Conceptual Framework Phase A — Objective and Qualitative Characteristics
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 (i.e. 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.