The International Accounting Standards Board has proposed a set of enhancements to the Conceptual Framework for Financial Reporting.
The Conceptual Framework underpins International Financial Reporting Standards and helps the IASB to develop standards. The exposure draft proposes a number of enhancements to the Conceptual Framework, including a new chapter on measurement that describes appropriate measurement bases (historical cost and current value, including fair value), and the factors to consider when selecting a measurement basis.
The changes also would confirm that the statement of profit or loss is the primary source of information about a company’s performance, and adding guidance on when income and expenses could be reported outside the statement of profit or loss, in Other Comprehensive Income (OCI). In addition, the proposed changes would refine the definitions of the basic building blocks of financial statements—assets, liabilities, equity, income and expenses.
The IASB listened to feedback from parties affected by the IASB’s work and is also proposing to place more emphasis on the importance of providing information needed for investors to assess management’s stewardship, and to reintroduce an explicit reference to “prudence,” explaining clearly what it means.
Prudence is described as the exercise of caution when making judgements under conditions of uncertainty. The framework would state that prudence is important to achieve neutrality and hence, a faithful representation; and to state explicitly that a faithful representation reports the substance of a transaction rather than merely its legal form. This proposal has met with some controversy, however.
The Conceptual Framework was last revised in 2010. In 2011, respondents to the IASB’s Agenda consultation called for the IASB to restart and prioritise revision of the parts that were not revised in 2010. The IASB has listened to that feedback and plans to issue a final Conceptual Framework in 2016.
“A solid Conceptual Framework is essential because it shapes the decisions the IASB takes when developing Standards,” said IASB chairman Hans Hoogervorst in a statement. “Two particularly important areas of the proposals published today are the clarification of the key role of profit or loss as an indicator of a company’s financial performance, and the chapter that describes the information provided by historical cost and current value measurements.”
The IASB has also published for public comment a separate exposure draft Updating References to the Conceptual Framework, which proposes that references to the Conceptual Framework are updated in existing Standards.
The Conceptual Framework was a joint project with the U.S. Financial Accounting Standards Board until 2010. At that time the IASB and FASB jointly published two chapters of the Conceptual Framework describing the objective of financial reporting and the qualitative characteristics of useful financial information. The IASB restarted the project in 2012. Since then, the IASB noted that it has no longer been working jointly with the FASB on this project. Instead, the IASB has been receiving input from a broad range of accounting standard-setters, including FASB, through the Accounting Standards Advisory Forum.
The deadline for commenting on the exposure drafts is Oct. 26, 2015.
A “Snapshot” document providing a high-level summary of the key aspects of the exposure draft can be found here and the exposure draft is available here. Comment letters can be submitted here. The IASB also plans to hold a live webinar on June 17 to introduce the proposals and answer questions.
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