By: Sandra Minaburo
Director of the Accounting Research Center
spmina@itam.mx
Among the projects that the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) have worked on together is, dating back to 2004, the joint project regarding changes to the Conceptual Framework, which so far has undergone many adjustments.
Among the projects that the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) have worked on together is, dating back to 2004, the joint project regarding changes to the Conceptual Framework, which so far has undergone many adjustments. In October 2004, both the FASB and the IASB added this comprehensive project to their agendas and divided it into the following phases:
Phase A: Objectives and qualitative characteristics.
Phase B: Elements of financial statements and recognition.
Phase C: Measurement.
Phase D: The reporting entity.
Phase E: Presentation and disclosure.
Phase F: Purpose and status of the joint project.
Phase G: Application to non-profit entities..
Phase H: Pending issues.
These phases were developed as single chapters to compose the new Conceptual Framework. In 2010 three chapters were issued: Chapter 1: The objective of financial information with a general purpose, and Chapter 3: Qualitative characteristics of useful financial information. These two chapters, which make up Phase A of the initial project, became effective on the same day they were enacted, which was September 28, 2010. Similarly, Chapter 2: The reporting entity, was issued for review and comments. Chapter 2: The reporting entity, which was already examined and revised but has not yet been enacted, would make up Phase D of the original project.
According to statements made by both agencies in late 2010, the IASB and the FASB decided to suspend the work they were doing together to give priority to other projects on their own agendas.
The FASB has definitely stopped progress on the review of its conceptual framework, but the IASB decided to resume and continue to work on its own in 2012 when, through a public consultation, it determined that the project was considered a priority by many users of financial information, and labeled it as the IASB-only comprehensive project.
The IASB has set 2015 as the deadline to finish reviewing the Conceptual Framework. Because of time constraints, it decided to focus on improving and filling the gaps in the current document, rather than restating and reconsidering certain aspects that currently are considered contradictory. To this end, it decided to dedicate itself to the development of a comprehensive proposal and not on one of each phase at the time as originally proposed, focusing on the following topics:
a) Elements of financial statements
b) Recognition and derecognition
c) Measurement
d) Presentation and disclosure
e) Other Comprehensive Income (OCI)
It was based on the analysis of these issues, which the IASB considers to be a priority, that the proposed changes to the Conceptual Framework were developed. The proposal is known as Discussion Paper DP/2013/1: A Review of the Conceptual Framework for Financial Reporting (DP), and was published in July 2013 to receive comments until January 14, 2014. It contains 26 questions, whose answers are intended to guide the IASB regarding the path that users of financial information suggest it follow for the development of the Conceptual Framework.
This DP is divided into nine sections that develop the main ideas and alternatives that the IASB is considering in order to carry out the Exposure Draft of the Conceptual Framework. Among the most important changes that are proposed for the accounting information system are new proposals regarding the definitions of assets, liabilities, equity, income and expenses, and of course, recognition, measurement, presentation and disclosure of said elements.
There is an intent in the DP to clarify and expand the definitions of both assets and liabilities, with the goal of more firmly stating that the asset is “an economic resource controlled by the entity and which is expected to generate economic benefits,” and that the liability is “an obligation on the part of the entity to transfer economic resources.” It includes, therefore, the definition of what should be considered an economic resource, which is “a right or other source of value that is capable of producing an economic benefit.”
Behind the current definitions of asset and liability is the concept of “uncertainty,” which is immersed in the identification of the likely economic benefits, both inflow and outflow, which are expected to be received or delivered for an asset or a liability. The DP discusses the advantages and disadvantages of using a threshold of certainty, whether under the current concept of virtually certain or of probable. IASB’s view is that these concepts of uncertainty are not needed to identify whether an asset is able to produce an economic benefit or a liability is capable of producing a transfer of an economic resource, so the proposed recognition criterion does not include any reference to the concept of probability.
Regarding equity, the focus is to provide the user with more information about the different types of capital investment, such as senior capital claims or subordinate equity claims. The DP suggests a statement of changes in equity that shows the different types of capital and wealth transfers that exist between them. The definition of capital remains in the statutes as the difference between total assets and total liabilities; that is, the entity’s net assets or the residual interest.
The document includes the concept of derecognition of assets and liabilities, which the current Conceptual Framework did not consider, although it is used in some of the International Financial Reporting Standards (IFRS) to define certain types of assets and liabilities. The general rule is that any asset or liability that does not meet the established criteria for recognition within the financial information should no longer be identified as such starting on the date it was no longer defined that way. Although the recognition criteria are clear, the problem arises when an entity retains part of a previously recognized asset or liability, in which case the DP suggests strengthening the rules of disclosure and presentation for these kinds of operations.
An important shortcoming of the current Conceptual Framework is that is does not include all the measures recently used to evaluate the different elements of financial statements. The DP suggests a limited number of measures to improve the comprehension of financial information and how to make it comparable. The measures fall into three categories: those based on cost, those based on market prices, and other measures based on cash flow. As for assets, the entity should choose the one that adequately reflects the way in which they contribute to the future cash flow, and for liabilities, it should choose the one that shows how the entity will cover or comply with said obligation.
Regarding the elements of the Income Statement, the DP proposes defining clearly the criteria that must be followed to differentiate between profits and losses; between the subtotals that make up the SCI (Statement of Comprehensive Income) and the recycling of OCI (Other Comprehensive Income) toward income for prior years. Thus it is proposed that it be determined which items of income or expenses must be submitted as part of the profits or losses, or as part of the OCI, and under which circumstances should the items previously recognized within them be recycled. For this, the DP proposed two approaches, one broad and one narrow. The difference between the two is that the broad approach proposes a continuous monitoring of recycling in order to determine when it is providing relevant information to determine the profits or losses for the period, and then in that moment the recycling should be made.
As for the presentation and disclosure criteria, the IASB is considering developing communication principles that ensure that the information that should be disclosed is disclosed, and also to reduce the burden of complying with the current rules of disclosure. The IASB bases itself on the idea that disclosures should complement the information presented in the financial statements by providing additional useful information regarding the items that are included in them. Other concepts are also included in the DP, such as the reporting entity, the business model, the unit of account, the going concern assumption of the operating business, and the idea of capital maintenance.
Finally, one must keep in mind that according to the IASB the Conceptual Framework has the following objectives:
a) To assist the Board in the development of future IFRS and in its review of existing ones.
b) To assist the Board in promoting the harmonization of regulations, accounting standards and procedures relating to the presentation of financial statements by providing a basis for reducing the number of alternative accounting treatments allowed by the IFRS.
c) To assist national standard-setting bodies in developing national standards.
d) To assist preparers of financial statements in applying IFRS and in dealing with topics that have yet to form the subject of an IFRS.
e) To assist auditors in forming an opinion on whether financial statements comply with IFRS.
f) To assist users of financial statements in interpreting the information contained in financial statements prepared in compliance with IFRS.
g) To provide to all those who are interested in the IASB’s work with the information about its approach to the formulation of IFRS.
Although the IASB’s Conceptual Framework is not part of the International Financial Reporting Standards, that is to say, it is not above any of them and it does not apply to any particular circumstance. It is important to know and understand its contents, since the IASB will guide itself by it and depend upon it for the development of future IFRS and for the revision of existing standards, which is reason enough to analyze and understand the potential impacts that the proposed changes could have on financial information.?
References
FASB. 2013. “International Convergence Page”. E.U.A. Available at FASB . Retrieved October 28, 2013.
IAS Plus. 2013. “Conceptual Framework: IASB – FASB Joint Project”. UK. Deloitte Global Services Limited. Available at IAS Plus. Retrieved October 28, 2013.
IFRS Foundation. 2013. “Conceptual Framework Project Page”. Londres, IFRS Foundation. Available at IFRS. Retrieved October 28, 2013.
Some thoughts on the IASB’s Conceptual Framework Discussion Paper
Director of the Accounting Research Center
spmina@itam.mx
Among the projects that the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) have worked on together is, dating back to 2004, the joint project regarding changes to the Conceptual Framework, which so far has undergone many adjustments.
Among the projects that the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) have worked on together is, dating back to 2004, the joint project regarding changes to the Conceptual Framework, which so far has undergone many adjustments. In October 2004, both the FASB and the IASB added this comprehensive project to their agendas and divided it into the following phases:
These phases were developed as single chapters to compose the new Conceptual Framework. In 2010 three chapters were issued: Chapter 1: The objective of financial information with a general purpose, and Chapter 3: Qualitative characteristics of useful financial information. These two chapters, which make up Phase A of the initial project, became effective on the same day they were enacted, which was September 28, 2010. Similarly, Chapter 2: The reporting entity, was issued for review and comments. Chapter 2: The reporting entity, which was already examined and revised but has not yet been enacted, would make up Phase D of the original project.
According to statements made by both agencies in late 2010, the IASB and the FASB decided to suspend the work they were doing together to give priority to other projects on their own agendas.
The FASB has definitely stopped progress on the review of its conceptual framework, but the IASB decided to resume and continue to work on its own in 2012 when, through a public consultation, it determined that the project was considered a priority by many users of financial information, and labeled it as the IASB-only comprehensive project.
The IASB has set 2015 as the deadline to finish reviewing the Conceptual Framework. Because of time constraints, it decided to focus on improving and filling the gaps in the current document, rather than restating and reconsidering certain aspects that currently are considered contradictory. To this end, it decided to dedicate itself to the development of a comprehensive proposal and not on one of each phase at the time as originally proposed, focusing on the following topics:
It was based on the analysis of these issues, which the IASB considers to be a priority, that the proposed changes to the Conceptual Framework were developed. The proposal is known as Discussion Paper DP/2013/1: A Review of the Conceptual Framework for Financial Reporting (DP), and was published in July 2013 to receive comments until January 14, 2014. It contains 26 questions, whose answers are intended to guide the IASB regarding the path that users of financial information suggest it follow for the development of the Conceptual Framework.
This DP is divided into nine sections that develop the main ideas and alternatives that the IASB is considering in order to carry out the Exposure Draft of the Conceptual Framework. Among the most important changes that are proposed for the accounting information system are new proposals regarding the definitions of assets, liabilities, equity, income and expenses, and of course, recognition, measurement, presentation and disclosure of said elements.
There is an intent in the DP to clarify and expand the definitions of both assets and liabilities, with the goal of more firmly stating that the asset is “an economic resource controlled by the entity and which is expected to generate economic benefits,” and that the liability is “an obligation on the part of the entity to transfer economic resources.” It includes, therefore, the definition of what should be considered an economic resource, which is “a right or other source of value that is capable of producing an economic benefit.”
Behind the current definitions of asset and liability is the concept of “uncertainty,” which is immersed in the identification of the likely economic benefits, both inflow and outflow, which are expected to be received or delivered for an asset or a liability. The DP discusses the advantages and disadvantages of using a threshold of certainty, whether under the current concept of virtually certain or of probable. IASB’s view is that these concepts of uncertainty are not needed to identify whether an asset is able to produce an economic benefit or a liability is capable of producing a transfer of an economic resource, so the proposed recognition criterion does not include any reference to the concept of probability.
Regarding equity, the focus is to provide the user with more information about the different types of capital investment, such as senior capital claims or subordinate equity claims. The DP suggests a statement of changes in equity that shows the different types of capital and wealth transfers that exist between them. The definition of capital remains in the statutes as the difference between total assets and total liabilities; that is, the entity’s net assets or the residual interest.
The document includes the concept of derecognition of assets and liabilities, which the current Conceptual Framework did not consider, although it is used in some of the International Financial Reporting Standards (IFRS) to define certain types of assets and liabilities. The general rule is that any asset or liability that does not meet the established criteria for recognition within the financial information should no longer be identified as such starting on the date it was no longer defined that way. Although the recognition criteria are clear, the problem arises when an entity retains part of a previously recognized asset or liability, in which case the DP suggests strengthening the rules of disclosure and presentation for these kinds of operations.
An important shortcoming of the current Conceptual Framework is that is does not include all the measures recently used to evaluate the different elements of financial statements. The DP suggests a limited number of measures to improve the comprehension of financial information and how to make it comparable. The measures fall into three categories: those based on cost, those based on market prices, and other measures based on cash flow. As for assets, the entity should choose the one that adequately reflects the way in which they contribute to the future cash flow, and for liabilities, it should choose the one that shows how the entity will cover or comply with said obligation.
Regarding the elements of the Income Statement, the DP proposes defining clearly the criteria that must be followed to differentiate between profits and losses; between the subtotals that make up the SCI (Statement of Comprehensive Income) and the recycling of OCI (Other Comprehensive Income) toward income for prior years. Thus it is proposed that it be determined which items of income or expenses must be submitted as part of the profits or losses, or as part of the OCI, and under which circumstances should the items previously recognized within them be recycled. For this, the DP proposed two approaches, one broad and one narrow. The difference between the two is that the broad approach proposes a continuous monitoring of recycling in order to determine when it is providing relevant information to determine the profits or losses for the period, and then in that moment the recycling should be made.
As for the presentation and disclosure criteria, the IASB is considering developing communication principles that ensure that the information that should be disclosed is disclosed, and also to reduce the burden of complying with the current rules of disclosure. The IASB bases itself on the idea that disclosures should complement the information presented in the financial statements by providing additional useful information regarding the items that are included in them. Other concepts are also included in the DP, such as the reporting entity, the business model, the unit of account, the going concern assumption of the operating business, and the idea of capital maintenance.
Finally, one must keep in mind that according to the IASB the Conceptual Framework has the following objectives:
Although the IASB’s Conceptual Framework is not part of the International Financial Reporting Standards, that is to say, it is not above any of them and it does not apply to any particular circumstance. It is important to know and understand its contents, since the IASB will guide itself by it and depend upon it for the development of future IFRS and for the revision of existing standards, which is reason enough to analyze and understand the potential impacts that the proposed changes could have on financial information.?
References