08 July 2015

EFRAG document for public consultation on the Conceptual Framework for Financial Reporting

The view presented considers that the Conceptual Framework would fail to meet European expectations as it lacks guidance, in particular on how to select a measurement and how to report performance, including what should be reported in profit or loss and when.

The IASB issued the ED Conceptual Framework for Financial Reporting (the ‘ED’) on 29 May 2015, with comments due by 26 October 2015. EFRAG has published a document where it seeks constituents’ views on the issues related to the ED. The positions expressed in the document have been reviewed and approved by the EFRAG Board as a basis for public consultation. The EFRAG Board will nevertheless pursue deliberations of the most critical issues during the comment period before forming preliminary views.

EFRAG expressed satisfaction in its response to the IASB Discussion Paper on the Conceptual Framework that the IASB had undertaken a comprehensive revision of the Conceptual Framework, decided to focus on financial statements, and adopted a pragmatic approach with the objective of providing a solution to identified problems. From EFRAG’s perspective this approach continues to be the right approach. EFRAG is aware that some other constituencies have called for the Conceptual Framework to be more aspirational in nature, and have exercised influence to set aside guidance that well illustrated the accounting model that was currently implemented in IFRS. From EFRAG’s point of view, the result is a set back from the approach in the Discussion Paper even though the analysis of measurement bases is significantly improved and has led EFRAG to be concerned that the Conceptual Framework as developed in the ED will not provide the clarity that is deemed necessary.

Having said that, EFRAG is pleased to note that the IASB has been responsive to some of EFRAG’s requests, in particular in its reconsideration of the objectives and qualitative characteristics of financial reporting. Good progress has been made in giving more prominence to the objective of stewardship and the re-introduction of prudence. EFRAG is nevertheless of the view that more needs to be done in those areas. EFRAG is not convinced that information that is relevant to support decisions to buy, hold and sell, and to support the assessment of stewardship are in all circumstances the same. On prudence, EFRAG agrees with most of the developments made in the Basis for Conclusions. However, EFRAG does not agree with the concluding remarks, and hence not with what the Conceptual Framework would say on prudence, were it to be finalised on the basis proposed.

Furthermore, EFRAG is opposed to having measurement uncertainty dealt with as part of relevance. The whole discussion on the concept of reliability originates, in EFRAG’s view, from a lack of common understanding between the IASB and some of its constituents of what a reliable measurement is. Disagreement on this means disagreement on what faithful representation is. EFRAG is not aware of any disagreement or misunderstanding of the other components of reliability, once prudence and substance over form are re-introduced. Instead of relabelling or changing the meaning of well understood concepts such as relevance and reliability, EFRAG urges the IASB to clarify the boundary of a ‘reliable estimate’. The revision of the Conceptual Framework is the ideal opportunity for this. EFRAG notes that it agrees with most of the IASB’s Basis for Conclusions on this issue. Also, re-instating ‘reliability’ as one of the two fundamental qualitative characteristics of financial reporting would be the best option from a European perspective, to ensure proper dialog and understanding with all stakeholders involved.

Finally, the ED does not provide the expected guidance on how to select a measurement basis or a conceptual foundation for the reporting of performance, including what should be reported in profit or loss and when. As indicated above, these are among the areas which have created the most contentious issues in the past: European expectations would not be met if the Conceptual Framework left decisions to be made by the IASB in the future solely guided by what the members of the IASB when an IFRS is issued would consider capable of bringing relevant, reliable and comparable information. To contribute to the work of the IASB on this issue, EFRAG has prepared a paper on profit or loss versus OCI in which it provides some views on how the distinction between these elements of performance could be made.

Comments are requested by 26 October 2015.

Full press release

Full consultation document

© EFRAG - European Financial Reporting Advisory Group