Conceptual Framework - Agenda paper 10
The IASB will continue its discussion of the comments received on the Conceptual Framework exposure draft (the ‘CF ED’). The topics for this meeting are as follows:
- Factors specific to initial measurement (APs 10B);
- More than one measurement basis (AP 10D); and
- Whether to confirm the proposals in the Updating References to the Conceptual Framework ED (AP 10E-10F).
In addition, the tentative decisions made to date are summarised in AP 10A. AP 10C contains the suggested revised draft to Chapter 6 — Measurement as regards initial measurement.
The Staff intends to discuss the following topics in the February 2017 Board meeting: (a) inconsistencies between the revised Conceptual Framework and other Standards; (b) effects analysis; and (c) due process.
Conceptual Framework - Factors specific to initial measurement - Agenda paper 10B
Feedback from respondents and Staff analysis
Exchanges of items of similar values and exchanges of items of different values
Only a few respondents commented on this topic. Generally, the respondents believed that the section is underdeveloped and incomplete, and that it fails to bring out an important assumption on which the measurement principles are premised: that transactions between entities are fair, negotiated, arm’s length, exchanges. Without this overarching assumption, the requirements might be seen as establishing an inappropriate principle for measuring related-party transactions at current value.
The Staff agrees with the respondents’ concerns, and notes that arm’s length transactions might not necessarily result in trades at ‘similar’ values.
Transactions with equity holders
Disagreements were few, and mainly related to the inappropriateness of measuring a contributed asset from equity holders at current value when the contribution is from a related party, e.g. intra-group transactions and business combinations under common control (BCUCC), as current practice is to record such assets at their historical carrying amount. Some respondents also believed that it would be costly and judgemental to obtain current value for the contributed asset and challenged whether grossing up underpayments is conceptually sound.
The Staff agrees with the respondents’ concerns. The Staff explores the alternative of recording the contributed asset at historical carrying amount and the issued equity at current value with the difference between the two recognised as an expense. They note that although this appears to be consistent with IFRS 2’s requirement to expense the amount attributable to ‘unidentified assets or services received’, they decide against including this in the CF as they believe it to be beyond the scope of the proposals and would pre-empt the Board’s considerations on the BCUCC project.
Internally constructed assets
With regard to the desirability of changing the measurement basis of an internally constructed asset subsequent to initial recognition, the few respondents who disagreed with the proposals believed that the paragraphs are redundant, and that the information provided by measuring an internally constructed asset at fair value on completion date is not useful for assessing cost-effectiveness (as suggested by the proposals), as an entity does not make money by transacting with itself.
The Staff agrees with the respondents, and acknowledges that the proposed discussion is hardly comprehensive regarding the pros and cons of changing the measurement basis subsequent to initial recognition.
The Staff recommends that the revised CF:
In relation to exchanges of items of similar values and exchanges of items of different values
- (a) retain the main principles about initial measurement as set out in the ED; (b) distinguish transactions that are on arm’s length terms from other transactions, rather than referring to ‘exchanges of items of similar values’ and ‘exchanges of items of different values’;
In relation to transactions with equity holders
- (c) retain the principle that a transaction with equity holders is measured at the current value of the asset received with a corresponding contribution from owners;
- (d) expand the principle in (c) above to address liabilities incurred to make distributions to equity holders;
- (e) clarify that the principle in (c) and (d) above applies only to transactions on arm’s length terms, and that the revised CF not address transactions on other terms; and
In relation to internally constructed assets
- (f) remove the discussion of internally constructed assets as set out in the ED.
Conceptual Framework - More than one relevant measurement basis - Agenda paper 10D
Feedback from respondents
There was mixed feedback from the respondents. Those who disagreed with using a different basis for measuring assets/liabilities and their related income/expenses argued that this would increase the cost and complexity and decrease the understandability of financial statements. They also believed that the proposals contradict the definitions of the elements of financial statements (as income and expenses are defined as increases and decreases in assets and liabilities, it logically follows that a single measurement basis should be used for assets/liabilities and their related income/expenses). Furthermore, they were unclear as to whether, and how, OCI could be used to reflect the effects of these different measurement bases.
These concerns were shared by those respondents who agreed with the proposals, who also sought further guidance on when using more than one measurement basis would be appropriate.
The Staff agrees that using more than one measurement basis would result in increased cost and complexity; however, they noted that the Board would take costs/benefits into account when requiring entities to use more than one measurement basis. The Staff also reiterates that instead of hindering understandability, using more than one measurement basis would enhance users’ understanding of complex economic transactions (e.g. providing information on the amortised cost basis and fair value basis for financial assets held for collecting cash flows and for sale).
The Staff provides further lukewarm analyses to address the other concerns.
The Staff recommends that the revised CF:
- (a) retain the statement that more than one measurement basis might sometimes be selected to provide information about an asset, liability, income or expense;
- (b) require that both the relevance and faithful representation of information about an asset, liability, income or expenses be considered when selecting more than one measurement basis. These two factors are consistent with those to be considered when making classification decisions between P/L and OCI; and
- (c) clarify that measuring an asset/liability at current value and the related income/expense on a different basis is an example of classifying income and expenses in the statement of profit or loss and other comprehensive income, as opposed to being a concept on its own (in other words, the different measurement basis is a consequence of having to present income and expenses separately between P/L and OCI).
Conceptual Framework - Updating References Exposure Draft — proposed amendments and transition and effective date — Agenda papers 10E and 10F
The purpose of this session is to discuss whether the Board should confirm the proposals in the ED Updating References to the Conceptual Framework (the ‘Updating References ED’) to update all references to the existing conceptual framework to the revised CF once published.
Feedback from respondents and Staff analysis
Most respondents agreed with the proposals, with one major exception being the reference to the framework in IFRS 3.11 in relation to recognising identifiable assets and liabilities on the acquisition date of a business combination only if they meet the definition of assets and liabilities in the framework. Since the revised definition of liabilities in the revised CF might lead to some levies being recognised at a different time when compared to the existing IFRS requirements, some respondents were concerned that this might lead to a day-2 gain or loss subsequent to acquisition. The Staff agrees that this would lead to unintended consequences (as the Updating References ED is not meant to introduce any technical changes to any of the Standards), and suggests retaining the reference to the existing framework with a narrow-scope amendment to IFRS 3 to address the potential day-2 gain or loss concern.
The Staff recommends that the Board confirm the proposals in the Updating References ED, except as noted above in relation to IFRS 3.11, together with a few other minor deletions and amendments.
The Staff further recommends that the Board confirm retrospective application of the proposed amendments with a transition period of around 18 months.