Phase A: Perspectives of financial reporting

The staff presented a paper summarising the implications of the Boards' decision to adopt the entity perspective in the Phase A discussion paper Preliminary Views on an improved Conceptual Framework for Financial Reporting: The Objective of Financial Reporting and Qualitative Characteristics of Decision-useful Financial Reporting Information (the DP). Board members had raised concerns that this decision and its implications for other parts of the conceptual framework project had not been adequately communicated to constituents in the DP.

Entity perspective: Under the entity perspective, the objective is to provide financial information about the entity's business to the entity's capital providers. Accordingly, there is no conceptual distinction between the various parties who have a financial interest in the entity since they are all capital providers or claimants (Accounting equation: Assets = Claims).

Proprietary perspective: The alternative perspective discussed in the Phase A deliberations was the proprietary perspective. Under the proprietary perspective, the objective of general purpose financial reporting is to provide financial information about the proprietor's business to the proprietor, that is, the reporting entity is assumed to have no substance of its own separate from that of its proprietors or owners. Accordingly, the accounting equation is: Assets minus liabilities = Proprietorship (Equity).

The Boards discussed the following issues:

• Potential implications for defining elements of financial statements (Phase B)
• Potential implications for the reporting entity (Phase D)

The staff was of the view that a full examination of the implications of perspective on all future phases of the conceptual framework project cannot and need not be conducted before publishing the Phase A exposure draft for public comment. Accordingly, the staff recommended proceeding with the Phase A exposure draft without delay and explaining in the basis for conclusion the decisions that have been reached with regard to entity vs. proprietary perspective as well as the implications that have not yet been deliberated.

Some IASB and FASB members stated that all implications should be deliberated as part of Phase A in order to avoid inconsistencies at later stages of the project. In particular, it was noted that the entity perspective may not be consistent with the parent company approach to consolidated financial statements discussed in Phase D.

Other Board members pointed out that the entity perspective has significant implications on the liability/equity distinction to be discussed in Phase B. They questioned whether under the entity perspective it would still be appropriate to present debt interest and dividend payments to owners differently. Some Board members responded that in their view the entity perspective would not preclude a different treatment of liabilities and equity since a distinction can still be made by ownership characteristics of the claims.

Finally, the majority of IASB and FASB members was in favour of the staff recommendation.

Phase D: Comments on second pre-ballot draft of the discussion paper

The Boards discussed the three views developed regarding to the usefulness of parent-only financial statements.

View A:

Both parent-only financial statements and consolidated financial statements are capable of providing decision-useful information to external users and parent-only financial statements should generally be provided in addition to consolidated financial statements.

View B:

Both parent-only financial statements and consolidated financial statements are capable of providing decision-useful information to external users and parent-only financial statements should 'sometimes' be provided in addition to consolidated financial statements.

View C:

The parent entity can have only one set of general purpose external financial statements (GPFS), which are its consolidated financial statements. Accordingly, parent-only financial statements should not be included in the general purpose financial report of a parent entity, although some parent-only information might be included, for example, in the notes to the consolidated financial statements.

The staff noted that a majority of FASB supports View C whereas the IASB has not yet reached a majority view. The Boards had a thorough debate and apparently a significant number of IASB members acknowledged that parent-only financial statements can be GPFS. However, no majority view on one of the three views was expressed by the IASB. One FASB member expressed frustration with regard to the progress made in the conceptual framework project. Finally there seemed to be a consensus to adopt the staff recommendation, that is, to express the following preliminary view in the Phase D discussion paper:

• A parent entity should always present consolidated financial statements.
• The presentation of parent-only financial statements should not be precluded at the conceptual level, provided they are included in the same financial report as the consolidated financial statements.
• It would be a standards-level issue to determine whether parent-only financial statements should be required (either always or in particular circumstances) or merely permitted, or whether similar types of information should be presented in another format.
• It would also be a standards-level issue to determine the manner in which information should be presented in the consolidated financial statements.