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FRC comments on the IASB’s Conceptual Framework discussion paper

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13 Jan 2014

The Financial Reporting Council (FRC) has today published their response to the International Accounting Standard Board’s (IASB’s) Discussion Paper: (DP/2013/1) ‘A Review of the Conceptual Framework for Financial Reporting’. The FRC agrees with a number of proposals within the Discussion Paper (DP) but has commented that “there are a number of areas where further development is necessary”.

The IASB’s Conceptual Framework sets out the concepts that underlie the preparation and presentation of financial statements.  The Conceptual Framework identifies the principles for the IASB to use when it develops and revises International Financial Reporting standards (IFRSs).  The DP was published in July 2013 and contained proposals for topical areas where it considered that amendments to the existing Conceptual Framework were necessary. Included in the DP were proposals to revise the definitions of an asset and a liability, to introduce guidance on derecognition, to clarify the objective and purpose of other comprehensive income and to set a framework for presentation and disclosure. 

The FRC “strongly support the IASB’s decision to recommence work on its Conceptual Framework” commenting that they believe that “the existing Conceptual Framework is out of date and incomplete”.  The FRC agrees with a number of the proposals within the DP: 

The IASB’s commitment to revisit the Conceptual Framework, to bring it up-to-date and add guidance in areas that are not adequately addressed.

The equal emphasis placed on the statement of profit or loss and OCI and the statement of financial position, and the recognition of the statement of cash flows as a primary financial statement.

The IASB’s preliminary view that a single measurement basis may not provide the most relevant information, and that the selection of a measurement basis should depend upon how an asset or liability contributes to future cash flows.

The retention of a total (or sub-total) for profit or loss as a primary source of information about the return an entity has made on its economic resources in a period.

The retention of the current definition of equity—the residual interest in the assets of the entity after deducting all its liabilities. 

However, they also believe that more “fundamental analysis”, than is currently provided in the DP, is required in areas such as:

The clarification of the definition of liabilities to situations where the requirement to transfer economic benefits can be avoided by the entity’s future actions;

The discussion of measurement concepts;

The objective of the statement of profit or loss; and

The unit of account. 

Regarding the discussion of measurement in the DP, the FRC comment that it “fails to provide the depth of analysis that is necessary if the Conceptual Framework is to provide useful guidance to the IASB for the development of accounting standards”.  They further comment that “the discussion of specific measurement bases is superficial and incomplete”. 

In particular, the FRC comment that they would like the concepts of accountability (or ‘stewardship’), reliability and prudence to be re-introduced to the Conceptual Framework (within the chapters on ‘Objectives and qualitative characteristics’) “as they are fundamental to financial reporting”.  The FRC highlight that many of the ideas that they put forward for the inclusion of these concepts are contained within their series of bulletins produced jointly with the European Financial Reporting Advisory Group (EFRAG).  The FRC would also like these chapters to “acknowledge that financial statements should provide information that assists in an assessment of the entity’s business model”.  They comment: 

Financial statements should not simply provide an inventory of assets and liabilities and information on changes in them, but should portray how the entity uses its assets and liabilities to create value. 

The FRC would like the Conceptual Framework to continue to reflect the concept of going concern and are of the view that the definitions of an asset and liability in the DP are “rather vague and may be interpreted broadly”.  They would like the Conceptual Framework to clarify their meaning “to ensure consistent application”.   

Whilst the FRC is supportive of the IASB’s intention to “complete its revision to the Conceptual Framework expeditiously”, they do express concerns with completing the project too soon and recommend that “the IASB keeps the timetable for the revisions to the Conceptual Framework under review” in case it needs to be extended to ensure that “a high quality Conceptual Framework” is finalised. 

The full comment letter can be accessed from the FRC website below. 

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