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 following extract from the IMA comment letter highlights the main areas of the DP which they are in support of: 

The mixed attribute model. We support the mixed attribute model and two measurement bases of amortised cost and fair value where the latter, mark to market or mark to model, is applied to financial instruments that are not held for the long-term. A single measurement basis would not necessarily provide relevant information.

A sub-total for profit or loss. We welcome a sub-total for profit and loss being retained. This should give a clear indication to investors of the return management has made on the economic resources entrusted to it in the period.

The current definition of equity. We support the current definition of equity as this is consistent with a proprietary perspective. As set out below, we believe the primary users of financial statements are the equity shareholders. Thus as opposed to the “entity perspective” which looks top-down at the entity, we believe accounting should be based on the “parent entity perspective”. The latter is where the assets and liabilities of an entity, even if that entity is not fully owned, are consolidated in full, and noncontrolling interests are separately identified such that the financial statements reflect what the shareholders of the consolidated parent company own. 

However, there are other areas of the proposals where they consider that further work is required.  In particular: 

• Ensuring that the concept of accountability or stewardship is given sufficient prominence within the Conceptual Framework chapter on objectives of financial reporting.  The IMA also comment that reliability should also be introduced as a separate qualitative characteristic.
• Defining profit or loss.  The IMA comment that “it is important that the IASB develops a robust definition of profit or loss” and especially provides clarity as to when to present items within profit or loss and other comprehensive income.
• Ensuring that the concept of prudence is “specifically written” into the Conceptual Framework.  They comment that “prudence should be a fundamental qualitative characteristic for guiding preparers (and auditors) when recognition involves estimates” and highlight that IFRSs already require prudence.
• The Conceptual Framework should give equal prominence to the primary financial statements.  The IMA view that the statement of financial position is given too much prominence in the DP.
• The Conceptual Framework should continue to reflect the concept of going concern as this is “one of the fundamental concepts that underlie financial reporting”.
• The discussion of measurement bases.  The IMA comment that this discussion is “cursory and incomplete” in the DP. 

Many of these comments are consistent with those of the European Insurance and Occupational Pensions Authority (EIOPA) and also those of the Financial Reporting Council (FRC), The Association of Chartered Certified Accountants (ACCA) and the Institute of Chartered Accountants in England and Wales (ICAEW). 

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

Click for:

• IMA Comment letter (link to IMA website).
• EIOPA comment letter (link to EIPOA website).
• Our previous UK Accounting Plus story on the IASB Discussion Paper: DP/2013/1: ‘A Review of the Conceptual Framework for Financial Reporting’.
• Our UK Accounting Plus project page in the Conceptual Framework.

After the IASB had published its revised Exposure Draft Insurance Contracts on 20 June 2013 EFRAG and the National Standard Setters from France, Germany, Italy and the UK, in coordination with the IASB staff, carried out a field-test on the proposed new requirements from July to October 2013.

The focus of the field test was the practical application of the new requirements and was intended to gather solely facts and objective data, rather than views and opinions.

The most commonly stated areas of concern related to: 

Applying the 'mirroring approach' to contracts that specify a link to the returns on underlying items.

Applying the revenue proposals to life insurance contracts.

The mandatory requirement to use other comprehensive income for presenting the effects of changes in the discount rate on insurance.

More information on the results of the field test are available on the EFRAG website.

SORPS issued by the AIC and their SORP Working Party apply to investment companies preparing accounts under UK GAAP to present a ‘true and fair view’ and are intended to supplement accounting standards and other legal and regulatory requirements to reflect transactions or circumstances that are unique to the sector in which they operate. 

The ED updates the previous SORP (which was issued in January 2009) to include the requirements of FRS 100 ‘Application of Financial Reporting Requirements’, FRS 101 ‘Reduced Disclosure Framework’ and FRS 102 ‘The Financial Reporting Standard applicable in the UK and Republic of Ireland'; the three main standards that were introduced as a package to replace UK GAAP.  Many paragraphs of the SORP have also been re-drafted to incorporate recent legislative changes which allow investment companies to distribute capital profits by way of a dividend.

Some of the most significant changes are:

• A recommendation that investment companies present the changes in their equity in a separate statement of changes in equity.
• No requirement for investment companies to provide a cash flow statement, subject to certain conditions.
• Investments to be measured at fair value with changes in fair value recognised in profit or loss.
• Investments held as part of an investment portfolio are excluded from consolidation.

It is expected that the final SORP will be effective for accounting periods beginning on or after 1 January 2015, consistent with the effective date for FRS 100, FRS 101 and FRS 102.  Early application is permitted.

Comments are invited until 19 March 2014.

The ED can be obtained from the AIC website, here.

The new Advisory Council members are:

• Olav Jones — Insurance Europe.
• Anne Simpson — Council of Institutional Investors.
• Surya Subramanian — Emirates NBD.

This is the second wave of appointments for 2014 (see previous article), which leaves two remaining appointments to be made.

The press release is available on the IASB’s website.

Some key suggestions made in the comment letter include:

To serve its intended purpose, the Board should treat the Framework as a living document to be updated as necessary to keep pace with changes in thinking on conceptual matters. There should be an established process for reviewing the Framework on a recurring basis. Unless the Framework is kept up to date, there is a risk of tension and conflicts between the Framework and conclusions that the Board reaches in individual projects. As the IASB develops new standards, it should have such a process to evaluate whether decisions it makes are consistent with the Framework. Departures should be identified and justified.

The IASB should have a plan for identifying and addressing any conflicts between the concepts and guidance in a revised Framework and existing IFRSs. It should identify any existing requirements that are contrary to the revised Framework and an action plan for resolving such conflicts. It would be unhelpful and potentially confusing to permit conflicts to exist for an extended period of time, in particular since those who apply and interpret existing IFRS requirements do so in the context of the Framework as it exists at any given time (see, for example, IAS 8.11).

The IASB should not amend the Framework to include new ideas and concepts that have not been fully deliberated and tested. This is another reason that the Framework should be a living document and amended only as work in different areas is completed.

The IASB should provide an appropriate level of detail in the Framework. The Framework should provide sufficient detail in its discussion of concepts such that it is clear how they are intended to be applied. However, the Framework should not to go into excessive detail about the accounting for particular transactions or events (e.g., how to measure or present particular transactions or when to derecognise elements of the financial statements). The IASB should not ‘hardwire’ views on accounting issues that would more suitably be resolved in individual standard-setting projects. In some areas, the discussion paper is too general and does not go into sufficient detail to be helpful (e.g., in Section 9 related to unit of account). In other areas, the discussion paper goes into more detail than seems suitable for a framework document (e.g., in Section 5 on distinguishing between liabilities and equity).

Click for access to the full comment letter.

The main concern is with companies which “have put in place arrangements to provide additional collateral to their pension schemes in exchange for reduced annual contributions and a longer period to fund the pension scheme deficit”.  Whilst the FRRP see “genuine commercial reason for establishing such arrangements” their focus over recent years (and where enquiries have been opened) has been on those companies that have reclassified pension liabilities as equity instruments. 

The FRC comment that some of the arrangements (which usually involve the establishment of a Scottish Limited Partnership to hold the collateral) contained within annual reports and accounts reviewed by the FRRP, have included additional features that appeared to have been introduced to “achieve the accounting outcome whereby a company’s obligation to make future payments to its pension scheme is transformed into an equity instrument in the company’s consolidated accounts”.  

The FRC further comment that this impacts favourably on financial solvency, gearing and reported comprehensive income. 

The full press release can be obtained from the FRC website, here.

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 ACCA comment that the CF should “include coverage of the concepts of prudence and accountability”.  They comment: 

Prudence is built into the existing IFRS in a number of ways and has implications for the draft guidance set out in the discussion paper on the recognition of assets and liabilities.  Given this, it would be wrong for the concept not to be addressed and explained in the conceptual framework.  Accountability is referred to but it needs to be promoted to a position of at least equal prominence to the making of investment or credit decisions. 

The ACCA also highlight that the IASB should introduce concepts or principles within the areas dealing with the unit of account, derecognition and disclosures as they see that these are still “gaps” in the Conceptual Framework.  They comment that “while we agree that there needs to be a degree of flexibility for the IASB in the application of the framework”, the CF, as it currently stands, is “unsatisfactory”.  

The ACCA would also like a “more coherent definition of liabilities that brings together the approach to conditional liabilities, constructive liabilities and the economics of economic compulsion”, “clearer recognition filters” for asset recognition and more work to be performed on when to recognise items in profit or loss or other comprehensive income (OCI).  They comment: 

Clear principles for the presentation of items as either OCI and profit or loss are needed, as the rationale for the differing treatment is difficult to discern. 

The comments of the ACCA are largely consistent with those of the Financial Reporting Council (FRC) and the ICAEW who would also like the re-introduction of the concepts of prudence and accountability within the Conceptual Framework and greater clarity as to when to recognise items within profit or loss and OCI. 

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

Click for:

• ACCA press release (link to ACCA website).
• ACCA full comment letter (link to ACCA website).
• ICAEW press release (link to ICAEW website).
• Our previous UK Accounting Plus story on the IASB Discussion Paper: DP/2013/1: ‘A Review of the Conceptual Framework for Financial Reporting’.
• Our UK Accounting Plus project page in the Conceptual Framework.

The guidance “illustrates how risk and assurance arrangements can be directed to meet the delivery and accountability needs of the Accounting Officer and Board, providing evidence-based assurances on the management of risks that threaten successful achievement of public service delivery objectives”. 

The guidance highlights that the assurance framework should provide evidence that underpins the risk and control environment in the annual Governance Statement, which is a key feature of an organisation’s annual report and accounts as it contains information on the corporate governance, risk management and internal control arrangements in place at the organisation. 

Information is provided as to how to structure an assurance framework (including assurance mapping (mapping assurances within an organisation to the risks identified which “threaten the achievement of an organisation’s outcomes and objectives”), with a “Three Lines of Defence” model put forward.  Guidance is also provided on how to manage, monitor and report on risks. 

The full publication can be obtained on the HM Treasury website, here.

The full agenda for the meeting, dated 10 January 2014, can be found here.  We will post any updates to the agenda, and our Deloitte observer notes from the meeting, on this page as they are available.