Conceptual Framework - Recognition and derecognition
The staff recapped on the main Board concerns from the meeting held in Tuesday 19 February. The staff then asked the Board whether they had any further comments regarding the discussion on definition of elements.
One Board member noted that additionally he would like the DP to cover “Contributions to equity” and Distributions of equity” that the staff had noted that the current version of the DP did not cover. The Board member noted that IFRIC received many comments regarding how to account for these. The staff noted that these would likely be covered within the equity/liability section of the DP.
The staff then asked the Board for any comments on the further guidance that was proposed to be included in the DP around identification of liabilities. One aspect of this additional guidance commented on the area of symmetry that had been a feature of the Board discussion on the Conceptual Framework. Some Board members were concerned with the drafting of the language specifically that it was very definite that an asset would always exist for one party where another has a liability. Board members were in tentative agreement over the requirement for symmetry in the DP but it was still unclear as to whether there would be absolute symmetry (and how symmetry would affect the Framework) and whether if a liability exists for one party, an asset will always exist for the other party. The Board members suggested that this guidance be revisited by the staff as the wording was too strong where there were still questions around symmetry.
The staff presented to the Board an early draft of the section on recognition and derecognition that would be included within the Conceptual Framework discussion paper (DP). This was briefly discussed in the Board meeting on Tuesday 19 February but no tentative Board decisions were made in that meeting.
The staff noted that the recognition criteria in the existing framework states that an entity recognises an item that meets the definition of an element if:
- It is probable that any future economic benefit associated with the item will flow to the or from the entity; and
- The item has a cost or value that can be measured reliably.
The staff also noted that there was also a cost constraint to recognition and this would be decided at a standards level by the IASB (i.e. if the costs of recognising an asset or liability outweigh the benefit then the IASB would not require recognition).
The staff discussed the concept of control and reiterated that they proposed for the concept of control in the DP to be dealt with in the recognition criteria rather than in the definition of an asset section. Some Board members had tentatively expressed a preference for control to be dealt with in the recognition section and other Board members were indifferent.
The staff noted that the concept of control in the DP would be based upon the basic concepts included within IFRS 10 Consolidated Financial Statements and the IASBs Exposure Draft Revenue from Contracts with Customers – i.e. that the entity has the ability to direct the use of an asset so as to obtain benefits (the staff did acknowledge that the definition of control proposed in the DP was similar to that in IFRS 10 but, unlike IFRS 10, did not require that the customer acquires substantially all the remaining benefits of the asset). The staff also discussed the notion of control in a principal and agent situation noting that if an entity holds a resource as an agent, the agent does not control the resource and hence does not have an asset.
The staff asked the Board members whether they had any comments on the discussion of control in the DP. One Board member reiterated the point made that control was the main issue for an item to be an asset rather than the notion of being scarce (as proposed to be included within the definition of an economic resource in the DP). He again suggested that control be included within the proposed definition of an asset in the DP.
No further significant comments were received in relation to the discussion of control in the DP.
The staff highlighted that some consider that the existing recognition criteria in the Conceptual Framework precludes the recognition of items if future economic benefits are not probable or if cost or value cannot be measured reliably. The staff therefore discussed with the Board whether the DP should include further recognition criteria relating to:
- Relevance and cost constraint
- Faithful representation
- Enhancing qualitative characteristics
The staff discussed uncertainty with the Board in two streams – element uncertainty (does an asset or liability exist) and outcome uncertainty (an asset of liability may exist but the outcome may be uncertain). The Staff proposed to the Board that the DP state that:
- an entity should not recognise an asset or liability if it is not virtually certain that the entity controls the asset or is bound by the liability (element uncertainty). The majority of Board members tentatively disagreed to this (see discussion below)
- an entity should recognise as assets all economic resources that the entity controls and recognise as liabilities all obligations that bind the entity The majority of Board members tentatively agreed to this subject to relevance, cost and faithful representation criteria (see discussion below)
- the recognition criteria should not include a probability threshold relating specifically to uncertainty of outcome. The staff noted that including such a threshold could lead to a failure to recognise some items (for example, options) that are undoubtedly assets or liability but are judged, at a particular time, to have a low probability of resulting in an inflow or outflow of economic benefits. The staff also noted that such items may swing above and below the threshold as the probabilities change. The majority of Board members tentatively agreed to this (see discussion below)
Relevance and cost constraint
The staff noted that information is relevant to users if it is capable of making a difference in the decisions made by users. The Staff proposed to the Board that the DP state that:
- The IASB should not require the recognition of an asset or liability if, in the IASBs view recognition:
- Would not result in relevant information; or
- Would provide information that is not relevant, or not sufficiently relevant to justify the cost of preparing it
The majority of Board members tentatively agreed to this (see discussion below)
The Staff proposed to the Board that the DP state that:
- The IASB would not require recognition of an asset or liability if, in the IASB’s view, recognition would not result in faithful representation of the entity’s resources or obligations, or of changes in its resources or obligations
The majority of Board members tentatively agreed to this (see discussion below)
The topic of uncertainty provoked debate among the Board members. A number of Board members expressed concern that the virtually certain criteria for determining whether an asset or liability should be recognised (did it exist, i.e. element uncertainty) was setting the criteria for recognition too high. Other Board members noted that the DP did not provide any explanation as to why the model had moved from a probable approach to a virtually certain approach and the detail in paragraph 34 was not enough. One Board member noted that the DP also proposed a virtually certain approach to both element and outcome uncertainty which was, again, too high a threshold.
There was general Board support for the staff approach of separating element and outcome uncertainty in the DP. A number of Board members tentatively agreed that there should not be a probability threshold for outcome uncertainty and an entity should recognise as assets all economic resources that it controls and recognise as liabilities all obligations that it is bound by after considering such things as faithful representation and cost constraints (only one Board member tentatively disagreed that an entity should recognise as assets all economic resources that it controls and recognise as liabilities all obligations that it is bound by).
Some Board members suggested that outcome uncertainty was not a recognition issue but a measurement issue. They argued that uncertainty around the ultimate inflow or outflow would have no effect on whether an asset or liability existed (or should be recognised) but upon the measurement of such an item. One Board member also agreed that virtual certainty was too high a threshold and that this approach would undermine usefulness of the financial statements if assets and liabilities are not recognised as a result or there not being virtual certainty (many would not be recognised as a result). This Board member also asked what impact virtual certainty would have on business combination accounting where there are uncertain elements.
In light of this discussion to remove the probability threshold relating to outcome uncertainty, it was tentatively agreed that for element uncertainty:
- The staff explore other thresholds for recognition such as probable rather than virtually certain that was considered too high by Board members. There was general tentative agreement that virtually certain was much too high a threshold to reach for recognition, however Board members still tentatively agreed that such a discussion of virtually certain v probable should be included in the DP.
- the staff explore different criteria for assets and liabilities in light of the first suggestion. Some Board members suggested using the IAS 37 criteria for contingent assets and provisions. It was suggested that an asset be recognised when it is virtually certain and a liability when it is probable. These suggestions gained broad Board support.
Other Board members tentatively discussed whether symmetry between assets and liabilities should be discussed in the DP (i.e. a probable criteria for both assets and liabilities or probable for liabilities and virtually certain for liabilities). It was not clear whether the majority of Board members favoured such an approach for recognition. The staff suggested that they include a discussion of both approaches and the majority of Board members tentatively agreed with this.
The Board members tentatively agreed that the staff explore these areas in the next draft of the section of the DP. One Board member noted that as it was a DP that was being produced then the DP should present different views and then ask for users/readers of the DP views.
The staff discussed de-recognition with the Board and noted that the existing Conceptual Framework does not discuss de-recognition and when de-recognition should occur. The staff noted that as there is no agreed conceptual approach, different standards have adopted different approaches.
The Staff proposed that the DP note that the objective of de-recognition is:
- To faithfully represent the resources and obligations remaining after the transaction; and
- To faithfully represent the changes in the resources and obligations as a result of the transaction.
The staff DP proposed that an entity should derecognise an asset or liability when it no longer meets the recognition criteria. The staff DP also proposed that if the entity was still exposed to some or all of the risks and rewards associated with the asset or liability, the IASB would need to determine at a standards level how the entity would best portray the change in those risks and rewards (i.e. where the entity may not physically hold (all or part) the asset or liability but may still be exposed to risks and rewards). The DP noted that one possible approach that the IASB may adopt could be enhanced disclosure
One member commented on what types of standards level decision disclosure the staff were contemplating. The staff noted that this could be disclosure of before and after the transaction and describing the changes as a result of a transaction. The staff noted that the key would be a standards level decision of the Board.
The staff also noted that if the DP approach was not adopted (i.e. derecognition is the mirror image of recognition) then symmetry would not be achieved which had been a constant topic of discussion by Board members during the Conceptual Framework discussions. The majority of Board members tentatively supported the notion of symmetry.
A number of Board members were concerned with the use of the words “risks and rewards” in the DP and the mixing of risks and rewards with control. These members noted that the staff should keep the direction of the DP but look to remove the reference to risks and rewards and replace this with the concept of control.
The staff noted that they would make this change in the next version of the DP.
Subject to the above changes, the majority of Board members tentatively agreed with the derecognition criteria that the staff proposed to be included in the DP.