FRC believes Conceptual Framework must 'embrace asymmetric prudence'

  • FRC comment letter Image

25 Nov 2015

The Financial Reporting Council (FRC) has commented on the IASB's exposure draft ED/2015/3 'Conceptual Framework for Financial Reporting'.

The FRC calls on the IASB to reconsider its proposed Conceptual Framework so that it properly reflects the importance of stewardship, prudence and reliability, which it considers to be fundamental to financial reporting. The FRC stresses that prudence is more than taking a cautious approach to accounting. Rather prudence prudence requires a greater readiness to recognise losses than profits:

The reintroduction to the Conceptual Framework of a specific reference to prudence is very welcome. However, the treatment of it in the Exposure Draft — as support for the idea of neutrality — is wholly inadequate. The essence of prudence is the idea referred to in the Basis for Conclusions as ‘asymmetric prudence’ — a lower threshold for the recognition of liabilities and losses than for assets and gains — which is absent from the text of the draft Conceptual Framework itself.

The FRC adds that the term 'neutrality' that is used in the framework might be misleading and suggests it should be replaced 'unbiased'.

Finally, the FRC notes that it is "particularly odd" that the IASB acknowledges that the concept of asymmetric prudence is reflected in current accounting standards (for example in IFRS 15), but has omitted it from its draft Framework.

Please click to access the full comment letter and a corresponsing press release on the FRC website.

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