2007 IASB Meeting - Objective and Qualitative Characteristics

At the October 2007 meeting the Board decided (i) to withdraw the relevant paragraphs on the objective and qualitative characteristics in the existing Framework and replace them with new Chapters 1 and 2 when they are finalised and (ii) to make consequential amendments to the rest of the existing Framework only when they are essential.

At this meeting the Board discussed three options in relation to the replacement of the term 'reliability' with 'faithful representation' and, in particular, its implications for the recognition criteria in paragraph 86 of the existing Framework, which deal with the reliability of measurements.

Option A:

Delete references to paragraphs that are withdrawn.

Under this option the phrase 'as discussed in paragraphs 31 to 38 of this Framework' would be removed from paragraph 86. Accordingly, the new Framework would contain the two terms 'reliability' and 'faithful representation' but no definition of 'reliability'.

Option B:

Include a rubric to tell constituents that some paragraphs in the existing Framework have been withdrawn and replaced with new chapters 1 and 2. Include, by way of footnote, the existing definition of 'reliability' the first time 'reliability' appears in the new Framework.

Under option B the new Framework would also contain the two terms 'reliability' and 'faithful representation'. However, in contrast to option A, the definition of 'reliability' in paragraph 31 of the existing Framework would be added as a footnote to paragraph 86.

Option C:

Update the recognition criteria in paragraph 86 to reflect the change in terminology. In this case the new Framework would contain only the term 'faithful representation'.

Under all options constituents would have to look at the basis for conclusions to be informed that 'reliability' and 'faithful representation' are essentially the same.

Some Board members noted that the term 'reliability' was removed for a good reason, namely that the term has been misunderstood in the past. Therefore, it should not be retained in the revised Framework. Other Board members pointed out that it would be helpful to retain the term 'reliability' until finalisation of the measurement part of the project (Phase C).

Finally, the Board agreed by majority vote to proceed with option B.

Discussion at the February 2008 IASB Meeting

The Board discussed a draft of the forthcoming Exposure Draft (ED) on Objective and Qualitative Characteristics.

'Accuracy' vs. 'free from error'

The Board discussed a drafting issue related to the forthcoming ED. A Board member had objected to using the term 'accuracy' in place of 'free from error' as a component of faithful representation. The Board member was concerned that 'accuracy' could be interpreted as implying a level of precision that the Board did not (ever) intend. Other Board members noted that the problem might be exacerbated in translation. After discussion, the Board agreed to use the phrase 'free from material error' in place of 'accuracy' in the ED.

Comparable financial information

The Board noted that the pre-ballot draft ED states that '[p]ermitting alternative accounting methods for the same economic phenomena may be undesirable, because to do so diminishes comparability'. The Board agreed with a suggestion that the ED should expand on that notion and agreed that an accounting standard should not allow different entities to apply different accounting methods (or policies) for similar economic phenomena. The Board noted that when explicit accounting alternatives exist in an accounting standard, users were not harmed, because disclosure of which of the explicit alternatives has been chosen must be made. However, there was greater potential for harm to users when an accounting standard implicitly allows different accounting methods to account for a similar accounting phenomenon. In such circumstances, users may not be aware of the different ways to account for that accounting phenomenon.

The Board noted that this was an enhancing characteristic of general purpose financial reporting that was of particular relevance to standard-setting activities, and that accounting standards should be clear and unambiguous.

Discussion at the April 2008 Joint IASB-FASB Meeting

Phase A: Perspectives of financial reporting

The staff presented a paper summarising the implications of the Boards' decision to adopt the entity perspective in the Phase A discussion paper Preliminary Views on an improved Conceptual Framework for Financial Reporting: The Objective of Financial Reporting and Qualitative Characteristics of Decision-useful Financial Reporting Information (the DP). Board members had raised concerns that this decision and its implications for other parts of the conceptual framework project had not been adequately communicated to constituents in the DP.

Entity perspective: Under the entity perspective, the objective is to provide financial information about the entity's business to the entity's capital providers. Accordingly, there is no conceptual distinction between the various parties who have a financial interest in the entity since they are all capital providers or claimants (Accounting equation: Assets = Claims).

Proprietary perspective: The alternative perspective discussed in the Phase A deliberations was the proprietary perspective. Under the proprietary perspective, the objective of general purpose financial reporting is to provide financial information about the proprietor's business to the proprietor, that is, the reporting entity is assumed to have no substance of its own separate from that of its proprietors or owners. Accordingly, the accounting equation is: Assets minus liabilities = Proprietorship (Equity).

The Boards discussed the following issues:

• Potential implications for defining elements of financial statements (Phase B)
• Potential implications for the reporting entity (Phase D)

The staff was of the view that a full examination of the implications of perspective on all future phases of the conceptual framework project cannot and need not be conducted before publishing the Phase A exposure draft for public comment. Accordingly, the staff recommended proceeding with the Phase A exposure draft without delay and explaining in the basis for conclusion the decisions that have been reached with regard to entity vs. proprietary perspective as well as the implications that have not yet been deliberated.

Some IASB and FASB members stated that all implications should be deliberated as part of Phase A in order to avoid inconsistencies at later stages of the project. In particular, it was noted that the entity perspective may not be consistent with the parent company approach to consolidated financial statements discussed in Phase D.

Other Board members pointed out that the entity perspective has significant implications on the liability/equity distinction to be discussed in Phase B. They questioned whether under the entity perspective it would still be appropriate to present debt interest and dividend payments to owners differently. Some Board members responded that in their view the entity perspective would not preclude a different treatment of liabilities and equity since a distinction can still be made by ownership characteristics of the claims.

Finally, the majority of IASB and FASB members was in favour of the staff recommendation.

May 2008: IASB and FASB issue Exposure Draft on Objective and Qualitative Characteristics

On 29 May 2008, the IASB and the US FASB published similar consultative documents on two of the eight phases of their joint project to develop an improved conceptual framework. The framework will provide a foundation for developing future accounting standards. The two consultative documents are:

• Exposure Draft: Chapters 1 and 2 of the Conceptual Framework (Objective and Qualitative Characteristics)
• Discussion Paper: Preliminary Views – The Reporting Entity