Conceptual Framework

Date recorded:

The Technical Principal on the Conceptual Framework project opened the session noting that the feedback summaries would provide the members with feedback on the main comments and themes arising in the comment letters. She stressed that they would not provide any analysis of the comments received.

She noted that the purpose of the session was to provide the Board members with an opportunity to ask questions and express any views or thoughts they might have on the feedback received that the staff might incorporate as they move forward with the project. 

The staff member noted that the meeting would focus on those papers where more important comments were received. Accordingly, papers 10B on the purpose and status of the Conceptual Framework, 10E on derecognition and 10H on presentation and disclosure were not discussed. For the other paper a staff member would give an overview of the contents of the paper and invite comments from the Board members.

Finally, she noted that the main focus of the April meeting would be to provide an overview of the staff's proposed strategy for the redeliberations on the Conceptual Framework going forward.


General overview (Paper 10A)

This paper provides a general overview of the comment letters received and other outreach undertaken and summarises some of the general comments made on the Discussion Paper including comments on the proposed timetable, due process and scope.

A Board member asked whether there were any major areas where respondents noted there was too much or too little detail in the Discussion Paper.

The Technical Principal responded, noting that the areas where respondents noted there was too much detail were in the discussions around measurement, liabilities and equity, and OCI. She also noted that areas where comments indicated more detail was needed were in the areas of derecognition and unit of account.  She further noted that the key was striking a balance between providing enough guidance so that the Conceptual Framework was useful without going down into standards level detail.

Another Board member noted that a strong impression he got from outreach discussions was that people didn’t feel there was enough level of detail in the area of linkage between assets and liabilities and the impact it had on measurement.

Another Board member commented in respect to paragraph 26 of the staff paper that discusses transition guidance. He acknowledged that the new Conceptual Framework would not override existing standards, but noted that in cases where there was no standard the financial statement preparer would go directly to the Conceptual Framework in accordance with IAS 8. He raised the question whether users would have to change practice immediately after the Conceptual Framework was issued.

The Director of Research responded noting that with regards to the effective date, for the previous versions there was no effective date and they were used immediately; however, he noted that whether an effective date was needed was a practicality issue that would need to be thought about further adding that if an entity was going to issue financial statements tomorrow one could not tell them today that they needed to change the accounting.

Another Board member noted comments on the propriety vs. entity view, noting that although there were relatively few comments on this the comments received were strong comments. He therefore suggested that the Board should prioritise this and have a discussion on this issue.   

Further, the Board member wondered what the feedback was telling them as regards the challenges in moving from the Discussion Paper to an Exposure Draft. She felt the feedback received was indicating that the Board had the right basis for moving forward, and now the Board members needed to determine how to divide the work up and consider the best order to work through the sections to ensure that all interactions between sections were captured, which would eliminate doubling up on efforts. She noted that she had tried to identify which sections would need early attention because either (a) feedback indicated the section would require the most work; or (b) the section provided a critical path for other sections. She noted that she had identified OCI, measurement, liabilities, and equity, adding that these sections would determine the timing and shape of project and that accordingly the Board should prioritise discussion on these sections. She then asked the staff and other Board members if they had identified any other such sections.

The Technical Principal responded by saying that she had identified the areas the staff also had concern over. She added presentation and disclosure to the list noting that feedback was quite mixed in this area.

The Chairman of the Board noted that based on his review of the feedback summaries there was really no consensus on any of the issues. He cautioned on the effects of making minor modifications to definitions and noted that the Board needed to 'pick their fights' carefully: Where the Board would decide to make a change it should do so and accept the consequences. He further suggested that the Board might not make all the slight modifications that were appearing in the discussion paper. He noted that before the Board would proceed there needed to be a reasoned calculation about which areas to continue with and which areas not to. He noted that the criticism regarding the measurement section not being developed enough was justified and acknowledged that the Board had more work to do on this area. He also commented that it was unlikely the Board would come to a final conclusion regarding profit or loss and OCI; however, although a solution may not be found the range of problems associated with these topics could be narrowed down significantly. He added that part of the problem could be transferred to presentation. He emphasised that the Board needed to pick the things they want to bring forward very carefully.

Another Board member commented that one of the areas where the Board needed to make a decision very soon was the area of presentation of financial performance due to its interaction with the discussion on OCI. He noted that the Board needed to decide whether to do more work on performance at this stage or to leave it to a separate project.

The Director of Research noted that one of the most common themes that had come up in the outreach was the effect the new Conceptual Framework would have on existing standards. He pointed out that it was very difficult to come up with a definitive list because in a lot of areas it would be a judgement question. He acknowledged that there would need to be some indication given of what differences would be, at a high level and for significant conflicts.

Another Board member noted several areas that had come up consistently in the past several Board meetings and in outreach discussions, these areas being (1) the definition of a liability and (2) OCI. The Board member noted that one of the real benefits coming out of preparation of the Exposure Draft would be the ability for the Board to put a stake in the ground and clarify its thinking in relation to these areas.


Elements of financial statements and recognition (Paper 10C)

This paper provides a summary of the feedback received on Section 2 (elements of financial statements) and part of Section 4 (recognition).

A Board member noted that, overall, he agreed with the Chairman’s comment in the previous discussion that as the Board moved into the next phase of the project it needed to be constrained and agree on the areas to be amended.

Another Board member brought up the area of rights and asked the staff what the feedback received was regarding rights.

The Director of Research responded that based on the outreach performed and comment letters received most comments regarding rights were driven directly from where people were at with leasing. People who were comfortable with the right-of-use approach said that it was fine; people who believed more in an indivisible physical asset wanted more discussion on this.

The Chairman noted that this was a chapter where he was concerned that even if the Board wanted to make slight improvements people may read more into it than what was intended.

The Director of Research noted that a common theme that had come up in a number of outreach meetings was whether the Board was intending there to be more asset/liability recognition or less.  The Director noted that this was a hard question to answer because it depended on what would happen with the recognition and recognition criteria and noted that the staff had communicated to people that the Board didn’t make changes with the objective of recognising more or less assets or liabilities but that the changes were catching up with how the Board were applying the existing definitions and that if the Board made changes and they were clearly understood it might be a better basis for communication on future standard setting decisions.

A Board member noted that the most important thing about this paper was where the notion of probability was included – recognition or measurement – and whether it was better dealt with in the Conceptual Framework or at the standards level. He noted that there was more flexibility in the standards but that the standards could be inconsistent with the Conceptual Framework. He also raised the concern about the arguments that when outcomes of certain measurements were so variable; it called into question whether one should be measuring or recognising.    

Another Board member also highlighted the importance of the issue of probability.


Additional guidance to support the asset and liability definitions (Paper 10D)

This paper provides a summary of the feedback received on Section 3 of the Discussion Paper that discusses additional guidance to support the asset and liability definitions.

A Board member raised two issues. The first related to going concern. He noted that the Elements Chapter (Chapter 4) was an odd place for it, adding that it should be in a prominent place as going concern was one of the fundamentals of financial reporting. The second issue he raised related to the importance of looking at both the balance sheet and income statement.

A staff member responded, noting that the purpose of views 2 and 3 in the staff paper was that it was important to ensure that the income statement was right as well so one were not only looking for an obligation. The feedback from respondents favouring these views showed they were looking at the income statement. With regards to going concern, the staff member noted that in the discussion paper it was proposed that the paragraph on going concern be retained and acknowledged that it was difficult to know where in the Conceptual Framework to place it.

Another Board member noted that 95% of the paper discussed liabilities and asked why there was such a focus on the liabilities side – was it because people felt there was a need to enhance the liability definition or was it because people were happy with the asset definition?

The staff member noted that it was the liabilities side where the most practical problems arose in practice.

Coming back to the issue that was raised earlier in the discussion by a Board member, another Board member commented on the relationship between going concern and liabilities. He noted that going concern was a fundamental principle in preparing financial statements and it had two consequences – (1) the premise under which assets were valued; and (2) the impact of (1) on liabilities. The member noted that, accordingly, the placement of going concern could be linked with the discussion on when to recognise a liability or how to measure an asset.

A further Board member noted that it was important not to underestimate the importance of articulating what they meant by constructive obligation and economic compulsion. For example, a lawyer would only consider legal obligations and therefore this material needed to be developed well.


Equity (Paper 10F)

This paper provides a summary of the feedback received on the definition of equity in the Discussion Paper.

A Board member commented on paragraph 17 of the staff paper that discusses the suggestion raised by some respondents that instead of making a binary distinction the statement of financial position should depict and describe the claims as a continuum. Paragraph 17a then states that by presenting the claims as a continuum any distinction would be at the discretion of the users of the financial statements according to their specific needs. He asked whether this meant that on the credit side there was no distinction.

The Director of Research responded that the point being made there was that these things were a continuum, and it could be very difficult to draw any line. Maybe the best thing to do was not to draw a line at all but to disaggregate and let users decide how to interpret the information.

The Board member noted that there was an interaction between the mezzanine approach and the strict liability approach with respect to the fact that in both approaches there was the potential for users to decide what was included in equity. He noted that secondary equity (under the strict obligation approach) would be included in the mezzanine, and the mezzanine could be treated at the discretion of users.  Accordingly, he suggested that the Board could look further into this concept.

Another Board member made the comment that in regards to the idea of having three categories rather than two the Board seemed to be constrained because they wanted to have only two categories in the statement of financial performance. He noted that the Board should not be opposed to the idea of having three categories because of the current form of the statement of financial performance although he acknowledged that this would become difficult if there were more than three categories.

The Director responded that the mezzanine idea did not necessarily have to be a third category; it could be a subcategory within one of the two existing categories.

Another Board member noted that the idea of a continuum or mezzanine was interesting because the Board was currently trying to fit things into either liability or equity classifications, however, there were many hybrid instruments around now. However, she questioned how much easier it would be to define three categories than two; she also questioned how the Board would get enough information content across so people would understand the concept of a continuum or mezzanine and what it would mean in terms of the nature of claims etc.

The Director noted that when they spoke to users about this topic they were most interested in potential dilution and classification was not really providing them with what they needed to know. Users were wanting more disclosure on what sort of dilution happened in different circumstances – they wanted more a scenario analysis than just a straight classification, which would come from disclosures. The Director acknowledged that current disclosures in this area were underdeveloped, noting that not as much attention had been paid to this area as would have been if it had been included in a separate standard and added that it might be something we might want to look at.

Another Board member noted the strong desire from users for more information about claims and how the equity pool (residual) would be divided up in various scenarios. She noted that this might be beyond what the Board could deliver in this project and noted that users had commented that even just being provided with the workings for EPS would be an improvement in the information they currently had. She acknowledged that this would be standards level detail and so favoured taking a strict obligation approach and including a statement in the Conceptual Framework with regards to the importance of information about claims of different holders classified as equity.

The same Board member further noted that if the focus was more on how to enhance information about changes in claims on recognised equity this could take some pressure off classification. She cautioned about the limitations of using a continuum from a disclosure perspective. She further noted with respect to the idea of keeping things high level that the Board should identify a couple of key issues that would be a challenge that should be addressed at a standards level, in part to make it clear that the Board was not addressing these issues in the Conceptual Framework. She gave the examples of (1) gross vs. net presentation when one had a put on own equity and (2) an issue of shares 'to a value of'.

Another Board member commented on paragraph 20 in staff paper 10M that notes that some users, including many equity analysts and investors, preferred the 'narrow equity approach' and asked whether the Board should do some research on how equity analysts were seeing equity and liabilities.

The Director responded that there was some research on how capital markets valued different instruments and there had been comments that items valued like equity should be classified as equity and vice versa for liabilities. However, he noted that this was not the basis for the existing distinction, which was based on whether there was an obligation to transfer resources. He further noted that classification based on a valuation perspective was not the way to go because there was value in knowing whether there are obligations to be paid out of the company.

The Director noted that it was not surprising that equity investors preferred the narrow equity approach because it was an approach that focused on their interests. He further noted that there was some information that related to an entity as a whole and other information that related to different categories of equity holders; there were too many dimensions to this problem to deal with it as a binary classification on the balance sheet.


Measurement (Paper 10G)

This paper summarises feedback received on the measurement section of the Discussion Paper, and Capital Maintenance.

A Board member referred to paragraph 61 in the Staff Paper regarding feedback received on capital maintenance and asked for clarification on this comment.

A staff member responded, noting that there was a general comment that the issues of measurement and presentation and OCI should be considered together as a package because this might give some insight into what should go into various parts of the income statement. The staff member noted that the idea behind the comment in paragraph 61 was that some things that were currently revalued or remeasured, depending on the chosen concept of capital maintenance, should not be included in comprehensive income but reported outside comprehensive income – whether in equity or elsewhere.

The Board member noted that they had OCI but no direct capital charge at the moment – and made the comment that he believed some OCI items should be charged directly to capital. He further noted that if the capital maintenance discussion was abandoned this would impede discussions on OCI. He stated that the Board should look further into this issue rather than maintaining current wording.

A staff member noted that in the existing standards there was a general implicit capital maintenance objective and that the staff were working on the principle of 'do not change things that do not need fixing'. The staff member noted that the decision was made to retain the current concept of capital maintenance for the purposes of the Conceptual Framework project and revisit when dealing with inflation in the future.

A Board member made the comment that to explore capital maintenance at this stage would take a long time and take attention away from other areas of the project that needed to be addressed now.

In response to a comment by a Board member the staff member noted that the concept of capital maintenance was not taken out because it would have resulted in too much work to justify taking it out – so it was decided that the safest approach was to keep it in.

There was general consensus that capital maintenance should be left alone.

Another Board member noted the feedback comment received that was included in paragraph 57e of the staff paper that suggested that the measurement section should include discussion of (a) Foreign currency translation and (b) Equity accounting. He asked the staff whether such items should be included in the measurement section or not.

The staff noted that the reason these topics were omitted from the Discussion Paper was because they are isolated issues that would need to be dealt with at a standards level anyway.

Another Board member noted that based on the comments received they were in support of the Board not trying to do anything on capital maintenance in the Conceptual Framework project but suggested that the Board could maybe document in the Basis for Conclusions a comment that “the Board decided not to try and assess at the Conceptual Framework level at this time how the concept of capital maintenance may alter the choice of a measurement basis that we will discuss in the Conceptual Framework in a general way without regard to consideration of capital maintenance”.

The Board member commented on the measurement chapter generally, noting that the Board should aim to include some high level concepts in the Conceptual Framework and acknowledge that this section was not as developed as other sections and, further, should not delay the Conceptual Framework project because of this area.


Presentation in the statement of comprehensive income – profit or loss and other comprehensive income (Paper 10I)

This paper provides a summary of the feedback received on Section 8 of the Discussion Paper that discusses presentation in the statement of comprehensive income – profit or loss (P&L) and other comprehensive income (OCI).

A Board member commented on the fact that people said profit or loss was the primary indicator of performance yet nobody actually knew what profit and loss was; therefore, if profit or loss were to be defined differently, would it still be the primary indicator of performance? 

Another Board member noted that the definition in most people’s minds was very clear – 'money in, money out – turns into a profit'; the problem would arise when accounting entries came in.

Another Board member remarked on a comment letter they had read that said 'do not even try to define OCI because OCI is and should be an exception'. He noted that OCI was used to solve some accounting quirks such as cash flow hedges and currency translation; profit or loss was everything else and should be as inclusive as possible rather than the Board coming up with an artificial definition of what profit and loss was.

Another Board member commented on the fact that there was a lot of interaction between measurement and OCI and that these should be discussed together. She noted that one was not a consequence of the other but there was a lot of natural interaction between the two.


Chapter 1 and chapter 3 of the existing Conceptual Framework (Paper 10J)

This paper summarises the feedback received on the paragraphs discussing Chapter 1 and Chapter 3 from Section 9 of the Discussion Paper.

A Board member noted that if an entity’s financial reporting was reliable enough prudence would not be needed. He asked if prudence was a substitute for when one could not be reliable.

A staff member responded, noting that prudence and reliability were closely linked and that if one was prudent then the financial statements would be more reliable.

The Board member noted that prudent financial statements were not necessarily more reliable. Prudence was being conservative, which was a form of bias and was really only appropriate when there was a lot of uncertainty.

Another Board member noted that the previous concept of prudence focused on circumstances of measurement uncertainty.

The staff member noted that the feedback received indicated that there were very mixed views of what prudence was.

The suggestion was made by a Board member that the Board should work on reliability first, which might help with prudence as the need for prudence was reduced if numbers were reliable enough. He noted that the order these things were approached might make a difference, i.e. look at reliability first and then prudence if there were doubts about how reliable something could be. 

There was a discussion on stewardship, with a Board member asking whether people who were supporting stewardship were wanting more information about the past.

The staff member responded saying yes, but also pointed out that providing the information needed to make decisions was in some cases slightly different to the information needed to assess stewardship.

Another Board member noted that given financial statements were inherently backward looking, they were very much an indicator of the performance of current management and current performance was the best indicator of future performance. Accordingly, stewardship was very important for providing useful information whether or not to invest in a company. 

A Board member noted that he did not want these notions to start overriding the standards and that there was a risk that these notions could lead to subjectivity.

In response to the comment made by the previous Board member, another Board member noted that he had seen the true and fair view override standards in some jurisdictions and agreed that the Board needed to be careful.

A further Board member noted two statements regarding prudence that were contradictory and noted that the Board needed to reconcile these. He noted that if the Board did not believe that the exercise of prudence was inconsistent with neutrality it should be put in back in.  Conversely, if the Board did believe that prudence would be inconsistent with neutrality it should not be included.


Feedback summary: user outreach (Paper 10M)

This paper summarises the feedback that the staff and the IASB received from investors and analysts on the Discussion Paper.

The Director of Research noted that, in general, there was a very low level of understanding of OCI amongst users and noted that even if nothing was changed regarding OCI more explanation on what OCI was trying to do would be helpful.

A Board member commented that there was a need to be extremely careful with what was included in OCI because a lot of people stopped looking at items when they are in OCI.

The Board member noted that it might be time to revisit the definition with better wording if the Board wanted people to understand what OCI was.

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