In July 2013, the International Accounting Standards Board (IASB) issued a discussion paper on review of the Conceptual Framework for financial reporting for comment only. Comments on this paper need to be given by 14th January, 2014.
The IASB’s discussion paper on the Conceptual Framework provides a welcome opportunity to set out the fundamental principles of accounting necessary to develop robust and consistent standards. Although this is not an immediate project, it would set the tone for the future direction of accounting.
Need for a review of the Conceptual Framework
In recent times, there have been many discussions regarding the extent of fair value accounting under IFRS, the measurement of performance, keeping assets on or off balance sheet etc. which raise questions on the fundamentals of accounting under IFRS. In the aftermath of the global financial crisis, as the accounting complexities increase, the IASB’s thinking about some of these fundamentals has also evolved. This gave rise to the need for a revised Conceptual Framework which reflects the recent changes in accounting and provides a backbone for future changes.
This discussion paper is designed to obtain initial views and comments on a number of matters, and focuses on areas that have caused problems in practice for standard setters as well as companies. It also sets out the IASB’s preliminary views on some of the topics under discussion.
Key changes envisaged
Revised definitions of assets and liabilities
The revised Conceptual Framework proposes to clarify the existing definitions of assets and liabilities. Rather than the focus of the current definition on inflow or outflow of resources, the proposals suggest that the focus should be on underlying resources or obligations as the basis for determining the recognition of an asset or liability. Given below are the proposed 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 of the entity 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.
Additional guidance on applying the definitions of assets and liabilities
The IASB proposes to provide additional guidance on the meaning of economic resource, control, transfer of economic resource, constructive obligations and present obligation. Additional guidance would be provided also on reporting the substance of contractual rights and contractual obligations and executory contracts. These would be helpful to support the proposed new definitions of asset and liability explained above.
Revised guidance on when assets and liabilities should be recognised
The IASB’s preliminary view on recognition is that 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 either because of cost benefit considerations or that such recognition would not be a faithful representation.
New guidance on when assets and liabilities should be derecognised
The existing Conceptual Framework does not address derecognition in a comprehensive manner. The IASB’s preliminary view is that an entity should derecognise an asset or a liability when it no longer meets the recognition criteria. However, for cases in which an entity retains a component of an asset or a liability, the IASB should determine, when developing or revising the standards, how the entity would best portray the changes that resulted from the transaction. This could be achieved by way of enhanced presentation or disclosure or continuing to recognise the original asset or liability and treating the proceeds received or paid for the transfer as a loan received or granted.
New way to present information about equity claims against the reporting entity
Financial statements currently do not clearly show how equity instruments with prior claims against the entity affect possible future cash flows to investors. Also, the IASB proposes to address the distinction between equity and liability, specifically the problems of applying the definition of liability consistently within IFRS.
Measurement requirements
This section of the discussion paper provides guidance to assist the IASB in developing measurement requirements in new or revised standards. The proposals state that there are different bases of measurement i.e cost, market prices including fair value and other cash flow based measurements. These bases should be applied based on their relevance, cost benefit analysis and their impact on the profit and loss/other comprehensive income (OCI) statement.
Principles for distinguishing profit or loss from OCI
The extant Framework does not provide guidance on presentation and disclosure. The reporting of financial performance (including the use of OCI and recycling) is a key topic that needs to be addressed. Further, the IASB proposes to provide more guidance in the area of materiality.
This Discussion Paper incorporates the views received through the IASB’s public consultation carried out in 2011. It has detailed discussions around the key topics mentioned above and other topics where different views have been deliberated and the IASB’s preliminary views have been stated out for comment. This is an important project for the IASB as it not only addresses concerns around the fundamental areas as they exist today but also set the principles for standards to be developed in the future.
