Exposure Draft (ED): Chapters 1 and 2 of the framework (Objective and Qualitative Characteristics)

This ED addresses the objective of financial reporting, the qualitative characteristics of information provided by financial reporting, and constraints on the provision of that information. The draft reflects the boards' updated proposals in the light of comments received on an initial consultation document published in July 2006. The ED proposes the following objective of financial reporting:

The objective of general purpose financial reporting is to provide financial information about the reporting entity that is useful to present and potential equity investors, lenders and other creditors in making decisions in their capacity as capital providers. Capital providers are the primary users of financial reporting. To accomplish the objective, financial reports should communicate information about an entity's economic resources, claims on those resources, and the transactions and other events and circumstances that change them. The degree to which that financial information is useful will depend on its qualitative characteristics.

To be useful in financial reporting, information must be a faithful representation of the economic phenomena that it purports to represent. Faithful representation is attained when the depiction of an economic phenomenon is complete, neutral, and free from material error. Financial information that faithfully represents an economic phenomenon depicts the economic substance of the underlying transaction, event or circumstances, which is not always the same as its legal form.

Discussion Paper: Preliminary Views – The Reporting Entity

The second document published sets out the boards' preliminary views on the reporting entity concept and related issues. Although the reporting entity concept determines some important aspects of financial reporting, the boards' existing frameworks do not address it specifically. The boards' preliminary views are:

• A reporting entity is a circumscribed area of business activity of interest to present and potential equity investors, lenders and other capital providers.
• Control is the basis for determining the composition of a group reporting entity.
• Consolidated financial statements should be prepared from the perspective of the group reporting entity.

With respect to preparer opinions the report states:

• A majority of respondents prefer the capitalisation method and/or support the endorsement of the standard.
• Even among capital intensive companies that would be affected most by the revised IAS 23, the EC's consultation and other reports reveal that these companies generally prefer to apply the capitalisation method.

• Increased comparability because one of the current options is eliminated
• Including borrowing costs in the cost of the assets is a better conceptual approach than expensing

• For those European companies currently expensing borrowing costs, the revised IAS 23 will impose an added cost and complexity.
• However, this affects a relatively small percentage of companies because most do not have any qualifying assets. 'The capitalisation of borrowing costs is of relevance only for those companies that are asset capital-intensive.' And 'the main part of these costs will be related to the first implementation of the revised standard and therefore not recurring.'

• The revised IAS 23 should be endorsed in the European Union as the benefits of its endorsement will outweigh the costs.

• 30% of the respondents said that, if given the choice now, they would consider adopting IFRSs. Another 10% percent felt they needed more information. 18% were undecided.
• Even among those companies that indicated they would not adopt IFRSs, if given the choice now, 45% would still consider adopting IFRSs within the next seven years.
• The industries with the most interest in adopting IFRSs were financial services, health services, and consumer and industrial products.
• Overall, more than 50% of respondents believe that at least a quarter of all US issuers will be using IFRSs within the next seven years, with approximately 85% of respondents indicating that at least 10% of US issuers will be using IFRSs.
• Of those US companies that would consider adopting IFRSs, 53% said they would adopt within three years.
• Of those companies considering IFRSs, 64% say they lack skilled resources in their US operations while 34% believe they lack skilled resources in their non-US operations. These results indicate that more training in IFRSs is required.