14 January 2014

Responses to IASB's conceptual framework for financial reporting: ACCA, Deloitte, EBA, EBF, EFRAG, FRC, Insurance Europe/CFO Forum

ACCA

Important areas are missing from the concepts for the preparation and presentation of financial statements, says ACCA. ACCA’s Global Forum for Corporate Reporting developed the detailed feedback to the IASB’s consultation, saying that the concepts of prudence and accountability need to be addressed and explained in this Conceptual Framework.

Richard Martin, head of corporate reporting at ACCA, comments: "This Framework is important as it helps the IASB prepare, develop and revise IFRS in a coherent and consistent way. While accountability is referred to in the Framework, and prudence is built into the existing IFRS in a number of ways, both need to be given more importance in the Framework."

ACCA broadly welcomes the proposals on measurement and the choice between different measures such as cost and market values as going a long way to providing appropriate guidance. This should help fill one of the major holes in the current framework. However in another critical area – what should be part of profit for the year and what can be treated as other comprehensive income – more work needs to be done to develop definitions and principles. There are other gaps in the Framework where no concept or principle seems to be included – such as on the unit of account issue, de-recognition and disclosures. 

Richard Martin adds: "This is an unsatisfactory situation where important aspects of setting accounting standards are missing. We also need a more coherent definition of liabilities that brings together the approach to conditional liabilities, constructive liabilities and the implications of economic compulsion."

Full response

Deloitte

To serve its intended purpose, the Board should treat the Framework as a living document to be updated as necessary to keep pace with changes in thinking on conceptual matters. There should be an established process for reviewing the Framework on a recurring basis. Unless the Framework is kept up to date, there is a risk of tension and conflicts between the Framework and conclusions that the Board reaches in individual projects. As the IASB develops new standards, it should have such a process to evaluate whether decisions it makes are consistent with the Framework. Departures should be identified and justified.

The IASB should have a plan for identifying and addressing any conflicts between the concepts and guidance in a revised Framework and existing IFRSs. It should identify any existing requirements that are contrary to the revised Framework and an action plan for resolving such conflicts. It would be unhelpful and potentially confusing to permit conflicts to exist for an extended period of time, in particular since those who apply and interpret existing IFRS requirements do so in the context of the Framework as it exists at any given time (see, for example, IAS 8.11).

Press release

Full comment letter

EBA

The revision of the CF could increase the relevance and usefulness of the fundamental principles for the IASB to consider during the standard-setting process and for the users of financial statements, during the application of standards and the interpretation of financial information. We agree with the scope of the issues being addressed in the DP. However, the EBA believes that certain aspects of the DP could be further developed or deserve further consideration.

The EBA is concerned that some of the proposals of the DP conflict with some of the requirements in the current standards that EBA generally agrees with and which may lead to significant unintended consequences in financial reporting of banks, such as the distinction between equity and liability and in respect of the derecognition of repurchase agreements resulting from the decision taken on `control´ versus `risk-and-rewards´ approaches. For that reason, the interaction of the revised CF with the existing standards needs further justification as we are concerned about the appropriateness of the inclusion of these proposed principles within the CF, which could limit the flexibility to develop specific treatment in the individual standards.

Finally, the EBA believes that the purpose of Profit and Loss and Other Comprehensive Income and the conditions under which recycling should occur deserve further conceptual analysis in order to ensure consistency in the presentation and the disclosures of financial statements.

Full comment letter

EBF

The Conceptual Framework should be the primary source for development of new requirements or guidance on the “complain or explain” basis. While the Framework should be principle based, it must be sufficiently clear given its usage by preparers and others in the absence or lack of clarity of a standard addressing a particular issue.

Assets and liabilities should be recognized when leading to useful and understandable information. EBF would agree with the removal of the probability threshold from the CF provided that sufficient weight is given to criteria of faithful representation and cost efficiency to prevent measurement methods having to be developed for low probability items when it is clear that the cost of the process will not be outweighed by the benefits.

The EBF is concerned with the recognition criteria solely based on the control notion that was rejected by the constituency in the proposed amendments to IAS 39. Consideration of risks and rewards is important to achieve fair representation of risks to which the entity is exposed. The EBF is also not comfortable with partial derecognition that depends on the unit of account (and definition of asset as a bundle of rights that can be separated). The EBF believes that the framework should include more analysis of the unit of account, but that it is important that it is not defined only as “the contract level”. 

Full comment letter

EFRAG

While EFRAG broadly agrees with the issues selected for the DP, it does not agree with all of the proposed solutions and thinks that some of the issues should be addressed on a more conceptual basis. This may partly be because many of the principles proposed have been generated from requirements in current Standards without their justification being debated conceptually. The revised Conceptual Framework should be based on the understanding of how clear objectives of financial reporting should be met in practice.

EFRAG provided high-level comments in relation to:

• Amendments to Chapters 1 and 3 of the existing Conceptual Framework
• The role of the business model in financial reporting
• Elements of financial statements and recognition
• Distinction between liability and equity elements
• Disclosure
• Implications on existing Standards of amending the Conceptual Framework.

Press release, 3.2.14

Full comment letter

FRC

The FRC believes the concepts of prudence, stewardship and reliability should be reintroduced to the international accounting standards Conceptual Framework, as they are fundamental to financial reporting.

In particular, FRC welcomes:

• The IASB’s commitment to revisit the Conceptual Framework, to bring it up-to-date and add guidance in areas that are not adequately addressed.
• The equal emphasis placed on the statement of profit or loss and OCI and the statement of financial position, and the recognition of the statement of cash flows as a primary financial statement.
• The IASB’s preliminary view that a single measurement basis may not provide the most relevant information, and that the selection of a measurement basis should depend upon how an asset or liability contributes to future cash flows.
• The retention of a total (or sub-total) for profit or loss as a primary source of information about the return an entity has made on its economic resources in a period.
• The retention of the current definition of equity—the residual interest in the assets of the entity after deducting all its liabilities.
• The inclusion of principles on presentation and disclosure as the first step of the IASB’s disclosure initiative.

There are, however a number of areas where further development is necessary. Examples of these include:

• clarification of the definition of liabilities to situations where the requirement to transfer economic benefits can be avoided by the entity’s future actions;
• the discussion of measurement concepts;
• the objective of the statement of profit or loss; and
• the unit of account.

FRC is pleased that the IASB is willing to consider changes to the Chapters on objectives and qualitative characteristics (which were revised in 2010) where this is shown to be necessary by the development of other parts of the Conceptual Framework. FRC strongly believes that these Chapters should emphasise the importance of accountability (or ‘stewardship’), reliability and prudence. These Chapters should also acknowledge that financial statements are more useful if they enable an assessment of the result of the entity’s business model.

Press release

FRC-response

Insurance Europe/CFO Forum Joint Response

The main views of the joint response are the following:

• The business model plays a role in financial reporting and thus should be part of the revised Conceptual Framework as financial statements would be made relevant by considering how an entity conducts its business activities. The notion of business model is very important for accounting for insurance activities. Insurers apply asset-liability management (ALM) strategies in which insurance liabilities and guarantees and their related assets are managed together according to the insurance contract liability profile to meet obligations towards policyholders.
• Insurance Europe/CFO Forum support a mixed measurement model for assets and liabilities.
• The P&L should be the primary performance statement, separately from OCI. The Conceptual Framework should include a principle that items in OCI should be recycled through P&L. In many cases, OCI items will automatically reverse over time. There may be cases where recycling does not provide relevant information, such cases should be dealt with in individual IFRSs.
• A principle based disclosure framework is needed.
• Further analysis is required on the impact of the proposed changes.

It is important that the development of the Conceptual Framework is consistent with IFRSs currently under development, particularly IFRS 4 and IFRS 9 which are still subject to further deliberation and change. Insurance Europe/CFO Forum believe the future Conceptual Framework exposure draft should identify any inconsistencies between the Conceptual Framework, existing standards and standards under development, with an explanation of how such inconsistences will be addressed. Insurance Europe/CFO Forum have also previously expressed the view that IFRS 4 and IFRS 9 should be finalised without any further delay to the extent that it is not to the detriment of their quality. Consequently, Insurance Europe/CFO Forum believe that the Framework’s development should not delay those standards, nor result in their reopening soon after finalisation.

Overall, Insurance Europe/CFO Forum note that the DP contains a significant amount of guidance. We consider that the final Conceptual Framework be kept principle based and as concise as possible. Insurance Europe/CFO Forum recommend that most guidance on application should continue to be included in the individual IFRSs.

Full response with appendix

Original discussion paper, 18.7.13