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Conceptual Framework

Date recorded:

Recap

The IASB published exposure draft ED/2015/03 Conceptual Framework for Financial Reporting (‘the ED’) in May 2015. After expiration of the comment period, the IASB resumed its deliberations by presenting an analysis of the comment letters at the March 2016 IASB meeting.

At this meeting the Board discussed the purpose and status of the Conceptual Framework and the approach to finalising the Conceptual Framework.

Purpose and status of the Conceptual Framework

The staff recommended that the IASB confirm that the purpose of the Conceptual Framework is to:

(a) assist the Board to develop IFRS Standards that are based on consistent concepts;

(b) assist preparers to develop consistent accounting policies when no IFRS Standard applies to a particular transaction or event, or when an IFRS Standard allows a choice of accounting policy; and

(c)  assist all parties to understand and interpret IFRS Standards.

As regards the status of the Conceptual Framework, the staff recommended that the IASB confirm that because the Conceptual Framework is not an IFRS Standard it does not override the requirements of any specific Standard.

Furthermore, the staff recommended that the Framework state that the IASB may depart from the Conceptual Framework when setting a Standard if the departure is explained in the Basis for Conclusions to that Standard. They also recommended to state that the Conceptual Framework is revised from time to time and that the Basis for Conclusions to the Conceptual Framework should provide examples of events and circumstances that could trigger a revision.

Approach to finalising the Conceptual Framework

The staff have identified areas in the ED that require further analysis and discussion. The agenda paper provides an overview of discussion topics for all chapters, however, in this meeting, the staff focus on the areas of measurement, reporting financial performance and concepts for liabilities and equity.

Measurement

The staff set out three different approaches to the redeliberations of the measurement chapter of the ED.

  • Approach A: Discard the measurement chapter and initiate a research project, thus postponing the revision of the Conceptual Framework until the research project is completed.
  • Approach B: Retain the measurement chapter with minor changes.
  • Approach C: Build on the measurement chapter, retaining many of its ideas and making the links between the ideas discussed clearer, and making the implications of the discussion evident.

The staff recommended Approach C, thus retaining the insights gained in developing the ED and the preceding discussion paper.

Reporting financial performance

The staff identified the following approaches to the redeliberations around the reporting financial performance chapter:

a) do not provide guidance;

b) provide high-level guidance; or

c) provide more specific guidance.

The staff recommended providing high-level guidance using the proposals in the ED as a starting point.

Concepts for liabilities and equity

The staff recommended that the Board continues to develop concepts to address challenges that arise in classifying financial instruments with characteristics of equity in the dedicated research project rather than in the Conceptual Framework project.

As regards concepts to address other problems in identifying liabilities, the staff recommended to continue developing those concepts as part of the Conceptual Framework project by refining the proposals in the ED rather than introducing new concepts.

In the meeting, the staff asked whether the Board agrees with the above staff recommendations.

 

Board discussion

Purpose and status of the Conceptual Framework

The Board members confirmed the purpose and status of the Conceptual Framework and the fact that it is not a Standard.  The Assistant Technical Manager in charge of the agenda item mentioned that some constituents wished for a higher status of the Conceptual Framework (similar to a constitution) and therefore the Board would not be allowed to deviate from it. She conceded that it was only a low number of respondents who expressed this idea.

They also agreed that the Board should be permitted to depart from some aspects of the Conceptual Framework which should then be explained in the Basis for Conclusions on the Standard in question.

The agreement was reflected by unanimous votes in favour of those staff recommendations.

While discussing the purpose and status, one Board member said the Board should consider expanding the scope of the Conceptual Framework to include business reporting as that became more and more important for preparers.

There was some controversy around the question as to whether it should be explicitly stated in the Conceptual Framework that it would be revised from time to time. The Chairman believed that this would be stating the obvious because all IASB pronouncements would be subject to change from time to time. One Board member expressed desire to state in the Basis for Conclusions on the Conceptual Framework which parts were final and which were still under discussion. This was rejected by several Board members as this would create a degree of uncertainty about the status of those ‘open’ sections. One Board member said that once the Conceptual Framework was published, it would be final in its entirety until it were to be amended under the due process.

When called to vote, eight of the fourteen Board members voted in favour of stating in the Conceptual Framework that it would be revised from time to time. However, only one Board member voted in favour of adding examples of events and circumstances that could trigger a revision of the Conceptual Framework to the Basis for Conclusions.

Approach to finalising the Conceptual Framework

The Board members had some granular comments as regards the proposed approach to finalising the Conceptual Framework. One Board member suggested also looking at comment letters that were in agreement with a section of the Conceptual Framework as agreement did not automatically mean they did not have further suggestions. Another Board member was concerned about the absence of combined financial statements in the list, however, the staff reassured him that this issue would be considered.

As regards the approach to analysing the effects of the Conceptual Framework there was general agreement (twelve of the fourteen Board members voted in favour of the staff recommendation) although some Board members warned not to rely solely on ASAF for the field testing.

Measurement

There was a controversial discussion as to how the measurement chapter should be finalised. While many Board members were in favour of retaining the measurement chapter with only minor changes, some favoured building on the existing chapter. The main concern with the “build” approach was timing. Although the staff estimated that the timetable could still be met with the build approach, many Board members expressed concerns about that estimation. They believed that at least two to three Board meetings were necessary to redeliberate the new proposals. There were even some Board members who thought that a re-exposure of the chapter might become necessary and that the Board should take its time to finalise this thoroughly.

The Vice-Chairman suggested that the Board should either retain the existing chapter aggressively or build upon it prudently and it was for the staff to decide which would be the best way forward.

Reporting financial performance

The Board was in general agreement about providing high-level guidance on performance reporting. The Chairman stated that the work done – especially in the Discussion Paper – was extremely useful and should not be abandoned. However, the discussion revealed that there was a different understanding between Board members about what high-level guidance meant.

One Board member said that performance would have to be defined as a starting point before continuing the discussion. He also said that structure, subtotals and also the split between P&L and OCI would have to be decided on a standard-level. To him, the Conceptual Framework should only contain conceptual guidance that helps the Board to decide, for example, where to split between P&L and OCI. The Research Director said that the main question would be if or when the Board wanted recycling, as different Boards have expressed different opinions about that.

When called to vote, 9 of the 13 Board members present favoured the staff recommendation to provide high-level guidance.

Concepts for liabilities and equity

The Board agreed unanimously with the staff recommendation to develop concepts to address challenges that arise in classifying financial instruments with characteristics of both liabilities and equity as part of the dedicated research project.

Also all voted in favour of developing concepts to address problems in identifying liabilities as part of the Conceptual Framework project.

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