Response to the IASB’s DP/2013/1 A Review of the Conceptual Framework for Financial Reporting 10 January 2014, Carien van Mourik, carien.vanmourik@open.ac.uk Open University Business School, Walton Hall, Milton Keynes, UK, MK7 6AA General comments The July 2013 IASB Conceptual Framework Discussion Paper (DP) revisits Chapter 4 of the 2010 IASB Framework, which is the remaining text from the 1989 IASC Framework and concerns the definition, recognition and measurement of the elements of financial statements. Chapters 1 and 3 of the 2010 IASB Framework and the Exposure Draft for Chapter 2 are the result of a joint project by the IASB and the FASB. This project was never meant to critically assess the logic and appropriateness of the objective of general purpose financial statements and the qualitative characteristics of useful information for application to financial reporting in an international context. It was a convergence project meant to iron out differences between the IASB and FASB frameworks. This time, the IASB decided to complete its Conceptual Framework on its own rather than as part of a convergence project with the FASB. The reasons for doing so are not crystal clear, although it seems to me that it is the right thing to do. After all, the FASB must serve the public interest in the US and the IASB must serve the international public interest, and the public interest is not necessarily the same in both contexts. In Question 22, this DP states: ‘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.’ 1 I do indeed believe that the IASB will need to comprehensively and fundamentally reconsider the objective of general purpose financial reporting, the definition of reporting entities, the qualitative characteristics of information that satisfies the objective, the ways in which financial reporting information satisfies the objective, and what this means for the definition, recognition, measurement, presentation and disclosure of the elements of financial statements. This will help the development of a theoretically and logically coherent Conceptual Framework. Chapters 1, 2 and 3 imply normative judgments and assumptions on which the actual accounting framework rests, and which therefore ought to be openly stated and much more seriously scrutinised and carefully justified than they currently are. A comprehensive review cannot easily be done following the building block approach used in the joint IASB/FASB project or in the 2013 DP because the assumptions and logic behind them must be clarified, evaluated and justified in accordance with the IASB’s mission and mandate (not those of the FASB in 1978 or the IASC in 1989). The DP shows that the building block approach is very much engrained in the IASB’s way of thinking about the Conceptual Framework. Unfortunately, thus far this approach has prevented the articulation and justification of the IASB Framework’s underlying assumptions and the logic (hinted at in OB1) according to which the other elements of the Framework flow from the objective of general purpose financial reporting. This logic would explain how, according to the IASB, the objective of general purpose financial reporting translates into the definition, recognition, measurement, presentation and disclosure of the elements of financial statements of a specific reporting entity. This comment letter will first answer question 1 and then move to question 22 before addressing the other questions in the DP in the regular order. 2 Question 1 Paragraphs 1.25-1.33 set out the 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 reason for that departure, in the Basis for Conclusions of that Standard. Do you agree with these preliminary views? Why or why not? a) No. Whether the IASB likes it or not, the current role of the IASB Conceptual Framework has grown much wider than it was originally designed for when the IASC Framework Steering Group worked on it from 1987 to 1989. At that time, the idea was that when reducing the number of options in the IASs this needed to be done in such a way that it could be shown that there was an overall logic and coherence to the standards. Since then, the IASB has become an actual international standard setter that needs to be able to stand its ground when under political pressure from different interest parties. It is now the IASB’s responsibility to make sure that its Conceptual Framework sets out a theoretically sound and coherently integrated set of principles and concepts underlying IFRS. The social responsibilities of the IASB have grown with the diversity of institutional environments where IFRS are used and the diversity of reporting entities that use IFRS. The Framework has become part of the effort to establish a more comprehensive theory of accounting. It has gained prominence in the education of many accounting students world-wide. This is a heavy responsibility and perhaps too much to ask of the IASB on its own, but the Framework is not like the Standards. The Framework is first and foremost based on normative choices which involve value judgements affecting the general public. With responsibility for such choices comes social as well as intellectual and political accountability. b) No. Building the comply-or-explain approach in from the start opens the door to departures from sound principles for political reasons. The danger here is 3 that the Framework will be used as a legitimising tool to do what is in the IASB’s own prudential interest. One of the main purposes of an accounting conceptual framework is to use it as a weapon against political and selfinterested interference in standard setting. This requires the Framework to be theoretically sound, epistemically justifiable, be supported by the IASB’s constituents, as well as applicable in practice. It also requires the IASB to be clear about its own and other perspectives on its social responsibilities as the world’s international accounting standard setter. 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. The IASB should fundamentally reconsider Chapters 1 and 3 in combination with Chapter 2 before amending Chapter 4 for the following reasons. 1. The current objective of general purpose financial reporting, the reporting entity and the qualitative characteristics of information that satisfies the objective are based on normative assumptions that were, perhaps, generally accepted in the USA environment of the 1970s as set out in SFAC No. 1. The decision-usefulness objective has not been justified and its underlying assumptions have not been questioned in a due process commensurate with the IASB’s technical, social and political responsibilities as a global accounting standard setter functioning in a multitude of the different institutional environment where IFRS has been adopted. 2. The underlying logic and normative assumptions with respect to global capital, financial, product and other markets and the role of (multinational) corporations in such markets are not explicitly stated. SFAC No. 1 explicitly 4 stated the assumptions on which the FASB Framework was based in the ‘Environmental Context of the Objective’ in SFAC 1 (FASB, 1978: Par. 9-16). For example, the decision usefulness objective is justified based on the idea that within a jurisdiction, the role of financial reporting is to promote the allocation of resources to the entities making the most efficient use of them. The IASC Framework made no mention of this assumption. Across different jurisdictions and institutional environments with different institutional complementarities it would be more difficult to justify, the IASC probably thought it better not to state this assumption in its 1989 Framework. By 2001 and again in 2010, people had come to take the decision-usefulness objective for granted and saw no reason to question the validity and fairness of the assumption in an international context. 3. The building block approach has caused the IASB Framework to be inconsistent because parts have been influenced by different people with different ideas and agendas at various points in time. 4. The decision-usefulness objective has not been interpreted and further developed in a manner consistent with Staubus’ Decision-usefulness Theory or his Residual Equity Theory. The FASB and the IASB appear to have cherry picked from the accounting literature without giving due reference to sources or explaining the relative strengths and weaknesses of concepts and theories they use or discard. Even more importantly, the IASB members seem to think that they can mix and match concepts and logics as they please or as per the outcome of some kind of social choice mechanism. A lack of respect for theory or perhaps theoretical awareness is evident from the way the issue of recycling or not recycling of OCI is discussed, or how there is no discussion of articulated versus non-articulated financial statements and the role of clean surplus in valuation and articulation or the reconciliation between cash flows and accruals-based profit or loss. The objective of IFRSs Without explicit normative assumptions as to the social meaning of the allocation of resources across reporting entities in global capital, product and other markets, or a financial performance concept to provide the logic that binds the elements of the conceptual framework together in a coherent manner, the DP leads into discussions 5 that are disjointed and confusing. If the IASB’s reason for being is to establish IFRSs in the international public interest, the IASB will need to reconsider the Conceptual Framework in its entirety and clarify its underlying methodological (philosophical) assumptions, starting with a definition of the international public interest and an explanation of the ways in which IFRSs serve it. Simply stating that it is in the public interest to have a single set of high quality financial reporting standards is no longer sufficient. For a discussion of the public interest in international financial reporting standard setting, please see Van Mourik (2013b). The objective of general purpose financial reporting A perspective on the allocation of resources in global capital and other markets and the justification of private property rights in multinational corporations listed at multiple stock exchanges in different countries provides normative assumptions as to the objectives of general purpose international financial reporting. The FASB based its Framework on Staubus (1959, 1961)’s decision-usefulness objective which focuses on predicting future cash flows because this suited the institutional environment on the USA in the 1960s and 70s described in ASOBAT (AICPA,1966) and SFAC No. 1 (FASB, 1978: Par. 9-16). These paint a picture of a ‘highly developed exchange economy’ (FASB, 1978: Par. 10) where investment is characterised by ‘a complex set of intermediaries which offer savers diverse types of ownership and creditor claims, many of which can be freely traded or otherwise converted into cash’ (FASB, 1978: Par. 11). ‘Most productive activity in the United States is carried on through investorowned business enterprises, including many large corporations that buy, sell and obtain financing in national or multinational markets’ (FASB, 1978: Par. 12). ‘(W)elldeveloped securities markets tend to allocate scarce resources to enterprises that use them efficiently and away from inefficient enterprises’ (FASB, 1978: Par. 13). The last point is extremely important in an international context because within a single jurisdiction, there will be complementary institutions that ensure that the losers are somehow compensated so that they do not become too disenfranchised. In an international context, we need to keep in mind that institutional complementarities vary across jurisdictions (See Leuz, 2010) and this may pile significant social costs on those environments where more entities have problems competing globally. 6 Now IFRS has been adopted in many different jurisdictions, it is necessary to better understand the different weights of the roles that financial reporting plays in different institutional environments because the international allocation of scarce resources potentially has more far-reaching social and economic consequences than the IASB is willing to consider. In most environments, investor decisions based on predicted future cash flows is probably not the only or even the main objective that needs to be satisfied by general purpose financial statements. It is highly doubtful that information useful for this objective is equally useful to satisfy the other main objectives of general purpose financial reporting. Proprietary Theory, Residual Equity Theory (better known as Decision-usefulness Theory (Staubus, 1959 and 1961)), Entity Theory and Enterprise Theory (Suojanen, 1958?) represent four perspectives on the role of accounting for the private property rights in what Fama & Jensen (1983) called ‘open corporations’. See Van Mourik (2010) for a literature review of the equity theories in accounting and Van Mourik (2013a: 56-60) for a discussion of objectives of external reporting under Proprietary, Entity and Enterprise Theory. If my interpretation is correct, the objectives of financial reporting under the four equity theories are: 1. to enable managers to discharge their stewardship responsibilities to the entity’s shareholders by determining and reporting increase the owners’ wealth measured as financial capital (Agency or Proprietary perspective: a corporation is a means for owners to increase their wealth) 2. to enable residual equity holders and other investors to make their economic decisions with respect to the corporation by enabling them to predict future cash flows to the entity and ultimately to themselves, by determining and reporting the value of and the increase in the residual equity holders’ wealth measured as financial capital (Decision-usefulness or Residual Equity perspective: a corporation is a means for investors to increase their wealth) 3. to co-ordinate and reconcile conflicting interests in the corporation in order to ensure the entity’s survival through the fair determination of profit for distribution to shareholders whilst protecting all the stakeholders’ interests by maintaining the current operating capacity of the entity’s productive capital (Entity perspective: a corporation is a social entity that has to fulfil the needs of all its financial stakeholders in order to survive), and 7 4. to co-ordinate and reconcile conflicting interests in the corporation in order to ensure its survival through the ensure the entity’s survival through the fair determination of profit for distribution to shareholders whilst protecting all the stakeholders’ interests by maintaining the current operating capacity of the entity’s productive capital, and to provide accountability to the wider public for the value created and distributed, and for being a responsible corporate citizen (Enterprise or Social perspective: a corporation is a social entity that has to fulfil the needs of all its stakeholders in order to survive and hence it must be accountable to all its stakeholders). The objective of general purpose financial reporting in the IASB Conceptual Framework is the same as that under Residual Equity Theory (or Decision-usefulness Theory). This implies that the IASB regards multinational corporations as means for residual equity holders and other international investors to increase their wealth, and the role of financial reporting is to enable them to make investment decisions. Personally, I believe that, as an international standard setter, the IASB would do well to accommodate all four normative perspectives in its Conceptual Framework because none of these can be chosen based on objective criteria or through social choice mechanisms. Furthermore, the IASB must pay attention to the specific agency problems and perverse incentives to engage in regulatory arbitrage (not only in terms of compliance with accounting regulation but also other legal requirements and enforcements such as those pertaining to taxation and company law, etc.) in the case of multinational corporations. How to satisfy the objective of general purpose financial reporting, particularly in an international context? Under a system of articulated financial statements, a financial performance concept provides the logic as to how a specific financial accounting and reporting model satisfies the chosen objective. By ‘financial performance concept’, I mean the set of logic and principles underlying the definition, recognition, measurement, presentation and disclosure of the elements of the statement of financial performance. The financial performance concept is connected to the logic and principles underlying the definition, recognition, measurement, presentation and disclosure of the elements of 8 the statement of financial position, the cash flow statement or the statement of changes in equity through the articulation of financial statements. Black (1993) and the G4 + 1 Position Paper by Cearns et al, (1999) advocate decoupling the measurement and recognition principles underlying the statement of financial position from those underlying the statement of financial performance. They appear to think that this would improve the decision-usefulness of financial statement information. This IASB DP, too, seems open to embracing the non-articulated system of financial statements because it discusses bridging items in OCI without tying recycling of the elements in OCI to the realisation concept. I do not know if this produces useful information for investors, but non-articulated financial statements could very well be the end of double-entry bookkeeping and accounting as we know it. The implications for accounting’s role in stewardship, contracting, capital maintenance and the protection of the interests of investors, creditors and other stakeholders in the longer term are not yet known. Non-articulated financial statements will also do away with the clean-surplus relation which is essential in certain valuation models. It is odd that the IASB has not included performance reporting and revenue and expense recognition in the Conceptual Framework. An accounting conceptual framework is incomplete without an explicit financial performance concept such as realised net income (profit or loss), realisable income or released-from-risk net income (in the Japanese Conceptual Framework). Net income realised on a transactions basis is often regarded as a current operating concept of profit whereas comprehensive income which is realisable on a valuation basis discloses both realised and realisable income as an all-inclusive concept of profit. Without any clear principles indicating the certainty and nature of the relationship between cash flows and accruals, the qualitative characteristics in an accounting conceptual framework have little operational value as a guiding principles for dealing with the allocation problem in accounting (Thomas, 1969) and providing logical bases for accounting standards for general purpose financial statements. 9 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 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 not then what do you suggest? No. First, I do not agree that for general purpose financial reporting purposes an asset should be defined as a resource. The idea that it needs to be capable of producing future economic benefits is very similar to the old idea of assets as capitalised expenses or service potentials which are meant to produce future income. To me these definitions are all the same and they express an idea which is given within the investment and production cycle of a business. Second, I do not agree that the objective of general purpose financial reporting is served by defining assets, liabilities, revenues/gains, expenses/losses separately from the criteria to recognise them in the financial statements. The IASB should reconsider the definition, recognition, measurement, presentation and disclosure of financial statement elements from a perspective that links any definitions through an explicit logic to the objective of financial reporting by corporate reporting entities. Suggested definitions: Asset: As a financial statement element an asset is a private economic good: for which either the whole bundle of private property rights or the private property rights related to its ownership, control and use, the generation of income and the receipt of cash from the good are legally enforceable, quantifiable in monetary terms in accordance with the characteristics of the markets in which the good is (or the separable private property rights related to the good are) bought and sold, and which is/are held by the reporting entity. 10 Liability: As a financial statement element a liability is a legally enforceable claim on the entity to transfer cash or other private economic goods (including the provision of services) to fulfil an obligation which has arisen as a result of a past transaction, action or event. It could include obligations that are entered into for prudential (i.e. self-interested) purposes or moral (i.e. ethical or social) purposes. Economic good: A product or service which can command a price when sold (Oxford Online Dictionary). Other definitions are possible and may refer to the scarcity of the good or service. Private good: A private economic good is characterised by excludability and rivalrous consumption. Private property rights: Private property rights include the right to make use of a good, to earn income from it, to lease it, to temporarily or permanently transfer control of it to another party, to subdivide it, and to sell it. Legal definitions may be more precise than this. Net assets: Assets less liabilities. Surplus: Net assets less share capital. The elements of surplus need to be clarified. As the IASB Framework is to some extent based on Decision-usefulness Theory, it adopts a mixed Proprietary/Residual Equity perspective on corporations that are a going concern, and hence defines assets, liabilities and regards equity as the residual. If it were based on Entity Theory of Enterprise Theory it would define surplus (net assets – share capital) share capital, realised and unrealised revenues/gains and expenses/losses separately, and it would pay attention to the separate definition, recognition, measurement, presentation and disclosure of those elements in surplus that are to be maintained and those that can be distributed. These may vary across jurisdictions, but that is no reason not to discuss their definition, recognition, measurement, presentation and disclosure in the Conceptual Framework. Question 3 Whether uncertainty should play any role in the definition 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 11 economic benefits. A liability must be capable of resulting in the 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 liability exists. If there could be significant uncertainty about whether a particular 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 not, what do you suggest? a) In business an asset is usually acquired because it is intended to generate income and net cash inflows in the future. There is no need to refer to expectations or the capacity to produce future income and net cash inflows, but there would be a need to refer to intended use as this is what influences an asset’s subjective value. This might lead into a discussion of business models where some assets are meant to be used in a transformation or value adding process (manufacturing, wholesale, retail and most services) and others are primarily held to benefit from increases or fluctuations in market prices (investment property and certain financial investments and financial instruments). Some of those assets are tangible, others are intangible, some are traded in fairly complete and efficient markets and others are traded in markets where prices can be influenced by the activity or volume of a single (or a few) buyers or sellers. Referring to probability thresholds in order to indicate the uncertainty of the expectations with which economic goods are held would be oversimplifying the idea of an asset. The definition of an asset as a financial statement element is not separate from its recognition, measurement, presentation or disclosure and needs to be considered in relation to the primary financial performance concept underlying the accounting/reporting system. Section 3 of the DP strongly resembles the discussions on the deficiencies of the matching concept. Section 3 presents the same (allocation) problem, looked at from a different side. Assets defined as resources are not necessarily real things that can be objectively defined, recognised and measured. It involves a similar subjectivity as the old matching concept. 12 Defining liabilities would depend on one’s view of the function of the reporting entity in society. Must liabilities be only legally enforceable obligations that determine the net assets i.e., the residual interest of the common shareholders? Or should they include the obligations to which an entity has committed due to the expectations from a broader group of stakeholders? Or the obligations the entity would need to take upon itself in order to present a favourable image in order to maintain the public’s support and patronage? The explanation of ‘constructive obligations’ in Section 3 implies that constructive obligations would ideally be objectively determined, but for a large part it depends on intention which is not objective. b and c) The recognition criteria for assets and liabilities in the IASB Framework are automatically the recognition criteria for changes in assets and liabilities. When the recognition of assets and liabilities is tied to the recognition of realised or realisable changes in assets and liabilities, the question of how to deal with existence uncertainty and outcome uncertainty is not separate. There is no faithful representation (in the sense of something corresponding to the economic reality it purports to represent) of a given probability. There is only a calculated probability for which the assumptions, the estimated and actual numbers and the methods and calculations can be at best verified or at least judged to be reasonable. If assets or liabilities are recognised based on such probability calculations, they would need to be disclosed as such and grouped in the balance sheet with items to which a similar level of uncertainty applies. Similarly, if changes in assets and liabilities resulting from such probability calculations are to be recognised in the statement of financial performance, the level of certainty with which they will be realised into cash inflows or outflows must be disclosed. Question 4 Elements for the financial 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 of equity are briefly discussed in paragraphs 2.37 – 2.52. 13 Do you have any comments on these items? Would it be helpful for the Conceptual Framework to identify them as elements of financial statements? Because the IASB Framework is built on the idea that assets are the foundation of financial reporting, it defines income/gains and expenses/losses as realisable increases or decreases in assets and liabilities. It regards measurable changes in assets and liabilities as income and expenses (Par. 2.38). Hence, it does not set out any recognition or measurement criteria for income (or gains) and expenses (or losses) and does not consider profit or loss, OCI or total comprehensive income as elements of financial statements (Par. 2.39). Mathematically, this argument follows the accounting equation (A – L = E) and therefore this way of thinking makes sense to those who hold a Proprietary or a Residual Equity view of corporations as reporting entities. However, defining and recognising income and expenses as changes in assets and liabilities makes the system tautological and reduces the information value of the statement of financial performance. The realisable comprehensive income concept of performance is implicit in the definition and recognition principles for assets and liabilities. Depending on the measurement used, this may lead to the inclusion of unrealised income/gains or expenses/losses in the primary measure of performance. This may be useful information to some investors, but not to most investors if it is not clear which income statement elements are realised and which are merely realisable and if not all unrealised gains and losses are recycled upon realisation. The DP makes a distinction between revenue and gains and between losses and expenses but not between realised and unrealised income/gains or expenses/losses (Par. 2.43 – 2.46). Then it does talk about differentiating between items in profit or loss and items in OCI (Par. 2.47 – 2.49) but decides to treat this as a matter of presentation of income and expense items (Par. 2.50) in Section 8 of the DP rather than as a matter of definition, recognition and measurement of income statement elements. However, the definitions of assets and liabilities cannot carry the measurement and recognition of revenues and expenses in the conceptual framework because the distinction between liabilities and equity is not as clear cut as the IASB presents it. The DP wishes this distinction were clear because it is based on either the 14 Proprietary or Residual Equity view and has adopted the asset-liability approach to the determination of income and expenses. Defining profit or loss, comprehensive income and OCI as well as share capital and the different elements of surplus would reduce the Framework’s Proprietary Theory bias. Question 5 Constructive obligations are discussed in paragraphs 3.39 – 3.62. The discussion considers the possibility of narrowing the definition 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? Constructive obligations are probably more in line with Entity Theory and Enterprise Theory than with Proprietary and Residual Equity Theory, so it depends on which perspective the IASB adopts. Both legal obligations and constructive obligations will need to be disclosed separately. Question 6 The meaning of ‘present’ in the definition of a liability is discussed in paragraphs 3.63–3.97. 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. 15 (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. Unfortunately, View 1 and View 2 have been framed using a different structure, which makes them harder to compare. Reframing them so they follow the same structure would lead to: 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 has the theoretical ability to avoid the transfer through its future actions. View 2: a present obligation must have arisen from past events and be practically unconditional. An entity does not have a present obligation if it has the practical ability to avoid the transfer through its future actions. If an entity has the ability to do something in theory, then the entity will have the ability to do it in practice if its managers, accountants and lawyers set their minds to it. Therefore, I think that View 2 is a false option. View 3 is another false option. If an obligation is conditional on the entity’s future actions, how can it be a present obligation? If the liability is a present legal obligation View 1 applies. If the liability is a constructive obligation it is probably not unconditional on the entity’s future actions. In sum, the definition and recognition of liabilities (and assets) is tricky if the financial measure of performance is primarily determined as the measurable change in net assets. 16 Question 7 Do you have comments on any of the other guidance proposed in this section to support the asset and liability definitions? Define net assets, surplus and its elements so it is clear what can and cannot be distributed. Under Residual Equity Theory and Proprietary Theory, a sharp distinction is crucial because of the asset-liability approach to income determination. Under Entity Theory and Enterprise Theory, it is not so important if there is a sharp distinction between liabilities and equity because the determination of distributable income does not primarily depend on the recognition and measurement of assets and liabilities. Both approaches have their theoretical and practical strengths and weaknesses, which is why in an international context it makes more sense to not choose between them but apply them both. 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? Given the fact that the IASB has been working on a revenue recognition project expected to result in a separate IFRS in the first quarter of 2014, the statement that in practice questions about recognition and derecognition relate mainly to assets and liabilities (Par. 4.2), seems to be a typical case of defining the problem out of the question. Furthermore, the DP suggests deleting all references to probability from the 17 recognition criteria (IASB, 2013: 2.17-2.36 and 4.8) for assets and liabilities. It does not discuss recognition criteria for revenues and expenses. As reliability has been replaced by faithful representation (= complete, neutral and free from error), I fear that it will lead to a situation where anything goes as long as you can defend it using the faithful representation or relevance (decision-usefulness) argument. More or less in the same way that the matching concept was taken too far, which led to reserves and allowances that should never have been recognised in the financial statements. This opens the door to discretional recognition of revenues, expenses, and both realised and unrealised gains and losses because of market price changes that have little to do with the entity’s financial performance from a current operating perspective because IASB (2010: 4.39) says ‘The interrelationship between the elements means that an item that meets the definition and recognition criteria for a particular element, for example, an asset, automatically requires the recognition of another element, for example, income or a 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 not agree, what changes do you suggest, and why? 18 In the examples given, I would support the risk and rewards approach because the control approach seems to generate perverse incentives to recognise gains or losses too hastily. I do not think I am able to generalise from these examples though. 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: (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)). (c) an entity should: (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 particular 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. (d) if an entity 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? a) No. Define net assets, surplus and its elements so it is clear what can and cannot be distributed and which elements of surplus are more senior or 19 junior when it comes to claims on the entity’s net assets. Local legislation and the entity’s constitution may be different, but defining net assets as equity and as a residual when it is not, is misleading. b) The IASB takes a Proprietary view of the company here. However, obligations to issue equity instruments are the entity’s liabilities, and obligations that will arise only on liquidation of the reporting entity are still the entity’s liabilities. I cannot see them any other way because the entity’s residual equity holders are protected by limited liability. But then, as I tend more towards Entity and Enterprise Theory, I do not believe it is helpful to pretend that there is a strict separation between liabilities and equity when many financial instruments straddle the two. c) It seems to me that the Strict Obligation approach is close to Staubus’ Decision-usefulness Theory and Residual Equity Theory because it insists upon a sharp distinction between liabilities and equity and separates the financial results for controlling and non-controlling interests. In my opinion, the wealth transfers referred to in Par. 5.11 – 5.17 are fictional in a going concern and will be irrelevant when the entity ceases to be a going concern. The Narrow Equity approach is perhaps more in line with Proprietary Theory because it is primarily concerned with the common shareholders’ interests. The Claims approach (Par. 5.51) would perhaps be more in line with an Entity view of the corporation. d) If an entity has issued no equity instruments, why would you treat the most subordinated class of instruments as if it were an equity claim? This probably has to do with Par. 5.28. Because I do not define assets as economic resources, I do not define liabilities as the obligation to transfer economic resources. In my view, a liability is an obligation to transfer a private property right (or set of private property rights) owned and controlled by the entity. The obligation to deliver equity instruments becomes an obligation to transfer a private property right in the entity itself. By the way, Example 5.1 appears too convenient to me. In order to illustrate an approach it would be necessary to do this under different scenarios. For example, in the case that the fair value increases rather than decreases, retained earnings could be wiped out. 20 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? 21 a) The objective of measurement is not primarily the faithful representation of relevant information about an entity’s assets, liabilities and changes in assets and liabilities, and about the efficiency and effectiveness with which the entity’s management have discharged their responsibilities to use the entity’s resources. In my opinion, the objective of measurement is to quantify in monetary term the elements of financial statements so as to enable financial statements to satisfy the chosen objective(s) of general purpose financial reporting. See the four views on the objective above. In many jurisdictions, such quantification serves the determination of income for distribution and must take into account the capital to be maintained so that it cannot be distributed as income when it is really the shareholders’ financial capital (to prevent the nominal capital from hollowing out), or when it is really the entity’s operating capital (to protect the interests of creditors, lenders and long-term shareholders). Such quantification also serves the measurement of financial performance of the entity, on the basis of which the managers’ performance are often assessed and which also forms the input for many other contracting numbers. Finally, such quantifications also form the input for models predicting future income and future cash flows or in comparative analyses of financial position and financial performance. b) A single measurement method for all assets and liabilities is not possible, either in theory or in practice. c) When selecting a measurement method to use for a particular item it is important to consider the reliability and verifiability of the measurement as well as the way in which the financial statement element is used in the value creation process (business model, current/non-current, monetary/nonmonetary) or how it results from this process. d) Is there a difference between how the entity’s management thinks assets and liabilities contribute to the creation of value and the generation future cash flows and how investors make this assessment? Do we know how they make this assessment? e) Does this not go without saying? f) The cost to the residual equity holders? The cost to the entity? The cost to society? Depends on your normative perspective. 22 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 individual 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. Relevance is not very well developed in Section 6. The idea appears to be relevance to the prediction of future cash flows, but what this means and to what kind of prediction models used by different users and different circumstances this pertains is not clear. Par. 6.16 – 6.19 give little guidance. The guidance in Par. 6.73 – 6.109 does not discuss the characteristics of the markets for the assets or liabilities either. It discusses initial recognition of assets or liabilities arising from exchanges of equal and nonequal value, non-exchange transactions and internal construction. This appears to come out of nowhere. It might be helpful to engage with the literature on the types of transactions that have been identified, for example by Staubus (1961) when he explained his theory of accounting to investors, or in ASOBAT of ABP No. 4. ABP No. 4 had adopted a Proprietary perspective that might be close to what the IASB has in mind, but without proper references, we will never know. 23 The subsequent measurement of assets as articulated in Par. 6.74 – 6.96, talks about how assets contribute to cash flows, which reminds of the idea of business models, but is probably meant to apply to individual assets or groups of assets. Similarly, the subsequent measurement of liabilities is articulated in Par. 6.97 - 6.109. As I believe that financial statement information must be useful for the four purposes implied by the four equity theories (stewardship, investment decisions, conflict resolution and social accountability), the relevance of measurement methods depends on the purpose at hand. Financial statements could accommodate different measurements that can be reconciled at a point in time and over different periods, so that accruals and cash flows always articulate. a-d) What is the logic or theory according to which these views would apply? What is the theory of investment decision-making and operations on which this is based? The Framework’s definition of relevance is too vague to present any operational guidance. Please present the sources of the theories or ideas that form the basis of these statements because here they are too vague to comment on. 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: (i) liabilities that will be settled according to their terms; and (ii) contractual obligations for services (performance obligations). (c) current market prices are likely to provide the most relevant information about liabilities that will be transferred. 24 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. Again, the idea of relevance is not well-developed and seems limited to investment decisions only. It would need to be defined in four different ways, in accordance with the different objectives under the four equity theories. Similar to under Question 12, the logic is not so clearly explained and the source of the theory or theories upon which it is based is not given. This is not helpful when trying to understand what the IASB means and how its views are justified. 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 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 factors 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? Again, the statements above are difficult to comment on because it is not clear where they come from (sources) and what is the thinking behind them. When measuring financial instruments and derivatives, in addition to being able to predict the cash flows associated with these instruments and determine the appropriate discount rates, 25 it is important to know the characteristics of the market in which they are bought and sold. Do the instruments have subjective value or not? Question 15 Do you have any further comments on the discussion of measurement in this section? The discussion of measurement needs to engage with the existing literature, for example Edwards and Bell (1995, 1961), ASOBAT and ABP No. 4, but particularly Feltham and Ohlson (1995), Barker (2004) and Penman (2007). 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) the relationship between primary financial statements. (b) disclosure in the notes to the financial statements, including: (i) the objective of the notes to the financial statements; and 26 (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. The suggested definitions of presentation and disclosure are idiosyncratic and confusing. In my opinion, presentation means how information is presented on the face of financial statements and in the notes or supplementary schedules, i.e. layout, classification, aggregation. There must be reasons for requiring the presentation of information in one way rather than in another way, and these reasons must be stated in the Conceptual Framework (I agree with Par. 7.48). Disclosure refers to whether an item of information is disclosed or not, and if it is disclosed, where it is disclosed and with what prominence and objective. If it is not disclosed, it must either be proprietary information or immaterial. Par. 7.15 and 7.31 is not specific enough. It should talk about the stock statements and flow statements and the relation between the two under the articulated view, or how they relate to one another if they do not articulate. How about clean surplus or dirty surplus? Par. 7.18 is again not specific enough. Also, as before, I do not agree with the idea that assets in financial statements represent economic resources. 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. 27 Do you agree with this approach? Why or why not? I do not see the need for more guidance on materiality. The concept is well understood. The application is subjective (Who knows what will influence decisions made by different users and where to draw the line?) and no amount of additional guidance will make it less so. 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? Communication principles could be useful, but I am not sure that Par. 7.50 has the right idea because it says that ‘(e)ffective communication reflects the fundamental qualitative characteristic of representational faithfulness and the enhancing qualitative characteristics of understandability and comparability’. Effective communication is indeed understandable, but most importantly, it fulfils its objective. To know whether or not this is the case, you need feedback from the users or you need to be able to measure outcomes in other ways. As there are many factors impacting on such outcomes, this may not be so easy. 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 revising particular Standards? 28 Par. 8.38 states that the DP does not choose a primary concept of financial performance. I believe that this is a big mistake because a concept of financial performance provides the logic and structure that connects the definition, recognition, measurement, presentation and disclosure of financial statement elements in an accounting conceptual framework. Without consciously choosing a primary concept of financial performance, it will default to comprehensive income where it is not clear what revenues/gains and expenses/losses have been recognised on a realisable basis or on the basis of realisation because comprehensive income is the residual. Without choosing to recycle items of OCI upon realisation, the relation between cash flows and profit or loss becomes unclear. The IASB Conceptual Framework should define profit or loss (probably as realised profit or loss), OCI and comprehensive income, and require profit or loss as a total or subtotal. It must be clear how profit or loss relates to cash flows through accruals for a financial performance measure to provide reliable input to valuation models. 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? All items in OCI must be reclassified to profit or loss upon realisation. If not, the reconciliation with cash flows is broken and the allocation problem becomes permanent until the end of the life of the entity. The idea in Approach 2A (Narrow approach to OCI) that items need to be included in profit or loss if and when they enhance the relevance of profit or loss for the period, and needs to be reclassified when reclassification results in relevant information requires a very clear definition or idea of what is relevant information. The IASB has not provided a definition of relevance to the extent necessary for these judgements. 29 The same applies to Approach 2B. They both hinge on a good workable definition of relevant information, which the Conceptual Framework does not supply, and would be difficult or even impossible to provide because different decisions by different users require information that has different attributes. 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. Neither. I support the idea that recycling is always required upon realisation. See for the arguments my answer to question 20. 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? An entity’s business model expresses the ways it uses cash and non-cash assets, liabilities, financial and other forms of leverage, and the criteria according to which it recognises revenues/gains and expenses/losses in order to add value and generate profits and cash. A business model influences how the entity deals with risk and uncertainty and hence has an impact on the entity’s direct and indirect stakeholders. 30 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 when 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? I do not know. I do not understand the explanation of unit of account very well. 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? When recognising, measuring, presenting and disclosing the elements of net assets other than share capital. 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. Capital maintenance should be discussed in relation to recognition and measurement of assets, liabilities, revenues and expenses, and the presentation and disclosure of shareholders’ equity and profit and loss. Financial capital maintenance (maintaining the shareholders’ financial capital) goes with Proprietary and Residual Equity Theory. Maintenance of the entity’s current operating capacity goes with Entity Theory and Enterprise Theory. 31 The Reporting Entity The 2010 Exposure Draft on the Reporting Entity included the following three questions for respondents that are still relevant to this DP: 1. Do you agree that a reporting entity is a circumscribed area of economic activities whose financial information has the potential to be useful to existing and potential equity investors, lenders and other creditors who cannot directly obtain the information they need in making decisions about providing resources to the entity and in assessing whether the management and the governing board of that entity have made efficient and effective use of the resources provided? If not, why? 2. Do you agree that if an entity that controls one or more entities prepares financial reports, it should present consolidated financial statements? Do you agree with the definition of control of an entity? If not, why? 3. Do you agree that a portion of an entity could qualify as a reporting entity if the economic activities of that portion can be distinguished from the rest of the entity and financial information about that portion of the entity has the potential to be useful in making decisions about providing resources to that portion of the entity? If not, why? 1) No. This definition is too vague and limited because of its focus on decisionusefulness. The other three main functions of financial reporting require a definition of a reporting entity that recognises how financial reporting is a means to reduce agency costs arising from agent-principal problems between the entity’s shareholders and its senior management, and the weaknesses of boards of directors in balancing the interests of all the corporation’s stakeholders as well as the stakeholders in the capital markets system (i.e. the general public). The definition of a reporting entity needs to be cognizant of the nature and structure of the reporting entity and the relations with its various stakeholders, not only its direct financial stakeholders. 2) I believe that each corporate legal entity should prepare and disclose a full set of independent financial statements and that, in addition, a combination of corporate legal entities under single control should present a full set of consolidated financial statements. 32 3) I don’t understand the question. Who decides what is useful to whom? The IASB? References Barker, R. (2004) Reporting Financial Performance. Accounting Horizons, 18 (2): 157-172. Black, F. (1993) ‘Choosing Accounting Rules’ Accounting Horizons 7 (1): 1-17. 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