November 25, The Honorable Hans Hoogervorst Chairman International Accounting Standards Board 30 Cannon Street London, EC4M 6XH United Kingdom

Transcription

1 The Honorable Hans Hoogervorst Chairman International Accounting Standards Board 30 Cannon Street London, EC4M 6XH United Kingdom Re: IASB Exposure Draft: Conceptual Framework for Financial Reporting Dear Chairman Hoogervorst: The U.S. Chamber of Commerce (the Chamber ) is the world s largest federation, representing the interests of more than three million U.S. businesses and professional organizations of every size and in every economic sector. These members are both users and preparers of financial information. The Chamber created the Center for Capital Markets Competitiveness ( CCMC ) to promote a modern and effective regulatory structure for capital markets to fully function in a 21 st century economy. To achieve these goals, the CCMC supports the creation of a single set of global accounting standards and has supported the improvement of standards and reduction of complexity through the convergence of U.S. Generally Accepted Accounting Principles ( US GAAP ) and International Financial Reporting Standards ( IFRS ). The CCMC appreciates the opportunity to comment on the International Accounting Standards Board ( IASB ) Exposure Draft on the Conceptual Framework for Financial Reporting (the Exposure Draft ). However, the CCMC continues to regret that the joint work of IASB and Financial Accounting Standards Board ( FASB ) on a conceptual framework has not continued, harming the movement and convergence towards a single global accounting standard. As previously noted, the CCMC has been a strong supporter of the convergence of IFRS and U.S. GAAP. This goal is best served if the conceptual frameworks of IASB and FASB do not diverge on fundamentals.

2 Page 2 The IASB embarked on the Conceptual Framework project to improve financial reporting by providing IASB with a more complete and updated set of concepts to use when it develops or revises IFRS. The CCMC previously commented on the IASB Discussion Paper, A Review of the Conceptual Framework for Financial Reporting 1 and our comments on the Exposure Draft expand on that letter and address new issues, such as materiality and prudence. Additionally, the CCMC wrote to the Securities and Exchange Commission ( SEC ) with proposals to modernize financial reporting. 2 We believe that several of the proposals put forth in that letter can be instructive to the IASB as it deliberates on the Exposure Draft. I. Convergence The objectives of IASB s Conceptual Framework are to assist the IASB in developing standards that are based on consistent concepts and preparers to develop consistent accounting policies when no Standard applies to a particular transaction or event, or when a Standard allows a choice of accounting policy. 3 In 2004, IASB and FASB commenced a joint project to revise their respective conceptual frameworks as a means to achieve convergence. In 2010, IASB and FASB issued two chapters of a revised conceptual framework, which focused on the objectives of general purpose financial reporting and the qualitative characteristics of useful financial information. These chapters are now part of IASB s existing Conceptual Framework. The IASB and FASB also published a discussion paper and exposure draft that covered the concept of a reporting entity, the definitions of the elements of financial statements, and held public roundtables on measurement concepts. However, in 2010, IASB and FASB suspended work on the joint conceptual framework in order to concentrate on more urgent projects that arose from the financial crisis. To the extent that IASB and FASB s respective conceptual frameworks are not substantially similar, the ability to converge IFRS and U.S. GAAP will be severely 1 See the January 12, 2014 letter from the U.S. Chamber of Commerce CCMC to the Honorable Hans Hoogervorst on A Review of the Conceptual Framework for Financial Reporting, 2 The October 9, 2013 letter to SEC Chair Mary Jo White can be found at: 3 See the Exposure Draft, page 6.

3 Page 3 undercut. Indeed, the Exposure Draft revisits and revises several of the areas finalized in the joint work of the IASB and FASB. II. Materiality The CCMC recognizes that FASB is currently proposing to amend the discussion of materiality in its Statement of Financial Accounting Concepts, which would create a difference between FASB s and IASB s respective Conceptual Frameworks in this regard. FASB s intent is to clarify that materiality is a legal concept, correct an inconsistency between the current definition of materiality in FASB Concepts Statements and the legal concept of materiality in the U.S., and explain that FASB observes but does not promulgate definitions of materiality. Materiality is a cornerstone of effective financial reporting to provide investors with decision useful information and for businesses to communicate information necessary for capital formation. The CCMC believes that FASB is taking the appropriate path in dealing with materiality and recommends that IASB take a similar approach. Accordingly, the IASB should recognize that materiality is defined by the jurisdiction in which IFRS is applied. Such an approach would, for example, help mitigate the potential complexities, confusion, and litigation risk for Foreign Private Issuers ( FPI s ) using IFRS for financial statements included in filings with the SEC. These potential vulnerabilities exist because the IASB s definition of materiality remains inconsistent with the securities laws in the U.S. 4 We believe that the timing of the FASB project provides the IASB with an opportunity to address this definition issue in a joint manner. III. Business Model Concept in Financial Reporting It is the CCMC s view that financial statements can be made more relevant if IASB considers how an entity conducts its business activities when it develops new or revised standards. Thus, the CCMC supports the use of the business model concept in financial reporting. Differing business models create different needs for financial 4 The CCMC recognizes that in October 2015 the IASB issued an Exposure Draft of an IFRS Practice Statement, Application of Materiality to Financial Statements. However, this Exposure Draft does not propose to change IASB s extant definition of materiality. Rather, the objective of this Practice Statement would be to provide guidance to assist management in applying the concept of materiality as defined by IASB s Conceptual Framework for Financial Reporting.

4 Page 4 statement users and this should be reflected in accounting standards when appropriate. The CCMC has raised this issue in commenting on numerous proposals with FASB and the IASB. In our view, use of the business model provides more accurate financial reports as the accounting will be able to more accurate identify and communicate economic activity related to a specific industry and business. This will assist in one of the primary goals of financial reporting providing investors with material decision useful information. The CCMC is disappointed that the Exposure Draft does not use the term business models or include a general discussion of the role played in financial reporting by how an entity conducts its business activities. Nonetheless, we appreciate that the Exposure Draft discusses that the latter does affect the unit of account, the selection of a measurement basis for an asset or a liability and related income and expense, and presentation and disclosure, including whether to include items of income and expense in OCI. 5 IV. Prudence The Exposure Draft proposes to restore the concept of prudence to IASB s Conceptual Framework. Specifically, the Exposure Draft states: Neutrality is supported by the exercise of prudence. Prudence is the exercise of caution when making judgments under conditions of uncertainty. The exercise of prudence means that assets and income are not overstated and liabilities and expenses are not understated. Equally, the exercise of prudence does not allow for the understatement of assets and income or the overstatement of liabilities and expenses, because such misstatements can lead to the overstatement of income or the understatement of expenses in future periods. 6 The CCMC questions the need for this revision. Moreover, the discussion in the Exposure Draft implies the existence of something akin to just right accounting. We believe that this position complicates the concept of neutrality and subsequently 5 See the Basis for Conclusions Exposure Draft, page See the Exposure Draft, page 29.

5 Page 5 promotes complexity in financial reporting. We believe that this will increase litigation risk for companies, management, audit committees, and auditors. This is a point and area of concern that we have raised previously with the SEC on IFRS work plans. Accordingly, the CCMC recommends that the IASB reconsider this aspect of the Exposure Draft. a. Cost-Benefit Considerations IV. Other Matters The CCMC strongly supports the use of cost-benefit considerations in accounting standard-setting and appreciates that the Exposure Draft maintains this concept. For example, the Basis for Conclusions portion of the Exposure Draft recognizes that the cost constraint plays a particularly important role in decisions about the unit of account, recognition, measurement, and presentation and disclosure. 7 In turn, the Exposure Draft discusses cost constraints in each of these sections of the proposed Conceptual Framework. Cost-benefit considerations are also important since the CCMC has raised process concerns when providing comments to both IASB and FASB. It is often difficult to understand what the benefits are to financial reporting users, the process used to discern those benefits and the transparency involved. Accordingly, the benefits of a proposal are not readily apparent and the process for how those benefits are determined is murky at best. We believe that the Conceptual Framework is one appropriate place for IASB to provide clarity on a transparent process and better help stakeholders in the financial reporting process understand the benefits, as well as the costs, of proposals. We encourage IASB to further consider this issue. b. Forward-Looking Information The CCMC supports the inclusion of presentation and disclosure guidance in the Conceptual Framework. Accordingly, the CCMC also supports the Exposure 7 See the Basis for Conclusions Exposure Draft, page 28.

6 Page 6 Draft view that forward-looking information is included in the financial statements (notes) only if it provides relevant information about an entity s assets liabilities and equity that existed at the end of, or during the period (even if they are unrecognized) or income and expenses for the period. 8 Consistent with the Exposure Draft, the CCMC also believes that other types of forward-looking information that may provide relevant information should be presented outside the financial statements (notes), for example, in management commentary. As an example, forward-looking information could be included in management commentary if the entity prepares one, similar to Management Discussion and Analysis required for public companies in the U.S. by the SEC. Nonetheless, the CCMC also believes that a balance must be maintained so that forward-looking information works in parallel with and not in conflict with disclosures required through law or regulation. While relevant and appropriate forward-looking disclosures can provide financial statement users with decision useful information, such information that conflicts with other disclosures may increase liability risk for companies and others ultimately harming investors. Additionally, if preparers are required to provide forward looking information in other corporate disclosures, duplicative disclosures should not be required in financial statements. c. Other Comprehensive Income The Exposure Draft includes a discussion of other comprehensive income ( OCI ) and the presentation of OCI in the statement of comprehensive income. Consistent with the Exposure Draft, the CCMC supports that the proposed Conceptual Framework would allow items of income and expense previously recognized in OCI to be recognized subsequently in the statement of profit or loss (i.e., recycling). 9 *** 8 See Exposure Draft, page See the Exposure Draft, page 77.

7 Page 7 Thank you for your consideration of these comments on IASB s proposed Conceptual Framework. We would be happy to discuss these issues with you further. The CCMC looks forward to continuing our efforts to work with IASB to achieve our goals of robust accounting standards that reflect the economic activity of business operations in furtherance of efficient and fair global capital markets. Sincerely, Tom Quaadman