20 December 2013

ESMA commented on lASB's Discussion Paper, A Review of the Conceptual Framework for Financial Reporting

According to ESMA, several concepts still need further analysis and clarification with respect to their impact on financial reporting. (Includes ESMA's comment on EFRAG's response.)

ESMA agrees with the purpose of the revised conceptual framework as a single and robust basis for the IASB to develop IFRSs and notes that it is essential to have a consistent approach between the conceptual framework and the standards. ESMA believes that issuers can also use the conceptual framework if there is no IFRS for a specific transaction or event but issuers using the conceptual framework when developing a policy based on IAS 8 should always comply with the conceptual framework. ESMA believes the IASB should consider the implications whether issuers are allowed to develop accounting policies by analogy with a standard that is in conflict with the conceptual framework.

ESMA supports the amended definitions of assets and liabilities, which must largely be considered together with the new criteria for recognition and de-recognition and measurement principles that are to be applied. Overall, it is difficult to have final answers to the proposals without looking at the level of standards and assessing the impact of these changes such as the removal of reference to probability. This could be a concern as the new definitions possibly widen the number of items to be recognised in the statement of financial position subject to the prudence notion discussion.

ESMA urges the IASB to clarify the dividing line, between what can reasonably be defined as an asset or a liability of an entity and what cannot. In particular, ESMA recommends the IASB to explore and clarify that the CF will not result in the recognition of unjustifiable assets, such as for instance unsupported workforce asset, in the statement of financial position following either definition, or recognition or measurement. In addition, ESMA recommends the IASB clarifying concepts such as executory contract or conditional obligation which are included as part of the notion of present obligation. ESMA fully agrees that present obligation should not be considered as strictly unconditional.

ESMA agrees with the preliminary view of the IASB to continue to use the definition for liability as a basis for distinguishing liabilities from equity instruments. ESMA supports maintaining the definition of equity as a residual interest, agrees that the distinction should be based on the characteristics of the instruments issued and supports the strict obligation approach. However, ESMA believes that the IASB should provide explicit guidance on which types of instruments constitute primary and secondary equity claims. ESMA also encourages the IASB to explore the concept of wealth transfer and consider how to depict the potential dilution of the ownership in an entity in a way that is most useful to the users of financial statements. ESMA encourages the IASB to consider all the potential impacts of the wealth transfer notion in the financial reporting and their understandability by users of financial statements.

Regarding measurement, ESMA agrees with the rejection of a single measurement approach, as for some categories of assets or liabilities fair value will be relevant, while for others this will not be the case. In the absence of an analysis of potential consequences of revised definition on the current standards, ESMA has concerns with regards to potential recognition and measurement impacts and urges the IASB to perform such analysis.

Full comment letter

Further comment letters

Original discussion paper, 18.7.13

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ESMA also published its comment letter to EFRAG on EFRAG's draft comment letter on the IASB's Discussion Paper on A review of the Conceptual Framework for Financial reporting:

ESMA agrees with EFBAG that the IASB may decide to issue a future Standard that conflicts with an aspect of the revised conceptual framework but this departure from the CF and the reasons for that should be described in the Basis for Conclusions on that Standard.

ESMA agrees with the purpose of the revised conceptual framework as a single and robust basis for the IASB to develop IFRSs and notes that it is essential to have a consistent approach between the conceptual framework and the standards. ESMA agrees with EFRAGs view that issuers can also use the conceptual framework if there is no IFRS for a specific transaction or event but, when developing a policy as &Bowed by IAS 8, issuers should always comply with the conceptual framework. The conceptual framework should then strike the right balance, i.e. should remain at a high level to avoid the creation of inconsistencies between the conceptual framework and IFRSs while not staying purely conceptual to include useful directions.

A number of existing standards may in the future be inconsistent with the revised conceptual framework. ESMA believes the IASB should consider the implications whether issuers are allowed to develop accounting policies by analogy with a standard that is in conflict with the conceptual framework.

ESMA supports the amended definitions of assets and liabilities, which must largely be considered together with the new criteria for recognition and de-recognition and measurement principles that are to be applied. ESMA agrees with EFRAG's view that current implications on existing Standards of amending the conceptual framework should be identified at the level of the ED, so that constituents have a clearer understanding of the possible outcomes of the proposed changes. Overall, it is difficult to have final answers to the proposals without looking at the level of standards and assessing the impact of these changes such as the removal of reference to probability. This could be a concern as the new definitions possibly widen the number of items to be recognised in the statement of financial position, subject to the prudence notion discussion.

Regarding measurement, ESMA agrees with the rejection of a single measurement approach, as for some categories of assets or liabilities fair value will be relevant, while for others this will not be the case. In the absence of an analysis of potential consequences of revised definition on the current standards ESMA has concerns with regards to potential recognition and measurement impacts and urges the IASB to perform such analysis. ESMA disagrees with EFRAG on the introduction of explicit probability thresholds acting as filters. Yet, ESMA believes that removing a probability test for the definition and recognition criteria may well equate to removing a sense check that currently exists for many issuers when in practice they are deciding to recognise assets and liabilities.

Full comment letter

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