Conceptual framework

Date recorded:

The Technical Principal informed the Board that staff had discussed the measurement and long-term investment parts of the Conceptual Framework project with ASAF members. A summary of the comments raised by ASAF members could be found in the Cover Paper. The Cover Paper also included a discussion of the interaction between the Disclosure Initiative and the Conceptual Framework.

The Vice-Chairman expressed discontent with the comment made at the ASAF meeting that some updates seemed to be based on current thinking and existing standards-level projects rather than on the development of underlying concepts. He asked whether there was any evidence of that.

One Board member asked whether it would be discussed in the Basis for Conclusions of the Framework why the impact of the business model was limited and why it did not override other measurements. The Technical Principal said that the BC had not yet been drafted but that staff considered explaining around the business model. The Research Director said that it would be stated that the term 'business model' had many meanings and had therefore been avoided.


Measurement – Measurement bases

The Technical Principal said that this was the third draft for the discussion of measurement bases. She reminded the Board that they had made many decisions with regard to factors that needed to be considered when selecting a measurement basis. The appendix to the agenda paper gave an analysis of which measurement basis provided which information and of the features of different measurement bases.

She continued with the changes that had been made compared to the previous agenda paper on measurement bases that had been discussed at the September meeting. The first change was the classification of measurement bases as either current or historical cost. She said that first comments on the current paper had indicated that current measurement should be renamed current value measurement. Current value measurement bases included fair value, fulfilment value, and value in use. The difference between those three was that fair value had a market participant perspective, whereas fulfilment value and value in use were entity-specific measurements. The reference to entry vs. exit values and current cost had been removed due to the comments raised in the previous IASB meeting. As regards current cost, one paragraph remained, describing under which circumstances it could provide more relevant information than historical cost. In addition, the description of net realisable value had been removed.

The Technical Principal continued by saying that staff proposed significant changes to cash flow-based measurement techniques. Staff now included them in current value measurements, but the Technical Principal expressed reservations with that conclusion. A solution might be to move cash flow-based measurements into a separate section whilst making clear that it was not a separate measurement basis. Also, much of the discussion on the factors that needed to be considered when selecting a measurement basis had been removed.

She asked the Board whether they supported the changes made and whether they had additional comments.

One Board member expressed concerns about changing current measurement to current value measurement as it could be misinterpreted as fair value by some.

Another Board member proposed to properly describe the main features of measurement bases instead of using examples. He said that examples were important, but they should merely be secondary to a description. He also had concerns about showing fulfilment value as purely current. He agreed with the staff's recommendation to describe cash flow-based measures as a separate technique making clear it was not a third category; however, he objected to the proposal to change current measurement bases to current value measurement bases.

A Board member had a question as regards historical cost. The paper stated that historical cost was adjusted for consumption and impairment. He asked whether those were the only reasons why historical cost could be adjusted. The Technical Principal said she could not think of any other reason. The Board member said that translation could be a factor, depending on whether it was a part of measurement. He conceded that it was not part of the Conceptual Framework project but proposed not to make the list of adjustment factors look exhaustive. A fellow Board member agreed.

The Board member also asked what the intention of staff had been when writing that value in use might not be a practical measurement basis for periodic measurements of assets used in combination with other assets. The Technical Principal replied that this was supposed to reflect the practical problems with value in use, i.e. allocating the value in use to an individual asset and not taking into account synergies. The Board member said that it could be read as generally constraining cash flow-based measurements.

A Board member had a question on the reference in the agenda paper that fulfilment value did not normally reflect own credit risk. He said that this had not been discussed and asked the Technical Principal whether this had been taken over from the insurance project. The Technical Principal confirmed that. The Board member asked what 'normally' meant. He said that it would not be of much help if the Board needed to make decisions about own credit. The Research Director said that fulfilment value could be defined either way, including or excluding own credit. His understanding was that the Board did not want to include own credit in measures other than fair value. The Board member said that, sometimes, own credit was not observable but was nonetheless included in the initial measurement of a liability. He said he could agree with what was proposed in the paper as long as it was explained. However, the reference that market and entity-specific values were similar would have to be amended because of own credit.

One Board member cited the reference in the agenda paper that in most cases, there was little reason to assume that market participants would use estimates different from those used by the entity. He said that this was a rather strong statement and that he could think of several reasons why the entity would use different estimates than those used by the market. The Technical Principal agreed and said that staff thought about unique assets when drafting this reference but would be happy to redraft.

A Board member said that it should be clarified that fair value, fulfilment value, and value in use were not the only examples of current measurement bases. The Vice-Chairman agreed.

A fellow Board member expressed concern about stating that historical cost had predictive value. She thought that was a strong expression and suggested redrafting. She also said that changes in interest rates could include changes in the price of risk, which market participants would require being compensated for. She therefore suggested not mentioning those two separately to avoid a conflict with IFRS 9.

One Board member said that the Framework should not be too neutral with regards to measurement. A fellow Board member agreed by saying that the Board might have to take some decisions for the Framework to be useful in the standard-setting process. She appreciated that the current paper had a reduced number of variants compared to the previous one. She also said that the Basis for Conclusions should explain why assets used in conjunction were not measured at current value, i.e. because information on the cash flows was more relevant for those assets. She then continued by saying that the discount rate might, but would not necessarily, have to incorporate risk factors. The Board member who had raised the concern before, replied that she did not disagree but that she demanded consistency with IFRS 9.

One Board member agreed with the staff paper but made reference to the section where it was stated that possible variations in the amount and timing of cash flows should be reflected in cash flow estimates. He said that when using a 'best estimate' technique, variations would not be considered.

Another Board member said that the circumstances in which historical cost was used should be clarified. It needed to be clear that historical cost should not merely be used because it created a steady measure. In his view, the circumstances included stable prices and the fact that cost approximated transaction price. The Chairman agreed by saying this should be mentioned in the section where the Board explained that historical measures were sometimes more useful than current measures. The Board member continued by saying that the presentation and measurement sections of the Framework should be interlinked. He said that with current measures, historical cost should always be disclosed to provide the best estimate of cash flows.

One Board member said that there were many variables in measuring a liability, for example entity-specific vs. market-view, own credit, risk adjustment, profit margin, etc. This led to many possible compositions of liabilities. He said fulfilment value should therefore be defined like value in use. The Technical Principal agreed that it would be helpful to have a definition; however, she believed that this would be a long discussion and was concerned that on a standards-level, the discussion would arise again when discussing whether the fulfilment value should be adjusted in particular circumstances. The Research Director said that the definition of value in use would not provide all answers either and that the answers needed to be given on a standards-level (i.e. IAS 36). He said that, nonetheless, staff could try defining fulfilment value. The Chairman proposed doing that and asked what that meant for the process. The Technical Principal said that they could bring back a new staff draft for the November IASB meeting. The Chairman agreed.

A Board member expressed concern that the Framework would then have different levels of detail as cash flow-based measures would not be defined. In response to that, the Chairman advised the staff to keep the definition of fulfilment value on a high level. The Research Director replied that the paper already contained a high level definition of fulfilment value, being the present value of cash flows estimated to arise in fulfilling the liability. He said that this was the same level as value in use in IAS 36. The Technical Principal was concerned that refining this definition would lead to an overly detailed definition. The Chairman acknowledged that but suggested including the spirit of the discussion in the next staff draft nonetheless. The Technical Principal agreed and said that this would be a sweep issue. The Chairman refrained from calling a vote given the general acceptance of the paper in the discussion.


Summary of potential inconsistencies between the existing standards and the Conceptual Framework Exposure Draft

The Technical Associate said that the agenda paper showed the implications of the revised Conceptual Framework for existing standards. She said that the Board had already discussed some of those implications. Staff recommended highlighting the potential implications in the Basis for Conclusions on the Exposure Draft. It should be made clear that the Framework did not override existing standards and that any standard changes needed to follow due process. She also said that preparers who used the Framework to develop an accounting policy due to lack of standard guidance (IAS 8) would be immediately affected by changes to the Framework.

She continued saying that staff had identified standards with inconsistencies to the revised Framework. These were reclassification requirements in IAS 32 and recognition requirements in IFRIC 21. Minor inconsistencies included standards that quoted asset and liability definitions but the staff did not see any application issues for those standards. They also included standards that did not state a disclosure objective or included a requirement of using forward-looking information unrelated to assets or liabilities at the end of the period. She said that changes to the Framework could have an impact on current projects, e.g. emission trading or rate-regulated activities. On the other hand, she said that some existing inconsistencies would disappear with the new Framework.

The Vice-Chairman said he agreed with this summary but strongly disagreed with some of the proposals suggested in the subsequent papers. He said that, currently, the Board was only deliberating an Exposure Draft  and, therefore, it seemed premature to him to think about changing the term reliable in the standards, as redeliberations on the Exposure Draft might bring the term back. A Board member shared the concerns and said that she agreed with adding the summary to the BC on the Exposure Draft, but would not agree with adding it to the final BC on the Framework. Another Board member disagreed with the Vice-Chairman's view and said that the Exposure Draft should be the Board's firm belief of a Conceptual Framework and, therefore, the Board needed to inform constituents about consequences for the standards if the Exposure Draft would be finalised as drafted. The Vice-Chairman pointed out that he agreed with the staff recommendation as regards highlighting issues in the BC and only had problems with the detailed amendments proposed to the standards.

The Chairman assumed that everyone agreed with the staff recommendation. Nobody objected.


Proposed amendments – Updating references to the Framework

The Technical Associate explained that several standards still referred to the old title of the Framework (i.e. 'Framework for the Preparation and Presentation of Financial Statements'). These references had not been updated when the title had been changed to Conceptual Framework for Financial Reporting. Staff recommended updating those references with the publication of the new Framework. The Technical Associate summarised the detailed proposals as laid out in the appendix to the agenda paper. The staff also recommended allowing a transition period of at least 18 months.

One Board member said that the Board had stated previously that they would not change any standard as a result of the transitioning to the new Framework. Being under this impression, he was confused as to why staff did now recommend making changes to standards. He understood that references needed to be updated but found it difficult where to draw the line. A Board member disagreed and said that some changes were necessary in his view. The Chairman supported that and said it was merely a technical issue to update references.

One Board member said he disagreed with the staff's view that updating the references had no significant effect. For example, updating the reference in IFRS 3 led to a different definition of assets and liabilities, which, in turn, could lead to a different recognition of assets and liabilities in a business combination. The Research Director said that whilst the changes could be significant for some, most constituents would only see marginal changes.

A Board member asked whether the amendments would be proposed in an Exposure Draft that was separate from the Exposure Draft on the Conceptual Framework. The Technical Principal confirmed that but said that both drafts would be issued at the same time and with the same comment period.

A fellow Board member repeated his concerns that the amendments would not be consequential only. He asked whether IFRIC 21 would still continue to apply under the changed liability definition in the Framework. A Board member confirmed that because standards and interpretations overruled the Framework. Another Board member agreed with the view of the former Board member, but pointed out that if no amendments were made, a debate would start as soon as the revised Framework would have been published.

Upon calling a vote, eleven of the 14 Board members voted in favour of changing the references to the Conceptual Framework.


Proposed amendments – Clarifying the term 'reliability'

The Technical Associate informed the Board that the staff had previously noted that the term 'reliability' was used in different ways in the standards. On one hand, it was used consistently with the existing Conceptual Framework to mean that there was an acceptable level of measurement uncertainty associated with an item. On the other hand, it was used consistently with the previous version of the Framework. That version had defined reliability as encompassing freedom from error, neutrality, prudence, completeness and substance over form. The term 'reliability' had been replaced with 'faithful representation' in the revised Conceptual Framework.

Where the term 'reliability' referred to a qualitative characteristic of financial information, staff recommended replacing it with the term ‘faithful representation’. The proposed transition period for these amendments would be at least 18 months. No changes were proposed for the instances where reliability referred to an acceptable level of measurement uncertainties.

The Chairman asked whether staff would still propose these changes if the IASB were not to change the Conceptual Framework. The Technical Associate confirmed that.

One Board member said that she did not disagree with the analysis performed by staff but that she would refrain from making changes at this point. This also included the changes proposed to IAS 1 and IAS 8. She said that IAS 1 and IAS 8 would probably be rewritten under the principles of disclosures project and suggested suspending the proposed changes until then. In her view, the proposed changes were not consequential.

A fellow Board member was concerned that the existing standards used one word with two meanings. He suggested fixing this problem swiftly outside of the Conceptual Framework project. The Vice-Chairman disagreed and said that the debate around reliability was still ongoing amongst constituents. The Chairman supported this and said that it would not be wise to end the discussion abruptly by proposing changes to the words. A Board member agreed and said that in his view, it was contradictory to propose amendments at the same time when the Board invited for discussions on the Framework, which could include discussions on the term 'reliability'.

A Board member said that the distinction between the two meanings of reliability as set out in the paper was not quite clear to him. A fellow Board member agreed and said that with many of the examples in the agenda paper where staff found that reliability meant measurement precision, he was of the opinion that it meant faithful representation. Not changing those instances would, thus, change the meaning of the standards, because after the amendments reliability would always equal measurement precision where in his view it should still be faithful representation. He suggested replacing 'reliability' with 'faithful representation' prospectively and leave the current references as they were. He asked why it was assumed that the IASB, when developing those standards, did not mean reliability as defined in the Framework that existed at that time. The Technical Principal replied that when she looked at the examples in the agenda paper, she said it was not possible to replace reliability with its definition in the previous Framework. She said that reliable in connection with measurement could not be replaced with faithful representation. The Board member disagreed. He said 'reliably measurable' meant that the measure was a faithful representation. He also said that before issuing the new Conceptual Framework, it should be absolutely clear what the Board meant with reliability and faithful representation. One Board member asked when this should be discussed. The Chairman said it would be imprudent to start the discussion now and said that the Exposure Draft would not propose changes in this respect.

When called for a vote, all Board members were in favour of putting the proposed amendments on hold.


Due process summary for the Conceptual Framework Exposure Draft

The Senior Technical Manager opened the discussion on the agenda paper by summarising the due process steps and concluded that the IASB had undertaken all required steps. She asked the Board whether they agreed. All agreed.

She then asked whether staff was granted permission to start the balloting process on the Exposure Draft. All agreed.

The Senior Technical Manager continued by asking whether any of the Board members intended to dissent from the Exposure Draft. One Board member considered dissenting from the proposed changes to the definition of a liability. She said it did not give the Board sufficient tools to answer outstanding questions on IAS 32. A fellow Board member considered dissenting from the OCI discussion, depending on the drafting. He also said that he would dissent from reliability if it was defined as measurement precision. The Technical Principal said that after the decisions taken earlier in the meeting, the issue around reliability would not be addressed in the Exposure Draft. The Board member replied that not addressing the issue might not be appropriate either. One Board member expressed concerns about the debt/equity distinction. He preferred to have something between liabilities and equity, but he conceded that this issue would not likely lead to his dissent from the Exposure Draft. A Board member said he was concerned with the word 'prudence'. He said it should be ensured that it was not purely read as 'no overstatement of assets' and 'no understatement of liabilities' but rather as 'neither overstating nor understating assets and liabilities'. Whilst the definition of a liability was not a problem for him, he said that the definition of OCI and the discussion on historic measurement versus current measurement could both be improved. He was concerned about a Framework that was anchored in historical cost and, therefore, anchored in the past. One Board member and the Chairman asked how OCI could be improved. A Board member proposed to remove the rebuttable presumption that all items of income and expense should be recycled.

The Senior Technical Manager continued by saying that the comment period needed to be at least 120 days due to the due process handbook. Staff noted that the Framework would have a profound effect on standard-setting and, therefore, suggested a longer comment period of 150 or 180 days.

One Board member said that 180 days would allow enough time for the Exposure Draft to be translated. A fellow Board member agreed with the 180 days because he did not want to make it look like the Board was in a hurry to finalise the Framework. Also, the holiday season of the Northern hemisphere should be taken into account when looking at the end of potential comment period. One Board member disagreed and proposed 150 days as it was the second round of consultation after the Discussion Paper, and therefore 150 days were sufficient in his view.

Upon taking a vote, nine of the 14 IASB members voted in favour of a 150 days period.


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