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Conceptual Framework

Date recorded:

(Afternoon only)

The Board were asked to consider three papers, as follows:

  • Qualitative characteristics: costs and benefits;
  • Elements 1: asset definition; and
  • Reporting entity: preliminary staff research.

Costs and Benefits

This paper considers whether the benefits of an accounting standard justify the costs involved. In particular, does the cost-benefit balance differ for different entities (e.g. small or unlisted companies). The paper considers what the current IASB Framework and FASB Concepts Statement 2 say on cost-benefit analysis. Both Frameworks acknowledge that for accounting standard setting, rigorous cost-benefit analysis is too difficult to apply and that the evaluation is judgemental. The paper then briefly considers other standard setters that have considered cost-benefit concepts. Finally, the paper considers the Board's alternatives, which are:

  • A. Do very little;
  • B. Commit to requesting more information; or
  • C. Commit to conduct actual cost-benefit analysis.

Staff recommended option B - namely, that the discussion of cost-benefit analysis is enhanced. This option involves requesting information and reviewing it, but not verifying that information or developing it in the absence of it being available. Option A was rejected as it was felt this would not be accepted by many of the Board's constituents. Option C was rejected as it might not be achievable and would extend the timetable of every standards project.

The majority of the Board agreed with the staff's proposal for option B, although a couple of Board members were unsure of the difference between a well explained option A and option B.

In addition, many of the Board felt that a fuller discussion of costs and benefits should be provided. This should clarify that costs are not the same as consequences. Further, benefits are not just to shareholders or owners of a business, but can be much wider. For example, they can benefit society by resulting in greater capital markets efficiency. This discussion should consider more fully what the costs are and who bears them, and what the benefits are and who gets them.

It was further agreed that there was no need for a different approach for different types of entity. However the application will result in different results for different types of entity.

The intention is to produce an exposure draft on objectives and qualitative characteristics to present to the Board in January.

Asset Definition

The paper proposed a definition of an asset as:

An asset of an entity is a present right, or other access, to an existing economic resource with the ability to generate economic benefits to the entity.

Some Board members were unclear of the impact of the change; what additional items would now be considered assets, or what items would no longer be considered assets. Generally, it was felt that the new definition would encompass more assets but that maybe too many would now be caught. For example, it would now cover all economic assets, rather than just accounting assets. It might also catch certain rights (such as a right to operate a store), or public facilities. It was noted that the asset definition would be tested at a later meeting.

There was discussion about what 'other access' meant. Staff agreed that this needed to be tightened. The intention was to avoid capturing only legal rights, but the current wording may be too broad.

There was general discussion about whether recognition criteria were being mixed in with the definition. For example, the definition could exclude the words 'of an entity' or 'to the entity', and still be the definition of an asset.

Reporting Entity

The IASB Framework defines the reporting entity in one sentence with no further explanation. The FASB framework does not contain a definition. Thus there is a gap in both frameworks, even though the concept exists. This paper considers what a reporting entity is - i.e. when is a legal entity or economic unit a reporting entity, aggregation versus disaggregation, the purpose of consolidated financial statements and whether control is the right basis for consolidation.

The Board questioned how concepts such as joint control or significant influence fit into this project. Staff noted that this would be during a later stage of the project. The purpose of this meeting was to establish the direction of the project and the key areas of focus.

The paper provoked a lot of discussion. Some Board members felt that the definition of a reporting entity should not depend on whether that entity produces financial statements and that the paper was often circular. Others felt that certain aspects of the paper were helpful, such as the distinction between direct and indirect control.

Generally, the Board felt that the project should remain broad, and consider only what a reporting entity is.

Correction list for hyphenation

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