IASB publishes Discussion Paper for a new Conceptual Framework
The International Accounting Standards Board (IASB) has published a comprehensive Discussion Paper (DP) containing proposals for topical areas where it considers a revision and amendment of the existing Conceptual Framework necessary. Included in the DP are proposals to revise the definitions of an asset and a liability, to introduce guidance on derecognition, to clarify the objective and purpose of other comprehensive income and to set a framework for presentation and disclosure. Comments are due 14 January 2014.
The current has been left largely unchanged since its inception in 1989. In 2004, the IASB and the US FASB decided to review and revise the conceptual framework, however, changed priorities and the slow progress in the project led to the project being abandoned in 2010.
- Phase A: Objective and qualitative characteristics
- Phase B: Elements and recognition
- Phase C: Measurement
- Phase D: Reporting entity
- Phase E: Presentation and disclosure
- Phase F: Purpose and status
- Phase G: Application to not-for-profit entities
- Phase H: Remaining issues
Of these phases only Phase A was finalised and introduced into the existing framework as Chapters 1 and 3 in September 2010. Phase D saw the publication of a discussion paper and an exposure draft but was never finalised. The boards discussed Phases B and C quite extensively without any consultation document ever being issued, and Phases E to H large remained untouched.
The IASB's comprehensive project on the Conceptual Framework
During the 2011 agenda consultation many participants called for the IASB to reactivate and finalise the conceptual framework project. As a result, the IASB officially added the project to its agenda again in September 2012 but decided to introduce two significant changes in relation to the predecessor project:
- The new project is no longer a joint project with the FASB but is an IASB-only project. This is due to the fact that the IASB generally decided to finalise current convergence projects jointly with the FASB but other than that not to privilege the FASB vis-à-vis the other standard-setters in the world any longer.
- The objectives of the new project are less ambitious. It no longer aims at a substantial revision of the framework but is focused on those topics that are not yet covered (e.g. presentation and disclosure) or that show obvious shortcomings that need to be dealt with. As opposed to the earlier project these areas are not dealt with by themselves - the discussion paper covers all aspects of the framework project.
The publication of the discussion paper marks the end of the first phase of the new project. After considering the comment letters on the ED, the Board intends to publish an exposure draft in the third quarter of 2014 and finalise the new conceptual framework by September 2015.
Summary of main proposals
Contents. The Discussion Paper contains almost 240 pages and is divided into nine chapters, which are accompanied by eight appendices. The paper is preceded by an almost 10 page executive summary containing the scope, the purpose, and the main contents of the document. The Discussion itself is structured as follows:
|2||Elements of financial statements|
|3||Additional guidance to support the asset and liability definitions|
|4||Recognition and derecognition|
|5||Definition of equity and distinction between liabilities and equity instruments|
|7||Presentation and disclosure|
|8||Presentation in the statement of comprehensive income - Profit or loss and other comprehensive income|
|Appendix A||Text of Chapters 1 and 3 of the existing Conceptual Framework|
|Appendix B||Reporting entity|
|Appendix C||Distinction between liabilities and equity instruments|
|Appendix D||Effect of strict obligation approach on different classes of instrument|
|Appendix E||Rights and obligations arising under options and forwards on an entity's own shares|
|Appendix F||Written put options on own equity and on non-controlling interests|
|Appendix G||Overview of topics for the revised Conceptual Framework|
|Appendix H||Summary of questions for respondents|
The key issues dealt with in each chapter are summarised below.
Section 1 (Introduction). The first section offers background information. it also describes the purpose of the conceptual framework and its status within the hierarchy of IASB pronouncements. The discussion paper explains that the conceptual framework's primary purpose is to assist the IASB in developing and revising IFRSs (even though it may be useful to parties other than the IASB) and that the framework does not override any specific IFRS. Should the IASB decide to issue a new or revised pronouncement that is in conflict with the framework, the IASB will highlight the fact and explain the reasons for the departure going forward.
Section 2 (Elements). Core of this section is a clarification of the definitions of 'assets' and 'liabilities' the IASB believes to be necessary. The framework will no longer refer to expected inflows or outflows of economic benefits but directly to the underlying resource or obligation. An 'economic resource' is defined as a right or other source of value that is capable of producing economic benefit. Additionally, the notion of probability will be removed from the definitions. In addition to assets and liabilities this section also defines income and expense, cash receipts and payments as well as contributions to, distributions of and transfers between classes of equity.
Section 3 (Additional guidance). This section contains further guidance on the definitions of assets and liabilities as outlined in the previous section. It aims mainly at testing the usefulness of the definitions in areas that have led to application problems in the past (e.g. the questions of what constitutes a constructive obligation and whether economic compulsion can play a role etc.). Most attention is given to discussing the meaning of 'present obligation' in connection with a liability; three different views are presented and respondents are asked for their comments.
Section 4 (Recognition/Derecognition). This section discusses the requirements for recognising assets and liabilities. Generally all assets and liabilities are to be recognised unless recognising an asset or a liability is considered irrelevant or not sufficiently relevant to justify the costs for doing so or no measurement of the item would lead to a sufficiently faithful representation. In these cases the IASB will be allowed to depart from the general completeness requirement. For the first time the framework will also contain derecognition requirements. The IASB suggests that an item is to be derecognised when it no longer meets the recognition criteria. Variants are discussed for certain borderline cases.
Section 5 (Equity). The fifth section is dedicated to equity which continues to be defined as residual interest. However, the IASB suggest refining the definition. New and rather revolutionary is the proposed introduction of a requirement to update the measure of the different classes of equity claims at the end of each reporting period in order to show dilution effects. Finally the section addresses the question whether the most subordinated class of instruments should be treated as equity if an entity has issued no equity instruments.
Section 6 (Measurement). In this section the IASB takes a closer look at measurement and describes the objectives of the different categories of measurement and how an appropriate measurement can be identified. The IASB believes using one measurement across all items of the balance sheet is not appropriate. It argues that every measurement should lead to relevant information on the balance sheet and in the statement of comprehensive income selecting an appropriate measurement will have to be subordinated to this objective.
Section 7 (Presentation and Disclosure). This section doesn't have a counterpart in the existing framework. Therefore, it contains a longer explanation of the purpose of the primary financial statements and the notes to the financial statements and their relationship. In this context the IASB also addresses materiality and forward-looking information.
Section 8 (Statement of comprehensive income). The eighth section mainly deals with distinguishing between profit and loss and other comprehensive income. The IASB suggests retaining both profit and loss and other comprehensive income and marking them by (sub)totals. As a principle, all income and expense will be shown in profit and loss unless relating to the remeasurement of assets and liabilities - these would normally be shown in other comprehensive income with recycling generally permitted. A definition of profit and loss is not included in the conceptual framework.
Section 9 (Other issues). The last section is a collection of a variety of quite different issues. The IASB suggests leaving the revised chapters on objectives and qualitative characteristics basically unchanged, considering the use of the business model in financial reporting, addressing the unit of account on standard level, considering the impact of the going concern assumption on accounting (when measuring assets and liabilities, when identifying liabilities and when making disclosures) as well as taking over the description and discussion of capital maintenance largely unchanged from the existing framework (the IASB may reconsider the concept of capital maintenance if it launches a project on hyperinflation).
The IASB allows constituents an extended six months period to work their way through the document and to respond to the questions raised; hence, comment letters are to be submitted by 14 January 2014.
- Press release on the IASB's website
- A Review of the Conceptual Framework for Financial Reporting (link to IASB website)
- IASB Snapshot introducing the DP (link to IASB website)
- Information about IASB web presentations of the proposals (link to IASB website)