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Conceptual framework - joint with FASB (education session)

Date recorded:

The IASB Technical Principal commented on the different approaches taken by the two Boards in their respective Conceptual Framework projects noting that the IASB has chosen not to adopt a phased approach and to, instead, produce a complete set of proposals on a revised Conceptual Framework – the Exposure Draft released earlier in 2015 evidenced this.

She went on to state that the FASB has adopted a phased approach to their Conceptual Framework project.

The FASB Project Lead outlined the approach taken by the FASB and explained why Measurement and Presentation had been selected as part of the first phase – these reasons are that the FASB believe these areas are, in the current FASB Conceptual Framework, the most deficient and the concepts relating to Presentation will be useful when discussing Measurement.

The IASB Technical Principal provided a brief overview of the Measurement proposals contained in the Conceptual Framework Exposure Draft – these were discussed in Agenda Paper 10A. She indicated that the primary focus of the paper was on describing the different measurement bases and the different information that each of these bases provide and the advantages and disadvantages of these bases.

She explained the two broad categories of measurement bases, namely; (adjusted) historical cost-based measures and current value (updated information at the balance sheet or measurement date). She discussed two further categorisations, namely: bases which are based on market participant assumptions (fair value) and those based on entity-specific assumptions (value for use).

The IASB Technical Principal then briefly discussed the factors that had been identified to be used when selecting an appropriate measurement base and described how the concepts of relevance and faithful representation would need to be considered as well as the enhancing characteristics. When considering relevance, the information that arises from a particular measurement base provided in the statement of financial position as well as the information relating to financial performance must be considered.

Furthermore, she discussed how the manner in which an asset or liability impacts on future cash flows and whether this would impact on the measurement base to be applied for different items. The business activities conducted by the entity may, at least in part, also impact on the measurement base selected. Finally, she addressed the concept of measurement uncertainty and how it may impact on the selection of an appropriate measurement basis.

The IASB Technical Principal then addressed the implications of faithful representation of financial information on the selection of measurement bases. She explained that it is necessary to consider links between assets and liabilities – if related assets and liabilities are measured using different measurement bases, accounting mismatches may arise which may not faithfully represent the financial performance of an entity.

She continued her overview by discussing the concept of understandibility in the context of measurement bases and reiterated the importance of the cost constraint.

The IASB Technical Principal then summarised the feedback received to date noting that the comment period for the Exposure Draft was still ongoing. She stated that there was support for the measurement approach suggested but there are big concerns surrounding the factors identified and their usefulness to the IASB when they are setting standards.

The FASB Project Lead then provided an overview of the FASB work conducted to date relating to measurement noting that they are not as far along the process as the IASB. However, she explained that there have been many public discussions and meeting with FASB members to discuss various measurement issues. She stated that the staff had summarised principles identified based on these discussions in Agenda Paper 10D.

The IASB Vice-Chairman highlighted paragraph 9 of Agenda Paper 10D and discussed how he firmly agreed with the concept of (or term) value flows and how these should also be considered instead of simply considering cash flows (as a term). He then stated that people use the term cash flows as an absolute concept rather than a ‘short hand’ as it is intended to be seen.

An IASB member discussed that the concepts of direct and indirect cash or value flow raised in Agenda Paper 10D were not dissimilar to factors raised in the IASB Exposure Draft, and was of the opinion that the IASB staff could use these terms to ‘crisp up’  the discussion and consideration in the relevant chapter of the IASB Exposure Draft. The IASB Technical Principal agreed stating that the idea was already implicitly part of the document, but could be brought out more clearly. Further she stated that this ‘clarification’ could be useful to addressing some comments raised by respondents that the Exposure Draft does not go far enough in addressing the implications and consequences of the selection of the different measurement bases.

Another IASB member sought clarification from the FASB members on a few issues. These included whether there should be a definition of OCI and earnings or profit or loss and how detailed and descriptive the measurement chapter should be.

A FASB member responded by saying that the FASB’s objective is to develop a chapter that looks at more than just broad measurement bases but delves deeper and looks at the choices available under, for instance, an historical cost model. However, he stated that the chapter was not to be written to justify previous decisions made.

He further discussed that the FASB’s objective is broader than that of the IASB (namely determining the factors that would lead to the choice between historical cost-based measures and current value measures) and this means that more detailed guidance (than that provided by the IASB in the Exposure Draft) could be provided.  However, he reiterated that no decisions had yet been made at this stage.

Another IASB member asked a question relating to paragraphs 10 – 12 of Agenda Paper 10D – the categorisation of cash flows as direct, indirect or somewhere in between. He questioned whether, analogising to leases where the cash flows are categorised as ‘somewhere in between’, granting a loan (where the underlying asset is cash) could result in cash flows similar to those of a lease. The only difference is the underlying asset.

The FASB Project Lead commented that this classification of loan cash flows had not been the intention and rather the loan would result in direct cash flows. However, a FASB member commented that a loan could be seen as leasing cash to another party. The IASB member then stated that he was confused by the classification proposed of direct and indirect cash flows given the query he had raised.

A FASB member requested clarity on information provided by IASB staff relating to feedback received relating to the factors to be applied when selecting measurement bases – this feedback stated that the factors are too subjective and do not make a link between assets and liabilities. The FASB member then enquired whether he would be correct in stating therefore that the type of asset or liability would dictate its measurement base. He asked a further question relating to the interplay been relevance and measurement uncertainty. He questioned whether there had been discussions around the point where a measure became so uncertain that it became not relevant.

The IASB Technical Principal responded to the two questions. In responding to the first question, she stated that respondents had requested further guidance relating to what sorts of measurement bases to apply for different assets and liabilities but they did not want too much guidance i.e. a prescriptive laundry list of assets and liabilities and the ‘required’ measurement base as this would be too much standards-level detail in the Framework.

She responded to the second question by stating that a balance would need to be struck and there can be no hard and fast rules written, instead judgement would need to be applied.

The FASB member responded by asking whether the overriding objective is relevance and then it is a matter of the IASB determining how much measurement uncertainty they are comfortable with. The IASB Technical Principal agreed with this and cited an example provided in the BCs to the Exposure Draft – there are two measurement bases that would provide equal relevance of information, the base with the lowest measurement uncertainty should be selected.

An IASB member stated that there were significant similarities between the Exposure Draft and the outcome of the work performed to date by the FASB staff. He then asked the FASB Project Lead whether there was anything identified that would be inconsistent with the IASB Exposure Draft.  The FASB Project Lead and the IASB Technical Principal concluded that there was general level of agreement, but there may be a difference as to when cost-based measurements may be used and their perceived relevance. The FASB Chairman responded by saying that cost-based measures may be relevant at certain times and were not just used when considering the cost-benefit thought process.

The IASB Chairman stated that he was not surprised that the Boards will come to similar outcomes because that similar principles have been used over time by the Boards.

An IASB member then posed a question regarding paragraph 28 of the paper – relating to the relevance of market exit prices for items not intended to be sold – the paper states that such measures would not be relevant in such instances. He then asked what the FASB staff thought when this issue would be considered further. The FASB staff indicated that discussions were at an early stage and no decisions had been made as yet.

Another IASB member questioned the wording of a paragraph relating to market exit prices. The paragraph as worded states that cash flows will be collected. The IASB member questioned whether this may be a point of divergence given that the intention of the entity may change relating to an asset and, therefore, cash flows might be collected rather than will be collected.

The FASB Chairman indicated that the words used in the paper were not final as yet, discussions were ongoing and nothing had been decided as yet.

Another IASB member discussed the measurement uncertainty issue raised earlier by a FASB member and how the IASB had determined to discuss this as a measurement issue rather than in the qualitative characteristics of information (reliability) and in the definition of assets and liabilities (in the concept of probable cash flows). He discussed the thresholds for recognition differences between the Conceptual Framework and at standards level and then asked the FASB members whether they foresaw a discussion regarding recognition thresholds taking place during their Conceptual Framework project.

A FASB member responded by saying that the word ‘probable’ used in the previous definitions had been miscommunicated to stakeholders who sought to apply it in the same way as it was applied in other guidance (it was intended to mean more than a non-zero probability rather than likely to occur).

Another FASB member highlighted another potential difference between the two Boards’ final outcomes in that the IASB’s treatment of transaction costs as part of the cost of an asset or liability may not be the same conclusion that the FASB get to.

 

The discussion then moved to Presentation and the FASB Project Lead provided a brief overview of Agenda Paper 10C stating that the FASB was further along in their discussions relating to Presentation and that decisions had been taken.

She explained that there were two deficiencies identified in existing Presentation guidance. These relate to the line items in which recognised items should be included and how should the line items be grouped and ordered and, secondly, the complementary nature of financial statements.

Relating to the first deficiency, two broad concepts have been discussed: information should be grouped into homogenous groups in line items to provide useful information. Line items should be grouped based on factors developed by the FASB.

She expanded on the second concept and stated that the FASB had tentatively decided that no conceptual basis exists for OCI and that this was intended to be included in the FASB Exposure Draft.

The IASB Technical Principal discussed how OCI has been dealt with in the Exposure Draft and basic principles have been included relating to how OCI should be used. However, ‘performance’ has not been defined as no real conceptual basis could be found to do this. Broadly, there is a presumption that incomes and expenses will be included in profit or loss (but this can be rebutted in specific circumstances) and it is presumed that amounts included in OCI will be recycled to profit or loss (this, too, can be rebutted in specific circumstances).

The IASB Technical Principal then briefly described the high level principles of presentation and disclosure included in the Exposure Draft. These include the objective and scope of financial statements, classification, aggregation and offsetting and what sort of information would be useful to be provided in the notes. These principles are high level and will be developed further into standards level guidance through the Disclosure Initiative.

The FASB Chairman expanded on the FASB Project Lead’s discussion relating to OCI by stating that OCI could still be used by the FASB even though they feel that there is no conceptual basis for it. He explained the FASB’s thinking about the Conceptual Framework and its use – firstly they would consider what was conceptual, then what was beneficial to users and then what satisfied the cost-benefit concept. Further, when, at a standards level, the FASB did not apply the Conceptual Framework, an explanation should be provided in the related BC. Therefore, he concluded that the two Boards thinking and potential use of OCI would, ultimately, be similar.

The IASB Chairman explained that he felt that the Conceptual Framework DP was not widely understood. He explained that there had been one conceptual basis for the use of OCI which is the incomplete measurement basis – where an asset and liability are measured differently or where one of the two is not measured at all and, as a result, counterintuitive results would emerge if OCI was not used at all. Therefore, to say that there is no conceptual basis for OCI is strong.

The FASB Chairman clarified the FASB view on OCI by stating that although it may have no conceptual basis does not mean that they don’t find its use beneficial.

An IASB member asked whether OCI would be used when developing a relevant presentation. She stated that she could see it playing a role in the consideration of aggregation and performance presentation.

A FASB member clarified that discussions had not yet been finalised.

Another IASB member agreed that in the past there was no consistent use of OCI and does not agree that there is no conceptual basis for OCI. He then posed a question to the FASB regarding whether the liability/equity discussion would be considered in its deliberations on its Presentation chapter.

A FASB member responded by stating that problems existed with the definition of a liability and this could result in inconsistent outcomes in any discussion regarding liability/equity. Therefore, measurement and presentation should be discussed and finalised first before tackling other issues, as measurement could drive presentation and vice versa.

The IASB Vice-Chairman queried the wording of paragraph 12 of the paper.  The resulting discussion discussed whether recurring and non-recurring transactions and certain from uncertain transactions should be assessed and grouped differently. There was agreement that this should be done, but the IASB Vice-Chairman still felt that the sentence was badly worded and did not describe what it was intended to.

An IASB member discussed that the current value of an item may be presented in the statement of financial position and the changes in that value may be presented separately. She then questioned whether the FASB thought that this could be achieved using two separate lines in a single statement whereas the IASB may present the two components in different statements – therefore, the information is important to both Boards.

A FASB member stated that he was concerned that by creating OCI that users would feel that this information was not important until it hit net income.

The IASB member continued by asking how consideration of the complementary financial statements would assist in classification decisions.

The FASB Project Lead stated that the primary objective of considering the complementary nature of statements was to ensure that the statements relate to one another and, where possible, it should be possible to link the statements.

Another IASB member commented on the FASB’s stance towards OCI and the fact that they would still use it (given potential benefits) despite stating that there was no conceptual basis for it. He questioned whether it would not be useful to discuss what those potential benefits might be. He would also prefer that given the lack of a conceptual basis for OCI that it would not be used. He also queried whether the FASB were also of the opinion that there was no conceptual basis for the recycling of OCI – the FASB stated that they did not think that there was a conceptual basis.

The FASB Chairman questioned whether as a result of not including OCI in the Conceptual Framework it would be harder to justify using it than it OCI had been included in the Conceptual Framework.

The IASB Chairman reiterated that net income is the primary indicator of performance and therefore, the presumption is that all items would be included in there. Only if there are very good reasons to do so, would OCI be used. He recommended that the FASB, too, create a high hurdle for the use of OCI.

The FASB Chairman stated that he did not feel that the Boards’ philosophies are different.

A FASB member stated that despite not developing a conceptual basis for OCI, this did not mean that no discussion relating to the use of OCI would be included.

Another FASB member stated that other than currency translations and cash flow hedges are the only items that have characteristics different to those other items included in OCI. With those other items, there are items with similar characteristics included in net income (not OCI) and therefore, it would be very difficult to formulate a conceptual basis for OCI.

The IASB Chairman closed the session.

Correction list for hyphenation

These words serve as exceptions. Once entered, they are only hyphenated at the specified hyphenation points. Each word should be on a separate line.