This site uses cookies to provide you with a more responsive and personalised service. By using this site you agree to our use of cookies. Please read our cookie notice for more information on the cookies we use and how to delete or block them.
The full functionality of our site is not supported on your browser version, or you may have 'compatibility mode' selected. Please turn off compatibility mode, upgrade your browser to at least Internet Explorer 9, or try using another browser such as Google Chrome or Mozilla Firefox.

Conceptual framework

Date recorded:

Cash-flow-based measurements

The first paper was devoted to the purpose of cash-flow-based measurements and possible changes to the description in the Discussion Paper of the factors to be considered when developing a cash-flow based measurement. The Board’s discussion on this paper was focused on the two staff recommendations in the paper.

The first of the two staff recommendations was not to restrict the Board’s use of cash-flow-based measurements to situations when they were being used as a technique to estimate the result of applying other measurement bases. The Technical Principal introduced the paper and asked the Board members whether they had any comments on the paper and whether they agreed with the staff recommendations in the paper.

The Chairman questioned whether, if the Board responded negatively to this question, a lot of work would need to be redone, for example, work on the insurance model. The Technical Principal responded by saying that this would not necessarily be the case as the Board had permission to override the Conceptual Framework.

A Board member noted that she agreed with the staff recommendation as cash-flow-based measurements were used in two different ways. She noted that in some situations, such as Level 3 fair values, a cash-flow-based measurement was being used as a technique to meet an objective, but in other cases, such as amortised cost in financial instruments, it was expressed as a calculation and not an objective of measuring a particular thing per se, but rather a description of a technique. With respect to amortised cost, she noted that it was hard to label as current or cost as current estimates of contractual cash flows discounted at an historic effective interest rate were used, so it was a combination of things and difficult to assign to one particular category.

Another Board member noted that there should be clear measurement bases and techniques that achieve those, so ideally there would not be some undefined cash flow technique that could just be anything. He observed that the staff had listed fulfilment value as a technique on the liabilities side, but that IAS 19, IAS 37, and insurance all required a DCF technique to be used, but in slightly different ways, to get to the resulting liability. He therefore, questioned whether each of those attempts to get to a fulfilment value, were an approximation of the same thing or slightly different versions of fulfilment value – and ultimately, what was fulfilment value?

The Technical Principal responded noting that she did not believe it was clear in any of those standards what the Board’s overall objective was and whether in fact it was fulfilment value and what was meant by the term. She noted that to some extent, what the staff was trying to do was to put a bit more guidance around it. So if the Board concluded in a particular standard that what they wanted was fulfilment value, then it would look to the way fulfilment value was described in the Conceptual Framework; if they it wanted to depart from it, it would need to say why, and if so, how.

The Board member responded noting that he agreed, which is why he did not believe cash-flow-based measurements should be measurement objectives or in the Conceptual Framework. He suggested including fulfilment value in the Conceptual Framework, providing a clear explanation of what it was. If IAS 19 departed from that, which it probably did (given the lack of justification for the high quality corporate bond rate), then at some point in the future the Board should think about measurement in IAS 19.

The Technical Principal responded, noting that the approach would be fine if the Board was confident they had defined enough measurement bases as reasonable starting points for the cash-flow-based measurements they were looking at. She noted that she was concerned about the situation arising where the Board wanted to describe something but was unable to use as a starting point one of the measurement bases described in the Conceptual Framework, and then adapt that. She further noted that in the discussion on the agenda paper on measurement categories discussed the previous day the Board had decided to categorise things into two broad categories of historical and current. Then within the current category, there were some measurement bases that had been identified and that were typically used and likely to be used going forward, for example, fair value, fulfilment value, and replacement cost, and that there would be a description of the current measurement bases within the Conceptual Framework.

The Chairman noted that the question remained, whether the Board thought a measurement basis was needed in itself for cash-flow-based measurements, which, he added, sounded more like a description of a technique; or whether some description of the underlying objectives that were trying to be achieved was needed.

Another Board member noted that he did not disagree with the wording in the question that the Board should not restrict its use of cash-flow-based measurements; however, he noted that he strongly believed that cash-flow-based measurements were always measurement techniques as opposed to measurement objectives in their own right.

The Technical Director clarified that what the question to the Board was saying was that in the discussion on the previous agenda paper, the Board discussed things that were going to be in two or three buckets (cost, current, fair value). The question here was asking whether the Board should restrict the use of cash-flow-based measurement techniques to only things in those buckets or whether they should be able to do other things that did not meet things in those buckets. He emphasised that the question was not whether cash-flow-based measurement was a measurement base by itself or not.

Another Board member noted that the Board may have created a problem for itself it did not need to have. She noted that no one was telling the Board they had to make a statement about whether cash-flow-based measurements were or were not measurement bases. She noted that in the discussion on the agenda paper measurement categories, the Board discussed overall categories and identifying techniques within them. She did not believe there was anything that would require the Board to state whether or not cash-flow-based measurements were measurement bases or not. She wondered whether it would be better to capture some of the discussion in the document or in the Basis for Conclusions.

The Technical Principal noted that the staff had raised the issue because feedback indicated that people had a very clear view that the Board should define or describe a series of measurement bases and then only use cash-flow-based measurements as a technique to arrive at those measurement bases, and the way cash-flow-based measurement techniques were used in existing standards did not appear consistent with that type of approach. With respect to the point made about saying the overall objective was fulfilment value or fair value, and all that the Board was doing was moving away slightly from that because of cost/benefit reasons, she was not convinced that it fully described what had actually been done in previous situations. In particular, she was concerned with describing the amortised cost measurement basis as either a historical cost or as a current measurement basis.

The Technical Director added that he did not believe there was a difference between things like some of the old liability standards where, at the time, the Board was not really thinking in terms of precise objectives. If the Board looked at it again it might well try and pin down more precise objectives and things like amortised cost or fair value hedge accounting that were not really captured by the two or three categories. He noted that the question was whether the Board wanted that sort of decision to sit as an exception to what was in the Conceptual Framework or to be derivable from something that was in the Conceptual Framework.

Another Board member noted that the 2009 Exposure Draft on amortised cost and impairment did not only focus on impairment, but also sought to set out an objective for amortised cost. She noted that this might be useful for the Board to look at as it described how amortised cost was different to historical cost but was still a cost-based measure in the sense that it determined an effective return based on initial expectations; that was what provided the cost anchor, and then it was a technique to allocate interest over the life. She noted that this might be useful in articulating how amortised cost was still a cost-based measure if the Board wanted to use the two categories. She further noted that on the hedge accounting issue, she believed it was just a situation where there was a mixture of measurements going on – partly cost/partly fair value – and that accordingly, it was not a separate category in its own right but rather a mixed combination in a single item.

Another Board member noted with respect to the three examples he had provided earlier of IAS 19, IAS 37, and insurance that under the old Conceptual Framework, which did not discuss measurement, the Board developed DCF techniques that were inconsistent, and yet the liabilities that were arrived at were very similar in many respects. He noted that he would like to see a Conceptual Framework in the future, where, had it been in place at the time these three standards were developed, a consistent answer would have been arrived at using the Conceptual Framework He was not sure that by agreeing with the staff recommendation, it would result in consistent answers if each of those three standards were to be revisited.

The Chairman noted that the answer could be that pensions and insurance were categorised under fulfilment value, to which the Board member again questioned what fulfilment value was – was it a vague notion with moving parts or a clearly defined thing, for example, would fulfilment value include own credit risk or not?

The Technical Director responded noting that there were three or four questions that needed to be answered, and that own credit was one; whether one had risk adjustments was another, whether one had profit margins yet another. Lastly, the extent to which there was a market focus for things like discount rates might again be another.

The Technical Principal asked the Board member who had raised the issue, whether, if the Board answered yes to this question to use a cash-flow based technique as a way of estimating a measurement basis, and the particular measurement basis was fulfilment value, and fulfilment value was described within the Conceptual Framework whether he believed the Board would get to the same answer for each of the three areas (IAS 19, IAS 37, insurance). The Board member responded that he believed the Board would be more likely to get to the same answer. It may not, but at least it would be conscious of why it was departing from that objective.

There was discussion amongst several Board members with respect to how precise the Board needed to be, recognising that there had never been a measurement chapter before and that there was obviously work to be done in the future, that this was a good first step, and that the Board should not preclude it as ever being a basis at this stage.

The Chairman noted that his feeling was that in many of the cash-flow-based measurements there was an implicit underlying measurement objective/base that the Board had not always formulated clearly or not at all. This would lead the Board to the conclusion that it was basically a technique to get to the objective. A first effort could be made at creating a broad category for this objective such as value in use or amortised cost, and making it clear that more work was to be done.

The Technical Director responded that it was possible to do this, and that, in a way, disagreeing with the question did not cause problems with respect to discussion in the measurement section. All it would potentially do would be to tie the Board’s hands going forward to some extent and force it to think in a more disciplined way about its approach to measurement – so whenever the Board was looking at measurement, it would need to start with something that was a measurement basis, and then, where applicable, justify and explain why it had moved away from that measurement basis.

The Technical Principal proposed that the Board could take an approach along the lines of when a cash-flow-based measurement technique was being used it would be used as a way of estimating a particular measurement basis described in the Conceptual Framework; any decision taken to move away from or to adjust that measurement basis in some way would be explained in the particular standard being developed at that point in time.

The Chairman pointed out that going down the route described by the Technical Principal acknowledged that a cash-flow-based measurement was a technique to get to a measurement basis and that measurement bases needed to be defined. If the measurement basis was not defined in the Conceptual Framework, then it needed to be defined elsewhere – which provided the Board with some flexibility. He noted that in the Discussion Paper the Board described cash-flow-based measurement as a measurement basis in itself; now it was saying that it was a technique to get to a measurement basis, which was a different conclusion, and in line with feedback received.

The Technical Director added that the implication was that, if the Board wanted to use some sort of cash-flow-based measurement technique that did not meet one of the described measurement bases, that would be a departure from the Conceptual Framework rather than application of the Conceptual Framework.

The Chairman asked the Board members whether they agreed with the proposal suggested earlier in the discussion by the Technical Principal that when a cash-flow-based measurement technique was being used it would be used as a way of estimating a particular measurement basis described in the Conceptual Framework, and that any decision taken to move away from or to adjust that measurement basis in some way would be explained in the particular standard being developed at that point in time.

Twelve of the fourteen Board members present voted in favour of this proposal.

The Technical Principal then went on to present the second staff recommendation, which was to include in the Exposure Draft:

  • An expanded discussion of the different approaches to dealing with uncertain cash flows;
  • Additional guidance on the use of discount rates; and
  • Additional guidance on when the effect of changes in an entity’s own credit standing should be included in the measurement of a liability.

One Board member thought that paragraph 24 (that set out what should be stated in the Exposure Draft) was a little too detailed. He disagreed with including the example in the Conceptual Framework, as the Conceptual Framework should not be going into that level of detail.

Another Board member noted that he did not believe that a paragraph on the principles of discounted cash flow models should be included, adding that the Conceptual Framework was not the right place to describe techniques and principles.

Another Board member referred to paragraph 29(c)(ii) in the agenda paper, noting that the wording stated that “… the Board should consider selecting a measurement basis that excludes the effect of changes in own credit”. He questioned whether this should say “excludes own credit”, because, for example, in insurance, fulfilment value was measured based on a discount rate that did not include own credit, and changes in own credit were not included either. The Technical Principal responded that the reason the staff had deliberately referred to changes in own credit was because they did not envisage that the effects of own credit would be excluded from the initial measurement of a particular asset or liability.

A further Board member also commented on the same paragraph, noting that she was okay with it as it included the word ‘consider’. She noted that the Board had tried a similar technique with IFRS 9 and had called it the ‘frozen credit spread technique’, which it believed was a good solution to own credit; however, the approach did not get support from users as they did not know what it was measuring. Accordingly, she noted that she was okay with considering it, but that it should not be given too much prominence as it might not receive a lot of acceptance.

Another Board member noted that in general she agreed with the recommendations to include more guidance in the Exposure Draft. With respect to use of expected value, she noted that it fell more clearly within the category of a technique because it could be used for several different measurement objectives and that should be made clear in the drafting.

Another Board member commented with respect to own credit risk and when or not it was appropriate for it to be included in cash flows. He referred to paragraph 29(c) and questioned whether it would be possible to link the notion in that paragraph with going concern. He suggested making more specific in paragraph 29(c)(ii) that when the objective was to estimate the fulfilment value, it was not appropriate to include own credit risk when applying the going concern assumption, as the expectation would be that an entity that was a going concern would be able to fulfil its contractual or other obligations.

The Technical Principal suggested that, rather than being included in paragraph 29(c)(ii), the reference to going concern could be included in paragraph 29(b), which discussed why own credit might not always provide useful information. Another Board member disagreed with mentioning going concern as it created a danger in terms of measuring financial liabilities.

The staff asked for a vote on each of the factors to be considered in cash-flow-based measurements. Thirteen of the fourteen Board members agreed with the staff recommendations on each of the factors, subject to the staff taking into consideration comments expressed by the Board members in the preceding discussion.

 

Profit or loss and other comprehensive income – clarifying the proposed approach

The next agenda paper contained a discussion of profit or loss (P&L) as the primary source of information about an entity’s performance for the period and explored the principles that could be used to identify some items of income and expense that must be included in profit or loss and those that could be included in OCI. A summary of the proposed approach to profit or loss and OCI, including the tentative decisions made by the Board in June 2014 and the clarifications that the staff recommend is set out in Appendix A of the agenda paper 10B.

The Senior Technical Manager introduced the paper by summarising the discussion around profit or loss as the primary source of information about performance. She asked the Board members whether they had any comments on the paper and whether they agreed with the staff recommendations therein.

One Board member noted that she was generally supportive of where the staff had got to, but made a comment with respect to setting expectations in relation to business model. She referred to paragraph 11(d) of the agenda paper, which states that “profit or loss can be more closely aligned to an entity’s business model than total comprehensive income”. She noted that while she did not object to the comment, she was concerned that the Board might send signals that could be misunderstood. The Board would then have to spend time closing expectation gaps about the extent to which the Board would either seek to align with business model presentation for different industries/types of companies, or in essence provide more flexibility than in the past to with respect to classification.

Another Board member agreed with the recommendation, but noted that the title ‘profit or loss as the primary source of information about performance’ implied that for all entities income and expense was performance (and that cash flows and balance sheet were less important). He noted that there may be entities where cash flows gave more information than income and expense or where income and expense needed to be looked at on the same level as cash flows to understand performance. He noted that he would prefer to say that income and expense was one facet of performance and cash flows another, rather than to put income and expense above the rest as the paper appeared to be conveying.

The Senior Technical Manager responded noting that the staff was saying that, although profit or loss was the primary source of information about performance, it was not the only source. She further noted that the staff did not intend to imply that each of the financial statements did not have equal prominence, but that in terms of information about performance specifically, profit or loss and other comprehensive income provided more information.

There was discussion amongst the Board members with respect to the importance of cash flows vs. profit or loss as the primary source of information about performance. One Board member used ENRON as an example, noting that the company was being analysed based on its income statement, whereas had the cash flows been looked at, it would have been identified that the company was not producing any cash flows but recording extraordinary revenue and profits. Another Board member noted that he believed that profit or loss was generally the primary source of information about performance in an environment where things were going well. However, he pointed out that in situations where things were going downhill, liquidity, cash flow, and the balance sheet became more important indicators of performance; he therefore suggested expanding on the definition. A further Board member suggested adding the word ‘generally’ [the primary source of information about performance].

The Chairman pointed out that what the paper was trying to say was that profit or loss was the primary source of information relative to OCI. If the Board had thought that OCI was just as important as profit or loss, everything would be included in profit or loss.

Another Board member noted that he would be concerned with widening performance to include things that were not income and expense. He acknowledged that cash flow, balance sheet, leverage and liquidity were all important in analysing a business; however, to define performance in such a wide way was dangerous. He believed that performance was accruals based income and expense and that there were different ways of analysing it, different measures of performance that included different components of it, and different measurement bases to get to the income and expense.

Another Board member raised a point with respect to the interaction between papers. She noted that in discussions on a previous paper, the Board had said that ‘in extreme circumstances, the measurement uncertainty associated with estimates of fair value may be so great that measurement at fair value may not provide relevant information’. She cautioned that the Board needed to watch the interaction with this as if the presumption can be rebutted and items included in OCI because the relevance of profit or loss is enhanced, she questioned whether people would think Level 3 fair value measurements were perfect candidates for OCI more broadly than what the Board might intend because of the link between measurement uncertainty and relevance.

The Senior Technical Manager went on to discuss principles for including items of income and expense in profit or loss or OCI.

One Board member agreed with the staff recommendations but drew attention to the sentence in paragraph 22 of the agenda paper that discusses assessing performance over several accounting periods (“over the term when particular management personnel were in charge”). He questioned how it would be understood if the paragraph was carried over into the Exposure Draft. He cautioned that the Board would need to be careful if this sentence was included in the Exposure Draft, as it could raise a number of questions with respect to stewardship.

Another Board member noted that he believed that the whole idea that P&L should be the primary measure of performance both within a period and over time gets to the idea that an item should not be permanently excluded from P&L and that this was supported by the recycling notion. He highlighted pensions as an example of an item that is permanently excluded from P&L at the moment. He noted that if someone was trying to hold management accountable for their stewardship of the business, including how they dealt with pensions, and they dealt with pensions really badly because they made the wrong investment decisions and lost a lot of money, currently that loss would appear in OCI and stay in OCI. He further noted that if the Board wanted to hold P&L to be the primary measure of performance over a period of years, P&L in the above example would overstate the performance of the business. He noted that the other part of this was that P&L in a particular period should also be a primary measure of performance. His contention with the recycling of pensions was that it was arbitrary, and if the recycling was arbitrary, then the amount that appeared in P&L for the recycling did not reflect an economic event in the period, was not relevant in assessing the performance of the period, and recycling did not result in the most relevant measure of performance being profit for that period. He further noted that this has always been evident where in the past, if material, investors would remove the recycled component in assessing the performance of the business because they knew it had nothing to do with performance in the current period. He added that if this Conceptual Framework had been in place at the time IAS 19 was written, OCI could not have been used for IAS 19. The implication of this was that it would have had to go to P&L unless the Board chose to deliberately depart from the Conceptual Framework and knowingly use OCI without recycling, which would be contrary to the Conceptual Framework that is now being presented, which is that P&L is the most relevant measure of performance in a period and over time.

He noted that while he generally supported the staff recommendation, he believed that the Conceptual Framework should give the Board discipline, and that there should be a high hurdle in situations where the Board wanted to depart from the Conceptual Framework. He noted that he was concerned with certain of the wording in paragraphs A8 and A9, which was effectively giving the Board an easy out. He noted that if the Board was clear about what the objective was, which was to have P&L as the primary measure of performance in a single period and over time, then OCI needed to be used with that objective in mind. He added that if the Board wanted to use OCI in a way that was not consistent with that, such as pensions, they should be honest and say ‘we are going to depart from the Conceptual Framework’. Accordingly, he noted that the last two sentences of paragraph A8 and everything but the first sentence of A9 should be deleted. The implication would be that pensions would be a departure from the Conceptual Framework, which he believed it was.

Another Board member noted that he agreed with the comments of the previous Board member. Further, he believed what was missing in the paper was a discussion about what the period was all about. He noted that usually the period was just one year, but that there were lots of economics that covered more than one year and, accordingly, that there were some transactions that should be allocated to several years. With respect to the pension example, he noted that a loss in year 1 was not relevant to that year given the investment was made to cover the employee’s life and that the loss should be allocated over time. Such a way of thinking should be introduced to enable completion of the discussion.

He further asked for clarification on the recommendation set out in paragraph 29(a) of the agenda paper that “only items of income and expense that arise from changes in current measures of assets and liabilities could be included in OCI”. He wanted to know specifically whether this meant that day 1 profits would be explicitly prohibited from being taken to OCI. The staff responded and confirmed that the intention was that day 1 profit would be excluded from OCI as only changes in current measures would go to OCI.

Several Board members commented on the wording in paragraph 38(b) of the agenda paper that talks about only including changes in OCI if enhances the relevance of profit or loss, and that it would be helpful to expand on what was meant by relevance.

There was discussion on paragraph A5 of the agenda paper. The Chairman noted that he was okay with the language, but was concerned how it might be interpreted by the outside world; for example, it could result in a large push towards use of cost-based measures because all items of income and expense that arise on assets and liabilities carried at cost-based measures must be included in P&L; or, that it could be interpreted that every current remeasurement was a potential candidate for OCI, which is not the case. He noted that the Board’s intention needs to be made crystal clear to avoid misinterpretation.

Upon being called to a vote by the Chairman, nine Board members voted in favour of the staff recommendation. One Board member noted that nine Board members had voted in favour of drafting as is, but noted that there was some discussion about whether the Conceptual Framework should have a higher hurdle from departure than just baking in flexibility, and suggested that, given the vote, the Board proceed with drafting in the Exposure Draft as recommended by the staff, but think about whether a specific question should be asked on this in the Exposure Draft. The Chairman agreed with this suggestion.

 

Presentation and disclosure – scope and content

The next agenda paper dealt with the scope and content of presentation and disclosure guidance to be included in the Conceptual Framework Exposure Draft. It contained four staff recommendations, which were the focus of the Board discussion. The Senior Technical Manager started with the first issue of the paper that was devoted to Primary financial statements and notes to the financial statements. The staff recommended that the Conceptual Framework Exposure Draft should not introduce a notion of 'primary financial statements' as had been proposed in the Discussion Paper. She asked the Board members whether they agreed with this staff recommendation.

One Board member disagreed with the staff recommendation, noting that he believed face presentation and other disclosures should be distinguished. He suggested that, instead of using the term ‘primary financial statements’, the term 'summary financial statements' could be used instead, which avoided implying that other disclosures were secondary.

The Chairman noted that he did not agree with the suggestion made by the previous Board member to use to the term 'summary'. However, he noted that he believed that everyone more or less understood what was meant by the term 'primary financial statements', and that the Board should not ignore this and should try to find a basis for it. He noted that most people understood that there was some difference between the primary financial statements and the notes, and provided two reasons why notes were used. The first reason was that information was still important, but of secondary importance, which is why it was not included in the primary financial statements. The second reason was that the information was still of high importance, but was considered to be too detailed to include in the primary financial statements, and that relegating such information to the notes did not necessarily mean that the information was of secondary importance. He added that he believed that if everyone used these terms, the Board should use them also and create some discipline around them.

Another Board member commented that while she agreed the term 'primary financial statements' was used frequently in practice, she questioned why it would be needed in the Conceptual Framework for many of the decisions made by the Board. She highlighted the fact that some of the feedback received on the Discussion Paper noted that introducing the term 'primary financial statements' could send the wrong message.

The Vice-Chairman suggested leaving the notion of primary financial statements in the Exposure Draft and asking a specific question on it. However, the Technical Director noted that he was concerned with ending up with too many questions in the Exposure Draft and did not believe the issue was important enough to warrant a specific question.

Several other Board members commented that including a notion of primary financial statements in the Conceptual Framework would be trying to 'fix something that was not broken'. One Board member added that, if such a notion was included, he believed that only the income statement and balance sheet should be primary financial statements, as only those two statements summarised the elements that had been identified (income, expenses, assets, liabilities and equity). He added that the statement of cash flows was a roll forward of one element (cash) and the statement of changes in equity was a roll forward of another element (equity). He noted that one advantage of only labelling the balance sheet and income statement as primary financial statements was that at some point the Board would be required to consider the suitability of the cash flow statement for all entities and circumstances. He added that many constituents had told the Board that cash flow statements were not useful under certain circumstances, and that by not including the statement of cash flows as a primary financial statement, it would give the Board some flexibility in determining when a cash roll forward was and was not appropriate.

Upon being called to a vote by the Chairman, twelve of the fourteen Board members present agreed with the staff recommendation.

The next issue was devoted to the objective of financial statements. The staff recommended that the Conceptual Framework Exposure Draft should state that the objective of financial statements was to provide information about an entity’s assets, liabilities, equity, income and expenses that was useful to users of financial statements in assessing the prospects for future net cash inflows to the entity and in assessing management’s stewardship of the entity’s resources. As a result, financial statements would provide information about the financial position, financial performance and cash flows of an entity.

One Board member noted that he strongly disagreed with the elimination of information about cash flows as an objective of financial statements. He noted that information about cash flows was important in assessing future prospects of an entity and in assessing the stewardship of management, and that the fact that IFRS required a statement of cash flows was proof of that. He questioned what the staff’s reason was for eliminating information about cash flows from the objective. The staff responded by saying that the intention was not to exclude information about cash flows from the objective. The staff was trying to capture in first sentence only items that were elements, adding that cash flow was an example of an asset so it was captured indirectly. To reinforce the importance of cash flows, the staff had added the final sentence.

Another Board member observed that the staff was not proposing to amend the objective of financial reporting here, but was rather supplementing the objective of financial reporting with another objective of financial statements. She questioned the need for an objective of financial statements. She believed there was enough market discipline that kept some clarity around the boundary between what was included in financial statements and other financial reports. As long as the Board was always clear when writing standards that it was writing them about financial statements, she did not believe there was a risk of confusion as to what people needed to look at when preparing financial statements. Other Board members also questioned why a separate objective for financial statements was needed. The Technical Director responded and noted that there was an objective for financial reporting as a whole, and that this recommendation was trying to deal with a subset of that, being financial statements. He noted that this guidance was to assist the Board in knowing what things it needed to be thinking about to include in financial statements.

Another Board member noted that he agreed with the recommendation as written, noting that it worked perfectly as it dealt with the elements, and roll forwards (cash flows, changes in equity) were dealt with elsewhere.

Nine Board members of the thirteen present for the vote agreed with the staff recommendation.

The Senior Technical Manager then turned to the scope of the notes to the financial statements. The staff recommended that the Conceptual Framework Exposure Draft should:

  1. discuss disclosures that the Board would normally consider requiring in setting Standards (but does not provide examples of different types of disclosures); and
  2. confirm the discussion of disclosure of risks and forward-looking information proposed in the Discussion Paper. In particular:
    1. the notes to the financial statements would normally include information about the nature and extent of risks arising from the entity’s assets and liabilities; and
    2. forward-looking information should be required only if it provides relevant information about the assets and liabilities that existed at the end of, or during, the reporting period.

One Board member expressed concern with respect to the fact that the recommendation stated that the notes to the financial statements would normally include information about the nature and extent of risks arising from the entity’s assets and liabilities, and questioned the applicability of this requirement to all entities. The staff observed that this should have read ‘normally consider requiring’, and noted that this would be amended.

Thirteen Board members agreed with the staff recommendation, subject to the amendment noted above.

Lastly, the Senior Technical Manager touched on other guidance on presentation and disclosure. The staff recommended confirming the guidance on classification and aggregation, offsetting and comparative information proposed in the Discussion Paper.

One Board member suggested that the word disaggregation should also be included, adding that some things in financial reporting were a disaggregation of even a single transaction. There were no other significant comments with respect to this staff recommendation.

All fourteen Board members agreed with the staff recommendation, subject to the inclusion of discussion on disaggregation.

 

Other elements

The next topic discussed focussed on whether to define other elements for the statement of changes in equity and the statement of cash flows. In the agenda paper the staff recommended that the Conceptual Framework should not define elements for the statement of changes in equity and for the statement of cash flows. Accordingly, the only elements would continue to be assets, liabilities and equity, and income and expense. The Board members were asked whether they had any comments on the paper and whether they agreed with the staff recommendation in the paper.

A Board member noted that, while he did not disagree with the staff recommendation, he was not convinced by the reasoning in the paper. He pointed out the fact that the argument in paragraph 17(a) in favour of introducing contributions to equity and distributions of equity as new elements was a strong argument, and that the arguments against, as set out in paragraph 18, were not as strong. He questioned the staff as to whether there were any other reasons why they had come to the recommendation in the paper.

The Technical Director responded and acknowledged that the argument in paragraph 17(a) was a strong argument. He noted that if the Conceptual Framework was being written from scratch, the staff might have been inclined to include these elements; however, he noted that the objective of the project was to try and fill gaps in the existing Conceptual Framework and to solve practice issues, which is why the staff recommended making no changes in this area.

Another Board member noted that he strongly supported the staff recommendation for two reasons. The first reason he gave was because he did not believe the issues people had with respect to contributions to and distributions of equity were conceptual level issues. The second reason he gave was because he believed if the Board tried to do something in this area, they would get into detailed standard level issues which would be difficult to solve.

Another Board member noted that he believed the Board should look at including these items as elements as the Board would not revisit the Conceptual Framework for a long time. He believed there was an existing problem that the Board had dealt with through an interpretation in terms of how to account for and apply the equity method and distributions and contributions, upstream and downstream transactions, and that they did not know how to characterise such transactions, whether they should be through profit or loss, other comprehensive income, equity changes and the like. He believed that introducing these elements would actually help solve some practice problems and would also help to solve a very thorny practice problem: The current cash flow statement was not a roll forward, but a depiction of a proxy for cash flow based on changes in assets and liabilities; as a result, it rarely delivered the kind of value most people were looking for, particularly within financial institutions. Accordingly, he noted that he believed it would be worthwhile for the Board to work on including these items as elements as it would help deal with practice problems.

Another Board member noted that he agreed with the comment of the previous Board member, at least for equity. He believed it was worth for the Board trying to define these elements in the Conceptual Framework, even if just from a practical perspective, as it would be easier to include in the Exposure Draft and remove later on, if necessary, than to try and include later on. The Chairman also noted that he was inclined to favour including contributions to and distributions of equity as elements. In response to the comments made by the two previous Board members who had spoken, another Board member warned the Board that including contributions to and distributions of equity as elements would result in a detailed discussion on capital maintenance.

Another Board member questioned why, in terms of potential elements, the staff focused on defining as elements contributions to and distributions of equity as opposed to just defining equity as the element.

The Technical Director responded, noting that income was defined as “increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants” and that, implicitly, income was defined as a subset of a larger group of movements. He then clarified that it was the contributions (the flow) rather than equity that the staff were trying to define (just as income and expense are the flows).

Another Board member noted that he would be nervous including these (contributions to and distributions of equity) as elements because it could restrict the Board’s movement when it came to working on the liabilities/equity project.

Upon called to a vote by the Chairman, eleven Board members agreed with the staff recommendation in the paper not to define elements for the statement of changes in equity and for the statement of cash flows.

 

Asset definition – control

This agenda paper considered feedback on the definition of control suggested in the Discussion Paper, and on the guidance accompanying that definition. The staff recommendations were set out in the paper in relation to the following four areas:

  1. control or risks and rewards of ownership;
  2. control – asset definition or recognition criteria;
  3. the definition of control; and
  4. supporting guidance on control.

The Technical Director introduced the paper and asked the Board members whether they had any comments on the paper and whether they agreed with the staff recommendations as set out in the paper.

With respect to the staff recommendation on supporting guidance on control, a Board member expressed concern with the proposal to delete the fish example that was included in the Discussion Paper from the Conceptual Framework. He noted that the Conceptual Framework would last for ten or twenty years, and during that time the environment would change, and that it would be a useful example to retain, particular with respect to open software scenarios.

There were no other significant comments. All fourteen Board members agreed with the four staff recommendations in the paper.

 

Liability definition – present obligation

The Senior Research Manager began by saying that the agenda paper dealt specifically with 'constrained discretion' which meant that the entity had some, but less than complete, discretion to avoid a future transfer. The Discussion Paper had looked at different scenarios in this context. One was where the entity did not have a legally enforceable obligation but possibly, because of its past practices or published policies, it had a constructive obligation. Another scenario was where the entity would have a legally enforceable obligation but only if it followed another course of action that satisfied a remaining condition. The third scenario was when there were options that would allow not transferring an economic resource but with restrictions around these options that would constrain the entity in the ability to exercise them. All of these scenarios posed the question of how constrained the discretion of an entity would have to be to constitute a present obligation.

The staff had developed a recommendation for a definition of present obligation. The first step in this process was to analyse the role that economic compulsion had in the identification of an obligation. The staff's conclusion on the first step was that economic compulsion had to be taken into account but, by itself, would not be sufficient as there needed to be a past event. The second step was to examine how constrained an entity's discretion should be for it to have an obligation. The analysis showed that the entity should have no practical ability to avoid the transfer of economic benefits. The third step was looking to finding a better term than ‘no practical ability to avoid', and the two alternatives where 'no realistic alternative' and 'little or no discretion to avoid'. However, the staff recommended retaining the term 'no practical ability to avoid'. The overall recommended definition from these steps was:

An entity has a present obligation to transfer an economic resource as a result of past events if both:
  1. the entity has no practical ability to avoid the transfer; and
  2. the amount of the transfer is determined by reference to benefits that the entity has received, or activities that it has conducted, in the past.

One Board member agreed and found that this was a significant progress in developing the Conceptual Framework. He especially liked the reference in the agenda paper where it said that "[a]n entity that prepares financial statements on a going concern basis has no practical ability to avoid a transfer that could be avoided only by liquidating the entity or ceasing trading". He also liked the idea of taking into account economic compulsion; however, he pointed out problems with different degrees of economic compulsion and when to decide whether an entity was economically compelled to do something. The Senior Research Manager replied that this would have to be dealt with in standard-setting. One Board member commented on the types of constrained discretion addressed in the Discussion Paper. Those were:

  • View 1: the entity has no ability to avoid future transfer;
  • View 2: the entity has no practical ability to avoid future transfer; and
  • View 3: the entity has less than complete discretion to avoid the future transfer.

Staff wrote that the agenda paper considered suggestions that the concept chosen should have an effect that was somewhere between the effects of View 2 and View 3 and was based on the amounts that it was probable (or expected) that the entity would transfer. The Board member said it should rather be the probability that the entity acted in a certain way. The amount that flowed from that action would only be a consequence and it should be more about existence. The Senior Research Manager replied that this had been examined in response to the feedback received but had then been rejected in a further section of the agenda paper. With regard to the proposed definition the Board member said that part (b) of the definition was measurement guidance rather than a condition that needed to be met. Another Board member agreed and said that the reference to 'amount' should be deleted in the proposed definition. One Board member wondered how the proposed definition would distinguish ordinary shares from a dividend stopper or a step-up clause as sometimes also with ordinary shares, an entity had no practical ability to avoid the transfer. The Senior Research Manager said that future dividends could not be liabilities as they were paid from future profits. One Board member said that a step-up clause had negative effects on the equity shareholders whereas the non-payment of dividends on ordinary shares did not. Another Board member criticised that the discussion in the agenda paper on ‘no practical ability to avoid’ referred to IFRS 9 and IFRS 10. He said that the term in those standards was meant for positive actions to avoid ('practical ability to exercise rights'). He would prefer the term 'no realistic alternative'. The Senior Research Manager replied that they had decided to use 'no practical ability' as it worked very well with constructive obligations. Another Board member showed sympathy for View 2 as a similar concept worked well for U.S. GAAP where it said 'little or no discretion'. One Board member said that the Discussion Paper had also looked at the substance of a transaction. He asked whether this would be carried forward to the Exposure Draft. The Senior Research Manager replied that there would be guidance saying that options in contracts that did not have commercial substance should be disregarded. She conceded that this guidance would be difficult with options that had some commercial substance. She said it might be worth exploring putting guidance on substance in the constraint discretion discussion.

Upon taking a vote on the staff's recommendation, all Board members voted in favour.

The Senior Research Manager continued with the discussion about guidance to be included in the Exposure Draft to support the meaning of 'no practical ability to avoid'. The staff recommended including guidance on:

  1. constructive obligations by using the wording from IFRS 15;
  2. obligations that were contingent on the entity’s future actions;
  3. when an entity had no practical ability to avoid a particular course of action; and
  4. going concern.

The Vice-Chairman commented on (a) where it said in the agenda paper that "customary practices, published policies or specific statements created a valid expectation of another party." He said that it might sometimes be difficult to identify another party. The Senior Research Manager said that it could be added that it did not necessarily have to be a specific party or that the party could even be society at large. One Board member commented on (c) and (d) and said that they only needed to be looked at if there was a present obligation and they could therefore be expansions of (b). She also said that it should be included that 'no practical ability to avoid' was more than 'probable' or 'more likely than not'. A fellow Board member said that questions could be raised as to when adverse economic consequences should be assessed. She said that it should be included in the Basis for Conclusions that those issues had been noted but deliberately not been addressed. One Board member commented on going concern. It said in the agenda paper that an entity that was preparing financial statements on a going concern basis would not have a practical ability to avoid a transfer that could be avoided only by liquidating the entity or by ceasing trading. He said that he was not happy with the word 'trading' but if it were to remain in the Conceptual Framework, he would prefer 'related trading' as some licenses were only for certain transactions and not for the business as a whole. The Senior Research Manager was not sure if this could be changed because of the definition of going concern but said that staff would take a look at it. One Board member said that he would subsume this issue under (c).

When called for a vote, all Board members agreed with the proposed application guidance.

The Senior Research Manager continued by saying that some respondents had said that constraint discretion could also be applied to assets and that it should be examined whether the applicability on assets had effects on the liability discussion. The staff considered the feedback but concluded that this discussion would not be helpful when defining liabilities.

One Board member agreed and said that the unit of account might not always be the same for the asset and the liability. A fellow Board member said that including the discussion might imply that assets and liabilities should be accounted for symmetrically in the counterparties' financial statements.

The Chairman called for a vote on the staff recommendation. All Board members voted in favour.

 

Derecognition

The Director of International Activities seconded from the Accounting Standards Board of Japan (ASBJ) opened his slot by saying that the feedback received on the Derecognition section of the Discussion Paper had been mixed. He said that respondents had offered different views on when an entity retained a component of an asset or a liability. If it was concluded that the entity had retained a component this could be portrayed by either:

  1. full derecognition;
  2. partial derecognition; or
  3. continued recognition.

The staff recommended that the decision for one of the approaches be made on a standards-level and not in the Conceptual Framework.

The staff thought that there were also three alternatives to portray a modification of a contract, similar to the approaches looked at for derecognition. As before, the staff recommended that the Board should decide on a standards-level which alternative would be appropriate.

A Board member said that it would not only be retention of a component but also retention of exposure. She also said that the fact pattern of the discussion on repurchase agreements included in the appendix of the agenda paper should be more specific. She said that it should be clarified how the repurchase price was determined. The discussion as presented implied that the repurchase price was irrelevant. One Board member asked whether the Conceptual Framework would provide any guidelines for the IASB on how to decide for one of the alternatives; for example, could one guideline be that the structure of a transaction was irrelevant? A fellow Board member replied that such guidelines were problematic in his view. One Board member said that in his view there was no possibility to partially derecognise. He said that it would be a question of unit of account. The Director replied that they meant 'transactions' that might encompass several units of accounts but would be happy to change to 'unit of account'. He said that the fact whether an asset could be componentised was one of the factors to consider when making a decision in favour of (a), (b), or (c). One Board member said the discussion of the repurchase agreement should also include whether the right was attached to a specified asset or whether it could be a similar asset.

The Chairman asked the Board whether they supported the staff recommendation. All Board members voted in favour.

 

Business Model

The Technical Manager began by saying that the Discussion Paper had stated that financial statements could be made more relevant if the IASB considered, when developing or revising particular standards, how an entity conducted its business activities. The feedback received on this topic was mixed as regards how to consider the business model in financial statements. Some respondents were concerned with the term 'business model'. The agenda paper contained a table that summarised whether staff had identified a role for consideration of the nature of an entity’s business activities on the following areas:

  1. recognition of assets and liabilities;
  2. measurement;
  3. presentation and disclosure;
  4. distinction between profit or loss and OCI;
  5. distinction between liabilities and equity; and
  6. unit of account.

The staff thought that consideration of the nature of an entity’s business activities was likely to improve the relevance of financial information in the areas of (b), (c), (d) and (f). In other roles of standard-setting the staff saw less relevance, e.g. in distinguishing between equity and liabilities. The staff also concluded that there was no overarching concept for the business model. Staff therefore recommended defining the concept; however, the term 'business model' should not be used in that concept to avoid confusion with other concepts.

One Board member agreed with the staff recommendations in light of the experience with IFRS 9. Another Board member expressed concerns about the summary provided in the questions included in the agenda paper as it seemed to be written from a preparer's perspective. The Chairman agreed and asked what was meant by "[…] the revised Conceptual Framework should […] describe for each area of standard-setting how the nature of an entity’s business activities would affect that area of standard-setting." The Technical Manager replied that, for example, when the Board decided on a measurement basis, it would consider how the assets and liabilities would contribute to future cash flows. The Chairman said that he understood, but he reminded the staff that the term 'business model' was only considered in a very limited number of standards whilst staff had written it should be described for 'each area'. The Technical Principal replied that it would only be described where relevant. The Chairman asked the Board whether they agreed with the recommendation under that premise. All Board members voted in favour.

 

Transition and effective date

The Technical Manager said that the Discussion Paper had stated that once the Conceptual Framework was published, the Board should apply it immediately. Some respondents had raised the question whether this would be the same for the IFRS Interpretations Committee. The staff analysed that the Due Process Handbook required the Interpretations Committee to consult the IASB if requirements in a standard were not consistent with the Conceptual Framework. The staff believed it was not necessary to add any further guidance for the Interpretations Committee on transition or effective date. For preparers, he said, the Conceptual Framework was applied through IAS 8 and, therefore, preparers would be required to apply the Framework retrospectively. The staff recommended a transition period of no less than 18 months.

One Board member asked whether the previous revision of the Framework had transition provisions. The Technical Associate negated that. The Board member expressed discomfort with the staff’s recommendations. His concern was the immediate applicability of the new Framework that, in his view, was contradictory to the usual process when changing a standard. One Board member asked what would happen with interpretations that were issued mainly on basis of the existing Conceptual Framework, if there were any. The Chairman replied that any interpretation would override the Framework. One Board member asked whether the term 'effective date' would be used in the Framework. The Technical Manager doubted that and said that it would probably be included in IAS 8. The Technical Director added that the reference to the Framework in IAS 8 would have to be changed and that this change would need an effective date. One Board member suggested presenting the section about the IFRS Interpretations Committee in the agenda paper to the Committee in its next meeting. A fellow Board member asked when the Board would decide whether consequential amendments of standards were required other than changing IAS 1 and IAS 8. The Chairman said that this should be considered when deliberating the final Framework. One Board member said that the language in the Framework with regard to applicability when a standard did not provide guidance on an issue should be decoupled from the language in IAS 8. Another Board member said that the potential changes in practice that would be required by introducing a new Framework should be flagged to preparers. The Vice-Chairman replied that he would not expect big differences in practice from applying the new Framework.

The Chairman called a vote on the staff recommendations. All Board members were in favour.

Correction list for hyphenation

These words serve as exceptions. Once entered, they are only hyphenated at the specified hyphenation points. Each word should be on a separate line.