Conceptual Framework Phase A — Objective and Qualitative Characteristics

Date recorded:

The Board discussed 'cross-cutting issues' relating to relevance and reliability and their component characteristics that were identified during the series of meetings held in November and December 2004 with small groups of Board members and staff. The Board also discussed some 'non-issues' related to the same qualitative characteristics.


The staff asked the Board to consider the question: What does relevance mean, and of what does it consist? Predictive value, confirmatory or feedback value, materiality, timeliness?

The Board seemed to agree generally with the staff although some Board members expressed concern about the use and context of the 'predictive value' notion. The Board seemed to suggest that better words could be used to describe the predictive value notion although the intention being to retain the current meaning attached to the term.


Faithful representation, including completeness and substance over form

The staff recommended that faithful representation continue to be identified as a key quality (or subquality) of accounting information, a quality that includes completeness and leaves no room for representations that subordinate substance to form. The Board generally expressed support for the direction taken by the staff on this issue. A number of Board members expressed their support to eliminate the term 'substance over legal form' from the Framework as it has the same meaning as 'faithful representation' therefore it cannot be a subset thereof. An explanation will be added, together with examples, to the Basis for Conclusions in order for constituents to follow the Board's thinking on this issue - that is, the notion of 'substance over legal form' is subsumed within the notion of 'faithful representation'.

Verifiability, including precision and uncertainty

The staff expressed agreement with the IASB Framework on the need for financial information to be free from material error in order that it can be relied on by users. The staff also agrees with the FASB Concepts Statements and others that the way to assure users that they can rely on the information is for it to be verifiable, preferably by direct verification. The staff therefore recommended that verifiability be included as a quality or sub-quality, with an explanation that emphasizes that being verifiable is necessary to provide assurance to users that the information is free from material error, as well as representationally faithful, complete, and neutral.

The Board agreed with the staff that the characteristic of verifiability is required in the framework. The Board also suggested clarifying that the notion of being able to 'vouch' is a subset of 'verifiability'.

Neutrality, including freedom from bias, prudence, and conservatism

The staff expressed reluctance to continue to include conservatism or prudence in a list of qualitative characteristics of accounting information together with neutrality. The clash of concepts is glaring. The Board agreed that the notion of conservatism should be eliminated but some guidance should be included in the Framework that requires the careful consideration and use of caution when faced by uncertainty (e.g. estimates).

On the issue of reliability, the staff pointed out that among accountants, usage of the notion varies. Many seem to equate reliability with verifiability, not representational faithfulness. In addition, different Standards have different hurdles for what represents 'reliable' measurement - is this because different meanings of reliable are applied (e.g. depending on desired outcome)? Or is it because of different trade-offs between relevance and reliability? Or is it the influence of conservatism? Why is some information 'sufficiently' reliable for balance sheet recognition but not for income statement (e.g. valuation changes recognised directly in equity)? These issues will be discussed by the Board at a future meeting.

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