17 November 2015

ESMA's response to EFRAG on the IASB’s EDs concerning Conceptual Framework for Financial Reporting

ESMA has published its comment letter to EFRAG in response to the IASB’s Exposure Drafts Conceptual Framework for Financial Reporting and Updating References to the Conceptual Framework: Proposed amendments to IFRS 2, IFRS 3, IFRS 4, IFRS 6, lAS 1, lAS 8, lAS 34, SIC-27 and SIC-32.

Considering the objective of the comprehensive revision of the Conceptual Framework, like EFRAG, ESMA regrets that the ED does not provide guidance on some essential issues in financial reporting which leaves the Conceptual Framework incomplete.

Like EFRAG, ESMA broadly agrees with the proposed definitions of elements in the ED but points out that the new definition of assets and liabilities, together with the new recognition and derecognition criteria might have an impact on the assets and liabilities to be recognised in the statement of financial position. Therefore, ESMA calls on the IASB to analyse the possible consequences of the proposed changes in their entirety on a broad set of potential rights and obligations that are currently not recognised in the financial statements.

While ESMA agrees with the proposed description of a ‘present obligation’ at the conceptual level, ESMA highlights the need for additional guidance at the level of individual standards that would make it operational. Furthermore, like EFRAG, ESMA urges the IASB to further explore consequences of the proposed definition of present obligation on a broad set of liabilities, such as different types of levies, restructuring plans and obligations stemming from the accounting for repairs and maintenance.

Like EFRAG, ESMA welcomes the proposed changes to Chapters 1 and 2 of the Conceptual Framework. In particular, ESMA welcomes giving more prominence to the importance of information needs regarding the assessment of management’s stewardship, in the objective of financial reporting and the re-introduction of explicit concepts of prudence and substance over form that respond to the European requests expressed after Chapters 1 and 2 of the Conceptual Framework were published in 2010. However, as ESMA agrees with the IASB that relevance and faithful representation should be identified as the two fundamental qualitative characteristics of useful financial information, it does not support the replacement of the term ‘faithful representation’ by ‘reliability’.

Contrary to EFRAG’s initial view, ESMA concludes that the proposed Conceptual Framework provides to the IASB an adequate basis for considering accounting for long-term investments and through making the management’s stewardship more prominent addresses appropriately the needs of long-term investors.

While ESMA agrees with the basis of most of the proposed concepts, additional clarifications are required before finalising the Conceptual Framework. These clarifications are required in particular on factors to consider when selecting a measurement basis and possible consequences of the proposed changes in the recognition criteria. Furthermore, ESMA is of the view that a more comprehensive effects analysis is required.

While ESMA welcomes that the ED acknowledges that the way in which an entity conducts its business activities may affect the unit of account, selection of a measurement basis as well as presentation and disclosure, contrary to EFRAG, ESMA is of the view the Conceptual Framework should not include a general discussion on the role of the business activities as the nature of entity’s business activities plays different roles in different aspects of financial reporting. Furthermore, unlike EFRAG, ESMA believes that while different aspects of financial reporting at the level of individual standards should consider the nature of business activities, this should not be the only or the primary consideration.

ESMA agrees with the existing status of the Conceptual Framework and believes that the proposed changed to the Conceptual Framework that conflict with existing standards should not automatically result in any changes to Standards. However, in case of a conflict between the [revised] Conceptual Framework and an existing standard, ESMA suggests the IASB to assess whether it needs to add that standard to its active [research] agenda and to identify ways to address this conflict. Equally, like EFRAG, ESMA does not believe that the Conceptual Framework should or from legal perspective could be subject to the endorsement process in the EU and thus be incorporated in the EU law.

Full comment letter

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