Heads Up — IASB invites comments on financial reporting framework

Published on: 26 Aug 2013

Download PDFAugust 26, 2013
Volume 20, Issue 28

by Magnus Orrell and Scott Streaser, Deloitte & Touche LLP


In July 2013, the IASB published a discussion paper1 (DP) on its Conceptual Framework for Financial Reporting. The DP provides the IASB’s preliminary views on a range of fundamental accounting topics, such as determining what an asset or liability is and distinguishing between liabilities and equity. Specifically, the DP suggests revisions to the framework’s definitions of assets and liabilities; a new way to present equity claims; new guidance on derecognition, measurement, presentation, and disclosure; and principles for distinguishing profit or loss from other comprehensive income (OCI). Comments on the DP are due by January 14, 2014.

This Heads Up provides an overview of the DP, focusing on issues that are more practical and that may eventually result in a change to existing IFRSs.

Editor’s Note: The framework, which the IASB uses to develop new and revised IFRSs, describes the concepts that govern the preparation and presentation of IFRS financial statements, such as definitions of assets, liabilities, equity, and income and expense. While the framework does not override the requirements of any particular IFRSs, it can help entities understand and interpret existing IFRSs and develop accounting policies when IFRSs do not specifically apply to a particular transaction or event. Although some existing IFRSs are likely to differ from the revised framework that the IASB ultimately issues, those IFRSs will continue to be authoritative until the IASB amends them to be in line with the revised framework.

Project Overview

The IASB framework was originally published in 1989. Between 2004 and 2010, the IASB and FASB were working jointly to develop an improved, common conceptual framework. In September 2010, the boards finalized the following two chapters of a new framework and replaced the related guidance in their existing frameworks:2

  • Chapter 1, “The Objective of General Purpose Financial Reporting.”
  • Chapter 3, “Qualitative Characteristics of Useful Financial Information.”

The IASB has no current plans to fundamentally reconsider these chapters.

In late 2010, the boards discontinued work on their joint framework project to focus on more urgent projects. In a subsequent public consultation on the IASB’s agenda, many IASB stakeholders identified the revised framework as a priority project. In 2012, the IASB decided to restart the project as an IASB-only project without the FASB.

The IASB expects to publish an exposure draft (ED) of a revised framework by the end of 2014 and aims to finalize the framework by the end of 2015.

The DP does not discuss the concept of a reporting entity, because the boards had already issued an ED on this topic in March 2010.3 The IASB plans to use this ED and related feedback in developing guidance on the reporting-entity concept in the revised framework.

Assets and Liabilities

The Role of Probability in the Definitions of Assets and Liabilities

The DP proposes that the framework redefine assets and liabilities as follows:

  • An “asset is a present economic resource controlled by the entity as a result of past events.” The DP defines an economic resource as “a right, or other source of value, that is capable of producing economic benefits.”
  • A “liability is a present obligation of the entity to transfer an economic resource as a result of past events.”

Editor’s Note: The current framework’s definitions of assets and liabilities require an expectation of future economic benefits or a future outflow of resources. In addition, the existing recognition guidance on assets and liabilities requires that a flow of future economic benefits be “probable.” Some interpret these definitions as meaning that an asset or liability does not exist or should not be recognized unless a minimum probability threshold is met. This interpretation raises the question of whether, for example, a purchased option that is not expected to be exercised qualifies as an asset or whether a written guarantee that is not expected to be called upon qualifies as a liability. Further, it is unclear whether the references to expectations and probable flows refer to uncertainty about the existence of an asset or liability (e.g., litigation over whether an obligation exists) or uncertainty about the outcome (e.g., uncertainty about whether an entity will collect a receivable or the potential exercise of an option).

The IASB’s preliminary view on these issues is that the definitions of assets and liabilities should not require an “expected” or “probable” inflow or outflow. It should be sufficient that a resource or obligation is “capable of producing [or resulting in a transfer of] economic benefits.” For example, a stand-ready obligation to transfer resources if a specified, uncertain event outside the entity’s control (e.g., an insurance contract obligation or guarantee obligation) occurs would qualify as a liability even though the obligation to transfer resources is conditional. However, outcome uncertainty may affect the measurement of an asset or liability.

Control of an Economic Resource

The DP proposes that the framework’s definition of control be in line with its definition of an asset. Specifically, the IASB proposes the following definition:

An entity controls an economic resource if it has the present ability to direct the use of the economic resource so as to obtain the economic benefits that flow from it.

The definition above differs from the definition of control in the IASB’s ED4 on revenue recognition, which defines control of an asset as when the customer is able “to direct the use of and obtain substantially all of the remaining benefits from the asset” (emphasis added). In the DP, the IASB suggests that the term “substantially all” is redundant and potentially confusing when an entity only recognizes the rights it controls. The DP highlights an example in which an entity has the right to obtain 20 percent of the economic benefits of a building. The entity does not have all or substantially all of the economic benefits of the building but does have the right to obtain 20 percent of these benefits. In this case, the entity should recognize its right to obtain 20 percent of the economic benefits of the building as an asset.

Constructive Obligations and Economic Compulsion

As with the existing framework, the IASB’s preliminary view is that the definition of a liability should not be limited to obligations that are enforceable against the entity. In addition, constructive obligations (e.g., a widely published policy of cleaning up contamination in a country with no legal requirement to do so or an informal practice of paying employee bonuses in excess of contractual requirements) would qualify as liabilities. Economic compulsion to transfer economic resources (e.g., economic compulsion to restructure an underperforming business), in the absence of an obligation to do so, would not result in a liability. The IASB plans to add guidance distinguishing constructive obligations from economic compulsion.

Obligations That Depend on an Entity’s Future Actions

The IASB’s preliminary view is that obligations that the entity might be able to avoid through its future actions (e.g., its own future performance or business decisions) could qualify as a liability. However, the IASB has not yet reached a preliminary view on whether the definition of a liability (1) should be limited to obligations that the entity has no practical ability to avoid (e.g., because it would need to significantly curtail business or cease selling its products to avoid the obligation) or (2) should extend to other conditional obligations that have resulted from past events.

Editor’s Note: Examples of obligations that the entity might be able to avoid through its future actions include an employee bonus with a vesting condition that is contingent on the employee’s remaining employed at the entity in the future, levies on revenue that are contingent on the entity’s continuing operation in a particular market, and contingent consideration in a business combination that depends on the acquired entity’s future earnings.

Liabilities and Equity

Distinguishing Between Liabilities and Equity

The DP notes that existing IFRS guidance on distinguishing between liabilities and equity is complex and identifies two approaches that could simplify this distinction:

  • A narrow equity approach — Only the most residual class of existing equity instruments issued by a parent would be classified as equity. Other equity claims, such as forwards and options on the entity’s shares, would be classified outside of equity. Changes in the measurement of these other equity claims would be recognized as gains or losses in profit or loss.
  • A strict obligation approach — All equity claims would be classified as equity. Only obligations to deliver cash or other assets would be classified as liabilities. Changes in the measurement of equity claims would be presented in the statement of changes in equity as a transfer of wealth between classes of equity claims.

The IASB’s preliminary view is that the strict obligation approach is preferable to the narrow equity approach. Unlike existing IFRSs, the strict obligation approach would never require liability classification of obligations to issue equity instruments because they do not involve an obligation to transfer cash or other assets. Under existing IFRSs, some obligations to issue equity instruments are classified as liabilities (e.g., those that result in a transfer of a variable number of shares worth a fixed monetary amount or a net-share-settled derivative on the entity’s shares). Like entities applying existing IFRSs, entities applying the strict obligation approach would treat forward contracts to repurchase the entity’s shares and written put option contracts on the entity’s shares as liabilities if they include an obligation to pay cash or other assets, although the measurement may change.

The DP indicates that an exception to the strict obligation approach may be provided for entities that have no equity instruments. Under the exception, such entities would be permitted to classify the most subordinate class of instrument as equity even if a transfer of cash or other assets is required (e.g., certain puttable instruments issued by cooperative entities and mutual organizations).

Presentation of Equity Claims

The DP proposes that the statement of changes in equity could display a separate column for each class of equity claim, such as primary equity claims (e.g., ordinary shares and noncontrolling interests in a subsidiary) and secondary equity claims (e.g., forward and option contracts on the entity’s shares), with further subdivision (e.g., share capital, retained earnings, and reserves) on the face of the statement or in the notes. At the end of each period, the entity would update the measurement of each class of equity claim by reallocating total equity between different classes of equity claims without affecting the total amount of equity. In this manner, the statement of changes in equity would show the amount of wealth transfer between different classes of equity claim (e.g., when the value of a written option on equity shares declines, the statement of changes in equity would show a wealth transfer from option holders to holders of ordinary shares). The IASB has not yet determined whether the measurement of each class of equity claims should be an allocated amount or a direct measure (e.g., fair value) of the equity claim.

Presentation of Profit or Loss and Other Comprehensive Income

The IASB’s preliminary view is that an entity should be required to present profit or loss as a total or subtotal in the statement of profit or loss and OCI. The DP explores how to distinguish income and expense items recognized in profit or loss from those recognized in OCI (e.g., on the basis of realization, recurrence, measurement uncertainty, or management control). The IASB’s preliminary view is that items recognized in OCI should be limited to items of income and expense resulting from changes in current measures of assets and liabilities (remeasurements). Two approaches to defining OCI are identified: a narrow approach and a broad approach.

Under a narrow approach to OCI, the use of OCI would be limited to two groups of items of income and expense:

  • Bridging items — In this case, OCI is used to “bridge” a measurement difference between the statement of financial position and the statement of profit or loss. One example of a bridging item is an investment in a financial instrument for which certain unrealized fair value changes are recognized in OCI rather than profit or loss.
  • Mismatched remeasurements — These occur when an item of income or expense reflects only part of a linked set of assets, liabilities, or past or planned transactions. One example is a derivative used for cash flow hedging of a forecast transaction for which derivative fair value gains and losses are deferred in OCI until the hedged transaction affects profit or loss. Another example is cumulative foreign exchange translation adjustments.

The DP suggests that under the narrow approach to OCI, an entity should be required to subsequently recycle amounts accumulated in OCI to profit or loss.

Editor’s Note: The narrow approach to OCI would be inconsistent with the current IFRS treatment of certain OCI items, such as revaluation gains and losses for property, plant, and equipment, intangibles, and exploration and evaluation assets; changes in fair value attributable to the issuer’s own credit risk for financial liabilities designated at fair value through profit or loss; and equity investments designated at fair value through OCI. The narrow view of OCI would also preclude the use of OCI for remeasuring net defined benefit assets and liabilities. The DP notes, however, that the IASB has no immediate plans to amend those IFRS requirements.

More items would be recognized in OCI under the broad approach than under the narrow approach. In addition to bridging items and mismatched remeasurement items, transitory remeasurements (i.e., remeasurements of long-term assets and liabilities that are likely to reverse or significantly change over the holding period) would be reflected in OCI. Examples of transitory remeasurements include the remeasurement of a net defined pension benefit liability or asset; revaluation gains and losses for property, plant, and equipment, intangibles, and exploration and evaluation assets; changes in fair value attributable to the issuer’s own credit risk for financial liabilities designated at fair value through profit or loss; and equity investments designated at fair value through OCI. The IASB would decide in each IFRS whether a transitory remeasurement should be subsequently recycled. However, the IASB has not yet determined whether it prefers the narrow approach or the broad approach.


The IASB’s preliminary view is that the measurement of an asset should depend on “how it contributes to future cash flows.” For instance, if an asset produces cash flows directly through sale, such as a financial instrument or traded commodity held for sale, a current exit price may be the most relevant measure. Similarly, in the case of physical assets or intellectual property for which an entity charges others for the right to use those assets (e.g., through a lease, rental, franchise, or royalty agreement), the current market price of the charge-for-use asset may be an appropriate measure, since it reflects the asset’s ability to generate contractual cash flows from existing contracts and cash flows from any subsequent sale of the underlying asset. The IASB qualifies this view by stating that “for large groups of low value charge-for-use items . . . cost-based information is likely to provide relevant information.”

Editor’s Note: The use of a current market price to measure charge-for-use items that are significant to the reporting entity (e.g., land, buildings, parks, ships, or aircraft for which the reporting entity is a lessor under an operating lease), as proposed by the IASB in the DP, is similar to the revaluation model for subsequent measurement of property, plant, and equipment and intangible assets allowed under IAS 165 and IAS 38,6 respectively. It is also similar to the fair value model for subsequent measurement of investment properties allowed under IAS 40.7 However, many entities currently choose to apply the cost model to their significant charge-for-use items, which represents an acceptable accounting election under current standards and is inconsistent with the subsequent measurement model proposed in the DP.

For assets that do not produce cash flows directly or that are used in combination with other assets, such as property, plant, and equipment; other assets used by the entity; and inventory, the IASB believes that cost-based information is normally “more relevant and understandable than current market prices.” Similarly, a cost-based measurement may be appropriate for financial assets that have insignificant variability in contractual cash flows and that are held for collection.

The DP proposes that measurement of a liability should depend on “how the entity will settle or fulfil the liability.” If the liability does not have stated terms (e.g., litigation) or highly uncertain settlement amounts (e.g., insurance contracts and postemployment benefits), cost may not be relevant. In this case, a cash-flow-based measurement (e.g., a present value of estimated cash flows) would be appropriate. For liabilities that will be settled according to their stated terms, a cost-based measurement “will normally provide the most relevant information.” A cost-based measurement may also be appropriate for liabilities related to obligations to perform services.

The DP suggests that the current market price is likely to be an appropriate measure (e.g., for derivatives) if (1) there is not a close link between the cost and the ultimate cash flows of an asset or liability, (2) there is significant variability in contractual cash flows, or (3) a liability will ultimately be transferred to another party.

Recognition and Derecognition


The IASB’s preliminary view is that all assets and liabilities (as defined) should be recognized. The DP recommends that to qualify for recognition, an item should not need to have a cost or value that can be reliably measured. The IASB reserves the right, however, to provide exceptions to its suggested recognition principle when it develops or revises particular IFRSs for which (1) the resulting information is irrelevant or not sufficiently relevant to justify the cost of preparing it or (2) no measure of the asset or liability would result in a faithful representation. For example, recognition might not result in relevant information “if the range of possible outcomes is extremely wide and the likelihood of each outcome is exceptionally difficult to estimate” (e.g., major litigation).


The DP indicates that the IASB generally favors a control approach to derecognition, under which an asset or liability should be derecognized when it no longer meets the recognition criteria. However, when developing or revising particular IFRSs, the IASB will determine whether to provide exceptions to the control approach for situations in which the entity retains a component of the original asset or liability (e.g., the IASB may determine that a risk-and-rewards approach is appropriate for a sale of receivables with recourse or a sale of a bond with a repurchase agreement).

Presentation and Disclosure

The DP suggests that the framework should include guidance on presentation and disclosure in the financial statements. According to the DP, the IASB would normally consider requiring the following disclosures when developing IFRSs:

  • Information about the reporting entity (e.g., information about subsidiaries, description of the business model, going concern, and nonadjusting subsequent events).
  • Amounts recognized in the financial statements, including changes in those amounts (e.g., disaggregation of line items, maturity analysis, rollforwards, segments, and reconciliations).
  • The nature and extent of the entity’s unrecognized assets and liabilities.
  • The nature and extent of risks (e.g., the types of financial risks faced by the entity and how the entity has managed those risks).
  • Methods, assumptions, and judgments (e.g., accounting policies, measurement methods, and sensitivities to key assumptions) and changes in those methods, assumptions, and judgments.

In addition, the DP suggests that the IASB should consider the following communication principles when setting disclosure requirements:

  • Disclosure guidance should promote disclosure of entity-specific information and discourage the use of “boilerplate” or generally available information that is not specific to the entity.
  • “[D]isclosure guidance should result in disclosures that are clear, balanced and understandable” and give entities the flexibility to provide such disclosures.
  • “[D]isclosure guidance should enable an entity to organise disclosures in a manner that highlights to a user of financial statements what is important.”
  • “[D]isclosures should be linked” (e.g., through cross-referencing).
  • “[D]isclosure guidance should not result in the duplication of the same information in different parts of the financial statements.”
  • “[D]isclosure guidance should seek to optimise comparability without compromising the usefulness of the information disclosed.”

Editor’s Note: The FASB issued a DP on its disclosure framework in July 2012, which considers some of these issues. For more information, see Deloitte’s July 17, 2012, Heads Up.

The IASB is also considering providing additional guidance on materiality. That guidance would emphasize the following points:

  • “[I]f information to meet a disclosure requirement in a Standard is not considered material, the entity may omit it from its financial statements.”
  • “[D]isclosures additional to those specifically required by a Standard may be required for material items in order to meet the disclosure objective of that Standard or to meet the objective of financial reporting.”
  • “[D]isclosure of immaterial information can impair the understandability of material information that is also disclosed.”
  • “[J]ust because a line item presented in a primary financial statement is determined to be material, it does not automatically follow that all IFRS disclosures pertaining to that line item are material to the entity’s financial statements. An entity would assess the materiality of each disclosure requirement individually.”

Other Issues

The following are some additional issues that the DP recommends the IASB consider:

  • Business model — To make financial statements more relevant, the DP suggests that the IASB should consider how an entity conducts its business activities in developing or revising IFRSs.
  • Employee share options — The DP proposes that the framework be clarified to specify that the cost of granting share options to employees and other issuances of shares for services qualify as an asset or expense, as applicable.
  • Trade date accounting — The DP notes that “trade date accounting is inconsistent with the concepts” discussed in the DP, because “the purchaser’s asset is not the underlying asset, it is the right to receive the underlying asset or, perhaps, depending on the circumstances, a single net right and obligation to exchange cash for the underlying asset.”
  • Commercial substance — The IASB suggests that “terms that have no commercial substance [i.e., that have no discernible effect on the economics of the contract] should be disregarded.” Terms that have no commercial substance include rights that the holder will not have the practical ability to exercise.

Editor’s Note: Consider a financial instrument such as a perpetual preferred share for which the issuer has no contractual obligation to pay an annual dividend to the holder and no contractual obligation ever to redeem the financial instrument. However:

  • The issuer has an option to pay a dividend of a specified amount.
  • The instrument contains a “dividend stopper” (i.e., unless the issuer pays the full amount of the discretionary dividend, it cannot pay any dividend to its ordinary shareholders).
  • The issuer has an option to redeem the financial instrument on a specified future date.
  • If the issuer does not redeem the financial instrument on that date, the dividend “steps up” to an amount that would give a cost of finance higher than the issuer would otherwise have to incur.

The DP suggests that in the example above, the option not to redeem the instrument may lack commercial substance because the “step-up” clause may economically compel the issuer to redeem the financial instrument on the specified date. Accordingly, the option could potentially be disregarded in the accounting analysis.


1 IASB Discussion Paper DP/2013/1, A Review of the Conceptual Framework for Financial Reporting.

2 See Deloitte’s October 4, 2010, Heads Up for further discussion.

3 See Deloitte’s March 25, 2010, Heads Up for further discussion.

4 IASB Exposure Draft ED/2011/6, Revenue From Contracts With Customers.

5 IAS 16, Property, Plant and Equipment.

6 IAS 38, Intangible Assets.

7 IAS 40, Investment Property.


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