Mr Hans Hoogervorst Chairman of the International Accounting Standards Board 30 Cannon Street London EC4M 6XH United Kingdom.

Transcription

1 Mr Hans Hoogervorst Chairman of the International Accounting Standards Board 30 Cannon Street London EC4M 6XH United Kingdom 10 December /602 Dear Mr Hoogervorst Re.: IASB Discussion Paper 2013/1 A Review of the Conceptual Framework for Financial Reporting The IDW appreciates the opportunity to comment on the IASB Discussion Paper 2013/1 A Review of the Conceptual Framework for Financial Reporting. In general, we welcome the Board s decision to reinitiate the Conceptual Framework project. However, we believe that the timing of the publication of the Discussion Paper is inopportune as the Board is still working on its four main standard projects (revenue recognition, leases, insurance contracts and financial instruments). It is essential to ensure that these long-term projects are consistent with one another and completed with priority. Upon completion of these projects, the Board should use the insights gained for revising the Conceptual Framework. We agree with the Board s decision to develop a complete set of proposals for a revised Conceptual Framework, i.e. not to continue with the phased approach. Given the complexity as well as the interdependency of the various issues addressed in the Conceptual Framework project, a phased approach would necessarily result in unintended consequences and could lead to new inconsistencies. However, we had expected the Board to undertake a fundamental and comprehensive review of the Conceptual Framework rather than merely updating, improving and filling in gaps. Currently it seems to us that the IASB is only proposing a quick fix solution.

2 page 2/23 IDW CL to Mr Hans Hoogervorst on DP/2013/1 A Review of the Conceptual Framework for Financial Reporting We doubt whether the proposals in the Discussion Paper reflect the significance of the Conceptual Framework appropriately. Many of the proposed approaches (e.g. to profit and loss and recycling or for the distinction between equity and liabilities) seem only half-baked. Moreover, in some cases the dividing line between the principles in the Conceptual Framework and the provisions in IAS 1 is not readily identifiable (e.g. in the case of going concern). Obviously, much more time is needed, and we urge the IASB to take the time necessary to revise the Framework in such a way that it can provide both, a consistent and sound conceptual basis for financial reporting under IFRS and be of real assistance to the IASB in developing or amending future Standards. Although the specific provisions at the Standards level should always take precedence over the principles of the Conceptual Framework, the Conceptual Framework must be generally binding when the IASB develops or amends Standards. Therefore, we recommend that going forward the IASB s adherence to the final provisions of the Conceptual Framework should be monitored. This would also contribute to improving the accountability of the entire IASB s standard-setting process. A departure from the Conceptual Framework should only be possible in rare cases. Further, we would like to comment on certain matters, as set out below. Section 1: Introduction Question 1: Paragraphs set out the proposed purpose and status of the Conceptual Framework. The IASB s preliminary views are that: 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 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? We agree with the proposed primary purpose of the Conceptual Framework, i.e. assisting the IASB in setting Standards that are principles-based and internally

3 page 3/23 IDW CL to Mr Hans Hoogervorst on DP/2013/1 A Review of the Conceptual Framework for Financial Reporting consistent. The IASB should only be able to develop or amend IFRSs on the basis of a complete and internally consistent Conceptual Framework. In the long run, the overall objective of the Board must be to achieve consistency between the future Conceptual Framework and the IFRSs. We acknowledge that this might not always be possible. Nevertheless, the IASB should not be able to make arbitrary departures from the Conceptual Framework. As mentioned in our general remarks, we recommend that the IASB s adherence to the principles of the Conceptual Framework should be monitored. A departure should only be possible in rare cases. Further, when departures are being considered, in order to meet the overall objective of financial reporting the IASB should be required to describe the reasons for the departure in the Basis for Conclusions on that Standard and examine whether the Conceptual Framework needs to be amended if the identified conflict highlights weaknesses in specific concepts and principles of the Conceptual Framework. In addition, we recommend that the IASB should not limit certain parts of the Conceptual Framework to its own use. All parts of the Conceptual Framework might be relevant to parties other than the Board under specific circumstances, e.g. when preparers are required to develop accounting policies in the absence of a specific relevant Standard or Interpretation (we refer to paragraph 11 of IAS 8). Section 2: Elements of financial statements Question 2: The definitions of an asset and a liability are discussed in paragraphs The IASB proposes the following definitions: (c) an asset is a present economic resource controlled by the entity as a result of past events. a liability is a present obligation of the entity to transfer an economic resource as a result of past events. 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?

4 page 4/23 IDW CL to Mr Hans Hoogervorst on DP/2013/1 A Review of the Conceptual Framework for Financial Reporting We concur with the IASB that the proposed definitions of an asset, a liability and an economic resource are more concise and focused, and show more clearly the parallel between the definitions of an asset and a liability. Nonetheless, it is not necessary to include both, the terms present and as a result of past events. We suggest the latter be deleted, as it is redundant. Moreover, we believe that additional guidance regarding the interaction of the criteria economic resource and control would be helpful. In particular, the role of risks and rewards within the definition of an asset and its relation to the concept of control should be explained. 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: (c) 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. 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. 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? Regarding the definitions of an asset and a liability, we agree with the Board s proposal not to retain the notion that an inflow or outflow is expected. Instead, an asset must be capable of producing economic benefits and a liability must be capable of resulting in a transfer of economic resources. Further, we believe that neither a probability threshold nor another reference to probability is needed as part of the definitions.

5 page 5/23 IDW CL to Mr Hans Hoogervorst on DP/2013/1 A Review of the Conceptual Framework for Financial Reporting Moreover, from a theoretical point of view, it might even be reasonable to consider uncertainty solely as part of measurement, i.e. not as a recognition criterion. This would ensure that the statement of financial position provides a complete picture of the rights and obligations of an entity. However, this completeness may only be achieveable at the expense of relevance of the information produced. In particular, if uncertainty is not considered as part of the recognition criteria, entities will end up having to recognise and then measure virtually all contingencies, including those with very low levels of probability. Measuring individual contingencies with low probability but potentially high outflow of economic resources can yield a wide range of values based on a high level of subjectivity. The relevance of the resulting (unreliable) information is questionable. Therefore, we recommend the IASB consider uncertainty in relation to the facts and circumstances of specific accounting issues, i.e. the Board should decide on whether to have a probability threshold for recognition at the Standards level. 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? We have suggested that the IASB provide modified or new definitions of elements of the statement(s) of profit or loss or OCI, the statement of cash flows and the statement of changes in equity. Unfortunately, the Board has, for various reasons, deferred its discussion of these basic conceptual issues. At the latest, the definitions of the elements of the primary statements will need to be addressed in the forthcoming Exposure Draft. Additionally, the IASB should develop a view as to the objective and the purpose of each of the primary financial statements, which would, in turn, need to be consistent with the general objective of financial reporting. Regarding the elements presented in the statement(s) of profit or loss or OCI in the existing Conceptual Framework, we would like to point out that: it always leads to some confusion when a sub-category ( expenses ) is given the same term as its main-category ( expenses ). We prefer the use of

6 page 6/23 IDW CL to Mr Hans Hoogervorst on DP/2013/1 A Review of the Conceptual Framework for Financial Reporting different terms as it is the case for income, which can be categorised as either revenue or gains. there is no clear differentiation between what constitutes expenses and losses : according to the current Conceptual Framework expenses could arise in the course of the ordinary activities of an entity, whereas losses may, or may not, arise in the course of the ordinary activities of the entity. This is not a helpful statement. Both terms should be defined without overlap. The same applies in respect of revenue and gains. It might be appropriate to discuss the definitions and characteristics of subcategories of the elements in the statement(s) of profit or loss or OCI within a future project on the presentation of financial statements. However, prior to this, a sound definition of performance will have to be developed. Section 3: Additional guidance to support the asset and liability definitions 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? The IDW agrees that the existing definition of a liability which encompasses both, legal as well as constructive obligations, should be retained. However, the characteristics of a liability have to be described more clearly. We support, inter alia, the proposed guidance for determining whether an entity has incurred a constructive obligation. In addition, we recommend the Board provide guidance on how to distinguish a constructive obligation from an economic compulsion. The guidance should clarify that an economic compulsion does not create a liability under the proposed definition.

7 page 7/23 IDW CL to Mr Hans Hoogervorst on DP/2013/1 A Review of the Conceptual Framework for Financial Reporting 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: (c) 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. 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. 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. We agree with the Board s decision to reject View 1. A liability defined as a present obligation that must have arisen from past events and be strictly unconditional does not provide relevant and comprehensive information about an entity s liabilities. Regarding View 2, the meaning of practically unconditional is unclear. The development of Standards based on such an undefined term that has to be interpreted in practice should be avoided as this will inevitably lead to an inconsistent application. Guidance would be needed to identify the types of condition that an entity might not have the practical ability to avoid. In respect of View 3, we have some doubts whether it would be appropriate to include all conditional obligations that the entity might be able to avoid through its future actions (but that have arisen as a result of past events).

8 page 8/23 IDW CL to Mr Hans Hoogervorst on DP/2013/1 A Review of the Conceptual Framework for Financial Reporting Before expanding the definition of a liability, the IASB should redeliberate the reasons for determining whether a present obligation exists or not at the level of current Standards (e.g. in IAS 37, IAS 19 or IAS 32). Question 7: Do you have comments on any of the other guidance proposed in this section to support the asset and liability definitions? In our view, the IASB should provide more guidance on executory contracts. For example, the Board should explain the basic difference between lease contracts and executory contracts. At present, we do not see any (economic) difference between an unconditional right-of-use asset arising from a lease contract and similar rights arising from executory contracts that are currently not recognised in the statement of financial position. As a consequence, were the right-of-use model implemented for lease contracts (i.e. leases are on-balance sheet ) whilst executory contracts with similar characteristics (especially service contracts) remain off-balance sheet, the resultant bright-line would offer structuring opportunities. Section 4: Recognition and derecognition 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: 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 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? We refer to our answer to question 3.

9 page 9/23 IDW CL to Mr Hans Hoogervorst on DP/2013/1 A Review of the Conceptual Framework for Financial Reporting 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). 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: (c) enhanced disclosure; 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 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 welcome the Board s decision to address the derecognition of assets and liabilities in the future Conceptual Framework. In general, we agree that the concept of control is preferable to the concept of risks and rewards insofar as it could ensure a symmetry between the criteria for recognition and derecognition. However, we have still some reservations about focusing solely on the concept of control. In some cases, an increased reference to risks and rewards might be reasonable. In our view, the IASB should clarify that the exposure to risks and rewards is at least an indicator of control and an important factor to consider when assessing control (we refer to paragraph BC32 of IFRS 10). Enhanced disclosure is not an appropriate means to portray transactions in which an entity disposes of a component of an asset or liability (i.e. when the entity retains a component of an original asset or a liability). Regarding the other two proposed approaches, i.e. either presenting any rights or obligations retained on a line item different from the line item that was used for the original rights or obligations, or continuing to recognise the original asset or liability and treating the proceeds received or paid for the transfer as a loan received or granted,

10 page 10/23 IDW CL to Mr Hans Hoogervorst on DP/2013/1 A Review of the Conceptual Framework for Financial Reporting we are not able to determine principally which of the two might be preferable. In our view, this issue is highly interrelated to the general question which of the derecognition models (full derecognition/partial derecognition) has to be applied. We acknowledge that both derecognition models have conceptual shortcomings and the decision as to which of them might be more appropriate, depends on the unit of account and the nature of the asset or liability considered (e.g. financial or non-financial asset/liability). Section 5: Definition of equity and distinction between liabilities and equity instruments 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: (c) (d) 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. 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) (ii) obligations to issue equity instruments are not liabilities; and obligations that will arise only on liquidation of the reporting entity are not liabilities (see paragraph 3.89). an entity should: (i) (ii) 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. recognise updates to those measures in the statement of changes in equity as a transfer of wealth between classes of equity claim. 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.

11 page 11/23 IDW CL to Mr Hans Hoogervorst on DP/2013/1 A Review of the Conceptual Framework for Financial Reporting Do you agree? Why or why not? If you do not agree, what changes do you suggest, and why? We concur with the Board that claims towards the assets of the entity should be classified as either liabilities or as equity. Further, 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. The IDW does not agree with the proposed narrow approach to equity classification. For example, we do not believe that it is appropriate to rely solely on a criterion that refers only to the most residual existing class of equity instruments issued by the parent (which includes non-controlling interests presented as a liability) as this seems to be in conflict with the entity theory. Although the proposed narrow approach is a simple approach for distinguishing financial liabilities from equity, it would result in an apparently overly restrictive classification of equity, and some type of measurement of claims that are akin to equity under the proposed definition. At present, we have some sympathy for the strict obligation approach. However, because of the current stage of this project, we are unable to assess whether the strict obligation approach might be appropriate in all circumstances due to the absence of a general explanation of the definition of liabilities. Therefore, we urge the Board to continue with both, research and outreach activities, in this important area before taking this further. Regarding the proposed concept of a wealth transfer, feedback from preparers, users and others will show whether there is sufficient support for such a complex approach. Section 6: Measurement Question 11: How the objective of financial reporting and the qualitative characteristics of useful financial information affect measurement is discussed in paragraphs The IASB s preliminary views are that: 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

12 page 12/23 IDW CL to Mr Hans Hoogervorst on DP/2013/1 A Review of the Conceptual Framework for Financial Reporting (c) (d) (e) (f) (ii) how efficiently and effectively the entity s management and governing board have discharged their responsibilities to use the entity s resources. a single measurement basis for all assets and liabilities may not provide the most relevant information for users of financial statements; 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; 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) (ii) for a particular asset should depend on how that asset contributes to future cash flows; and for a particular liability should depend on how the entity will settle or fulfil that liability. 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 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? In general, we agree with the Board s preliminary views. However, further guidance regarding cash-flow-based-measurements is desirable. For example, clarifying the objective and the rationale for applying different versions of the DCF-method would be helpful, e.g. the determination of an appropriate discount rate. At present, several techniques are used in IFRSs for discounting without a clear rationale; often resulting in diverse practical issues.

13 page 13/23 IDW CL to Mr Hans Hoogervorst on DP/2013/1 A Review of the Conceptual Framework for Financial Reporting 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: (c) (d) 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 normally provide information that is more relevant and understandable than current market prices. if assets contribute directly to future cash flows by being sold, a current exit price is likely to be relevant. 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. 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. 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: (c) cash-flow-based measurements are likely to be the only viable measurement for liabilities without stated terms. a cost-based measurement will normally provide the most relevant information about: (i) (ii) liabilities that will be settled according to their terms; and contractual obligations for services (performance obligations). current market prices are likely to provide the most relevant information about liabilities that will be transferred.

14 page 14/23 IDW CL to Mr Hans Hoogervorst on DP/2013/1 A Review of the Conceptual Framework for Financial Reporting 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. 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: (c) if the ultimate cash flows are not closely linked to the original cost; 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 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? Answers to questions 12-14: In our opinion, the guidance provided on the subsequent measurement of assets and liabilities is too specific, in view of the fact that it is intended to become part of the Conceptual Framework not the Standards. In addition, some statements are not convincing and contradict certain provisions at current Standards level. For example, the IASB s preliminary view that if an asset contributes directly to future cash flows by being sold, a current exit price is likely to be relevant contradicts the measurement bases of assets in IAS 2 and IFRS 5. Further, the guidance could be read as implying that those measurement bases listed in the Discussion Paper are the only ones the IASB supports. Given the objective and purpose of a Conceptual Framework, we recommend the Board focus on the development of principles on the measurement, i.e.

15 page 15/23 IDW CL to Mr Hans Hoogervorst on DP/2013/1 A Review of the Conceptual Framework for Financial Reporting stating which measurement bases exist for the measurement of assets and liabilities, clarifying that all measurement bases are coequal, and requiring that the measurement basis chosen in a Standard must fulfil the objectives of relevance and faithful representation. Specific provisions (e.g. relating to derivatives) have to be addressed at the Standards level. Question 15: Do you have any further comments on the discussion of measurement in this section? At the moment, we do not have any further comments on the discussion of measurement. Section 7: Presentation and disclosure 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: the primary purpose of the Conceptual Framework, which is to assist the IASB in developing and revising Standards (see Section 1); and other work that the IASB intends to undertake in the area of disclosure (see paragraphs ), including: (i) (ii) (iii) 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; amendments to IAS 1; and additional guidance or education material on materiality. 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: presentation in the primary financial statements, including:

16 page 16/23 IDW CL to Mr Hans Hoogervorst on DP/2013/1 A Review of the Conceptual Framework for Financial Reporting (i) (ii) (iii) (iv) (v) what the primary financial statements are; the objective of primary financial statements; classification and aggregation; offsetting; and the relationship between primary financial statements. disclosure in the notes to the financial statements, including: (i) (ii) the objective of the notes to the financial statements; and 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. The IDW agrees with the Board s intention to include guidance on presentation and disclosure in the future Conceptual Framework. While we concur with the proposed guidance on presentation, we do not agree with the proposed guidance on disclosure. Although the Board is, by now, aware of the problem of information overload in the notes to the financial statements, principles on disclosure to address this problem are still lacking. In our view, the Conceptual Framework should include general guidance on minimum disclosure requirements at the Standards level as well as a general provision as to the conditions under which additional disclosure requirements will be necessary. Furthermore, we recommend the Board clarify that disclosures should never be used to remedy shortcomings in the recognition and measurement provisions (as it is the case for offsetting financial instruments). Which disclosures are absolutely indispensable at the Standards level will need to be determined by asking users what kind of information they require for their analyses, and why. 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 addi-

17 page 17/23 IDW CL to Mr Hans Hoogervorst on DP/2013/1 A Review of the Conceptual Framework for Financial Reporting tional guidance or education material on materiality outside of the Conceptual Framework project. Do you agree with this approach? Why or why not? The issue of materiality is central to financial reporting. We believe it is important that preparers, auditors, users, financial reporting enforcement authorities and regulators have a common understanding of materiality because differences in understanding among these groups would lead to miscommunication in financial reporting, diminish the value of financial reporting to users and cause friction among the parties. While the IASB does not propose to amend, or add to, the guidance in the Conceptual Framework on materiality, the International Auditing and Assurance Standards Setting Board (IAASB), as the international standards setter for auditing standards, has already provided considerable additional guidance in relation to materiality which could be in support of the IASB s work. The IDW would also be pleased to be of further assistance if desired by the Board. We believe that the current definition of materiality in paragraph QC 11 of the Conceptual Framework should be redrafted in order to increase a common understanding and application of materiality in IFRS. For example: Misstatements, including omissions, are considered to be material if they, individually or in aggregate, are reasonably expected to influence the economic decisions of users taken on the basis of the financial statements as a whole. This definition has the advantage of clarifying that omissions are misstatements and that if a misstatement is not reasonably expected to influence the economic decisions of users based on the financial statements as a whole, then such a misstatement is not material. This sets an appropriate risk threshold for determining the materiality that applies in a particular instance. In view of the significance of the issue, the Board should not simply develop education material on materiality as this would not be subject to the formal due process. 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

18 page 18/23 IDW CL to Mr Hans Hoogervorst on DP/2013/1 A Review of the Conceptual Framework for Financial Reporting 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? The IASB should consider communication principles provided in the Discussion Paper when it sets disclosure requirements. However, we doubt whether the Conceptual Framework is the right place to address guidance in respect of an electronic format of financial statements. Those provisions focus on standardised terminology as well as totals and subtotals in order to ensure the electronical usability of financial information. It is a specific technical issue with no direct interrelation to the development of the IFRSs and therefore, it should not be part of the Conceptual Framework. Section 8: Presentation in the statement of comprehensive income profit or loss and other comprehensive income 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 amending Standards? 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?

19 page 19/23 IDW CL to Mr Hans Hoogervorst on DP/2013/1 A Review of the Conceptual Framework for Financial Reporting 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. Answers to questions 19-21: At present, expecting an assessment of the Board s proposals is not reasonable, as they are still at too early a stage of development. For example: The Board has not provided a definition of performance. However, this is the key prerequisite for assessing whether any of the approaches presented (or any potential other approaches) provides the most relevant information for users. Further, the Board has not yet provided any real justification as to why it believes it necessary to differentiate items of income and expense between profit or loss and other comprehensive income. Even assuming it is necessay to differentiate profit or loss from other comprehensive income, there is no concept or principle provided that would explain why and under what conditions recycling might be necessary. There is a lack of clear and consistent principles for classifying items as bridging items, mismatched remeasurements or transitory remeasurements. Currently, it seems to us that the IASB is primarily trying to justify the status quo by developing complex and rule-based approaches rather than developing principles. In our view it is essential that the IASB first develop principles for measuring and presenting performance. In this context, the Board needs to clarify whether profit or loss on the one hand or comprehensive income on the other hand is preferable as a performance indicator (or the starting point for a performance analysis). Without this, the IASB will never be in a position to develop consistent principles for structuring the statement of comprehensive income. The Discussion Paper states that some are of the view that profit or loss should be defined explicitly, and not merely as a default category that contains all items

20 page 20/23 IDW CL to Mr Hans Hoogervorst on DP/2013/1 A Review of the Conceptual Framework for Financial Reporting of income and expense not included in OCI. Those with this view often suggest a particular attribute or factor as a basis for that definition. Despite the fact that the IASB believes that none of them can be used in isolation to define what should be included in profit or loss, it might make sense to analyse such an approach more thoroughly. Section 9: Other issues 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. In respect of prudence, we concur with the following statement in your speech at the FEE Conference on Corporate Reporting in Brussels (September 2012): the basic tenets of the Concept of Prudence are still vital for our work. Indeed, the exercise of caution is visible in many of our standards and is also an important issue in the development of new standards. Indeed, one might very well conclude that the old Concept is not dead, but alive and kicking indeed. As you clearly stated, the concept of prudence is used in current Standards and will be used in future standards. Therefore, it has to be articulated within the Conceptual Framework as any other principle or concept used within the IFRS in order to ensure its consistent application across both, current and future Standards. The concept of prudence should be reintroduced into the future Conceptual Framework, based on the description in paragraph 37 of the pre-2010 Conceptual Framework: Prudence is the inclusion of a degree of caution in the exercise of the judgements needed in making the estimates required under conditions of

21 page 21/23 IDW CL to Mr Hans Hoogervorst on DP/2013/1 A Review of the Conceptual Framework for Financial Reporting uncertainty, such that assets or income are not overstated and liabilities or expenses are not understated. We acknowledge that prudence is nowadays subject to intense (and partly controversial) discussion. In our view, this contention results from a lack of common understanding. The IASB should take the opportunity to explain the relationship between prudence and neutrality more clearly: Each time when preparers are required to exercise judgements, neutrality is an important objective that has to be strived for, but, the inclusion of a degree of caution in the exercise of the judgements needed in making the estimates required under conditions of uncertainty is also necessary and reasonable in order to prevent speculation being based on overly optimistic assumptions. Prudence represents that degree of caution and both, the concept of neutrality and prudence, contribute to faithful representation in the IFRS financial statements. 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? In our view, the IASB should not include a business model concept in the Conceptual Framework. Considering the business model might be relevant to some specific accounting issues and, therefore, ought to be addressed at the Standards level. 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 de-

22 page 22/23 IDW CL to Mr Hans Hoogervorst on DP/2013/1 A Review of the Conceptual Framework for Financial Reporting velops 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 the IASB s preliminary view that the unit of account should be decided at the Standards level and, in this context, the IASB should always consider the qualitative characteristics of useful financial information. However, we believe that the concept of, and the principles for, identifying the unit of account should be addressed in the Conceptual Framework. 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? We agree with the Board that additional guidance regarding the going concern assumption would be desirable. The existing Conceptual Framework does not include any guidance on financial reporting in situations in which an entity is no longer a going concern and will probably not continue in operation in the foreseeable future. Appropriate guidance is needed as this is an area of high relevance in practice. However, in this context, we question whether such guidance should be part of the Conceptual Framework. With regard to the status of the Conceptual Framework they might be better placed in a particular IFRS. 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.

23 page 23/23 IDW CL to Mr Hans Hoogervorst on DP/2013/1 A Review of the Conceptual Framework for Financial Reporting We agree with the Board s view to deliberate the appropriate capital maintenance concept when discussing accounting for high inflation. However, we would like to note that capital maintenance is not only important in that context, but also in other areas such as the revaluation of assets and foreign currency accounting. Other remarks Finally, we note that another standard-setter (the International Public Sector Accounting Standards Board, IPSASB) is also currently in the process of developing its own Conceptual Framework. The IDW has recently submitted several letters to the IPSASB, suggesting that the respective Boards cooperate as far as possible with a view to ensuring that conceptual issues that are not affected by differences in the public and private sectors should be treated the same. The IDW believes there is no merit in having differences at a conceptual level that are not justified by sector specifics. We would be pleased to answer any questions that you may have or discuss any aspect of this letter. Yours sincerely Ulrich Schneiß Deputy Technical Director Accounting and Auditing Uwe Fieseler Director International Accounting