Discussion Paper: A Review of the Conceptual Framework for Financial Reporting

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1 Rio Tinto plc 2 Eastbourne Terrace London W2 6LG United Kingdom T +44 (0) F +44 (0) January 2014 International Accounting Standards Board 30 Cannon Street London EC4M 6XH United Kingdom Dear Sir / Madam Discussion Paper: A Review of the Conceptual Framework for Financial Reporting We are pleased to respond to your invitation to comment on the proposals in this Discussion Paper ( DP ). Rio Tinto is a leading international mining group headquartered in the UK, combining Rio Tinto plc, a London and New York Stock Exchange listed company, and Rio Tinto Limited, which is listed on the Australian Securities Exchange. We appreciate the IASB s response to the 2011 agenda consultation which identified the Conceptual Framework ( the Framework ) as a priority project. However, we believe that some of the proposals in the Framework, particularly around the definitions of assets and liabilities, represent fundamental changes to the existing standards. Removal of the recognition threshold for assets and liabilities and the potential widening of the definition of liabilities, in particular, would impose a very significant cost on preparers without, arguably, any corresponding benefit to users. We are particularly concerned that any new Extractive Activities standard, based on the principles established in the Framework, might require recognition and probability weighted measurement of all exploration assets as the definitions and recognition criteria for assets proposed in the DP do not require future economic benefits to be probable. We are also concerned that there is no clear path forward to address the inconsistencies between the proposed Framework and existing standards and consider that it is very important that the practical consequences, to IFRS preparers, of endorsement of the Framework are clear. It would be very difficult to work with a Framework that has a different definition of liabilities to that in the existing IAS 37 standard for instance. Lastly, whilst we agree that it will be helpful for the IASB to refer to the principles established in the Framework when developing and revising IFRSs we see the Framework s function of providing guidance for preparers as being of equal importance. Our comments to the specific questions set out in the DP are included below. If you have any questions regarding our response, please do not hesitate to contact me. Yours faithfully Delwin Witthöft Group Deputy Controller Rio Tinto plc. Registered office 2 Eastbourne Terrace, London, W2 6LG, United Kingdom. Registered in England No

2 Question 1 Paragraphs set out the proposed purpose and status of the Conceptual Framework. The IASB s preliminary views are that: (a) the primary purpose of the revised Conceptual Framework is to assist the IASB by identifying concepts that it will use consistently when developing and revising IFRSs; and (b) in rare cases, in order to meet the overall objective of financial reporting, the IASB may decide to issue a new or revised Standard that conflicts with an aspect of the Conceptual Framework. If this happens the IASB would describe the departure from the Conceptual Framework, and the reasons for that departure, in the Basis for Conclusions on that Standard. Do you agree with these preliminary views? Why or why not? With reference to a), whilst we agree that it will be helpful for the IASB to refer to the principles established in the Framework when developing and revising IFRSs we see the Framework s function of providing guidance for preparers as being of equal importance. The qualitative characteristics of useful financial information, in particular, are important to the accounting for extractive activities which are scoped out of a number of standards and which are subject to fairly limited guidance in others. With reference to b), whilst we agree it will be helpful to describe the reasons for conflicts in the Basis for Conclusions to a Standard we feel that the IASB should retain the option to alter the Framework in the future. The requirement for a departure may mean that there are unforeseen shortcomings in the Framework. We are also concerned that there is no clear path forward to address the inconsistencies between the proposed Framework and existing standards and consider that it is very important that the practical consequences, to IFRS preparers, of endorsement of the Framework are clear. It would be very difficult to work with a Framework that has a different definition of liabilities to that in the existing IAS 37 standard for instance. Question 2 The definitions of an asset and a liability are discussed in paragraphs The IASB proposes the following definitions: (a) an asset is a present economic resource controlled by the entity as a result of past events. (b) a liability is a present obligation of the entity to transfer an economic resource as a result of past events. (c) an economic resource is a right, or other source of value, that is capable of producing economic benefits. Do you agree with these definitions? Why or why not? If you do not agree, what changes do you suggest, and why? Our primary concern with the definitions is the removal of the word expected. This is addressed in our response to question 3) below. Question 3 Whether uncertainty should play any role in the definitions of an asset and a liability, and in the recognition criteria for assets and liabilities, is discussed in paragraphs The IASB s preliminary views are that: (a) the definitions of assets and liabilities should not retain the notion that an inflow or outflow is expected. An asset must be capable of producing economic benefits. A liability must be capable of resulting in a transfer of economic resources. (b) the Conceptual Framework should not set a probability threshold for the rare cases in which it is uncertain whether an asset or a liability exists. If there could be significant uncertainty about whether a particular type of asset or liability exists, the IASB would decide how to deal with that uncertainty when it develops or revises a Standard on that type of asset or liability. (c) the recognition criteria should not retain the existing reference to probability. Do you agree? Why or why not? If you do not agree, what do you suggest, and why? Page 2 of 13

3 We think that either the definitions of assets and liabilities or the recognition criteria should retain the notion that an inflow or outflow is expected. If the notion of expected is retained within the Framework then the IASB could override that notion in particular standards if considered appropriate after due process. We understand the conceptual reasons for removing expected from the definitions but we are concerned that agreement to this principle in abstract by respondents will be looked upon as endorsement of that principle for future standards where it can have very significant practical implications. Once embodied in the Framework there may be considered to be a rebuttable presumption that, in principle, all assets and liabilities should be recognised even if they are not expected to materialise. This would create conflict with existing standards and although it is not intended that the Framework would override them the conflict would inevitably lead to inconsistent application. We are particularly concerned as a mining company that this principle could be used if the Extractive Activities project resumes. For example, every exploration project may be capable of producing economic benefits in theory but in practice few will come to fruition. Attempting to recognise the uncertainty of future economic benefits through measurement would not, in our view, provide relevant information and would be subjective, could lead to divergence in practice, could be commercially sensitive and, we believe, would not meet the cost/benefit criteria. We recognise that the IASB has included factors for consideration in paragraph 4.26, in particular, in paragraph 4.26 a) as to when recognition may not produce relevant information but in this case the implication is that there should be disclosure of a range of values which is likely to be equally sensitive and onerous. We would expect that similar issues may arise in other areas, for example, research, brand names, customer relationships. Measurement for all of these areas would involve very significant management time and judgement. If assets and liabilities for which realisation is less than probable are recognised and the uncertainty reflected in their measurement, we believe that the financial statements would be considerably harder to interpret than is currently the case. It seems to us that such accounting treatment may in some instances represent a move towards recording assets and liabilities at something more akin to fair value than historic cost. In such instances the accounting principles would be similar to those followed for business combinations and could introduce many practical issues. In the case of business combinations, the valuation of the individual assets and liabilities is usually based on the advice of expert valuers and other subject matter experts and the measurement of the individual assets and liabilities acquired can be verified in aggregate to the transaction cost paid by a third party, thereby meeting the qualitative characteristics of relevance, faithful representation and verifiability. If there is no such transaction, the measurement of the assets and liabilities may not meet the prescribed qualitative characteristics. This approach could result in a significant increase in the amount of liabilities recorded. Potentially, remote liabilities for which disclosure is not currently considered necessary under existing standards could be reflected on the balance sheet. We are not sure that this recognition principle meets the objective of providing useful information to users of financial statements in making decisions about providing resources to the entity. There may also be unintended consequences if the remoteness of the liabilities is not fully understood. Question 4 Elements for the statement(s) of profit or loss and OCI (income and expense), statement of cash flows (cash receipts and cash payments) and statement of changes in equity (contributions to equity, distributions of equity and transfers between classes of equity) are briefly discussed in paragraphs Do you have any comments on these items? Would it be helpful for the Conceptual Framework to identify them as elements of financial statements? It would be helpful to identify these items as elements of financial statements but we agree that the current guidance in the Framework should remain and that any further refinements should be addressed as a separate project. Page 3 of 13

4 Question 5 Constructive obligations are discussed in paragraphs The discussion considers the possibility of narrowing the definition of a liability to include only obligations that are enforceable by legal or equivalent means. However, the IASB tentatively favours retaining the existing definition, which encompasses both legal and constructive obligations and adding more guidance to help distinguish constructive obligations from economic compulsion. The guidance would clarify the matters listed in paragraph Do you agree with this preliminary view? Why or why not? We agree with the preliminary view in the DP that the existing definition of a liability which encompasses both legal and constructive obligations should be retained. We consider that this definition most faithfully represents the entity s financial position at the balance sheet date. We are unclear however, as to where constructive obligations are included in the three views included in the DP and this is addressed further in our response to Question 6. We were interested to note that the IASB quoted the FASB s conclusion on Asset Retirement and Environmental Obligations, which specifically apply only to legal obligations on the basis that the estimation of liabilities arising from constructive obligations in this sphere can be very subjective and therefore a potential barrier to consistency and comparability. We would support the general principle of limiting recognition of certain types of liabilities to those which are legally enforceable and, more specifically, making asset retirement obligations a special case as the FASB has done. Question 6 The meaning of present in the definition of a liability is discussed in paragraphs A present obligation arises from past events. An obligation can be viewed as having arisen from past events if the amount of the liability will be determined by reference to benefits received, or activities conducted, by the entity before the end of the reporting period. However, it is unclear whether such past events are sufficient to create a present obligation if any requirement to transfer an economic resource remains conditional on the entity s future actions. Three different views on which the IASB could develop guidance for the Conceptual Framework are put forward: (a) View 1: a present obligation must have arisen from past events and be strictly unconditional. An entity does not have a present obligation if it could, at least in theory, avoid the transfer through its future actions. (b) View 2: a present obligation must have arisen from past events and be practically unconditional. An obligation is practically unconditional if the entity does not have the practical ability to avoid the transfer through its future actions. (c) View 3: a present obligation must have arisen from past events, but may be conditional on the entity s future actions. The IASB has tentatively rejected View 1. However, it has not reached a preliminary view in favour of View 2 or View 3. Which of these views (or any other view on when a present obligation comes into existence) do you support? Please give reasons. As noted in our response to question 5 we are unclear as to where constructive obligations are included in the three views and whether there is intended to be a link between the concept of practically unconditional in View 2 and the concept of no realistic alternative which distinguishes constructive obligations in IAS 37. Inclusion of a decision tree in the final standard might be helpful in understanding how the definition will work in practice. We do not support View 1, except for certain specific cases such as Asset Retirement Obligations, because, as the DP notes, this would mean the entity would not recognize the full expected cost of its activities in the reporting period. We feel that View 3 is very open ended and we cannot support it for that reason. The examples provided are fairly straight forward and it is difficult to argue with the answers given. However, we agree with the results in those examples because they match costs to benefits and are, presumably, the entity s best estimate of the outcome at the balance sheet date. We would not agree with the general principle of Page 4 of 13

5 recognizing a liability that is conditional on future actions the entity could realistically avoid. On balance, we would support View 2 except for certain specific cases such as Asset Retirement Obligations. We would note, however, that in particular, in Scenario 1 under View 2, the fact that two fifths of the obligation is being provided seems to be a measurement issue rather than a recognition issue in that the obligating event is either the employee joining the company or, perhaps, the completion of five years service when the entity can no longer avoid the obligation. The employer has no obligation to pay any bonus if the employee leaves after two years. This is in contrast to the example in IAS 37 of an entity which operates an offshore oilfield where there is an obligation for decommissioning from commencement of construction. We consider that the DP should clarify the trigger point for the obligation and clarify why pro-rata measurement is appropriate. More generally, we feel that there may be a more fundamental issue which should be considered which is whether an income statement approach (which focusses on matching costs to revenues and reflecting the entity s performance) or a balance sheet approach (which focusses on the period end position) is the most appropriate accounting basis. We believe that that the DP should address this issue as it is so fundamental to financial reporting. Question 7 Do you have comments on any of the other guidance proposed in this section to support the asset and liability definitions? The guidance on executory contracts in paragraph is helpful, however, the guidance refers to current practice and it is unclear from the DP whether the intention is that this should change. Any change from the current accounting for executory contracts would be extremely onerous. With respect to the detail, it would be helpful to give further practical examples of the difference between net rights and obligations and offsetting separate assets and obligations. It would also be helpful to give further practical examples of the meaning of simultaneous in the context of this discussion. We would note that if a product has been delivered the entity becomes liable to pay the supplier but there would not be simultaneous transfer of funds on delivery in practice. Question 8 Paragraphs discuss recognition criteria. In the IASB s preliminary view, an entity should recognise all its assets and liabilities, unless the IASB decides when developing or revising a particular Standard that an entity need not, or should not, recognise an asset or a liability because: (a) recognising the asset (or the liability) would provide users of financial statements with information that is not relevant, or is not sufficiently relevant to justify the cost; or (b) no measure of the asset (or the liability) would result in a faithful representation of both the asset (or the liability) and the changes in the asset (or the liability), even if all necessary descriptions and explanations are disclosed. Do you agree? Why or why not? If you do not agree, what changes do you suggest, and why? As noted in our response to Question 3 we do not agree with the principle that an entity should recognise all its assets and liabilities regardless of the likelihood that economic benefits are transferred. Rather we believe that the expected threshold should be retained in the Framework either in the definition of assets and liabilities or in the recognition criteria. The IASB could then consider standard by standard whether it was appropriate to override this. It would be helpful for the Framework to standardise the meaning of probable as more likely than not. The balance sheet is already on a mixed measurement basis and a reader needs to understand accounting conventions and make references to detailed notes to gain an understanding of an entity s accounts. For example, certain financial instruments are measured at cost and others are not. If assets and liabilities that are not probable are Page 5 of 13

6 recognised this will make it considerably harder to interpret the financial statements and, we consider, represents a move towards showing assets and liabilities at something more akin to a fair value than historic cost. The reasons given in paragraph 4.25 for not recognising an asset or liability are helpful and the Framework could note that these points should be considered in the design of individual standards. Question 9 In the IASB s preliminary view, as set out in paragraphs , an entity should derecognise an asset or a liability when it no longer meets the recognition criteria. (This is the control approach described in paragraph 4.36(a)). However, if the entity retains a component of an asset or a liability, the IASB should determine when developing or revising particular Standards how the entity would best portray the changes that resulted from the transaction. Possible approaches include: (a) enhanced disclosure; (b) presenting any rights or obligations retained on a line item different from the line item that was used for the original rights or obligations, to highlight the greater concentration of risk; or (c) continuing to recognise the original asset or liability and treating the proceeds received or paid for the transfer as a loan received or granted. Do you agree? Why or why not? If you do not agree, what changes do you suggest, and why? We consider that de-recognition should be the mirror image of recognition. We do not think it is logical to apply different criteria to an asset or liability which the entity has previously controlled to one which has all the same characteristics but which has been newly acquired. Question 10 The definition of equity, the measurement and presentation of different classes of equity, and how to distinguish liabilities from equity instruments are discussed in paragraphs In the IASB s preliminary view: (a) the Conceptual Framework should retain the existing definition of equity as the residual interest in the assets of the entity after deducting all its liabilities. (b) the Conceptual Framework should state that the IASB should use the definition of a liability to distinguish liabilities from equity instruments. Two consequences of this are: (i) obligations to issue equity instruments are not liabilities; and (ii) obligations that will arise only on liquidation of the reporting entity are not liabilities (see paragraph 3.89(a)). (c) an entity should: (i) at the end of each reporting period update the measure of each class of equity claim. The IASB would determine when developing or revising particular Standards whether that measure would be a direct measure, or an allocation of total equity. (ii) recognise updates to those measures in the statement of changes in equity as a transfer of wealth between classes of equity claim. (d) if an entity has issued no equity instruments, it may be appropriate to treat the most subordinated class of instruments as if it were an equity claim, with suitable disclosure. Identifying whether to use such an approach, and if so, when, would still be a decision for the IASB to take in developing or revising particular Standards. Do you agree? Why or why not? If you do not agree, what changes do you suggest, and why? We agree with a) and b). We are concerned with c). The requirement to continually remeasure options granted, for example, is onerous and potentially commercially sensitive. We do not have a view on d). Question 11 How the objective of financial reporting and the qualitative characteristics of useful financial information affect measurement is discussed in paragraphs The Page 6 of 13

7 IASB s preliminary views are that: (a) the objective of measurement is to contribute to the faithful representation of relevant information about: (i) the resources of the entity, claims against the entity and changes in resources and claims; and (ii) how efficiently and effectively the entity s management and governing board have discharged their responsibilities to use the entity s resources. (b) a single measurement basis for all assets and liabilities may not provide the most relevant information for users of financial statements; (c) when selecting the measurement to use for a particular item, the IASB should consider what information that measurement will produce in both the statement of financial position and the statement(s) of profit or loss and OCI; (d) the relevance of a particular measurement will depend on how investors, creditors and other lenders are likely to assess how an asset or a liability of that type will contribute to future cash flows. Consequently, the selection of a measurement: (i) for a particular asset should depend on how that asset contributes to future cash flows; and (ii) for a particular liability should depend on how the entity will settle or fulfil that liability. (e) the number of different measurements used should be the smallest number necessary to provide relevant information. Unnecessary measurement changes should be avoided and necessary measurement changes should be explained; and (f) the benefits of a particular measurement to users of financial statements need to be sufficient to justify the cost. Do you agree with these preliminary views? Why or why not? If you disagree, what alternative approach to deciding how to measure an asset or a liability would you support? We agree with a), b) and c). In relation to d) we would suggest that it is principally management s view (and not the view of other stakeholders) of how an asset will contribute to cash flows or how a liability will be settled that should determine the measurement basis and that this approach will then produce the most relevant information for investors, creditors and other lenders. We do have an important caveat with respect to impairment testing under IAS 36 in that we believe an entity should still be able to look to the higher of fair value less costs of disposal and value in use. We do not believe that value in use is necessarily determined from an entity s perspective (as stated in para (a)) as the calculation of value in use is very restrictive in that it excludes growth opportunities and uncommitted restructuring benefits which the entity may well assume for its financial planning purposes. It would not be helpful to write down an asset which, commercially, has a higher value both to a third party and to the entity. We do support looking to the way in which a liability will be settled to determine its measurement basis. The basis incorporated into the cash flow forecasts which management prepares in order to run the business must also be the most relevant for external reporting. This is particularly relevant for decommissioning liabilities where transfer values for these liabilities would be very hard to determine and might be significantly different to the ultimate settlement by the entity. We agree with e). We strongly agree with f). We would note that cost is by far the easiest basis of measurement. We are concerned that under the proposals the measurement concept will be used to compensate for recognizing assets and liabilities that are less than probable. We consider that the benefits of this would be much outweighed by the additional costs as explained in our response to Questions 3 and 8. Question 12 The IASB s preliminary views set out in Question 11 have implications for the subsequent measurement of assets, as discussed in paragraphs The IASB s preliminary views are that: (a) if assets contribute indirectly to future cash flows through use or are used in combination with other assets to generate cash flows, cost-based measurements Page 7 of 13

8 normally provide information that is more relevant and understandable than current market prices. (b) if assets contribute directly to future cash flows by being sold, a current exit price is likely to be relevant. (c) if financial assets have insignificant variability in contractual cash flows, and are held for collection, a cost-based measurement is likely to provide relevant information. (d) if an entity charges for the use of assets, the relevance of a particular measure of those assets will depend on the significance of the individual asset to the entity. Do you agree with these preliminary views and the proposed guidance in these paragraphs? Why or why not? If you disagree, please describe what alternative approach you would support. We agree with a), however, as noted in our response to question 3 above, if cost is adjusted to take into account uncertainty then we would see this as being more akin to fair value than true cost. We do not agree with b). Firstly, we agree with the existing standards under which assets expected to be sold (for example inventory and assets held for sale) are measured at the lower of cost or carrying amount and net realisable value or fair value less costs of disposal. Secondly, all inventory (other than consumable stores and raw materials) is expected to be sold yet paragraph 6.83 refers only to traded commodities. It is a complication to have a different measurement bases for different types of inventory. It is also not clear what is meant by traded commodities. For example, all aluminium traded on the LME must conform to strict specifications regarding quality, lot size and shape. Our aluminium operations produce a variety of ingot products (having different characteristics dependent on the alloys and purity levels and in different shapes and sizes) that cannot all be sold to the LME. It would be illogical to have some aluminium inventory valued at market price and other value added inventory valued at cost because it is not considered tradeable. Revenue recognition is a complex area and a new standard on this topic will be issued shortly. Recognising deferred revenue for the period of time from when the product is ready for sale to the point in time at which the revenue recognition criteria are met and then subsequently realising that revenue will increase the complexity of reporting, gross up the balance sheet and potentially confuse readers. We would question whether this requirement would meet the cost/benefit test. We agree with c). We do not agree with the proposal in d) to use current market prices to value charge for use assets. The assumption is that this information would be readily available but it may not be for less common assets, and use of the entity s own valuations may be commercially sensitive. In addition, this proposal seems to conflict with the Leases exposure draft under which a lessor would retain the asset at its existing carrying amount for type B leases. Question 13 The implications of the IASB s preliminary views for the subsequent measurement of liabilities are discussed in paragraphs The IASB s preliminary views are that: (a) cash-flow-based measurements are likely to be the only viable measurement for liabilities without stated terms. (b) a cost-based measurement will normally provide the most relevant information about: (i) liabilities that will be settled according to their terms; and (ii) contractual obligations for services (performance obligations). (c) current market prices are likely to provide the most relevant information about liabilities that will be transferred. Do you agree with these preliminary views and the proposed guidance in these paragraphs? Why or why not? If you disagree, please describe what alternative approach you would support. We agree with a). We agree with b) although we are not sure that it is helpful to describe the measurement basis of a liability as cost-based. It would be helpful to provide an illustrative example so that there is no doubt as to what is meant. Page 8 of 13

9 We agree with c). However, we would note that this is not consistent with the current standard for assets held for sale where assets and liabilities are fair valued as a group rather than individually. Question 14 Paragraph 6.19 states the IASB s preliminary view that for some financial assets and financial liabilities (for example, derivatives), basing measurement on the way in which the asset contributes to future cash flows, or the way in which the liability is settled or fulfilled, may not provide information that is useful when assessing prospects for future cash flows. For example, cost-based information about financial assets that are held for collection or financial liabilities that are settled according to their terms may not provide information that is useful when assessing prospects for future cash flows: (a) if the ultimate cash flows are not closely linked to the original cost; (b) if, because of significant variability in contractual cash flows, cost-based measurement techniques may not work because they would be unable to simply allocate interest payments over the life of such financial assets or financial liabilities; or (c) if changes in market factors have a disproportionate effect on the value of the asset or the liability (i.e. the asset or the liability is highly leveraged). Do you agree with this preliminary view? Why or why not? We do not agree. We would suggest that if the assets are held for collection or the liabilities are to be settled according to their terms then current market prices are generally not relevant information. For example, a number of our electricity purchase contracts for aluminium smelters have links to the aluminium price and these contracts act as partial economic hedges of movements in the aluminium selling price. The electricity purchased contributes indirectly to future cash flows by being used in the production of aluminium. The Group cannot separately dispose of the embedded derivative element within the contract. We do not consider that marking to market the embedded derivatives within these contracts provides meaningful information that faithfully represents the economic substance of the contracts as well as management s intentions to settle the contracts by taking delivery of the electricity. We consider that the most meaningful accounting policy would be to recognise the electricity cost as incurred. Recording these embedded derivatives is arguably misleading and is not consistent with the Group s business model. We recognise that the current accounting treatment for embedded derivatives under IAS 39 is aligned with the accounting treatment for derivatives. However we believe that cost is more suitable for those derivatives embedded in contracts that the entity intends to settle by taking physical delivery rather than by cash settlement. As such, it would be helpful to have a caveat to the indicators above to cover these circumstances. Question 15 Do you have any further comments on the discussion of measurement in this section? No further comments. Question 16 This section sets out the IASB s preliminary views about the scope and content of presentation and disclosure guidance that should be included in the Conceptual Framework. In developing its preliminary views, the IASB has been influenced by two main factors: (a) the primary purpose of the Conceptual Framework, which is to assist the IASB in developing and revising Standards (see Section 1); and (b) other work that the IASB intends to undertake in the area of disclosure (see paragraphs ), including: (i) a research project involving IAS 1, IAS 7 and IAS 8, as well as a review of feedback received on the Financial Statement Presentation project; (ii) amendments to IAS 1; and (iii) additional guidance or education material on materiality. Page 9 of 13

10 Within this context, do you agree with the IASB s preliminary views about the scope and content of guidance that should be included in the Conceptual Framework on: (a) presentation in the primary financial statements, including: (i) what the primary financial statements are; (ii) the objective of primary financial statements; (iii) classification and aggregation; (iv) offsetting; and (v) the relationship between primary financial statements. (b) disclosure in the notes to the financial statements, including: (i) the objective of the notes to the financial statements; and (ii) the scope of the notes to the financial statements, including the types of information and disclosures that are relevant to meet the objective of the notes to the financial statements, forward-looking information and comparative information. Why or why not? If you think additional guidance is needed, please specify what additional guidance on presentation and disclosure should be included in the Conceptual Framework We broadly agree with the IASB s views about the scope and content of guidance that should be included in the Conceptual Framework. We would note, however, that in our view it is unhelpful to publish separate educational material because while its status is unclear it could be viewed by auditors and regulators as being mandatory. In addition, it is unhelpful to have more than one reference point for accounting guidance on a particular topic and for IFRS preparers to have to consider the hierarchy of published guidance. We would suggest that any educational material should be included within the relevant standard ideally before it is first issued but as an Amendment if not. If it is not considered sufficiently authoritative to be included in a standard then arguably it should not be issued at all. Question 17 Paragraph 7.45 describes the IASB s preliminary view that the concept of materiality is clearly described in the existing Conceptual Framework. Consequently, the IASB does not propose to amend, or add to, the guidance in the Conceptual Framework on materiality. However, the IASB is considering developing additional guidance or education material on materiality outside of the Conceptual Framework project. Do you agree with this approach? Why or why not? We think that the concept of materiality is adequately described in the existing Conceptual Framework. The description of materiality is a specific instance of the Conceptual Framework providing guidance to preparers. Whilst IAS 1 defines Material it does so with reference to the Framework and the Framework provides more detail on the entity-specific nature of materiality. Moreover, we see the Framework as the natural place for definitions of terms that are fundamental to the preparation of IFRS financial statements with standards such as IAS 1 providing detailed guidance on their application. Question 18 The form of disclosure requirements, including the IASB s preliminary view that it should consider the communication principles in paragraph 7.50 when it develops or amends disclosure guidance in IFRSs, is discussed in paragraphs Do you agree that communication principles should be part of the Conceptual Framework? Why or why not? If you agree they should be included, do you agree with the communication principles proposed? Why or why not? We think that the proposed communication principles are helpful. Page 10 of 13

11 Question 19 The IASB s preliminary view that the Conceptual Framework should require a total or subtotal for profit or loss is discussed in paragraphs Do you agree? Why or why not? If you do not agree do you think that the IASB should still be able to require a total or subtotal profit or loss when developing or revising particular Standards? We do agree that the Conceptual Framework should require a total or subtotal for profit or loss. We agree that this phrase is deeply ingrained in all stakeholders minds as it is a key performance metric and would expect that reporters would include such a subtotal as Non GAAP information if it was not prescribed. Question 20 The IASB s preliminary view that the Conceptual Framework should permit or require at least some items of income and expense previously recognised in OCI to be recognised subsequently in profit or loss, i.e. recycled, is discussed in paragraphs Do you agree? Why or why not? If you agree, do you think that all items of income and expense presented in OCI should be recycled into profit or loss? Why or why not? If you do not agree, how would you address cash flow hedge accounting? We do agree that at least some items of income and expense previously recognised in OCI should be recycled to profit or loss. For example, we consider it would be illogical to say that a derivative is a cash flow hedge of future sales but not permit the gain or loss on the hedge to be presented against the sales revenue when it is recognised. If the cash flow hedge gain or loss is not recycled to profit or loss, it is questionable whether entities would elect to apply hedge accounting. We do not think that all items of income and expense that are recognised in OCI should be recycled to the income statement. For example, it would be very difficult to determine a meaningful basis for recycling actuarial gains and losses to the income statement. Any recycling methodology used (for example amortisation of actuarial gains and losses to income over the expected average remaining service life of the employees) would be purely arbitrary and might not be a faithful representation of the timing of recognition. Question 21 In this Discussion Paper, two approaches are explored that describe which items could be included in OCI: a narrow approach (Approach 2A described in paragraphs ) and a broad approach (Approach 2B described in paragraphs ). Which of these approaches do you support, and why? If you support a different approach, please describe that approach and explain why you believe it is preferable to the approaches described in this Discussion Paper. We do not support Approach 2A because under this approach actuarial gains and losses could not be recognised in OCI and we do not consider that it is meaningful to reflect these in the income statement. On this basis we prefer Approach 2B, although it would be helpful to expand on the reasons why certain impairment charges would not be included in OCI given the principles set out in the paper. Paragraphs 8.47 and 8.51 imply that OCI would not be used for remeasurement (such as impairment) of cost based items on the grounds that information about transactions provided by cost-based measurements provides important information about the return that the entity has made on its economic resources. We would question whether this is necessarily the case in a situation when the impairment relates to a subsidiary which has been fair valued (and a non-cash gain recorded in the income statement) due to the acquisition of a small incremental stake in a joint venture or an associate that achieves control. The subsequent impairment of the carrying value of the subsidiary does not result from an outflow of cash or other resources from the entity but rather from an accounting uplift. Page 11 of 13

12 Question 22 Chapters 1 and 3 of the existing Conceptual Framework Paragraphs address the chapters of the existing Conceptual Framework that were published in 2010 and how those chapters treat the concepts of stewardship, reliability and prudence. The IASB will make changes to those chapters if work on the rest of the Conceptual Framework highlights areas that need clarifying or amending. However, the IASB does not intend to fundamentally reconsider the content of those chapters. Do you agree with this approach? Please explain your reasons. If you believe that the IASB should consider changes to those chapters (including how those chapters treat the concepts of stewardship, reliability and prudence), please explain those changes and the reasons for them, and please explain as precisely as possible how they would affect the rest of the Conceptual Framework. We believe that the concepts of prudence and substance over form should be reinstated in the Conceptual Framework. We consider that these terms are also deeply ingrained in the economy, business and investors minds whilst their replacements are not yet in common usage. There seems to be some inconsistency in the arguments used for removing prudence. For example, paragraph 9.20 notes that Few would disagree with the idea expressed in the pre-2010 Conceptual Framework that a preparer should exercise caution when making estimates and judgements under conditions of uncertainty whilst paragraph 9.19 implies that the exercise of such caution would lead to a conservative bias in the financial statements. Whilst substance over form may be considered redundant as a concept in that it is only one aspect of faithful representation it encapsulates the requirement to look to the commercial basis of a transaction. It is unhelpful to no longer be able to refer to this concept in IFRS and we would support its reinstatement. Question 23 Business model The business model concept is discussed in paragraphs This Discussion Paper does not define the business model concept. However, the IASB s preliminary view is that financial statements can be made more relevant if the IASB considers, when developing or revising particular Standards, how an entity conducts its business activities. Do you think that the IASB should use the business model concept when it develops or revises particular Standards? Why or why not? If you agree, in which areas do you think that the business model concept would be helpful? Should the IASB define business model? Why or why not? If you think that business model should be defined, how would you define it? We do agree that use of the business model concept is helpful and welcome its use in the measurement section of the Framework in particular. We do feel, however, that all key terms within the Framework should be defined so that there is a common understanding of their meaning. Question 24 Unit of account The unit of account is discussed in paragraphs The IASB s preliminary view is that the unit of account will normally be decided when the IASB develops or revises particular Standards and that, in selecting a unit of account, the IASB should consider the qualitative characteristics of useful financial information. Do you agree? Why or why not? We agree with this approach as we think it would be impractical to come to a conclusion in the Framework that would apply for all standards. Page 12 of 13

13 Question 25 Going concern Going concern is discussed in paragraphs The IASB has identified three situations in which the going concern assumption is relevant (when measuring assets and liabilities, when identifying liabilities and when disclosing information about the entity). Are there any other situations where the going concern assumption might be relevant? As the going concern concept is so fundamental to the financial statements we would suggest that it should be given more emphasis in the Framework. If an entity is not a going concern the basis of preparation of the financial statements changes and limiting the relevance of the going concern assumption to three areas perhaps understates its importance. Question 26 Capital maintenance Capital maintenance is discussed in paragraphs The IASB plans to include the existing descriptions and the discussion of capital maintenance concepts in the revised Conceptual Framework largely unchanged until such time as a new or revised Standard on accounting for high inflation indicates a need for change. Do you agree? Why or why not? Please explain your reasons. We agree with this approach as high inflation is generally not an issue for us. Page 13 of 13