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Conceptual Framework

Date recorded:

Agenda Paper 10B: Sweep Issues

The Technical Principal introduced the agenda paper that comprised four sweep issues on the Conceptual Framework project. She pointed the Board to the summary of recommendations in the agenda paper and asked whether the Board agreed with these recommendations.

One Board member said that he understood that the changes were necessary and it was therefore difficult to disagree with them. He asked the staff to confirm that these modifications would not change practice. The Technical Principal confirmed that and said it was only an update of terminology.

Another Board member was concerned about the removal of the references to gains and losses. The Technical Principal replied that the concept of income and expense was inclusive and that they did not want to suggest any sub-classification. The Vice-Chairman agreed with staff and said that those terms had been used falsely in practice for a while.

A Board member disagreed with the staff recommendation that the Conceptual Framework should not comment on whether the disclosure guidance in standards included providing information that enabled a user of financial statements to recalculate the amounts recognised in the financial statements. In his view, it should even go further and state the objective that users should be enabled to understand the amounts in the financial statements. The Research Director clarified that the negative statement was explicitly about recalculating and that this was a repetition from the Discussion Paper. It did not mean that there would not be an objective about understanding the amounts in financial statements. It meant instead that the Disclosure Initiative would consider whether an objective of the notes was also to help users recalculate the amounts.

Another Board member said she shared the concern about unintended consequences from removing the reference to gains and losses from the Conceptual Framework. However, she reminded the Board that this was an Exposure Draft and that such consequences would probably be flagged by constituents. She therefore supported the recommendation despite her concerns.

One Board member said that he would prefer having more discussions on the Exposure Draft as, in his view, rules were integrated into the Conceptual Framework. He asked how and when the matching principle would be discussed. The Technical Principal said that income and expense were defined as changes in assets and liabilities in the Framework. Therefore, matching would be ensured by simultaneous changes in assets and liabilities.

A Board member disagreed with comments from respondents to the Discussion Paper that the existing Framework put emphasis on the balance sheet but understood that this was a common misunderstanding. Therefore this should be addressed in his view. He quoted a reference from a past agenda paper. It stated that the IASB and other standard setters had found over many years that it was simpler to define assets and liabilities first and then define income and expenses as the changes of those. He said that this should be included in the Basis for Conclusions in the Exposure Draft as an explanation. He also said that he missed the link between the nature of assets and liabilities and the unit of account. He said that enlarging the unit of account might eliminate the matching issue. He agreed that the Conceptual Framework could not address those issues but it could describe the relationship between the nature of an asset or liability, the unit of account, the length of the reporting period and accounting mismatches. The Technical Principal said that except for the reporting period those topics would all be covered in the Exposure Draft.

One Board member said that the removal of gains and losses could strengthen the perception that the Framework was balance sheet-focused. He said that the removal therefore needed a strong justification in the Basis for Conclusions.

Another Board member supported the staff’s proposal to state that the objective of disclosure guidance was not to enable users to recalculate the amounts in the financial statements. The Vice-Chairman disagreed and said some disclosures do have the objective to help users recalculate. One Board member asked what the Exposure Draft would state in general about disclosure objectives. The Research Director said that the Exposure Draft would state high-level principles on disclosure and more detailed guidance would be considered in the Disclosure Initiative.

One Board member disagreed with the staff’s decision not to discuss periodicity and suggested outlining periodicity as an assumption in the introductory section of the Framework, together with the reporting entity and going concern. The Technical Principal replied that reporting entity and going concern would be discussed in the section about the role of financial statements.

The Chairman called a vote on the staff recommendations in the agenda paper. Eleven of the 14 Board members voted in favour of the recommendations.

 

Agenda Paper 10C: Update on the FASB’s and IPSASB’s Conceptual Framework projects

The Senior Technical Manager introduced the agenda paper. She said that the projects of the FASB and the IPSASB on their frameworks did not indicate that any tentative decisions taken by the IASB to date needed revisiting. The Vice-Chairman said that the only difference to the IPSASB’s Framework was that they had a separate section about deferred assets and liabilities.

One Board member said that another difference would be the definition of ownership contributions and distributions as elements in the IPSASB’s Conceptual Framework which would be understandable for private entities but not for public entities. The Vice-Chairman said that public entities also made distributions, for example to their parent entities. The Board member said that he was more concerned about the question of why a framework for public entities like the IPSASB’s would contain elements of ownership whilst a framework for private entities like the IASB’s would not. The Research Director said that income and expenses were proposed to be defined as changes in assets or liabilities other than distributions or contributions. He said that the Board had decided that distributions and contributions should not be elements as this would most likely cause drafting issues and it had not caused issues in the past.

 

Agenda Paper 10D: Measurement – Transaction costs

The Technical Principal reminded the Board that the Discussion Paper was silent on transaction costs. However, this was an issue that was often discussed when drafting a new standard. Staff had therefore decided to propose adding transaction costs to the discussion of measurement bases in the Conceptual Framework. The Technical Principal said that the agenda paper distinguished two types of transactions costs. The first category was the cost of acquiring an asset or incurring a liability and would therefore increase the carrying amount of an asset or decrease the carrying amount of a liability. The second category was transaction costs that were incurred when realising an asset or settling a liability. These costs decreased the carrying amount of assets and increased the carrying amount of liabilities.

The discussion in the agenda paper on the first category of transaction costs began with assets and liabilities that were measured at current value. The costs of acquiring an asset or incurring a liability were a feature of the transaction rather than a feature of the current value. The staff therefore recommended that transaction costs were not a part of the current value.

One Board member asked whether this was consistent with IFRS 13 Fair Value Measurement. The Technical Principal confirmed that. A Board member added that it was also consistent with IFRS 9 Financial Instruments.

A fellow Board member asked if there were any examples for transaction costs that occurred on fulfilment of a liability. The Technical Principal said that costs of employment of a third party to fulfil the liability on the entity’s behalf would be an example. The Board member replied that to him those were costs of execution, not transaction costs.

A Board member said that transaction costs could be separate assets and liabilities and he was therefore concerned stating that they were part of an asset or a liability. He agreed that costs incurred on acquisition of an asset should be included in the asset but he was concerned about the way this was presented in the agenda paper. The Technical Principal replied that in most cases transaction costs would not meet the asset criteria and that the paper focused on those. The Research Director added that costs by themselves would never meet the definition of an asset. An asset could only be a right, so the question was whether it was a separate right or an underlying right.

One Board member did not disagree with the paper but was concerned about the level of detail. He said that to him it was too much detail for a Conceptual Framework. The Technical Principal replied that transaction costs had always been an issue when the Board had been trying to set a Standard and they therefore believed it would be sensible to have high-level guidance in the Framework. The Board member replied that he agreed but that the guidance should be concise.

Another Board member said it was unclear to him when transaction costs were included in the measurement. The Vice-Chairman replied that they would be included when measured at cost and excluded when measured at fair value.

The Chairman called a vote on the staff recommendation to state that if the objective of a measurement was to depict the current value of an asset or liability, measurement should not reflect the transaction costs of acquiring the asset or incurring the liability. 13 of the 14 Board members agreed.

The Technical Principal then went on to cost-based measures. The staff recommended that if the objective of a measurement was to depict cost of an asset or liability, that measurement should reflect the transaction costs of acquiring the asset or incurring the liability.

One Board member expressed concern about the conflict with the Basis for Conclusions on IFRS 3 Business Combinations. She said she would prefer examining the logic about when the services were consumed as part of the transaction. Another Board member agreed and said to her the decision was not as simple as the decision not to include transaction costs in fair value.

A Board member supported the staff recommendation and said that this had been common practice and that he failed to see evidence that the common practice was broken.

One Board member asked if the recommendation meant that if the objective of a measurement was to depict transaction price instead of cost, transaction costs would not be included. The Technical Principal confirmed that and said that transaction price would be fair value. The Board member asked how this would work in connection with IFRS 3 as under IFRS 3 initial recognition was at fair value which was deemed cost; however, transaction costs were not included in that cost. The Technical Principal said it was not included as it was a fair value measurement.

Another Board member said that including the transaction costs in an asset was intuitive for him, however, including it in a liability was less intuitive. He said that the liability should be presented at face value and any transaction costs should be a separate asset. The Technical Principal replied that transaction costs would actually be deducted from the liability. The Board member suggested explanation in the Exposure Draft.

The Senior Director for Technical Activities said that IFRS 3 did not have the objective to measure all assets and liabilities at fair value. Much more, it wanted to achieve accounting as if all assets and liabilities had been acquired separately, i.e. cost. He said that IFRS 3 had almost led to an amendment to IAS 16 to exclude transaction costs.

The Chairman asked the Technical Principal how she would summarise the discussion. She replied that she heard that some of the Board members thought the issue was too complex for the Conceptual Framework whilst some agreed with the staff recommendation. The Chairman asked the Board who was in favour of remaining silent on transaction costs in the Framework. One Board member asked whether that also included the Basis for Conclusions. Another Board member said that he would be very concerned if the Framework remained silent as there were discrepancies because of the lack of guidance. He said that a solution might be to state what was in the agenda paper as a general guidance and also state that sometimes the Board needed to depart from that general guidance. The Vice-Chairman said that this was true for all statements in the Conceptual Framework.

One Board member said that in his view, transaction price (fair value) and cost only differed for transaction costs. Setting transaction costs aside, they were almost always the same. Therefore, in his view, this issue should be addressed.

Another Board member agreed with addressing but said that it should not hold up the rest of the project. She said that this might be something that needed revisiting at a later point.

The Chairman summarised that the issue was very controversial and therefore suggested not to include it in the Conceptual Framework.

The Vice-Chairman called a vote on who agreed with all recommendations in the staff paper. Nine of the 14 members agreed. The IASB would therefore include the discussion in the Framework.

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