EFRAG published its draft comment letter on the CICA research paper, 'Toward a Measurement Framework for Financial Reporting by Profit-Oriented Entities'. Comments on the letter are invited by 31 December, 2012.
EFRAG welcomes the work carried out in relation to the research paper Toward a Measurement Framework for Financial Reporting by Profit-Oriented Entities, issued by the Canadian Institute of Chartered Accountants.
EFRAG agrees with the paper that stewardship should be considered in determining how assets and liabilities should be measured, and that an appropriate measurement basis should not rely on estimates with large margins of errors when applied in practice. However, EFRAG disagrees with the measurement model proposed in the paper and that measurement at Current Market Value provides the most useful information when this value is practicable of faithful representation.
EFRAG does not think that it will be possible to identify an ideal measurement basis. Instead EFRAG thinks the role of a measurement framework should be to explain the properties of various measurement bases and by reference to users’ needs provide directions on when the different properties are important. Absent detailed knowledge on how users use financial statements, EFRAG considers that implications of a measurement basis on both an entity’s financial position and performance should be considered.
EFRAG believes that in order to provide relevant performance reporting, measurement should reflect how an entity is generating its cash flows (the sources of its earnings) and be linked to actual cash flows. If purchase efficiency, for example, is an important performance driver, it may be relevant to provide information about holding gains and losses. On the other hand, if an entity is only generating its cash flows from transforming raw materials into finished goods, information about holding gains and losses on assets may be irrelevant and should thus not be presented in the income statement. In order for performance reporting to be relevant, EFRAG also thinks it is important that measurement bases of various assets and liabilities are not considered in isolation.
Finally, EFRAG thinks that a conceptual framework for measurement should work for all entities. In this respect EFRAG notes that EFRAG found it difficult to apply the distinction between operating, financing and investing activities to financial institutions such as banks and insurance companies.
Press release
Draft comment letter
© EFRAG - European Financial Reporting Advisory Group
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