WELLINGTON OFFICE Level 7, 50 Manners St, Wellington • AUCKLAND OFFICE Level 12, 55 Shortland St, Auckland POSTAL PO Box 11250, Manners St Central Wellington 6142, New Zealand • PH +64 4 550 2030 • FAX +64 4 385 3256

W W W .X R B . G OV T .N Z

19 December 2013

Mr Hans Hoogervorst

Chairman

The International Accounting Standards Board

30 Cannon Street

London EC4M 6XH

United Kingdom

Dear Hans

IASB Discussion Paper DP/2013/1 A Review of the Conceptual Framework for Financial

Reporting

The New Zealand Accounting Standards Board (NZASB) is pleased to submit its comments

regarding the International Accounting Standards Board (IASB) Discussion Paper DP/2013/1 A

Review of the Conceptual Framework for Financial Reporting.

We regard the conceptual framework project to be a priority project and commend the IASB for

taking the project on.

We are pleased that the IASB is developing the Conceptual Framework as a whole; in a single

phase, rather than in multiple phases as was originally planned. Completing the project in a

single phase enables the links between different aspects of the framework to be considered and

issues to be dealt with coherently and comprehensively. The Discussion Paper therefore is

helpful in providing a collation of issues that the IASB seeks to consider in the project.

Support for the project and taking an appropriate amount of time in order to be an

improvement on the existing Conceptual Framework

As noted above, we are pleased that the IASB is completing the conceptual framework project in

a single phase. Although the Discussion Paper is under-developed in places, we support the

IASB intention of inviting comments on an early draft so that early feedback can be obtained on

the direction of the project. This will enable the IASB to further refine the scope, content and

approach to the conceptual framework project.

2

However, given the extent of work required for that refinement, the range and complexity of

the issues to be addressed and the divergence of views on those issues, if any new framework is

going to be a sufficient improvement on the existing Conceptual Framework, more time will be

required to debate and deal with the many issues that need to be addressed. Therefore, we

strongly encourage the IASB to reconsider the timetable for the next phase of the project.

While we understand the desire to avoid the project taking too long, the revised Conceptual

Framework needs to be enduring and a significant improvement on the existing Conceptual

Framework, as it is unlikely to be reviewed again in the near future. Therefore, we strongly

encourage the IASB to take an appropriate amount of time to complete the project in order to

achieve a higher quality Conceptual Framework. This is certainly preferable to completing the

project in a short timeframe resulting in a framework that is not a significant improvement on

the existing Conceptual Framework, or that is not comprehensive and/or contains concepts that

are not sufficiently robust. In particular, we consider more time should be taken to further

develop the following fundamental areas without which any revised Conceptual Framework

would not be a sufficient improvement on the current Conceptual Framework:

(a) the meaning of ‘financial performance’;

(b) the distinction between profit or loss and OCI;

(c) the meaning of ‘present obligation’;

(d) recognition criteria (and how to deal with uncertainty);

(e) measurement; and

(f) presentation and disclosure.

The above points are discussed in more detail in the appendix to this letter, in our responses to

the specific questions for respondents.

In addition, in a number of areas, the discussion is too detailed and focused on particular items

or issues in isolation. We consider that more time needs to be taken to consider the consistency

of concepts across all aspects of the financial statements and to consider the coherence of the

Conceptual Framework as a whole.

We also consider that providing an executive summary of Conceptual Framework would be

helpful to constituents given that the revised Conceptual Framework is likely to be a much

longer document and preparing a summary would assist in considering the consistency and

coherence of the Conceptual Framework as a whole.

3

Role and purpose of the Conceptual Framework

Role of the Conceptual Framework

It is important to be clear about the role of the Conceptual Framework, as it has a significant

impact on the project, in particular, how issues are approached. We consider that the

Conceptual Framework should continue to be a framework of accounting concepts - rather than

accounting conventions, methods, or practical expedients.

This does not mean that the Conceptual Framework is a highly idealistic document that has little

application in the real world. On the contrary, accounting concepts should be based on real

world economic phenomena. The Conceptual Framework provides the foundation for the

preparation of General Purpose Financial Reports (GPFR). If those GPFR are to provide useful

information to users, then the concepts need to be grounded in real world economic

phenomena. Rather, the point is that the Conceptual Framework should contain concepts

without compromises. Standards-level considerations (such as practical and/or political

considerations) might result in the need for compromise but those compromises are dealt with

at standards-level; they should not be embedded into the Conceptual Framework.

If compromises are embedded into the Conceptual Framework it will fail to serve its purpose of

providing a conceptual foundation for GPFR. For this reason, the Conceptual Framework project

should not be used as an opportunity to codify or justify existing accounting treatments without

adequate conceptual justification. We are concerned that there are parts of the Discussion

Paper where this seems to be happening; there are places where the Discussion Paper

catalogues existing accounting treatments in particular accounting standards, seemingly without

any question of the underlying conceptual rationale for those treatments.

In addition, the Conceptual Framework is not a standard and, therefore, should not be treated

as such. For example, in most cases, the Conceptual Framework should describe accounting

concepts, rather than precisely define them. Because the Conceptual Framework is not a

standard, it does not contain any accounting requirements, which means that it is often not

necessary to include precise definitions or definitive specifications about the application of

concepts. Also, because the Conceptual Framework is not a standard, it is not necessary or

appropriate to build in ‘anti-abuse’ rules into the Conceptual Framework, such as the comments

in paragraph 1.29 about restricting the use of guidance in the Conceptual Framework on when

income or expense items would be presented in profit or loss or other comprehensive income

(OCI). Any restrictions on the use of concepts should be dealt with at the standards-level, which

is where requirements are established.

Furthermore, the IASB aims to set principles-based standards, therefore, the Conceptual

Framework too has to be principles-based.

Purpose of the Conceptual Framework

We consider that the Conceptual Framework is not there only to guide the IASB in standards-

4

level projects. The concepts in the Conceptual Framework are pervasive – these concepts

underlie the preparation and presentation of GPFR and therefore the concepts impact on all

aspects of financial reporting. This includes – but is not limited to – the IASB’s role in setting

accounting standards. The Conceptual Framework is used by the IASB but is also used by: (i)

preparers and auditors to interpret and apply standards; (ii) users of GPFR to understanding the

concepts and basis used to prepare GPFR; and (ii) all as the basis for communication of

accounting concepts and issues using commonly understood accounting language. The list of

uses and users of the Conceptual Framework is a reflection of this pervasiveness. Therefore, just

because the IASB is a primary user of the Conceptual Framework does not mean that the

Conceptual Framework should be focused on the IASB’s needs in setting standards. The IASB

has an important role in setting standards, but that role is only one part of the financial

reporting process. The Conceptual Framework has a much broader purpose, as is stated in the

existing Conceptual Framework and it is important to keep this broader purpose in mind,

because it provides the context for the Conceptual Framework, that is, the Conceptual

Framework is a conceptual framework for general purpose financial reporting, not a toolkit for

the IASB in setting standards.

Departures from the Conceptual Framework

We strongly support the proposal to explain any departures from the Conceptual Framework in

any accounting standards. However, we consider that it is not helpful to refer to such

departures as being ‘rare’.

In any standards-level project, there are a variety of considerations that include, but are not

limited to, the concepts in the Conceptual Framework. Other considerations, such as pragmatic

and/or political considerations, might result in the need for a compromise in a particular

standard. That does not mean that the Conceptual Framework is flawed or not sufficiently

robust, it is simply a reflection of the reality of setting accounting standards. It is not realistic –

or appropriate – to indicate the frequency with which departures might occur. Doing so has the

following implications:

(a) It treats the Conceptual Framework as some form of constitution but a constitution (such

as a constitution of a company or a country) is essentially a governance document, which

acts to place some constraints on a governing body (of the entity/country) in order to

protect other parties (such as shareholders and citizens). We consider that the

Conceptual Framework is not a governance document.

(b) For departures to be rare, it would be necessary for either:

(i) The IASB to look ahead and anticipate all the key standards-level considerations

and all possible future types of transactions, so that they can be taken into account

when developing the Conceptual Framework – this is not possible; and/or

(ii) The Conceptual Framework would need to contain concepts that are at a very high

level, vague or ambiguous, so that any standards-level requirements can be said to

5

be consistent with the Conceptual Framework.

Instead of referring to ‘rare cases’, in our view, the key point is that the Conceptual Framework

provides the conceptual foundation for setting standards and hence should always be the

starting point in any standards project. In addition, any departures from (or conflicts with) the

Conceptual Framework because of other standards-level factors need to be carefully considered

and explained.

Working with the IPSASB

We encourage the IASB and the IPSASB to work closely together in developing their conceptual

frameworks as the two Boards are likely to be considering similar issues. We consider that the

development of the conceptual frameworks is too important for the two Boards to be working

independently of each other. Ideally, the IASB and IPSASB frameworks should only contain

different concepts in instances where there are differences between private and public sectors.

Responses to specific questions for respondents

We consider that a number of issues discussed in the Discussion Paper are unresolved and

further development and/or significant revision is required in a number of areas. Hence, there

are some areas in which we consider that the specific questions for respondents are not

necessarily focused on the right issues. Nevertheless, our responses to the specific questions for

respondents are provided in the appendix to this letter.

If you have any queries or require clarification of any matters in this submission, please contact

Clive Brodie (clive.brodie@xrb.govt.nz) or me.

Yours sincerely

Michele Embling

Chairman – New Zealand Accounting Standards Board

Email: michele.embling@xrb.govt.nz

6

Appendix

Section 1 Introduction

Question 1

Paragraphs 1.25–1.33 of the Discussion Paper set out the proposed purpose and status of the

Conceptual Framework. The IASB’s preliminary views are that:

(a) the primary purpose of the revised Conceptual Framework is to assist the IASB by

identifying concepts that it will use consistently when developing and revising

International Financial Reporting Standards (IFRSs); and

(b) in rare cases, in order to meet the overall objective of financial reporting, the IASB may

decide to issue a new or revised Standard that conflicts with an aspect of the Conceptual

Framework. If this happens the IASB would describe the departure from the Conceptual

Framework, and the reasons for that departure, in the Basis for Conclusions on that

Standard.

Do you agree with these preliminary views? Why or why not?

(a) Purpose of the Conceptual Framework

As noted in our cover letter, we consider that the Conceptual Framework is not there only to

guide the IASB in standards-level projects. The concepts in the Conceptual Framework are

pervasive – these concepts underlie the preparation and presentation of GPFR and therefore the

concepts impact on all aspects of financial reporting. This includes – but is not limited to – the

IASB’s role in setting accounting standards. The Conceptual Framework is used by the IASB but

is also used by: (i) preparers and auditors to interpret and apply standards; (ii) users of GPFR to

understanding the concepts and basis used to prepare GPFR; and (ii) all as the basis for

communication of accounting concepts and issues using commonly understood accounting

language. The list of uses and users of the Conceptual Framework is a reflection of this

pervasiveness. Therefore, just because the IASB is a primary user of the Conceptual Framework

does not mean that the Conceptual Framework should be focused on the IASB’s needs in setting

standards. The IASB has an important role in setting standards, but that role is only one part of

the financial reporting process. The Conceptual Framework has a much broader purpose, as is

stated in the existing Conceptual Framework and it is important to keep this broader purpose in

mind, because it provides the context for the Conceptual Framework, that is, the Conceptual

Framework is a conceptual framework for general purpose financial reporting, not a toolkit for

the IASB in setting standards.

(b) Conflicts with the Conceptual Framework

As noted in our covering letter, we strongly support the proposal to explain any departures from

the Conceptual Framework in any accounting standards. However, we consider that it is not

helpful to refer to such departures as being ‘rare’.

7

In any standards-level project, there are a variety of considerations that include, but are not

limited to, the concepts in the Conceptual Framework. Other considerations, such as pragmatic

and/or political considerations, might result in the need for a compromise in a particular

standard. That does not mean that the Conceptual Framework is flawed or not sufficiently

robust, it is simply a reflection of the reality of setting accounting standards. It is not realistic –

or appropriate – to indicate the frequency with which departures might occur. Doing so has the

following implications:

(a) It treats the Conceptual Framework as some form of constitution but a constitution (such

as a constitution of a company or a country) is essentially a governance document, which

acts to place some constraints on a governing body (of the entity/country) in order to

protect other parties (such as shareholders and citizens). We consider that the

Conceptual Framework is not a governance document.

(b) For departures to be rare, it would be necessary for either:

(i) The IASB to look ahead and anticipate all the key standards-level considerations

and all possible future types of transactions, so that they can be taken into account

when developing the Conceptual Framework – this is not possible; and/or

(ii) The Conceptual Framework would need to contain concepts that are at a very high

level, vague or ambiguous, so that any standards-level requirements can be said to

be consistent with the Conceptual Framework.

Instead of referring to ‘rare cases’, in our view, the key point is that the Conceptual Framework

provides the conceptual foundation for setting standards and hence should always be the

starting point in any standards project. In addition, any departures from (or conflicts with) the

Conceptual Framework because of other standards-level factors need to be carefully considered

and explained.

Section 2 Elements of Financial Statements

Question 2

The definitions of an asset and a liability are discussed in paragraphs 2.6–2.16 of the Discussion

Paper. The IASB proposes the following 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.

Do you agree with these definitions? Why or why not? If you do not agree, what changes do

you suggest, and why?

8

Definitions of an asset and a liability

We agree with the proposed definitions of an asset and a liability (subject to our comments on

Question 6). We consider the definitions to be an improvement on the existing definitions.

Removal of “expected” appropriately focuses the definition on the resource and resource

capacity (rather than future expectations).

Retaining ‘past event’ in the definitions

We consider that ‘past event’ is not necessary in the definitions. In our view, the identification

of a past event is not always required in order for an asset or liability to exist. The question is

whether or not an asset or liability exists at the reporting date and this could be determined by

reference to present circumstances.

We acknowledge that past events give rise to assets and liabilities and the requirement for a

past event may, in certain circumstances, give greater clarity in determining when assets and

liabilities exist. Therefore, we consider that guidance on the application of the definitions could

include the existence of a past event as one of the factors to consider in identifying assets and

liabilities at a reporting date.

Our view is reflected in paragraph 2.16(c) of the DP, which says: “… It is not necessary to identify

that [past] event in order to identify whether the entity has an asset or a liability. Nevertheless,

by identifying that event, an entity can determine how best to portray that event in its financial

statements, for example, how best to classify and present income, expenses or cash flows

arising from that event.”

Reference to control in the definitions

We agree that ‘control’ should continue to be part of the definition of an asset (rather than the

recognition criteria) for the following reasons:

(a) financial reports relate to a reporting entity and control appropriately links an asset to

that reporting entity;

(b) including control in the definition, and so, linking an asset to a reporting entity, is

consistent with the ‘entity perspective’;

(c) liabilities are entity-specific (and so too are income and expenses); therefore, including

control in the definition of an asset appropriately links elements to the reporting entity;

(d) including control in the definition results in a definition that is more coherent (for the

above reasons); and

(e) application of the definition would be more efficient because an entity, in applying the

definition, would be focused only on assets that relate to the reporting entity; rather

9

than, in theory, having to identify all possible assets before then having to consider the

recognition criteria and eliminate all those assets identified that were captured by the

definition but which do not relate to the reporting entity.

Question 3

Whether uncertainty should play any role in the definitions of an asset and a liability, and in the

recognition criteria for assets and liabilities, is discussed in paragraphs 2.17–2.36 of the

Discussion Paper. The IASB’s preliminary views are that:

(a) the definitions of assets and liabilities should not retain the notion that an inflow or

outflow is ‘expected’. An asset must be capable of producing economic benefits. A

liability must be capable of resulting in a transfer of economic resources.

(b) the Conceptual Framework should not set a probability threshold for the rare cases in

which it is uncertain whether an asset or a liability exists. If there could be significant

uncertainty about whether a particular type of asset or liability exists, the IASB would

decide how to deal with that uncertainty when it develops or revises a Standard on that

type of asset or liability.

(c) the recognition criteria should not retain the existing reference to probability.

Do you agree? Why or why not? If you do not agree, what do you suggest, and why?

(a) Removal of ‘expected’ from the definitions

We agree with the proposal to remove ‘expected’ from the definitions. We consider that the

removal of ‘expected’ from the definitions appropriately focuses the definitions on the

resources and resource capacity (rather than future expectations).

(b) and (c) Probability thresholds

We consider that probability thresholds should be removed from the definitions provided that

concerns about the implications of this for recognition are appropriately dealt with through

more robust recognition criteria.

We consider that dealing appropriately with uncertainty outside of the definitions makes the

definitions more neutral. All elements should stand to be recognised, unless they are

immaterial or do not meet the recognition criteria. Uncertainty can be dealt with elsewhere in a

manner that would achieve reporting of relevant and representationally faithful information.

Furthermore, we think it is useful to differentiate between element uncertainty and outcome

uncertainty. This is because, in some cases, it may be clear that an element exists but the

element may be subject to outcome uncertainty (such as a financial guarantee).However, we

have a significant concern that removing probability thresholds from both the definitions and

recognition criteria, and dealing with uncertainty primarily through measurement, could result

in a multitude of items being recognised at small amounts measured based on complicated

10

probability-weighted estimates. Section 4 (paragraph 4.26) of the Discussion Paper

acknowledges this problem but does not adequately address this fundamental issue. We

consider that the recognition of a large number of small amounts related to unlikely events

potentially could result in financial statements that are no longer relevant or a faithful

representation because information provided would not be useful, or could even be misleading.

In addition, we consider that, if amounts and events recognised are too uncertain, users could

be misled by the ‘illusion of precision’ that does not exist in circumstances where there is a wide

range of possible outcomes. And in some cases, such as where a probability-weighted

measurement is used, the amount recognised is unlikely to represent any of the possible

outcomes. Alternatively, users may choose to ignore the recognised amounts and apply their

own assessments instead, in which case, users would be better served by disclosure alone,

rather than recognition. Therefore, the cost of recognition and measurement probably

outweigh any benefits and users probably would be better served by disclosure alone.

We consider that the above concerns must be addressed by developing more robust recognition

criteria and by providing more guidance on how to deal with uncertainty.

Regarding the proposed recognition criteria, we consider that the principles underlying

paragraphs 4.25 and 4.26 of the Discussion Paper should be used to develop more robust

recognition criteria.

In particular, we consider that guidance should be provided to assist in the application of the

recognition criteria in determining the appropriate mix of recognition and disclosure and to

identify circumstances in which users would be better served by disclosure alone.

Question 4

Elements for the statement(s) of profit or loss and OCI (income and expense), statement of cash

flows (cash receipts and cash payments) and statement of changes in equity (contributions to

equity, distributions of equity and transfers between classes of equity) are briefly discussed in

paragraphs 2.37–2.52 of the Discussion Paper.

Do you have any comments on these items? Would it be helpful for the Conceptual Framework

to identify them as elements of financial statements?

Definition of ‘income’ and ‘expenses’

We agree with the proposals to retain the existing definitions of ‘income’ and ‘expense’.

Definition of movements in cash as elements

Cash flows should not be defined as elements. Cash flows represent movements in another

element rather than elements themselves. We consider the statement of cash flows to be a way

of presenting information about movements in particular balance sheet items (cash and cash

equivalents). Unlike ‘income’ and ‘expenses’, there appears to be no advantage to

11

distinguishing movements in cash by defining these movements as separate elements.

Definition of movements in equity as elements

We would support defining contributions and distributions of equity as separate elements of

financial statements. Distinguishing these movements from other elements is useful, otherwise

they would be part of ‘income’ and ‘expenses’.

However, we would not support the definition of transfers between classes of equity as

separate elements. Transfers between categories of equity is an issue of presentation, and

hence no elements are needed for these transfers. In addition, transfers between categories of

equity would not be confused with other elements so there is no advantage to distinguishing

transfers from other elements.

Section 3 Additional guidance to support the asset and liability definitions

Question 5

Constructive obligations are discussed in paragraphs 3.39–3.62 of the Discussion Paper. The

discussion considers the possibility of narrowing the definition of a liability to include only

obligations that are enforceable by legal or equivalent means. However, the IASB tentatively

favours retaining the existing definition, which encompasses both legal and constructive

obligations—and adding more guidance to help distinguish constructive obligations from

economic compulsion. The guidance would clarify the matters listed in paragraph 3.50 of the

Discussion Paper.

Do you agree with this preliminary view? Why or why not?

We consider that a present obligation should encompass both legal and constructive obligations

so as to appropriately represent economic substance (rather than legal form). Some liabilities,

such as constructive obligations, are not enforceable by legal or equivalent means. Not

recognising these liabilities in financial statements would result in the financial statements being

misleading.

We agree with the proposals to add more guidance to help distinguish constructive obligations

from economic compulsion.

Question 6

The meaning of ‘present’ in the definition of a liability is discussed in paragraphs 3.63–3.97 of

the Discussion Paper. A present obligation arises from past events. An obligation can be viewed

as having arisen from past events if the amount of the liability will be determined by reference

to benefits received, or activities conducted, by the entity before the end of the reporting

period. However, it is unclear whether such past events are sufficient to create a present

obligation if any requirement to transfer an economic resource remains conditional on the

entity’s future actions. Three different views on which the IASB could develop guidance for the

Conceptual Framework are put forward:

12

(a) View 1: a present obligation must have arisen from past events and be strictly

unconditional. An entity does not have a present obligation if it could, at least in theory,

avoid the transfer through its future actions.

(b) View 2: a present obligation must have arisen from past events and be practically

unconditional. An obligation is practically unconditional if the entity does not have the

practical ability to avoid the transfer through its future actions.

(c) View 3: a present obligation must have arisen from past events, but may be conditional

on the entity’s future actions.

The IASB has tentatively rejected View 1. However, it has not reached a preliminary view in

favour of View 2 or View 3.

Which of these views (or any other view on when a present obligation comes into existence) do

you support? Please give reasons.

Determining when a present obligation exists

In considering the three views and the various scenarios outlined in the Discussion Paper, the

NZASB notes that different views on this topic are related to the objective of financial reporting,

the definition of elements flowing from that objective, and the relationship between the

statement of financial position and the statement of comprehensive income. In particular, it

depends on which of the following approaches is adopted:

Claims approach

Paragraph OB4 of Chapter 1 of the Conceptual Framework on the objective of financial reporting

and the definitions of elements are both consistent with a claims approach. In accordance with

paragraph OB4 and the definitions of elements, the statement of financial position presents

information about the resources of the entity (assets) and claims against those resources

(liabilities and equity) as at a particular point in time, so represents a snapshot in time. The

statement of comprehensive income presents information about changes in the entity’s

resources and/or claims against those resources that have occurred between two points in time

(excluding contributions from and distributions to owners).

Thus, when considering whether or not a present obligation exists at the reporting date, the

focus is on determining whether or not there is a present claim against the entity’s assets at that

point in time – rather than whether or not future cash outflows are expected to occur or must

occur, for example, to enable the entity to continue to operate as a going concern.

Under this approach, we believe that either View 1 or View 2 should be adopted, with the

majority of NZASB members supporting View 2.

Under a claims approach, we do not support View 3 because, in this context, it is too broad and

unclear, including how a present obligation should or could be distinguished from economic

compulsion.

13

Furthermore, in our view, in considering the application of Views 1 and 2 to the various

scenarios outlined, the key difference between View 1 and View 2 is whether the present

obligation arises from either:

• The final ‘triggering’ event only, which creates the obligation at a single point in time, such

as exceeding the revenue threshold in Scenario 2. It could be argued that until that final

event occurs, no claim on the entity’s assets exists, irrespective of (a) the likelihood or

certainty of the triggering event occurring in the future and (b) the fact that the amount

payable to settle that future claim is based on the entity’s past sales, profits or other

activities (which is consistent with View 1); or

• A series of related events, which effectively create the obligation over time, such as earning

revenue during the reporting period in Scenario 2 – given that the entity would not have

exceeded the threshold when the final CU1 of revenue is earned (the triggering event under

View 1) if the entity had not already earned CU499.999 million in revenue before earning

that final CU1 of revenue. Hence, when the final triggering event (the exceeding of the

threshold) is dependent upon other past events, it could be argued that is artificial to focus

on the final event only as creating the obligation (which is consistent with View 2).

In addition, it should be noted that we do not agree with the analysis of Scenario 1 under View

1, because the analysis assumes that the entity could terminate the employment contracts

before the end of the vesting period. Whether or not that analysis is correct depends on the

employment laws in the relevant jurisdiction. In many jurisdictions, it is likely that the entity will

not be able to terminate the employee’s employment. Compliance with the terms of the

contract is therefore within the control of the employee (much like exercise of an option is

within the control of the holder, not the issuer). Also, any modification of the contract terms to

remove the bonus is likely to result in the entity having to pay some form of compensation to

the employee in respect of services rendered to date. This suggests there is an obligation (a

constructive obligation if not a legal obligation) in respect of services rendered to date.

Performance approach

Paragraph OB3 of Chapter 1 of the Conceptual Framework on the objective of financial reporting

explains that existing and potential investors, lenders and other creditors need information to

help them assess the prospects for future cash inflows to any entity, in order to help them

assess the returns they could expect to receive from the entity, such as dividends and interest

payments. This implies that information about the entity’s performance is very important.

Therefore, if financial statements are to serve the objective of providing useful information to

investors, lenders and other creditors, it could be argued that the definition of liabilities should

not be so tightly constructed that it results in a performance statement that omits expenses

relating to the current period’s performance solely because the obligating event has not yet

occurred.

Under this approach, it is argued that the current and proposed definitions of elements,

whereby the statement of financial position represents a snapshot in time, create an artificial

14

division of the entity’s activities into supposedly discrete intervals. However, in reality, as long

as the entity continues to operate as a going concern, there is often a clear link between past

and future events and transactions. If those links are ignored, the financial statements will not

provide useful information.

Therefore, under a performance approach, the focus is not on (or not only on) identifying

present claims at the reporting date. Instead, liabilities would be defined in terms of expected

future cash outflows of cash or other assets that arise from and/or relate to past activities of the

entity. This approach would focus on reporting on the entity’s performance rather than its

financial position.

Applying this approach to the various scenarios outlined, we consider would result in

conclusions similar to those reached under View 3. Although the Discussion Paper presents View

3 in the context of the existing definitions of elements, which are based on a claims approach, it

seems more consistent with the performance approach outlined above.

Coherence of the Conceptual Framework

The issues raised above essentially relate to the long-standing debate about a ‘balance sheet’ or

‘income statement’ approach to financial reporting.

In our view, this is an important conceptual issue that should be addressed so that the

Conceptual Framework contains consistent and coherent concepts. This is because the above

issue impacts on many aspects of the Conceptual Framework, including: the definitions of

elements; the selection of measurement bases; the objective of each of the primary financial

statements and the relationship between those statements; and the distinction between profit

or loss and other comprehensive income. Without tackling this pervasive issue, there is a

significant risk that the Conceptual Framework will lack clarity, consistency and coherence.

There is also a significant risk that the Conceptual Framework will not help in resolving long-

standing controversial issues in standards-level projects, given that ignoring a problem does not

make it go away.

Other comments on Section 3

Reference to incomplete projects

We consider that the Discussion Paper should not refer to current, and controversial projects.

Paragraphs 3.90 to 3.95 of the Discussion Paper consider how the various views about ‘present

obligation’ would affect a current, and controversial, IASB research project on Emissions Trading

Schemes (ETS). Commentators are likely to be influenced by their views on the ETS operating in

their jurisdiction, which may lead to a desire to ‘reverse engineer’ the Conceptual Framework to

produce the ‘desired’ outcome in particular projects.

15

Principal-agent relationships

We note that paragraphs 3.31 and 3.32 of the Discussion Paper discuss principal-agent

relationships and suggest that any item held by an agent on behalf of the principal should not be

recognised (or disclosed). We consider that the Discussion Paper does not adequately address

situations where an agent may need to recognise or disclose items held on behalf of the

principal, for example:

(a) items controlled by an agent that are recognised, such as goods and services tax collected

or paid on behalf of the government recognised in the agent’s financial statements; and

(b) items held by an agent that users should be made aware of by way of disclosure in the

agent’s financial statements, such as consignment inventory.

Reference to existing practice (executory contracts)

The discussion in paragraphs 3.109 to 3.112 of the Discussion Paper lacks clarity and does not

consider the issues conceptually. We do not consider it sufficient or appropriate to just quote

existing practice. There needs to be a clearer analysis that explains the circumstances in which

the contract itself is the asset or liability, not the underlying rights/obligations. In order to

provide sufficient clarity or explanation, the discussion should cover some more difficult issues,

such as take or pay contracts and unconditional contracts to buy or sell property. This

discussion would help to identify the nature of the assets or liabilities and hence, the

circumstances when the contract itself is the asset or liability and/or when there are assets or

liabilities for the underlying rights or obligations.

Section 4 Recognition and derecognition

Question 8

Paragraphs 4.1–4.27 of the Discussion Paper discuss recognition criteria. In the IASB’s

preliminary view, 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 because:

(a) recognising the asset (or the liability) would provide users of financial statements with

information that is not relevant, or is not sufficiently relevant to justify the cost; or

(b) no measure of the asset (or the liability) would result in a faithful representation of both

the asset (or the liability) and the changes in the asset (or the liability), even if all

necessary descriptions and explanations are disclosed.

Do you agree? Why or why not? If you do not agree, what changes do you suggest, and why?

Removal of reference to probability

As noted in our response to Question 3, we agree that probability thresholds should be removed

16

from the definitions provided that concerns about the implications of this for recognition are

appropriately dealt with through more robust recognition criteria. We consider that dealing

appropriately with uncertainty outside of the definitions makes the definitions more neutral. All

elements should stand to be recognised, unless they are immaterial or do not meet the

recognition criteria. Uncertainty can be dealt with elsewhere in a manner that would achieve

reporting of relevant and representationally faithful information.

However, we have a significant concern that removing probability thresholds from both the

definitions and recognition criteria, and dealing with uncertainty primarily through

measurement, could result in a multitude of items being recognised at small amounts measured

based on complicated probability-weighted estimates. We consider that this issue needs to be

dealt with through more robust recognition criteria.

Conditions for recognition

As noted in our response to Question 3, we do not agree with the conditions for recognition of

an asset or liability. We consider that the principles underlying paragraphs 4.25 and 4.26 of the

Discussion Paper should be used to develop more robust recognition criteria.

We consider that an item should be recognised when recognition would result in information

that is relevant and representationally faithful and the benefits of recognition outweigh the cost.

Otherwise, if too much uncertainty exists, disclosure alone may be more appropriate.

Therefore, recognition criteria should cover both relevance and faithful representation and the

cost-benefit constraint relates to both relevance and faithful representation, not just relevance.

Question 9

In the IASB’s preliminary view, as set out in paragraphs 4.28–4.51 of the Discussion Paper, an

entity should derecognise an asset or a liability when it no longer meets the recognition criteria.

(This is the control approach described in paragraph 4.36(a) of the Discussion Paper). However,

if the entity retains a component of an asset or a liability, the IASB should determine when

developing or revising particular Standards how the entity would best portray the changes that

resulted from the transaction. Possible approaches include:

(a) enhanced disclosure;

(b) presenting any rights or obligations retained on a line item different from the line item

that was used for the original rights or obligations, to highlight the greater concentration

of risk; or

(c) continuing to recognise the original asset or liability and treating the proceeds received or

paid for the transfer as a loan received or granted.

Do you agree? Why or why not? If you do not agree, what changes do you suggest, and why?

We agree that, in most cases, derecognition mirrors (or should mirror) recognition. In this

regard, we support the ‘control approach’ to derecognition; that is, an item should be

17

derecognised when the item no longer meets the recognition criteria.

In cases where an entity has disposed of only part of an asset or liability, we consider that

circumstances would dictate whether full or partial derecognition is appropriate. However, this

does not mean that the decision to use the full or partial derecognition approach is made at

standards-level without guiding principles in the Conceptual Framework. The Conceptual

Framework should still provide principles to distinguish circumstances in which the full or partial

derecognition might be appropriate.

Section 5 Definition of equity and distinction between liabilities and equity instruments

Question 10

The definition of equity, the measurement and presentation of different classes of equity, and

how to distinguish liabilities from equity instruments are discussed in paragraphs 5.1–5.59 of the

Discussion Paper. In the IASB’s preliminary view:

(a) the Conceptual Framework should retain the existing definition of equity as the residual

interest in the assets of the entity after deducting all its liabilities.

(b) the Conceptual Framework should state that the IASB should use the definition of a

liability to distinguish liabilities from equity instruments. Two consequences of this are:

(i) obligations to issue equity instruments are not liabilities; and

(ii) obligations that will arise only on liquidation of the reporting entity are not

liabilities (see paragraph 3.89(a) of the Discussion Paper).

(c) an entity should:

(i) at the end of each reporting period update the measure of each class of equity

claim. The IASB would determine when developing or revising particular Standards

whether that measure would be a direct measure, or an allocation of total equity.

(ii) recognise updates to those measures in the statement of changes in equity as a

transfer of wealth between classes of equity claim.

(d) if an entity has issued no equity instruments, it may be appropriate to treat the most

subordinated class of instruments as if it were an equity claim, with suitable disclosure.

Identifying whether to use such an approach, and if so, when, would still be a decision for

the IASB to take in developing or revising particular Standards.

Do you agree? Why or why not? If you do not agree, what changes do you suggest, and why?

We consider that the discussion of the distinction between debt and equity and the issues in

question, would be clearer if the discussion were structured differently. We recommend firstly

explaining the fundamental nature of the problem, for example, why we need a distinction

between different types of claims (as noted in various parts of the Discussion Paper, financial

statements are not intended to show the value of the entity, so there has to be a line drawn

somewhere between claims that are remeasured and claims that are not remeasured).

18

Then, an explanation should be provided of the two main themes or characteristics (developed

over decades) that determine how to distinguish between liabilities and equity: (i) “liquidity” i.e.

whether or not the claim imposes on the entity a present obligation to transfer economic

resources to the claimholder (the basis for the current distinction between liabilities and equity

in the Conceptual Framework and IFRS 2 Share-based Payments); and (ii) “ownership”– in

particular, whether the claim is a fixed, prior claim or whether it is a variable, residual claim

(used in IAS 32 Financial Instruments: Presentation). However, there have always been

instruments that do not fall neatly into these classifications. The classic example being non-

participating, non-redeemable preference shares.

(a) Definition of equity as a residual

We agree with the proposal to retain the existing definition of equity as the residual interest in

the assets of the entity after deducting all its liabilities.

(b) Distinction between liabilities and equity

We agree with the proposal to use the definition of a liability to distinguish liabilities from equity

instruments.

Such an approach faithfully represents the interests of equity holders and avoids overlaps or

gaps between definition of a liability and that of equity.

(c) Updating allocation of equity and remeasurement of some classes of equity by direct

measurement

Updating the allocation of equity

In order for financial statements to provide existing and potential investors with information

about how equity instruments with prior claims against the entity affect possible future cash

flows to those investors, in the Discussion Paper it is proposed that entities could update the

measurement of each class of equity instrument at the end of each reporting period (either by

direct measurement or by an allocation of total equity). It is proposed that updates to those

measurements be recognised in equity as a transfer of wealth between classes of equity claims.

We do not support updating the allocation of total equity amongst the different classes of

equity holders. We consider that remeasuring equity claims is unlikely to meet its stated aims

because it seems likely to depict notional, rather than substantive, transfers between different

equity classes. Reasons for this include the following:

(a) The amount of net assets typically is composed of a mixture of historical and current

measurements of assets and liabilities.

(b) Current values of equity interests reflect the amounts, timing and uncertainty of expected

future cash flows from the entity, which include future cash flows from items not

19

recognised as assets and liabilities.

(c) Equity holders do not have claims to specified amounts of cash from the entity—if they

did, those claims would in fact be liabilities.

In addition, accounting for transactions with a particular class of owner cannot cater for the

indirect effects of those transactions on the value of other classes of equity claims. For example,

the issue of ordinary shares at fair value during a period of credit rationing might enable an

entity to finance a new investment opportunity and thus increase the value of all classes of

equity interests in the entity. The issue of shares would be presented in the statement of

changes in equity solely as an increase in issued share capital, even though the value of other

equity interests (e.g. call options on the entity’s shares) might also be enhanced.

We consider that user needs would be best served by presenting equity instruments in order of

seniority from most to least (or least to most) subordinate. In addition, it is important for the

related notes to disclose information about the rights of different types of equity instruments.

Remeasurement of certain classes by direct measurement

We do not support the proposal that entities update the measurement of each class of equity

instrument at the end of each reporting period and that the measure of some classes of equity

may need to be updated by direct measurement (such as, measurement at fair value).

Reasons for this include the following:

(a) Remeasuring equity appears to conflict with the objective of financial statements:

Financial statements depict economic phenomena affecting the entity, not economic

phenomena affecting other parties (such as capital providers) only.

(b) Remeasuring equity appears to conflict with defining equity as a residual: If equity is

defined as residual, updating the measurements of the underlying assets and liabilities

automatically updates equity.

(c) Remeasuring classes of equity by direct measurement could inadvertently capture the

value of unrecognised items (such as internally generated goodwill).

(d) Remeasuring equity creates a need for a second distinction to be drawn – between equity

claims that will not be remeasured and those that will be remeasured.

(e) Remeasuring equity claims raises broader conceptual issues, such as whether the financial

statements are prepared from the entity perspective or the proprietary perspective.

(f) Remeasuring equity seems unnecessary: The fair value of different classes of equity

instruments is already ascertainable from market information outside financial

statements and remeasuring classes of equity adds cost and complexity to financial

20

reporting, with questionable benefits.

(d) Entities with no equity

Although paragraph 5.57 of the Discussion Paper states that ‘the revised Conceptual Framework

should indicate that an entity should treat some obligations that oblige the issuer to deliver

economic resources as if they were equity instruments’; Question 10(d) seems to suggest that

this will be a standards-level decision for the IASB to make without any guiding principles in the

Conceptual Framework.

In our view, the Conceptual Framework should address whether, for ‘an entity that has issued

no equity instruments’, it is appropriate to treat the most subordinated class of instruments as if

it were an equity claim. For example, an entity that has issued puttable financial instruments

that give the holders a pro-rata residual interest in the entity’s net assets and oblige the entity

to deliver cash or other assets to the holders on liquidation or on early redemption at an

amount broadly equivalent to that pro rata share.

Financial statements should report substance over form. Even if an entity does not have

instruments that meet the definition of equity because all of the instruments meet the

definition of a liability, the entity is likely to have some type of residual interest that, in

substance, represents its equity. However, the Conceptual Framework needs to identify the

principles that ought to be applied to determine when this is the case.

Section 6 Measurement

Question 11

How the objective of financial reporting and the qualitative characteristics of useful financial

information affect measurement is discussed in paragraphs 6.6–6.35 of the Discussion Paper.

The IASB’s preliminary views are that:

(a) the objective of measurement is to contribute to the faithful representation of relevant

information about:

(i) the resources of the entity, claims against the entity and changes in resources and

claims; and

(ii) how efficiently and effectively the entity’s management and governing board have

discharged their responsibilities to use the entity’s resources.

(b) a single measurement basis for all assets and liabilities may not provide the most relevant

information for users of financial statements;

(c) when selecting the measurement to use for a particular item, the IASB should consider

what information that measurement will produce in both the statement of financial

position and the statement(s) of profit or loss and OCI;

21

(d) the relevance of a particular measurement will depend on how investors, creditors and

other lenders are likely to assess how an asset or a liability of that type will contribute to

future cash flows. Consequently, the selection of a measurement:

(i) for a particular asset should depend on how that asset contributes to future cash

flows; and

(ii) for a particular liability should depend on how the entity will settle or fulfil that

liability.

(e) the number of different measurements used should be the smallest number necessary to

provide relevant information. Unnecessary measurement changes should be avoided and

necessary measurement changes should be explained; and

(f) the benefits of a particular measurement to users of financial statements need to be

sufficient to justify the cost.

Do you agree with these preliminary views? Why or why not? If you disagree, what alternative

approach to deciding how to measure an asset or a liability would you support?

General comments on Section 6

The lack of measurement concepts is a major deficiency in the existing Conceptual Framework.

We therefore welcome the IASB’s intention to develop measurement concepts. However, the

virtually zero starting point from the current Conceptual Framework, combined with the short

amount of time between recommencement of the project and issue of the Discussion Paper, has

understandably resulted in this section of the Discussion Paper being one of the most under-

developed sections of the Discussion Paper. We therefore strongly recommend that the IASB

devote considerably more time to this topic in the next phase of the project. In our view, it is

essential that the gap in the current Conceptual Framework is filled in a manner that is

conceptually robust – otherwise there is a significant risk that it could detract from, rather than

improve upon, the existing Conceptual Framework.

For example, Section 6 contains no coherent discussion of various measurement bases or what

they represent in concept (such as the measurement attributes and/or objective of each

measurement base). In some places, it appears to be more like a catalogue of measurement

methods currently used in standards, without any examination of what those measurement

methods represent in concept – or even if they have any conceptual basis. We appreciate that

this is a complex topic, with divergent views on how to approach it. However, this makes it even

more important to approach this topic from a conceptual perspective.

We therefore consider that this Section needs a considerable amount of revision. To that end,

we have focused our responses to the questions below on our proposed approach to revising

this section.

22

(a) Measurement objective

We agree that a measurement objective is necessary. We consider an overall measurement

objective is essential to provide a clear link between measurement bases and the objectives and

qualitative characteristics of financial reporting. Consequently, the measurement objective

should be based on the objective and qualitative characteristics of financial reporting.

This is particularly important as many doubt that there is a single measurement basis that is

likely to ensure that reported information fulfils all the qualitative characteristics. A

measurement objective will also guide preparers in establishing appropriate accounting policies

for transactions not covered by IFRS.

In addition to an overall measurement objective, we consider that measurement bases should

be classified based on their individual objectives. The classification will aid decisions at

standards-level and in practice – for example, some measurement questions arise in practice

about how to apply a standard arise because the standard does not contain a clear

measurement objective.

We recommend classifying different measurement bases as either an entry-price or an exit-

price, and either entity or non-entity specific, as the IPSASB did in its Exposure Draft, Conceptual

Framework for General Purpose Financial Reporting by Public Sector Entities: Measurement of

Assets and Liabilities in Financial Statements, summarised below:

Liabilities Assets Entry or exit Entity or non-

entity specific

Historical cost Historical cost Entry Entity specific

Market value [fair

value]

Market value [fair

value]

Exit Non-entity specific

Cost of release Net selling price Exit Entity specific

Assumption price Replacement cost Entry Entity specific

Cost of fulfilment Value in use Exit Entity specific

Classifying measurement bases as above provides a clear summary of the available

measurement bases and what each basis represents. This is a key missing piece of the draft

chapter, as it jumps from the overall measurement objective to the selection of measurement

bases, without establishing what each measurement base represents in concept.

We also disagree with the proposed categories in paragraph 6.37 of the Discussion Paper, as we

consider the classification of measurement basis as cost-based, current value based and cash

flow based is not helpful or accurate, or appropriate in some cases. In particular, the category

‘cash-flow-based measurements’ appears to be a heterogeneous collection of existing

measurement methods used in accounting standards, with no consideration of whether there is

23

a conceptual rationale for those methods. Measurement bases should not be confused with

measurement methods. This appears to be the case with the measurements classified as cash-

flow-based.

(b) A single measurement basis

We consider that using a single measurement basis may be ideal but this is unlikely to be

achievable due to cost–benefit constraints and lack of agreement on the single, most

appropriate measurement base. In addition, the selection of the most relevant and

representationally faithful measurement base for particular items, including taking into account

the entity’s business model and other factors (as discussed below), necessarily results in the use

of more than one measurement basis.

(c) Selecting a measurement base: Consideration of information produced in both the statement

of financial position and the statement(s) of profit or loss and OCI

We support consideration of the financial statements as a whole in determining the appropriate

measurement basis. However, in order to give consideration to the information produced in the

financial statements, the measurement concepts and/or guidance in this section of the

Conceptual Framework should be linked with other aspects of the Conceptual Framework (as

discussed in our response to Question 6 and some other questions), such as: the objective of

each of the primary financial statements; the relationship between those statements; and the

distinction between profit or loss and other comprehensive income. In our view, robust

measurement concepts cannot be developed without first having a clearer picture of these

related issues. For example, when selecting the measurement base to use for a particular item,

the consideration of the usefulness of the information produced in both the statement of

financial position and the statement of comprehensive income depends upon the objective of

each of those primary financial statements and the relationship between them.

In addition, we are strongly opposed to split measurement, that is, the use of different

measurement basis in different statements and the difference being recognised in OCI.

Movements in elements should be measured on the same basis as those elements. Using

different measurements in different statements results in bridging items that reflect accounting

responses rather than economic phenomena.

(d) Relevance of a particular measurement base

This proposal reflects a business model approach, as acknowledged in paragraph 9.33 of the

Discussion Paper. We agree that the business model should play a part in the selection of

measurement bases. However, we are not convinced that it represents the only factor. In our

view, the Conceptual Framework, having established a measurement objective and identified

measurement bases that are explained and classified according to their measurement objective

(as discussed above), should then consider how each measurement base can provide useful

information to users of the financial statements. Such a discussion would assist the IASB in

24

selecting a measurement base in a particular accounting standard. The entity’s business model

will factor into this discussion but other factors are also important to consider. For example, a

current entry price (i.e. replacement cost) or current exit price (e.g. fair value) for property,

plant and equipment held for use can provide useful information, notwithstanding the entity’s

intention to continue holding the asset for use rather than sale. Current replacement cost, for

example, reflects the asset’s service potential, i.e. its capacity to contribute to the entity’s

future net cash inflows through use in the entity’s operations. The asset’s current fair value

reflects market-participants’ views of the cash-generating capability of the asset, based on the

asset’s highest and best use. In making these comments, we are not necessarily advocating the

use of current values instead of historical cost as a general principle. Rather, we consider that

some of the comments in the Discussion Paper on the usefulness of particular measurement

bases are over-simplified.

(e) Minimum number of different measurement bases

Limiting the number of different measurements used to the smallest number necessary to

provide relevant information is not an objective. The number of measurement bases required is

as many as is necessary to achieve a relevant and faithful representation and meet user

information needs.

(f) Benefits of a particular measurement must justify the cost

We agree that the benefits of a particular measurement must justify the cost. Costs vary

between different measurement bases and in the context of particular items, therefore, cost

must be a consideration in selecting an appropriate measurement base.

Question 12

The IASB’s preliminary views set out in Question 11 have implications for the subsequent

measurement of assets, as discussed in paragraphs 6.73–6.96 of the Discussion Paper. The

IASB’s preliminary views are that:

(a) if assets contribute indirectly to future cash flows through use or are used in combination

with other assets to generate cash flows, cost-based measurements normally provide

information that is more relevant and understandable than current market prices.

(b) if assets contribute directly to future cash flows by being sold, a current exit price is likely

to be relevant.

(c) if financial assets have insignificant variability in contractual cash flows, and are held for

collection, a cost-based measurement is likely to provide relevant information.

(d) if an entity charges for the use of assets, the relevance of a particular measure of those

assets will depend on the significance of the individual asset to the entity.

Do you agree with these preliminary views and the proposed guidance in these paragraphs?

Why or why not? If you disagree, please describe what alternative approach you would support.

25

The proposed implications for subsequent measurement are not necessarily true in all

circumstances and, in some cases, are too detailed for inclusion in the Conceptual Framework.

As discussed in our response to Question 11, the measurement selection question should not be

over-simplified. Rather, the Conceptual Framework should follow the approach we have

suggested above.

Furthermore, it is proposed that if, assets contribute indirectly to future cash flows through use

or are used in combination with other assets to generate cash flows, cost-based measurements

normally provide information that is more relevant and understandable than current market

prices. Also, it is proposed that, if assets contribute directly to future cash flows by being sold, a

current exit price is likely to be relevant. These proposals suggest that inventory should be

measured at selling price. However, doing so would result in the recognition of profits in

advance of sale of the inventory. We also note that despite the view expressed in (b), the

Discussion Paper later concludes in paragraph 6.80 that inventory should not be measured at a

current exit price, with a questionable rationale. These views also suggest that administration

land and buildings should be measured at cost when, depending on the circumstances, fair value

may provide the most relevant information.

The Discussion Paper seems to presume that historical cost is relevant. We question this

presumption, particularly for long-lived appreciating assets, such as property. In making this

comment, we are not necessarily advocating the use of current values rather than historical

cost. Rather, it is a reflection of our earlier comments about considering the measurement

objectives of each of the measurement bases and not over-simplifying the measurement base

selection question.

We also consider that discussion of when a particular measurement basis might be most

appropriate and the measurement basis applicable to specific types of assets (such as financial

assets) to be too detailed for a discussion in the Conceptual Framework – detail like this should

be dealt with at standards-level.

However, as discussed earlier, we do agree that an entity’s business model is a factor to

consider in determining the appropriate measurement base, as is the case currently for assets

used for different purposes.

Question 13

The implications of the IASB’s preliminary views for the subsequent measurement of liabilities

are discussed in paragraphs 6.97–6.109 of the Discussion Paper. The IASB’s preliminary views

are that:

(a) cash-flow-based measurements are likely to be the only viable measurement for liabilities

without stated terms.

(b) a cost-based measurement will normally provide the most relevant information about:

(i) liabilities that will be settled according to their terms; and

(ii) contractual obligations for services (performance obligations).

26

(c) current market prices are likely to provide the most relevant information about liabilities

that will be transferred.

Do you agree with these preliminary views and the proposed guidance in these paragraphs?

Why or why not? If you disagree, please describe what alternative approach you would support.

See our responses to Questions 11 and 12 above.

Question 14

Paragraph 6.19 of the Discussion Paper states the IASB’s preliminary view that for some financial

assets and financial liabilities (for example, derivatives), basing measurement on the way in

which the asset contributes to future cash flows, or the way in which the liability is settled or

fulfilled, may not provide information that is useful when assessing prospects for future cash

flows. For example, cost-based information about financial assets that are held for collection or

financial liabilities that are settled according to their terms may not provide information that is

useful when assessing prospects for future cash flows:

(a) if the ultimate cash flows are not closely linked to the original cost;

(b) if, because of significant variability in contractual cash flows, cost-based measurement

techniques may not work because they would be unable to simply allocate interest

payments over the life of such financial assets or financial liabilities; or

(c) if changes in market factors have a disproportionate effect on the value of the asset or

the liability (i.e. the asset or the liability is highly leveraged).

Do you agree with this preliminary view? Why or why not?

The measurement basis applicable to specific types of assets (such as financial assets) to be too

detailed for a discussion in the Conceptual Framework – detail like this should be dealt with at

standards-level. However, if retained, we do agree with the statements (a) – (c) in the question

above.

Question 15

Do you have any further comments on the discussion of measurement in this section?

We do not agree with the statement, in paragraph 6.24 of the Discussion Paper, that

subsequent measurement should always be the same as initial measurement. It is conceivable

that a more relevant subsequent measurement basis will arise, for example, if the way in which

the asset is used changes after initial acquisition.

27

Section 7 Presentation and disclosure

Question 16

This section sets out the IASB’s preliminary views about the scope and content of presentation

and disclosure guidance that should be included in the Conceptual Framework. In developing its

preliminary views, the IASB has been influenced by two main factors:

(a) the primary purpose of the Conceptual Framework, which is to assist the IASB in

developing and revising Standards (see Section 1); and

(b) other work that the IASB intends to undertake in the area of disclosure (see paragraphs

7.6–7.8 of the Discussion Paper), including:

(i) a research project involving IAS 1, IAS 7 and IAS 8, as well as a review of feedback

received on the Financial Statement Presentation project;

(ii) amendments to IAS 1; and

(iii) additional guidance or education material on materiality.

Within this context, do you agree with the IASB’s preliminary views about the scope and content

of guidance that should be included in the Conceptual Framework on:

(a) presentation in the primary financial statements, including:

(i) what the primary financial statements are;

(ii) the objective of primary financial statements;

(iii) classification and aggregation;

(iv) offsetting; and

(v) the relationship between primary financial statements.

(b) disclosure in the notes to the financial statements, including:

(i) the objective of the notes to the financial statements; and

(ii) the scope of the notes to the financial statements, including the types of

information and disclosures that are relevant to meet the objective of the notes to

the financial statements, forward-looking information and comparative

information.

Why or why not? If you think additional guidance is needed, please specify what additional

guidance on presentation and disclosure should be included in the Conceptual Framework.

In our view, the discussion of the primary financial statements – what they are, the objective of

each of the primary financial statements and the relationship between them – is considerably

under-developed. For example, the discussion on the objective of the primary financial

statements essentially repeats aspects of Chapter 1 of the revised Conceptual Framework, with

little further elaboration. As discussed in our responses to other questions (e.g. Question 6 and

Question 19), these issues need to be considered more fully, in conjunction with related issues

covered in other parts of the Conceptual Framework.

28

With regard to disclosures in the notes to the financial statements, we are very supportive of

the work the IASB is undertaking in both this project and other projects. Preparers and users

have been objecting to excessive disclosures for many years and the NZASB supports these

concerns.

We therefore consider it essential for the Conceptual Framework to identify underlying

presentation and disclosure principles in order to find a long-term solution to the problem of

disclosure overload and consider that this project is a significant opportunity for the IASB to

make a difference to accounting standards and financial reporting in this regard.

In particular, we consider that disclosures should be aimed at the common information needs of

users, which is consistent with the concept of general purpose financial reports, rather than

aimed at meeting the individual information needs of a variety of individual users.

We also recommend developing a concept that would help to identify and distinguish between

core information and supporting information. For example, core information could be

information that is essential to an understanding of the entity’s performance and position, while

supporting information could be information that is useful, but not necessarily essential, to that

understanding. Such a concept could help address the issue of ‘disclosure overload’.

The face of the financial statements (in information areas where statements are appropriate)

should be limited to core information, and the notes can contain both core and supporting

information. The term ‘display’ could then be used to address issues such as layout of

information – for example, the ordering of items within the statement of financial position or

within the notes.

We consider that the identification of specific items of core and supporting information should

be made at the standards level whereas the Conceptual Framework should contain the

underlying concepts. It would be worth mentioning in the Conceptual Framework that, for each

information area, presentation and disclosure (or what we suggest is referred to as the

reporting objective) is a unifying concept rather than being readily disaggregated into individual

standards. We would support a move away from the present practice of concentrating on

recognition and measurement within a standard and then considering disclosures, almost as an

afterthought.

Accordingly, we recommend that for, each information area (such as a primary financial

statement), the IASB develops an overarching presentation concept. As discussed in our

responses to other questions, this presentation concept would link to other parts of the

Conceptual Framework, such as the definitions of elements and the selection of measurement

bases. This would enable the development of a presentation standard to identify the relevant

disclosures and ensure that the package of information contained in the financial statements

meets the qualitative characteristics and objective of financial reporting.

29

Question 17

Paragraph 7.45 of the Discussion Paper describes the IASB’s preliminary view that the concept of

materiality is clearly described in the existing Conceptual Framework. Consequently, the IASB

does not propose to amend, or add to, the guidance in the Conceptual Framework on

materiality. However, the IASB is considering developing additional guidance or education

material on materiality outside of the Conceptual Framework project.

Do you agree with this approach? Why or why not?

We consider that the concept of materiality is clearly described in the existing Conceptual

Framework. However, we welcome additional guidance or educational material on materiality

to assist preparers, auditors and regulators in applying the concept, in particular, to disclosure

requirements.

Question 18

The form of disclosure requirements, including the IASB’s preliminary view that it should

consider the communication principles in paragraph 7.50 of the Discussion Paper when it

develops or amends disclosure guidance in IFRSs, is discussed in paragraphs 7.48–7.52 of the

Discussion Paper.

Do you agree that communication principles should be part of the Conceptual Framework? Why

or why not?

If you agree they should be included, do you agree with the communication principles

proposed? Why or why not?

We agree that presentation and disclosure in financial statements should be a form of

communication, rather than a compliance exercise and that communication principles should

form part of the Conceptual Framework. However, we note the principles in paragraph 7.50 of

the Discussion Paper do not all link to the qualitative characteristics and objective of financial

reporting. We recommend developing principles that link clearly to the qualitative

characteristics and objective of financial reporting. This will assist with the selection of what to

present and what to disclose (and the level of detail to present and disclose).

Refer to our response to Question 16 above.

Section 8 Presentation in the statement of comprehensive income—profit or loss and other

comprehensive income

Question 19

The IASB’s preliminary view that the Conceptual Framework should require a total or subtotal

for profit or loss is discussed in paragraphs 8.19–8.22 of the Discussion Paper.

Do you agree? Why or why not?

30

If you do not agree do you think that the IASB should still be able to require a total or subtotal

profit or loss when developing or amending Standards?

Generally, we do not support defining totals or subtotals in the Conceptual Framework. This is

because the Conceptual Framework will be used for many years to come. It should be a forward

looking document that does not confine itself to existing practice. Financial reporting evolves

over time and the Conceptual Framework should be flexible enough to cope with that change.

Writing into the Conceptual Framework specific totals and subtotal unnecessarily limits the

expected life of the Conceptual Framework.

Nevertheless, we understand the IASB’s reason for tackling this issue in the project and,

irrespective of whether it’s addressed at the conceptual level or standards-level, we agree that it

is an important issue, given the way in which the use of OCI has evolved over time without a

clear rationale for why items are included in OCI and whether or when they should be recycled.

The Discussion Paper presumes that profit or loss is a primary performance measure but

provides no justification for this view. We recommend that the first conceptual question to

address is the objective of profit or loss as a primary performance measure. This would provide

a conceptual rationale for distinguishing between profit or loss and OCI.

We also note that profit or loss often is the starting point for any analysis of an entity’s

performance, therefore, this makes it important to develop an overall conceptual basis for

making the distinction between profit and loss and OCI, which links back to the objective of the

statement of financial performance/comprehensive income. Also, the profit and loss/OCI

distinction links back to the overall objective of financial reporting and other aspects of the

Conceptual Framework, such as the definitions of elements and measurement.

For example, in developing a conceptual basis for distinguishing between profit or loss and OCI,

an important question to consider is whether the objective is to focus only on items with

‘predictive value’ (the objective of decision-usefulness/predicting future cash flows). This

approach would imply that the objective is to construct a type of ‘pro forma’ profit and loss that

essentially reports what the entity's performance would have been, in an alternative world in

which the ‘noise’ created by items with little predictive value is excluded. Alternatively, should

the performance statement also provide information about what actually happened during the

reporting period (and therefore also serves the accountability objective)? In our view, the latter

is the appropriate approach.

In addition, in the same way as the financial statements are not designed to show the value of

the entity (as per paragraph OB6 in the revised Conceptual Framework), the statement of

financial performance/comprehensive income should not be designed to show the entity's

future performance – it can help with such predictions, but it needs to report on past

performance because it is a statement of historical performance, not prospective performance.

In our view, the desire to isolate various types of items, such as non-recurring items and many of

the other items listed in Table 8.1 in the Discussion Paper, is driven by a desire to create a pro-

31

forma measure of the entity’s performance, rather than a measure of the entity’s actual

historical performance. We agree with the disaggregation or separate presentation of items

with little predictive value can provide useful information, but that does not necessarily mean

that such items should be presented in OCI.

These comments reinforce our earlier comments about developing a robust concept for

financial performance, including for profit or loss as a primary performance measure. This is

essential in order to distinguish between profit or loss and OCI in a consistent manner. Although

there are divergent views on how that distinction is drawn, most agree that consistency is very

important.

Question 20

The IASB’s preliminary view that the Conceptual Framework should permit or require at least

some items of income and expense previously recognised in OCI to be recognised subsequently

in profit or loss, i.e. recycled, is discussed in paragraphs 8.23–8.26 of the Discussion Paper.

Do you agree? Why or why not? If you agree, do you think that all items of income and expense

presented in OCI should be recycled into profit or loss? Why or why not?

If you do not agree, how would you address cash flow hedge accounting?

Under our proposals in response to question 19 above, we consider that all items in OCI should

be recycled because, in general, OCI items are types of “unrealised” gains/losses, which should

be recycled when realised. Further, recycling all OCI items is important to create a consistent

and coherent treatment of OCI.

This includes recycling asset revaluation reserves on disposal (if the unrealised gains/losses are

recognised in OCI) such as property, plant and equipment revaluation gains/losses (which would

provide comparability with the treatment of such gains on property, plant and equipment

measured at cost, which are reported in profit or loss on disposal).

Question 21

In this Discussion Paper, two approaches are explored that describe which items could be

included in OCI: a narrow approach (Approach 2A described in paragraphs 8.40–8.78 of the

Discussion Paper) and a broad approach (Approach 2B described in paragraphs 8.79–8.94 in the

Discussion Paper).

Which of these approaches do you support, and why?

If you support a different approach, please describe that approach and explain why you believe

it is preferable to the approaches described in this Discussion Paper?

As noted in our response to Question 11 above, we are strongly opposed to split measurement,

that is, the use of different measurement basis in different statements and the difference being

recognised in OCI. Movements in elements should be measured on the same basis as the

underlying elements.

32

We strongly disagree with the proposals in relation to ‘bridging items’ as these items are like

balancing items or deferrals and do not represent real world economic phenomena. In our view,

elements in financial statements should represent ‘real-world’ economic phenomena rather

than accounting constructs. The Conceptual Framework should not elevate such accounting

constructs to a status equivalent to that of elements.

We do not agree with transitory remeasurements, especially if they are essentially bridging

items (such as, pieces of remeasurements).Section 9 Other issues

Question 22

Chapters 1 and 3 of the existing Conceptual Framework

Paragraphs 9.2–9.22 of the Discussion Paper address the chapters of the existing Conceptual

Framework that were published in 2010 and how those chapters treat the concepts of

stewardship, reliability and prudence. The IASB will make changes to those chapters if work on

the rest of the Conceptual Framework highlights areas that need clarifying or amending.

However, the IASB does not intend to fundamentally reconsider the content of those chapters.

Do you agree with this approach? Please explain your reasons.

If you believe that the IASB should consider changes to those chapters (including how those

chapters treat the concepts of stewardship, reliability and prudence), please explain those

changes and the reasons for them, and please explain as precisely as possible how they would

affect the rest of the Conceptual Framework.

Accountability

We consider that the IASB should revisit chapters 1 and 3 in light of conclusions reached in this

project and recent events. In particular, consideration should be given to emphasising the role

of financial statements in providing information about the stewardship of management in light

of the global financial crisis. In the recent crisis, financial reports were criticised for failing to

provide enough information about stewardship of management. There can be no doubt that

holding management to account remains a very important purpose of financial reporting.

We are not, however, suggesting a fundamental reconsideration of these chapters. Rather, we

are recommending that some revision is required for consistency with other parts of the revised

Conceptual Framework and to improve the balance of the discussion of accountability in Chapter

1 – at present, the discussion of accountability appears to be more of a ‘bolt on’ to the objective

of decision-usefulness/predicting future cash flows.

‘Reliability’ or ‘faithful representation’

We consider that reliability should not be reinstated as a qualitative characteristic. We agree

with the IASB’s previous decision to replace reliability with faithful representation.

33

Prudence

Current practice and judgements are already influenced by prudence, however, is not necessary

or appropriate to build this into the Conceptual Framework. Rather, the development of more

robust recognition criteria (as discussed in our earlier responses) would assist with exercising

caution when making estimates and judgements in the presence of uncertainty.

We also understand that the term ‘prudence’ is interpreted and applied differently in different

jurisdictions. Therefore, if it is included in the Conceptual Framework, it would be important to

clearly explain the particular meaning of prudence that has been adopted. For example, some

might equate ‘prudence’ with regulatory concerns about financial stability, so it would be

important for any discussion of prudence to clearly distinguish between the notion of prudence

in the context of financial reporting compared with how it might be used in other contexts,

including for regulatory purposes.

Given the danger of misinterpretation and misapplication, we strongly support retaining the

current position in the revised Conceptual Framework of not referring to prudence.

Reporting entity

We agree that the Conceptual Framework should continue to broadly describe, rather than

precisely define, a reporting entity. An international standard setter cannot precisely define

within its standards which types of entities should apply the standards. The final responsibility

for determining which organisations are reporting entities and whether or not they are required

to apply a particular set of accounting standards rests with individual jurisdictions.

Question 23

Business model

The business model concept is discussed in paragraphs 9.23–9.34 of the Discussion Paper. This

Discussion Paper does not define the business model concept. However, the IASB’s preliminary

view is that financial statements can be made more relevant if the IASB considers, when

developing or revising particular Standards, how an entity conducts its business activities.

Do you think that the IASB should use the business model concept when it develops or revises

particular Standards? Why or why not?

If you agree, in which areas do you think that the business model concept would be helpful?

Should the IASB define ‘business model’? Why or why not?

If you think that ‘business model’ should be defined, how would you define it?

We agree that the business model concept should play a role in standard-setting. If financial

reporting appropriately reflects an entity’s business model, financial reporting provides users of

financial reports with relevant information because reports reflect how the entity is managed

and how the entity generates economic value. Consequently, reports provide users with

34

information that enables them to assess the resources of the entity, claims against the entity,

and how the entity’s management and governing board have discharged their responsibilities to

use the entity’s resources.

However, excessive consideration of an entity’s business model in determining standards risks

standards becoming more and more industry, sector and/or transaction specific, which is not

consistent with principles-based standard setting.

Therefore, we consider that the Conceptual Framework include a discussion of when an entity’s

business model is a factor to consider in developing standards but should not mandate that

business models be considered in every instance. That discussion should describe, not define,

the business model concept (see our comments in the covering letter on the use of descriptions

rather than definitions at the conceptual level).

Question 24

Unit of account

The unit of account is discussed in paragraphs 9.35–9.41 of the Discussion Paper. The IASB’s

preliminary view is that the unit of account will normally be decided when the IASB develops or

revises particular Standards and that, in selecting a unit of account, the IASB should consider the

qualitative characteristics of useful financial information.

Do you agree? Why or why not?

We agree that the unit of account should be decided at the standards-level. However, principles

to guide this decision should be provided in the Conceptual Framework, such as the principles

covered in paragraphs 9.38 - 9.41 of the Discussion Paper (that is, the unit of account selected

should result in relevant information, faithful representation of the information reported and a

balance between benefits and costs).

Question 25

Going concern

Going concern is discussed in paragraphs 9.42–9.44 of the Discussion Paper. The IASB has

identified three situations in which the going concern assumption is relevant (when measuring

assets and liabilities, when identifying liabilities and when disclosing information about the

entity).

Are there any other situations where the going concern assumption might be relevant?

We note no other situations where the going concern assumption might be relevant.

However, the going concern assumption underlies the recognition and measurement of assets

and liabilities. Given its importance to other areas of the Conceptual Framework, going concern

has not been sufficiently discussed.

35

Question 26

Capital maintenance

Capital maintenance is discussed in paragraphs 9.45–9.54 of the Discussion Paper. The IASB

plans to include the existing descriptions and the discussion of capital maintenance concepts in

the revised Conceptual Framework largely unchanged until such time as a new or revised

Standard on accounting for high inflation indicates a need for change.

Do you agree? Why or why not? Please explain your reasons.

We consider the discussion in the Discussion Paper to be too brief to adequately address the

pros and cons of various concepts of maintenance, including the implications for various parts of

the Conceptual Framework, such as elements, measurement and the objective of various

financial statements. We understand why the IASB has decided not to make any change to the

existing Conceptual Framework. However, having decided not to change the current approach

to capital maintenance, the Basis for Conclusions to the Conceptual Framework should explain

why alternative approaches were rejected.