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17 November 2015

ESMA's response to the IASB’s EDs on Conceptual Framework for Financial Reporting


ESMA has published its comment letter in response to the IASB’s Exposure Drafts Conceptual Framework for Financial Reporting and Updating References to the Conceptual Framework: Proposed amendments to IFRS 2, IFRS 3, IFRS 4, IFRS 6, lAS 1, lAS 8, lAS 34, SIC-27 and SIC-32.

ESMA strongly supports the aim of the IASB’s Conceptual Framework project to improve financial reporting by providing a clear and comprehensive set of updated concepts. ESMA welcomes the ED as it provides a number of updated concepts underpinning IFRS financial reporting. In particular, ESMA is of view that the ED provides welcomed changes and clarifications to the existing Conceptual Framework in areas such as elements of financial statements and their recognition. Furthermore, ESMA welcomes the proposed guidance on reporting entity, derecognition and the role of business activities in financial reporting.

However, considering the objective of the comprehensive revision of the Conceptual Framework, ESMA regrets that the ED does not provide guidance on some essential issues in financial reporting which leaves the Conceptual Framework incomplete. ESMA is of the view that these remaining gaps in the Conceptual Framework need to be filled on a timely basis. In particular,

-       ESMA notes that the ED does not include sufficient guidance on distinguishing between liability and equity. In this respect, ESMA agrees with the Alternative View of Suzanne Lloyd and Patrick Finnegan in paragraphs AV8 - AV14 of the ED. ESMA agrees with the view of the IASB that the definition of a liability should be used to distinguish between liability and equity, but is concerned that the IASB has not sufficiently considered the issue yet. While ESMA understands that this issue is treated in the separate project, from a timing perspective, we are concerned that this project might lead to subsequent changes to the definition of a liability.

-       ESMA is concerned that the ED does not attempt to define performance as highlighted in the Alternative View of Stephen Cooper and Patrick Finnegan. It implies that the Conceptual Framework will include neither a clear basis for distinguishing between items that should be recognised in profit or loss and items that should be recognised in other comprehensive income (DCI), nor a principle establishing whether and when recycling is appropriate.

ESMA broadly agrees with the proposed definitions of elements in the ED but points out that the new definition of assets and liabilities, together with the new recognition and derecognition criteria might have an impact on the assets and liabilities to be recognised in the statement of financial position. Therefore, ESMA calls on the IASB to analyse the possible consequences of the proposed changes in their entirety on a broad set of potential rights and obligations that are currently not recognised in the financial statements.

While ESMA agrees with the proposed description of a ‘present obligation’ at the conceptual level, it highlights the need for additional guidance at the level of individual standards that would make it operational. Furthermore, ESMA urges the IASB to further explore consequences of the proposed definition of present obligation on a broad set of liabilities, such as different types of levies, restructuring plans and obligations stemming from the accounting for repairs and maintenance.

While ESMA agrees with the basis of most of the proposed concepts, additional clarifications are required before finalising the Conceptual Framework. These clarifications are required in particular on factors to consider when selecting a measurement basis and possible consequences of the proposed changes in the recognition criteria. Furthermore, ESMA is of the view that a more comprehensive effects analysis is required. Moreover, in case of conflict between the [revised] Conceptual Framework and an existing standard, ESMA suggests the

IASB to assess whether it needs to add that standard to its active [research] agenda and to identify ways to address this conflict.

Finally, ESMA agrees with the proposed transition requirements and effective date of the proposed consequential amendments updating references to the Conceptual Framework.

Full comment letter



© ESMA


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