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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?
© IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
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
© IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
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
© IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
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.
© IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
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
© IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
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
© IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
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
© IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
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:
• arises from past events,
and
• is practically unconditional.
The entity does not have
practical ability to
avoid the transfer through its
future actions.
View 3
An obligation that:
• arises from past events,
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
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