The preliminary consultation period on the conceptual framework of the International Accounting Standards Board (IASB) closed 14 January, with some of the respondents suggesting that a number of concepts, such as prudence or accountability, should be explained in more detail.
The IASB published on 18 July 2013 a Discussion Paper (DP) intended to revise its conceptual framework, a tool that sets the foundations or concepts used for the preparation of financial statements.
According to the IASB the DP is the first step in the revision process of the conceptual framework and in light of the participants’ comments it will develop and launch an Exposure Draft for comment on the same subject.
More than 30 respondents from around the world provided feedback on the DP, including the Association of Chartered Certified Accountants (ACCA), the UK Financial Reporting Council (FRC) and the Institute of Chartered Accountants in England and Wales (ICAEW), which all of them voiced certain concerns when submitting their responses last week.
Missing conceptsACCA said some important areas were missing from the conceptual framework, in particular the concepts of prudence and accountability, which need to be addressed and explained.
"While accountability is referred to in the framework and prudence is built into the existing IFRS in a number of ways, both need to be given more importance in the framework," ACCA head of corporate reporting Richard Martin said.
Although not covered by the existing conceptual framework, other comprehensive income (OCI) is another critical area for ACCA, as well as the definition of year profit, which both need more developed definitions and principles.
"Important aspects of setting accounting standards are missing. We also need a more coherent definition of liabilities that brings together the approach to conditional liabilities, constructive liabilities and the implications of economic compulsion," Martin said.
For ICAEW, the IASB should explain the objectives underlying the reporting of profit or loss in its conceptual framework.
"One of the most widely used numbers in financial reporting is the profit or loss – or earnings – for the period. But various items are excluded from profit or loss and recognised instead in OCI. At the moment there is no clear and consistent basis for this," ICAEW head of financial reporting faculty Nigel Sleigh-Johnson said.
Prudence Both, ICAEW and the FRC, also said the conceptual framework should explain the concept of prudence. In particular the FRC said that three fundamental concepts -prudence, stewardship and reliability, should be "reintroduced" to framework.
"In 2010, the IASB made some changes that downplayed the ideas of prudence, stewardship/accountability and reliability. We are pleased that the IASB has said that it will reconsider this in the light of work on the rest of the conceptual framework," FRC board member and accounting council chairman Roger Marshall said.
In July 2013, commenting on the publication of the DP, ICAEW’s Sleigh-Johnson said that it was disappointing to see that while the paper discussed the 2010 exclusion of prudence from the conceptual framework, it did not suggest reinstating it.
"Whether or not this should happen will, I’m sure, prove a key part of the forthcoming debate," he anticipated.
FRC codes and standards executive director Melanie McLaren said the IASB’s DP also made a number of "thoughtful suggestions". She said that the FRC particularly welcomed the recognition that financial reporting should not be based entirely on market values.
McLaren added that FRC’s response also recommend that financial statements should show the performance of an entity’s business model.
"It is all too often said that directors cannot recognise their business from their financial statements. Accounting standards should allow an appreciation of the results of the business model," McLaren said
RevisionAlthough interconnected with the existing IASB’s standard-setting agenda, the revision of its conceptual framework do not necessary involves changes to IFRSs.
According to the IASB the conceptual framework neither is an IFRS nor overrides IFRS requirements, as changes to current IFRSs need to follow the established procedure for that matter.
As IASB chairman Hans Hoogervorst said when the DP was published, it "gives people the opportunity to help us to shape the future of financial reporting by discussing the concepts that drive our work".
ICAEW said the conceptual framework assists the IASB in developing standards and called for more frequent revisions, as this one is the first since it was published in 1989.
"Once every quarter of a century is not often enough. Changes may not always be substantial, but the framework has to evolve with developments in business, markets, technology, the regulatory framework and accounting thought," Sleigh-Johnson said.
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