Conceptual Framework for Financial Reporting

Transcription

1 International Financial Reporting Standards Conceptual Framework for Financial Reporting Meeting with investors The views expressed in this presentation are those of the presenter, not necessarily those of the IASB or IFRS Foundation.

2 Session overview 2 Prudence Measurement Proposals on profit or loss and OCI* *Other comprehensive income

3 A brief history of prudence 3 Deliberate understatement of assets or income, or overstatement of liabilities or expenses is not permitted as it is inconsistent with neutrality Prudence - the exercise of caution under conditions of uncertainty - helps make financial statements useful to investors Framework Includes explicit reference to prudence Conceptual Framework Reference to prudence removed Discussion Paper Call (from some) for reintroduction Exposure Draft Proposes reintroduction Removed because of concerns that it could lead to cookie jar reserves and earnings manipulation

4 What did investors say about prudence? 4 Some investors stated the Conceptual Framework should refer to prudence Some investors stated the Conceptual Framework should not refer to prudence These investors argue that prudence is needed to make financial statements useful These investors argue that prudence could lead to subjectivity and bias in financial statements Some investors were indifferent These investors argue that reintroducing prudence would make very little difference to the financial statements Among those investors who support bringing back a reference to prudence there were different interpretations of what prudence means: Some believe prudence it is the exercise of caution under conditions of uncertainty (see slide 4) Others advocate asymmetric prudence (see slide 5)

5 What is prudence? Prudence - the exercise of caution when making judgements under conditions of uncertainty Supports neutrality: means that assets and income are not overstated and liabilities and expenses are not understated does not allow for the understatement of assets and income or the overstatement of liabilities and expenses 5 Does not prohibit recognition of unrealised gains - if that information is useful No cookie jar reserves

6 IASB rejects asymmetric prudence 6 Asymmetric prudence systematically requiring more evidence to support the recognition of gains(or assets) than of losses (or liabilities) systematically requiring the selection of costbased measurements The IASB supports neutrality and rejects asymmetric prudence because: Introducing a conservative bias in measurement would increase the subjectivity of financial statements (how much bias is a good thing?) and reduce comparability Measuring assets and liabilities at current value, even if those current values need to be estimated, can provide useful information (eg many financial instruments)

7 Questions for investors 7 Do you support reintroducing a reference to prudence in the Conceptual Framework? Why or why not? Do you agree with the proposed description of prudence as the need to exercise caution when making judgements under conditions of uncertainty? Do you agree that the exercise of prudence: means that assets and income are not overstated and liabilities and expenses are not understated? does not allow for the understatement of assets and income or the overstatement of liabilities and expenses? Should the discussion of prudence in the Conceptual Framework address any other points?

8 Measurement bases 8 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 participant s assumptions Fair Value Entity-specific assumptions Value in use (assets) Fulfilment value (liabilities)

9 Factors when selecting a measurement basis 9 Relevance Information produced in both statement of financial position and statement(s) of financial performance How an asset or liability contributes to future cash flows depends in part on business activities being conducted Characteristics of asset or liability eg nature or extent of variability in cash flows, sensitivity to risks etc Level of uncertainty but sometimes a measurement with a high degree of uncertainty is the only relevant measurement

10 Factors when selecting a measurement basis 10 Faithful representation Consider how best to portray link between items Others Understandability Using new or different measurement bases could reduce understandability Avoid unnecessary changes in measurement bases Cost constraint Benefit of providing useful information should always exceed the cost of doing so

11 How should business activities impact measurement? 11 Example reporting of real estate Real estate can contribute to cash flows in different ways: Can be used in combination with other assets, liabilities and resources (eg an office building) Can generate cash flows directly from sale or rental income (investment property) Should all real estate be measured using the same measurement basis (cost or current value)? Should the measurement basis used vary depending on how the real estate contributes to future cash flows?

12 Dual measurement 12 Dual measurement a current value measurement basis for the asset or the liability in the statement of financial position; and a different measurement basis to determine the related income or expenses in the statement of profit or loss. difference is included in OCI For example, FVOCI for financial assets Statement of financial position Statement of profit or loss OCI Fair value Amortised cost Difference between fair value and amortised cost

13 Questions for investors 13 Has the IASB identified the right factors to consider when selecting a measurement basis? Do you think the IASB should add additional factors that could facilitate the selection of a measurement basis? Do you agree with the approach that sometimes more than one measurement basis could provide useful information (dual measurement)?

14 Proposals on presentation in profit or loss 14 This statement is the primary, but not the only, source of information about an entity s financial performance in the period Profit or loss is a required total or subtotal Statement of profit or loss 20X5 20X4 Revenue from customers 234, ,367 Cost of sales (112,764) (106,259) Taxes (21,546) (20,587) Profit (loss) for the year 18,897 16,763 Rebuttable presumption that income and expenses are included in profit or loss

15 Proposals on presentation in OCI 15 Income and expenses included in OCI only if that enhances relevance of profit or loss in the period Presumption that income and expenses included in OCI in one period are subsequently included in profit or loss (recycled) Statement of comprehensive income 20X5 20X4 Profit (loss) for the year 18,897 16,763 Currency translation 68 (51) FV adjustment cash flow hedging (2,764) 6,259 Taxes (215) 87 Other comprehensive income for the year (2,546) 4,253 Total comprehensive income for the year 16,351 21,016 OCI only for some income and expenses from changes in current measures of assets and liabilities OCI items are also a source of information about performance for the period

16 Use of OCI in existing Standards examples 16 A change in a current measure of asset / liability? Use of OCI enhances relevance of profit or loss? Rebuttable presumption on recycling? Effective portion of changes in fair value of cash flow hedging instruments!!! Own credit risk when fair value option used for financial liabilities!! " Exchange differences on net investments in foreign operations!?! Remeasurement of net defined benefit pension assets or liabilities!? "

17 Questions for investors 17 Do you agree with describing profit or loss as the primary source of information about financial performance for the period? If not, how would you describe, or define profit or loss instead? Do you agree that the rebuttable presumption on recycling would result in better information for investors? Overall, do you believe that the proposals would result in more consistent requirements for reporting financial performance and would assist users of financial statements in understanding entities performance?