The IASB continued its discussions on the Conceptual Framework project. At this meeting, the IASB discussed and provided comments on a series of papers that taken together comprise an early draft of the Conceptual Framework Discussion Paper.
Most of the papers discussed at this meeting were redrafts of papers presented at the February and March 2013 meetings, updated in response to comments made during those meetings. In addition to the matters discussed below, IASB members provided the staff with various suggestions for improving the Discussion Paper.
The IASB also received a summary of the Conceptual Framework discussion that took place at the first meeting of the Accounting Standards Accounting Forum (ASAF). The summary is available here.
Purpose and status of the Conceptual Framework (Agenda references 10A and 10A(a))
At the February 2013 meeting, the IASB tentatively decided that the primary purpose of the Conceptual Framework is to assist the IASB in the development of future IFRSs and in its review of existing IFRSs. The Conceptual Framework may also assist preparers of financial statements in developing accounting policies for transactions or events that are not covered by existing IFRSs. In rare cases, the IASB may issue a new or revised IFRS that conflicts with some aspect of the Conceptual Framework if this is necessary to meet the overall objective of financial reporting. The IASB would explain its reasons for adopting such an approach in the Basis for Conclusions on that new or revised IFRS.
In this meeting, the IASB noted that:
a. the purpose of the Conceptual Framework is to assist the IASB by identifying principles for the IASB to use consistently in developing and revising IFRSs; and
b. the Conceptual Framework may help interested parties to understand and interpret IFRSs.
Elements of financial statements (Agenda reference 10B, 10B(a))
The IASB discussed the definitions of an asset and a liability. The existing definitions are:
a. An asset is a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity.
b. A liability is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits.
In February 2013, the IASB tentatively decided to make the following improvements to these definitions, to:
a. emphasise that an asset is the resource and a liability is the obligation, rather than the economic benefits that may flow from the resource or obligation; and
b. remove the reference to ‘expected’ inflows or outflows of economic benefits from the definitions.
At this meeting, the IASB discussed the following definitions that implement these changes:
a. An asset of an entity is a present economic resource controlled by the entity as a result of past events.
b. A liability of an entity is a present obligation of the entity to transfer an economic resource as a result of past events.
c. An economic resource is a right, or other source of value, that is capable of producing economic benefits, but only for the party that controls it.
The IASB noted that these definitions differed in the following respects from the definitions discussed in February:
a. The reference to control has been moved back into the definition of an asset. In February, the reference to control appeared in the recognition criteria, not in the definition of an asset.
b. The explicit reference to past events has been restored. The definition proposed in February did not include reference to past events, on the basis that it was redundant if the definition included the word ‘present’.
The IASB tentatively decided that the Discussion Paper should propose these revised definitions. The IASB also instructed the staff to consider, in drafting, whether to delete from the definition of an economic resource the phrase ‘but only for the party that controls it’.
In February, the IASB tentatively decided that the Discussion Paper should explain the difference between uncertainty about whether an asset or liability exists (sometimes called ‘existence uncertainty’) and uncertainty of outcome. Among other things, the IASB discussed at that meeting what approach to adopt for existence uncertainty, but did not reach a tentative conclusion.
At this meeting, the IASB continued that discussion. The IASB tentatively decided that the Conceptual Framework should not set a probability threshold to determine whether an asset or liability exists, in the rare cases when this is uncertain. If existence uncertainty is significant in a particular project, the IASB would decide in that project:
a. which threshold, if any, would result in the most relevant information for users; and
b. how to provide the most faithful representation of the circumstances, and how to make the information provided more complete, verifiable, timely and understandable.
Additional guidance to support the asset and liability definitions (Agenda references 10C and 10C(a))
The IASB discussed three approaches for identifying present obligations in which the outcome depends on the entity’s future actions:
a. Approach 1—obligations must be unconditional. For as long as an entity could avoid the transfer of resources through its future actions, it does not have a present obligation.
b. Approach 2—identify an obligation at the earlier of the two following times:
i. when the entity incurs an unconditional obligation to transfer an economic resource; and
ii. when the entity receives benefits in exchange for which it accepts a responsibility to transfer an economic resource.
c. Approach 3—identify a liability if, as a result of past events, the entity has an obligation to transfer economic resources to another party on more onerous terms than would have been required in the absence of those past events.
The IASB tentatively decided that:
a. it does not support Approach 1; and
b. it does not yet have a preference between Approaches 2 and 3.
Recognition and derecognition (Agenda reference 10D and 10D(a))
In February 2013, the IASB tentatively decided that, in general, recognising items that meet the definition of assets or liabilities is likely to provide useful information about the resources of the entity, claims against the entity and how effectively and efficiently management is using the entity’s resources. However, there may be cases in which an entity should not recognise some asset or liability, either because recognising the element may not provide relevant information, or because the cost to provide the information is more than the benefits of providing the information.
At this meeting, the IASB tentatively decided that the recognition criteria should discuss, in addition to situations in which recognition may not provide relevant information, situations in which recognition may not result in a faithful representation. Thus, the Conceptual Framework would indicate that the IASB might decide in a particular standard that an entity should not recognise an asset or liability:
a. if recognising the asset or liability would provide users with information that is not relevant, or not sufficiently relevant to justify the cost; or
b. if no measurement of the asset or liability would result in a faithful representation of the asset or liability and of changes in the asset or liability
Measurement (Agenda reference 10F, 10F(a) and 10F(b))
Principles of measurement
In February 2013, the IASB discussed the following proposed principles of measurement:
a. Principle 1: the objective of measurement is to represent faithfully the most relevant information about the economic resources of the reporting entity, the claims against the entity, and how efficiently the entity’s management and governing board have discharged their responsibilities to use the entity’s resources.
b. Principle 2: although measurement generally starts with an item in the statement of financial position, the relevance of information provided by a particular measurement method also depends on how it affects the statement of comprehensive income and, if applicable, the statements of cash flows and of equity and the notes to the financial statements.
c. Principle 3: the cost of a particular measurement must be justified by the benefits of reporting that information to existing and potential investors, lenders, and other creditors.
Also in February 2013, the IASB tentatively decided that the most relevant measurement method will depend upon:
a. how the value of an asset will be realised; and
b. how an obligation will be fulfilled or settled.
At this meeting, the IASB tentatively decided the following:
a. The first principle discussed in February should be retained as a statement of the objective of measurement (rather than as a principle).
b. The second and third principles discussed in February, and the related discussion of those principles, should be retained as background information about how the objectives of financial reporting and the qualitative characteristics of useful financial information should influence measurement requirements. That discussion would make the following general points.
i. the cost of a particular measurement should be justified by the benefits of reporting that information; and
ii. in selecting an appropriate measurement method, the IASB should consider the information that would result from that method in both the statement of financial position and the statement of comprehensive income.
c. The following two factors should be developed into principles for inclusion in the Discussion Paper:
i. The most relevant measurement method for an asset should be consistent with the way by which that asset will contribute to future net cash inflows and the most relevant measurement method for a liability should be consistent with the way by which the entity will settle or otherwise fulfil that liability.
ii. The number of different measurements used should be the minimum necessary to provide relevant information. Unnecessary changes in measurement methods should be avoided, and necessary changes should be clearly explained.
Presentation in the statement of comprehensive income—profit or loss and OCI (Agenda references 10H and 10H(a))
The IASB discussed whether and how to distinguish items included in profit or loss from items included in other comprehensive income (OCI). The IASB tentatively decided that the Discussion Paper will review two broad approaches to presentation of profit or loss and OCI:
a. Approach 1 proposes that the Conceptual Framework should prescribe presentation of profit or loss as a total or subtotal. The items presented in OCI should be limited to remeasurements of recognised assets and liabilities measured on a current measurement basis. The IASB directed the staff to include in the Discussion Paper at least two variants of Approach 1:
i. In the first variant of Approach 1, only two types of items are eligible for presentation in OCI (bridging items and mismatched remeasurements). Bridging items arise where the IASB decides that profit or loss should reflect a different measurement basis to that reflected in the statement of financial position. Mismatched remeasurements arise where an item of income or expense represents an economic phenomenon so incompletely that reporting that item in profit or loss would not provide relevant information. In this variant of Approach 1, all items presented in OCI are recycled in subsequent periods.
ii. In the second variant of Approach 1, three types of item are eligible for presentation in OCI (bridging items and mismatched remeasurements as well as an additional category of items based on a set of indicators). An item presented in OCI is recycled into profit or loss in subsequent periods if, and only if, the IASB determines that recycling that item provides relevant information.
b. Approach 2 proposes that there should be a single statement of comprehensive income and that the Conceptual Framework would not prescribe a subtotal for profit or loss (or any other subtotal). Items presented in the statement of comprehensive income would be presented only once, that is, items previously presented in any part of the statement of comprehensive income would not be recycled in a subsequent period.
The Discussion Paper will indicate the IASB’s preliminary preference for Approach 1. The IASB did not express a preference between the variants of that approach.
The use of the term ‘business model’ in the Conceptual Framework (Agenda reference 10K)
At this meeting, the IASB discussed whether an entity’s business model is relevant to decisions that the IASB will make in setting Standards. The IASB tentatively decided that, when the IASB develops new or revised Standards, financial statements can be made more relevant if the IASB considers how an entity conducts its business activities. In addition, the IASB tentatively decided that the Discussion Paper should not provide a formal definition of ‘business model’.
The IASB provided some additional comments on the following topics for the staff to consider in drafting the Discussion Paper:
a. Definition of equity and distinction between liabilities and equity instruments (Agenda references 10E, 10E(a) and 10E(b));
b. Presentation and disclosure (general) (Agenda reference 10G and 10G(a));
c. Reporting entity (Agenda reference 10I and 10I(a)); and
d. Capital maintenance (Agenda reference 10J and 10J(a)).
In May 2013, the IASB will review the due process followed in developing the Discussion Paper. At that meeting, the staff will also seek permission to begin the balloting process for the Discussion Paper, with the aim of publishing in early July.