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Conceptual framework

Date recorded:

The Technical Principal on the conceptual framework project opened the session noting that the purpose of the session was for the Board members to provide feedback on the staff’s proposed approach to redeliberations on the conceptual framework project, as set out in staff papers 10A through 10D. She further noted that, in addition to receiving feedback on the proposed approach to redeliberations, the Staff would also like to receive feedback from the Board members with respect to staff paper 10E, which sets out the purpose and status of the conceptual framework.

 

Strategy for redeliberations

The first paper provides a general overview of the timetable, scope and the staff’s proposed approach to redeliberations on the Discussion Paper. The purpose of the paper is to obtain feedback from the Board members on the proposed approach, as set out in the paper.

The Vice-Chairman opened the discussion, noting that he agreed with the proposed timeline in the staff paper and drew attention to the fact that a target date of Q2 2016 for a finalised conceptual framework was already 9 months later than originally planned. He acknowledged that, as noted in the staff paper, the timing of a finalised conceptual framework will be dependent on comments received on the Exposure Draft; but stressed that the Board should be disciplined and keep the project moving forward with the aim of completion in the shortest time possible. To this end, he suggested that the very difficult topics should be set aside and dealt with separately once the major project had been completed. In relation to the staff’s proposal to leave capital maintenance largely unchanged, he acknowledged that leaving it alone would be the easiest option; however, he suggested that some thought should be given as to whether there should be a question in the Exposure Draft with respect to what people thought should be done in this area, noting that some people regard capital maintenance as quite important.

Another Board member commented with respect to the review of Chapters 1 and 3, noting that the staff and Board needed to keep firmly in mind the fact that those chapters were written to be converged with U.S. GAAP. She cautioned about the need to be very careful making changes in these chapters, as wording changes could have a way of resulting in unintended consequences. She warned that if the Conceptual frameworks began to diverge, it could be harder to achieve standards that were converged with the U.S.

The Chairman noted that he agreed with the comments of the previous Board member, but noted that some changes would be unavoidable. He further noted that he did not think that making some changes would make it impossible to converge with the U.S. because the principles were so general. He added that the Board would need to find a way to make those changes in a way that would not impact on standard setting.

Another Board member emphasised the importance of the Board understanding what was being achieved through completion of the project. His understanding was that the Board was making general, relatively minor corrections to the existing conceptual framework, which he did not believe would result in significant changes. Accordingly, and despite agreeing with the proposed timeline, he regarded timeliness of the project as less important. In his view, it was more important that the Board took the time to identify the areas where expectation gaps existed and spent time addressing them. He cited the areas of profit and OCI as such areas and commented that the Board appeared to be on the right track in those areas. He further noted that performance could be another such area and pointed out that there was no proposal to do anything in this area. He therefore warned that people may question why there nothing was being done in this area.

In response to the comment made by the previous Board member, another Board member noted that she disagreed with the comment that what the Board was doing was minor overall. She noted that, although the Board’s approach to the project was to update and improve the existing conceptual framework rather than starting with a clean sheet, the comment failed to recognise all the work that the Board had done over the past six or so years that had challenged thinking in certain areas. She noted that the project provided an opportunity for the Board to capture and include some of those ideas in the conceptual framework. She acknowledged that what was being done may not appear revolutionary, but noted that it should be viewed as a major improvement rather than a minor tweak. She cautioned about underselling what was being accomplished by the Board through the project and added that the Board should work expeditiously to complete the project.

Another Board member noted that he did not disagree with the staff proposal for capital maintenance not to be discussed as part of the conceptual framework project. However, he observed that this would not prevent the Board from discussing capital maintenance if anything arose in discussions on other sections that would warrant a discussion on capital maintenance, and questioned whether his understanding was correct.

The Technical Principal responded that if the staff was to come across a situation where a discussion on capital maintenance would be important, it would not be ignored. She added that the staff proposal was merely to avoid a full scale reconsideration of the issues around capital maintenance as that would be very time consuming.

The Board member further noted that he agreed with the timetable proposed by the staff. However, he pointed out that to enable the Board to keep to the proposed timetable, the staff had proposed that many important areas would be left to the research project. He highlighted the fact that no time had been scheduled for the research project and noted that it appeared as though the project was being carried out in a phased approach, with the research project as the second phase. He questioned whether the staff intended to schedule any time for the research project.

The Technical Principal responded noting that the proposed approach was quite different to a phased approach, as if the Board achieved what had been set out in the proposed approach, this would result in a conceptual framework that was complete. She acknowledged that some areas of the conceptual framework may be less developed than others, but emphasised that, even if there was limited progress made on the research project, there would still be some guidance in the less developed areas. She further noted that part of the reason for the staff proposal to take some areas through to research was because it was hard to determine how long the research would take in those areas.

The Director of Research added that a lot of the research would likely be more standards-level research. He noted that it was an open question whether the results of said research would need to feed directly into the conceptual framework or not, noting that this would not be known until the time the research was performed.

Another Board member noted that he was also supportive of the approach and timetable proposed by the staff. He referred to paragraph 12 of the staff paper, noting that he agreed with the proposal that the revised conceptual framework should only address financial statements, but pointed out that interim reports were within the scope of financial statements. He asked the staff whether it would be possible, without too much being added to the project, to consider the objective of interim reports in comparison to the objective of annual financial statements, to determine whether there was anything specific with interim reports that would merit discussion. He noted that the question of whether interim reports were a distinct period approach or part of the wider annual period was a concept that should be reconfirmed or checked. He believed that there should be something included in the Exposure Draft with respect to the overall principle for interim reports.

The Director of Research responded, noting that he disagreed with that approach. He noted that although the approach taken to interim reporting was a conceptual question, he noted that there would not be any great advantage gained by trying to tackle the issue in the conceptual framework. The issue was one that related to a single standard and that would be better addressed in a standards-level project when IAS 34 was next looked at.

The Board member responded stressing that the approach taken to interim reports has a big impact on recognition and measurement. He pointed out that he was merely asking the staff whether it was feasible to consider this point without delaying the project.

Another Board member commented in relation to the above discussion, noting that she was not supportive of a principle on interim reporting being included in the conceptual framework. Although she agreed with the point made by the previous Board member that there were a number of related recognition and measurement issues, they were recognition and measurement issues within the context of interim reporting. She reinforced the point made by the Director of Research that there were concepts involved in interim reporting, but these concepts were more contained within the context of interim reporting. She noted that these concepts would be better debated in a more focused project that addressed interim reporting specifically than in such a broad project as the Conceptual framework, in part because this was an area where accounting requirements and regulatory regimes crossed over.

Another Board member noted that from the beginning he had suggested that the Board applied a much more focused approach to the project, noting that going forward the Board should set a very clear objective and only deduct and not add topics. He felt that significant progress could be made by the Board with respect to additional guidance on liabilities, but questioned how much could be achieved on the definition of assets and liabilities. He said he did not support a discussion of the relationship between financial statement notes and others, noting that this was a difficult area because of the different views held by people, one reason being the differing requirements of the various regulatory frameworks. He agreed with the staff recommendation to keep the status quo with respect to capital maintenance, and noted, in relation to the previous discussion on interim reports, that he also was not supportive of a principle on interim reporting being included in the conceptual framework.

The Chairman concluded the discussion on the staff paper. He noted that from his reading of a number of the comment letters that were received on the Discussion Paper, it became clear that if the Board made even minor changes to wording, it could give rise to deep philosophising and possible misunderstanding as people read more into such changes than what was necessarily intended by the Board. He pointed to the proposed changes to aspects of the definitions of an asset and a liability as an example, and noted that it was already clear that removing probability from the definition of an asset would give rise to major discussion. He therefore, recommended that the staff only proposed changes that would be clear improvements in order to avoid debates that would be counterproductive.

 

Initial Strategy: Liabilities and Equity

The Technical Manager presented the staff’s proposed approach to the section on distinguishing between liabilities and equity. He pointed out that, finally, the conceptual framework would contain much less guidance than was included in the Discussion Paper. The scope was going to be limited to topics in the conceptual framework, i.e. the definitions of these elements. Definitions and objectives would be discussed at a future meeting.

A Board member noted that she agreed with the approach proposed by the staff of focusing on the distinction between liabilities and equity at the conceptual framework level, and dealing with the detail in the research project. She noted that it would be important when the Board was coming up with a definition of liabilities versus equity that the relevance of instruments settled in own shares was considered. A specific question would be whether own shares could ever be considered to be a resource, as not currently having an answer to that question in the conceptual framework caused a lot of problems and inconsistencies between standards. She agreed that to draw the right line in the conceptual framework between liabilities and equity, it would be helpful to get a good understanding from users of financial statements with respect to what they considered important about a liability versus equity. She further noted that it would be helpful to flesh out in the conceptual framework the information that it would be useful to have with respect to different claims on the entity (for example, liquidity, solvency, dilution effect), which the Board could then use as a signpost in the standards level project.

Another Board member highlighted the fact that, currently, the only tool the Board had to solve issues in this area was classification as either liability or equity, but noted that there were a range of issues (for example, concerns about liquidity, solvency, and dilution). She further noted that if the Board could do a better job of splitting out the different strands that influenced classification decisions, it might help the Board to think about what it was trying to achieve and avoid bringing into the definition of liability a wider range of issues that did not really relate to classification per se. She added that it was important that the Board emphasised that it was not going to solve standards-level issues in the conceptual framework. It was important that the Board laid the groundwork in the conceptual framework to enable it to separate out the other issues that had been grouped together as a classification issue. This may allow the Board to make greater progress down the track.

Another Board member noted that if the Board could lay the groundwork in the conceptual framework project, as suggested by the previous Board member, the Board would have achieved a lot. He noted that he was in favour of the idea to use the statement of changes in equity to present information. He also strongly suggested that the Board should put effort into discussing the ‘third category’ approach with users, regulators and standard setters to enable to the Board to develop an understanding of whether this approach was necessary, and whether it was useful.

Another Board member asked a question about the comment in paragraph 3 of the staff paper that the conceptual framework should continue to define a liability and equity but not provide guidance on how to distinguish liabilities from equity instruments. He noted that they sounded like the same thing, and asked the staff to provide clarification.

The Technical Manager responded noting that there was a difference between the definitions themselves and how those definitions were applied at the standards’ level in classifying particular instruments. He noted that such guidance as to whether instruments should be combined or separated for classification purposes would need to be developed at the standards’ level, using the definitions developed in the conceptual framework.

In response to the staff member’s comment, the Board member questioned whether, if the Board defined a liability and equity really well, this would also help to distinguish between the two.

The Technical Manager responded that having a clear definition did not solve all the issues associated with trying to distinguish between instruments that had characteristics of both.

The Board member also raised the issue of how and whether the guidance would apply to structures other than corporate entities, such as partnerships and cooperatives.

The Technical Manager responded that the intention in defining a liability and equity was not to focus on certain types of entities or structures, but rather to focus on the characteristics of what was trying to be captured within each element. If the elements were defined well, the definitions should be able to be applied in different forms of entities or structures.

Referring to paragraphs 21 and 22 of the staff paper, the Board member further asked the staff to clarify that they were indeed thinking of a two category approach.

The Technical Manager said that the staff did not believe that introducing another fundamental distinction was necessary. He noted that this did not preclude the identification of sub-classes within these categories. He said that, for example, a sub-class could be identified within liabilities that could have different characteristics to other liabilities and that may require specific recognition, measurement and disclosure requirements.

Another Board member pointed out that the binary approach arose some 100 years ago when economic transactions were very simple. There were a lot of different and complex instruments that had been developed since, and in the future more would likely be seen. Accordingly, the binary approach would not survive. He noted that the shortcoming of the binary approach was the inability to define liability or equity: If a liability was defined strictly, the residual would go to equity resulting in the equity definition being very obscure, and the same issue would arise with the liability definition if equity was defined strictly. He further noted that labelling items as either a liability or equity could lead to misunderstandings, especially amongst those who did not have knowledge of accounting, as such users would think of items labelled as a liability as debt, and items labelled as equity as capital. He suggested that a ‘third category’ approach should not be ignored now.

The Chairman noted that he believed a binary approach was necessary, noting that investors should know, when push comes to shove, whether the instrument they had invested in was an instrument of last resort or whether they were one of the creditors to the entity.

Another Board member agreed with the above comment made by the Chairman. In response to the comments made by previous Board members who favoured introducing some sort of third category approach, she noted that instruments were on such a complete spectrum that whether there were two, three or twenty categories, there would still be users who would complain that an instrument was not in the category they thought it should be in. She noted that this was why she agreed with the comments made by a previous Board member that the Board needed to look at ways other than classification to catch some of the nuances of certain instruments, for example, through presentation, the statement of changes in equity, or disclosures.

Another Board member noted that although he had some sympathy for the arguments for a third category approach, he agreed with a binary classification approach. He noted that he liked the approach set out in paragraph 30 of the staff paper with respect to further developing the objectives of depicting cash leverage and depicting return leverage, noting that those two aspects as well as the notion of dilution and wealth transfer were what users were interested in. The Board needed to find a way to depict those effects throughout the financial statements. He also believed (as noted by a previous Board member) that instruments settled in own shares presented a problem and that such instruments should be liabilities. He suggested that a principle the Board could investigate in when determining what constituted a liability was whether cash leverage, returns leverage or both were created by the instrument, noting that instruments settled in own shares would be captured in the definition of liabilities (as they created returns leverage, even though not cash leverage). He further noted that employee stock options that created cash leverage (but arguably negative returns leverage because they were risk absorbing) would be liabilities. Further, where there was an instrument with negative returns leverage or wealth creation, there was clearly something else going on that needed to be explained in the financial statements. This was why he favoured the inclusion of statement of changes in equity and wealth transfer type of information in financial statements.

The Vice-Chairman noted that he also supported the binary approach and agreed with the staff recommendation in the paper. He noted that he was disappointed with the responses received on the Discussion Paper in relation to updating measurements of equity claims and recognising such updates in the statement of changes in equity. He noted very little support for the suggestion and questioned whether people had considered and/or understood it properly. He suggested the Board had another go with this in the Exposure Draft, noting that it did have a lot of strengths in sorting out the issue. He further noted that he did not support any variations of the liability or equity definitions for other entities or structures (for example, cooperatives or partnerships).

Another Board member questioned whether the Board needed to perform an ‘effect analysis’ of all proposals to determine whether there may be any unintended consequences of going down a route that is very different from current practice, for example, introducing a mezzanine approach.

Another Board member responded to the point raised by the previous Board member noting that the idea behind the conceptual framework was to set a platform. He added that the place to consider any effect analysis or impact was in the application at the standards level.

In response to the above discussion, the Technical Manager pointed out that the staff would be working on the research project simultaneously, which would enable examination of the consequences of applying concepts at the standards level. He further noted that the analysis could be performed within the context of the research project.

Another Board member commented on paragraph 31 of the staff paper, noting the conciseness of the recommendation. He noted that there seemed to be a balancing act between a having a clear definition and the level of application guidance needed.

Another Board member noted that he also favoured a binary approach, noting, as commented by previous Board members, that the Board should use the statement of changes in equity or other means as a way to solve some of the issues, rather than introduce a third category. He believed that using examples to educate would be helpful.

 

Initial Strategy: Measurement

The Technical Principal summarised the comments from constituents, saying that there appeared to be high level support for the proposals. However, as many respondents had raised questions as to the details as well as concerning the approach, staff had put together three possible approaches to the measurement section of the conceptual framework Exposure Draft, as follows:

  • Approach 1 – do not develop a measurement section of the conceptual framework Exposure Draft and start a research project on measurement;
  • Approach 2 – build on the proposals in the Discussion Paper, modified in the light of feedback received; and
  • Approach 3 – include high-level guidance on measurement in the conceptual framework Exposure Draft and start research work to develop more detailed measurement concepts.

She asked the Board to indicate which of these approaches they would prefer. The approach recommended by the staff is Approach 2.

A Board member noted he was confused with respect to what Approach 2 was, noting that what was set out in paragraph 23(b) of the staff paper appeared quite high level in comparison to what was included in the Discussion Paper, in particular, in relation to how assets and liabilities contributed to future cash flows (as noted in paragraph 9(b) of the staff paper).

The Technical Principal responded that the intention with Approach 2 was to cut back on a lot of what was in the original Discussion Paper and in particular, the discussion of the implications of the approach on different types of assets and liabilities. She agreed with a lot of the comments that were received that the Discussion Paper was straying into standards level detail. She further noted that the staff saw Approach 2 as being a much higher level approach than what was suggested in the Discussion Paper. The Board member asked whether there would be a principle that the Board might use to decide when a particular measurement basis should be used. The Technical Principal responded that the staff would explore whether there could be a principle that could be used when selecting measurement bases.

Another Board member said he liked Approach 2 because it was a high level approach but at the level of detail needed. He thought that it would provide the guidance needed when selecting a measurement approach at the standards level. However, he asked what the difference between Approaches 2 and 3 was. He acknowledged the comments received that further research should be performed in this area; however, he noted that this was an area that was common in accounting literature, and accordingly, the Board should not devote its resources to more research on measurement at this stage.

The Technical Principal responded, noting that the main difference between Approaches 2 and 3 was the commitment to research that would be made under Approach 3. She further noted that the staff would like to explore whether there would be some sort of principle that could be used in selecting a particular measurement basis (the point raised by the previous Board member), and that this would be performed under Approach 2. Under Approach 3, the staff would definitely not go down that route. Based on the response provided by the Technical Principal, the Board member confirmed that he definitely preferred Approach 2. The Technical Principal further added that Approach 2 would not stop the staff from looking at any of the other outputs from the research work or standards level projects, noting that if something came out of those activities that the staff thought could be usefully included in the conceptual framework, it would be taken into consideration.

Another Board member noted that he agreed with the staff recommendation and that, in his opinion, Approach 2 was the best approach of those discussed in the staff paper. He believed that one of the best things that could come out of discussion on measurement was not just a description of the measurement bases, but a principle as to when a measurement basis would be more appropriate and sound. He liked what the Discussion Paper did in this respect, and he felt that how an asset contributed to future cash flows or how a liability would be settled were the most relevant criteria that would be used to make that selection. He noted that one of the biggest concerns of investors over the years had been the use or introduction of measurement bases to the exclusion of information about others. He therefore felt that the discussion on measurement needed to deal with how assets contributed to future cash flows because that was the central issue investors were focused on. He emphasised that disclosure of value was relevant at all times because it always affected an asset’s ability to contribute to future cash flows. He added that he would support use of the business model in selection criteria.

Another Board member noted that she was supportive of Approach 2 from the perspective that this approach recognised that measurement was an important missing element in the conceptual framework currently. She encouraged making progress in this area even though the output may not be as fully developed as other sections of the conceptual framework. She suggested that, rather than focusing on describing outcomes (identifying different measurement bases that are really labels that had been attached to instructions for how to measure items), the Board should take a step back and try to focus more on the components of a measurement and the drivers for when these would be updated. She suggested identifying the standard components that all measurement bases have (such as cash flows, time value of money, etc.) to then discuss why one might want to update some or all of these components, upwards or downwards. She further noted that the factors that would drive the decision whether or not to update the estimate of cash flows, or reset a discount rate, would be factors such as how an asset was going to be used or how a liability was going to be settled.

The Chairman noted that he strongly agreed with the comments made by the previous Board member. He noted that the Board would already have gained a lot if it came to a very systematic description of what the different measurement bases could achieve. He believed there was a sliding scale of components of value that a specific measurement basis would want to update, adding that historic cost was the most limited and full fair value the most comprehensive way of updating value. He noted that all the separate components of value that existed and that would be updated by different sliding scales of measurement bases should be analysed. Some criteria should be developed for why it would be likely that for certain types of information one would be looking more to historic cost, for others to full fair value, and for the rest, somewhere in between. He felt that if the Board could do that in a much more systematic way than in the Discussion Paper, a lot could be achieved.

Another Board member noted that he disagreed with the comment made by a previous Board member that the Board should not devote resources to undertake more research on measurement. He noted that measurement was such a fundamental concept that there should almost be permanent research on measurement. He drew attention to the fact that many of the research projects undertaken were predominantly about measurement. He gave the examples of the discount rate and equity method projects, noting that he believed the Board should emphasise the research that was performed on an ongoing basis, of which measurement was a fundamental element.

Another Board member noted that he agreed with the staff recommendation in Approach 2. He pointed out that the Board was not only developing the conceptual framework for its own use. The area of measurement was of more interest to preparers than other areas, as there was very little written conceptually about measurement. He encouraged the Board to keep this thought in mind as the measurement section was developed. He further referred to the disadvantages of Approach 2 listed in paragraph 25 of the staff paper, noting that he recognised the points, but did not believe they should be listed as disadvantages. Specifically, in relation to the disadvantage at 25(b) that ‘it could tie us into concepts that we may subsequently want to change’; he noted that this was the case with every project the Board undertook, and accordingly, should not be listed as a specific disadvantage here.

Another Board member noted that she also agreed with Approach 2. She said that it would be most helpful for the Board moving forward in standard-setting if as much work as possible could be done in setting out the things that needed to be thought about when deciding which measurement basis would be the most appropriate in different circumstances. She noted that the Board should definitely look at the role of business model in selection criteria, but cautioned about the need to be careful in how the term was used. She referred to the confusion caused by the inclusion of business model in IFRS 9, noting that it had been used in a different way to what the Board had intended.

Another Board member commented on the fact that a lot of the dialogue in the Discussion Paper around various measurement bases dealt with the cost of going through the process of coming up with the measurement. He believed it was important for the Board to develop more rigour around that concept as it tended to be used as a smoke screen for saying why something should not be done even though it might provide relevant information. He further noted that, if one owned an asset, one would take on the responsibility of measurement of that asset upon acquisition; an entity had a responsibility of knowing what the value of that asset was every time it reported a balance sheet. He further noted that the Board needed to examine very closely the issue of cost, and the types of costs it is referring to, before being able to say that cost is a balancing act with benefit.

In response to the comment made by the previous Board member, the Chairman noted that he was not sure how far into this issue the Board could get within the context of the conceptual framework project. However, he noted that cost versus benefit was extremely important in the choice of a measurement basis, and so was the leeway for possible abuse of measurement bases, especially in cases where this was highly vulnerable to subjectivity. He believed it was important and should be considered.

 

Initial Strategy: Profit or loss and other comprehensive income

The Senior Technical Manager provided some background on the presentation of profit or loss (P&L) versus other comprehensive income (OCI), summarising the key messages received on the Discussion Paper. This feedback had led the staff to develop three alternative approaches on the use of P&L and OCI for the upcoming Exposure Draft as follows:

  • Approach 1 – do nothing in the conceptual framework (for now), but undertake a research project on performance reporting and consider the use of P&L and OCI in that project;
  • Approach 2 – provide high level principles in the conceptual framework and do not attempt to draw a conceptual line between P&L and OCI; and
  • Approach 3 – fine-tune and finalise the specific proposals included in the conceptual framework Discussion Paper.

The Board was asked whether they agreed with the staff recommendation to pursue Approach 2.

The Chairman opened the conversation noting that, from his reading of a number of the comment letters received on this issue, he believed that many constituents underestimated the importance of decisions already taken by the Board in the Discussion Paper. Firstly, he noted the clear choice for P&L as a key performance indicator, which was different from the previous preference of the Board for a single statement of comprehensive income. He believed it was a very realistic choice because of the fact that the P&L was so widely used by the markets for PE ratios, EPS etc. He noted that the previous preference of the Board had arisen partly from the Board feeling uncomfortable that what was being put into OCI would be disregarded if comprehensive income was not looked at as a whole.

Secondly, he noted the decision that OCI should only be used if it enhanced the relevance of the P&L – a principle that, if taken seriously, would serve as a break on the possible use of OCI. He noted the paradox that a lot of people who liked P&L were often quite eager to put items in OCI because they did not like the outcome if the items went through P&L. He made reference to the informal principle that was developing that, if an item of income was so important that it could lead to bankruptcy of a company (referring to the case of employee benefits in the U.S.), it should probably not go through OCI, but through P&L. He further noted that in reading the comment letters received, he had become convinced by those who had said that the Board should not try to find a conceptual basis for OCI but to treat it as an exception, which led him in the direction of favouring Approach 2. However, he noted that the differences between Approaches 2 and 3 were not that significant, as the Board had done a good job of describing the possible reasons for the use of OCI in the Discussion Paper.

He added that some reasons for the use of OCI were very clear, such as dealing with accounting quirks (for example, cash flow hedges), but that it needed to be made clear in the Basis for Conclusions that for some other items currently in OCI (for example, pensions and insurance), the outcome was much less clear cut. He noted that the Board should not try to define OCI but treat it as an exception. However, he noted that the Board should define P&L, and referred to the definition suggested by the Japanese in their comment letter as a good starting point – ‘The change in net assets, comprising the net assets that are measured using measurement bases that are relevant from the perspective of reporting financial performance’. He noted that if the Board could do something to this effect, it would really serve to bring the discussion forward and provide more guidance in the future about when to use OCI. He acknowledged that the Board had made clear that some past decisions on OCI were open for debate, but felt that the Board should be upfront about that.

Another Board member noted that he wanted to better understand Approach 2 in the context of the Chairman’s comments, particularly with respect to the comment in paragraph 39 of the staff paper that ‘this approach would not aim to develop the specific proposals on the three categories of items that could be included in OCI under the conceptual framework Discussion Paper. He also referred to paragraph 38(c) of the staff paper that noted that Approach 2 would require items of income and expense to be included in P&L unless, exceptionally, the Board concluded that inclusion of an item of income and expense in OCI enhanced the relevance of P&L. He noted that the Board would need to include justifications for making an exception. He believed those justifications were the ones already expressed in the Discussion Paper and urged the Board not to forget the work that had already been done in the Discussion Paper.

Another Board member noted that he did not agree to the use of OCI only on an exceptional basis and referred to IFRS 9 where the Board had recently used OCI, not on an exceptional but on a conceptual basis. He noted that for items where a conceptual basis could not be found that, perhaps, an exception could be used, which caused him to prefer a mixture of Approaches 2 and 3. He did not see Approach 2 as only using OCI on an exceptional basis because the Board had done differently in recently issued standards, as said before.

Another Board member noted that she agreed with the previous comments made. If Approach 2 was not that different to Approach 3 in the sense that if the Board was to build on some of the work done in the Discussion Paper that described the circumstances in which OCI might need to be used, it would help the Board going forward when using the conceptual framework. She noted that people might not necessarily consider IFRS 9 items to be exceptions, because they considered exception to mean ‘not used much’. OCI was still a relatively new concept, and if the Board built on the concepts in the Discussion Paper in Approach 2 style, it would encourage understanding.

Another Board member believed the Board was going in the right direction in this area. He reinforced the point raised by the previous Board member that OCI was something that people did not really appreciate or look for, and if they saw it they did not really note it. He noted that, even if the Board did come up with a definition of OCI, it was important that the Board described the reasons behind certain items being taken to OCI. He further suggested determining the items that currently go to OCI and why these items should go to OCI. It should further be assessed how such items should be treated going forward.

Another Board member noted that he believed the Board should be more ambitious and not just stop at what was proposed in Approach 2. He believed OCI should not be treated as an exception that the Board would not need to find a conceptual basis for. He noted that what was done in IFRS 9 with respect to the use of OCI should not be categorised as an exception, emphasising that the Board did this for a sound conceptual reason at the time. He felt that the Board needed to make a decision whether it believed in that conceptual basis or not. He further noted that if the Board believed it was the right conceptual basis in that particular case, then this should be written up in the conceptual framework to confirm that it was a valid conceptual reason to use OCI. He agreed with the comment made by the previous Board member that the Board should examine the reasons behind the existing uses of OCI to determine whether they agreed or disagreed. In the cases where the Board agreed that there was a sound conceptual reason for the use of OCI, that reason should be included in the conceptual framework. He agreed that OCI should only be used when it enhanced the relevance of P&L, but noted that the Board could not just stop there, as the meaning of what was meant by ‘enhancing the relevance of P&L’ needed to be explained. He made the obvious point that making the P&L less volatile was not an example of enhancing the relevance of the P&L. Lastly, he did not believe P&L could be defined without OCI being defined, and noted that overall he was closer to Approach 3 than Approach 2.

Another Board member noted that she agreed with the comments made by the previous Board member, adding that she believed that Approach 2 was the absolute minimum the Board could do in this area. The closer the Board could get to Approach 3, the better.

Another Board member noted that he agreed with the comments made by previous Board members, who favoured Approach 3. He noted that he favoured Approach 3 also for the reason that, because the Board was working towards an Exposure Draft, this created an opportunity to present certain ideas in the Exposure Draft. If people did not like them, the Board could back off in the final conceptual framework. He also referred to paragraph 51 of the staff paper, which stated that a consideration factor for not recommending approach 3 was that ‘this approach would entail guidance that is not entirely consistent with the existing and proposed use of P&L and OCI’. He did not believe that this would ever be a reason for not doing something. Neither did he believe the Board would need to rush around and change the standards instantly once the conceptual framework had been completed.

Another Board member noted that she was between Approaches 2 and 3. She noted that, as commented by the previous Board member, the Board should push hard to try and develop its thinking as much as possible in terms of what was included in the Exposure Draft. However, the reason she did not have a complete preference for Approach 3 was because she believed that what the Board should be trying to achieve with respect to defining/describing OCI was more in line with what was proposed in Approach 2. The difference she saw between Approaches 2 and 3 was that she saw Approach 3 as starting with the presumption that certain items, with certain characteristics, would be presented in OCI. She preferred an approach with a starting presumption of an all-inclusive P&L though, with the option to filter out certain items to OCI on an exceptional basis.

Another Board member noted that he preferred Approach 3, based on his personal experience. In performing outreach on the conceptual framework he had spoken with investors in the US. He noted that when they were walked through the explanation of what the Board was trying to do to distinguish P&L from OCI, their reaction was very positive and they appreciated the efforts the Board was putting in to make the distinction clearer. He also noted comments from investors that they had noticed the growth of the OCI concept. It would be extremely important for the difference between P&L and OCI to be distinguished/defined/described as this enabled them to assign the right valuations or multipliers to those elements of the financial statements when they performed analysis. He also noted that he had performed some research on the database of a large data aggregator of financial reporting information. He had observed that the income statement information stopped at net income and did not include total comprehensive income, which meant that in this case OCI was being completely ignored. He summed up by noting that the great clarity and spotlight the Board could shine on this area, the more value it would add for all parties.

Another Board member also commented on the use of the word ‘exceptional’. He believed there should be a presumption that if a certain measurement basis was selected for a particular item, changes in that measurement should flow through the income statement. This was more understandable and clearer and avoided the confusion of whether something was in or out of profit. He believed there could be circumstances where the relevance of performance measures of P&L would be enhanced if a different measurement basis was used, and if one wanted to describe that as exceptional, this would be fine. However, he felt that it was for the Board to decide under those circumstances where the relevance of P&L was enhanced by having that different measurement basis. Nonetheless, the Board should think very carefully because of the consequences in terms of actually adding confusion by using that extra measurement basis. He felt the Board needed to do more research on performance reporting to really solve the OCI issue, because other uses of OCI such as equity securities in OCI and pensions would never be solved by thinking of two measurement bases. Those uses of OCI arose for other reasons and he felt that the long-term solution to those other uses of OCI, which he regarded as truly exceptional, could only be solved by thinking more holistically about performance reporting. The Board should put those issues to one side or come back to those in the future once it had solved performance reporting.

The Chairman brought the discussion to a close. He highlighted the concerns raised with respect to the use of the word exceptional, noting that he could accept this word not being used. This would eliminate what might be perceived as too high a barrier and in contrast to what the Board had done in the past. He noted that the presumption should be that items went through P&L as a rule and that there may be circumstances in which items would go through OCI. He drew attention to the fact that there were people who would try to take a broad approach and put every unrealised measurement into OCI. He cautioned that the Board should not be providing a legitimation for this. He noted that, based on the discussion, he sensed that Board members had indicated that the Board should not throw away the very good work that had been done in the Discussion Paper in providing possible explanations for the use of OCI. If it was decided that P&L was a key performance measurement, then the Board needed to be very careful with the use of OCI. He agreed with suggestion that for the areas where the Board was unsure about the justification for the use of OCI (for example, pensions and insurance), it could refer to the work on performance reporting to find a better solution. He concluded that the Board needed to be extremely careful in this area, because people do not look in OCI.

 

Purpose and status of the conceptual framework

The Technical Manager presented the final paper on the purpose and status of the conceptual framework, and addresses four questions. The Board was asked to confirm whether they agreed with the staff recommendations.

The first question related to the notion of the IASB being the primary user of the conceptual framework. Many constituents disagreed with this exclusiveness and pointed out that the conceptual framework was equally useful to other constituents, e.g. preparers when deriving accounting policies. The staff therefore proposed to delete the concept of the primary user. The Board agreed with the staff recommendation.

The Technical Manager went on to the second issue, which dealt with the status of the conceptual framework in relation to standards. The proposal in the Discussion Paper had been that the conceptual framework would neither be a standard nor have the authority to overwrite a standard. Some constituents proposed reversing the hierarchy to put the conceptual framework above standards. However, as the majority of the respondents seemed to agree with the proposal, staff proposed not to change the current status.

A Board member drew the Board’s attention to the fact that there was one situation where the principles in the conceptual framework were a basis for overriding a standard, that being the true and fair override in IAS 1. He noted that in situations where a preparer decided to override a standard, it could only be based on the conceptual framework.

In response to this comment, another Board member noted that an override would not only be based on the conceptual framework. Preparers would determine whether or not application of the principles in a certain standard adequately described a transaction and whether there was a need to override the standard. However, he noted that this could be done from outside the conceptual framework.

The Board member who raised the issue responded that his understanding of the true and fair override was that, when there was a departure from a standard, this could only be based on the idea of achieving a true and fair view. When departing from a standard, one needed to comply with the superior objectives, which were in the conceptual framework.

The Chairman cautioned that this would be basically saying that the conceptual framework overrode standards, which would be very dangerous, and suggested that this issue should be left alone. The Board member clarified that the point he was trying to make was that the principles in the conceptual framework applied both when a standard was applied, and when a standard was departed from.

Another Board member suggested that this point could be dealt with by adding a clarification in the Basis for Conclusions to the conceptual framework. He suggested stating that the fact that the conceptual framework was not a standard and did not override the requirements of specific standards did not call into question the requirement to present a true and fair view, because this requirement was in IAS 1. A fellow Board member noted that this would not be necessary as this point was already in IAS 1.

When called to a vote, the Board agreed with the staff recommendation.

The third question dealt with the issue whether certain parts of the conceptual framework be available for use by the IASB only. Several Board members suggested that the Board revisit this decision at the end of the project when the final wording in the conceptual framework would be known, acknowledging that this issue could be problematic in some situations (e.g., when choosing whether or not something should be reported in OCI rather than P&L).

A Board member raised the issue of prudence as a potentially problematic area and asked whether, if prudence were to be introduced into the conceptual framework, the Board would allow preparers to exercise prudence or whether this would be reserved for the Board when standard-setting. He agreed that the Board should revisit this decision when the final wording in the conceptual framework was known. Several other Board members questioned whether or not this decision was even necessary given the Board’s decision on the status.

The final question raised concerned possible departures from the conceptual framework and whether the Board should be able to do so. The Board confirmed this reading.

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