Conceptual Framework 22 October 2013 São Paulo · Conceptual Framework 22 October 2013 São Paulo...

The views expressed in this presentation are those of the presenter,

not necessarily those of the IASB or IFRS Foundation.

© 2013 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

International Financial Reporting Standards

Conceptual Framework22 October 2013

São Paulo

Philippe Danjou, IASB member

Amaro Gomes, IASB member

Peter Clark, Director of Research

Session overview 2

• Why?

• Where are we?

• High level overview of proposals– Measurement

– Presentation & disclosure (including profit or loss and

OCI)

– Definitions of elements (including recognition, and

boundaries between liabilities/equity)

• Questions

Why? 3

• Previous project suspended in 2010

• Agenda consultation– Priority project

• Purpose of Conceptual Framework project– Not a fundamental rethink

– Update, improve and fill in gaps

– Focus on problems in standard-setting

• Purpose of the Discussion Paper – Starting point for discussion and outreach

– Seek views on key issues from interested parties

Where are we? 44

• Objective of financial reporting

• Qualitative characteristics

Completed

• Reporting entity

ED (2010) • Everything else on financial statements

Now

Objective of financial reporting 5

Users need information to help them assess the prospects for future net cash inflows to the entity (OB 3)

Information about resources and claims against the entity, and

changes to them (OB 4)

Information to assess effective and efficient management of resources (OB 4)

To provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other

creditors in making decisions about providing resources to the entity. (OB 2)

Qualitative characteristics

© IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

6

Useful

Fundamental

qualitative

characteristics

• Relevance

• Faithful

representation Complete

Neutral

Free from error

Enhancing

qualitative

characteristics

• Comparability

• Understandability

• Verifiability

• Timeliness

Measurement 7

A single measurement basis may not provide the most relevant information

Number of different measurements used should be smallest number necessary

The objective of measurement is to faithfully represent relevant

information about:

• the resources of the entity and claims against the entity, and changes

to those resources and claims

• how efficiently and effectively the entity’s management and governing

board have discharged their responsibilities to use the entity’s

resources.

Measurement (2) 8

Consider information produced in both:

the statement of financial position (SFP); and

the statement(s) of profit or loss and other comprehensive income (OCI)

Most relevant measure depends on:How an asset contributes to future cash flows (eg use, sell)How the entity will fulfil or settle a liability

Consider cost-benefit

9

Presentation & disclosures: Current problems

Not currently addressed

Presentation

How to present performance?

Profit or loss

OCI

Disclosures

Poorly targeted

Conceptual Framework project

Disclosure initiatives

9

Presentation & disclosure: suggested approach 10

• Information about the existing resources, claims against the entity, and changes to those resources and claims

Clarify purpose of primary financial statements & notes

• Classification, aggregation & offsetting

• Relationship between primary financial statements

Introduce principles for presentation

• Materiality

• Communication

Introduce principles for disclosures

Why distinguish between profit or loss and OCI?

Agenda consultation

Users ignore changes in OCI

Lack of clarity on role of profit or loss and OCI

Recycling?


11

Distinguish using an attribute?

Profit or loss

• Realised

• Recurring (persistent)

• Operating

• Measurement certainty

• Short-term

• Under management control

OCI

• Unrealised

• Non-recurring

• Non-operating

• Measurement uncertainty

• Long-term

• Outside management control


12

IASB’s view: No one way to distinguish profit or loss and OCI

Profit or loss and OCI: suggested approaches 13

• Profit or loss communicates the primary picture of the return an entity has made on its resources

• Some items of income or expense should be reported outside profit or loss (in OCI)

• Two approaches to distinguish profit or loss and OCI:

• Narrow approach

• Broad approach

IASB’s preliminary view: Retain profit or loss as a subtotal or total

• No subtotal (ie profit or loss or OCI) defined in the Conceptual Framework

• No recycling

• Not well supported

Alternative approach


Narrow use of OCI

• Bridging– Two different measures

– Eg IFRS 9 Classification and

Measurement ED [changes in

FV], Insurance contracts ED

[changes in discount rate]

• Mismatched– Current remeasurement

information incomplete

– Eg Effective portion of changes

in fair value in cash flow hedge

14

Profit or loss

OCI

All recycle All recycle

Two different measures (bridging)

20X1

Interest income A

Impairment (B)

Profit or loss A-B

Statement of comprehensive

income

15

Statement of profit or loss

20X1

Profit or loss A-B

Fair value changes C

Total comprehensive

income A-B+C

Example (IFRS 9 2012 ED):

In 20X1, financial assets are measured at amortised cost in the

statement of profit or loss and fair value in the balance sheet.

In 20X4, the financial assets are sold.


C = Differences between amortised cost (in

profit or loss) and fair value (in balance

sheet)

Two different measures (bridging) (2)

20X4

Interest income A

Impairment (B)

Gain on sale

(reclassification

adjustment)

D

Profit or loss A-B+D

Statement of comprehensive

income

16

Statement of profit or loss

20X4

Profit or loss A-B+D

Fair value changes during

the year

C

Reclassification adjustment

to profit or loss (D)

Total comprehensive

income A-B+C


D = cumulative change in fair value until date of sale

= sales proceeds less amortised cost

Broad use of OCI

• Bridging

• Mismatched

• Transitory remeasurements– Long-term – remeasurement expected to reverse or change

significantly– remeasurement enhances profit or loss as the

primary indicator of the return the entity has made on its economic resources

– Eg pensions remeasurement

17

Profit or loss

OCI

All recycle

Some recycle, if

relevant

‘Transitory remeasurements’

Impact on

financial position

20X2

CU

20X2 service cost 12

20X1 service cost 10

20X1 ‘catch-up’ 2

Pension liability 24

18

Impact on

comprehensive

income

20X2

CU

Profit or loss 12

OCI:

Pension liability

remeasurement 2

Total 14

Example – Pensions

20X1: Estimate of employee service cost is CU10 per year

20X2: Revised estimate of employee service cost is CU12 per year

- revision due to change in inflation forecast

Transitory

effect of

inflation is

separately

presented

Relevant

information

about 20X2

service costs


SummaryNarrow Approach Broad Approach

When can OCI be

used?

Use of OCI is only where permitted

or required by IFRS

Use of OCI is only where permitted or

required by IFRS

Items eligible? Mismatched remeasurements

Bridging items

Mismatched remeasurements

Bridging items

Transitory remeasurements

Recycling Always

Driven by the category and the

reason why the item went into OCI

Sometimes

Bridging and mismatched always

Transitory remeasurements – only if it

provides relevant information

Result Limited items in OCI

Less discretion for the IASB

More items in OCI (in line with current

use)

More discretion for the IASB


19

Elements: Existing definitions 20

Asset [of an entity] Liability [of an entity]

• a resource controlled by the

entity

• a present obligation of the

entity

• as a result of past events • arising from past events

• from which future

economic benefits are

expected to flow to the

entity

• the settlement of which is

expected to result in an

outflow from the entity of

resources embodying

economic benefits

Proved useful tool for many years, but some problems

Elements: Problems with existing definitions and recognition 21

• Risk of confusing:– the resource or obligation, with

– the inflows or outflows of economic benefits that the

resource or obligation may generate

• What does ‘expected’ mean? How about probability

from the recognition criteria?

• More guidance needed?– What is a resource?

– What is an obligation?

Possible revised definitions 22

Asset [of an entity] Liability [of an entity]

• A present economic

resource

controlled by the entity as a

result of past events

• a present obligation of

the entity to transfer an

economic resource as a

result of past events

• An economic resource = a right, or other source of value,

that is capable of producing economic benefits

Clarify definitions

Summary of further guidance proposed

To support asset definition

meaning of ‘economic resource’

meaning of ‘controlled’

To support liability definition

constructive obligations

impact of future events

(see next slide)

To support both definitions

reporting substance of

contractual rights and obligations

executory contracts

23

View 1

An obligation that:

• arises from past events,

and

• is strictly unconditional.

The entity has no ability to

avoid the transfer through its

future actions.

‘Present’ obligation—views considered in Discussion Paper24

View 2

An obligation that:


and

• is practically unconditional.

The entity does not have

practical ability to

avoid the transfer through its

future actions.

View 3

An obligation that:


and

• may be either

unconditional or

conditional on the entity’s

future actions.

On meeting any further

specified conditions, the

entity will have to transfer an

economic resource that it

would not have had to

transfer in the absence of the

past events.

Recognition & derecognition 25

• Recognition – Recognise items that meet definitions of elements,

unless results do not provide useful information

(relevant, faithful representation) or costs exceed

benefits

• Derecognition:– None in the existing Conceptual Framework

– Mirror image of recognition in most cases, but in some

cases may need to consider:

– Enhanced disclosure, or presentation on a separate line

items; or

– Continued recognition

Liability vs Equity 26

• Existing definition: the residual interest in the assets of

the entity after deducting all its liabilities

• Problem: to distinguish liabilities from equity

instruments, Standards (IAS 32) use complex criteria

that:– conflict with the conceptual definitions

– are difficult to understand and apply

• Possible approach:– Use conceptual definition of a liability:

– to show obligation to transfer economic resources

– Use expanded statement of changes in equity:

– to show wealth transfers between equity holders

Example: Changes in Equity 2727

Share

capital

Retained

earnings

Opening 1 January 20X2 10,000 20,000 4,000

- 34,000

Written option issued

-

- - 5,000 5,000

Total profit/

comprehensive income

for X2

- 3,500 200

- 3,700

Change in fair value of

written option

- 1,000 - -1,000 -

31 December 20X2 10,000 24,500 4,200 4,000 42,700

Existing shareholders of

parent

Non-

controlling

interests (NCI)

Obligation

to issue

shares

Total

Timetable 2828

18 Jul 2013 Issue DP

6-month comment period

(14 Jan 2014)

Q4 2014 Issue ED

End 2015

Final

More information

• Discussion Paper

http://go.ifrs.org/DP-Conceptual-Framework-July-2013

• Snapshot

http://go.ifrs.org/Snapshot-DP-Conceptual-Framework-

2013

• Conceptual Framework website

http://go.ifrs.org/Conceptual-Framework

• Existing Conceptual Framework

including (Chapters 1 & 3)

http://eifrs.ifrs.org/eifrs/bnstandards/en/2013/conceptual

framework.pdf

29

303030Questions











http://go.ifrs.org/Snapshot-DP-Conceptual-Framework-2013













http://eifrs.ifrs.org/eifrs/bnstandards/en/2013/conceptualframework.pdf




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