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  • Conceptual framework
    down the route described by the Technical Principal acknowledged that a cash flow based measurement was a technique to get to a measurement basis and that measurement bases needed to be defined If the measurement basis was not defined in the Conceptual Framework then it needed to be defined elsewhere which provided the Board with some flexibility He noted that in the Discussion Paper the Board described cash flow based measurement as a measurement basis in itself now it was saying that it was a technique to get to a measurement basis which was a different conclusion and in line with feedback received The Technical Director added that the implication was that if the Board wanted to use some sort of cash flow based measurement technique that did not meet one of the described measurement bases that would be a departure from the Conceptual Framework rather than application of the Conceptual Framework The Chairman asked the Board members whether they agreed with the proposal suggested earlier in the discussion by the Technical Principal that when a cash flow based measurement technique was being used it would be used as a way of estimating a particular measurement basis described in the Conceptual Framework and that any decision taken to move away from or to adjust that measurement basis in some way would be explained in the particular standard being developed at that point in time Twelve of the fourteen Board members present voted in favour of this proposal The Technical Principal then went on to present the second staff recommendation which was to include in the Exposure Draft An expanded discussion of the different approaches to dealing with uncertain cash flows Additional guidance on the use of discount rates and Additional guidance on when the effect of changes in an entity s own credit standing should be included in the measurement of a liability One Board member thought that paragraph 24 that set out what should be stated in the Exposure Draft was a little too detailed He disagreed with including the example in the Conceptual Framework as the Conceptual Framework should not be going into that level of detail Another Board member noted that he did not believe that a paragraph on the principles of discounted cash flow models should be included adding that the Conceptual Framework was not the right place to describe techniques and principles Another Board member referred to paragraph 29 c ii in the agenda paper noting that the wording stated that the Board should consider selecting a measurement basis that excludes the effect of changes in own credit He questioned whether this should say excludes own credit because for example in insurance fulfilment value was measured based on a discount rate that did not include own credit and changes in own credit were not included either The Technical Principal responded that the reason the staff had deliberately referred to changes in own credit was because they did not envisage that the effects of own credit would be excluded from the initial measurement of a particular asset or liability A further Board member also commented on the same paragraph noting that she was okay with it as it included the word consider She noted that the Board had tried a similar technique with IFRS 9 and had called it the frozen credit spread technique which it believed was a good solution to own credit however the approach did not get support from users as they did not know what it was measuring Accordingly she noted that she was okay with considering it but that it should not be given too much prominence as it might not receive a lot of acceptance Another Board member noted that in general she agreed with the recommendations to include more guidance in the Exposure Draft With respect to use of expected value she noted that it fell more clearly within the category of a technique because it could be used for several different measurement objectives and that should be made clear in the drafting Another Board member commented with respect to own credit risk and when or not it was appropriate for it to be included in cash flows He referred to paragraph 29 c and questioned whether it would be possible to link the notion in that paragraph with going concern He suggested making more specific in paragraph 29 c ii that when the objective was to estimate the fulfilment value it was not appropriate to include own credit risk when applying the going concern assumption as the expectation would be that an entity that was a going concern would be able to fulfil its contractual or other obligations The Technical Principal suggested that rather than being included in paragraph 29 c ii the reference to going concern could be included in paragraph 29 b which discussed why own credit might not always provide useful information Another Board member disagreed with mentioning going concern as it created a danger in terms of measuring financial liabilities The staff asked for a vote on each of the factors to be considered in cash flow based measurements Thirteen of the fourteen Board members agreed with the staff recommendations on each of the factors subject to the staff taking into consideration comments expressed by the Board members in the preceding discussion Profit or loss and other comprehensive income clarifying the proposed approach The next agenda paper contained a discussion of profit or loss P L as the primary source of information about an entity s performance for the period and explored the principles that could be used to identify some items of income and expense that must be included in profit or loss and those that could be included in OCI A summary of the proposed approach to profit or loss and OCI including the tentative decisions made by the Board in June 2014 and the clarifications that the staff recommend is set out in Appendix A of the agenda paper 10B The Senior Technical Manager introduced the paper by summarising the discussion around profit or loss as the primary source of information about performance She asked the Board members whether they had any comments on the paper and whether they agreed with the staff recommendations therein One Board member noted that she was generally supportive of where the staff had got to but made a comment with respect to setting expectations in relation to business model She referred to paragraph 11 d of the agenda paper which states that profit or loss can be more closely aligned to an entity s business model than total comprehensive income She noted that while she did not object to the comment she was concerned that the Board might send signals that could be misunderstood The Board would then have to spend time closing expectation gaps about the extent to which the Board would either seek to align with business model presentation for different industries types of companies or in essence provide more flexibility than in the past to with respect to classification Another Board member agreed with the recommendation but noted that the title profit or loss as the primary source of information about performance implied that for all entities income and expense was performance and that cash flows and balance sheet were less important He noted that there may be entities where cash flows gave more information than income and expense or where income and expense needed to be looked at on the same level as cash flows to understand performance He noted that he would prefer to say that income and expense was one facet of performance and cash flows another rather than to put income and expense above the rest as the paper appeared to be conveying The Senior Technical Manager responded noting that the staff was saying that although profit or loss was the primary source of information about performance it was not the only source She further noted that the staff did not intend to imply that each of the financial statements did not have equal prominence but that in terms of information about performance specifically profit or loss and other comprehensive income provided more information There was discussion amongst the Board members with respect to the importance of cash flows vs profit or loss as the primary source of information about performance One Board member used ENRON as an example noting that the company was being analysed based on its income statement whereas had the cash flows been looked at it would have been identified that the company was not producing any cash flows but recording extraordinary revenue and profits Another Board member noted that he believed that profit or loss was generally the primary source of information about performance in an environment where things were going well However he pointed out that in situations where things were going downhill liquidity cash flow and the balance sheet became more important indicators of performance he therefore suggested expanding on the definition A further Board member suggested adding the word generally the primary source of information about performance The Chairman pointed out that what the paper was trying to say was that profit or loss was the primary source of information relative to OCI If the Board had thought that OCI was just as important as profit or loss everything would be included in profit or loss Another Board member noted that he would be concerned with widening performance to include things that were not income and expense He acknowledged that cash flow balance sheet leverage and liquidity were all important in analysing a business however to define performance in such a wide way was dangerous He believed that performance was accruals based income and expense and that there were different ways of analysing it different measures of performance that included different components of it and different measurement bases to get to the income and expense Another Board member raised a point with respect to the interaction between papers She noted that in discussions on a previous paper the Board had said that in extreme circumstances the measurement uncertainty associated with estimates of fair value may be so great that measurement at fair value may not provide relevant information She cautioned that the Board needed to watch the interaction with this as if the presumption can be rebutted and items included in OCI because the relevance of profit or loss is enhanced she questioned whether people would think Level 3 fair value measurements were perfect candidates for OCI more broadly than what the Board might intend because of the link between measurement uncertainty and relevance The Senior Technical Manager went on to discuss principles for including items of income and expense in profit or loss or OCI One Board member agreed with the staff recommendations but drew attention to the sentence in paragraph 22 of the agenda paper that discusses assessing performance over several accounting periods over the term when particular management personnel were in charge He questioned how it would be understood if the paragraph was carried over into the Exposure Draft He cautioned that the Board would need to be careful if this sentence was included in the Exposure Draft as it could raise a number of questions with respect to stewardship Another Board member noted that he believed that the whole idea that P L should be the primary measure of performance both within a period and over time gets to the idea that an item should not be permanently excluded from P L and that this was supported by the recycling notion He highlighted pensions as an example of an item that is permanently excluded from P L at the moment He noted that if someone was trying to hold management accountable for their stewardship of the business including how they dealt with pensions and they dealt with pensions really badly because they made the wrong investment decisions and lost a lot of money currently that loss would appear in OCI and stay in OCI He further noted that if the Board wanted to hold P L to be the primary measure of performance over a period of years P L in the above example would overstate the performance of the business He noted that the other part of this was that P L in a particular period should also be a primary measure of performance His contention with the recycling of pensions was that it was arbitrary and if the recycling was arbitrary then the amount that appeared in P L for the recycling did not reflect an economic event in the period was not relevant in assessing the performance of the period and recycling did not result in the most relevant measure of performance being profit for that period He further noted that this has always been evident where in the past if material investors would remove the recycled component in assessing the performance of the business because they knew it had nothing to do with performance in the current period He added that if this Conceptual Framework had been in place at the time IAS 19 was written OCI could not have been used for IAS 19 The implication of this was that it would have had to go to P L unless the Board chose to deliberately depart from the Conceptual Framework and knowingly use OCI without recycling which would be contrary to the Conceptual Framework that is now being presented which is that P L is the most relevant measure of performance in a period and over time He noted that while he generally supported the staff recommendation he believed that the Conceptual Framework should give the Board discipline and that there should be a high hurdle in situations where the Board wanted to depart from the Conceptual Framework He noted that he was concerned with certain of the wording in paragraphs A8 and A9 which was effectively giving the Board an easy out He noted that if the Board was clear about what the objective was which was to have P L as the primary measure of performance in a single period and over time then OCI needed to be used with that objective in mind He added that if the Board wanted to use OCI in a way that was not consistent with that such as pensions they should be honest and say we are going to depart from the Conceptual Framework Accordingly he noted that the last two sentences of paragraph A8 and everything but the first sentence of A9 should be deleted The implication would be that pensions would be a departure from the Conceptual Framework which he believed it was Another Board member noted that he agreed with the comments of the previous Board member Further he believed what was missing in the paper was a discussion about what the period was all about He noted that usually the period was just one year but that there were lots of economics that covered more than one year and accordingly that there were some transactions that should be allocated to several years With respect to the pension example he noted that a loss in year 1 was not relevant to that year given the investment was made to cover the employee s life and that the loss should be allocated over time Such a way of thinking should be introduced to enable completion of the discussion He further asked for clarification on the recommendation set out in paragraph 29 a of the agenda paper that only items of income and expense that arise from changes in current measures of assets and liabilities could be included in OCI He wanted to know specifically whether this meant that day 1 profits would be explicitly prohibited from being taken to OCI The staff responded and confirmed that the intention was that day 1 profit would be excluded from OCI as only changes in current measures would go to OCI Several Board members commented on the wording in paragraph 38 b of the agenda paper that talks about only including changes in OCI if enhances the relevance of profit or loss and that it would be helpful to expand on what was meant by relevance There was discussion on paragraph A5 of the agenda paper The Chairman noted that he was okay with the language but was concerned how it might be interpreted by the outside world for example it could result in a large push towards use of cost based measures because all items of income and expense that arise on assets and liabilities carried at cost based measures must be included in P L or that it could be interpreted that every current remeasurement was a potential candidate for OCI which is not the case He noted that the Board s intention needs to be made crystal clear to avoid misinterpretation Upon being called to a vote by the Chairman nine Board members voted in favour of the staff recommendation One Board member noted that nine Board members had voted in favour of drafting as is but noted that there was some discussion about whether the Conceptual Framework should have a higher hurdle from departure than just baking in flexibility and suggested that given the vote the Board proceed with drafting in the Exposure Draft as recommended by the staff but think about whether a specific question should be asked on this in the Exposure Draft The Chairman agreed with this suggestion Presentation and disclosure scope and content The next agenda paper dealt with the scope and content of presentation and disclosure guidance to be included in the Conceptual Framework Exposure Draft It contained four staff recommendations which were the focus of the Board discussion The Senior Technical Manager started with the first issue of the paper that was devoted to Primary financial statements and notes to the financial statements The staff recommended that the Conceptual Framework Exposure Draft should not introduce a notion of primary financial statements as had been proposed in the Discussion Paper She asked the Board members whether they agreed with this staff recommendation One Board member disagreed with the staff recommendation noting that he believed face presentation and other disclosures should be distinguished He suggested that instead of using the term primary financial statements the term summary financial statements could be used instead which avoided implying that other disclosures were secondary The Chairman noted that he did not agree with the suggestion made by the previous Board member to use to the term summary However he noted that he believed that everyone more or less understood what was meant by the term primary financial statements and that the Board should not ignore this and should try to find a basis for it He noted that most people understood that there was some difference between the primary financial statements and the notes and provided two reasons why notes were used The first reason was that information was still important but of secondary importance which is why it was not included in the primary financial statements The second reason was that the information was still of high importance but was considered to be too detailed to include in the primary financial statements and that relegating such information to the notes did not necessarily mean that the information was of secondary importance He added that he believed that if everyone used these terms the Board should use them also and create some discipline around them Another Board member commented that while she agreed the term primary financial statements was used frequently in practice she questioned why it would be needed in the Conceptual Framework for many of the decisions made by the Board She highlighted the fact that some of the feedback received on the Discussion Paper noted that introducing the term primary financial statements could send the wrong message The Vice Chairman suggested leaving the notion of primary financial statements in the Exposure Draft and asking a specific question on it However the Technical Director noted that he was concerned with ending up with too many questions in the Exposure Draft and did not believe the issue was important enough to warrant a specific question Several other Board members commented that including a notion of primary financial statements in the Conceptual Framework would be trying to fix something that was not broken One Board member added that if such a notion was included he believed that only the income statement and balance sheet should be primary financial statements as only those two statements summarised the elements that had been identified income expenses assets liabilities and equity He added that the statement of cash flows was a roll forward of one element cash and the statement of changes in equity was a roll forward of another element equity He noted that one advantage of only labelling the balance sheet and income statement as primary financial statements was that at some point the Board would be required to consider the suitability of the cash flow statement for all entities and circumstances He added that many constituents had told the Board that cash flow statements were not useful under certain circumstances and that by not including the statement of cash flows as a primary financial statement it would give the Board some flexibility in determining when a cash roll forward was and was not appropriate Upon being called to a vote by the Chairman twelve of the fourteen Board members present agreed with the staff recommendation The next issue was devoted to the objective of financial statements The staff recommended that the Conceptual Framework Exposure Draft should state that the objective of financial statements was to provide information about an entity s assets liabilities equity income and expenses that was useful to users of financial statements in assessing the prospects for future net cash inflows to the entity and in assessing management s stewardship of the entity s resources As a result financial statements would provide information about the financial position financial performance and cash flows of an entity One Board member noted that he strongly disagreed with the elimination of information about cash flows as an objective of financial statements He noted that information about cash flows was important in assessing future prospects of an entity and in assessing the stewardship of management and that the fact that IFRS required a statement of cash flows was proof of that He questioned what the staff s reason was for eliminating information about cash flows from the objective The staff responded by saying that the intention was not to exclude information about cash flows from the objective The staff was trying to capture in first sentence only items that were elements adding that cash flow was an example of an asset so it was captured indirectly To reinforce the importance of cash flows the staff had added the final sentence Another Board member observed that the staff was not proposing to amend the objective of financial reporting here but was rather supplementing the objective of financial reporting with another objective of financial statements She questioned the need for an objective of financial statements She believed there was enough market discipline that kept some clarity around the boundary between what was included in financial statements and other financial reports As long as the Board was always clear when writing standards that it was writing them about financial statements she did not believe there was a risk of confusion as to what people needed to look at when preparing financial statements Other Board members also questioned why a separate objective for financial statements was needed The Technical Director responded and noted that there was an objective for financial reporting as a whole and that this recommendation was trying to deal with a subset of that being financial statements He noted that this guidance was to assist the Board in knowing what things it needed to be thinking about to include in financial statements Another Board member noted that he agreed with the recommendation as written noting that it worked perfectly as it dealt with the elements and roll forwards cash flows changes in equity were dealt with elsewhere Nine Board members of the thirteen present for the vote agreed with the staff recommendation The Senior Technical Manager then turned to the scope of the notes to the financial statements The staff recommended that the Conceptual Framework Exposure Draft should discuss disclosures that the Board would normally consider requiring in setting Standards but does not provide examples of different types of disclosures and confirm the discussion of disclosure of risks and forward looking information proposed in the Discussion Paper In particular the notes to the financial statements would normally include information about the nature and extent of risks arising from the entity s assets and liabilities and forward looking information should be required only if it provides relevant information about the assets and liabilities that existed at the end of or during the reporting period One Board member expressed concern with respect to the fact that the recommendation stated that the notes to the financial statements would normally include information about the nature and extent of risks arising from the entity s assets and liabilities and questioned the applicability of this requirement to all entities The staff observed that this should have read normally consider requiring and noted that this would be amended Thirteen Board members agreed with the staff recommendation subject to the amendment noted above Lastly the Senior Technical Manager touched on other guidance on presentation and disclosure The staff recommended confirming the guidance on classification and aggregation offsetting and comparative information proposed in the Discussion Paper One Board member suggested that the word disaggregation should also be included adding that some things in financial reporting were a disaggregation of even a single transaction There were no other significant comments with respect to this staff recommendation All fourteen Board members agreed with the staff recommendation subject to the inclusion of discussion on disaggregation Other elements The next topic discussed focussed on whether to define other elements for the statement of changes in equity and the statement of cash flows In the agenda paper the staff recommended that the Conceptual Framework should not define elements for the statement of changes in equity and for the statement of cash flows Accordingly the only elements would continue to be assets liabilities and equity and income and expense The Board members were asked whether they had any comments on the paper and whether they agreed with the staff recommendation in the paper A Board member noted that while he did not disagree with the staff recommendation he was not convinced by the reasoning in the paper He pointed out the fact that the argument in paragraph 17 a in favour of introducing contributions to equity and distributions of equity as new elements was a strong argument and that the arguments against as set out in paragraph 18 were not as strong He questioned the staff as to whether there were any other reasons why they had come to the recommendation in the paper The Technical Director responded and acknowledged that the argument in paragraph 17 a was a strong argument He noted that if the Conceptual Framework was being written from scratch the staff might have been inclined to include these elements however he noted that the objective of the project was to try and fill gaps in the existing Conceptual Framework and to solve practice issues which is why the staff recommended making no changes in this area Another Board member noted that he strongly supported the staff recommendation for two reasons The first reason he gave was because he did not believe the issues people had with respect to contributions to and distributions of equity were conceptual level issues The second reason he gave was because he believed if the Board tried to do something in this area they would get into detailed standard level issues which would be difficult to solve Another Board member noted that he believed the Board should look at including these items as elements as the Board would not revisit the Conceptual Framework for a long time He believed there was an existing problem that the Board had dealt with through an interpretation in terms of how to account for and apply the equity method and distributions and contributions upstream and downstream transactions and that they did not know how to characterise such transactions whether they should be through profit or loss other comprehensive income equity changes and the like He believed that introducing these elements would actually help solve some practice problems and would also help to solve a very thorny practice problem The current cash flow statement was not a roll forward but a depiction of a proxy for cash flow based on changes in assets and liabilities as a result it rarely delivered the kind of value most people were looking for particularly within financial institutions Accordingly he noted that he believed it would be worthwhile for the Board to work on including these items as elements as it would help deal with practice problems Another Board member noted that he agreed with the comment of the previous Board member at least for equity He believed it was worth for the Board trying to define these elements in the Conceptual Framework even if just from a practical perspective as it would be easier to include in the Exposure Draft and remove later on if necessary than to try and include later on The Chairman also noted that he was inclined to favour including contributions to and distributions of equity as elements In response to the comments made by the two previous Board members who had spoken another Board member warned the Board that including contributions to and distributions of equity as elements would result in a detailed discussion on capital maintenance Another Board member questioned why in terms of potential elements the staff focused on defining as elements contributions to and distributions of equity as opposed to just defining equity as the element The Technical Director responded noting that income was defined as increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity other than those relating to contributions from equity participants and that implicitly income was defined as a subset of a larger group of movements He then clarified that it was the contributions the flow rather than equity that the staff were trying to define just as income and expense are the flows Another Board member noted that he would be nervous including these contributions to and distributions of equity as elements because it could restrict the Board s movement when it came to working on the liabilities equity project Upon called to a vote by the Chairman eleven Board members agreed with the staff recommendation in the paper not to define elements for the statement of changes in equity and for the statement of cash flows Asset definition control This agenda paper considered feedback on the definition of control suggested in the Discussion Paper and on the guidance accompanying that definition The staff recommendations were set out in the paper in relation to the following four areas control or risks and rewards of ownership control asset definition or recognition criteria the definition of control and supporting guidance on control The Technical Director introduced the paper and asked the Board members whether they had any comments on the paper and whether they agreed with the staff recommendations as set out in the paper With respect to the staff recommendation on supporting guidance on control a Board member expressed concern with the proposal to delete the fish example that was included in the Discussion Paper from the Conceptual Framework He noted that the Conceptual Framework would last for ten or twenty years and during that time the environment would change and that it would be a useful example to retain particular with respect to open software scenarios There were no other significant comments All fourteen Board members agreed with the four staff recommendations in the paper Liability definition present obligation The Senior Research Manager began by saying that the agenda paper dealt specifically with constrained discretion which meant that the entity had some but less than complete discretion to avoid a future transfer The Discussion Paper had looked at different scenarios in this context One was where the entity did not have a legally enforceable obligation but possibly because of its past practices or published policies it had a constructive obligation Another scenario was where the entity would have a legally enforceable obligation but only if it followed another course of action that satisfied a remaining condition The third scenario was when there were options that would allow not transferring an economic resource but with restrictions around these options that would constrain the entity in the ability to exercise them All of these scenarios posed the question of how constrained the discretion of an entity would have to be to constitute a present obligation The staff had developed a recommendation for a definition of present obligation The first step in this process was to analyse the role that economic compulsion had in the identification of an obligation The staff s conclusion on the first step was that economic compulsion had to be taken into account but by itself would not be sufficient as there needed to be a past event The second step was to examine how constrained an entity s discretion should be for it to have an obligation The analysis showed that the entity should have no practical ability to avoid the transfer of economic benefits The third step was looking to finding a better term than no practical ability to avoid and the two alternatives where no realistic alternative and little or no discretion to avoid However the staff recommended retaining the term no practical ability to avoid The overall recommended definition from these steps was An entity has a present obligation to transfer an economic resource as a result of past events if both the entity has no practical ability to avoid the transfer and the amount of the transfer is determined by reference to benefits that the entity has received or activities that it has conducted in the past One Board member agreed and found that this was a significant progress in developing the Conceptual Framework He especially liked the reference in the agenda paper where it said that a n entity that prepares financial statements on a going concern basis has no practical ability to avoid a transfer that could be avoided only by liquidating the entity or ceasing trading He also liked the idea of taking into account economic compulsion however he pointed out problems with different degrees of economic compulsion and when to decide whether an entity was economically compelled to do something The Senior Research Manager replied that this would have to be dealt with in standard setting One Board member commented on the types of constrained discretion addressed in the Discussion Paper Those were View 1 the entity has no ability to avoid future transfer View 2 the entity has no practical ability to avoid future transfer and View 3 the entity has less than complete discretion to avoid the future transfer Staff wrote that the agenda paper considered suggestions that the concept chosen should have an effect that was somewhere between the effects of View 2 and View 3 and was based on the amounts that it was probable or expected that the entity would transfer The Board member said it should rather be the probability that the entity acted in a certain way The amount that flowed from that action would only be a consequence and

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  • Conceptual framework
    concerned about equalling the terms reliability and faithful representation If the Board had believed those terms were equal at the time when it revised the Conceptual Framework this would have been reflected in the revised Framework The Chairman called a vote on a and b provided that the wording would be amended 12 of the 14 Board members voted in favour Upon calling a vote on c as proposed by staff only 1 Board member was in favour The Technical Principal continued with the topic of faithful representation She said that the Discussion Paper had suggested that faithful representation had fewer implications on measurement than relevance The Discussion Paper also suggested that an estimate of an unobservable price could be faithful representation if adequate disclosures were made A few respondents disagreed with that by saying that if the estimate was highly uncertain the item could not be represented faithfully The Technical Principal recommended to carry forward the discussion of faithful representation from the Discussion Paper as stated in the agenda paper to the Exposure Draft and to add the idea that a faithful representation by itself did not necessarily result in useful information but that the information provided by the representation must also be relevant One Board member agreed with the staff recommendation but was concerned about the wording in the agenda paper In the agenda paper it said that the Discussion Paper highlighted w hen deciding whether a particular measurement faithfully represents an entity s financial position and performance the IASB may need to consider how best to portray a link between items He said in cases of accounting mismatches the word may would be too weak In this case the IASB would have to consider how best to portray a link between items Another Board member disagreed by saying that the issue of linked instruments was too detailed for the Framework and she would therefore prefer not to include it One Board member said that the agenda paper used the word related assets and liabilities instead of linked and was concerned that related was once again too weak a word as many things could be related The Technical Principal replied that staff had been deliberately vague with the wording to give the IASB more leeway when deciding measurement bases One Board member disagreed with the vagueness The Chairman replied that the intention of this phrasing was too avoid accounting mismatches A Board member said that financial statements were a summary of information and a mixed measurement model would create inconsistency which should be avoided for assets and liabilities that were linked He said that otherwise this would not be a faithful representation in his view The Technical Director said that he agreed that the Framework should contain stronger words than just saying measurement should be consistent One Board member said she preferred to have the wording more generally Another Board member said that accounting mismatches that resulted from actual economic circumstances should be visible in the financial statements A fellow Board member agreed and said that on the other hand it should be made very difficult for the IASB to deliberately create an accounting mismatch if that was not warranted by economic circumstances The Chairman called a vote upon the staff recommendation a without amendments 10 Board members voted in favour of a When voting on b all members agreed The Technical Principal then introduced the topic of understandability She said that the Discussion Paper stated that understandability could be enhanced if the number of different measurement bases used was limited to the smallest number necessary to provide relevant information and if unnecessary changes in measurement bases were avoided and necessary changes were clearly explained Many respondents to the Discussion Paper had agreed with these statements She conceded that some disagreed because they felt that there should not be an artificial limit of measurement bases and a different measurement basis should be used if the Board believed it would provide relevant information The staff believed that this was not the intention of the Board and instead the Board wanted to highlight that it would be problematic to design new measurement bases for every standard The staff recommended that the Exposure draft should explain the need to weigh the benefits of a new or different measurement basis against any increased costs or complexity and retain a discussion of necessary and unnecessary changes in measurement bases The Vice Chairman asked whether a would not just state the obvious The Technical Principal conceded that it did to some extent One Board member asked whether a was only applicable for a new measurement method or also for existing measurement methods The Technical Principal confirmed that it was only applicable for completely new measurement methods One Board member said that whilst she understood that new measurement bases might bring benefit users of financial statements might be overwhelmed with for example 10 different cash flow based measurements e g entity market risk free etc The Chairman asked whether a should read weigh the benefits of multiple measurement bases The Technical Principal said that this could be interpreted as the Board moving towards one measurement basis One Board member said that instead of a he would like to retain the wording from the Discussion Paper on understandability i e the number of measurement bases should be the smallest necessary to provide relevant information He did not see how this would put an artificial limit to the number of measurement bases and thought that explaining this might help eliminating the concerns of respondents He then asked what different meant in staff recommendation a One Board member said that using a new measurement basis might actually reduce costs and complexity When voting on a 9 of the 14 Board members agreed Subsequently all of the Board members voted in favour for b On the other enhancing qualitative characteristics i e timeliness verifiability and comparability the staff recommended that the Exposure Draft should include the discussion suggested in

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  • Conceptual framework
    along the lines of paragraph 3 5 of the Discussion Paper The Conceptual Framework should include guidance on economic benefits broadly consistent with the guidance in paragraph 3 6 of the Discussion Paper and paragraph 33 of IFRS 15 Revenue from Contracts with Customers and The purpose of depreciation and amortisation is to depict consumption of the bundle of rights that constitutes an asset The Technical Director introduced the paper and asked the Board members whether they had any comments on the paper and whether they agreed with the Staff recommendations in the paper 1 ECONOMIC RESOURCES One Board member commented on the recommendation that the Conceptual Framework should provide examples along the lines of paragraph 3 5 of the Discussion Paper She noted that the list of examples might have been helpful in the Discussion Paper to give people a sense of what the Board was talking about but suggested that the Board steered away from including long lists of examples in the Conceptual Framework She noted that the Conceptual Framework should only retain the top level description of nature for example enforceable rights established by contract law or similar means and maybe one or two examples where the Board felt the top level descriptions were too abstract She cautioned against ending up in a situation where someone thinking about property plant and equipment for example would not only have to look in IAS 16 but also in the Conceptual Framework The Chairman and several other Board members also agreed with this comment Another Board member suggested that perhaps some examples could be included in the Basis for Conclusions when talking about what other standards say The Technical Director noted that the Staff would look again at whether they had the right level of detail in this paragraph He noted that the Staff would look at which of the examples i v could be included and further noted that the existing Conceptual Framework had some discussion at this level of detail for some of the items He added that this was something that would need to be assessed in drafting Several Board members raised concerns with respect to how goodwill should be treated in the Conceptual Framework One Board member noted that while he agreed that goodwill should be on the balance sheet it had always troubled him that it was defined as an asset and questioned whether its special nature should be acknowledged in the Conceptual Framework Another Board member pointed out the concerns expressed by respondents with respect to goodwill as set out in paragraph 10 d of the Agenda Paper He noted that respondents had commented that the rationale in IFRS 3 for concluding that goodwill was an asset was not convincing and that goodwill by itself was incapable of producing economic benefits and relied on the cash generating abilities of other assets He suggested that this issue could be solved by providing a general definition of assets in the Conceptual Framework with some type of exception for goodwill A further Board member agreed with the comments made by the previous Board members and reiterated that goodwill deserved a description of the special status it had within the notion of an asset He added that to ignore goodwill in the Conceptual Framework and just have some description in the Basis for Conclusions to IFRS 3 was not doing it justice He further added that he would like to see some discussion in the Conceptual Framework because the residual of the IFRS 3 calculation did not meet the definition of an asset The Technical Director responded and noted that the Staff had suggested taking goodwill out of the list of examples to prevent this type of debate arising He noted that the debate happened in IFRS 3 where there was an extensive discussion in the Basis for Conclusions to IFRS 3 as to why the Board had concluded that goodwill met the definition of an asset and noted that he saw little value in reopening the debate Another Board member responded noting that he believed goodwill should be included in the Conceptual Framework because it was controversial He noted that a number of people still struggled with whether goodwill should be an asset and accordingly noted that there was no better place than the Conceptual Framework for the issue to be addressed The Technical Director pointed out that the purpose of the project was to fill in the gaps in the Conceptual Framework that had caused problems in setting standards and particularly ones that had caused problems in more than one standard He noted that the goodwill question was predominantly a one standard issue and therefore did not meet the criteria for discussion He further noted that there was an answer on goodwill in IFRS 3 and that goodwill did not need to be addressed as part of the Conceptual Framework project In response to the previous discussions around goodwill another Board member cautioned that the Board was at risk of letting the tail wag the dog She noted that the Board needed to define an asset in the Conceptual Framework and then at the standards level determine whether what was being looked at for example goodwill met the definition and added that the Conceptual Framework was not the place for this determination to take place Another Board member suggested that the examples in the paper should be used to stress test the definition and characteristics but should not be included in the Conceptual Framework She cautioned about using the Conceptual Framework as a place to tidy up things that had not made it into standards If the Board determined in performing this exercise that there was something missing from a standard they should take a note of it and address it when they next looked at the standard Another Board member also cautioned about including examples in the Conceptual Framework of items that the Board believed were unclear at the standards level so that in effect the Conceptual Framework was being used to plug a gap in the standards The Technical Director agreed with previous comments that the examples of economic resources should not comprise a list of standards level decisions He also noted that there were some general principles included in paragraph 3 5 that should be captured and noted that the Staff would go away and look at the list and determine which items were more standards level issues and which were more general principles and only include useful illustrations of the general principles where required All Board members agreed with this approach 2 ECONOMIC BENEFITS A Board member commented on a point mentioned in the Agenda Paper which noted that a number of respondents had asked for more detailed guidance on the notion of economic benefits He asked how the Staff had responded to these requests as this was not discussed in the Agenda Paper The Technical Director responded that the requests received were not very specific and accordingly the Staff did not see any obvious reason to add more guidance He noted that the discussion in IFRS 15 was a relatively high level discussion and that it seemed strange to add more than that in the Conceptual Framework He further noted that the Staff were not aware of any obvious areas of guidance that could be added that would be helpful at the Conceptual Framework level All Board members agreed with the Staff recommendation that the Conceptual Framework should include guidance on economic benefits broadly consistent with the guidance in paragraph 3 6 of the Discussion Paper and paragraph 33 of IFRS 15 3 DEPRECIATION The Technical Director kicked off the discussion on depreciation and amortisation He noted that the Board s tentative decision to change the definition of an asset had resulted in the need to change the depreciation definition so that it referred to the consumption of the economic resource bundle of rights rather than the consumption of economic benefits He drew the Board s attention to paragraph 28 of the Agenda Paper where the Staff had illustrated the underlying concepts involved He noted that the situation could be described in two different ways both of which resulted in the same practical answer One has a machine with a 5 year life and consumes the service potential of the machine as they go along and One has a series of rights and uses up the individual rights Several Board members commented that the first description was much more easily understood They noted that they believed the issue was being made unnecessarily complex by talking about rights in year one two and subsequent years They noted that this concept could be explained more simply by making reference to the consumption of the economic resource rather than the consumption of the bundle of rights year 1 year 2 etc comprising that economic resource Another Board member commented that the discussion of how depreciation would be calculated based on the bundle of rights was going to a standards level discussion In response to the above comments by Board members the Technical Director suggested that the purpose of depreciation should therefore be to depict consumption of the economic resource that constitutes an asset rather than the bundle of rights that constitutes an asset Based on the preceding discussion the decision was made to reword the question to the Board in the Agenda Paper to Does the IASB agree that that purpose of depreciation and amortisation is to depict consumption of the economic resource that constitutes an asset Thirteen Board members agreed with the revised Staff recommendation Asset and liability definitions executory contracts The Senior Research Manager began by saying that the Agenda Paper examined whether executory contract asset and liabilities should be specifically included in the asset and liability definitions of the Conceptual Framework The existing Framework did not provide concepts on this issue The Discussion Paper said that a net asset or a net liability would arise under an executory contract if the contract was enforceable The feedback received on this was generally positive The Agenda Paper for this session was focused on the nature of the assets and liabilities in executory contracts In the Staff s view the Conceptual Framework should state that an enforceable executory contract contained a right and an obligation to exchange economic resources and that the combined right and obligation constituted a single asset or liability This conclusion would be subject to a caveat such that there were situations in which an entity entered into a forward contract and where the purchaser would obtain control of the underlying before the contract was actually settled In such a circumstance an entity should gross up the rights and obligations and present an asset and a liability The Senior Research Manager went on to say that Staff did not expect these conclusions to have any significant impact on current standards as the single asset would be generally lead to an amount of zero unless the contract was onerous hence there would be no need to recognise the net asset or liability The conclusions had been discussed at the recent ASAF meeting where members had generally agreed that a clearer concept was needed and that a single item be recognised However the ASAF members had had mixed views as regards the Staff s conclusion for justifying the single asset or liability The Staff recommended that the Conceptual Framework should include concepts that explain the nature of the assets and liabilities It should state that the combined right and obligation to exchange economic resources constituted a single asset or liability The Senior Research Manager asked whether the Board agreed with this recommendation One Board member asked how a single asset or liability would be distinguished from a forward contract He asked whether an executory contract could be seen as a forward or a series of forwards The Senior Research Manager agreed that a plain vanilla forward would be an executory contract The Board member asked whether this assessment would sustain when looking at executory contracts in the truest sense of their meaning i e none of the parties had performed and no consideration had been exchanged He said that one party paying a premium for the forward could be seen as performance The Senior Research Manager confirmed that this would not be a wholly executory contract but the conclusions in the paper would extend to contracts where the parties had partially performed The key principle was that there was still an exchange that had to occur The Board member also struggled with the reference in the Agenda Paper that certain forwards might give the purchaser control of the resource and others might not The Senior Research Manager said there were forwards that looked executory but in fact were not One example would be a sale and repurchase agreement After the sale had occurred the repurchase agreement looked like an executory contract However in that example the seller would have never derecognised the asset so the repurchase could not be an executory contract as the seller had retained control over the underlying She conceded that these kinds of contracts were rare and not the general situation Another Board member asked whether there were other examples The Senior Research Manager said that long term construction contracts might be an example where there was a contract to buy an asset at a later date but the purchaser was gaining control over the work in progress during construction The Board member doubted that anything would be accounted for during the construction phase The Technical Director conceded that he had trouble himself thinking of another example especially in a stand alone situation which is why that had come up with the example of a sale and repurchase Another Board member felt that recognition of an asset or a liability should always be linked to a past event He therefore struggled with recognising assets and liabilities from an executory contract whether as one single asset or liability or as an asset and a liability at the same time Commenting on the previous issue of obtaining control a Board member said that he agreed that the purchaser might control an underlying asset in a forward contract He asked whether Staff had considered what happened if the purchaser did not control the underlying asset but was economically compelled to buy the asset for example a retailer who needed to buy the inventory from a supplier The Senior Research Manager confirmed that it was considered to some extent and said that the supplier might no longer have control over the asset either especially if the asset was customised Another Board member had a comment regarding the outlined possible approach for measurement In the Agenda Paper Staff had stated that the IASB might decide that a particular standard should apply the same measurement bases for executory contract assets or liabilities as it specified for the assets and liabilities that arose when one of the parties subsequently performed its obligations and the contract was no longer executory He asked whether that meant that interest rate swaps could be measured at cost as an interest rate derivative was effectively the delivery of a fixed interest security that could be eligible for cost measurement The Senior Research Manager said that not every standard needed to follow the suggested approach The Board member asked whether this meant a departure from the Framework The Senior Research Manager negated that as the Framework had the overall objective of providing most reliable information When asked whether they agreed with the Staff s recommendation that an enforceable executory contract contained a right and an obligation that constituted a single asset and that a forward contract normally gave the right to buy the underlying resource not the resource itself 13 of the 16 Board members agreed The Senior Research Manager finally asked the Board whether they agreed with the Staff recommendation not to include the measurement of executory contracts in the Conceptual Framework All Board members agreed Unit of account The Director of International Activities seconded from the ASBJ reminded the Board that the IASB s preliminary view in the Discussion Paper had been that unit of account should be decided at a standards level Many respondents had agreed with the preliminary view but some respondents had asked for a more detailed discussion of the unit of account The Staff recommended that the Board confirmed its preliminary view in the Discussion Paper i e the Framework should describe possible units of account and include a list of factors to consider when determining the unit of account but should not rank the priorities of the factors The Director then opened the floor for discussion One Board member said that the IASB could make explicit in the Framework that there was no single unit of account for all standards and that the unit of account for recognition and measurement might differ in some cases Also it could be added that the unit of account would not offset assets and liabilities but was usually either an asset or a liability which could be aggregated for presentation purposes which would not be a unit of account issue A fellow Board member picked up a reference from the Agenda Paper that some respondents wanted the Conceptual Framework to commit the IASB to explain in the Basis of Conclusions to individual standards what unit of account it had selected and why He asked the staff how they intended to respond to that The Director said that they agreed with the general idea but did not see the need for requiring it to be in the Conceptual Framework The Chairman called a vote on the Staff s recommendation all Board members agreed Presentation and disclosure communication aspects The Assistant Technical Manager opened the discussion on presentation and disclosure by highlighting that the Disclosure Initiative was looking into communication aspects of presentation and disclosure as well Therefore in the Agenda

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    the staff brought the notion of a past event back into the definition All Board members agreed that the term present should be retained in the proposed definition of a liability and that the term present should be added to the proposed definition of an asset as proposed in the Discussion Paper Fourteen Board members agreed that the phrase as a result of past events should be retained in both the definition of an asset and the definition of a liability Recognition This agenda paper was devoted to recognition The paper recommended that the Conceptual Framework should not include explicit recognition criteria Instead it should provide a narrative discussion of the thought process to go through in making recognition decisions along the lines indicated in paragraph 19 of the paper The Technical Director introduced the paper and asked the Board whether they had any comments on the paper and whether they agreed with the staff recommendations in the paper Several Board members challenged the thought process idea set out in paragraph 19 of the paper They noted that just describing a process was too unreliable a way of providing guidance and asked the staff to come back with something that looked more like criteria but that also had some sort of override built into them Another Board member observed that there was no ranking of the items in paragraph 19 b and noted that because of this it could be read as if one item is not satisfied the asset or liability is not recognised She noted that for example in the case of a difficult to measure Level 3 financial instrument there may be no existence uncertainty and good probability of an inflow of economic benefits but the instrument may be difficult to measure and noted that this should not be a reason for not recognising it She added that the only situation where it should not be recognised would be if recognising it would provide less relevant information than no number at all There was a lot of discussion with respect to whether or not the probability threshold should be removed from the Conceptual Framework Some Board members agreed with removing the probability threshold from the Conceptual Framework One Board member noted that the current definition raised questions about how much uncertainty there had to be in order for an asset or a liability to be recognised or not and did not deal with a minimum threshold He added that by taking probability out of the Conceptual Framework and making it a standards level decision better guidance and specificity would be brought to the standards the IASB would write and assets and liabilities that should potentially be recognised would not be ruled out on an initial basis Another Board member also shared this concern and noted that non recognition should be a very high threshold A further Board member also raised the issue of different interpretations of probable in different jurisdictions One Board member noted that he preferred to retain probability in the Conceptual Framework as a fall back position rather than ending up in a situation where everything had to be recognised unless a standard said otherwise Another Board member suggested retaining probability in the Conceptual Framework and providing exemptions as to why in certain circumstances there would be exemptions from it noting that this would be easier than having the question in every standard Another Board member was concerned with removing probability from the recognition criteria because of the implicit or explicit message the Board might be sending that all uncertainty could be dealt with as a measurement issue and noted that it also raised concerns with respect to the requirement to search for everything possible A further Board member also expressed concern that if expected was removed from the asset definition and probability was removed from recognition it could be interpreted as anything goes when recognising assets When called to a vote nine Board members agreed with the staff recommendation Elements Approach to defining income and expense This agenda paper discussed the approach to defining income and expense In the paper the staff recommended that the Conceptual Framework should continue to define income and expense by reference to changes in assets and liabilities The Technical Director introduced the paper and asked the Board whether they had any comments on the paper and whether they agreed with the staff recommendations in the paper There were no significant comments raised by Board members Fifteen Board members agreed with the staff recommendation Reporting entity General The agenda paper for this subject dealt with various issues related to the reporting entity The following subjects were addressed in the paper description of a reporting entity control of an entity joint control and significant influence boundaries of a reporting entity unconsolidated financial statements and consolidated financial statements and combined financial statements A staff member introduced the paper and asked the Board whether they had any comments on the paper and whether they agreed with the staff recommendations in the paper One Board member suggested clarifying in the wording that unincorporated entities or portions of unincorporated entities could qualify as reporting entities She also commented with respect to combined financial statements and wondered whether it would be beneficial to add a high level comment in the Conceptual Framework that addressed some of the concerns about combined financial statements and what should be included in combined financial statements She suggested that language be added along the lines of If it is not the whole of a legal entity one needs to determine whether it gives a true and fair view of the activity it purports to represent Another Board member expressed concern that a preparer could potentially prepare financial statements omitting the bad parts that would still be IFRS compliant because of the lack of guidance about what a portion of an entity was or was not Another Board member noted that he did not believe the chapter was even necessary He noted that he favoured a brief discussion on the topic in the introduction to the Conceptual Framework Another Board member noted that the paper stated that when an entity reported on an unconsolidated basis it should also report on a consolidated basis or at least indicate how such information could be found He pointed out though that the same requirement did not exist when an entity reported as a portion of an entity He questioned why if unconsolidated financial statements were misleading when not accompanied by consolidated financial statements the financial statements of a portion of an entity would not be misleading absent the description of the full entity Another Board member questioned whether if an entity chose or was required to present general purpose financial statements that those financial statements would necessarily have items that met the definitions of assets or liabilities She noted that the definition of an asset had the notion of control and noted that often a portion of an entity would not control the assets the whole entity had assigned to it and questioned whether it should be made clear that just because a portion of an entity qualified as a reporting entity it did not mean that any assets or liabilities could be reported and that the assets and liabilities reported still needed to meet the Conceptual Framework definitions Another Board member pointed out that there was no guidance in IFRSs around what a preparer of a portion of an entity should do and accordingly that he did not agree with the inclusion of a portion of an entity in the definition of a reporting entity The Board members voted on the 7 recommendations set out in the paper as Questions 1 through 7 Question 1 Thirteen Board members agreed with the staff recommendation Question 2 Twelve Board members agreed with the staff recommendation Question 3 All Board members agreed with the staff recommendation Question 4 The Board did not vote on this recommendation as the recommendation was considered redundant as if it could be accepted that an entity had to prepare consolidated financial and could also prepare unconsolidated financial statements it would not be OR but both Question 5 Thirteen Board members agreed with the staff recommendation Question 6 Eleven Board members agreed with the staff recommendation Question 7 Twelve Board members agreed with the staff recommendation Reporting entity Perspective This agenda paper was about the perspective from which financial statements should be prepared The staff recommended that the IASB confirm its view that financial statements should be presented from the perspective of the entity as a whole A staff member introduced the paper and asked the Board whether they had any comments on the paper and whether they agreed with the staff recommendation in the paper One Board member made reference to the discussion in paragraph 29 of the paper that states that presenting financial statements from the perspective of the entity as a whole does not mean that the information needs of the parent entity s shareholders would be ignored He believed that a much more positive statement was needed with respect to the importance of the information relevant from the perspective of parent company shareholders and that financial statements should provide them with the information required to understand their position and to make decisions He noted that the information required to enable common shareholders to determine the impact that other equity holders had on their returns was currently poorly communicated and further added that he believed that if the parent company shareholder perspective was more prominent in the Conceptual Framework it may have led to more prominent information being presented about some of the other classes of equity in past projects Several other Board members noted that they agreed with the point raised by the previous Board member and one Board member added that in addition to other equity claimants another class of capital providers that needed to be addressed was lenders He further noted that a major shortcoming of the entity perspective was that it treated all classes of equity holders the same and caused leverage ratios such as debt equity to be understated because a non controlling shareholder was not the same as a shareholder of the parent company but gave the perspective that they were He added that accordingly it was important that supplementary information was provided The Chairman suggested that the staff looked into the concern raised in the above discussion Fifteen Board members agreed with the staff recommendation Going concern In the next agenda paper the staff presented its proposals for incorporating the going concern assumption into the revised Conceptual Framework in the light of the feedback received on the IASB s Discussion Paper The staff recommended that the going concern assumption should be treated as an underlying assumption The revised Conceptual Framework should include the current description of the going concern assumption with the amendments suggested in paragraph11 of the agenda paper the IASB should not provide additional guidance on the going concern assumption in the Conceptual Framework the IASB should not address guidance on the preparation of financial statements by entities that are not going concerns as part of this project and the IASB should not address additional disclosures about going concern as part of this project A staff member introduced the paper and asked the Board whether they had any comments on the paper and whether they agreed with the staff recommendation in the paper One Board member commented with respect to the choice of words in the amendment to the description of the going concern assumption and suggested that cease trading could be replaced with cease operating as he believed trading was not as easy to understand However another Board member highlighted the fact that the staff had stated in the paper that the reason for using the words cease trading was to align with the wording in IAS 1 and IAS 10 Another Board member referred to paragraph 7 of the paper which summarised feedback received on the Discussion Paper and noted that several of the points were valid concerns but should be addressed at the standards level Accordingly she agreed with the staff recommendation not to address the concerns in the Conceptual Framework project The Board member also raised the issue of the impact of the going concern assumption on other areas of the Conceptual Framework such as the link between the going concern assumption and identifying a present obligation and noted that she believed there were several areas where more could be done to articulate how one should consider the going concern assumption when reaching certain decisions Fourteen Board members agreed with the staff recommendation Stewardship This paper was devoted to the question whether Chapter 1 of the Conceptual Framework should give more prominence to the idea that financial statements should provide information to help users assess the stewardship of management Four approaches are discussed in the paper Approach 1 Do nothing Approach 2 Include an explicit reference to stewardship Approach 3 Increase the prominence of stewardship within the overall objective of financial reporting Approach 4 Treat stewardship as an additional objective of financial reporting separate from decision usefulness The approach recommended by the staff is Approach 3 The Technical Principal introduced the paper and asked the Board whether they had any comments on the paper and whether they agreed with the staff recommendation in the paper One Board member noted that he agreed with Approach 3 however he did not agree with the comment in the paper that the information needed to assess the stewardship of management was separate from the information needed to assess the prospects for future net cash inflows to the entity He noted that use of the word separate indicated the existence of two different sets of information which was not accurate given that a lot of the information used to assess the two criteria would be the same Another Board member expressed concern that Approach 3 could be read as two criteria that had to be met in order for the overall objective to be met He questioned whether information that did not meet one of the criteria would not satisfy the overall objective and whether this could affect measurement or presentation The Technical Principal responded that the idea of the recommended approach was not to create separate objectives but to have the overall decision usefulness objective as overarching objective and acknowledge that information would be needed to assess future cash flows and information would be needed to assess stewardship of management In many cases they would be similar sets of information in some cases they might be different and preparers should look at providing that information if they believed it would be useful to users The Chairman pointed out that in the current Conceptual Framework stewardship was submerged into the goal of estimating future cash flows He noted that there was a 90 overlap between the two goals and that he strongly supported the proposal to increase the prominence of stewardship as this was one of the sets of information investors wanted Another Board member suggested that in order to address the fact that a lot of the information used to assess the two criteria would be the same a separate paragraph could be included as OB5 that stated that the information that was useful to assess the prospects for future net cash inflows to the entity was also useful for assessing stewardship and also state the additional information that could be useful to assess stewardship A Board member wondered whether stewardship and resource allocation decisions could ever lead to different recognition and measurement The Technical Principal noted that additional information could be needed to enable the assessment of the stewardship of management and noted that she could not see any situation where a conflict would arise Another Board member questioned whether if the Board agreed with Approach 3 the objective of the measurement chapter would be changed The Technical Principal responded that the staff had not gone far enough on the measurement chapter to know the direction that would be taken She commented that some of the feedback received on the measurement objective was that it was not particularly useful and that the staff may ask the Board whether an overall measurement objective was needed at all She further added that if it was agreed that an overall measurement objective was needed that it would need to be ensured that the wording was consistent with the final wording in Chapter 1 Fifteen Board members agreed with the staff recommendation Reliability The next agenda paper discussed whether a reference to reliability should be included in Chapter 3 of the Conceptual Framework The staff did not recommend Replacing the qualitative characteristic of faithful representation with reliability Including reference to reliability as either an additional qualitative characteristic or as an aspect of either of relevance or faithful representation The Technical Principal introduced the paper and asked the Board whether they had any comments on the paper and whether they agreed with the staff recommendation in the paper A number of Board members noted that they supported the staff recommendation One Board member noted that she supported the staff recommendation particularly for the reason set out by the staff in paragraph 24 of the paper with respect to the potential for tension between a difficult to measure item and the relevance of that item Another Board member noted that although he supported the staff recommendation he was concerned that the removal of the word reliability had resulted in some people misunderstanding or intentionally misunderstanding that IFRSs were not reliable He noted that in order to avoid such intentional misunderstanding or criticism the Board could introduce wording around credibility He noted that the fact that financial statements should be credible was a key concept that should be acknowledged in the Conceptual Framework not in Chapters 1 or 3 but perhaps in the introduction or preface Several

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  • Conceptual framework
    a liability as debt and items labelled as equity as capital He suggested that a third category approach should not be ignored now The Chairman noted that he believed a binary approach was necessary noting that investors should know when push comes to shove whether the instrument they had invested in was an instrument of last resort or whether they were one of the creditors to the entity Another Board member agreed with the above comment made by the Chairman In response to the comments made by previous Board members who favoured introducing some sort of third category approach she noted that instruments were on such a complete spectrum that whether there were two three or twenty categories there would still be users who would complain that an instrument was not in the category they thought it should be in She noted that this was why she agreed with the comments made by a previous Board member that the Board needed to look at ways other than classification to catch some of the nuances of certain instruments for example through presentation the statement of changes in equity or disclosures Another Board member noted that although he had some sympathy for the arguments for a third category approach he agreed with a binary classification approach He noted that he liked the approach set out in paragraph 30 of the staff paper with respect to further developing the objectives of depicting cash leverage and depicting return leverage noting that those two aspects as well as the notion of dilution and wealth transfer were what users were interested in The Board needed to find a way to depict those effects throughout the financial statements He also believed as noted by a previous Board member that instruments settled in own shares presented a problem and that such instruments should be liabilities He suggested that a principle the Board could investigate in when determining what constituted a liability was whether cash leverage returns leverage or both were created by the instrument noting that instruments settled in own shares would be captured in the definition of liabilities as they created returns leverage even though not cash leverage He further noted that employee stock options that created cash leverage but arguably negative returns leverage because they were risk absorbing would be liabilities Further where there was an instrument with negative returns leverage or wealth creation there was clearly something else going on that needed to be explained in the financial statements This was why he favoured the inclusion of statement of changes in equity and wealth transfer type of information in financial statements The Vice Chairman noted that he also supported the binary approach and agreed with the staff recommendation in the paper He noted that he was disappointed with the responses received on the Discussion Paper in relation to updating measurements of equity claims and recognising such updates in the statement of changes in equity He noted very little support for the suggestion and questioned whether people had considered and or understood it properly He suggested the Board had another go with this in the Exposure Draft noting that it did have a lot of strengths in sorting out the issue He further noted that he did not support any variations of the liability or equity definitions for other entities or structures for example cooperatives or partnerships Another Board member questioned whether the Board needed to perform an effect analysis of all proposals to determine whether there may be any unintended consequences of going down a route that is very different from current practice for example introducing a mezzanine approach Another Board member responded to the point raised by the previous Board member noting that the idea behind the conceptual framework was to set a platform He added that the place to consider any effect analysis or impact was in the application at the standards level In response to the above discussion the Technical Manager pointed out that the staff would be working on the research project simultaneously which would enable examination of the consequences of applying concepts at the standards level He further noted that the analysis could be performed within the context of the research project Another Board member commented on paragraph 31 of the staff paper noting the conciseness of the recommendation He noted that there seemed to be a balancing act between a having a clear definition and the level of application guidance needed Another Board member noted that he also favoured a binary approach noting as commented by previous Board members that the Board should use the statement of changes in equity or other means as a way to solve some of the issues rather than introduce a third category He believed that using examples to educate would be helpful Initial Strategy Measurement The Technical Principal summarised the comments from constituents saying that there appeared to be high level support for the proposals However as many respondents had raised questions as to the details as well as concerning the approach staff had put together three possible approaches to the measurement section of the conceptual framework Exposure Draft as follows Approach 1 do not develop a measurement section of the conceptual framework Exposure Draft and start a research project on measurement Approach 2 build on the proposals in the Discussion Paper modified in the light of feedback received and Approach 3 include high level guidance on measurement in the conceptual framework Exposure Draft and start research work to develop more detailed measurement concepts She asked the Board to indicate which of these approaches they would prefer The approach recommended by the staff is Approach 2 A Board member noted he was confused with respect to what Approach 2 was noting that what was set out in paragraph 23 b of the staff paper appeared quite high level in comparison to what was included in the Discussion Paper in particular in relation to how assets and liabilities contributed to future cash flows as noted in paragraph 9 b of the staff paper The Technical Principal responded that the intention with Approach 2 was to cut back on a lot of what was in the original Discussion Paper and in particular the discussion of the implications of the approach on different types of assets and liabilities She agreed with a lot of the comments that were received that the Discussion Paper was straying into standards level detail She further noted that the staff saw Approach 2 as being a much higher level approach than what was suggested in the Discussion Paper The Board member asked whether there would be a principle that the Board might use to decide when a particular measurement basis should be used The Technical Principal responded that the staff would explore whether there could be a principle that could be used when selecting measurement bases Another Board member said he liked Approach 2 because it was a high level approach but at the level of detail needed He thought that it would provide the guidance needed when selecting a measurement approach at the standards level However he asked what the difference between Approaches 2 and 3 was He acknowledged the comments received that further research should be performed in this area however he noted that this was an area that was common in accounting literature and accordingly the Board should not devote its resources to more research on measurement at this stage The Technical Principal responded noting that the main difference between Approaches 2 and 3 was the commitment to research that would be made under Approach 3 She further noted that the staff would like to explore whether there would be some sort of principle that could be used in selecting a particular measurement basis the point raised by the previous Board member and that this would be performed under Approach 2 Under Approach 3 the staff would definitely not go down that route Based on the response provided by the Technical Principal the Board member confirmed that he definitely preferred Approach 2 The Technical Principal further added that Approach 2 would not stop the staff from looking at any of the other outputs from the research work or standards level projects noting that if something came out of those activities that the staff thought could be usefully included in the conceptual framework it would be taken into consideration Another Board member noted that he agreed with the staff recommendation and that in his opinion Approach 2 was the best approach of those discussed in the staff paper He believed that one of the best things that could come out of discussion on measurement was not just a description of the measurement bases but a principle as to when a measurement basis would be more appropriate and sound He liked what the Discussion Paper did in this respect and he felt that how an asset contributed to future cash flows or how a liability would be settled were the most relevant criteria that would be used to make that selection He noted that one of the biggest concerns of investors over the years had been the use or introduction of measurement bases to the exclusion of information about others He therefore felt that the discussion on measurement needed to deal with how assets contributed to future cash flows because that was the central issue investors were focused on He emphasised that disclosure of value was relevant at all times because it always affected an asset s ability to contribute to future cash flows He added that he would support use of the business model in selection criteria Another Board member noted that she was supportive of Approach 2 from the perspective that this approach recognised that measurement was an important missing element in the conceptual framework currently She encouraged making progress in this area even though the output may not be as fully developed as other sections of the conceptual framework She suggested that rather than focusing on describing outcomes identifying different measurement bases that are really labels that had been attached to instructions for how to measure items the Board should take a step back and try to focus more on the components of a measurement and the drivers for when these would be updated She suggested identifying the standard components that all measurement bases have such as cash flows time value of money etc to then discuss why one might want to update some or all of these components upwards or downwards She further noted that the factors that would drive the decision whether or not to update the estimate of cash flows or reset a discount rate would be factors such as how an asset was going to be used or how a liability was going to be settled The Chairman noted that he strongly agreed with the comments made by the previous Board member He noted that the Board would already have gained a lot if it came to a very systematic description of what the different measurement bases could achieve He believed there was a sliding scale of components of value that a specific measurement basis would want to update adding that historic cost was the most limited and full fair value the most comprehensive way of updating value He noted that all the separate components of value that existed and that would be updated by different sliding scales of measurement bases should be analysed Some criteria should be developed for why it would be likely that for certain types of information one would be looking more to historic cost for others to full fair value and for the rest somewhere in between He felt that if the Board could do that in a much more systematic way than in the Discussion Paper a lot could be achieved Another Board member noted that he disagreed with the comment made by a previous Board member that the Board should not devote resources to undertake more research on measurement He noted that measurement was such a fundamental concept that there should almost be permanent research on measurement He drew attention to the fact that many of the research projects undertaken were predominantly about measurement He gave the examples of the discount rate and equity method projects noting that he believed the Board should emphasise the research that was performed on an ongoing basis of which measurement was a fundamental element Another Board member noted that he agreed with the staff recommendation in Approach 2 He pointed out that the Board was not only developing the conceptual framework for its own use The area of measurement was of more interest to preparers than other areas as there was very little written conceptually about measurement He encouraged the Board to keep this thought in mind as the measurement section was developed He further referred to the disadvantages of Approach 2 listed in paragraph 25 of the staff paper noting that he recognised the points but did not believe they should be listed as disadvantages Specifically in relation to the disadvantage at 25 b that it could tie us into concepts that we may subsequently want to change he noted that this was the case with every project the Board undertook and accordingly should not be listed as a specific disadvantage here Another Board member noted that she also agreed with Approach 2 She said that it would be most helpful for the Board moving forward in standard setting if as much work as possible could be done in setting out the things that needed to be thought about when deciding which measurement basis would be the most appropriate in different circumstances She noted that the Board should definitely look at the role of business model in selection criteria but cautioned about the need to be careful in how the term was used She referred to the confusion caused by the inclusion of business model in IFRS 9 noting that it had been used in a different way to what the Board had intended Another Board member commented on the fact that a lot of the dialogue in the Discussion Paper around various measurement bases dealt with the cost of going through the process of coming up with the measurement He believed it was important for the Board to develop more rigour around that concept as it tended to be used as a smoke screen for saying why something should not be done even though it might provide relevant information He further noted that if one owned an asset one would take on the responsibility of measurement of that asset upon acquisition an entity had a responsibility of knowing what the value of that asset was every time it reported a balance sheet He further noted that the Board needed to examine very closely the issue of cost and the types of costs it is referring to before being able to say that cost is a balancing act with benefit In response to the comment made by the previous Board member the Chairman noted that he was not sure how far into this issue the Board could get within the context of the conceptual framework project However he noted that cost versus benefit was extremely important in the choice of a measurement basis and so was the leeway for possible abuse of measurement bases especially in cases where this was highly vulnerable to subjectivity He believed it was important and should be considered Initial Strategy Profit or loss and other comprehensive income The Senior Technical Manager provided some background on the presentation of profit or loss P L versus other comprehensive income OCI summarising the key messages received on the Discussion Paper This feedback had led the staff to develop three alternative approaches on the use of P L and OCI for the upcoming Exposure Draft as follows Approach 1 do nothing in the conceptual framework for now but undertake a research project on performance reporting and consider the use of P L and OCI in that project Approach 2 provide high level principles in the conceptual framework and do not attempt to draw a conceptual line between P L and OCI and Approach 3 fine tune and finalise the specific proposals included in the conceptual framework Discussion Paper The Board was asked whether they agreed with the staff recommendation to pursue Approach 2 The Chairman opened the conversation noting that from his reading of a number of the comment letters received on this issue he believed that many constituents underestimated the importance of decisions already taken by the Board in the Discussion Paper Firstly he noted the clear choice for P L as a key performance indicator which was different from the previous preference of the Board for a single statement of comprehensive income He believed it was a very realistic choice because of the fact that the P L was so widely used by the markets for PE ratios EPS etc He noted that the previous preference of the Board had arisen partly from the Board feeling uncomfortable that what was being put into OCI would be disregarded if comprehensive income was not looked at as a whole Secondly he noted the decision that OCI should only be used if it enhanced the relevance of the P L a principle that if taken seriously would serve as a break on the possible use of OCI He noted the paradox that a lot of people who liked P L were often quite eager to put items in OCI because they did not like the outcome if the items went through P L He made reference to the informal principle that was developing that if an item of income was so important that it could lead to bankruptcy of a company referring to the case of employee benefits in the U S it should probably not go through OCI but through P L He further noted that in reading

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  • Conceptual Framework
    member noted that in the discussion paper it was proposed that the paragraph on going concern be retained and acknowledged that it was difficult to know where in the Conceptual Framework to place it Another Board member noted that 95 of the paper discussed liabilities and asked why there was such a focus on the liabilities side was it because people felt there was a need to enhance the liability definition or was it because people were happy with the asset definition The staff member noted that it was the liabilities side where the most practical problems arose in practice Coming back to the issue that was raised earlier in the discussion by a Board member another Board member commented on the relationship between going concern and liabilities He noted that going concern was a fundamental principle in preparing financial statements and it had two consequences 1 the premise under which assets were valued and 2 the impact of 1 on liabilities The member noted that accordingly the placement of going concern could be linked with the discussion on when to recognise a liability or how to measure an asset A further Board member noted that it was important not to underestimate the importance of articulating what they meant by constructive obligation and economic compulsion For example a lawyer would only consider legal obligations and therefore this material needed to be developed well Equity Paper 10F This paper provides a summary of the feedback received on the definition of equity in the Discussion Paper A Board member commented on paragraph 17 of the staff paper that discusses the suggestion raised by some respondents that instead of making a binary distinction the statement of financial position should depict and describe the claims as a continuum Paragraph 17a then states that by presenting the claims as a continuum any distinction would be at the discretion of the users of the financial statements according to their specific needs He asked whether this meant that on the credit side there was no distinction The Director of Research responded that the point being made there was that these things were a continuum and it could be very difficult to draw any line Maybe the best thing to do was not to draw a line at all but to disaggregate and let users decide how to interpret the information The Board member noted that there was an interaction between the mezzanine approach and the strict liability approach with respect to the fact that in both approaches there was the potential for users to decide what was included in equity He noted that secondary equity under the strict obligation approach would be included in the mezzanine and the mezzanine could be treated at the discretion of users Accordingly he suggested that the Board could look further into this concept Another Board member made the comment that in regards to the idea of having three categories rather than two the Board seemed to be constrained because they wanted to have only two categories in the statement of financial performance He noted that the Board should not be opposed to the idea of having three categories because of the current form of the statement of financial performance although he acknowledged that this would become difficult if there were more than three categories The Director responded that the mezzanine idea did not necessarily have to be a third category it could be a subcategory within one of the two existing categories Another Board member noted that the idea of a continuum or mezzanine was interesting because the Board was currently trying to fit things into either liability or equity classifications however there were many hybrid instruments around now However she questioned how much easier it would be to define three categories than two she also questioned how the Board would get enough information content across so people would understand the concept of a continuum or mezzanine and what it would mean in terms of the nature of claims etc The Director noted that when they spoke to users about this topic they were most interested in potential dilution and classification was not really providing them with what they needed to know Users were wanting more disclosure on what sort of dilution happened in different circumstances they wanted more a scenario analysis than just a straight classification which would come from disclosures The Director acknowledged that current disclosures in this area were underdeveloped noting that not as much attention had been paid to this area as would have been if it had been included in a separate standard and added that it might be something we might want to look at Another Board member noted the strong desire from users for more information about claims and how the equity pool residual would be divided up in various scenarios She noted that this might be beyond what the Board could deliver in this project and noted that users had commented that even just being provided with the workings for EPS would be an improvement in the information they currently had She acknowledged that this would be standards level detail and so favoured taking a strict obligation approach and including a statement in the Conceptual Framework with regards to the importance of information about claims of different holders classified as equity The same Board member further noted that if the focus was more on how to enhance information about changes in claims on recognised equity this could take some pressure off classification She cautioned about the limitations of using a continuum from a disclosure perspective She further noted with respect to the idea of keeping things high level that the Board should identify a couple of key issues that would be a challenge that should be addressed at a standards level in part to make it clear that the Board was not addressing these issues in the Conceptual Framework She gave the examples of 1 gross vs net presentation when one had a

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  • IASB Chairman and Senior Technical Directors’ reports
    IASB re deliberations had not begun EFRAG had presented its Bulletin on prudence and its place in the conceptual framework There had been broad agreement among ASAF that prudence should be discussed with several important provisos These included the absence of bias no return of hidden reserves cookie jars and articulating the concept in such a way that it was not contradictory to the principle of neutrality Moving to the leases project directly he noted that a majority of users want leases on balance sheet but it was also clear that analysts would probably continue to make their own adjustments and that these often over estimated the amount of leverage in the balance sheet Recent decisions on financial instrument impairment had clarified the threshold between the good book and the bad book and had also clarified the unit of account in this situation In addition the IASB had stated explicitly that considerations such as loan to value and unemployment indicators must be taken into account when assessing impairment It was not appropriate to rely solely on delinquency He noted that the FASB continued to pursue a single measurement method but was looking further at the timing of recognition It was obvious from feedback received so far that respondents are unhappy about recognising 100 lifetime losses on Day 1 Revenue recognition a couple of hiccups had arisen as a result of drafting but Mr Hoogervorst was confident adamant that re deliberations would be complete by the October IASB meetings Comments on the insurance contracts ED close in late October and it was clear that the IASB would not be able to please everyone in all countries The IASB was committed to finding an acceptable solution Suzanne Lloyd addressed aspects of IFRS 9 in particular removing the mandatory effective date of the Standard and the amendments related to the presentation of changes in the value of own debt In addition she noted and explained the rationale for allowing the amendments to corporate hedge accounting She gave a high level presentation on why the IASB s revisions should assist preparers to report and users understand a company s risk management policies and how the hedging strategy helps to mitigate risk Ms Lloyd noted that work on portfolio hedging continues Related Topics Resources Accounting Standards Advisory Forum ASAF Projects Conceptual Framework Comprehensive IASB project Financial instruments General hedge accounting Financial instruments Impairment Financial instruments Macro hedge accounting IAS 1 Disclosures about going concern Insurance contracts Phase I Leases IFRS 16 Revenue recognition Standards IFRS 9 Financial Instruments Other Hoogervorst Related news Reactions to the proposed amendments intended to address concerns about the different effective dates of IFRS 9 and the forthcoming new insurance contracts standard 08 Feb 2016 We comment on the IASB s proposed amendments to IFRS 4 08 Feb 2016 FEE briefing paper on the endorsement of IFRS 9 08 Feb 2016 EU endorsement of IFRS 9 now expected in the second half of 2016 04 Feb 2016 IASB issues Investor Perspectives

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  • Conceptual Framework
    from scratch A Discussion Paper is due to be released in July 2013 It will address those areas in the Framework that the IASB thinks are critical and need attention The IASB was not planning to re open the work in Chapter 1 Objectives of financial reporting or Chapter 3 Qualitative Characteristics or Chapter 2 the Reporting Entity which has been exposed but not issued Some bits will be referenced in the DP more in the ED The project is no longer a bilateral project with FASB The project is no longer a phase by phase project the DP will present all chapters Timetable is ambitious but project will deal with essentials Although no longer a joint project Ron Lott a senior FASB staff member has been seconded to the IASB on a 50 basis The FASB contributes to the project on the same basis as any other ASAF member An IOSCO representative noted that its members hear from many constituents about the role of cash in reporting performance has the company generated free cash and is it able to make distributions Other Council members asked that a discussion of prudence and the IASB s definition of the term be restored to the Framework This would take the heat off both the Framework and the IASB building in some IFRS jurisdictions Concerns over the role of the concept of stewardship in financial reporting were also important Related Topics Projects Conceptual Framework Comprehensive IASB project Related news Summary of the December 2015 ASAF meeting now available 22 Jan 2016 IASB updates work plan 22 Jan 2016 EFRAG publishes summary report for its Conceptual Framework outreach event in Brussels 12 Jan 2016 Summary of the CMAC November 2015 meeting 22 Dec 2015 EFRAG EFFAS AIAF and IASB issue summary of outreach event

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