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Conceptual framework

Date recorded:

Measurement – Measurement bases

The Technical Principal opened the session by explaining that measurement had been discussed at the last IASB meeting and the Board had asked staff to bring back a staff paper that encompassed fewer categories of measurement bases than the last paper. A description of cash-flow-based measurement technique was also included in the agenda paper.

The first change staff had made was categorising measurement bases as entry value (i.e. information about the input on an entity’s business activities) or exit values (i.e. information about the output of an entity’s business activities). For example, if entities wanted to inform users about margins, they would report entry values to enable users to calculate the margin as the difference between the entry value and the sales price. If the entity wanted to present the value of an asset or a liability, exit prices were more appropriate. The difference between entry and exit values was similar to the difference between historical cost and current value.

The second change was to reduce the number of measurement bases described. Replacement costs and assumption proceeds had been combined to ‘current cost’ to achieve this. Similarly, historical cost and historical proceeds had been combined to ‘historical cost’. The staff had struggled to reduce any further but mentioned current cost as a possible elimination, albeit not recommending eliminating. Another possible (however not recommended) elimination was value in use as it was only used to calculate impairment for historical cost and, therefore, an entity-specific exit value.

A Board member disagreed with value in use being an exit value as it represented the value that was realised through using the asset. The Technical Principal replied that using the asset was seen as a form of exit in the paper. The Board member suggested using the term ‘realisation value’ to clarify. The Vice-Chairman disagreed with the suggestion and supported the staff’s view. A Board member said that she thought entry meant ‘acquisition’ and exit meant ‘consumption or disposition’. The Technical Principal confirmed that.

She then continued by explaining that staff had problems to categorise amortised cost as it was neither clearly a historical nor a current measurement basis and neither clearly an entry nor an exit value. It combined elements of all categories. It was therefore not featured in the description of different measurement bases in Appendix A of the agenda paper but in Appendix B where cash-flow-based measurement techniques were described.

One Board member asked whether this also applied to amortised cost of fixed assets. The Technical Principal replied that this would not typically be called ‘amortised cost’ but ‘historical cost’. He disagreed by saying historical cost was the price that was paid at acquisition. The Technical Principal replied that historical cost would include depreciation and amortisation in the staff’s view. What was described by the Board member was the transaction price.

The Chairman said that the Board had asked to reduce to two categories. However, he believed that had not been achieved as there were customised measurement bases outside the two categories.

The Executive Technical Director said that in his view amortised cost would be the same as value in use. The Technical Principal disagreed as, in her view, value in use was a current measure whilst amortised cost was not.

One Board member said that, in his view, the fulfilment value used in the insurance model was another customised measurement basis. He said that this was an example of how industries pressured the IASB to develop such customised models. He referred to the list of factors in the agenda paper that should be considered when using a cash-flow-based measurement technique and suggested adding a discussion about why customised measurement techniques were often used. The Technical Principal said that this would be a separate discussion. The Board member agreed but still thought it belonged in that section. He conceded that it was perhaps acceptable for it not to be in the list of factors he referred to.

The Chairman said that if the third category was needed in the staff’s view it should not be put in an appendix. The Technical Principal said that it was only in the appendix for this agenda paper but that they intended to include customised measurements in the main body of the Exposure Draft. The Chairman asked why staff saw amortised cost as a customised measurement. The Technical Principal justified that with the lack of a conceptual basis for amortised cost. She said that in the staff’s view the Framework should contain concepts for measurement instead of a mere list of commonly used measurement bases. On these conceptual grounds, measurement bases could then be customised.

A Board member agreed but had problems distinguishing between historical and current cost. As an example he gave a fixed asset in a foreign subsidiary which was measured at historical cost but translated at a current rate. The Vice-Chairman replied that this would be a combination of the two. The Technical Principal said that foreign exchange was deliberately not discussed in the agenda paper as this was a standard-level decision. The Board member disagreed and argued that IAS 21 talks about measurement when translating and, therefore, it needed to be discussed.

Another Board member said that amortised cost, in his view, was historic cost and therefore not customised. Increases to amortised cost were capitalised interest and any decrease was a return on capital. Prepayments in his view were a ‘catch-up’ adjustment. He believed that there was no difference between amortised cost and historic cost as both were conventions. The Chairman asked whether this also applied to the insurance model. The Board member negated that. Another Board member agreed with that and said she would see it as a cost-based measurement. It was difficult for her to imagine a Conceptual Framework that did not include amortised cost as a measurement basis. A fellow Board member said that measurement rules were full of conventions, for example, if the useful life of a fixed asset changed, the depreciation plan would be changed only going forward whilst when cash flows changed with a financial asset, the measurement basis was changed retrospectively. Another Board member said he saw amortised cost as a bundle of rules. The Research Director pointed out possible difficulties in working a definition of amortised cost without referring to interest.

One Board member said he still preferred the original categorisation of the Discussion Paper, i.e. three categories. He said that amortised cost was a subcategory of cost. The Chairman asked what he would see in the third category then. The Board member replied that the third category would be a residual to him, comprising all the measurement bases that were difficult to categorise. When the Chairman asked for an example he said he would have to think about one. The Technical Principal reminded the Board that the third category in the Discussion Paper was cash-flow-based measurement bases. She asked the Board member if he suggested this would be the same and would be used for insurance liabilities, for example. The Board member agreed. Another Board member suggested that the third category could be ‘different types of current’.

One Board member asked what the basis for cost was. She asked whether this only comprised transaction cost or also depreciation and impairment. She said the Board should focus on the primary objective of measurement for the Conceptual Framework instead of categorising.

A fellow Board member agreed with amortised cost being a separate category but highlighted that the definition was different for a financial instrument and an intangible asset, for example. He also said that language should be simplified for preparers and field auditors as they would not necessarily know what entry and exit values were. He further said that amortised cost could only be applied from day 2 as day 1 would always be fair value plus transaction cost. The Technical Principal said that this was a question of definition and the whole measurement (including day 1) could be seen as ‘amortised cost measurement’. The Board member noted that this would be worth discussing in the paper. The Vice-Chairman asked whether day 1 should not rather be historical cost.

One Board member said that the Board should give staff a clearer direction on whether the proposed two-category model needed refinement (i.e. adding a third category for ‘residual’) or whether they should redraft to return to the three categories of the Discussion Paper. He expressed preference for the latter. He also asked in which category inflation-adjusted components fell.

Another Board member said, whilst agreeing, he found the reference to entry and exit prices being equal in the same market confusing. He said that for input, entry values mattered and for output, exit values mattered. So, as an example, for a purchase price allocation he would use input (i.e. entry values). He wondered why IFRS 3 did not use entry prices as a consequence. Also, he asked if a car was bought in a showroom for $50,000, what the entry and exit values would be once it was out on the street. The Technical Principal replied regarding IFRS 3 that both, current cost and fair value, would make sense. She said that in many cases there would not be a difference between the two. The Board member said that the concept in IFRS 3 was rather one of replacement cost. He said that entry and exit prices would conceptually always be equal. He was concerned that this discussion could be confusing with regard to IFRS 13.

A fellow Board member supported the two categories but would be fine with subcategories. He would prefer using ‘historical’ and ‘current’ to ‘entry’ and ‘exit’. The Chairman agreed and said that the Board should not include something in the Framework that was purely theoretical in nature and had no links to the standards. He also warned that going back to three categories would produce the same responses from constituents as were received in response to the Discussion Paper. He would subsume amortised cost under ‘cost’.

One Board member suggested starting the chapter with considerations, followed by a brief description of the characteristics of measurement bases and then describe the main characteristics in depth. The Chairman objected and said this would be too complicated.

The Technical Principal suggested describing the two categories and then allocating the measurement bases to them, e.g. historical cost and amortised cost in ‘cost’. She said that staff had not done that for this paper as it lacked a conceptual basis and had therefore introduced the ‘entry value’ vs. ‘exit value’ discussion. She noted that the Board was unhappy with this discussion and therefore suggested removing it. The Chairman agreed and said that this was a good basis for the Framework chapter. The Technical Principal asked whether the rest of the Board members agreed with that and whether they wanted amortised cost to be allocated to the cost category. A Board member asked why it needed to be allocated at all, as there was ‘pure’ cost, ‘pure’ current and many hybrids.

The Technical Principal asked whether it would help the Board having clear objectives to make decisions on a standard-level easier. The Vice-Chairman replied that this would be discussed in the next paper.

The Technical Principal summarised that what she thought the Board asked was to bring back a paper that had two measurement categories: cost and current. Within those, describe points that needed to be considered (e.g. entity-specific vs. market, etc.). A Board member warned that there should not be an exhaustive list of measurement bases but rather examples for each category. One Board member summarised that current measures were ones that were not influenced by the original cost whilst cost-based measures were always affected by the original cost. The Board then discussed whether it should be current cost, price or value, but the Vice-Chairman advised them not to focus on the wording. He said that current cost was a widely used term and it should not be changed for the Framework.

 

Measurement – Use of a single or default measurement basis

The Technical Principal reminded the Board that it had decided that it did not want to perform extended research on measurement, including the different approaches proposed by respondents to the Discussion Paper. One of the approaches had suggested the use of a single or default measurement basis. However, the Board had asked for an agenda paper that described the approaches proposed by respondents. This agenda paper discussed the advantages and disadvantages of those different approaches. Also, it contained the approach proposed by the AASB to include an ideal concept of wealth. Single measurement bases included historical cost, fair value, current entry values and deprival or relief value. The Technical Principal asked the Board whether they had comments or whether they wanted to explore one of the approaches further.

One Board member said the reference in the agenda paper that historical cost was less expensive and complex than fair value applied only to pure cost. Any adjustment to the cost concept could be even more expensive and complex than fair value.

The Vice-Chairman said that the Framework should be aspirational and, therefore, it should strive for one measurement basis only. He conceded that constituents could interpret this part of the Framework as an aspiration for fair value. In his view, this would not be completely wrong, as historic cost could not be used for all items in the financial statements. He therefore preferred striving for a form of current measurement. He said that deprival cost worked very well for the Australian government in the past decades. One Board member replied that, in his view, the mixed measurement model was not broken so he would not suggest fixing it. He was concerned that a single measurement model would not be simpler as there were different types of assets in the balance sheet. A fellow Board member agreed. He said it would be difficult to justify another type of measurement in the Basis for Conclusions in a standard if the Framework stated that aspiration was for one measurement basis only. One Board member added that the mixed measurement model was much easier to apply as different assets were purchased for different purposes and, therefore, the measurement should be different. The Chairman said that the AASB had, in fact, proposed a mixed measurement model. The Vice-Chairman said that he saw a single model work, and economically, only current cost was relevant. He explained that this was the reason why national statistics offices around the world were only interested in current cost. A Board member asked whether economists had the same information needs as investors. The Vice-Chairman conceded that they might not have identical needs but the general needs were similar.

The Chairman summarised that the Board did not wish to proceed with a single measurement basis.

 

Measurement – Selection of a measurement basis

The Technical Principal introduced the agenda paper and reminded the Board that they had made some decisions on the selection of a measurement basis. She said that the agenda paper continued to support a mixed measurement model. She pointed out that this had been the proposed model in the Discussion Paper and that it had received broad support from respondents.

One Board member said that whilst he did not support a single measurement model in general, there might be circumstances in which it was appropriate, e.g. on liquidation. The Technical Principal replied that the paper encompassed such situations. Another Board member said that it was not necessary in his view to make an explicit reference to such situations.

A Board member referred to the part of the agenda paper where it said that the IASB needed to consider the assessment of investors how an asset or a liability would contribute to future cash flows when selecting a measurement basis. She was concerned that this could imply that management’s assessment on this might be irrelevant. The Chairman shared this concern.

The Technical Principal said that this was part of question 2 and opened the discussion on that question. She said that respondents to the Discussion Paper had showed broad support for selecting a measurement basis that was based on an assessment how an asset or a liability would contribute to future cash flows. She therefore suggested carrying forward this reference to the Exposure Draft, together with the reference that this was only one of the factors to consider when selecting a measurement basis and that the importance of each of the factors depended on the facts and circumstances. She asked the Board members whether they agreed.

The Chairman agreed and suggested the reference be made more objective by removing the reference to investors, creditors and other lenders from the proposed wording.

The Technical Principal summarised that the Board was content with the staff recommendation if the reference to investors, creditors and other lenders was deleted.

She moved on to question 3 where staff asked the Board whether they agreed with the Exposure Draft stating that the way in which an entity conducted its business activities should be considered when deciding how an asset or a liability contributed to future cash flows. She also asked whether they agreed that the Conceptual Framework should not refer explicitly to any specific business activity, although this had been proposed by respondents to the Discussion Paper. She said that respondents also thought that referring to the business activity could help improve the relevance of the financial statements. She conceded that some respondents had expressed concerns with regard to management intent.

One Board member asked whether staff intended addressing accounting mismatches, as the business model played a role in those as well. The Technical Principal replied that this had been included in one of the decisions made in July.

A Board member disagreed with the staff’s recommendation and said that business activities were a pseudonym for business model which in his view led to the ‘management intent’ problem. He conceded that IFRS 9 used the business model with regard to measurement but hoped that would stay an exception. A fellow Board member disagreed and said that financial reporting was also about the reporting of business activities. He then referred to the reference in the agenda paper where staff had stated that, as an example, non-financial institutions would normally repay their financial liabilities in accordance with their contractual terms rather than seek to transfer them to a third party. He asked whether the intention was only to cover ‘normal’ scenarios in the standards or if ‘abnormal’ scenarios should also be discussed. The Technical Principal said that this was generally the case but she could think of situations where also ‘abnormal’ outcomes would be covered.

One Board member asked the Technical Principal to confirm that not the fact that an entity was a lender influenced the measurement but the fact how the lender managed its financial assets. The Technical Principal confirmed that.

A fellow Board member agreed with the staff’s recommendation. He made reference to the FRC’s comment about management intent. The FRC had said that an asset should not be written down simply because management intended to use it in a sub-optimal manner. He believed that if management used an asset in a sub-optimal way, this should be reflected in the financial statements as the asset produced less cash flows.

One Board member expressed concern about the wording in the agenda paper that a business activity was entity-specific. He was concerned that the Framework might conflict with standards. Standards described a certain measurement but if an entity conducted its business differently, it could be derived from those words that the measurement was different. The Technical Principal replied that the guidance was directed at the Board when selecting a measurement basis. The Board member then suggested deleting the reference to the entity and merely say ‘business activities should be considered …’. Supported by the Chairman, the Technical Principal agreed.

A Board member suggested merging questions 2 and 3 by saying that how an asset or a liability was used in the business activity should be considered when selecting a measurement basis. Everyone agreed.

The Technical Principal said that question 4 regarded the interaction of the selection of a measurement basis and the use of other comprehensive income. She reminded the Board that they had taken several decisions on OCI and that it should be restricted to items of income and/or expense or components of income and/or expense that were derived from a change in current measurement of an asset or liability. The IASB had decided that the use of OCI enhanced the relevance of financial statements. OCI could be used when the IASB decided that one measurement basis was appropriate for the statement of financial position and a different measurement basis was appropriate for the statement of profit or loss. The agenda paper discussed when such dual measurement could be appropriate. She asked the Board whether they agreed to state in the Exposure draft that it would be appropriate when

(a)    the IASB concluded that a current measurement basis provided relevant information in the statement of financial position, but that including a component of the change in the current measurement in OCI allowed the entity to provide better information about an aspect of the entity’s business activities; and

(b)   there was more than one way in which an asset or a liability was likely to contribute to future cash flows.

The Vice-Chairman agreed with (a). As regards (b) he said he did not understand that if, for example, an entity had an asset that was held for two reasons (i.e. appreciation and cash inflows), why not both parts were recognised in profit or loss. The Technical Principal said that there were several ways in practice to present the different kinds of income. A Board member supported the Vice-Chairman and said that this should be linked to the OCI decision as there were other ways to disaggregate. The Technical Principal confirmed that this was the case.

A Board member said he did not agree with (a) and (b) as they were too specific considering that there were three conceptual bases to use OCI. He said that OCI could only be used if it provided more relevant information. However, this information could be provided by a different disaggregation. The Chairman said that the use of OCI could only be defended by stating that it provided more relevant information.

One Board member suggested reducing the discussion and agreed with (b) as one example when dual measurement was appropriate. She said that (a) was basically a recapitulation of the Board’s discussions and, therefore, did not serve a great purpose in her view though she did not disagree with it. The Technical Principal agreed. A fellow Board member said that there was a lot of overlap between (a) and (b) and that they were incomplete, in her view. Agreeing with that, a Board member suggested deleting the reference to the business activities in (a) and making (b) the reasoning for (a) (i.e. ‘because there is more than one way …’).

The Technical Principal said that she needed to think about drafting and that her impression was that the measurement section did not need an extensive discussion on that as it was already portrayed in the OCI section. She said she would include that, occasionally, there was more than one measurement basis and would then discuss how best to present this fact (i.e. disclosure or OCI). The Board agreed.

Question 5 concerned the nature of an asset or a liability and if it was one of the factors that should be considered when selecting a measurement basis. Many respondents to the Discussion Paper had agreed with that, however, some had thought that this was more a standards-level issue. Staff partly agreed with that but suggested an underpinning conceptual basis.

One Board member said that ‘nature’ should be replaced with ‘characteristics’. Another Board member asked whether high variability demanded current value. The Technical Principal said that this would be the Board’s decision. He replied that, for example, crude oil inventory or intangible assets also had a high variability but cost as a measurement basis. The Technical Principal said that they deliberately did not demand fair value for high variability to avoid confusion. The Board member was concerned that this was not enough guidance for future standard-setting. The Vice-Chairman believed that it was not so much the nature of an asset or a liability than the business model that determined the measurement, for examples regards liabilities, he would find the fulfilment value more relevant than the fair value. A Board member replied that users had demanded fair value to be able to see changes in credit risk early.

One Board member agreed with the staff recommendation and said that nature was but one factor, other factors also needed to be considered. No further comments were made.

 

Measurement – initial measurement

The Technical Principal said that this paper addressed two minor issues. She said that one of the issues was to align the terminology with the description of measurement bases and to delete much of the standard-level detail that was in the Discussion Paper. Also, some points on the exchanges of value should be clarified. The other issue was changing the requirement that initial and subsequent measurement should be the same.

One Board member said with financial instruments the initial measurement was fair value and then, if the standard required that, amortised cost was applied from that initial fair value. She asked how this would fit in the context of the paper. The Technical Principal replied that fair value was deemed cost which would be one of the cases were a change of measurement basis would be permitted.

No further comments were made.

 

Implications of long-term investment for the Conceptual Framework

The Research Director introduced the agenda paper. The paper addressed the information that could be provided on long-term investments of the entity and what information about the entity a long-term investor could need. He pointed out that these were two separate questions. He said that government bodies had promoted long-term investment and had considered issues relating to it. He conceded that there was no definition of long-term investment. He asked the IASB whether they agreed that they had sufficient tools in the proposed Framework to make decisions about long-term investments and that no other part of the Framework needed any reference to long-term investments.

One Board member said that when assessing business activities the relationship between assets and liabilities, i.e. how an entity financed its activities, played an important role. Another Board member said that the fair value was different from the fundamental long-term value as it included margins from a small number of people trading. He asked the Research Director how the Framework would be dealing with that. He replied that he would see the discussion in the section of the Framework where market vs. entity-specific values were discussed.

A Board member said he agreed with the staff’s recommendation. However, he did not believe that there was a call for changing the accounting for investments in subsidiaries, joint ventures or debt instruments. He thought the main concern would be equity investments. He asked whether this would affect the Framework. The Research Director replied that this would be a standards-level decision and would therefore not affect the Framework.

One Board member said that it would be especially important to see whether there was a mismatch in durations of assets and their funding liabilities. She agreed, however, that the Board had sufficient tools in the Conceptual Framework to address these issues.

Upon calling a vote, all fourteen Board members agreed with the staff’s recommendation.

The Research Director went on to long-term investments in the reporting entity. He said that there were concerns amongst constituents that the Board might focus too much on short-term investors and potential investors (rather than existing investors). Another concern was the excessive use of current measurements and the implied focus on short-term investors. The Research Director said that staff did not understand the link between current measurements and short-term investors. In their view the long-term investors were even more interested in current measurements. Also, staff believed it was correct to also focus on potential investors. Next in the paper was the objective of financial reporting where he said that it should not be an objective to encourage or discourage a certain type of behaviour in investors. He continued with stewardship and prudence, which were also topics that had come up regularly in the discussion of long-term investment. Also, he said that there was a concern that current measures could lead to volatile and sometimes excessive dividends and bonuses.

He asked the Board whether they agreed that the Framework (including the tentative decisions made to date) contained sufficient and appropriate discussion of the aforementioned topics.

A Board member said that bonuses, dividends and tax payments were always topics at outreaches to constituents. He said that the Framework was clear on these issues, however, he felt that it should be further clarified that this was not an accounting problem. A fellow Board member welcomed the agenda paper and suggested to include parts of it in the Basis for Conclusions. Several Board members supported that.

One Board member said that the changes in claims to the entity were of particular interest for long-term investors. Also, she said, the Board had made tentative decisions with regards to going concern that would provide useful information to long-term investors.

A fellow Board member said that stewardship was more important for long-term than for short-term investors and, therefore, long-term investors required more information.

The Chairman summarised that the Board took this issue seriously and suggested to include the topic in the Basis for conclusions. Upon calling a vote, all Board members agreed with the staff recommendation.

 

Equity

This session was devoted to concluding the IASB’s discussions for the equity section of the Conceptual Framework Exposure Draft. The Technical Manager introduced the session and noted that five papers had been prepared for the meeting. He noted that the staff wanted to focus discussion on agenda papers 10H and 10K, which were the papers that discussed the consequences for the Conceptual Framework. He noted that agenda papers 10I and 10J were provided for information purposes, and that the IASB had already seen a version of agenda paper 10I, and that agenda paper 10J supplemented agenda paper 10I based on comments received from the IASB when the topic was previously discussed.

 

Consequences of approaches explored

In the corresponding agenda paper the staff explored whether, and the extent to which, the definitions of liability and equity needed to change in order to implement the approaches in agenda paper 10I. The Technical Manager introduced the paper and asked the IASB members whether they agreed with the staff recommendation that:

  1. The definitions of a liability and of equity should not be amended at this time; and if not, how the definitions should be amended and why?
  2. the staff explore a more complete implementation of the combined settlement and value approach in the Research Project.

One IASB member noted that she believed that the IASB needed to propose an amendment to the liability definition. In particular, she noted that the definition needed to be amended to address the variable share settlement issue, as the current literature [IAS 32 and IFRS 2] provided conflicting answers. The Conceptual Framework project provided the IASB with a good opportunity to address the issue. She noted that the staff had identified [in paragraph 42 of the paper] that one of the disadvantages of amending the definition of a liability was that it would be a fundamental change; however, she questioned how significant this change would be given most of the proposed definition aligned with IAS 32. She further noted that she was concerned at the suggestion that this issue should be addressed in the Research Project rather than the Conceptual Framework project as a) the scope of the Research Project has yet to be determined, b) without more answers from the Conceptual Framework project, trying to come up with answers to known problems in IAS 32 could be difficult, and c) the Conceptual Framework should provide the foundation to resolve standards level problems, rather than being 'completed' as a result of standards level decisions.

Another IASB member noted that she supported the staff recommendation not to amend the existing definitions at this time, particularly from a process perspective. She acknowledged the conflicts between IAS 32, IFRS 2, and the existing Conceptual Framework definitions. She noted that, in theory, the Conceptual Framework should provide the foundation for resolving standards level issues, but cautioned the IASB about "tying its hands" before performing an in depth exploration of the issues and figuring out the best way of resolving the triangular tension. She noted she favoured an approach whereby the IASB acknowledged the tensions that existed, rather than doing a 'quick fix' and learning later on that there were a number of consequential effects on other things the IASB had not thought through when trying to reason from the Conceptual Framework. She reiterated that she agreed with the first IASB member on what the problems were, but disagreed with a 'quick fix' resolution.

The Executive Technical Director acknowledged that, in an ideal world, both the Conceptual Framework and standards would be amended simultaneously. He noted that making a change in the Conceptual Framework without making standards level changes could cause people to question what this meant and whether they needed to do anything differently. He further noted that when the IASB carried out work at the standards level, it could result in thinking differently about the Conceptual Framework, and questioned whether the IASB needed to look at a process for revisiting the Conceptual Framework subsequent to completion of the standards level work. He stressed the need to look at both projects in parallel.

Another IASB member noted that he also supported proposing amendments to the liability definition. He highlighted the fact that this was an issue that had been ongoing for many years. It was an easy solution to say that it would be dealt with in the Research Project, but he questioned whether that would actually happen. He observed that the IASB had not really been applying the existing Conceptual Framework definition across the board for some time. He acknowledged that the definition worked in 95% of cases, but that it was clear that the IASB did not really believe in that definition given the way they had been looking at IAS 32 and IFRS 2. Accordingly, he noted that it seemed odd that the IASB would continue with a definition, potentially for a long while, that they probably would not apply, and that would result in exceptions to the Conceptual Framework in the future. He further noted that amending the definition would get the IASB closer to the way they had been thinking about a liability.

The IASB member noted that if the IASB proposed an amended definition in the Exposure Draft, the original could be reverted back to if necessary. He questioned the staff as to the progress they expected to make on the Research Project in the next 12 months or so, before the final Conceptual Framework was issued.

The Technical Manager responded and noted that both projects would need to be carried out in parallel. He noted that the standards level work would need to be completed and exposed, with the comment periods for both projects at least overlapping to enable people to see the effects the proposed changes to the definition would have on the standards level issues. He further noted that the proposed definition resulted in a closer alignment of the definition with IAS 32; however, the scope of what was to be considered at the standards level for IAS 32 still needed to be determined. In particular, he noted that it would need to be determined whether the project would encompass a fundamental review and rewrite; or whether it would address the practice issues surrounding IAS 32, such as diversity in practice, and certain of the application issues, and look at refining wording and include further work on presentation and disclosure.

Another IASB member noted that, while he understood the arguments of those IASB members who favoured proposing an amendment to the liability definition, he supported the staff recommendation to retain the current definition and focus efforts in this area on the Research Project. He observed that the issue had been ongoing for years, and that he did not believe that an immediate change to the liability definition in the Conceptual Framework would necessarily help much.

In response to the ongoing discussion, the Chairman suggested that the IASB could take a step forward and propose an amendment to the liability definition at this stage if they felt comfortable doing so. He acknowledged that there were still some question marks around the edges, but that the IASB could take this step and propose an amendment to the Conceptual Framework definition (which would be in line with IAS 32), continue with the Research Project, and fine tune the definition where necessary down the track.

Another IASB member noted that he agreed with those IASB members who favoured proposing an amendment to the liability definition in the Exposure Draft. He suggested that it could be beneficial for the work that had been completed to date to be reflected in the Exposure Draft, and the Exposure Draft process used as an opportunity to test that work in the market, and for that work to be refined based on comments received.

The Technical Director commented in response to certain of the comments in the preceding discussion. Firstly, he reminded the IASB that they were discussing the definition of one of the elements, which are the ‘cornerstones’ of the Conceptual Framework and referred to more often in standard setting than anything else. He expressed concern about making a fundamental definition more complex and difficult to understand in order to resolve issues that related to a small population of transactions.

Secondly, he responded to the concern expressed that people are currently forced to go through very difficult judgement exercises in determining classification of certain instruments. He acknowledged that it was a valid concern, but noted that changing the liability definition was not the only way to deal with the concern. He noted that one possible way of addressing the issue could be for the IASB to put in some 'bright-ish' lines at the standards level to make the exercise more operational.

Lastly, he questioned whether or not enough testing had been carried out to date for the IASB to feel reasonably confident about including a new definition in the Exposure Draft. He acknowledged that the Exposure Draft was not a final document, but cautioned the IASB that they should be fairly confident that what was proposed in the Exposure Draft was along the right lines, and not something that they would change their minds about down the track.

An IASB member noted that he agreed with the Technical Director that the definitions of the elements in the Conceptual Framework should remain straightforward and not go into the level of detail included in paragraph 41 of the paper. He further noted that he believed the Research Project should be carried out in parallel with the Conceptual Framework project and that the IASB needed to revisit whether the binary approach was the right conclusion.

In response to the comment by the Technical Director, an IASB member noted that she agreed that getting the words right in the definition was not a trivial matter. With respect to the complexity point, she noted that she agreed that applying the second piece of the proposed definition would be more complicated; however, highlighted the fact that 95% of people would not need to refer to that part of the definition. She acknowledged that it was only a very small percentage of the population who issued variable share settled instruments, but for those people, they were big numbers, and having a clear idea of whether variable settlement in itself was an issue was much easier than going through term sheets or getting legal advice on what would happen if they were required to issue more shares than they were able to. Accordingly, she noted that she disagreed with respect to the practical implication of the complexity.

The Technical Director responded, and noted that he was thinking more of the 95% of people who had to read the whole definition, than the 5% who it would actually be relevant to, on the complexity point.

Another IASB member noted that her technical instinct was to follow the route set out in paragraph 41; however, she reiterated the concerns she had from a process perspective. She provided some history on the issue and questioned how the IASB could solve in an afternoon, an issue that had been ongoing for fifteen years. She noted that she did not believe the IASB should make a change now that may need to be reconsidered in the future, especially given the fact they were dealing with an element.

The Vice-Chairman noted that while he could see merit in the suggestion made by another IASB member to reflect the work performed to date in the Exposure Draft, he also acknowledged the comment made by the Technical Director that the IASB should not be fiddling with the definition of elements without having clearly thought through the impacts. He suggested that another way forward could be for the IASB not to propose a change in the Exposure Draft, but to discuss an alternative definition which would address some of the problems, and ask people to provide their opinions on it. He also noted that he was opposed to revisiting the binary approach conclusion, as suggested by another IASB member earlier in the discussion.

The Chairman questioned the Technical Manager whether, if the IASB requested the staff to work on a proposed amendment to the liability definition to be included in the Conceptual Framework Exposure Draft, the staff would feel confident they could deliver a reasonable product. Another IASB member questioned what the timetable was for issuing the Exposure Draft. The Technical Principal responded and noted that the staff were planning to issue the Exposure Draft in January 2015. She added that in order to meet this date, the IASB needed to finalise its decisions by the end of the October 2014 meeting, which left only one meeting left to come to a decision on this issue. The IASB member noted that he did not believe the IASB could find an alternative to the proposed definition in one meeting. The Chairman also noted that he felt uncomfortable about trying to achieve this in such a short period of time, and asked the IASB members whether they could support the original staff recommendation in the paper. Nine IASB members agreed with the staff recommendation in the paper.

Another IASB member highlighted that it would be important for the IASB to mention in the Basis for Conclusions that the decision not to make or propose a change to the definitions at this time was not affirming the current definitions. The Chairman agreed, and noted that quite a lot of the preceding discussion could be included in the Basis for Conclusions.

There was discussion about the need to include a question in the Exposure Draft with respect to this topic. The Technical Manager noted that if the definition was not going to be changed, and the work was going to be done as part of the Research Project with the view to potentially amending the Conceptual Framework subsequent to completion of that work, it would be better to just scope this topic out of the Conceptual Framework, as if people confirmed definitions, it would be quite difficult to amend them later on.

 

Classes and accounting requirements within equity

The paper discussed whether the Conceptual Framework should require or preclude any accounting requirements to be discussed in a future project to develop or amend a Standard on the classification of claims on equity as equity. Such accounting requirements may include:

  1. Classes within equity; and
  2. Recognition, measurement, presentation and disclosure of information that might be relevant for users regarding different classes of equity.

The Technical Manager introduced the paper and asked the IASB members whether they agreed with the staff recommendation in the paper that the Conceptual Framework should neither require nor preclude any accounting requirements for classes of claims within equity that will result in useful information to users of the financial statements.

The Vice-Chairman noted that he understood that there was not a lot of response to this section of the Discussion Paper, and questioned whether his understanding was correct. The Technical Manager responded and noted that people did respond to certain suggestions, for example, to remeasure certain items within equity. He added that the staff could take those comments and respond to them in the standards level project, which they believed was the more appropriate place to address the comments.

Several IASB members asked for clarification on the staff recommendation. One IASB member noted that equity was still going to be a residual, so questioned whether the recommendation was effectively leaving the door open for allocations in the future at a standards level. The Technical Manager responded, and noted that this could refer to allocations, but also if a lot of items ended up within equity, the IASB might want to require some direct measurement within equity, and that this option should not be precluded. He added that there were some good responses, from users in particular, about such suggestions in the Discussion Paper. He further added that the equity section in the current Conceptual Framework talks about classifying and reallocating, and that he would expect any discussion to be quite similar to this.

Another IASB member observed that what had been included in the Discussion Paper with respect to this topic was more standards level, but was included in the Discussion Paper to give people an idea about the direction the IASB might want to take. He noted that, while he acknowledged that what had been included in the Discussion Paper was not appropriate for inclusion in the Conceptual Framework, he believed that there should be something more objectives based included in the Conceptual Framework on this topic. He highlighted the current problem with respect to the lack of information about the different types of equity claims, what people get out of a business, what the wealth transfers are, etc. He further noted that he would like to see something included in the Conceptual Framework that [for example, if the IASB issued IFRS 2 again] would persuade the IASB to provide more information about the different types of equity claims and relevant rights, what they do and do not get out of the business. Other IASB members noted that they agreed with this suggestion.

The Technical Director noted that, at a minimum, the staff could include wording that stated that the IASB should think about whether any disclosures are required. All IASB members agreed with the staff recommendation in the paper.

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.