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Conceptual Framework - Sweep issues

Date recorded:

The Technical Principal introduced the agenda paper that comprised four sweep issues that had arisen when staff had started drafting the Exposure Draft on the Conceptual Framework.

The first issue concerned the approach to the recognition chapter. The Technical Principal reminded the Board that they had decided not to describe specific recognition criteria for assets and liabilities. Instead several factors should be described that governed the recognition of assets and liabilities. Those factors should be linked to the qualitative characteristics of financial statements and cost benefit considerations. The Technical Principal conceded that the staff had struggled drafting those factors. She suggested instead describing relevance, faithful representation and cost benefit as criteria for recognition.

The Chairman agreed with the approach as it was firmer than before. One Board member said that cost benefit was a pervasive factor in financial statements. She was therefore concerned about explicitly stating cost benefit in the recognition criteria. The Technical Principal replied that cost benefit was a particular aspect of recognition and had therefore been reiterated in the recognition section. The Board member agreed that cost benefit should be discussed in that section but disagreed with stating it as a criterion. She also said that the reference to non-recognition of internally-generated goodwill in the current draft was out of place in her view. To her it was a standards-level decision. The Technical Principal said that it was meant as an introduction to the section about intangibles that were not separable from goodwill.

One Board member disagreed with the reference in the staff draft that only in exceptional cases there was a range of possible estimates. The Technical Principal agreed that those situations occurred more often, however what was meant was that only in exceptional circumstances the availability of a wide range of possible estimates would lead to non-recognition of an asset or liability. The Research Director confirmed that. The Board member also had difficulties understanding the part of the staff draft where it was stated that a low probability of an inflow or outflow of economic benefits did not mean that the measure would not provide useful information, especially if there was an exchange transaction with an observable price. In reply to that, another Board member referred to a lottery ticket as an example. With a lottery ticket, there was a low probability of an inflow of economic benefits but the lottery ticket was purchased at an observable price. The former Board member agreed that this was a good example and asked the staff to redraft this section to better understand what was meant.

One Board member disagreed with the fact that this was labelled as a sweep issue. He also disagreed with the newly introduced criteria for recognition as in his view they were objectives of recognition and not criteria that needed to be met in advance. Another Board member agreed. The Technical Principal replied that under the current Framework there had also been recognition criteria. The Board member said that in his view the discussions had shown that ‘criteria’ was an undesired term.

The Vice-Chairman was in favour of the proposals, however, he struggled with the reference in the staff draft that the lack of a past event could prohibit recognition. He said that the Board had decided before that the past event did not play a role in recognition.

The Chairman asked who supported the staff recommendation. 12 of the 14 Board members were in favour.

The next issue concerned the definition of an economic resource. The Technical Principal said that both the asset and the liability definitions in the Exposure Draft included the term ‘economic resource’. Economic resource was in turned defined as a right that was capable of producing economic benefits. The term ‘capable’ did not mean a minimum probability threshold but meant that at least in some circumstances the economic resource would generate economic benefits. When drafting this section the staff realised that the term ‘capable’ was already used in the discussion of relevance in the existing Conceptual Framework. As the ambiguous use of ‘capable’ could potentially raise confusion, the staff suggested replacing ‘is capable of’ in the discussion of economic resources with ‘has the potential to’.

A Board member agreed with the change. He said that ‘capable’ implied a probability threshold, especially when translated to Portuguese. The Chairman agreed and said that translation to other languages also might be problematic. He concluded that everyone agreed to change the draft.

The Technical Principal introduced the next issue which was the objective of profit or loss. She reminded the Board that they voted in favour of bringing forward the dual objective of profit or loss from the Discussion Paper. The staff, however, realised in the drafting process that the objective of profit or loss was redundant as it had already been covered by the overall objective of financial reporting. In addition to that, other components of financial statements did not have a separate objective either. The Technical Principal therefore suggested deleting the objective.

One Board member agreed but said that the Board had missed an opportunity to define objectives for all components of financial statements. A fellow Board member agreed as well but also saw the objective as an additional signpost in the difficult question of what went into profit or loss and what went into OCI.

A fellow Board member did not see a redundancy as the general objective of financial statements stated ‘depicting the return an entity had made on its economic resources’ whilst the objective for profit or loss added ‘during the period’ to this objective. In his view this expressed a key element in the distinction between profit or loss and OCI. The Chairman and Vice-Chairman agreed with that. One Board member said that the Board was struggling with defining objectives for other components and he welcomed the fact that this objective would be deleted as well. He also asked why OCI would not be part of the objective if it were to be left in the draft. The Technical Principal shared this concern as the objective as drafted might indicate that nothing would ever be recognised outside of profit or loss. One Board member said that this would be consistent with the decision the Board had made. The Chairman qualified that by saying that at least there was a high hurdle for recognising items outside of profit or loss.

A Board member reminded the Board that this was only the Exposure Draft stage so she suggested leaving the objective in the draft and wait for comments from constituents on this. A fellow Board member agreed but said that the objective should be made consistent with the OCI discussions of the Board.

One Board member asked the Technical Principal as to how the distinction between profit or loss and OCI would be portrayed in the Conceptual Framework if the objective were to be deleted. The Technical Principal replied that the Exposure Draft would state that there was a rebuttable presumption that all items of income and expense were recognised in profit or loss but that sometimes it would be more relevant if certain items were excluded.

One Board member expressed disappointment over the fact that the IASB was unable to define an objective for a balance sheet. The Technical Manager reminded him that the Board did not want to define objectives for financial components because it would have meant to decide what the primary components of financial statements were. The Chairman confirmed that.

The Research Director suggested not labelling the paragraph as an objective but rather include them as a description. 13 of the 14 Board member voted in favour of this.

The final issue was in relation to the reference to the entity perspective. The Technical Principal said that the Board had discussed the perspective from which financial statements should be prepared and had decided that the financial statements should be prepared from the perspective of the reporting entity as a whole. Although this was consistent with the rest of the Exposure Draft, staff had struggled linking this statement to other aspects in the Conceptual Framework. Staff therefore suggested deleting this statement.

A Board member asked whether that point would then be mentioned somewhere else in the Conceptual Framework. The Technical Principal replied it would be included in the Basis for Conclusions.

Another Board member disagreed with the staff recommendation because a statement on the perspective had been demanded repeatedly by constituents and would facilitate the standard-setting process, for example, with respect to consolidation. That was supported by another Board member.

When called to vote, only two of the 14 Board members agreed with the staff recommendation.

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