AAT RESPONSE TO THE IASB DISCUSSION PAPER ON “A REVIEW OF THE
CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING”
1
2
1
INTRODUCTION
1.1
The Association of Accounting Technicians (AAT) is pleased to take part in this
opportunity to comment on the IASB Discussion Paper on “A Review of the
Conceptual Framework for Financial Reporting”.
1.2
AAT has 50,0001 Members and 80,0001 Students worldwide.
1.3
AAT has over 3,900 Members in Practice who provide accounts and tax
services, including assisting companies to meet their statutory filing obligations,
to over 300,000 sole traders, partnerships and limited companies, covering a
full range of businesses, particularly small and medium sized enterprises and
owner managed entities.
OVERVIEW
2.1
Although the current Conceptual Framework was published as recently as
2010, it was developed during the early period of the recent economic crisis
which has had unprecedented and unforeseeable consequences globally.
Consequently, we fully support the need to reconsider the basic concepts of
accounting in the light of this experience and to develop future accounting
standards on the basis of concepts which anticipate the possibility of similar
crises arising in the future. While the fundamental concepts of financial
reporting are not going to prevent recessions arising in the future, users may be
better prepared and forewarned to manage the effects if necessary, if
appropriate concepts are adopted.
2.2
As our following responses to specific questions will demonstrate, we recognise
that the needs of users of financial statements should be the primary
consideration when establishing basic concepts for reporting, but that the
needs in respect of listed or public entities are totally different to those of owner
managed entities.
2.3
There is a need to clearly identify the main purpose of financial statements as
far as users’ interests are concerned and we have indicated our views on this
matter in our responses to the specific questions which follow. We do not
consider that users require financial statements with the primary objective of
evaluating the entity’s ability to pay dividends as stated in paragraph 8.20(a).
We believe the ability to pay dividends is primarily illustrated by the balance
sheet in so far as dividend payments are dependant upon the net assets
position of an entity, its liquid resources and its anticipated future needs for
liquid resources. Profitability is a secondary concern. In any event, the primary
use of financial statements will vary for each class of user, whether they are the
management, employees, suppliers, finance providers or investors. There will
also be more classes of users with interests in larger entities whereas for owner
Figures correct as at 31 December 2013
managed entities, the needs are likely to be limited to those of the owners
themselves and the providers of finance.
3.
RESPONSE TO QUESTIONS FOR RESPONDENTS
Question 1
Paragraphs 1.25-1.33 set out the proposed purpose and status of the Conceptual
Framework. The IASB’s preliminary views are that:
(a)
the primary purpose of the revised Conceptual Framework is to assist the IASB
by identifying concepts that it will use consistently when developing and revising
IFRSs; and
(b)
in rare cases, in order to meet the overall objective of financial reporting, the
IASB may decide to issue a new or revised Standard that conflicts with an
aspect of the Conceptual Framework. If this happens the IASB would describe
the departure from the Conceptual Framework and the reasons for that
departure, in the Basis for Conclusions on that Standard.
Do you agree with these preliminary views? Why or why not?
3.1
We agree with the preliminary views set out in paragraphs 1.25 – 1.33 as it is
clear that concepts utilised in financial reporting should be consistently applied,
but that where exceptionally the need for effective reporting is in conflict with
established concepts, the reasons for departure from those concepts should be
fully justified. However, every effort should be made to avoid the need for
departing from established concepts.
Question 2
The definitions of an asset and a liability are discussed in paragraphs 2.6-2.16. The
IASB proposes the following definitions:
(a)
an asset is a present economic resource controlled by the entity as a result of
past events.
(b)
a liability 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.
Do you agree with these definitions? Why or why not? If you do not agree, what
changes do you suggest, and why?
3.2
We agree with the definition of “asset”, “liability” and “economic resource” set
out in paragraphs 2.6-2.16 except for the use of the word “controlled” used in
the definition of “asset”. There could be situations where the economic benefits
of an economic resource are available to an entity even though not under its
control. An example is royalty income generated from music copyright. Such a
resource is certainly an asset, although there may be difficult arguments to
consider when attempting to establish the value of future benefits but the
nature of such can be disclosed in financial reports even if not quantifiable.
Question 3
Whether uncertainty should play any role in the definitions of an asset and a liability
and in the recognition criteria for assets and liabilities, is discussed in paragraphs
2.17-2.36. The IASB’s preliminary views are that:
(a)
the definitions of assets and liabilities should not retain the notion that an inflow
or outflow is ‘expected’. An asset must be capable of producing economic
benefits. A liability must be capable of resulting in a transfer of economic
resources.
(b)
the Conceptual Framework should not set a probability threshold for the rare
cases in which it is uncertain whether an asset or a liability exists. If there could
be significant uncertainty about whether a particular type of asset or liability
exists, the IASB would decide how to deal with that uncertainty when it develops
or revises a Standard on that type of asset or liability.
(c)
the recognition criteria should not retain the existing reference to probability.
Do you agree? Why or why not? If you agree, what do you suggest and why?
3.3
We believe that uncertainties should be considered in the light of prudent
consideration of the matter in question although we do see a need to recognise
that there are degrees of uncertainty. Assets should not be recognised where
there is any degree of uncertainty other than a “remote” uncertainty of future
benefits. Liabilities should be recognised even if there is some uncertainty
other than in a “remote” situation. While “probable” liabilities should be
recognised in the financial statements, where any degree of significant
uncertainty attaches to contingent assets or contingent liabilities, such should
be disclosed with a narrative explanation to enable users to understand the
situation.
Question 4
Elements for the statement(s) of profit or loss and OCI (income and expense),
statement of cash flows (cash receipts and cash payments) and statement of changes
in equity (contributions to equity, distributions of equity and transfers between classes
of equity) are briefly discussed in paragraphs 2.37-2.52.
Do you have any comments on these items? Would it be helpful for the Conceptual
Framework to identify them as elements of financial statements?
3.4
It is helpful for the Conceptual Framework to identify the elements of financial
statements as discussed in paragraphs 2.37. – 2.52. subject to the need to
establish that the profit or loss statement reflects a true and fair view of the
result for the period, as we have addressed in our responses to subsequent
questions.
Question 5
Constructive obligations are discussed in paragraphs 3.39-3.62. The discussion
considers the possibility of narrowing the definitions of a liability to include only
obligations that are enforceable by legal or equivalent means. However, the IASB
tentatively favours retaining the existing definition, which encompasses both legal and
constructive obligations and adding more guidance to help distinguish constructive
obligations from economic compulsion. The guidance would clarify the matters listed
in paragraph 3.50.
Do you agree with the preliminary view? Why or why not?
3.5
We are in support of maintaining the status quo. There are risks attaching to a
narrow definition of a liability as being only obligations enforceable by legal or
equivalent means in that obligations could be excluded which are fundamental
to the entity in question. For example, where future viability is dependent upon
a long term restructuring plan, the obligations attaching to that plan additional
to those which are legally enforceable, should be recognised at the time of
commitment by the entity, which may be at an earlier time than a legally binding
commitment.
Question 6
The meaning of ‘present’ in the definition of a liability is discussed in paragraphs 3.633.97. A present obligation arises from past events. An obligation can be viewed as
having arisen from past events if the amount of the liability will be determined by
reference to benefits received, or activities conducted, by the entity before the end of
the reporting period. However, it is unclear whether such past events are sufficient to
create a present obligation if any requirement to transfer an economic resource
remains conditional on the entity’s future actions. Three different views on which the
IASB could develop guidance for the Conceptual Framework are put forward:
(a)
View 1 a present obligation must have arisen from past events and be strictly
unconditional. An entity does not have a present obligation if it could, at least in
theory, avoid the transfer through its future actions.
(b)
View 2 a present obligation must have arisen from past events and be
practically unconditional. An obligation is practically unconditional if the entity
does not have the practical ability to avoid the transfer through its future actions.
(c)
View 3 a present obligation must have arisen from past events, but may be
conditional on the entity’s future actions.
The IASB has tentatively rejected View 1. However, it has not reached a preliminary
view in favour of View 2 or View 3.
Which of these views (or any other view on when a present obligation comes into
existence) do you support? Please give reasons.
3.6
As implied by our response to Question 5, a “present” obligation should be
recognised on a prudent basis, reflecting the actuality of a situation and not the
theoretical or legal position only. Consequently, a “present” obligation may
exist where it is conditional on the entity’s future actions, but there should be no
expectation that the entity will not take the appropriate future actions relevant to
the “present” obligation. As previously stated, the example of a long term
reconstruction illustrates this point. Therefore we are broadly in support of view
3.
Question 7
Do you have comments on any of the other guidance proposed in this section to
support the asset and liability definitions?
3.7
We have no other comments on other guidance in section 2 in respect of asset
and liability definitions.
Question 8
Paragraphs 4.1-4.27 discuss recognition criteria. In the IASB’s preliminary view, an
entity should recognise all its assets and liabilities, unless the IASB decides when
developing or revising a particular Standard that an entity need not, or should not,
recognise an asset or a liability because:
(a)
recognising the asset (or the liability) would provide users of financial
statements with information that is not relevant, or is not sufficiently relevant to
justify the cost; or
(b)
no measure of the asset (or the liability) would result in a faithful representation
of both the asset (or the liability ) and the changes in the asset (or the liability),
even if all necessary descriptions and explanations are disclosed.
Do you agree? Why or why not? If you do not agree, what changes do you suggest,
and why?
3.8
We fully agree with the basic concept that an entity should recognise all of its
assets and liabilities. However, any exceptions to this concept, based on the
costs of providing the information, has to be balanced against the degree of
relevance to the users of the financial statements and it should be clear that,
subject only to materiality considerations, the nature of all assets and liabilities
should be disclosed, even if only in note form where the costs of quantification
may not be considered justifiable. This should only need to arise in rare
occasions, as it would be expected that prudently based estimations or
valuations could be included in financial statements.
3.9
On this basis we would expect some disclosure of all assets and liabilities even
if no measure of the asset or liability would result in a faithful representation of
both the asset or liability and the change in the asset or liability.
Question 9
In the IASB’s preliminary view, as set out in paragraphs 4.28-4.51, an entity should
derecognise an asset or a liability when it no longer meets the recognition criteria.
(this is the control approach described in paragraph 4.36(a)). However, if the entity
retains a component of an asset or a liability, the IASB should determine when
developing or revising particular Standards how the entity would best portray the
changes that resulted from the transaction. Possible approaches include:
(a)
enhanced disclosure:
(b)
presenting any rights or obligations retained on a line item different from the line
item that was used for the original rights or obligations, to highlight the greater
concentration of risk; or
(c)
continuing to recognise the original asset or liability and treating the proceeds
received or paid for the transfer as a loan received or granted.
Do you agree? Why or why not? If you do agree, what changes do you suggest, and
why?
3.10
We agree with the concept of enhanced disclosure referred to under (a) above.
Where a situation arises where there is a retained component of an asset or
liability which should be derecognised, it should be adequate to provide users
of the financial statements with the required understanding of the situation by
enhanced disclosure. In our view the other two approaches suggested in
paragraphs 4.50 would add unnecessary complexities to the financial
statements.
Question 10
The definition of equity, the measurement and presentation of different classes of
equity, and how to distinguish liabilities from equity instruments are discussed in
paragraphs 5.1-5.59. In the IASB’s preliminary view:
(a)
the Conceptual Framework should retain the existing definition of equity as the
residual interest in the assets of the entity after deducting all its liabilities.
(b)
the Conceptual Framework should state that the IASB should use the definition
of a liability to distinguish liabilities from equity instruments. Two consequences
of this are:
(c)
(i)
obligations to issue equity instruments are not liabilities; and
(ii)
obligations that will arise only on liquidation of the reporting entity are not
liabilities (see paragraph 3.89(a)).
an entity should:
(d)
(i)
at the end of each reporting period update the measure of each class of
equity claim. The IASB would determine when developing or revising
particularly Standards whether that measure would be a direct measure, or
an allocation of total equity.
(ii)
recognise updates to those measures in the statement of changes in
equity as a transfer of wealth between classes of equity claim.
if an equity has issued no equity instruments, it may be appropriate to treat the
most subordinated class of instruments as if it were an equity claim, with suitable
disclosure. Identifying whether to use such an approach, and if so, when, would
still be a decision for the IASB to take in developing or revising particular
Standards.
Do you agree? Why or why not? If you do not agree, what changes do you suggest,
and why?
3.11
For owner managed entities the identification of “equity” interests as compared
to “liabilities” is generally readily identifiable as a matter of fact but does not
necessarily fall in line with the definitions set out in the Conceptual Framework.
3.12
As a basic concept, “equity” interests should represent a fundamental right to
share in the net assets of the entity with income returns dependent upon the
profitability and cash resources of the entity, and carrying risks which are
subordinate to all other claims against the entity. “Liabilities” are represented by
a certainty of the amount due even if the amount due or the attached “interest”
charge is profit related. Such should not be considered as “equity” unless it is
specifically subordinated to all other claims against the Company.
Question 11
How the objective of financial reporting and the qualitative characteristics of useful
financial information affect measurement is discussed in paragraphs 6.6-6.35. the
IASB’s preliminary views are that:
(a)
the objective of measurement is to contribute to the faithful representation of
relevant information about:
(i)
the resources of the entity, claims against the entity and changes in
resources and claims; and
(ii)
how efficiently and effectively the entity’s management and governing
board have discharged their responsibilities to use the entity’s resources.
(b)
a single measurement basis for all assets and liabilities may not provide the
most relevant information for users of financial statements;
(c)
when selecting the measurement to use for a particular item, the IASB should
consider what information that measurement will produce in both the statement
of financial position and the statement(s) of profit or loss and OCI;
(d)
the relevance of a particular measurement will depend on how investors,
creditors and other lenders are likely to assess how an asset or a liability of that
type will contribute to future cash flows. Consequently, the selection of a
measurement:
(i)
for a particular asset should depend on how that asset contributes to future
cash flows; and
(ii)
for a particular liability should depend on how the entity will settle or fulfil
that liability.
(e)
the number of different measurements used should be the smallest number
necessary to provide relevant information. Unnecessary measurement changes
should be avoided and necessary measurement changes should be explained;
and
(f)
the benefits of a particular measurement to users of financial statements need to
be sufficient to justify the cost.
Do you agree with these preliminary views? Why or why not? If you disagree, what
alternative approach to deciding how to measure an asset or a liability would you
support?
3.13
We agree with the preliminary views concerning measurement discussed in
paragraphs 6.6. – 6.35 and in particular the relevance of a measurement being
dependant on how investors, creditors and other lenders are likely to assess
how an asset or a liability will contribute to future cash flows and the conclusion
that this factor should lead to a prudent basis for measurement.
Question 12
The IASB’s preliminary views set out in Question 11 have implications for the
subsequent measurement of assets, as discussed in paragraphs 6.73-6.96. The
IASB’s preliminary views are that:
(a)
if assets contribute indirectly to future cash flows through use or are used in
combination with other assets to generate cash flows, cost-based
measurements normally provide information that is more relevant and
understandable than current market prices.
(b)
if assets contribute directly to future cash flows by being sold, a current exit
price is likely to be relevant.
(c)
if financial assets have insignificant variability in contractual cash flows, and are
held for collection, a cost-based measurement is likely to provide relevant
information.
(d)
if an entity charges for the use of assets, the relevance of a particular measure
of those assets will depend on the significance of the individuals asset to the
entity.
Do you agree with these preliminary views and the proposed guidance in these
paragraphs? Why or why not? If you disagree, please describe what alternative
approach you would support.
3.14
Again we agree with the preliminary views discussed in paragraphs 6.73 –
6.96., in particular that the basic concept of measurement of overall results,
simplistically stated, should be to reflect the aggregated profits and losses
achieved by an entity from individual transactions over a long term period,
representing cash generated from revenue and capital income compared with
cash expended on revenue and capital costs. The fact that financial
statements are drawn up at shorter annual intervals requires that they should
represent a “fair” allocation of the results to be achieved over the longer term
period. In particular, these give rise to the need to anticipate the useful lives of
long term assets but to take a prudent approach to such forecasts.
Question 13
The implications of the IASB’s preliminary views for the subsequent measurement of
liabilities are discussed in paragraphs 6.97-6.109. The IASB’s preliminary views are
that:
(a)
cash-flow based measurements are likely to be the only viable measurement for
liabilities without stated terms.
(b)
a cost-based measurement will normally provide the most relevant information
about:
(c)
(i)
liabilities that will be settled according to their terms; and
(ii)
contractual obligations for services (performance obligations).
current market prices are likely to provide the most relevant information about
liabilities that will be transferred.
Do you agree with these preliminary views and the proposed guidance in these
paragraphs? Why or why not? If you disagree, please describe what alternative
approach you would support.
3.15
The preliminary views and proposed guidance set out in paragraphs 6.97 –
6.109 are acceptable. However, it would be preferable not to give prominence
to the concept that “current market prices are likely to provide the most relevant
information that will be transferred”. We consider the concept should be that
the ultimate cash flow value of the liability at the date of credit transfer is the
amount which should be recognised so as to avoid distortions and over or
under valuations where volatile market prices exist.
Question 14
Paragraph 6.19 states the IASB’s preliminary view that for some financial assets and
financial liabilities (for example, derivatives), basing measurement on the way in
c
which the asset contributes to future cash flows, or the way in which the liability is
settled or fulfilled, may not provide information that is useful when assessing
prospects for future cash flows. For example, cost-based information about financial
assets that are held for collection or financial liabilities that are settled according to
their terms may not provide information that is useful when assessing prospects for
future cash flows:
(a)
if the ultimate cash flows are not closely linked to the original cost;
(b)
if, because of significant variability in contractual cash flows, cost-based
measurement techniques may not work because they would be unable to simply
allocate interest payments over the life of such financial assets or financial
liabilities; or
(c)
if changes in market factor have a disproportionate effect on the value of the
asset or the liability (i.e. the asset or the liability is highly leveraged).
Do you agree with this preliminary view? Why or why not?
3.16
We agree that ultimate cash flows should be reflected in financial reports,
where these are significantly different from cost based measurements,
particularly to ensure that assets are not overstated and liabilities understated
as regards ultimate anticipated realisable amounts.
Question 15
Do you have any further comments on the discussion of measurement in this section?
3.17
We have no further comments to add on the topic of “measurement”.
Question 16
This section sets out the IASB’s preliminary views about the scope and content of
presentation and disclosure guidance that should be included in the Conceptual
Framework. In developing its preliminary views, the IASB has been influenced by
two main factors:
(a)
the primary purpose of the Conceptual Framework, which is to assist the IASB
in developing and revising Standards (see Section 1); and
(b)
other work that the IASB intends to undertake in the area of disclosure (see
paragraphs 7.6-7.8), including:
(i)
a research project involving IAS 1, IAS 7 and IAS 8, as well as a review of
feedback received on the Financial Statement Presentation project;
(ii)
amendments to IAS 1; and
(iii)
additional guidance or education material on materiality.
Within this context, do you agree with the IASB’s preliminary views about the scope
and content of guidance that should be included in the Conceptual Framework on:
(a)
presentation in the primary financial statements, including:
(i)
what the primary financial statements are;
(ii)
the objective of primary financial statements;
(iii)
classification and aggregation;
(iv) offsetting; and
(v)
(b)
the relationship between primary financial statements.
the disclosure in the notes to the financial statements; and
(i)
the objective of the notes to the financial statements; and
(ii)
the scope of the notes to the financial statements, including the types of
information and disclosures that are relevant to meet the objective of the
notes to the financial statements, forward-looking information and
comparative information.
Why or why not? If you think additional guidance is needed, please specify what
additional guidance on presentation and disclosure should be included in the
Conceptual Framework.
3.18
We are broadly in agreement with the proposals to develop a Conceptual
Framework specifically related to “presentation and disclosure” with a view to
replacing IAS1, IAS7 and IAS8. However in developing this Conceptual
Framework consideration needs to be given to the following matters:
i)
The needs of the users of financial statements, and the fact that the
needs of owner managed entities are totally different to those of large
public or listed entities. With this in mind, it may be appropriate to
develop a framework which related to “presentation and disclosure”
concepts relevant to all entities, but also provides further guidance for
each class of entity where the needs of users differ.
ii)
The Statement of Other Comprehensive Income for owner managed
entities is generally not a contentious matter as regards disclosures in
that usually it reflects only the effect of revaluations.
iii)
The required disclosures in notes to the financial statements also need to
be specifically relevant to the needs of users, so as to be only relevant
and material information to avoid unnecessarily lengthy narrative in
financial statements which can hinder a proper understanding of the
statements.
iv)
When considering the delivery of information by electronic means, it
should be recognised that the format of disclosures have a significant
impact on ease of interpretation and that any electronic systems
employed need to deliver information in the prescribed format.
Question 17
Paragraph 7.45 describes the IASB’s preliminary view that the concept of materiality
is clearly described in the existing Conceptual Framework. Consequently, the IASB
does not propose to amend, or add to, the guidance in the Conceptual Framework
on materiality. However, the IASB is considering developing additional guidance or
education material on materiality outside of the Conceptual Framework project.
Do you agree with this approach? Why or why not?
3.19
We agree with the approach proposed to deal with the concept of materiality
although we would suggest that it would be helpful for the Conceptual
Framework to emphasise strongly the need to apply materiality considerations
appropriately in order to assist users in assimilating and understanding the
information contained in financial statements without being overburdened by
immaterial and irrelevant information.
Question 18
The form of disclosure requirements, including the IASB’s preliminary view that it
should consider the communication principles in paragraph 7.50 when it develops or
amends disclosure guidance in IFRSs is discussed in paragraphs 7.48-7.52.
Do you agree that communication principles should be part of the Conceptual
Framework? Why or Why not?
If you agree they should be included, do you agree with the communication
principles proposed? Why or Why not?
3.20
As indicated by our responses to questions 16 and 17, we agree that
communication principles should be part of the Conceptual Framework.
Question 19
The IASB’s preliminary view that the Conceptual Framework should require a total or
subtotal for profit or loss is discussed in paragraphs 8.19-8.22.
Do you agree? Why or why not?
If you do not agree do you think that the IASB should still be able to require a total or
subtotal profit or loss when developing or amending Standards?
3.21
We agree that the Conceptual Framework should require a total, or subtotal, for
profit or loss as this item is the key amount which reflects the “result” for the
period in question. The primary consideration has to be that this item reflects a
“true and fair view” of the “result” and that accounting concepts are applied
which eliminate the prospect of unfavourable contributions to the results being
hived off into other parts of the financial statements, such as the OCI.
Question 20
The IASB’s preliminary view that the Conceptual Framework should permit or require
at least some items of income and expense previously recognised in OCI to be
recognised subsequently in profit or loss, i.e. recycled, is discussed in paragraphs
8.23-8.26.
Do you agree? Why or why not? If you agree, do you think that all items of income
and expense presented in OCI should be recycled into profit or loss? Why or why
not?
If you do not agree, how would you address cash flow hedge accounting?
3.22
In the context of the proposals, we support the concept of “recycling” although
this support has to be viewed in the context of restricting items permitted to be
disclosed in the OCI. The concept of unrealised amounts or amounts to be
realised in the long term being included in the OCI is acceptable but we do not
accept that items outside of management control should not be included.
There are many aspects of day to day operations which are outside the control
of management and which properly form part of the operating results of the
entity. However, we do see merit, for example, in surpluses or deficits on
revaluations of assets being shown in the OCI as they occur, but when the
assets concerned are actually realised, that the overall surplus or deficit arising
from the proceeds compared to cost should be recognised in the profit and loss
statement and not just the surplus or deficit arising subsequent to the most
recent revaluation, so as to ensure that the historic surplus or deficit impacts on
the results disclosed in the profit and loss statement and does not ignore the
revaluation movements which have arisen over the life of the asset.
Question 21
In this Discussion Paper, two approaches are explored that describe which items
could be included in OCI: a narrow approach (Approach 2A described in paragraphs
8.40-8.78) and a broad approach (Approach 2B described in paragraphs 8.79-8.94).
Which of these approaches do you support, and why?
If you support a different approach, please describe that approach and explain why
you believe it is preferable to the approaches described in this Discussion Paper.
3.23
Of the two approaches to the OCI suggested, our preference would be for the
narrow approach to be adopted so as to restrict and limit any possible use of
the OCI to include any operational results deemed to be unfavourable by the
compilers of the statements. This approach is also complementary to our
response to question 20 in promoting the concept that items to be omitted from
the profit and loss statement should be restricted.
Question 22
Chapters 1 and 3 of the existing Conceptual Framework
Paragraphs 9.2-9.22 address the chapters of the existing Conceptual Framework
that were published in 2010 and how those chapters treat the concepts of
stewardship, reliability and prudence. The IASB will make changes to those
chapters if work on the rest of the Conceptual Framework highlights areas that need
clarifying or amending. However, the IASB does not intend to fundamentally
reconsider the content of those chapters.
Do you agree with this approach? Please explain your reasons.
If you believe that the IASB should consider changes to those chapters (including
how those chapters treat the concepts of stewardship, reliability and prudence),
please explain those changes and the reasons for them, and please explain as
precisely as possible how they would affect the rest of the Conceptual Framework.
3.24
The existing Conceptual Framework which was published in 2010, in our
opinion, needs to be revisited as regards the concepts of “faithful
representation” and “prudence”. The concept prior to 2010 of “reliability” as
opposed to “faithful representation” firstly better meets the needs of users of
financial statements, and secondly is a stronger concept less open to a range
of interpretations. However, “reliability” should not be dependant upon
“verifiability” as those responsible for preparing financial statements should be
under an obligation to provide reliable information even if it cannot be verified,
particularly with regard to subjective and estimated evaluations. Even so,
information lacking verifiability should only be acceptable where supporting
evidence is not available in which case explanations need to be given in
financial statements containing such information. Such an approach also
needs to be considered alongside the concept of “prudence”. The 2010
Conceptual Framework refers to information being “neutral” which implies a
“mid-point” approach to evaluations where uncertainties give rise to a range of
possible results. In our opinion prudence should be applied where a range of
possible results exist, particularly as there is likely to be stronger evidence
available to support a prudent evaluation as opposed to an optimistic approach.
It is vital that fundamental concepts should ensure that assets are not
overstated and liabilities are not understated in relation to their ultimate realised
cash flow impact on the entity.
Question 23
Business Model
The business model concept is discussed in paragraphs 9.23-9.34. This Discussion
Paper does not define the business model concept. However, the IASB’s preliminary
view is that financial statements can be made more relevant if the IASB considers,
when developing or revising particular Standards, how an entity conducts its
business activities.
Do you think that the IASB should use the business model concept when it develops
or revises particular Standards? Why or why not?
If you agree, in which areas do you think that the business model concept would be
helpful?
Should the IASB define ‘business model’? Why or why not?
If you think that ‘business model’ should be defined, how would you define it?
3.25
The use of the “business model” concept would undoubtedly prove to be useful
to users of financial statements in providing an insight into the entity’s attitudes
and policies adopted in its activities, being focused on a management
information style of reporting. However, we believe that many entities would
find this approach goes too far in releasing commercially sensitive information
to the public. There is also the potential weakness that the “business model”
approach may reflect information designed solely as a basis for making
management decisions based on the performance of the entity on a periodic
basis (such as monthly) or individual project basis and not intended as a basis
for reflecting accumulated results achieved over a specific accounting period or
to reflect a true and fair view of assets and liabilities at the end of the period
concerned. If such a concept were adopted it would be necessary to define
“business model” to ensure that all entities provided the same range and depth
of information, but if owner managed entities are required to apply a “business
model” concept it may be difficult to apply a definition where the proprietor is
making decisions in response to situations as they arise and does not have a
formal management information process. Should owner managed entities have
a formal management information reporting procedure, it is likely that significant
year end adjustments are required to achieve financial statements which show
a “true and fair view”. As we see significant practical difficulties in defining and
applying a practical “business model” concept to financial reports we do not feel
able to offer a definition for “business model”.
Question 24
Unit of account
The unit of account is discussed in paragraphs 9.35-9.41. The IASB’s preliminary
view is that the unit of account will normally be decided with the IASB develops or
revises particular Standards and that, in selecting a unit of account, the IASB should
consider the qualitative characteristics of useful financial information.
Do you agree? Why or why not?
3.26
We agree that the appropriate “unit of account” as discussed in paragraphs
9.35 – 9.41. should be decided as the IASB develops or reviews particular
standards. However ease of handling of information contained in financial
statements should be a major consideration in grouping assets and liabilities
used for similar purposes, so as to avoid excessive and unwieldy overload of
information. The basic concept to be adopted should be the aggregation of all
rights attaching to any assets or liabilities, with the grouping of such which are
held within the entity for similar purposes and evaluated on the basis of the
entity’s anticipated use or outcome for the entity even though this may result in
effectively recognising both gains and losses and differing cash flow outcomes
within a group.
Question 25
Going concern
Going concern is discussed in paragraphs 9.42-9.44. The IASB has identified three
situations in which the going concern assumption is relevant (when measuring
assets and liabilities, when identifying liabilities and when disclosing information
about the entity).
Are there any other situations where the going concern assumption might be
relevant?
3.27
We consider the following to be examples of other situations where the going
concern might be relevant.
3.28
In the course of preparation of all financial statements considerations of
potential threats to going concern should be a basic concept to be applied.
Potential threats, such as reliance on one customer, may not necessarily
warrant any adjustment to the measurement of assets or liabilities but could be
of assistance to users of financial statements by the nature of the threat being
disclosed. As has been experienced in recent times, apparently gilt edged
“High Street” entities can collapse and create a domino effect impacting on
those in their supply chain.
Question 26
Capital maintenance
Capital maintenance is discussed in paragraphs 9.45-9.54. The IASB plans to
include the existing descriptions and the discussion of capital maintenance concepts
in the revised Conceptual Framework largely unchanged until such time as a new or
revised Standard on accounting for high inflation indicates a need for change.
Do you agree? Why or why not? Please explain your reasons.
3.29
4
We agree with the IASB plans relating to “capital maintenance” as discussed in
paragraphs 9.45 – 9.54. for the reasons set out in those paragraphs.
CONCLUSIONS
4.1
We have identified that there are certain basic fundamental concepts which are
necessary for effective financial reporting which have influenced the responses
we have given to the foregoing detailed questions and which are as follows:
4.1.1
The needs of the users of financial reports for “owner managed entities”
are not the same as those of “listed or public entities”. The needs of
users of owner managed entities financial reports are mainly:
i) to evaluate the credit worthiness of the entity concerned
ii) to meet statutory and other compliance regulations imposed on the
entity
iii) as a basis for computing the entity’s liability to taxation.
4.1.2 There is a need to adopt a prudent approach to information included in
financial reports, particularly where it is derived from estimated or
subjective evaluation or is influenced by other uncertainties. In addition
care needs to be exercised when permitting the use of fair value
accounting especially for assets or liabilities which may be subject to
volatile markets. “Profits” disclosed in financial statements need to be
realised or free of risk of not being realised, other than remote risks.
Consequently valuations should only be used in financial statements on a
similar basis.
4.2
4.1.3
In conjunction with adopting a prudent approach to financial reporting
there is a need to establish an appropriately realistic balance of probability
in considering what should be reported, and to provide appropriate
explanations of how any uncertainties might impact on the results
disclosed in the financial statements.
4.1.4
Materiality considerations have an important impact in ensuring that
financial reports do not become overloaded with disclosures, which might
make it difficult for a recorder to identify the significant facts.
4.1.5
In order for financial statements to present a “true and fair view” there has
to be an overriding concept of applying substance over form so that
fundamental concepts for reporting should not be considered inviolable.
By encouraging a “prudent” approach to financial reporting, entities will be able to
establish a track record with users to create confidence in the reliability of the
financial statements provided by them.
4.3. We have welcomed this opportunity to comment on the “Review of the
Conceptual Framework for Financial Reporting” to assist the IASB in establishing
the fundamental approach required to develop accounting standards which
soundly recognise both local and international economic conditions which have
developed rapidly over recent times.
If you have any questions or would like to consult further on this issue then please contact
the AAT at:
email: consultation@aat.org.uk and aat@palmerco.co.uk
telephone: 020 7397 3088
FAO. Aleem Islan
Association of Accounting Technicians
140 Aldersgate Street
London
EC1A 4HY