22 October 2015

EBF: Comment letter on the IASB ED Conceptual Framework for Financial Reporting

The EBF agrees that the main purpose of the Conceptual Framework (CF) is to assist the IASB in developing standards that are based on consistent concepts. The EBF notes that there are several areas e.g. measurement basis, derecognition, performance reporting where the CF is not definitive and suggests that solutions will need to be developed at the standards level. While the EBF does not disagree with this approach, the EBF notes that, to meet the objectives of the CF, the IASB will need to compare the conclusions in these areas across standards and be clear why these are the same or different.

The EBF response to the 2013 Discussion Paper (DP) noted that it was not necessary to reintroduce prudence in the CF, whilst if it were to be done, it would be necessary to clearly define it and differentiate it from the regulatory concept of prudential reporting. Nevertheless, the EBF can accept prudence being included in the CF and defined as the exercise of caution when making judgements under conditions of uncertainty.

However, the EBF agrees that the concept should not be extended to include ‘asymmetric prudence’. The EBF would strongly object to asymmetry being an overarching concept. Such an inclusion would introduce bias into standard setting, where it would be assumed that gains and losses and assets and liabilities would be treated differently in all circumstances to the detriment of meeting the objectives of financial reporting in terms of providing relevant information that faithfully represents the transactions and economic situations. The EBF agrees asymmetry may be appropriate in particular situations, which are best determined at the standards level.

For example, IAS 37 ‘Provisions, Contingent Liabilities and Contingent Assets’ requires different recognition thresholds for contingent liabilities and contingent assets and IFRS 15 ‘Revenue from Contracts with Customers” requires variable consideration to only be recognised a revenue to the extent it is highly probable that it will not reverse. Therefore it is clear that accounting standards can be developed that include asymmetry when it is assessed to be appropriate in a particular situation. However, it may be that the reasons for this can be better expressed. Alternatively, a small minority of the EBF consider that including asymmetry in the definition of prudence could also serve to clarify standards development in some circumstances.

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