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1 Chapter 1 : Conceptual Framework for Financial Reporting The International Accounting Standards Board (Board) has today issued a revised version of its Conceptual Framework for Financial Reporting that underpins IFRS Â Standards. The Conceptual Framework sets out the fundamental concepts of financial reporting that guide the Board in developing IFRS Standards. The preferred approach will ensure maintaining IFRS compliance for for-profit publicly accountable entities, as well as address the issues identified: This has drawn attention to the more emotionally-charged issue of special purpose financial statements SPFS. Reporting entity issue The RCF entity definition of reporting determines a boundary for what economic activities need to be included in general purpose financial statements GPFS. The concern is that the inconsistency between the two definitions could result in misinterpretation, the wrong application of AASs or non-compliance with IFRS. Special purpose financial statements issue The dissatisfaction with SPFS has been building for some time as the proposition from which it was developed has diminished over the past 30 odd years. Arguably this is not best achieved with SPFS. Australia is the only country permitting entities to self-assess what type of financial statements are required where financial statements are required by a regulator. The AASB sees this as a way to contribute to the current environment of building trust and comparability through transparency. Making this happen is not easy in the current environment. It has been over ten years since the size thresholds around proprietary companies were last revised. As such, the AASB has decided that with the revision to the Conceptual Framework that now is the time to address the special purpose issue. This includes consolidation and equity accounting where applicable. For example, an entity principally holding investment properties would also need to consider the disclosure requirements in AASB Investment Property. So there is still an element of the preparer determine what to disclose. Genuine consultation process The AASB has been explicit in its communication that it is genuinely interested in feedback and views on all aspects of the consultation. The AASB is open to other suggestions. ITC 39 is the first step in the consultation process in relation to Phase 2, which will include significantly more gathering of data and research, targeted consultation and only then the issue of an Exposure Draft. The AASB has not ruled out additional tier s and is seeking comment by all as part of the consultation process. The key for the AASB will be the development of an objective criteria to determine who falls in each tier. Transitional relief One of the most significant impact of an entity currently preparing SPFS moving to preparing GPFS is the application of consolidation and equity accounting â where these have not previously been applied. The AASB is aware of the practical difficulties that such a requirement brings and is committed to providing practical transitional relief to alleviate the challenges of sourcing historical data that may either not be able to be obtained, or not reliable if obtained, in order to apply consolidation or equity accounting, as applicable. The other options considered The AASB did consider four other options for addressing the perceived issues: Operate with two conceptual frameworks indefinitely Option 3: All entities apply the RCF when it first becomes applicable Option 4: ITC 39 details each of these options together with benefits and barriers to each â and why the AASB has rejected the respective option and prefers Option 1. Next steps Read the ITC for further information and full details. Submissions relating to Phase 1 are due by 9 August. Submissions relating to Phase 2 are due by 9 November. Page 1

2 Chapter 2 : IASB updates work plan Accountancy Daily The International Accounting Standards Board issued the revised Conceptual Framework for Financial Reporting in March We have now created a quiz to help you test your knowledge and understanding of this important document. You will be asked to answer eight randomly selected questions from a. They will need to consider pertinent information from other sources as well. However, these are not considered a primary user and general purpose financial reports are not primarily directed to regulators or other parties. Information about the claims and payment requirements assists users to predict how future cash flows will be distributed among those with a claim on the reporting entity. Users need to be able to distinguish between both of these changes. This information indicates how the entity obtains and spends cash, including information about its borrowing and repayment of debt, cash dividends to shareholders, etc. Qualitative characteristics of useful financial information The qualitative characteristics of useful financial reporting identify the types of information are likely to be most useful to users in making decisions about the reporting entity on the basis of information in its financial report. The qualitative characteristics apply equally to financial information in general purpose financial reports as well as to financial information provided in other ways. The usefulness of financial information is enhanced if it is comparable, verifiable, timely and understandable. Financial information is capable of making a difference in decisions if it has predictive value, confirmatory value, or both. The predictive value and confirmatory value of financial information are interrelated. To be useful, financial information must not only be relevant, it must also represent faithfully the phenomena it purports to represent. Faithful representation means representation of the substance of an economic phenomenon instead of representation of its legal form only. Prudence is the exercise of caution when making judgements under conditions of uncertainty. Comparability enables users to identify and understand similarities in, and differences among, items. Verifiability means that different knowledgeable and independent observers could reach consensus, although not necessarily complete agreement, that a particular depiction is a faithful representation. While some phenomena are inherently complex and cannot be made easy to understand, to exclude such information would make financial reports incomplete and potentially misleading. Financial reports are prepared for users who have a reasonable knowledge of business and economic activities and who review and analyse the information with diligence. However, enhancing qualitative characteristics either individually or collectively cannot render information useful if that information is irrelevant or not represented faithfully. Reporting such information imposes costs and those costs should be justified by the benefits of reporting that information. The IASB assesses costs and benefits in relation to financial reporting generally, and not solely in relation to individual reporting entities. The IASB will consider whether different sizes of entities and other factors justify different reporting requirements in certain situations. It can be a single entity or a portion of an entity or can comprise more than one entity. A reporting entity is not necessarily a legal entity. As the project to revise the Framework progresses, relevant paragraphs in Chapter 4 will be deleted and replaced by new Chapters in the IFRS Framework. Thus, the financial statements presume that an entity will continue in operation indefinitely or, if that presumption is not valid, disclosure and a different basis of reporting are required. These broad classes are termed the elements of financial statements. The elements directly related to financial position balance sheet are: Page 2

3 Chapter 3 : IFRSÂ Standardsâ Issued at 1 January (Red Book) - Best Books of the Month - Accountant' Underlying assumption. The IFRS Framework states that the going concern assumption is an underlying assumption. Thus, the financial statements presume that an entity will continue in operation indefinitely or, if that presumption is not valid, disclosure and a different basis of reporting are required. Concepts of capital and capital maintenance Appendix A Glossary The key content of each chapter is summarised below: Status and purpose of the Conceptual Framework. It maintains that the framework does not override any specific IFRS. Chapter 1 - The objective of general purpose financial reporting. This is the first of the two chapters that were finalised as part of the joint project with the FASB in, so there are only limited changes. The chapter notes that objective of general purpose financial reporting is to provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions relating to providing resources to the entity. Chapter 2 - Qualitative characteristics of useful financial information. This is the second of the two chapters that were finalised as part of the joint project with the FASB in published as Chapter 3 in the Conceptual Framework. Again, changes are limited. Materiality is noted as an entity-specific aspect of relevance. The chapter reintroduces an explicit reference to the notion of prudence and states that the exercise of prudence supports neutrality. Prudence is defined as the exercise of caution when making judgements under conditions of uncertainty. New is also a clarification that faithful representation means representation of the substance of an economic phenomenon instead of representation of its legal form only. Chapter 3 - Financial Statements and the reporting entity. It only mentions two statements explicitly: New to the framework is the definition of a reporting entity and the boundary of a it. Chapter 4 - The elements of financial statements. The main focus of this chapter is on the definitions of assets, liabilities, and equity as well as income and expenses. The definitions are quoted below: 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. A present obligation of the entity to transfer an economic resource as a result of past events. The residual interest in the assets of the entity after deducting all its liabilities. Increases in assets or decreases in liabilities that result in increases in equity, other than those relating to contributions from holders of equity claims. Decreases in assets or increases in liabilities that result in decreases in equity, other than those relating to distributions to holders of equity claims. New is the introduction of a separate definition of an economic resource to move the references to future flows of economic benefits out of the definitions of an asset and a liability. The expression "economic resource" instead of simply "resource" stresses that the IASB no longer thinks of assets as physical objects but as sets of rights. The definitions of asets and liabilities also no longer refer to "expected" inflows or outflows. Chapter 5 - Recognition and derecognition. The Conceptual Framework states that only items that meet the definition of an asset, a liability or equity are recognised in the statement of financial position and only items that meet the definition of income or expenses are to be recognised in the statement s of financial performance. However, their recognition depends on two criteria: The framework also notes a cost constraint. New to the framework is the discussion of derecognition. The requirements as presented in the framework are driven by two aims: The framework also describes alternatives when it is not possible to achieve both aims. Chapter 6 - Measurement. Current cost is newly introduced into the Conceptual Framework as it is widely advocated in academic literature. A table offers an overview of the information provided by various measurement bases. The framework also sets out factors to consider when selecting a measurement basis relevance, faithful representation, enhancing qualitative characteristics and the cost constraint, factors specific to initial measurement, as well as more than one measurement basis and points out that consideration of the objective of financial reporting, the qualitative characteristics of useful financial information and the cost constraint are likely to result in the selection of different measurement bases for different assets, liabilities and items of income and expense. The framework does not provide detailed guidance on when a particular measurement Page 3

4 basis would be suitable because the suitability of particular measurement bases will vary depending on facts and circumstances. On equity, the framework offers some limited discussion, although total equity is not measured directly. Still, the framework maintains, it may be appropriate to measure directly individual classes of equity or components of equity to provide useful information. Chapter 7 - Presentation and disclosure. In this chapter, the framework discusses concepts that determine what information is included in the financial statements and how that information should be presented and disclosed. The statement of statement of comprehensive income is newly described as "statement of financial performance", however, the framework does not specify whether this statement should consist of a single statement or two statements, it only requires that a total or subtotal for profit or loss must be provided. Notably, the framework does not define profit or loss, thus the question of what goes into profit or loss or into other comprehensive income is still unanswered. Chapter 8 - Concepts of capital and capital maintenance. The content in this chapter was taken over from the existing Conceptual Frameworkand and discusses concepts of capital financial and physical, concepts of capital maintenance again financial and physical and the determination of profit as well as capital maintenance adjustments. The IASB decided that updating the discussion of capital and capital maintenance could have delayed the completion of the framework significantly. The Board might consider revising the description and discussion of capital maintenance in the future if it considers such a revision necessary. The Conceptual Framework does not have a stated effective date and the Board will start using it immediately. Not all amendments, however update those pronouncements with regard to references to and quotes from the framework so that they refer to the revised Conceptual Framework. Some pronouncements are only updated to indicate which version of the framework they are referencing to the IASC framework adopted by the IASB in, the IASB framework of, or the new revised framework of or to indicate that definitions in the standard have not been updated with the new definitions developed in the revised Conceptual Framework. The amendments, where they actually are updates, are effective for annual periods beginning on or after 1 January Page 4

5 Chapter 4 : Financial Reporting Brief August Deloitte Ireland Audit & Assurance The Conceptual Framework for Financial Reporting is the foundation on which the IASB develops new accounting standards. The Board has just released its revised Framework, which is effective immediately and contains changes that will set a new direction fo\ r IFRS in the future. The main changes to the new Conceptual Framework compared with the version of the Conceptual Framework are: All these materials and further information are available on https: In this meeting, the Committee decided to make the following recommendations to the Board: It was described in the request that the entity made a payment which is in dispute with a tax authority and the entity determines that it probably does not have an obligation for the amount. The Committee observed that the payment made by the entity is: Therefore, the entity recognises an asset when the payment was made to the tax authority. The Committee also observed that the asset recognised may not be clearly captured within the scope of any IFRS. As such, an entity applies paragraphs 10 and 11 of IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors in developing and applying an accounting policy for the measurement of the asset. The Committee encourages interested parties to submit their response on the Open for comment page https: Prioritisation of the topics: The Board tentatively decided: The Board tentatively decided not to pursue any further the following topics: The Board decided that the staff should perform further analysis on: The Board will discuss these topics at a future meeting. The Board decided to perform a targeted Standards-level review of disclosure requirements. The Board tentatively decided to develop guidance for the Board itself to use when developing and drafting disclosure requirements, and obtain formal stakeholder feedback when the guidance is subsequently used as part of standard -setting. The Board also tentatively decided to test the guidance developed by applying it to one or two selected standards. The objective will be to improve the usefulness of disclosures provided to the primary users of financial statements, and not to change the volume of disclosure requirements. However, this may be a consequence. Finally, the Board tentatively decided to prepare an Exposure Draft of amendments to the disclosure requirements which would give stakeholders the opportunity to comment on the guidance. Dynamic Risk Management The Board discussed the target profile; one of the core areas of the dynamic risk management accounting model. No decision was made; however, the Board tentatively decided that staff should continue developing the model and update the Board in a future meeting. The Board tentatively decided that the accounting model should: The next steps are that the Board will discuss proposals for the measurement aspect of the model and will decide whether to develop proposals for an Exposure Draft or a higher level overview of the model for consultation through a Discussion Paper. However, the Board was not asked to make any decisions and will discuss its approach to the project at a future meeting. The four proposed amendments are: The Board initially supported the following proposals: However, the Board decided not to amend IFRS 8 as, when taken in aggregate, the Board believed that the proposals would not result in sufficient improvements in information to investors to justify the costs that stakeholders would incur. The Board decided to perform the follow-up work listed below: Continue liaison with the valuation profession, monitoring new developments in practice and promoting knowledge development and sharing. Conduct no other follow-up activities as a result of findings from the PIR. The Board was not asked to make any decisions. Chapter 5 : IASB publishes revised Conceptual Framework Conceptual Framework for Financial Reporting is issued by the International Accounting Standards Board (Board). Disclaimer: To the extent permitted by applicable law, the Board and the IFRS Foundation. Chapter 6 : Issue 80 - IFRS News in Brief RSM Global Page 5

6 (the revised Conceptual Framework) on 29 March â The Conceptual Framework sets out a comprehensive set of concepts for financial reporting, standard setting, guidance for preparers in developing. Chapter 7 : 18RU Conceptual Framework: special purpose going? KPMG AU The International Accounting Standards Board (IASB) has published its revised 'Conceptual Framework for Financial Reporting'. Included are revised definitions of an asset and a liability as well as new guidance on measurement and derecognition, presentation and disclosure. The new Conceptual. Page 6