Conceptual framework

Date recorded:

Measurement – Objective and the effect of the qualitative characteristics

The Technical Principal began by saying that the Discussion Paper suggested an objective for measurement. She said that whilst the majority of respondents agreed with the objective, some disagreed. Most of those who disagreed said that the objective of measurement simply repeated the objective of general purpose financial statements. Therefore staff recommended describing in the Exposure Draft how measurement contributed to the overall objective of financial reporting.

One Board member asked whether the term 'monetary' would be used in the Exposure Draft. Staff proposed in the agenda paper for the Conceptual Framework to state that measurement provided information in monetary terms about the resources of an entity, claims against the entity and changes in those resources and claims. The Technical Principal confirmed that. She said it was a suggestion from one of the comment letters. The Board member replied that he was concerned about the wording 'monetary' as it might conflict with the definition of 'monetary' in IAS 21. He asked whether translation of foreign currency would be seen as part of the measurement. A Board member replied that for purposes of the Framework, monetary meant numbers instead of words and should not be confused with monetary items in IAS 21. One Board member added that it also meant no physical quantities. The Technical Director added that they would remain silent on foreign exchange as this was a problem that was dealt with on a standard-level (i.e. IAS 21).

One Board member said that using the word 'monetary' was highly confusing and the wording should therefore be revised. Another Board member said that not every monetary number was a result of measurement and that this should be clarified. One Board member said that also recognition, presentation and disclosure provided information in monetary terms. The Technical Principal replied that it needed to be measured before. The Vice-Chairman suggested rephrasing by saying "measurement was the process of quantifying in monetary terms". Several Board members agreed. One Board member asked whether the definition should make reference to functional currency. The Technical Principal disagreed and suggested instead to explain in the Basis for Conclusions why this problem was not addressed. The Chairman called a vote on the amended statement. All Board members agreed.

The Technical Principal continued by saying that regarding relevance the Discussion Paper suggested that the IASB, when selecting a measurement basis, should consider what information that measurement basis would produce in both the statement of financial position and the statement(s) of profit or loss and OCI. The staff stated that they wanted to hold on to this suggestion. They believed that the relative weights that the IASB would need to give to the information produced in the statement of financial position and the statement(s) of profit or loss and OCI depended on the circumstances. The Technical Principal asked the Board whether they agreed. All agreed.

The Technical Principal went on to talk about reliability as a part of the relevance discussion. She reminded the Board that they had decided that reliability should not be reintroduced as a qualitative characteristic of useful financial information. When making this decision, the Board noted that the existing Conceptual Framework suggested that a high level of uncertainty in an estimate might mean that it did not provide relevant information.

The staff therefore recommended for the Exposure Draft:

  1. to state that the level of uncertainty associated with the measurement of an item was one of the factors to be considered when selecting a measurement basis;
  2. to state that a high degree of measurement uncertainty should not prevent the use of a measurement basis that provided relevant information; and
  3. to refer explicitly to reliability when describing the level of measurement uncertainty associated with the measurement of an item.

The Chairman suggested to amend (a) to read 'the level of certainty' when talking about reliability. The Technical Principal agreed. One Board member agreed with (a) and (b) but not with (c). He said that reliability should not be redefined, even though the term was no longer used as a qualitative characteristic. He said that the use of 'reliability' in the standards was partly contradictory to what was suggested in (c). The Technical Principal replied that wherever in the standards 'reliability' was used to mean 'faithful representation' it would be replaced with 'faithful representation' to avoid that conflict.

One Board member asked whether a Level 3-measurement, which was relatively uncertain, would be considered unreliable then. The Technical Principal agreed it would be less reliable but as stated in (b) it would not be less relevant. Several Board members expressed their concerns about that. The Chairman said he felt more comfortable with the word ‘measurement certainty’ rather than 'reliability' as it would be a contradiction to rely on something that was unreliable only because it represented the best estimate available. It was better to say to rely on something that was uncertain.

One Board member said he agreed with the staff proposal. He said that the word 'reliability' would need to be replaced in the standards which was relatively difficult. The Technical Principal agreed.

A Board member expressed concerns about recommendation (b). He believed that this statement could contaminate quality of financial statements. The Chairman disagreed but conceded that the wording could be different. He suggested to state: "A high degree of measurement uncertainty does not mean that a particular measurement basis does not provide relevant information." The Technical Principal agreed.

One Board member said that the reliability of a measurement basis might be dependent on the disclosure. The Chairman replied that this would be a disclosure principle and not a measurement principle. One Board member asked which degree of measurement uncertainty in (b) would mean that the measurement was no longer reliable. The Technical Principal said that this would be for the Board to decide on a standards-level. One Board member said that the uncertainty might sometimes be so high that it became a recognition issue rather than a measurement issue. One Board member was concerned that all, (a), (b) and (c) would cause problems with proposed or existing literature and therefore proposed revision of all three statements. A fellow Board member said that it should not be stated that uncertainty could become so high that the measurement was no longer relevant. One Board member asked the staff to provide an analysis of all the uses of 'reliability' in the standards and where it meant 'measurement certainty' as opposed to 'faithful representation'. He strongly disagreed with changing the definition of reliability as this would require changes throughout the standards. One Board member suggested using a different term, for example, 'unbiased estimation'. Another Board member was concerned about equalling the terms 'reliability' and 'faithful representation'. If the Board had believed those terms were equal at the time when it revised the Conceptual Framework, this would have been reflected in the revised Framework.

The Chairman called a vote on (a) and (b) provided that the wording would be amended. 12 of the 14 Board members voted in favour. Upon calling a vote on (c) as proposed by staff, only 1 Board member was in favour.

The Technical Principal continued with the topic of 'faithful representation'. She said that the Discussion Paper had suggested that faithful representation had fewer implications on measurement than relevance. The Discussion Paper also suggested that an estimate of an unobservable price could be faithful representation if adequate disclosures were made. A few respondents disagreed with that by saying that if the estimate was highly uncertain, the item could not be represented faithfully. The Technical Principal recommended to

  1. carry forward the discussion of faithful representation from the Discussion Paper as stated in the agenda paper to the Exposure Draft; and
  2. to add the idea that a faithful representation by itself did not necessarily result in useful information but that the information provided by the representation must also be relevant.

One Board member agreed with the staff recommendation but was concerned about the wording in the agenda paper. In the agenda paper it said that "[...] the Discussion Paper highlighted [...] [w]hen deciding whether a particular measurement faithfully represents an entity's financial position and performance, the IASB may need to consider how best to portray a link between items." He said in cases of accounting mismatches, the word 'may' would be too weak. In this case the IASB would have to consider how best to portray a link between items. Another Board member disagreed by saying that the issue of 'linked' instruments was too detailed for the Framework and she would therefore prefer not to include it. One Board member said that the agenda paper used the word 'related' assets and liabilities instead of 'linked' and was concerned that 'related' was once again too weak a word as many things could be related. The Technical Principal replied that staff had been deliberately vague with the wording to give the IASB more leeway when deciding measurement bases. One Board member disagreed with the vagueness. The Chairman replied that the intention of this phrasing was too avoid accounting mismatches. A Board member said that financial statements were a summary of information and a mixed measurement model would create inconsistency which should be avoided for assets and liabilities that were linked. He said that otherwise this would not be a faithful representation in his view. The Technical Director said that he agreed that the Framework should contain stronger words than just saying measurement should be consistent. One Board member said she preferred to have the wording more generally. Another Board member said that accounting mismatches that resulted from actual economic circumstances should be visible in the financial statements. A fellow Board member agreed and said that on the other hand it should be made very difficult for the IASB to deliberately create an accounting mismatch if that was not warranted by economic circumstances.

The Chairman called a vote upon the staff recommendation (a) without amendments. 10 Board members voted in favour of (a). When voting on (b) all members agreed.

The Technical Principal then introduced the topic of 'understandability'. She said that the Discussion Paper stated that understandability could be enhanced if the number of different measurement bases used was limited to the smallest number necessary to provide relevant information and if unnecessary changes in measurement bases were avoided and necessary changes were clearly explained. Many respondents to the Discussion Paper had agreed with these statements. She conceded that some disagreed because they felt that there should not be an artificial limit of measurement bases and a different measurement basis should be used if the Board believed it would provide relevant information. The staff believed that this was not the intention of the Board and instead the Board wanted to highlight that it would be problematic to design new measurement bases for every standard. The staff recommended that the Exposure draft should:

  1. explain the need to weigh the benefits of a new or different measurement basis against any increased costs or complexity; and
  2. retain a discussion of necessary and unnecessary changes in measurement bases.

The Vice-Chairman asked whether (a) would not just state the obvious. The Technical Principal conceded that it did to some extent. One Board member asked whether (a) was only applicable for a new measurement method or also for existing measurement methods. The Technical Principal confirmed that it was only applicable for completely new measurement methods. One Board member said that whilst she understood that new measurement bases might bring benefit, users of financial statements might be overwhelmed with, for example, 10 different cash flow-based measurements (e.g. entity, market, risk-free, etc.). The Chairman asked whether (a) should read "[...] weigh the benefits of multiple measurement bases [...]". The Technical Principal said that this could be interpreted as the Board moving towards one measurement basis. One Board member said that instead of (a) he would like to retain the wording from the Discussion Paper on understandability (i.e. the number of measurement bases should be the smallest necessary to provide relevant information). He did not see how this would put an artificial limit to the number of measurement bases and thought that explaining this might help eliminating the concerns of respondents. He then asked what 'different' meant in staff recommendation (a). One Board member said that using a new measurement basis might actually reduce costs and complexity. When voting on (a), 9 of the 14 Board members agreed. Subsequently, all of the Board members voted in favour for (b).

On the other enhancing qualitative characteristics (i.e. timeliness, verifiability and comparability), the staff recommended that the Exposure Draft should include the discussion suggested in the Discussion Paper, largely unchanged. All Board members agreed.

On cost constraint, the staff recommended retaining a separate reference to cost-benefit constraint as one of the factors the IASB should consider when selecting a measurement. The Technical Principal explained that nearly all respondents agreed with that. However some referred to the existing Conceptual Framework where cost was a pervasive constraint on financial reporting and said it would be unnecessary and confusing to repeat this in the measurement section. The staff would nonetheless like to retain it in the section but wanted to make clear in the drafting that it did not mean the cost restraint did not apply elsewhere in the financial statements.

One Board member expressed her concern about explicitly mentioning the cost restraint in the measurement section. She said that materiality was equally important but was not mentioned. When voting on the retaining of a cost-benefit constraint, 9 Board members voted in favour.


Measurement – Measurement categories

The Technical Principal reminded the Board that in April 2014, the Board had decided to make a number of changes to the way that measurement was addressed on the Discussion Paper. In particular, the Board agreed that much of the discussion of the implications of the approach to measurement for particular types of assets and liabilities should be removed from the measurement section. Instead, the Board wanted to describe different measurement bases and the information that these measurement bases might produce as well as the factors that made a particular measurement basis useful. A working draft of such descriptions was included in the appendix to the agenda paper. The Board had received comments to the measurement categories depicted in the Discussion Paper (i.e. cost-based measurements, current market prices including fair value and other cash flow-based measurements). In response to these comments the staff discussed the different ways in which measurement could be categorised (i.e. historical vs. current measures, entry vs. exit values, entity vs. market perspective). The discussion on market prices had subsequently been replaced with a broader discussion on current measures.

Overall, the staff proposed that the Conceptual framework should describe the following measurement bases:

  1. historical cost and historical proceeds;
  2. fair value;
  3. net realisable value and cost of release;
  4. replacement cost and assumption proceeds; and
  5. value in use and fulfilment value.

The Chairman clarified that cash-flow based measurement would also be included if the Board agreed on the next agenda paper.

One Board member said that those were too many measurement bases and that they had a significant overlap between them. The description of how the IASB decided on one measurement basis would be very difficult to draft. He also said that for a liability, the number for fair value, cost of release and assumption proceeds would be the same in his view and if not, it would be difficult to identify the drivers behind the differences. Also, IFRS 13 suggested that replacement cost could be used when calculating fair value. He said it would make no sense to have it as a separate measurement basis. The Vice-Chairman added that in the same market, entry and exit values would be identical and therefore he did not understand the reference in the working draft where it said "[e]xit values include [...] any profit inherent in [the measured] items [while] [e]ntry values did not". Another Board member agreed with reducing the items on the list. One Board member suggested having three different categories: historical, current and fair value. The Vice-Chairman said he would see fair value as a current value. The Board member replied that fair value must be a market value whilst current could be either a market value or an entity specific value. The Technical Principal said that the Board member's definition of current sounded relatively broad. She asked whether she wanted this category to be split up in subcategories. The Board member confirmed that. A fellow Board member asked if the factors that made a particular measurement basis more useful have a certain hierarchy, for example, would measurement uncertainty be the most important factor. The Technical Principal negated that. The Board member said he would like to see a hierarchy in the Framework as otherwise it would only be a pool of possible measurement bases and would not assist the IASB in making decisions. The Technical Principal replied that the problem would be that different factors weighed differently in specific facts and circumstances. The Board member replied that in his view, a framework should describe how to weigh different factors. One Board member was concerned with the reference in the working draft that the value that was likely to be received from an asset would be reflected by an exit value as it was an output from an entity's business activities. He thought that most assets were inputs into an entity's business activities and therefore it would be an entry value in that logic. One Board member said that he would like to have explained in the framework that depreciation was not used to derive the appropriate balance of an asset but to show the appropriate movements in the income statement. The Chairman agreed with the comments on broader categorisation. One Board member suggested that the staff took into consideration the Basis for Conclusions on IFRS 13 when writing the Exposure Draft to avoid conflicts. The Board continued discussing about having two categories only (historical and current). One Board member asked in which category amortised cost for financial instruments fell as those were updated for changes (e.g. changes in cash flows) but discounted with a historical rate. She therefore suggested using the word 'cost-based' instead of 'historical'.

The Technical Principal concluded that the Board would like that staff rationalised the measurement bases into fewer categories, ideally 'cost-based' and 'current' and that fair value should be discussed under the 'current' section.

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