IASB January 2009

The Board discussed phases A, C and D of the project on the conceptual framework.

Phase A - qualitative characteristics and constraints of financial reporting

The Board reviewed responses to the exposure draft (ED) An improved Conceptual Framework for Financial Reporting: Chapter 2: Qualitative Characteristics and Constraints of Decision-useful Financial Reporting Information and tentatively reconfirmed the following proposals made in the ED.

• to use the term ‘faithful representation’ to refer to the characteristic labelled as ‘reliability’ in the existing Framework.
• to classify relevance and faithful representation as fundamental characteristics. In response to comments received, the Board will clarify that the components of faithful representation (neutrality, completeness and freedom from error) are not absolutes.
• to classify verifiability, comparability, timeliness and understandability as enhancing characteristics.
• to describe materiality and cost as constraints on financial reporting.

Phase C – measurement

The Board discussed which measurement bases should be included in the framework and how they might be grouped to facilitate discussion and decisions about measurement issues. The Board also discussed possible simplifications to current and possible bases that might improve the use of a mixed-basis measurement system. No decisions were made.

Phase D – reporting entity

The Board discussed some of the issues arising from responses to the discussion paper Preliminary Views on an improved Conceptual Framework for Financial Reporting: The Reporting Entity. The Board tentatively decided:

• to revise the description of a reporting entity to state that a reporting entity is a circumscribed area of economic activity whose financial information has the potential to be useful to present and potential equity investors, lenders and other capital providers for decisions in their capacity as capital providers. 
•  to update the list of capital providers in the description of a reporting entity if any changes are made to the list of the primary users of financial information in Chapter 1 The Objective of Financial Reporting.
• to clarify that an entity can be a reporting entity even if it is currently inactive.
• Implications of the description of a reporting entity

The Board also tentatively affirmed the following decisions:

• A reporting entity need not be a legal entity.
• A legal entity could, but would not necessarily, meet the description of a reporting entity.
• A branch or segment of a legal entity could, but would not necessarily, meet the description of a reporting entity.

Group reporting entity

The Board tentatively decided that:

• if the reporting entity controls other entities, it should present consolidated financial statements using the controlling entity model.
• when the controlling entity is not a reporting entity, it may be useful to present combined financial statements of entities under common control.
• an assessment of risks and rewards might be useful for implementing the controlling entity model in some circumstances, but should not replace control as the basis for identifying the entities to be consolidated.
• parent-only financial statements should not be mandatory but may provide useful information if they are presented together with consolidated financial statements.

Next steps

The Board and the FASB will continue their discussions in March.