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Conceptual Framework Phase A — Objectives and Qualitative Characteristics

Date recorded:

The staff led the Board through a series of issues raised by Board members during their review of a pre-ballot draft of final chapters on the Objectives and Qualitative Characteristics of Financial Reporting.

Effective Date and Amendments to IFRS

The Board agreed that the revised chapters of the Framework should be effective on issue. Conforming terminology (especially in IAS 8) would be introduced, most likely through the Annual Improvements process.

Some Board members were concerned about both these matters, but agreed that the Framework is not an IFRS and that it would be inappropriate for the Framework to make consequential amendments to IFRSs - that was for the Board to do separately.

Structure and Introduction

The Board agreed that Chapters 1 and 2 of the revised Framework would replace existing paragraphs 12-22 and 24 to 46.

Paragraph 23, which addresses going concern, will remain, pending being incorporated in the measurement chapter.

The Introduction to the Framework, paragraphs 1-8 and 10-11 would be retained. Paragraph 9 (which addresses users) is now addressed in Chapter 1 (Objectives) and would be deleted.

Terminology

Throughout the Framework, the term 'standard setters' and 'boards' should be replaced by the term 'board' [meaning the IASB].

Objective - general issues

The staff was requested to provide more precision in the 'Objective of general purpose reporting' section to clarify that the cash flows being addressed in this situation are those from an investor's investment in the entity, not the cash flows of the entity itself.

The Board agreed that no amendment of the Framework was necessary to address a potential inconsistency with the IFRS for SMEs. The latter document should be amended if necessary.

The Board agreed to clarify in the section on 'Usefulness of financial reporting in assessing cash flow prospects' that the cash flows in question are the providers of capital's cash flows, not those of the entity.

Objective - Stewardship

The Board supported the staff's drafting for two paragraphs addressing management's stewardship responsibilities (although the term 'stewardship' is not used) and had no appetite for further elaboration. Board members noted that the words were very carefully crafted and should be left as they were.

Objective - 'Financial reporting' or 'financial statements'?

The Board agreed that the scope of the Framework - 'financial reporting' - is appropriate and that the narrower 'financial statements' is not appropriate, as it would be used as an excuse to resist any activity the Board might wish to undertake on matters outside the financial statements, such as management commentary.

Objective - Financial stability

The Board agreed that 'financial stability' should not be an objective of financial reporting. There was no clear consensus as to what 'financial stability' meant, other than perhaps as code for avoiding volatility in profit or loss.

However, the Board was sensitive to the work and report of the Financial Crisis Advisory Group and supported a suggestion that the themes in the FCAG Report should be incorporated in the Basis for Conclusions, since they supported the Board's conclusions in the Framework. Reference to the FCAG might be made via a footnote in the Basis.

Characteristics - Neutrality

The Board agreed that 'neutrality', in terms of the neutrality of the Board, should not be addressed in the Framework, but is a valid topic for discussion when the Board revises its Due Process Handbook. The discussion of neutrality of financial reporting in the Framework was appropriate.

Characteristics - Freedom from error

The discussion of faithful representation in the Framework would include an expanded discussion of the use of estimates. In particular, the Board discussed whether a particular sentence, 'Those representations would be considered to be free from error if they are based on appropriate inputs and estimation techniques that reflect the best available information' was too absolute and whether it should be modified or deleted. The Board concluded that the sentence was acceptable as drafted, but that the Basis for Conclusions should explain the Board's reasoning about what 'free from error' and 'appropriate inputs' meant in this context.

Characteristics - Enhancing characteristics

The Board agreed to retain the four enhancing characteristics of financial information: comparability, verifiability, timeliness, and understandability. There was no implied hierarchy among them.

Various other minor issues related to drafting were also addressed and direction given to the staff.

Correction list for hyphenation

These words serve as exceptions. Once entered, they are only hyphenated at the specified hyphenation points. Each word should be on a separate line.