23 April 2013

EFRAG's newsletter on the European Conceptual Framework

EFRAG, FRC, ANC, ASCG and OIC have published the third issue of their new newsletter, 'Keep up with getting a better framework', informing European constituents on the latest developments regarding the progress of the Conceptual Framework project with the IASB and other stakeholders.

On 3 April, National Standard-Setters (‘the members’) met in the EFRAG Consultative Forum of Standard-Setters to discuss their initial views on the direction of the IASB Conceptual Framework project. The purpose was to enable the European delegation to be fully representative of Europe’s preliminary views at the first meeting of the Accounting Standards Advisory Forum (ASAF).

The members noted that the project would only deal with financial statements. While some agreed with this approach, others thought that the broader scope of financial reporting had to be considered. A compromise of considering the role of financial statements within the context of financial reporting was proposed.

The benefits of the definitions of assets and liabilities discussed by the IASB were questioned. Some members did not agree with moving criteria currently included in the definitions to the recognition criteria. Others thought that it was less useful to have short definitions of assets and liabilities if it would be necessary to further define concepts included in these definitions. In addition, some members thought it should be debated whether income and expenses should be defined on the basis of changes in assets and liabilities.

Contrary to the IASB’s tentative view, there was consensus among members that uncertainty about inflows and outflows should be taken into account before recognising assets and liabilities. Members also considered that such a certainty threshold related to assets had to be higher than for liabilities. Divergent views were expressed on whether the Conceptual Framework should include thresholds or just provide guidance on how these should be set on a standards level.

The general principles for measurement tentatively agreed by the IASB and the idea of basing measurement on how an asset is expected to be used and a liability settled were considered sensible starting points.

Generally, members thought that the implications of many of the proposals of the DP and their alternatives should be further reasoned and illustrated with explanations of what the IASB wanted to achieve. The principles for the Conceptual Framework should not be deduced from current requirements. For example, the IASB should not develop criteria for what items should be included in OCI on the basis of current requirements. Instead some members thought the criteria should be developed by first describing what financial performance is and then what role profit or loss and OCI should play in presenting information on financial performance. Similarly, instead of considering fair value as defined in IFRS 13 as the alternative to cost based measures, the IASB should consider what characteristics a relevant current value measure should comprise.

Members acknowledged that the IASB’s tentative ideas related to debt/equity could solve some (but not all) current issues relating to distinguishing debt from equity. However, the IASB’s ideas also made some members think that it could be beneficial to consider from what perspective financial statements should be prepared (e.g. entity approach versus parent company approach).

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