Re: EFFAS Comment Letter on the Exposure Draft Conceptual Framework for Financial Reporting

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1 IASB International Accounting Standards Board IFRS International Financial Reporting Standard Mr. Hans Hoogervorst 30 Cannon Street London, EC4M 6XH United Kingdom Hamburger Allee 45 DE Frankfurt am Main Direct number: Internet: Contact: Raquel Zaragoza November 25, 2015 Re: EFFAS Comment Letter on the Exposure Draft Conceptual Framework for Financial Reporting Dear Madam, dear Sir, EFFAS' Commission on Financial Accounting ( FAC, Commission, we ) is pleased to share with you the views of European users of financial statements regarding the Exposure Draft ED/2015/3 on the Conceptual Framework for Financial Reporting ( the ED ). To draw these comments FAC has held discussions between its members and other analysts in their respective constituencies. Please see Annex attached. The FAC would like to highlight some key points: It supports to give more prominence to stewardship within the objective of financial reporting. The Commission would like to have a better understanding of what the introduction of prudence means in terms of practical outcome. It clearly considers that primary users should remain the main target group of the standard setting process. Relevance and faithful representation should continue as fundamental qualitative characteristics of useful financial information. The notion of the benefits have to outweigh the costs should not be linked with the qualitative characteristic of high quality financial reporting. The ED should explain better what the matching principle means in terms of good financial reporting.

2 2 The concept that similar assets should be accounted for in the same way by different entities should be clarified. It may be relevant to understand that two entities have acquired similar assets but for a different price. The IASB s approach to make no explicit reference to the business activity of longterm investments is endorsed. The Commission considers that it is very difficult to define long term versus short term investors and would not focus on the needs of each of them. The FAC would like to stress that the profit and loss statement is the starting point and main source of information for analysts and investors. The other comprehensive income (OCI) items are complementary and can provide valuable information on an entity, in particular regarding its financial position. The separation between net profit and OCI should be maintained. FAC believes that no references to valuation, namely an entity s value, should be made when discussing the standard setting process. If you would like to further discuss the views expressed in this letter please do not hesitate to contact us. Best regards, Javier de Frutos, Chairman Commission on Financial Accounting EFFAS Commission on Financial Accounting EFFAS was established in 1962 as an association for nationally-based investment professionals in Europe. Headquartered in Frankfurt am Main, EFFAS comprises 27 member organizations representing more than 16,000 investment professionals. The Commission on Financial Accounting is a standing commission of EFFAS aiming at proposing and commenting on financial issues from an analyst standpoint. FAC members are Javier de Frutos (Chairman, IEAF-Spain), Jacques de Greling (Vice-Chairman- SFAF, France), Bertrand Allard (SFAF, France), Rolf Rundfelt (SFF, Sweden), Friedrich Spandl (ÖVFA, Austria), Henning Strom (NFF, Norway), Serge Pattyn (BVFA/ABAF, Belgium), Jérôme Vial (SFAA, Switzerland), Luca D Onofrio (AIAF, Italy).

3 3 ANNEX Comments to ED Questions Question 1- Proposed changes to Chapters 1 and 2 (a) Stewardship Within the context of financial reporting the FAC agrees to give more prominence to stewardship in making decisions about providing resources to the entity. This should be part of the general objective given that standard setting does not overtake local legal requirements. We also think that standard setting should be focused on what is defined as the primary users, namely existing and potential investors, lenders and other creditors that make decisions about providing resources to the entity. This view should nevertheless not exclude other users such as employees, customers and regulators that also benefit from financial reporting. (b) Prudence The Commission supports to incorporate the notion of prudence, described as the exercise of caution when making judgements under conditions of uncertainty. It should be underlined however that the understatement and/or overstatement of assets and/or liabilities should be avoided. It is just a matter of the degree of caution when making judgements under conditions of uncertainty. Additionally, we consider that the standard setting process and financial reporting are unrelated aspects of how entities are valued. Entities valuation is usually the responsibility of analysts and investors. (c) Substance over form The idea of substance over form should prevail when setting standards. We agree that financial information should faithfully represent the facts that it purports to present. Only then will the financial information be useful. (d) Measurement uncertainty The FAC considers that if to a certain extent financial information is not totally reliable, it can still be relevant. If something is uncertain to be measured it could be presented in the primary financial statements or disclosed in the notes. (e) Qualitative characteristics The Commission considers that the Conceptual Framework should continue identifying relevance and faithful representation as the two fundamental qualitative characteristics of

4 4 useful financial information. The Commission believes that users properly understand these two fundamental characteristics. In reference to timeliness, it should be mentioned that financial information is relevant when it is made available to decision-makers in time to be capable of influencing their decisions. Information however may remain timely long after the end of the reporting period. We consider that this aspect however is not related to the standard setting process. Within the context of standard setting, we understand that timeliness does not imply that financial information has to be made public within a certain time frame. We think that the standards should facilitate providing information relevant for an entity in a timely manner. There are other parties involved in financial reporting better positioned to determine the timing aspects of the framework. (d) Cost constraint on useful financial reporting The Commission is of the opinion that the line of reasoning in the Conceptual Framework should be focused on providing high-quality financial reporting and this approach should prevail over costs. Qualitative disclosures in the notes can be regarded as an appropriate complement. Question 2- Description and boundary of a reporting entity The Commission considers that consolidated accounts should be provided as well as companies individual accounts. There are different types of users that look at the separate and/or the consolidated accounts for different reasons. The Conceptual Framework should reflect that. Control however is a concept that probably needs further clarification as the basis for consolidation. Question 3- Definition of Elements The first primary statement that both analysts and investors look at is the profit or loss statement. The profit or loss statement chiefly provides information about the performance over the past period and that is essential information for users. Although we believe that the role of the net result c.q. performance is underestimated in the asset-liability approach, we do not consider the balance sheet a residual statement. Both primary financial statements are important. The information given in the profit or loss statement needs to be correct. This implies to be compliant with the matching principle that has to stand on its own as a guiding principle. It cannot be the indirect result of being the measurement of assets and liabilities. Question 4- Present Obligation The commission has no specific comments on this issue.

5 5 Question 5- Other guidance on the elements Regarding the executory contracts, we are unsure on the potential application of the recognition criteria for executory contracts and would recommend that it is tested before its implementation. Question 6- Recognition criteria We think that if assets and liabilities meet the recognition criteria and the information is relevant, they should be recognized and not be subject to the concept of the benefits exceed the costs. This is difficult to apply in practice as entities might measure and have different opinions on weighing the benefits vis a vis the costs. We think that assets and liabilities should be recognised unless imply excessive costs to measure the asset or liability and in that case disclosure should be clearly stated in the notes. We do not agree thus that the cost aspect is equally important as the recognition and measurement criteria. Moreover, the Commission considers that Paragraph 5.7 should be reviewed as it suggests that recognizing all assets would potentially depict the value of the entity which is not necessarily correct and unimportant in the context of standard setting. Investors and analysts value companies based on different approaches and therefore we consider that the Conceptual Framework and the accounting standards in general should not refer to any aspects of the valuation of companies. Question 7- De-recognition The Commission has no comments on this issue. Question 8- Measurement bases Regarding paragraph 6.17, it might be relevant for users to understand that two entities have acquired similar assets at different prices. The Commission believes that this approach stems from the asset-liability concept with which we do not agree and leads to the conclusion that similar assets or liabilities should not be differently measured. From a user perspective this is not necessarily correct because taking into account concerns related to performance measurement it leads to different conclusion. Different acquisition prices give different outcomes in terms of profitability and performance ( result /invested capital) and this difference should be reflected in the financial statements: a lower acquisition price for similar assets reflects better management performance. From a user perspective that is of utmost importance. Question 9 - Factors to consider when selecting a measurement basis We think that if a measurement basis is the most appropriate to account for a certain transaction - in terms of relevance and faithful representation assuring transparent financial reporting - then the cost to provide the information should not be the deciding factor as suggested.

6 6 Also, it is hardly understood how financial information can be relevant and faithfully when assets and liabilities are not or only partially recognised. Moreover, the Commission disagree with consideration stating that if the measurement basis does not provides relevant information then the asset should not be recognised. At cost should then be perhaps the best option. In this particular case probably disclosures in the notes (instead of presentation in the primary financial statements), including qualitative and if possible quantitative comments on the uncertainties, would probably be the most appropriate way to deal with this. Question 10- More than one relevant measurement basis The Commission recognizes the preeminence of the profit and loss to assess performance and also recognizes that some changes in assets and liabilities should be included in OCI. Thus, it agrees that in specific cases it would acceptable to use different measurement basis. Question 11- Objective and scope of financial statements and communication The Commission agrees that the Conceptual Framework should clearly define between presentation and disclosure. Thus it would also be advisable to identify the different financial statements such as financial position, profit and loss and other comprehensive income statements as well as statement of cash flows and changes in equity. This would facilitate the communication when presentation and disclosure issues are discussed. Moreover, we agree that information about transactions or events that have occurred after the end of the reporting period should be included in the financial statements if such information is necessary to meet the objective of financial statements. The Commission would like to underline that no references to the return that an entity has made on its economic resources during the period should be mentioned in the Conceptual Framework. It considers to be sufficient the fact that stewardship is defined as how efficiently and effectively the entity s management and governing board have discharged their responsibilities to use the entity s resources. No reference to any kind of return should be made as financial analysts use different calculation methods to calculate returns depending on the type of valuation Therefore, we consider unnecessary to state in the Conceptual Framework that The purpose of the statement of profit or loss is to depict the return that an entity has made on its economic resources during the period. Question 12- Description of the statement of profit or loss The commission supports the description of profit or loss as proposed in the ED.

7 7 Question 13-- Reporting items of income or expenses in other comprehensive income The approach described in BC7.38 is supported. We think that profit or loss is (1) the primary source of information about an entity s financial performance and (2) a subtotal, namely a net profit caption, is required. Moreover, the interaction with other financial statements should not be neglected. The Commission would like to additionally highlight that (OCI) should be presented clearly and understandably. The Commission has done empirical work noticing that companies present the same OCI concept in different ways and with different breakdowns. This is an important consideration for users to have reliable and faithful information from entities. Question 14- Recycling The Commission thinks that no items of income or expense should be excluded from profit or loss unless there is a compelling reason to do so. For instance, if recycling might be misleading in terms of the primary performance of the entity. Question 15- Effects of the proposed changes to the Conceptual Framework We agree with not changing immediately existing Standards as a result of the changes to be introduced in the Conceptual Framework. Any decision to amend an existing Standard should follow IASB s normal due process for adding a project to its agenda. Question 16- Business activities We think that the financial statement have to consider what an entity does and how is doing it, namely the nature of its business activity. Financial statements that take this into consideration are likely to provide more useful and relevant information. For instance the nature of the business of manufacturing companies, trading companies and services companies are different and this should be taken into consideration in the way the accounting numbers are treated in the financial reporting. It should be clear however that the definition of the element is a more predominant principle than the business model or the long-term or short-term nature of a business and cannot be rebutted. Question 17- Long-term investment The Commission considers that is very difficult impossible to define which entities in which sectors are long or short term oriented. The Commission agrees with the IASB s conclusion in BCIN.41 that the Conceptual Framework contains sufficient and appropriate discussion of primary users and their information needs, and on the objective of general purpose financial reporting, to address appropriately the needs of long-term investors. High quality accounting standards should be based upon the needs of all investors.

8 8 Question 18- Other comments No additional comments.