20 Nov 2015 12:00pm

Conceptual framework ED needs much more work

ICAEW believes that the International Accounting Standards Board has made “significant progress” towards a high quality, comprehensive conceptual framework for international financial reporting standards

But it is not there yet and there are several areas where the ICAEW Financial Reporting Faculty thinks the proposals “remain unconvincing” and others where the exposure draft (ED) “deliberately defers resolving difficult issues”.

It also thinks the IASB needs to make its mind up what the aim of the conceptual framework is – whether it is there to delineate what the IASB should be doing when setting standards (the aim the faculty supports) or to provide guidance for preparers.

“We believe the conceptual framework should be a living document, updated and amended as business practices change and as thinking about financial reporting develops,” the faculty says in its response to the ED.

“When the IASB issues standards that depart from the framework, it should explain why it has done so and in due course, when the framework is next revised, bring the framework into line with the new thinking embodied in the most recent standards.”

Currently, the faculty says, the ED’s proposals don’t always match the IASB’s latest thinking as reflected in recent standards. It points to the description of measurement bases in the ED which does not tally with the IASB’s measurement requirements in the recent IFRS 9, Financial Instruments, and IFRS 15, Revenue from Contracts with Customers. This difference “raises questions about the proposed framework’s credibility”.

Another concern centres on the proposal to adopt two measurement bases for the same item at the same time which would set “a dangerous precedent” if adopted. The faculty dismisses the idea as a convenient mechanism for simultaneously applying different views about the appropriate measurement basis for a particular item, “in order to reconcile those who take opposing views as to the primacy or importance of the statement of financial position and the income statement”.

Faculty head Nigel Sleigh-Johnson welcomed much of the ED, in particular the reinstatement of the concept of prudence which ICAEW had fought to get brought back.

He was not happy that the ED’s proposals exclude “asymmetric prudence” (greater readiness to recognise losses rather than gains) from the framework but added that “we want to be clear that making this change is not supposed to stop the use of fair value measurements in appropriate circumstances, or the recognition of fair value gains in financial statements”.

He also wanted to see the framework refer to the concept of the “true and fair view” rather than just “fair presentation”.

“At the moment IFRS standards refer only to the latter but in many jurisdictions, including the EU, there is an overriding and very important requirement to give a ‘true and fair view’ in financial statements,” he said. “Clarification is something long overdue.”

In other words, the proposed new conceptual framework is good in parts but needs a lot more hard work and clarifications before it is ready to go live.

Julia Irvine


Related articles

Perspective on prudence

Draft framework needs urgent work, says FRC

IASB reintroduces concept of prudence

IASB lacking in prudence