IASB publishes Exposure Draft of a new Conceptual Framework

28 May 2015

The International Accounting Standards Board (IASB) has published a comprehensive Exposure Draft
(ED) containing proposals for topical areas where it considers a revision and amendment of the
existing Conceptual Framework necessary. Included in the ED are proposals to revise the definitions
of an asset and a liability, to introduce guidance on measurement and de-recognition, and to set a
framework for presentation and disclosure. The main ED is accompanied by an ED containing
proposals regarding references to the Conceptual Framework in other IASB pronouncements.
Comments on both EDs are due 26 October 2015.

Background

The current Conceptual Framework has been left largely unchanged since its inception in 1989. In
2004, the IASB and the FASB decided to review and revise the conceptual framework, however,
changed priorities and the slow progress in the project led to the project being abandoned in 2010
after only Phase A of the original joint project had been finalised and introduced into the existing
framework as Chapters 1 and 3 in September 2010. Phase D saw the publication of a discussion
paper and an exposure draft but was never finalised. The Boards discussed Phases B and C quite ex-
tensively without any consultation document ever being issued, and Phases E to H largely remained
untouched.

During the 2011 agenda consultation many participants called for the IASB to reactivate and finalise
the conceptual framework project given the multitude of open conceptual issues it is facing in many
of its current projects. As a result, the IASB officially added the project to its agenda again in
September 2012, this time as an IASB-only project and no longer aimed at a substantial revision of
the framework but focused on those topics that are not yet covered (e.g. presentation and disclo-
sure) or that show obvious shortcomings that need to be dealt with. As a first step, a Discussion
Paper covering all aspects of the framework project was published in July 2013, followed now by two
EDs - one covering the Conceptual Framework itself, one covering references to the Conceptual
Framework in other IASB pronouncements.

Summary of main proposals

ED/2015/3 Conceptual Framework for Financial Reporting sets out the revised Conceptual
Framework structured into an introduction, eight chapters, and two appendices:

Chapter Topic

Introduction

1 The objective of general purpose financial reporting

2 Qualitative characteristics of useful financial information

3 Financial statements and the reporting entity

4 The elements of financial statements

1
5 Recognition and de-recognition

6 Measurement

7 Presentation and disclosure

8 Concepts of capital and capital maintenance

Appendix A Cash-flow-based measurement techniques

Appendix B Glossary

The key proposals in each chapter are summarised below:

Introduction. The first section offers background information. It also describes the purpose of the
conceptual framework and its status within the hierarchy of IASB pronouncements. The ED explains
that the Conceptual Framework's primary purpose is to assist the IASB in developing and revising
IFRSs (even though it may be useful to parties other than the IASB) and that the framework does
not override any specific IFRS. Should the IASB decide to issue a new or revised pronouncement
that is in conflict with the framework, the IASB will highlight the fact and explain the reasons for the
departure going forward.

Chapter 1 - The objective of general purpose financial reporting. This is the first of the two
chapters that were finalised as part of the joint project with the FASB in 2010, so there are only
limited changes. In essence, the IASB's proposals in this chapter aim at giving prominence to the im-
portance of providing information that is needed to assess management's stewardship of the
entity's resources.

Chapter 2 - Qualitative characteristics of useful financial information. This is the second of the two
chapters that were finalised as part of the joint project with the FASB in 2010 (published as Chapter
3 in the 2010 Conceptual Framework). Again, proposed changes are limited. However, the IASB
proposes to reintroduce an explicit reference to the notion of prudence and states that the exercise
of prudence supports neutrality. Prudence is defined as the exercise of caution when making judge-
ments under conditions of uncertainty. The chapter also contains a proposed addition that would
clarify that faithful representation means representation of the substance of an economic phenom-
enon instead of representation of its legal form only.

Chapter 3 - Financial Statements and the reporting entity.The ED states the objective of financial
statements (to provide information about an entity's assets, liabilities, equity, income and expenses
that is useful to financial statements users in assessing the prospects for future net cash inflows to
the entity and in assessing management's stewardship of the entity's resources) and sets out the
going concern assumption. Interestingly, the ED only mentions two statements explicitly: the
statement of financial position and the statement(s) of financial performance (the latter being the
former statement of comprehensive income); the statement of cash flows and the statement of
changes in equity go unmentioned. The chapter also discusses the definition of a reporting entity
and the boundary of a reporting entity. It also states the IASB's conviction that, generally, consoli-
dated financial statements are more likely to provide useful information to users of financial state-
ments than unconsolidated financial statements.

Chapter 4 - The elements of financial statements. The main focus of this chapter is on the defini-
tions of assets, liabilities, and equity as well as income and expenses. The definitions are quoted

2
below:
Asset. An asset is a present economic resource controlled by the entity as a result of past events. An
economic resource is a right that has the potential to produce economic benefits.
Liability. A liability is a present obligation of the entity to transfer an economic resource as a result
of past events.
Equity. Equity is the residual interest in the assets of the entity after deducting all its liabilities.
Income. Income is increases in assets or decreases in liabilities that result in increases in equity,
other than those relating to contributions from holders of equity claims.
Expenses. Expenses are decreases in assets or increases in liabilities that result in decreases in
equity, other than those relating to distributions to holders of equity claims.
Note that, other than in the DP, the IASB has backed away from changes in the definitions liabilities
and equity that would address the problems that arise in classifying instruments with characteris-
tics of both liabilities and equity. Exploring those problems has been transferred to the IASB's
research project on financial instruments with the characteristics of equity.

Chapter 5 - Recognition and de-recognition. The ED states that only items that meet the definition
of an asset, a liability or equity are recognised in the statement of financial position and only items
that meet the definition of income or expenses are to be recognised in the statement(s) of financial
performance. However, their recognition depends on three criteria: their recognition provides
users of financial statements with (1) relevant information about the asset or the liability and about
any income, expenses or changes in equity, (2) a faithful representation of the asset or the liability
and of any income, expenses or changes in equity, and (3) information that results in benefits
exceeding the cost of providing that information. Nevertheless, the ED also maintains that whether
the information provided is useful to users depends on the item and the specific facts and circum-
stances and requires judgement and possibly varying recognition requirements between standards.
De-recognition requirements as presented in the ED are driven by two aims: the assets and liabili-
ties retained after the transaction or other event that led to de-recognition must be presented
faithfully and the change in the entity's assets and liabilities as a result of that transaction or other
event must also be presented faithfully. The ED also describes alternatives when it is not possible to
achieve both aims.

Chapter 6 - Measurement. This chapter is dedicated to the description of different measurement

bases (historical cost and current value (fair value and value in use/fulfilment value)), the informa-
tion that they provide and their advantages and disadvantages. A table offers an overview of the
information provided by various measurement bases. The ED also sets out factors to consider when
selecting a measurement basis (relevance, faithful representation, enhancing qualitative character-
istics, and factors specific to initial measurement) and points out that consideration of the objective
of financial reporting, the qualitative characteristics of useful financial information and the cost
constraint are likely to result in the selection of different measurement bases for different assets,
liabilities and items of income and expense. Appendix A of the ED supplements Chapter 6 and
describes cash-flow-based measurement techniques for cases when a measure determined using a
measurement basis cannot be observed.

Chapter 7 - Presentation and disclosure. In this chapter, the ED discusses concepts that determine
what information is included in the financial statements and how that information should be
presented and disclosed. The statement of statement of comprehensive income is newly described
as "statement of financial performance", however, the ED does not specify whether this statement
should consist of a single statement or two statements, it only requires that a total or subtotal for

3
profit or loss must be provided. Notably, the ED does not define profit or loss, thus the question of
what goes into profit or loss or into other comprehensive income is still unanswered.

Chapter 8 - Concepts of capital and capital maintenance. The proposals in this chapter were taken
over from the existing Conceptual Framework with minor changes for consistency of terminology.
The IASB states that it would consider revising the description and discussion of capital mainte-
nance if it were to carry out a future project on accounting for high inflation. However, it also states
that no such work is currently planned.

ED/2015/4 Updating References to the Conceptual Framework contains proposed amendments to

IFRS 2, IFRS 3, IFRS 4, IFRS 6, IAS 1, IAS 8, IAS 34, SIC-27 and SIC-32 in order to update those pro-
nouncements with regard to references to and quotes from the framework so that they refer to the
revised Conceptual Framework. As the Conceptual Framework will mainly affect the IASB and its
work while the proposals regarding the other pronouncements could also affect preparers, the IASB
considers granting a transition period of approximately 18 months for the amendments proposed in
ED/2015/4 in order to give preparers time to identify, understand and adjust to possible implica-
tions.

Comment deadline and next steps

The IASB allows constituents an extended six months period to work their way through the
document and to respond to the questions raised; hence, comment letters are to be submitted by
26 October 2015. The IASB will consider the comments received when developing the final version of
the revised Conceptual Framework. The IASB aims to finalise the revised Conceptual Framework in
2016.

Note: On 22 September 2015, the IASB decided to extend the comment letter deadline to 25
November 2015.

Additional information

 Press release on the IASB's website

 ED/2015/3 Conceptual Framework for Financial Reporting (link to IASB website)

 Basis for Conclusions for ED/2015/3 (link to IASB website)

 IASB Snapshot introducing the ED/2015/3 (link to IASB website)

 ED/2015/4 Updating References to the Conceptual Framework (link to IASB website)

 IFRS in Focus — IASB issues Exposure Draft for a revised Conceptual Framework

 IAS Plus project page on the IASB’s conceptual framework project

On 17 June 2015, the IASB will give a live web presentation introducing the Exposure Draft and
offering the public an opportunity to ask questions. More information on the webinar is available on
the IASB website.