Conceptual framework

Date recorded:

Agenda Paper 10: Sweep Issues

The Technical Principal informed the Board that the session was about sweep issues that had arisen on comments received on the pre-ballot draft of the Conceptual Framework. The Technical Principal said that the ballot draft for the Exposure Draft of the Conceptual Framework could be expected at the beginning of April.

The first sweep issue concerned measurement uncertainty. The staff did not ask the Board to reconsider any of their tentative decisions. The staff only proposed revised drafting of the paragraphs that addressed measurement uncertainty, especially in Chapter 2 of the Exposure Draft. Respondents found those paragraphs to be unclear, inconsistent and confusing. The Technical Principal presented the proposed amendments in detail.

One Board member said that she welcomed the discussion about the trade-off between uncertainty and relevance that had been introduced by staff. She was however concerned that it would be difficult to determine whether the level of uncertainty was too high to use the measurement in the financial statements. She said that people might be confused whether measurement of a derivative or an unquoted equity instrument would be too uncertain to recognise.

Another Board member asked if in the case where two estimates had a different level of uncertainty one was less relevant than the other. He said that to him ‘relevant’ meant useful information and that both could provide useful information and hence be relevant. He conceded that one might be less reliable than the other. The Technical Principal replied that the drafting aimed to express that if there was a choice between equally relevant measures the one with the lowest level of measurement uncertainty should be elected. The Research Director added that measurement uncertainty was one of many factors that contributed to relevance.

The Vice-Chairman concluded that the staff could proceed with the proposed drafting.

The Senior Technical Manager continued with two issues on terminology in the draft. The issues arose around the terms ‘statement(s) of financial performance’ and ‘other comprehensive income’. In the staff’s view, ‘statement(s) of financial performance’ was preferable to ‘statement of profit or loss and statement of comprehensive income’.

One Board member disagreed with that view. He said that similar to ‘statement of financial position’, constituents would not start using the term ‘statement(s) of financial performance’. Another Board member did not object to the change in terms, however he asked whether this could be explained somewhere in the Conceptual Framework. The Senior Technical Manager replied that there was a discussion in the Basis for Conclusions on the Exposure Draft.

One Board member expressed concern that renaming might bring back the calls for one statement instead of two. Another Board member supported the renaming as the current term translated oddly into Portuguese.

A Board member said that he disagreed with using one term for two statements. The Research Director replied that constituents were confused about the term ‘statement of comprehensive income’. They believed that items in this statement were items of OCI.

The Senior Technical Manager introduced the next question that concerned OCI. Staff proposed not to use the term in the Conceptual Framework as there was confusion around the term as it was neither purely income but also expenses nor comprehensive since not all assets and liabilities were recognised. Also, it was unclear what ‘other’ meant and since the Framework did not use the term ‘comprehensive income’ there was no need for an ‘other comprehensive income’.

The Chairman strongly disagreed with that view. He said that he felt less firmly about renaming the statement of comprehensive income but he rejected the proposal of renaming OCI. One Board member said removing OCI from the Framework would mean having to go through all Standards removing OCI as well.

The Vice-Chairman called a vote on the staff recommendation to change the term ‘statement of comprehensive income’ to the term ‘statement(s) of financial performance’. Nine of the fourteen Board members were in favour. On removing the term ‘OCI’ from the Framework, only three Board members agreed.

The Senior Technical Manager introduced the next issue which concerned dual measurement, i.e. the selection of a current measurement basis for an asset or a liability in the statement of financial position and the selection of a different measurement basis for related income and expense. Excluding those income and expenses permanently (i.e. no recycling) from the statement of profit or loss might enhance the relevance of the information in that statement. This had led to confusion amongst the reviewers of the pre-ballot draft. The staff therefore recommended extending the discussion on dual measurement and inserting an illustrative example. The example explained that the income or expense would be disaggregated with the amortised cost part recognised in profit or loss and the fair value part recognised in OCI.

One Board member said that the example was confusing and that the disaggregation was not similar to recycling in her view. The Chairman agreed and said that the example was too extensive. Another Board member also proposed not to include the example as this was an exception to the benchmark treatment of dual measurement (i.e. no recycling). A fellow Board member agreed and said that the introduction of disaggregation was not a sweep issue as it would change the entire concept of recycling.

The Research Director replied that there was a lot of confusion about recycling and that communication was required. One Board member agreed but said that this should be done through the performance reporting project. He said that the example was not conceptual and therefore not fit for the Conceptual Framework.

The Vice-Chairman called a vote on including the example in the Exposure Draft. None of the Board members voted in favour. One Board member said that this should not mean that the Exposure Draft should avoid the term ‘disaggregation’. The Technical Principal said that the draft also mentioned disaggregation in the presentation section and that this should not be removed.

The Technical Principal then went on to the issue on reporting entities. Constituents had expressed concerns that the definition of a reporting entity was too broad as entities could also report on an incomplete set of activities. The staff therefore recommended prescribing that the financial statements of a reporting entity should provide information that was useful to the users of financial statements in making decisions about providing resources to the entity. Also, economic activities of the reporting entity should be a complete set of economic activities.

One Board member agreed and said that constituents should be reminded that there was an overall objective of financial statements. Another Board member said that statements prepared only for regulatory purposes would not meet that objective but he agreed that it needed to be a complete set of economic activities. A fellow Board member said that those were special purpose financial statements whilst the objective was for general purpose financial statements.

A Board member said that it would be difficult to define a complete set of economic activities. He said that he therefore suggested not changing anything. The Vice-Chairman agreed.

One Board member asked whether a complete set of economic activities had to meet the definition of a business under IFRS 3. He believed that it could also encompass things other than a business. The Technical Principal replied that there was no intent to restrict this to businesses and that the staff did not intend to define what a complete set of economic activities was.

One Board member said that in his view the entire chapter on reporting entities was unnecessary and that it should be kept as simple as possible.

A Board member expressed concern that the reference to economic activities could be confused with the economic phenomena in the ‘Qualitative Characteristics’ section of the Framework. The Technical Principal did not share that concern.

One Board member said that the high level of the current drafting could be interpreted as if there were no restrictions around the reporting entity. She therefore agreed with the staff recommendation.

Another Board member was not only concerned about splitting up legal entities into reporting entities but also about combining several legal entities into one reporting entity. The Technical Principal said that the staff recommendation would allow for further discussions about combining financial statements. The Senior Technical Manager added that the ‘Business Combinations under Common Control’ project did not address carve-out or combined financial statements but only transactions that were a business combination under common control under IFRS 3 and group restructuring. However, constituents would like to have a broader scope for that project.

The Vice-Chairman called a vote on whether there should be any guidance on the issue. Ten of the thirteen Board members present were in favour. The Vice-Chairman suggested that staff should draft guidance and bring this back to the Board. The Research Director said that the guidance should remind constituents to consider the qualitative characteristics when defining a reporting entity. One Board member added that the guidance would probably not apply to legal entities as it was clear there what the reporting entity was.

Another Board member said that general purpose financial statements were a complete set of information that provided useful information. He said that the discussion should include this fact.

The Senior Technical Manager introduced the last issue which concerned the update of a quote from the Conceptual Framework. IFRS 2 referred to the definition of a liability that would be inconsistent with the revised Conceptual Framework. All Board members agreed to update that reference.

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