IFRS Foundation

Conceptual Framework
for Financial Reporting
4 November 2016
Matt Tilling, Director of Education

The views expressed in this presentation are those of the presenter,

not necessarily those of the International Accounting Standards Board (the Board)
or IFRS Foundation.
Copyright IFRS Foundation. All rights reserved

Session overview
Background
Objectives and qualitative characteristics
Elements
Recognition and derecognition
Measurement
Reporting financial performance

Other proposals
Case studies

IFRS Foundation

Background

Copyright IFRS Foundation. All rights reserved

Do we need a Conceptual Framework?

YES because
it supports principle-based Standards by:
providing a consistent starting point
focusing on principles rather than rules

it addresses fundamental issues:

What is the
objective of
financial
reporting?

What are assets, liabilities, equity,

income and expenses, when
should they be recognised and
how should they be measured,
presented and disclosed?

What makes
financial
information
useful?

it underpins the decisions made by the Board when setting Standards

What is it for?

It is a practical tool that assists:

The Board
to develop Standards

Preparers
to develop consistent
accounting policies

Others
to understand and
interpret Standards

It is not a Standard and does not override Standards

Aspects of some Standards may not conform with the Conceptual Framework,
eg practical expedients

Timeline

July 2013

May 2015

Discussion Paper

Exposure Draft

2017
Revised
Conceptual Framework

Approach to finalisation
What we heard

What we decided

Feedback mostly supportive

Measurement chapter needs
more guidance
Proposals on other
comprehensive income (OCI)
need more work

Build on existing proposals

Develop proposals further

Support for dealing with

distinction between liabilities and
equity in a separate research
project
Some want more research before
finalising

Address uncertain liabilities but

also undertake further research
in separate project

Develop high-level proposals on

use of OCI. Look at presentation
of financial performance in a
separate project

Finalise 2017 based on ED

What are the biggest achievements?

Recognition &
Derecognition

Uncertain
liabilities

Resolve role of
prudence and
stewardship
Guidance on
use of OCI
Measurement

IFRS Foundation

Objective and qualitative

characteristics

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Objective and qualitative characteristics

10

The objective of general purpose financial reporting is to provide

useful financial information
Relevance

Faithful representation

Relevant financial information is

capable of making a difference in a
decision made by users

Representation of relevant economic

phenomena and faithful
representation of the substance of
the phenomena that it purports to
represent
Complete, neutral and free from error

Enhancing characteristics
Comparability Verifiability Timeliness Understandability

Cost constraint

Stewardship
Exposure Draft
Give more
prominence to the
need to provide
information to
assess
managements
stewardship of
the entitys
resources

11

What we heard
Many welcomed
proposal
Some wanted
stewardship
as additional
objective
Some asked for
more guidance on
implications of
proposal
Some disagreed
with proposal

Tentative
decisions
As in ED but clarify
link between
objective of
financial reporting
and stewardship.
Resource allocation
decisions include
decisions:
to buy, sell or hold
to provide or settle
loans
needed while
holding investments

Prudence
Exposure Draft
Reintroduction of
explicit reference to
prudence (exercise
of caution when
making decisions
under conditions of
uncertainty)
No overstatement or
understatement of
assets, liabilities,
income or expenses
(ie neutral)

12

What we heard
Many welcomed
proposal
Some would like
asymmetric
prudence or
acknowledgement
of asymmetric
accounting
treatment
Some objected to
proposal because of
concerns it could
lead to bias

Tentative
decisions
As in EDinclude
reference to
cautious prudence
Rejected
asymmetric
prudence
Acknowledge
possibility of treating
assets (income)
different from
liabilities (expenses)
if provides useful
information

Measurement uncertainty (reliability)

Exposure Draft
If an estimate is too
uncertain, it might
not provide
relevant information
Trade-off against
other factors that
affect relevance
Retain faithful
representation as a
label for that
qualitative
characteristic

What we heard

13

Tentative
decisions

Some argued
measurement
uncertainty is a
factor affecting
faithful
representation

Describe
measurement
uncertainty as
factor affecting
faithful
representation

Some would like a

return to reliability

Clarify in Basis that

a trade-off can exist
between relevance
and faithful
representation
Do not relabel as
reliability

IFRS Foundation

Elements

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Elements: Definitions of assets and liabilities

Existing definitions

15

Exposure Draft

Asset
A resource controlled by the entity A present economic resource
(of an entity) as a result of past events and from controlled by the entity as a
which future economic benefits
result of past events
are expected to flow to the entity
Liability
A present obligation of the entity
A present obligation of the entity
(of an entity) arising from past events, the
to transfer an economic resource
settlement of which is expected to as a result of past events
result in an outflow from the entity
of resources embodying economic
benefits
Economic
resource

Not defined

A right that has the potential to

produce economic benefits

Elements: Liabilities

16

Present obligation to transfer

an economic resource
No practical ability to avoid
the transfer

AND

The extent of the obligation is

determined by reference to past
activities or benefits received

Definition of assets, liabilities and equity

Exposure Draft
Removal of
expected flows
Economic resource
is a right
Guidance on
present obligation
No amendments to
equity but separate
research project

What we heard
Broad support for
proposed changes
Most supportive of
expanding liability
definition to include
transfers that entity
has no practical
ability to avoid and
of decision to deal
with liability/equity
distinction in
separate research
project

17

Tentative
decisions
Confirm removal of
expected flows
instead potential to
produce/ require
Assets: economic
resource is a right
(not a right or other
source of value)
November Board
meeting: guidance

on present
obligation

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Recognition and
derecognition

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Recognition
Recognition

19

Existing criteria

Exposure Draft

Meet the definition of an asset

or a liability
Probable that any future
economic benefit associated
with the asset or liability will
flow to the entity
The asset or liability has a
cost or value that can be
measured reliably

Meet the definition of an

asset or a liability
Relevance
Faithful representation
Cost/benefit

Recognition

20

Exposure Draft

What we heard

Removal of
probability threshold
instead focus on
relevance and
faithful
representation
Cost/ benefit as third
criterion

Broadly supportive
of proposed
approach
Some believe
proposed
recognition criteria
are too subjective
and require too
much judgement
Some concerns
about removal of
probability criterion

Tentative
decisions
Confirm removal of
probability criterion
Confirm relevance
and faithful
representation as
recognition criteria
Explain need to
consider
cost/benefit
Enhance guidance
on low probability
assets and liabilities

Derecognition
Existing criteria

Derecognition None

21

Exposure Draft

Aim is to faithfully represent

both:
the entitys retained
assets and liabilities; and
any resulting changes in
its assets and liabilities

Derecognition
Broadly supportive of the proposed approach
Some expressed the view that derecognition
should mirror recognition

IFRS Foundation

Measurement

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Measurement bases

23

Measurement bases
Historical cost
Uses information derived from the
transaction or event that created
the asset or liability

Current value
Uses information that is updated to
reflect conditions at the
measurement date
Measurement based on:
Market participants
assumptions
Fair Value

Entity-specific
assumptions
Value in use (assets)
Fulfilment value
(liabilities)

Selecting a measurement basis

Relevance

Faithful representation

Others

24

Selecting a measurement basis

25

Relevance

Faithful representation

Others

Consider information produced

in both statement of financial
position and statement(s) of
financial performance
How an asset or liability
contributes to future cash flows
Characteristics of asset/liability
Level of measurement
uncertainty

Selecting a measurement basis

Relevance

Faithful representation
Free from error perfectly accurate
Accounting mismatch
Others

26

Selecting a measurement basis

Relevance

Faithful representation

Others
Understandability
Cost constraint

27

What we have heard

28

Measurement
Support for mixed measurement approach
and suggested measurement bases
Some suggested undertaking more research
before issuing Conceptual Framework or to
start a separate research project

Tentative decisions
Expand discussion of ED proposals
to provide a clearer link between the
factors to consider and the selection
of a measurement basis
Continue with mixed measurement
approach

IFRS Foundation

Reporting financial
performance

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Presentation in profit or loss

This statement is
the primary, but
not the only,
source of
information
about an entitys
financial
performance in
the period

30

Statement of profit or loss

Revenue from customers
Cost of sales

Taxes

Profit (loss) for the year

20X5

20X4

234,439

212,367

(112,764)

(106,259)

(21,546)

(20,587)

18,897

16,763

Profit or loss is a
required total or
subtotal
Rebuttable presumption that
income and expenses are
included in profit or loss

Reporting financial performance

31

Exposure Draft

What we heard

Tentative
decisions

Profit or loss is
primary, but not only,
source of information
about entitys
financial
performance in the
period
Profit or loss
(sub)total required
Rebuttable
presumption: income
and expenses are
included in profit or
loss

Half agreed with

description of
statement of profit
or loss
Many expressed a
concern that the
proposed guidance
is insufficient

Confirm proposals
except for replacing
rebuttable
presumption with a
principle that
income and
expenses are
included in profit or
loss

Many would like us

to define profit or
loss/ financial
performance

Presentation in OCI
Income and
expenses
included in
OCI only if
that
enhances
relevance of
profit or loss
in the period

32

Statement of comprehensive income

20X5

20X4

18,897

16,763

68

(51)

(2,764)

6,259

(215)

87

Other comprehensive income for the year

(2,546)

4,253

Total comprehensive income for the year

16,351

21,016

Profit (loss) for the year

Currency translation
FV adjustment cash flow hedging

Rebuttable
presumption
that income
and expenses
included in OCI
in one period
are
subsequently
included in
profit or loss
(recycled)

Taxes

OCI only for some income and

expenses from changes in current
measures of assets and liabilities

Reporting financial performance

Exposure Draft
Income and
expenses included in
OCI only if it
enhances relevance
of profit or loss for
the period
Rebuttable
presumption: income
and expenses will be
recycled
OCI only for changes
in current measures
of assets and
liabilities

What we heard
Many disagreed
with proposals on
use of OCI
Diverse views on
what should be
included in OCI
Roughly half agreed
that OCI items
should be recycled

33

Tentative
decisions
Confirm proposals
except for replacing
rebuttable
presumption with a
principle that
income and
expenses will be
recycled

IFRS Foundation

Other proposals

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Other proposals in the ED

35

Substance
over form
Executory
contracts

Income &
expenses

Presentation
and
disclosure
Reporting
entity

Primary user
Capital
maintenance

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Case studies

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Examplesassets

37

Proposed definition and key supporting concepts

An asset is a present economic resource controlled by the entity as a result of past events.
An economic resource is a right that has the potential to produce economic benefits.

In principle, each of an entitys rights is a separate asset. However, for accounting purposes,
related rights are often treated as a single asset, namely the unit of account.
For an economic resource to have the potential to produce economic benefits, it need not
be certain or even probable that the economic resource will produce economic benefits. It is
only necessary that the economic resource already exists and that there is at least one
circumstance in which it would produce economic benefits. (However, if the probability of
future economic benefits is low, the Board might decide in some cases that the applicable
IFRS Standard should not require recognition of the asset)
An entity controls an economic resource if it has present ability to direct the use of the
economic resource and obtain the economic benefits that flow from it.

Goodwill

38

Facts
An entity has an established and profitable logistics business.
Among other things, it has distribution vehicles, warehouses,
logistics management IT systems, an assembled workforce, a
recognisable brand and well-established relationships with
customers and suppliers. The business is worth more than the fair
values of the entitys identifiable assets (ie the assets that are
separable from the business or that arise from contractual or legal
rights). The extra component is the entitys goodwill. Does that
goodwill meet the definition of an asset?

Goodwill

39

Criterion

Met?

Right
Controlled by entity
As a result of past events

Potential to produce economic

benefits

Asset?

Assembled and trained workforce

40

Facts
An entity has assembled and trained a workforce to operate its
business efficiently.
Employees must give three months notice to terminate their
contracts of employment. However, employees are likely to make
their services available for longer periods. So the value of the
assembled workforce is higher than the value of the entitys
contractual right to exchange three further months service from
each employee for three further months salary.
Does the assembled and trained workforce give rise to an asset
beyond any asset arising from the entitys contractual right to
exchange three further months service from each employee for
three further months salary?

Assembled and trained workforce

Criterion

41

Met?

Right
Controlled by entity
As a result of past events

Potential to produce economic

benefits

Asset?

Examplesliabilities

42

Proposed definition and key supporting concepts

A liability is a present obligation of the entity to transfer an economic resource as a result of past events.
An entitys obligation to transfer an economic resource must have the potential to require the entity to
transfer an economic resource to another party. It need not be certain, or even probable, that the
entity will be required to transfer an economic resource, but the obligation must already exist and there
must be at least one circumstance in which it will require the entity to transfer an economic resource.
(However, if the probability of a transfer is low, the Board might decide in some cases that the applicable
IFRS Standard should not require recognition of the liability)
An entity has an obligation if it has no practical ability to avoid the transfer. An entity has no practical
ability to avoid a transfer if, for example, the transfer is legally enforceable, or if any action necessary to
avoid the transfer would cause significant business disruption or would have economic consequences
significantly more adverse than the transfer itself.
An obligation is a result of past events (and hence a present obligation) if the entity has received the
economic benefits or conducted the activities that establish the extent of its obligation. An event
establishes the extent of an obligation if it specifies either the amount of the future transfer or the basis for
determining that amount.

A court case

43

Facts
After a wedding, ten people died, possibly as a result of food
poisoning from products sold by the entity. Legal proceedings are
started seeking damages from the entity. The entity disputes that
its products were the cause of the deaths. Does it have a liability?

A court case

44

Criterion

Met?

Potential to require transfer of

economic resource to another party
As a result of past events

No practical ability to avoid

Liability?

Legal requirement to fit smoke filters

45

Facts
Under new legislation, an entity is required to fit smoke filters to its
factories by 30 June 20X1. At the end of the entitys reporting
period (30 December 20X0), the entity has not fitted the smoke
filters.
The entity could be fined for operating without smoke filters after 30
June 20X1.
Does it have a liability at 30 December 20X0?

Legal requirement to fit smoke filters

Criterion

46

Met?

Potential to require transfer of

economic resource to another party
As a result of past events

No practical ability to avoid

Liability?

Further information

47

Exposure Draft Conceptual Framework for Financial Reporting

http://go.ifrs.org/ED-CF-May2015

Conceptual Framework website

http://go.ifrs.org/Conceptual-Framework

Snapshot
http://go.ifrs.org/CFSnapshot2015

Register for email alerts

http://eifrs.ifrs.org/eifrs/Register

Questions

48