Conceptual framework

Date recorded:

Sweep issue: measurement uncertainty and the fundamental qualitative characteristics of useful financial information — Agenda paper 10


In this paper, the Staff discussed the concerns raised by the reviewers of the pre-ballot draft of the revised Conceptual Framework (CF) in relation to measurement uncertainty and the fundamental qualitative characteristics of useful information.

Guidance in the pre-ballot draft

The revised CF states that the use of reasonable estimates is an essential part of the preparation of financial information. Even a high level of measurement uncertainty does not necessarily prevent an estimate from providing useful information. However, in some cases, the level of measurement uncertainty can be so high that it is necessary to consider whether other information would be more useful than the highly uncertain estimate (as an extreme example, measuring a complex financial instrument at cost instead of at a fair value that is highly uncertain).

The revised CF also states that information must both be relevant and provide a faithful representation if it is to be useful. However, the revised CF contains no explicit principle that a trade-off may need to be made between relevance and faithful representation, nor guidance on how to deal with a situation when only one type of information about a particular economic phenomenon is considered relevant (e.g. only fair value information is relevant) but that information is subject to a high degree of measurement uncertainty. Nonetheless, the Basis for Conclusions of the revised CF alludes to these issues.

Feedback on the pre-ballot draft

Given the lack of guidance, the reviewers questioned:

  1. whether the revised CF would allow a trade-off to be made between relevance and faithful representation when deciding what information, if any, should be provided for an economic phenomenon; and
  2. if so, what factors should be considered in making such a trade-off.

The reviewers also had different views on whether a highly uncertain estimate could ever faithfully represent the underlying transaction:

  • If yes, then the requirement in QC18 about identifying and providing the next most relevant type of information that could faithfully represent the transaction (e.g. measuring the complex derivatives at cost rather than at fair value) is redundant.
  • If not, it is unclear what type of information should be provided if the highly uncertain estimate were the only relevant measure of the transaction.

Staff analysis

The 2010 Conceptual Framework at paragraph QC16 already implies a need for trade-off between relevance and faithful representation. In some cases, the most relevant information about a phenomenon may be a highly uncertain estimate. In these situations, depending on facts and circumstances, the most useful information may be:

  • the highly uncertain estimate accompanied by appropriate disclosures;
  • an estimate of another amount that is subject to a lower measurement uncertainty but provides slightly less relevant information; or
  • in rare situations, information that does not rely on an estimate.

The appropriate trade-off between relevance and faithful representation depends on the specific facts and circumstances of each case. For example, a higher level of measurement uncertainty supported by appropriate disclosures might be considered acceptable for a financial instrument measured at fair value, but not so for a unique internally generated intangible asset or a lawsuit provision. As such, the Staff believed that how to apply this trade-off is something that the Board would have to consider when setting Standards, and is not something that should be prescribed in the CF.

Staff recommendation

 In light of the above, the Staff recommended that the Board:

  1. clarify in Chapter 2 of the revised CF (i.e. not just in the Basis for Conclusions) that a trade-off may need to be made between relevance and faithful representation, specifically between relevance and measurement uncertainty; but
  2. do not discuss how such a trade-off is made.

Next steps

The Staff plan to present any further sweep issues at the October 2017 Board meeting. They aim to ballot the revised CF in Q4 2017 and to issue the final version in Q1 2018.


The Board approved the Staff recommendation without significant discussion.

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