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Conceptual Framework Phase A — Objective and Qualitative Characteristics

Date recorded:

The Board commenced its redeliberations of Chapter 2 of the Exposure Draft of Phase A of the Conceptual Framework project: Qualitative Characteristics and Constraints of Financial Reporting. In particular, the Board discussed:

  • whether the revised Framework should classify or somehow distinguish the qualitative characteristics, and if so, whether the classifications in the ED continue to be appropriate; and
  • whether the term 'reliability' should be replaced by 'faithful representation' as proposed in the ED.

Classifying the qualitative characteristics

Board members agreed that a distinction needed to be made and that the proposal in the ED between 'fundamental' and 'enhancing' was appropriate.

However, the fact that a qualitative characteristic was not labelled as 'fundamental' should not be taken to mean that it was 'not important'. This would need more careful explanation. In addition, the Board agreed that there was no hierarchy implied in the enhancing characteristics. Board members found the proposals a significant improvement over the existing guidance and something that helped to structure their thinking. Several agreed that, for any given issue, the relative importance of the various enhancing characteristics would differ, but that they were all necessary components of relevance and faithful representation in financial reporting.

Reliability vs. Faithful Representation

The Board reaffirmed its desire to use 'faithful representation' in preference to 'reliability' as a qualitative characteristic.

Although some Board members were cautious about losing the term 'reliable' from the general IFRS lexicon, other Board members and IASB senior staff noted that 'reliable' was one of the most problematic terms in that lexicon. Some used it to imply precision; others used it as an excuse to avoid recognising liabilities; others to imply verifiability. The Board concluded that the only way to avoid this misuse and the consequent mis-communication was to focus on what the Framework was trying to communicate was to use a different term. 'Faithful representation' was perhaps not the ideal term, but it was the best they had.

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