Conceptual framework for financial
reporting
Exposure draft ED/2015/3 of a revised framework issued by the
International Accounting Standards Board in May 2015
Comments from ACCA
25 November 2015
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www.accaglobal.com
Further information about ACCA’s comments on the matters
discussed here may be obtained from the following:
Richard Martin
Head of Corporate Reporting, ACCA
Email: richard.martin@accaglobal.com
ACCA welcomes the opportunity to provide comments on the
exposure draft (ED) of a revised conceptual framework. This has been
done with the assistance of the members of ACCA’s Global Forum for
Corporate Reporting who have considered the questions raised, and
their views are reflected in the following comments.
MAIN COMMENTS
The conceptual framework (CF) is an important document. While not a
standard in itself to be complied with it should help to shape future
standard setting by the IASB by ensuring greater consistency and
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coherence in the process. In some circumstances those preparing and
auditing accounts may need to refer to it to help them.
We support the proposed framework in most respects.
Our reservations are set out in the answers below to the specific
questions raised in the ED and principally are as follows.
Prudence should not be included in the CF as part of neutrality in
terms of the preparation of financial statements. The two concepts
seem to be too different and there is a risk that prudence will be
selectively applied by preparers to ‘manage’ their reported financial
information.
The potential for asymmetric recognition in standard-setting, however,
of assets and liabilities and gains and losses referred to in the basis for
conclusions needs to be part of the CF itself.
A clear principle is needed for definition of the reporting entity, so that
when combined financial statements are produced there are some
concepts to guide their use.
The equity method of accounting is not covered by the draft CF,
despite being used in the standards themselves. The concept needs to
be included and identified either as an extension of the consolidation
concept in Chapter 3, or as a measurement basis in Chapter 6.
Certain conceptual issues are currently inadequately addressed in this
ED – specifically the distinctions between liabilities and equity in one
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case and that between profit and other comprehensive income (OCI)
as the other. IASB has chosen that these are progressed as standard
setting projects. If so they need to be progressed with high priority
and then the concepts that are settled on need to be included in a
timely revision of the CF. In our view the current incoherent treatment
of OCI is one of the most significant weaknesses in IFRS.
The question of recycling of items from OCI to profit or loss needs to
be addressed not as a rebuttable presumption but as a question of
relevant and understandable information for users and the criteria to
guide that decision set out in the CF.
Chapter 8 on capital maintenance is currently inconsistent with the rest
of the CF and should be removed for now and reconsidered.
SPECIFIC COMMENTS ON QUESTIONS RAISED
Question 1—Proposed changes to Chapters 1 and 2
Do you support the proposals:
(a) to give more prominence, within the objective of financial reporting, to the
importance of providing information needed to assess management’s
stewardship of the entity’s resources;
(b) to reintroduce an explicit reference to the notion of prudence (described
as caution when making judgements under conditions of uncertainty) and to
state that prudence is important in achieving neutrality;
(c) to state explicitly that a faithful representation represents the substance
of an economic phenomenon instead of merely representing its legal form;
(d) to clarify that measurement uncertainty is one factor that can make
financial information less relevant, and that there is a trade-off between the
level of measurement uncertainty and other factors that make information
relevant; and
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(e) to continue to identify relevance and faithful representation as the two
fundamental qualitative characteristics of useful financial information?
Why or why not?
(a) We agree with the importance of the stewardship objective, but consider
that it in the conceptual framework (CF) it should be an objective for financial
reporting on an equal footing with providing information for economic
decisions.
(b) We do not agree with how prudence has been dealt with in paragraph
2.18.
The way it has been stated there prudence is a quality (caution in the face of
uncertainty) which should be followed in the preparation of financial
statements. This approach risks encouraging earnings management by
apparently giving companies the freedom to reduce profits by applying
‘prudence’ in the preparation of their accounts when that is convenient.
Prudence also seems inherently inconsistent with neutrality and so cannot
be incorporated within that concept.
When there is significant uncertainty with regards to an asset or liability then
that should be properly reflected in the risk premium or adjustment that is
made in reaching either an assessment of any impairment of a historical cost
element or one at fair value. The uncertainty must be incorporated to
achieve an unbiased measurement. It is often the case that external parties
in valuing assets and liabilities may place more weight on downside rather
than on upside risks.
However the CF is principally an aid to the IASB to help set standards that
are coherent and achieve the right objectives, rather than a guide to
preparers. We see an important role for what could be termed prudence in
standard setting, particularly in the possibility that there should in some
cases be asymmetric recognition of assets and liabilities and gains and
losses.
This asymmetrical prudence can be seen in the standards themselves, for
example in the treatment of onerous and executory contracts (IAS37),
contingent assets and liabilities (IAS37), deferred tax assets and liabilities
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(IAS19) and in variable consideration in IFRS15. However in other cases
such as financial instruments there is basically no asymmetric recognition.
This possibility of asymmetry is confirmed in the basis of conclusion but
being so self-evidently important in standard setting it should be dealt with in
the CF itself, as a possibility (not a necessity) in Chapter 1 and under
recognition criteria in Chapter 4.
We agree with proposed treatment of significant measurement uncertainty.
We note above that uncertainty otherwise should be reflected by preparers
in valuations via the proper reflection of risk. Beyond that we see less of a
role for specific prudence to be applied by the IASB in setting the
measurement requirements in IFRS.
(c) We agree with the specific reference to substance over form. We suggest
that the word ‘merely’ is replaced by ‘only’.
(d) As noted above we agree with the treatment of measurement uncertainty.
(e) We agree with relevance and faithful representation as the fundamental
characteristics of useful financial information. We agree that faithful
representation is a better term than reliability in the sense that it seems to
capture more of the ‘presents fairly’ or ‘true and fair’ concept.
Question 2—Description and boundary of a reporting entity
Do you agree with:
(a) the proposed description of a reporting entity in paragraphs 3.11–3.12;
and
(b) the discussion of the boundary of a reporting entity in paragraphs 3.13–
3.25?
Why or why not?
There is no clear principle for determining the reporting entity. Control (direct
and indirect) is discussed in terms of the boundary of the reporting entity. We
are content that further elaboration of control is left to standards such as
IFRS10. However joint control and significant influence are not discussed
and that seems a significant omission in the CF given their appearance in
two standards. Some may see the concepts as partially extending the
reporting entity to include joint ventures and associates.
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The issue of the lack of a clear definition of the reporting entity also arises in
terms of combined financial statements. We are pleased that the concept
and possibility of combined financial statements is included in the CF, with
its implicit confirmation that combined financial statements could comply with
IFRS. However with no principles in determining the reporting entity this
leaves the field wide open as to what entities could be combined. Paragraph
3.11 simply says that a reporting entity could be one that “chooses to
prepare general purpose financial statements”.
The CF is mainly to assist the IASB in setting standards but as there is no
IFRS for combined financial statements then preparers following IAS8.10
hierarchy may be looking to the CF for guidance in this area and so this lack
of guidance or restriction is particularly significant.
Paragraph 3.20 could be read to imply that separate financial statements
should always be prepared along with consolidated ones. That would seem
a step too far and in contradiction to existing standards.
In our view 3.23 is not helpful and would be better deleted. The usefulness of
unconsolidated compared to consolidated financial statements depends on
the purpose for which they are being used.
Chapter 3 refers to unconsolidated financial statements whereas IAS27
refers to separate financial statements and consistency in terminology here
would help.
Question 3—Definitions of elements
Do you agree with the proposed definitions of elements (excluding issues
relating to the distinction between liabilities and equity):
(a) an asset, and the related definition of an economic resource;
(b) a liability;
(c) equity;
(d) income; and
(e) expenses?
Why or why not? If you disagree with the proposed definitions, what
alternative definitions do you suggest and why?
We agree with the definitions of assets and liabilities. They are clearer than
the current ones and they should exclude the probability element. We also
agree with definitions that depend on them – that is equity, income and
expenses.
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We note that the definition of assets is broad and would encompass a
number of items that would not be included in the current definition and
therefore the recognition criteria are particularly important.
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Some more detailed comments are:
 In 4.10 access to public goods are an economic resources for an
entity, but they are not assets because they are not controlled by the
entity. This would be more in line with the concepts of capital in
Integrated Reporting for example.
 We are not sure that 4.25 is very helpful with its implicit requirement
of symmetry between different parties. It could be deleted without
affecting 4.26 for example.
There is also more supporting material needed for the definition of liability.
Question 4—Present obligation
Do you agree with the proposed description of a present obligation and the
proposed guidance to support that description? Why or why not?
There is explanation in 4.32 to 4.35 of this condition ‘no practical ability to
avoid a transfer’, but some aspects should be more definitively dealt with.
Liabilities contingent on the future actions of others would generally be
recognised, but those dependent on the entity’s own action would only be
where the ‘no practical ability’ test would be applied. 4.32 talks about
business disruption or adverse economic consequences, but there is a scale
from probable economic advantage to economic compulsion that needs to
be addressed.
In terms of a past event the concept of the ‘stand ready’ obligation should be
covered.
4.31(a) refers to the receipt of economic benefits and we think that in some
cases that should be an important factor in deciding whether a liability exists.
Question 5—Other guidance on the elements
Do you have any comments on the proposed guidance? Do you believe that
additional guidance is needed? If so, please specify what that guidance
should include.
Given the significance of cash flows both in the determination of useful
information and in the importance of the cash flow statement, it seems a
significant omission that the elements defined in the CF do not include cash
inflows and outflows.
We note that the CF does not set out any further principles for the boundary
between what are equity instruments and what are liabilities. This is intended
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to be the subject of a standards level project, but when those principles are
established they need to be incorporated into the CF.
No further comments.
Question 6—Recognition criteria
Do you agree with the proposed approach to recognition? Why or why not? If
you do not agree, what changes do you suggest and why?
We agree with the approach to recognition of setting out criteria to consider
without determining the balance between them. In applying these criteria the
IASB will need to be careful to try and minimise inconsistencies between the
standards that might result.
We have noted above our concern that the possibility in some cases of
asymmetrical recognition of assets compared to liabilities, and of gains
compared to losses needs to be reflected in the discussion of recognition
criteria.
Paragraph 5.13(a) refers to the existence of assets and its separability from
goodwill. Arguably this separability should therefore be part of the definition
of an asset.
Question 7—Derecognition
Do you agree with the proposed discussion of derecognition? Why or why
not? If you do not agree, what changes do you suggest and why?
We agree with the discussion of derecognition. Currently some standards
employ a control model and others (such as for financial instruments) a risk
and reward approach. Both are included as 5.25 and 5.29 respectively.
Question 8—Measurement bases
Has the IASB:
(a) correctly identified the measurement bases that should be described in
the Conceptual Framework? If not, which measurement bases would you
include and why?
(b) properly described the information provided by each of the measurement
bases, and their advantages and disadvantages? If not, how would you
describe the information provided by each measurement basis, and its
advantages and disadvantages?
We agree that the two main categories of measurement bases are historical
cost and current values. However the implication of this for measurement
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bases that do not appear to fit under either of these is not clear, for example
the equity basis of measurement (for associates and JVs). The lack of
reference to joint control or significant influence noted in response to Q2
above makes this of greater importance.
6.23 The discussion could make clearer that fair value reflects future cash
flows except for transaction costs. The CF might note that sometimes
transaction costs are not separated but are reflected in the bid-offer spread.
Question 9—Factors to consider when selecting a measurement basis
Has the IASB correctly identified the factors to consider when selecting a
measurement basis? If not, what factors would you consider and why?
We agree with the factors identified, especially the two in paragraph 6.54.
The CF could spell out the implications of these, in terms of which business
models are more likely to lead to current values and which more likely to
lead to cost-based measures.
Question 10—More than one relevant measurement basis
Do you agree with the approach discussed in paragraphs 6.74–6.77 and
BC6.68? Why or why not?
There may be cases where, using the criteria of relevant information, the
profit or loss treatment might be best on a historical cost basis and yet the
balance sheet should incorporate a current value. However such treatments
do go against the basic model of the connection of income statements and
balance sheets and can add significant complexity (see our comments in
response to Q13 and Q14). So such solutions should not be readily
employed.
Question 11—Objective and scope of financial statements and
communication
Do you have any comments on the discussion of the objective and scope of
financial statements, and on the use of presentation and disclosure as
communication tools?
We agree with what is included in these sections.
.
Question 12—Description of the statement of profit or loss
Do you support the proposed description of the statement of profit or loss?
Why or why not?
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If you think that the Conceptual Framework should provide a definition of
profit or loss, please explain why it is necessary and provide your suggestion
for that definition.
We agree with the description of the profit or loss as the primary source of
information about the entity’s financial performance. We recognise it as a
long standing and the most widely used measure of performance.
For this reason it would be better if the CF included a positive definition.
However we accept that for now it is difficult to provide that.
In the absence of such a definition then we agree with the default position
being that all income and expenses are reported in profit or loss, unless
required or allowed by an IFRS to be included in OCI.
The basis for conclusion includes a reference to the restriction that only the
IASB can allow the OCI treatment. Occasionally preparers will need to use
the CF in the absence of an applicable IFRS, so it is important that this
restriction is in the CF itself and not in the basis for conclusions.
Question 13—Reporting items of income or expenses in other
comprehensive
income
Do you agree with the proposals on the use of other comprehensive
income? Do you think that they provide useful guidance to the IASB for
future decisions about the use of other comprehensive income? Why or why
not?
If you disagree, what alternative do you suggest and why?
We consider that more emphasis in the CF should be given to developing a
useful presentation of the statement of comprehensive income as a whole
and less to the separation of OCI from profit and loss. What is most
important is that there is transparency for the readers of the financial
statements of the different components of comprehensive income. In the end
the stewardship objective means that management are accountable for
comprehensive income and not just what is in profit and loss. IASB should
be looking more to encouraging helpful analysis of all of the components of
comprehensive income, to try to identify for users items that are likely to be
persistent and have more implications for the trend of future performance
from those that may be ‘one off’.
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As noted above we consider it would be better for the CF to have a positive
definition of profit, although we recognise that this is difficult to achieve at
present. If there can be no positive definition of profit for the period then we
accept there cannot be one of OCI either. Paragraph 7.24 sets out the
criteria for IASB to decide when an item could be reported in OCI. We do not
object to either (a) or (b) but think they are too imprecise to form an
adequate basis for such decisions to be taken on a consistent and coherent
basis. In particular 7.24(b) needs the criteria set out which will be used to
judge the relevance of the information referred to.
Furthermore the conditions in 7.24 are not framed positively, so they are
criteria for possible inclusion in OCI, not for deciding whether something
should in principle be included in OCI.
The current incoherent picture of OCI treatments is one of the most
significant weaknesses in current IFRS and one where the CF is expected to
point the way. This proposed version of the CF does not progress sufficiently
in that direction. We consider that this profit or loss/OCI issue needs more
research by IASB in different presentations and an overall reconsideration of
performance presentation generally including revising IAS1 and IFRS8.
Question 14—Recycling
Do you agree that the Conceptual Framework should include the rebuttable
presumption described above? Why or why not?
If you disagree, what do you propose instead and why?
We do not agree with the rebuttable presumption proposed that all items in
OCI should ultimately be recycled, but consider that there should be no
presumption either way. The CF should set out the criteria that will be
considered in reaching a decision in a standard on whether there should be
recycling. Recycling of elements that have formed part of OCI increases the
complexity of the financial statements and may in some cases reduce the
relevance and understandability of the profit and loss statement. We see the
need for recycling for cash flow hedging instruments, but believe that to be a
special case.
As noted above in general there should be more emphasis on
comprehensive income rather than on its separation into two components.
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Question 15—Effects of the proposed changes to the Conceptual
Framework
Do you agree with the analysis in paragraphs BCE.1–BCE.31? Should the
IASB consider any other effects of the proposals in the Exposure Draft?
We do not disagree with the analysis provided, but we think that it is
incomplete.
We agree that IFRIC21 and potentially IAS37 itself may not be consistent
with the definitions of liabilities included in the CF. Likewise the distinction
between debt and equity in IAS32 would not be consistent. We note that
IASB is contemplating or already working on projects that would reconsider
those standards.
However we find that the differences analysed are incomplete and that there
are potentially more standards that will be inconsistent. For example in our
answer to Q8 above we highlight that the equity accounting approach in
IFRS11 and IAS28 appears to be inconsistent with the CF. Other examples
might be the lack of discounting of deferred tax liabilities or the assets and
liabilities in accounting for government grants.
Question 16—Business activities
Do you agree with the proposed approach to business activities? Why or
why not?
We would prefer the CF used the term ‘business model’ to ‘business
activities’. ‘Business model’ is used to mean a variety of things in a general
context. However it is better at capturing the idea of how value is created by
the reporting entity and would come to have a more specific and narrower
meaning in reporting standards. It is also the term already used in IFRS9
and in other forms of reporting such as Integrated Reporting. ‘Business
activities’ on the other hand is a vaguer term and could simply mean the
economic sectors where the entity operates.
The implications of different business models are addressed in the different
Chapters of the CF, for example on presentation, measurement and the unit
of account. It will also be needed for Chapter 7 and the OCI issue (see Q14
above). Given that we think that the CF should include an overall discussion
of the business model and its significance.
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Question 17—Long-term investment
Do you agree with the IASB’s conclusions on long-term investment? Why or
why not?
We agree with the conclusions of the IASB that long term investors can be
served by the current formulation of the CF.
Question 18—Other comments
Do you have comments on any other aspect of the Exposure Draft? Please
indicate the specific paragraphs or group of paragraphs to which your
comments relate (if applicable).
As previously noted, the IASB is not requesting comments on all parts of
Chapters 1 and 2, on how to distinguish liabilities from equity claims (see
Chapter 4) or on Chapter 8.
In our view the inclusion in 1.6 of the other sorts of information that might be
needed should be improved. There has been a general reassessment of the
importance of non-financial information in corporate reporting to which the
CF should respond. The Integrated Reporting is one such indication of the
wider perspective that is needed. IASB’s own Management Commentary
guidance points to different factors than are currently included in 1.6.
Chapter 8 introduces the concept of capital maintenance adjustments,
however these are not included among the elements discussed in Chapter 4
nor appear on the diagram at 5.6 for example. In 8.4 such adjustments are
regarded as expenses, but in 8.8, 8.9 and 8.10 they seem to be specifically
excluded from being expenses. They therefore undermine the main model.
Furthermore the non-application in IFRS of the concepts of capital
maintenance needs to be made clearer than it is in 8.9. Capital maintenance
adjustments as far as we are aware are not being specifically required in
IFRS at present.
For both these reasons we think the whole of Chapter 8 would be better
removed from the CF for now and reconsidered.
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