Conceptual Framework Phase A — Objective and Qualitative Characteristics and Phase B — Elements and Recognition

Date recorded:

(afternoon only)

Phase B: Elements

The Claims Approach

(FASB staff participated by video link from Norwalk.)

The FASB staff introduced a lengthy paper prepared in response to the request from the Boards in November 2006 that, with respect to the existing definitions of liabilities and equity, it should develop the 'single element approach and to determine the potential implications of adopting that approach.' The paper focused on developing a single element, called for the purposes of the discussion 'claims', that would replace the liability and equity elements. The paper is available in the Observer Notes section of the IASB's website.

The Board thanked the staff for the analysis and the work that had been done in response to the Boards' request. However, beyond that, the IASB members were divided. Some thought that the analysis should not be developed further (in the words of one Board member: 'close the door; lock it; lose the key'); others thought that the analysis should be taken a bit further, as it would help to inform the debate on elements. Some Board Members thought that the staff analysis would be an excuse not to answer difficult questions, mainly related to items in profit and loss arising from changes in claims. To develop the Claims Approach could delay any resolution on real accounting issues for several years. Others disagreed, noting that it would not solve all problems, but it would be a useful start. The chairman appreciated the staff's work, but thought the Claims Approach held more problems than promise.

The FASB staff assigned to the FASB's Liabilities and Equity project noted that the FASB had not discussed whether to include a discussion of the Claims Approach in the forthcoming FASB Preliminary Views Document. To do so would delay the issue of that document by several months. IASB members generally did not like the idea that exploring a conceptual issue should delay a Standards-level project that was needed.

IASB staff asked the IASB for proper direction. The vote that followed was characterised by a Board Member as follows:

  • 7 Board Members would stop work on the Claims Approach now
  • 4 Board Members want the staff to pursue the Claims Approach further
  • 3 Board Members would not want exploration of the Claims Approach to hinder the progress on the FASB's Liabilities and Equity project, but would not want to lose the benefit of the work and analysis done to date.

This would seem to suggest that the IASB would not want additional staff effort to be expended on the topic. However, given that the FASB has not discussed this issue, and the project is a joint project, a final decision will not be made until the FASB had the opportunity to discuss it.

Phase A: Objective and Qualitative Characteristics

Comment Letter Analysis

The IASB staff introduced their analysis of comments received on the IASB's Discussion Paper Preliminary Views on an Improved Conceptual Framework for Financial Reporting: The objective of financial reporting and the qualitative characteristics of decision-useful financial reporting information. The staff suggested that the Board defer debating the issues raised in the comment letters until future meetings. The staff analysis is available in the Observer Notes section of the IASB's website.

Objective of financial reporting: Stewardship

This was one of the most contentious aspects of the Discussion Paper, and 86% of respondents who commented on this aspect of the DP did not support the Board's proposals. There was general agreement among Board Members that they had not expressed themselves well: Stewardship is important in that management is responsible for the resources committed to it. How well management has used those resources is important when making decisions about future resource allocations. However, Board Members noted also that there was no consensus among commentators on what 'stewardship' means; respondents clearly had different notions in mind. It was important to some Board Members that the notion of stewardship being equated with 'things under the control of management' ('operating' performance) be rejected.

Later in the session, the staff suggested that, in addition to informal discussions with individual respondents aimed at understanding their comments, there might be an opportunity to hold a public meeting to discuss this issue. This might be held either (a) after the Boards redeliberate the issue, but before exposure, or (b) during the exposure phase of this part of the Framework. No decision was made.


Some commentators had asked that internal users be identified as potential users of general purpose financial reporting. Board Members noted that, in large corporate groups, some managers relied heavily on the external reporting, because to develop special internal reporting systems would be too costly. Board Members acknowledged this, but did not think that this changed the objective of general purpose financial reporting, nor the primary focus on external users.

The Board acknowledged that it had probably contributed to respondents' confusion by issuing its Discussion Paper at about the same time as the CFA Institute's Comprehensive Business Reporting Model: Financial Reporting for Investors. The two documents defined their user groups differently, although both concentrated on the information needs of the residual equity holders as being the class of users most reliant on general purpose financial statements.

The comment letter analysis discussed various other issues raised on the Objective section of the Discussion Paper, but these issues were not discussed at this session. They will be addressed when the Board redeliberates this section.

Qualitative characteristics

Relevance. The Board noted that a substantial proportion of respondents had criticised as vague the proposed description of relevance - something 'capable of making a difference'. The respondents suggested that the vagueness might inappropriately broaden the definition. However, Board Members noted that the phrase was used by securities regulators, which is why the Board had used it.

Faithful representation. Again, a substantial majority of commentators had opposed the Boards' proposals to use the term 'faithful representation' instead of 'reliable' as a principal qualitative characteristic. Board Members took note, but also thought that some commentators might have been thinking of 'reliability' in terms of a recognition principle. The Board asked the staff to undertake further analysis of how commentators understood 'reliable', so that they might respond to the criticisms in a more informed way.

Understandability. A significant proportion of commentators had argued that the 'understandability' characteristic should require making financial statements understandable for the common user and should place less emphasis on sophisticated users. Board members noted that the word can be used to mean 'understandability of a Standard', 'understandability of the accounting it produces', and 'understandability of the financial reporting'. The Board appeared to have sympathy for these issues and would look at them in more detail when it redeliberated the topic.

Constraints in financial reporting

There was a brief discussion of the analysis of comments on the constraints on financial reporting and whether additional qualitative characteristics should be added.

Next steps

The staff intends to return to the Board with issues for redeliberation on at least three occasions:

  • at the Joint IASB/FASB meeting in April 2007, when issues such as the authority and place in the [IAS 8] hierarchy will be discussed;
  • at the separate Board meetings to be held in April 2007, at which matters in Chapter 2 (Qualitative Characteristics) will be discussed
  • at the separate Board meetings in May/June 2007, at which Chapter 1 issues (Objectives, etc) will be discussed.

The staff is still hopeful that an Exposure Draft of the two chapters will be issued in the third quarter of 2007, but is aware that the timetable might slip a bit.

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