Conceptual framework
Conceptual Framework — Agenda paper 10
The IASB is continuing its discussion of the comments received on the Conceptual Framework exposure draft. The topics for this meeting were: testing the proposed asset and liability definitions (agenda paper 10B); testing the proposed asset and liability definitions — Illustrative examples (agenda paper 10); executory contracts (agenda paper 10D); unit of account (agenda paper 10E); asymmetry in treating gains and losses (agenda paper 10G) and materiality (agenda paper 10H). In addition, the tentative decisions made to date were summarised in agenda paper 10A.
The Board will discuss at their next meeting in November 2016 the following topics: a) the definition of a liability and the concept supporting that definition; b) derecognition; c) measurement; d) capital maintenance; e) business activities and long-term investment; f) the effect of the revised Conceptual Framework on preparers ; and the Exposure Draft Updating References to the Conceptual Framework.
Conceptual Framework — Testing the proposed asset and liability definitions — Agenda paper 10B
Background
The staff presented in this session their analysis of the testing performed on the proposed definitions of assets and liabilities. The staff discussed illustrative examples with participants at the World-Standard-setters meeting in September 2016. The examples are included in agenda paper 10C. The Board was not asked to make technical decisions. The Board is scheduled to redeliberate in November the proposed liability definition and supporting concepts. The staff will be asking the Board to consider the meaning of ‘arisen from past events’ and concepts on existence uncertainty. The staff set out in the agenda paper the examples that were the cause of those concerns. The staff believed that the proposed concepts on the meaning of the phrase ‘arisen from past events’ could be improved and that the Board should add concepts on existence uncertainty.
On the other hand, the staff believed that the following concepts do not require further discussion by the Board: a) the subjectivity of the ‘no practical ability to avoid criterion’; and b) obligations to refrain from particular activities.
Discussion
The Board agreed with the Staff’s analysis.
The Board did not take issue with the fact that the Conceptual Framework (‘CF’) did not give a single clear answer to every financial reporting question because if it did, there would be no need for IFRS Standards and Interpretations. They acknowledged that the concepts and definitions helped narrow the range of possibilities and would guide preparers to the appropriate answers. In respect of the asset definition and control of asset, one Board member suggested that the Staff clarify whether the CF was referring to control of the actual asset or the benefits arising from the assets and to apply this concept consistently throughout all the examples. Another Board member suggested that the Staff explore how the executory contract concept would help to identify past events as regards the proposed liability definition. The Staff was also asked to focus on the logic in arriving at the answer to the various examples as opposed to the actual answer itself.
Conceptual Framework — Executory contracts — Agenda paper 10D
Background
The purpose of this agenda paper was to discuss the comments received and the staff analysis on executory contracts.
Staff analysis
The ED did not include a question on executory contracts. However, some respondents agreed with the ED proposals whereas others disagreed because they view an executory contract as giving rise to a separate right and a separate obligation. They also expressed different views on whether the separate right and obligation should be treated as a separate unit of account. The staff indicated that the Board has already addressed this concern and stated that both the right and obligation under an executory contract are conditional upon each other. The Board also noted that there is a net inflow or outflow of economic resources when the parties perform their obligations. Accordingly, the right and the obligation cannot be separated. The staff also believes that the Conceptual Framework should not specifically address recognition of executory contracts because the Conceptual Framework does not address specific recognition requirements. The staff indicated that the Basis for Conclusions already indicates that the current practice of not recognising an asset or a liability for many executory contract is expected to continue.
Staff recommendations
The staff recommended that no changes be made to the ED proposals. Accordingly, the staff recommended confirming the ED proposals that state the following: (i) an executory contract establishes a right and an obligation to exchange economic resources; (ii) that right and the obligation to exchange economic resources are interdependent and cannot be separated; and (iii) the combined right and obligation constitute a single asset or liability.
The staff also considered that the chapter should not contain any further discussion on this topic and the discussion proposed in the Basis for Conclusions should not be moved to the main body of the Conceptual Framework.
Discussion
The Board approved all of the Staff’s recommendations.
In respect of executory contracts where a penalty is payable upon cancellation, the Staff agreed to explore what would be the rights and obligations of the contracting parties under those circumstances to assess whether any changes should be made to the proposals.
Conceptual Framework — Unit of account — Agenda paper 10E
Background
This paper discussed whether any changes are needed to the proposed concepts on the unit of account in the light of the comments received on the Exposure Draft In particular, this paper considered whether: (a) the proposed concepts should be expanded or shortened; b) the unit of account should be selected before or after considering how recognition and measurement would apply; (c) it may be appropriate to select one unit of account for recognition and a different unit of account for measurement; and d) the cost constraint should be identified as a separate factor to consider in selecting the unit of account.
Staff analysis
The staff indicated that about a half of the respondents explicitly agreed that the unit of account for a particular item must be considered at the Standards-level based on the concepts included in the Conceptual Framework. Some of these respondents suggested that the Conceptual Framework should require the Board to identify the unit of account in the Standards and explain the rationale for the selected unit of account in the Basis for Conclusions on the Standard in question. The staff also noted that some responded indicated the following concerns:
- The proposed concepts are insufficient or unclear and do not provide a clear direction to the Board in selecting a unit of account when setting Standards. The staff believes that the proposed thought process for the Board to follow in selecting the unit of account and the examples included in the ED are appropriate.
- The proposed concepts need to be shortened. The staff disagrees with this proposal because the discussion was already expanded in response to comments received from the DP.
- The unit of account should be selected before or in conjunction with determining recognition and measurement. The staff believes that the selection of the unit of account and consideration of how to apply recognition and measurement requirements are interrelated and accordingly should be considered at the same time rather than sequentially. The staff noted that when it develops Standards the Board will be considering both the unit of account and recognition and measurement requirements for a particular item at the same time.
- Sometimes it might be appropriate to select different units of account for recognition and measurement. The staff agrees with this view because it is possible for items to qualify for recognition on an individual basis and to be measured on a group basis.
Staff recommendation
The staff recommended that the Board: a) does not provide additional guidance on the unit of account in the Conceptual Framework; (b) does not shorten the discussion of the proposed concepts on the unit of account; (c) clarifies in the Conceptual Framework that the unit of account is selected for an asset or a liability when considering how recognition and measurement will apply; (d) confirms that sometimes it may be appropriate to select one unit of account for recognition and a different unit of account for measurement; (e) confirms that the selected unit of account may need to be aggregated or disaggregated for presentation and disclosure purposes; and (f) does not identify the cost constraint as a distinct factor in selecting the unit of account.
Discussion
The Board approved all of the Staff’s recommendations without much discussion.
Conceptual Framework — Asymmetry in treating gains and losses — Agenda paper 10G
Background
The Board tentatively decided in September 2016 that the main body of the Conceptual Framework should acknowledge that in some cases income/ expenses and assets/liabilities may be treated differently. The purpose of this session was to discuss the staff proposed wording.
Staff analysis
The staff analysed two possible options: (a) to include the proposed wording in chapter 2 and/or; b) to include the wording in the recognition and/or measurement chapter. If the first option is selected, the staff believes that it would help clarify the distinction between prudence and asymmetry and emphasise that asymmetric treatment can be selected only when it is necessary to provide a faithful representation of relevant information. The wording proposed by the staff is included in the agenda paper and states the following: “The exercise of prudence does not imply a need for asymmetry, eg more persuasive evidence to support the recognition of assets than of liabilities or of income than of expenses. Nevertheless, such asymmetry may sometimes arise as a consequence of providing relevant information that faithfully represents what it purports to represent.”
In relation to the second option, the staff noted that asymmetry is most commonly associated with recognising losses earlier than gains so it could be useful to include a more prominent observation on the role of asymmetry in the recognition chapter. In terms of measurement, the staff believed that asymmetry is most commonly associated with the selection of measurement bases that includes losses at an earlier stage than gains. The staff noted that many respondents view historical cost as an example of asymmetry in financial reporting. The staff believed that the ED already made it clear that that the Board has no preference for any measurement basis.
Staff recommendation
The staff recommended including the acknowledgement of possible asymmetry both in chapter 2 and the recognition chapter. The staff did not propose any changes to the measurement chapter.
Discussion
The Board were all in favour of the Chairman’s suggestion to include the proposed wording in chapter 2 only, subject to redrafting.
A few Board members, including the Chairman, believed that including the proposed wording in one place is sufficient. The Chairman further believed that the addition should be made in chapter 2 as the asymmetry concept related to the concept of prudence, is discussed there. Many Board members disagreed with associating historical cost with asymmetry and asked that the Staff ensure that no such association was made in the body of the CF, as well as to state the Board’s disagreement in the Basis for Conclusion. The Staff was also asked to expand on the interaction between neutrality and prudence in the CF.
Conceptual Framework — Materiality — Agenda paper 10H
Background
This agenda paper remained unchanged from Agenda paper 10F posted in September 2016 which was not discussed at such date.
The ED proposed that no amendments be made to the concept of materiality in the Conceptual Framework except to clarify that decisions about materiality reflect the needs of the primary users, not the needs of any other group.
Staff analysis and recommendation
The staff noted that few respondents made comments on this topic. Respondents suggested that after the work on materiality is completed as part of the Disclosure Initiative, the Conceptual Framework should be revised to reflect it.
The staff indicateed that the Principles of Disclosure Discussion Paper will suggest a number of changes to the existing definition of materiality in IAS 1 and IAS 8. Their assessment was that the proposed definition in the Principle of Disclosure project is consistent with the ED. However, the discussion paper will suggest clarifying the threshold at which information becomes material by replacing “could influence” with “could reasonably be expected to influence” and including reference to “obscuring” information, not only omitting and misstating it. The staff recommended retaining the definition of materiality proposed in the ED.
Discussion
The Board approved the Staff’s recommendation.
The discussion centred on how to accelerate the incorporation of the changes proposed in the PoD DP, i.e. replacing “could influence” with “could reasonably be expected to influence” and including reference to “obscuring” information to IAS 1 and IAS 8. The Board believed that these minor additions would achieve a big improvement on the existing definition of materiality. Some members suggested publishing the PoD DP for comment in tandem with an exposure draft to amend the definition of materiality in IAS 1 and IAS 8 as proposed above. The Staff said they would have to assess whether there would be any unintended consequences with such a proposal.
