The IASB discussed an early draft of sections of a Discussion Paper on the Conceptual Framework, addressing:
- the purpose of the Conceptual Framework;
- the definitions of the elements of financial statements: asset, liability, equity, income and expense;
- unit of account;
- recognition and derecognition;
- the boundary between liabilities and equity;
- measurement; and
- reporting entity.
In addition, the IASB also had education sessions on the following topics, on which no decisions were taken:
- research undertaken by the Accounting Standards Board of Japan on the use of other comprehensive income (OCI) by entities in various countries and industries; and
- feedback on the IASB’s disclosure forum held in late January 2013, and the results of a related survey on disclosures. A feedback statement is expected to be published in the second quarter of 2013.
Purpose of the Conceptual Framework (Agenda Paper 3A)
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.
The Conceptual Framework is not an IFRS and does not override IFRSs. The IASB tentatively decided that this would continue to be the case.
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 tentatively decided that it would need to describe and explain any such departure in the Basis for Conclusions on that IFRS.
Definition of the elements of financial statements (Agenda papers 3B and 3C)
Definitions of an asset and a liability
The IASB discussed the definitions of an asset and a liability. The existing definitions are:
- 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.
- 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.
The IASB discussed the following possible changes to the definitions of an asset and a liability, which could be implemented by amending the definitions or adding guidance:
- emphasising that the asset is the resource and a liability is an obligation, rather than the economic benefits that may flow from the resource or obligation; and
- removing the term ‘expected’ from the definition. This will avoid implying that an item will not qualify as an asset or liability if the probability of an inflow or outflow does not reach some minimum threshold. In the IASB’s view, as long as an item is capable of producing an inflow or outflow of resources, it can meet the definition of an asset or liability, even if the probability of an inflow or outflow is very low (eg out of the money options). Removing the reference to ‘expected’ flows from the definition would also remove confusion over how that reference interacts with the reference to probability in the recognition criteria (see below for a discussion of recognition criteria).
The IASB also discussed whether to make the following further changes to the definitions:
- Remove the reference to ‘past events’, and instead emphasise that an asset is a present resource and a liability is a present obligation.
- Move the reference to ‘control’ from the definition of an asset to the recognition criteria (see the discussion of recognition criteria below).
Agenda Paper 3B suggested that the following revised definitions of an asset and a liability would reflect all the changes discussed above:
- An asset is a present economic resource.
- .A liability is a present obligation to transfer an economic resource.
- An economic resource is a scarce item that is capable of producing economic benefits to the party that controls the item.
Additional guidance on applying the definitions
The IASB also discussed additional guidance to support the definitions of an asset and a liability:
- Clarifying what is a resource is: the IASB tentatively decided to clarify that:
- a resource can have different forms ie enforceable rights (eg trade receivables) and other economic resources (eg knowhow).
- ifor a physical object, eg an item of property, plant and equipment, the economic resource is not the underlying object but a set of rights to obtain the economic benefits generated by the physical object.
- Executory contracts: the IASB discussed whether in principle, a net asset or net liability arises under a contract for which neither party has performed if the contract is enforceable (an executory contract). The IASB noted that these contracts are typically initially measured at zero.
With regard to additional guidance for a liability, the IASB discussed three approaches for identifying present obligations:
- Approach 1—apply a principle that 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.
- Approach 2—modify the principle in Approach 1 so that an unconditional obligation is not the only type of liability. Applying Approach 2 means that a present obligation also exists if both the following conditions are met:
- an obligation accumulates over time or as the entity receives goods or services and those goods or services have already started to accumulate; and
- although there is a theoretical possibility that a final condition will not be met, that possibility is not realistic.
- Approach 3—focus on past events instead of future events. Applying Approach 3 means that a present obligation will arise 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.
No preliminary views were reached on these approaches and the IASB instructed the staff to include a description of all three approaches in the Discussion Paper.
Definitions of income and expense and other elements of the financial statements
The IASB discussed the existing definitions of income and expense and noted that significant changes were probably unnecessary. The IASB will consider in March 2013 whether to provide additional definitions of elements to distinguish items presented in profit or loss from items presented in other comprehensive income.
The IASB also noted that the Discussion Paper may discuss whether there is a need to define elements for statements of cash flows and of changes in equity, eg cash receipts, cash payments, contributions to equity, distributions of equity and transfers between classes of equity.
Recognition and derecognition (Agenda Paper 3E)
The existing Conceptual Framework includes the following recognition criteria:
An item that meets the definition of an element should be recognised if:
- it is probable that any future economic benefit associated with the item will flow to or from the entity; an
- the item has a cost or value that can be measured reliably.
The IASB discussed the following possible improvements to the recognition criteria:
- Removing the term ‘probable’ from the recognition criteria: .
- The IASB tentatively agreed that the Discussion Paper should explain the difference between uncertainty about whether an asset or liability exists (sometimes called ‘existence uncertainty’ or ‘element uncertainty’) and uncertainty of outcome
- Uncertainty over the existence of the asset or liability: in most cases, it is clear whether an asset or liability exists, but in some cases this may be uncertain. The IASB tentatively decided that the Discussion Paper will discuss the different approaches for such cases. The issues to be considered include whether to apply an explicit probability threshold in such cases, what the threshold should be (eg virtually certain, probable) and whether the threshold for an asset should be the same as for a liability.
- Uncertainty of outcome: the IASB tentatively decided that although an asset or a liability must be capable of generating inflows or outflows of economic benefits, there is no minimum probability threshold that those inflows or outflows must reach before a resource or an obligation qualifies as an asset or a liability.
- Providing additional guidance on when an entity controls an asset: the IASB tentatively decided that the Discussion Paper will include a definition of control that is based on IFRS 10 Consolidated Financial Statements and the IASB’s Exposure Draft (ED) Revenue from Contracts with Customers.
The IASB also tentatively decided that:
- in general, recognising items that meet the definition of assets or liabilities is likely to provide useful information for assessing: i.the amount, timing and uncertainty of future cash flows; and
- how effectively and efficiently management is using the entity’s resources;
- however, there may be cases for 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.
The existing Conceptual Framework does not define ‘derecognition’ and does not describe when derecognition should occur.
At this meeting, the IASB discussed whether the derecognition criteria should be the mirror image of the recognition criteria. The IASB tentatively decided that an entity should derecognise an asset or a liability when it no longer meets the recognition criteria. However, when the entity has retained some component of an asset or liability, the IASB will determine, at a standards level, how best to portray the change in those rights or obligations. Possible approaches include:
- enhanced disclosures;
- presenting any rights or obligations retained on different lines from the line used for the original rights or obligations, to highlight the difference in risk profiles; or
- continuing to recognise the original asset or liability, and treating the proceeds received or paid for the transfer as a loan received or granted.
Boundaries between liabilities and equity (Agenda Paper 3D)
The existing Conceptual Framework defines equity as the residual interest in the assets of the entity after deducting all its liabilities. The existing definition of a liability focuses on whether the entity has an obligation to transfer economic benefits. However, some Standards (eg IAS 32 Financial Instruments: Presentation) use complex exceptions to these basic definitions when distinguishing between liabilities and equity instruments. These exceptions are difficult to understand and apply.
The IASB discussed a possible approach that:
- retains the existing definition of a liability; and
- remeasures equity claims through a statement of changes in equity to show wealth transfers between different classes of equity holders.
The IASB directed the staff to develop this approach further for inclusion in the Discussion Paper.
The existing Conceptual Framework lists four measurement bases and does not provide any guidance for when to use them.
General principles for measurement (Agenda Paper 3F)
At this meeting, the IASB discussed, and made tentative decisions on, the following principles of measurement. These principles are derived from the objective of financial reporting and the qualitative characteristics of useful financial information as described in Chapters 1 and 3 of the Conceptual Framework.
- 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.
- 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.
- 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.
The IASB noted that it will need to consider all three principles in selecting an appropriate measurement. The IASB also acknowledged that, at a practical level, many transactions are reflected in the income statement as they take place. Application of the three principles is therefore more relevant when those transactions create assets or liabilities that cross reporting dates. In applying the three principles, none has a higher priority than the others.
Some IASB members suggested adding an additional principle, namely, that the number of measurements used should be the minimum number necessary to provide relevant information.
Initial and subsequent measurement (Agenda Paper 3G)
The IASB tentatively decided that the most relevant measurement method will depend on:
- how the value of the asset will be realised. The value of an asset can be realised by, for example: i.using it;
- selling it;
- selling it;
- holding it; or
- charging others for the right to use it.
- how the obligation will be fulfilled or settled. An obligation can be fulfilled or settled by: i.settling the obligation according to its terms;
- selling it;
- performing services, or hiring others to perform services, to satisfy a claim with no stated amount;
- settling a claim that has no stated or determinable amount by negotiation or in litigation; or
- transferring the obligation to another party and being released by the creditor or other claimant.
The IASB discussed the different measurement bases for initial measurement and when they might be appropriate:
- cost (subject to a recoverability or adequacy test);
- fair value; and
- other bases if they will be used for subsequent measurement. The IASB will discuss such bases in March 2013.
Reporting entity (Agenda Paper 3H)
The IASB have previously issued a Discussion Paper and then an Exposure Draft on the reporting entity. Consequently, the IASB tentatively decided that it will not discuss the reporting entity proposals, including comments received on the 2010 ED, in detail until it begins to develop the Conceptual Framework Exposure Draft. The Discussion Paper will include an appendix that summarises the content of the 2010 Exposure Draft and of the comment letters that were received on it.
In March 2013, the IASB expects to discuss the following issues:
- presentation (including what should be included in other comprehensive income);
- constructive obligations; and
- other measurement approaches.
In April 2013, the IASB expects to discuss a revised draft of the Discussion Paper that will reflect comments received at the February and March 2013 meetings.
The IASB also noted that the Accounting Standards Advisory Forum (ASAF) will discuss the Conceptual Framework at its first meeting in April 2013.