The IASB’s Conceptual Framework sets out the concepts that underlie the preparation and presentation of financial statements. The Conceptual Framework identifies the principles for the IASB to use when it develops and revises International Financial Reporting standards (IFRSs). The DP was published in July 2013 and contained proposals for topical areas where it considered that amendments to the existing Conceptual Framework were necessary. Included in the DP were proposals to revise the definitions of an asset and a liability, to introduce guidance on derecognition, to clarify the objective and purpose of other comprehensive income and to set a framework for presentation and disclosure. 

The FRC “strongly support the IASB’s decision to recommence work on its Conceptual Framework” commenting that they believe that “the existing Conceptual Framework is out of date and incomplete”. The FRC agrees with a number of the proposals within the DP: 

The IASB’s commitment to revisit the Conceptual Framework, to bring it up-to-date and add guidance in areas that are not adequately addressed.

The equal emphasis placed on the statement of profit or loss and OCI and the statement of financial position, and the recognition of the statement of cash flows as a primary financial statement.

The IASB’s preliminary view that a single measurement basis may not provide the most relevant information, and that the selection of a measurement basis should depend upon how an asset or liability contributes to future cash flows.

The retention of a total (or sub-total) for profit or loss as a primary source of information about the return an entity has made on its economic resources in a period.

The retention of the current definition of equity—the residual interest in the assets of the entity after deducting all its liabilities. 

However, they also believe that more “fundamental analysis”, than is currently provided in the DP, is required in areas such as:

The clarification of the definition of liabilities to situations where the requirement to transfer economic benefits can be avoided by the entity’s future actions;

The discussion of measurement concepts;

The objective of the statement of profit or loss; and

The unit of account. 

Regarding the discussion of measurement in the DP, the FRC comment that it “fails to provide the depth of analysis that is necessary if the Conceptual Framework is to provide useful guidance to the IASB for the development of accounting standards”. They further comment that “the discussion of specific measurement bases is superficial and incomplete”. 

In particular, the FRC comment that they would like the concepts of accountability (or ‘stewardship’), reliability and prudence to be re-introduced to the Conceptual Framework (within the chapters on ‘Objectives and qualitative characteristics’) “as they are fundamental to financial reporting”. The FRC highlight that many of the ideas that they put forward for the inclusion of these concepts are contained within their series of bulletins produced jointly with the European Financial Reporting Advisory Group (EFRAG). The FRC would also like these chapters to “acknowledge that financial statements should provide information that assists in an assessment of the entity’s business model”. They comment: 

Financial statements should not simply provide an inventory of assets and liabilities and information on changes in them, but should portray how the entity uses its assets and liabilities to create value. 

The FRC would like the Conceptual Framework to continue to reflect the concept of going concern and are of the view that the definitions of an asset and liability in the DP are “rather vague and may be interpreted broadly”. They would like the Conceptual Framework to clarify their meaning “to ensure consistent application”.   

Whilst the FRC is supportive of the IASB’s intention to “complete its revision to the Conceptual Framework expeditiously”, they do express concerns with completing the project too soon and recommend that “the IASB keeps the timetable for the revisions to the Conceptual Framework under review” in case it needs to be extended to ensure that “a high quality Conceptual Framework” is finalised. 

The full comment letter can be accessed from the FRC website below. 

Click for:

• Press release (link to FRC website)
• Full comment letter (link to FRC website)
• Our previous story on DP/2013/1
• Our project page on the Conceptual Framework

EFRAG supports the IASB's proposed amendments to IAS 27 Separate Financial Statements, stating in its draft comment letter that the amendments better align the accounting principles applicable to different sets of financial statements. However, the EFRAG suggests the following issues for reconsideration:

• Consequential amendments to IAS 28 Investments in Associates and Joint Ventures — EFRAG encourages the IASB to better explain why they are necessary in the Basis for Conclusions.
• Retrospective application — EFRAG thinks that "relief should be provided from full retrospective application to entities that opt to use the equity method to account for subsidiaries in their separate financial statements".
• Objective of separate financial statements — EFRAG would like the IASB to clarify the objective of separate financial statements in this project and in the future.

Comments on the EFRAG draft comment letter invited by 30 January 2014.

Please click for:

• EFRAG draft comment letter (link to EFRAG website)
• Press release (link to EFRAG website)
• Our December 2013 story on ED/2013/10
• Our IAS 27 — Equity method in separate financial statements project page
• Deloitte's IFRS in Focus newsletter explaining the ED's proposed amendments

Since the last designation was made up to 31 October 2012, newly designated IFRSs include:

• Recoverable Amount Disclosures for Non-Financial Assets — Amendments to IAS 36 (issued in May 2013)
• Novation of Derivatives and Continuation of Hedge Accounting — Amendments to IAS 39 (issued in June 2013)
• IFRIC 21 Levies (issued in May 2013)

The designation has yet to cover the period after October 2013, so two recent amendments issued in November, namely 1) Defined Benefit Plans: Employee Contributions — Amendments to IAS 19 and 2) IFRS 9 Financial Instruments — Hedge Accounting and amendments to IFRS 9, IFRS 7 and IAS 39 have not been included in the scope of 'designated' IFRSs in Japan.

Click for the FSA press release (in Japanese only, link to FSA website).

EFRAG and ICAS believe that the IASB standard-setting process must be supported by a sound analysis and understanding of how the information that results from IFRS application is used. They also believe that the current revision of the IFRS conceptual framework will provide a good opportunity to integrate some of the lessons learned from the review and from further research into the IASB's standard-setting process.

The review was undertaken by a team of European academics and was aimed at answering the following questions:

• Who are the key capital providers to companies in the European Union?
• What decisions are capital providers making and what are the information needs for these decisions?
• What information do these capital providers currently use to make financial decisions and assess stewardship?
• How and for what purposes is this information accessed and used? In particular, what is the 'logic' of the models applied?
• How important are financial statements for capital providers' decision making and assessing stewardship? How are financial statements used?
• What additional information would capital providers consider to be useful?

Not surprisingly, the review revealed that financial statements are used in different ways by different capital providers who have different needs and different objectives. The authors of the review maintain, however, that more research into the topic is needed, especially empirical research into what information capital providers use, where and how they obtain the information and what additional information they would like to have. However, the authors feel that the initial results of the review already allow for drawing the following conclusions (reproduced from the report):

Please click for access to the full report on the EFRAG website.

Private Company Decision-Making Framework

The Private Company Decision-Making Framework ("the Guide") was developed to assist the FASB and the PCC in determining whether — and in what circumstances — to provide alternative recognition, measurement, disclosure, display, effective date or transition guidance for private companies reporting under US GAAP.

"Th[e] Guide provides considerations for the PCC and the Board in making user-relevance and cost-benefit evaluations for private companies under the existing conceptual framework. The Guide is intended to be a tool to help the Board and the PCC identify differential information needs of users of public company financial statements and users of private company financial statements and to identify opportunities to reduce the complexity and costs of preparing financial statements in accordance with U.S. GAAP."

Definition of a Public Business Entity

The FASB issued ASU 2013-12, Definition of a Public Business Entity: An Addition to the Master Glossary, in conjunction with the Guide. The ASU allows the FASB, PCC, and EITF to determine (1) what companies will be included in the scope of the Guide and (2) the scope of new financial accounting and reporting guidance.

The ASU does not contain an effective date; however, an entity would apply the definition of a public business entity in connection with its adoption of the first ASU that uses the term.

According to the final ASU:

A public business entity is a business entity meeting any one of the criteria below. Neither a not-for-profit entity nor an employee benefit plan is a business entity.

a. It is required by the U.S. Securities and Exchange Commission (SEC) to file or furnish financial statements, or does file or furnish financial statements (including voluntary filers), with the SEC (including other entities whose financial statements or financial information are required to be or are included in a filing).

b. It is required by the Securities Exchange Act of 1934 (the Act), as amended, or rules or regulations promulgated under the Act, to file or furnish financial statements with a regulatory agency other than the SEC.

c. It is required to file or furnish financial statements with a foreign or domestic regulatory agency in preparation for the sale of or for purposes of issuing securities that are not subject to contractual restrictions on transfer.

d. It has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market.

e. It has one or more securities that are not subject to contractual restrictions on transfer, and it is required by law, contract, or regulation to prepare U.S. GAAP financial statements (including footnotes) and make them publicly available on a periodic basis (for example, interim or annual periods). An entity must meet both of these conditions to meet this criterion.

An entity may meet the definition of a public business entity solely because its financial statements or financial information is included in another entity’s filing with the SEC. In that case, the entity is only a public business entity for purposes of financial statements that are filed or furnished with the SEC.

For more information on the Guide and the ASU, see Deloitte's Accounting Journal Entry and the FASB's website for its:

• Press release
• FASB in Focus newsletter
• Video discussion

The EFRAG Consultative Forum of Standard Setters (CFSS) held its meeting in preparation for the Accounting Standards Advisory Forum (ASAF) meeting of 5 and 6 December 2013. Topics discussed were:

• Profit and loss, other comprehensive income and recycling,
• Stewardship,
• Reliability,
• Definition, recognition and measurement of liabilities,
• IFRS 3 post implementation review, and
• Rate regulation.

Topics discussed at the EFRAG Technical Expert Group (TEG) meeting were:

• EFRAG Paper The equity method: Measurement basis or one-line consolidation?
• Insurance contracts
• Defined Benefit Plans: Employee Contributions (Amendments to IAS 19)
• Macro hedging
• Conceptual framework
• Classification and measurement
• Accounting for Long-Term Investment Business Models
• IASB ED on separate financial statements (equity method)
• IASB ED on annual improvements (cycle 2012-2014)
• IFRS 11 Joint Arrangements

Click for the EFRAG Update (link to EFRAG website).

The IASB issued the amendments in November 2013 to clarify the requirements that relate to how contributions from employees or third parties that are linked to service should be attributed to periods of service.

EFRAG's initial assessment is that the amendments satisfy the technical criteria for EU endorsement and EFRAG should therefore recommend their endorsement.

The endorsement status report, dated 23 December 2013, is available here.

The exposure draft, ED 54 Reporting Service Performance Information, follows an earlier consultation paper released in 2011 and responds to the perceived need for a principles-based and consistent framework for service performance information that focuses on user needs. The principles in ED 54 align with the IPSASB's view that public sector financial reporting has a greater scope than financial statements alone, and are consistent with the IPSASB Conceptual Framework . The Basis for Conclusions on the exposure draft expresses this in this way:

The Conceptual Framework notes that the primary function of governments and most public sector entities is to provide services to constituents. Consequently, their financial results need to be assessed in the context of the achievement of service delivery objectives. Reporting non-financial as well as financial information about service delivery activities, achievements and/or outcomes during the reporting period is necessary for a government or other public sector entity to discharge its obligation to be accountable―that is, to account for, and justify the use of, the resources raised from, or on behalf of, constituents. Decisions that donors make about the allocation of resources to particular entities and programs are also made, at least in part, in response to information about service delivery achievements during the reporting period, and future service delivery objectives.

The proposed RPG recommends that entities define service performance objectives that describe the planned result(s) that an entity is aiming to achieve, expressed in terms of inputs, outputs, outcomes, efficiency, or effectiveness. Objectives depend on the nature of the entity and might include for example impacts on society such as educational achievements, poverty and crime levels, and health outcomes in general or of particular groups within society - the draft RPG provides the following specific example of an objective: "To increase the percentage of infants that have received a vaccination for measles from 65% to 95%".

Once the service performance objectives have been determined, the presentation of service performance information is then presented in a way that is appropriate to those objectives, so as to enable users to assess:

• service delivery activities and achievements during the reporting period
• financial results in the context of the achievements and service delivery objectives
• efficiency (relationship between inputs and outputs or outcomes) and effectiveness (relationship between actual results and objectives in terms of outputs or outcomes).

Service performance information can be presented either as part of a report that includes the financial statements, or be presented in a separate report. The RPG provides factors to consider in making this choice and provides guidance on additional disclosures that should be presented in a separate report.

After requesting constituent comment in the 2011 consultation paper on whether the guidance on service performance information should be authoritative or non-authoritative, the IPSASB decided in March 2013 that it "should be addressed presently through development of a Recommended Practice Guideline". Accordingly, consistent with other RPGs already issued by the IPSASB, the proposed RPG would be best practice, and entities would not be required to comply with it in order to asset compliance with International Public Sector Accounting Standards (IPSAS) in their financial statements.

The exposure draft is open for comment until 31 May 2014. Click for (link to the IFAC website):

• IPSASB announcement
• IPSASB ED 54 Reporting Service Performance Information
• IPSASB 'At a Glance' document on ED 54.