Exposure Draft ED/2015/3: Conceptual Framework for Financial Reporting Exposure Draft ED/2015/4: Updating References to the Conceptual Framework

Central Finance Shell International Limited Shell Centre London SE1 7NA Tel 020 7934 2304 E-mail simon.ingall@shell.com 25 November 2015 International Accounting Standards Board 30 Cannon Street London EC4M 6XH Dear Sir or Madam, Exposure Draft ED/2015/3: Conceptual Framework for Financial Reporting Exposure Draft ED/2015/4: Updating References to the Conceptual Framework We are pleased to take this opportunity to respond to the Exposure Draft (ED/2015/3) Conceptual Framework for Financial Reporting, and the accompanying ED/2015/4 Updating References in the Conceptual Framework. We commend the IASB for giving priority to this project, which we and many other constituents called for in responding to the 2011 Agenda Consultation. We also welcome certain changes to the draft Conceptual Framework in the ED compared with the 2013 Discussion Paper (DP), for example to give more emphasis to stewardship and to improve the guidance on measurement. However we still have some concerns with the proposals and these are set out in our responses in Appendix 1 (ED/2015/3) and Appendix 2 (ED/2015/4) to the specific questions. A key concern remains that the changes to the asset and liability definitions coupled with those to recognition may have a detrimental effect on financial reporting. We recommend the changes are field-tested in order that both the IASB and its constituents can understand the impact in practice on reporting and standard-setting. In addition we believe there is lack of a clear conceptual basis for the use of other comprehensive income and in the definition of financial performance. Please do not hesitate to contact me if you have any questions about the responses. Yours faithfully, Simon Ingall Registered in the Netherlands number 27146204 Registered office: Carel van Bylandtlaan 30, 2596 HR, The Hague, The Netherlands VAT registration number NL004790996B29

Head, Accounting Policies Research & Development Appendix 1 Exposure Draft ED/2015/3: Conceptual Framework for Financial Reporting Question 1 Proposed changes to Chapters 1 and 2 Do you support the proposals: (a) to give more prominence, within the objective of financial reporting, to the importance of providing information needed to assess management s stewardship of the entity s resources; (b) to reintroduce an explicit reference to the notion of prudence (described as caution when making judgements under conditions of uncertainty) and to state that prudence is important in achieving neutrality; (c) to state explicitly that a faithful representation represents the substance of an economic phenomenon instead of merely representing its legal form; (d) to clarify that measurement uncertainty is one factor that can make financial information less relevant, and that there is a trade-off between the level of measurement uncertainty and other factors that make information relevant; and (e) to continue to identify relevance and faithful representation as the two fundamental qualitative characteristics of useful financial information? Why or why not? We welcome the additional prominence given to stewardship. We also welcome the reintroduction of prudence but we do not agree with the IASB s rationale - apparently as a means of counteracting of what it believes is management bias towards optimism - and therefore we are not clear how it would play a part in the IASB s considerations of recognition and measurement at standards level. We have the following detailed comments: Paragraph 2.4 states that If financial information is to be useful, it must be relevant and faithfully represent what it purports to represent. Therefore, it is either relevant or not relevant (or a faithful representation or not) and, contrary to paragraphs 2.12-2.13, there must be a degree of measurement uncertainty that causes financial information not to be relevant (or not to be a faithful representation) and therefore not to be useful. It might be clearer for constituents if the Conceptual Framework would use the terms assets and liabilities consistently throughout the document. Is there a good reason in referring to the resources of the entity and claims against the entity when these are no different from assets and liabilities? We comment further on this when responding below to Question 3. The discussion of measurement uncertainty is now included within relevance. Previously it was mentioned in paragraph 2.19. However, with reference to paragraph 2.20, it is necessary to consider both relevance and faithful representation when selecting a measurement basis, taking uncertainty into account. Would it be better to move the text in 2.12-2.13 (and subject to the first bullet point above) into the section 2.20-2.21? In paragraph 2.18, it is not clear why more emphasis is given to the second statement by adding the because phrase. It would be more neutral to add because such mis-statements can lead to the understatement of income or the overstatement of expenses in future periods to the third sentence. Question 2 Description and boundary of a reporting entity Do you agree with: (a) the proposed description of a reporting entity in paragraphs 3.11 3.12; and (b) the discussion of the boundary of a reporting entity in paragraphs 3.13 3.25? Why or why not? 2

Paragraph 3.15 appears to introduce the term unconsolidated financial statements for the financial statements of a reporting entity whose boundary is based on direct control only (and further discussed in paragraphs 3.19-3.20). This may or may not be a better term than separate financial statements, but there is no mention in this ED or ED/2015/4 of consequential changes to the term used in standards. The relevant section of the Basis for Conclusions (paragraph BC3.10-3.17) needs some amendments to improve the language, and consistency with the ED itself. For example, paragraph BC3.10 states Hence, if an entity controls one or more entities, it should present consolidated financial statements but of course an entity - even if it controls other entities - may not be required (or choose) to prepare consolidated financial statements. Also we do not believe it is part of the IASB s role, and in any case it is not a conceptual issue, to dictate that it is necessary to disclose in the unconsolidated financial statements how users may obtain the consolidated financial statements (paragraph 3.25). Question 3 Definitions of elements Do you agree with the proposed definitions of elements (excluding issues relating to the distinction between liabilities and equity): (a) an asset, and the related definition of an economic resource; (b) a liability; (c) equity; (d) income; and (e) expenses? Why or why not? If you disagree with the proposed definitions, what alternative definitions do you suggest and why? Contrary to paragraph BC4.17, we believe that having the potential to produce is a broader term than expected. We consider that the proposed changes to the definitions of an asset and a liability, when coupled with the proposed recognition criteria, may have a detrimental effect on financial reporting. Complexity is added in terms of the need to determine whether, in the case of assets, a right has the potential to produce economic benefits rather than whether it is expected to do so (and if so then in having to go through consequential recognition/measurement exercises or disclosures of unrecognised assets) with no benefit. If an item is not expected to result in an inflow or outflow of economic benefits then that should be a sufficient place to draw the line. We do not see how including other items will better meet the objective of financial reporting. And, as it will not necessarily always be a fact as to whether an item has that potential, a judgement would then have to made in any case as to whether an item is expected to have it, which renders the change rather pointless. We also believe that the proposed definition of an asset could be simplified and made more consistent because: use of the word present alongside economic resource or obligation seems unnecessary. We note that references in section 1 to resources and claims are not preceded by that word; as stated in our response to the DP, the use of a definition that is reliant on a supporting definition may be unhelpful (as noted in paragraph BC4.9(c)); that supporting definition uses the word economic twice; contrary to paragraphs BC2.32 and BC4.16, if the IASB believes that has the potential to and is capable of have the same meaning, it would be clearer to use consistent language throughout the ED; and we have doubts as to whether as a result of past events is necessary or is, like present, simply tautology. It is difficult to see how an entity can have a right (or an obligation) that can arise other than from past events (as expressed by respondents; refer to paragraph BC4.20). 3

The definition of an asset would therefore be a right controlled by the entity that is expected to produce economic benefits. We agree with paragraph 4.10 that rights that are identical to those held by all other parties do not give the entity the potential to receive economic benefits beyond those available to all other parties, but the words we have underlined do not appear in the definition of an asset. Under that definition therefore, these would still be assets. It would seem that a better argument here (and in BC4.38) to exclude such items under the proposed definition is that the entity does not control these rights? We believe that it should be possible to be consistent and replace the term economic resources in paragraph 4.8 and later paragraphs. For example, it seems confusing and somewhat circular to define an economic resource as a right that etc and then refer in paragraph 4.8(a)(iii) to a right to exchange economic resources etc. We would also amend the definition of a liability accordingly (and refer to our response to Question 4 below). As regards the definitions of income and expenses, we believe that the words that result in increases/decreases in equity are unnecessary in paragraphs 4.48 and 4.49. Question 4 Present obligation Do you agree with the proposed description of a present obligation and the proposed guidance to support that description? Why or why not? For consistency with our proposed definition of an asset (refer to our response to Question 3 above), our proposed definition of a liability would be an obligation which an entity has no practical ability to avoid to transfer a right that is expected to produce economic benefits. Paragraph 4.31 can be deleted. In any case, there seems to be some confusion in the definitions proposed in the ED. If a present obligation must have arisen from past events (as stated in paragraph 4.31(b)), then it is duplication also to include as a result of past events in the definition of a liability in paragraph 4.24. Otherwise we agree with the related guidance in the ED and consider its inclusion, if translated into accounting standards, would improve their practicability and the understandability of the outcome. Question 5 Other guidance on the elements Do you have any comments on the proposed guidance? Do you believe that additional guidance is needed? If so, please specify what that guidance should include. It is not clear why paragraph 4.46, which appears to relate to presentation and disclosure, should be included in a section on definition. (And the heading Equity should be Definition of equity consistent with the headings for the other elements of financial statements; even if its definition is as a residual.) The section Unit of account relates more to recognition and measurement (Chapter 5). Question 6 Recognition criteria Do you agree with the proposed approach to recognition? Why or why not? If you do not agree, what changes do you suggest and why? We refer to the concerns expressed in our response to the DP regarding the elimination of the probability criteria and the impact on financial reporting (reproduced in italics below). We are still concerned about the implications for items that are not covered in an existing standard (and the implications for changes in the future to existing standards). We disagree with paragraph BC5.39 that a probability threshold is not 4

sufficiently aligned with the concept (relevance) that it is supposed to achieve. We do not see how widening the scope will better meet the objective of financial reporting. Coupled with the proposed new definitions of assets and liabilities, in theory a preparer is faced with more complexity in terms of seeking out any such items that might now qualify as assets and liabilities and, if so, in deciding whether they should be recognised (and then how they are measured, and/or disclosed as unrecognised assets and liabilities). We do not see that the outcome will better meet the objective of financial reporting. It is difficult to see the benefit to users of recognising an asset or liability which does not meet that threshold of certainty. We are concerned that in practice the changes proposed in the DP to the definitions and to recognition taken together may significantly complicate the development of future accounting standards and lead to less clarity as regards existing IFRSs Under the DP s proposals, an asset or a liability will always appear on the balance sheet unless the IASB decides, on a case-by-case basis for each new accounting standard, that it meets at least one of the proposed non-recognition criteria. This could become a major focus of debate during the standard-setting process; particularly as one of the criteria relates to cost/benefit which is often highly contentious. The Framework is intended to assist the IASB but also has a role of assisting other parties in interpreting standards and developing accounting policies. It is difficult to see how this role would work if such key issues are only decided on a case-by-case base. It appears that all assets or liabilities are recognised unless an individual standard specifically states otherwise. The ED appears even less clear about criteria for disclosures about unrecognised assets and liabilities. Paragraphs 7.2-7.3 implies they are always required which, as noted above, could open a can of worms; paragraph 5.11 states that disclosures may be needed. The second sentence of paragraph 5.3 is not related to recognition but to presentation and disclosure. We believe that (paragraph 5.9) it is irrelevant (and somewhat presumptuous) to say that the failure to recognise some assets and liabilities makes financial statements less complete. It seems to imply that recognition should be automatic, rendering criteria unnecessary. We suggest deleting that part of the text. Question 7 Derecognition Do you agree with the proposed discussion of derecognition? Why or why not? If you do not agree, what changes do you suggest and why? We have no comments. Question 8 Measurement bases Has the IASB: (a) correctly identified the measurement bases that should be described in the Conceptual Framework? If not, which measurement bases would you include and why? (b) properly described the information provided by each of the measurement bases, and their advantages and disadvantages? If not, how would you describe the information provided by each measurement basis, and its advantages and disadvantages? Question 9 Factors to consider when selecting a measurement basis Has the IASB correctly identified the factors to consider when selecting a measurement basis? If not, what factors would you consider and why? Question 10 More than one relevant measurement basis Do you agree with the approach discussed in paragraphs 6.74 6.77 and BC6.68? Why or why not? 5

We agree that the ED correctly identifies the appropriate measurement bases; this is much clearer than in the DP. Whilst we understand why the IASB might seek to explain the outcome in this way, it does not seem to be internally consistent to refer (for example in paragraph 6.29 and in Table 6.1) to the use of a measurement basis for income and expenses. The ED states that income and expenses are the result of changes in assets and liabilities (paragraphs 4.48-4.52). We therefore find the sections on the statement of financial performance somewhat confusing. It is, for example, difficult to rationalise the item impairment losses in each of the three columns. Paragraph 6.48 also refers to selecting a measurement basis for the related income and expenses. We note there is a more consistent description in paragraph 7.11: income or expenses arising from change in the carrying amount of an asset or liability. The focus should be on considering the measurement basis (for recognised assets and liabilities) that, taking into account the qualitative characteristics and cost constraint, produces the most appropriate outcome for both the statement of financial position and the statement(s) of financial performance in meeting the objective of financial reporting. And, even more important on our view, is considering whether a different measurement basis may be more appropriate for allocating the change in the carrying amount of assets and liabilities between the statement of profit and loss and other comprehensive income (paragraph 6.76). We refer to this further in our response below to Question 12. We have the following further detailed comments: We believe that paragraph 6.77 should be re-worded as it implies there is a single measurement basis selected for the statement of profit and loss, and that the income or expenses are measured using that basis. In respect of the discussion in the ED on current value measurement bases, we are not sure whether the level of detail in paragraphs 6.46 is necessary in a Conceptual Framework. Also paragraph 6.23 implies that there is only one valuation technique for determining fair value. Question 11 Objective and scope of financial statements and communication Do you have any comments on the discussion of the objective and scope of financial statements, and on the use of presentation and disclosure as communication tools? We understand that the presentation and disclosure concepts set out in the ED will be developed further within the IASB s Disclosure Initiative. Paragraph 7.2(a) implies that, to meet the objective of financial statements, all items that meet the definition of an element must be recognised. We would recommend re-wording this (perhaps to certain items) to avoid a contradiction with Chapter 5 (and to ensure that references to unrecognised items in 7.2(b)(ii) and 7.3(a) would still apply). Question 12 Description of the statement of profit or loss Do you support the proposed description of the statement of profit or loss? Why or why not? If you think that the Conceptual Framework should provide a definition of profit or loss, please explain why it is necessary and provide your suggestion for that definition. Question 13 Reporting items of income or expenses in other comprehensive income Do you agree with the proposals on the use of other comprehensive income? Do you think that they provide useful guidance to the IASB for future decisions about the use of other comprehensive income? Why or why not? If you disagree, what alternative do you suggest and why? We appreciate the efforts made by the IASB during this project to try to ensure that any noise i.e. changes in assets and liabilities generated by use of the current value measurement basis which do not represent the 6

primary component of financial performance, is kept out of the statement of profit or loss. We had raised some concerns when responding to the ideas in the DP, which perhaps had not been fully developed. And we continue to believe that the distinction between profit or loss and other comprehensive income (OCI) is much more than a presentation issue. However, whilst the proposed purpose of the statement of profit or loss in the ED (paragraph 7.20) is an improvement, we have some sympathy with the alternative view expressed in paragraphs AV2-AV5, in particular about the lack of a clear conceptual basis for the use of OCI and a definition of financial performance. In particular, the purpose of the statement of profit or loss in the ED somewhat relies on the term return on economic resources and therefore is still not be sufficiently robust, and it causes confusion with its use in paragraph 1.16 where it appears to refer to the overall financial performance. The purpose of the statement of profit or loss should be clearly linked to the objective of financial reporting in respect of financial performance i.e. to provide information about an entity s income and expenses that is useful to users of the financial statements in assessing the prospects for future net cash inflows to the entity and in assessing management s stewardship of the entity s resources. (The outcome should result in minimising the need for management to provide additional information when communicating with investors.) Therefore it should be the subset of the statement of financial performance that best achieves this objective by including the components of changes in assets and liabilities as a result of transactions and other events that have the most persistence and predictive value. (Of course, one might question why it would useful to measure any assets and liabilities at current value if it does not provide the most appropriate information in terms of persistence and predictive value but, for example in the case of defined benefit plans, it is perhaps the least worst option.) In respect of the proposed rebuttable presumptions (paragraphs 7.23-7.24), we consider that only income or expenses that relate to assets or liabilities measured at current values should be candidates for allocation between the statement of profit or loss and OCI. We believe the purpose proposed above for the statement of profit or loss should eliminate the need for other rebuttable presumptions. Using a different measurement basis to measure assets and liabilities to generate the portion of income and expense to be included in profit and loss may be a convenient tool, but without a robust purpose, it is not clear in the ED as to whether this would result in the most appropriate information about financial performance. Question 14 Recycling Do you agree that the Conceptual Framework should include the rebuttable presumption described above? Why or why not? If you disagree, what do you propose instead and why? We agree with the presumption, although the wording in paragraphs 7.26-7.27 should be aligned with the proposed definition for the purpose of the statement of profit or loss set out above in our response to Question 13. Question 15 Effects of the proposed changes to the Conceptual Framework Do you agree with the analysis in paragraphs BCE.1 BCE.31? Should the IASB consider any other effects of the proposals in the Exposure Draft? 7

We do believe that it is important that that the changes to the definitions of elements and to recognition are field-tested as we are concerned about unexpected consequencies. Please also refer to our response to ED/2015/4 in Appendix 2. Question 16 Business activities Do you agree with the proposed approach to business activities? Why or why not? In our response to the DP, we asked that the role of the business model in financial reporting should be explicitly stated in the Framework. Whilst we do not necessarily agree with the arguments used by the IASB to justify why the term business model is not used in the ED, we welcome the inclusion of the need to take into account how an entity conducts its business activities, particularly in measurement and presentation. With respect to presentation, we note that paragraph BCIN.33 states (with a cross-reference to paragraph 7.19) that it is relevant in deciding whether to include income and expenses in profit or loss or in OCI (which we would welcome). However we could not see this mentioned in paragraph 7.19 nor could we see that the IASB has explained how it is relevant to the proposed approach in paragraphs 7.19-7.27. Question 17 Long-term investment Do you agree with the IASB s conclusions on long-term investment? Why or why not? We consider that the needs of long-term investors, including the ability to assess management s stewardship, should be the focus of standard-setting and actually we believe that this is reflected in the ED s proposals. It does not, of course, mean that the use of current value measurements is never appropriate. Question 18 Other comments Do you have comments on any other aspect of the Exposure Draft? Please indicate the specific paragraphs or group of paragraphs to which your comments relate (if applicable). As previously noted, the IASB is not requesting comments on all parts of Chapters 1 and 2, on how to distinguish liabilities from equity claims (see Chapter 4) or on Chapter 8. We note that Chapter 8 Concepts of capital and capital maintenance is largely unchanged from the current Conceptual Framework. We are not clear why this chapter is still considered necessary but, if it is to be retained, the references to profit (and to being the residual amount that remains after expenses have been deducted from income) appear to be inconsistent with its use elsewhere in the ED. In fact on page 17 of the document it states that the ED does not define profit or loss. Whilst we have no comments on the content of Appendix A Cash-flow-based measurement techniques, we would question whether this level of detail should be included in a Conceptual Framework. 8

Appendix 2 Exposure Draft ED/2015/4: Updating References to the Conceptual Framework Question 1 Replacing references to the Conceptual Framework The IASB proposes to amend IFRS 2, IFRS 3, IFRS 4, IFRS 6, IAS 1, IAS 8, IAS 34, SIC-27 and SIC-32 so that they will refer to the revised Conceptual Framework once it becomes effective. Do you agree with the proposed amendments? Why or why not? We note in paragraph BC6 that the IASB is not proposing to update the existing definition of a liability and an asset in IAS 37 and IAS 38 respectively. In IAS 37 there is a definition of a provision (IAS 37.14) that will apply independent of the definition of a liability and therefore which will not be affected by changes to the Conceptual Framework. However the definitions of an intangible asset and an identifiable asset in IAS 38 depend on the definition of an asset. To avoid confusion and inconsistency, the IASB should clarify that the definition of an asset in IAS 38.8 applies for the purposes of that accounting standard. That should also help mitigate a little the concern set out in our response to ED/2015/3 about the impact of the new definitions of an asset, and related recognition criteria, on reporting. Question 2 Effective date and transition The IASB proposes that: (a) a transition period of approximately 18 months should be set for the proposed amendments. Early application should be permitted. (b) the amendments should be applied retrospectively in accordance with IAS 8, except for the amendments to IFRS 3. Entities should apply the amendments to IFRS 3 prospectively, thereby avoiding the need to restate previous business combinations. Do you agree with the proposed transition provisions and effective date? Why or why not? As discussed above, we have concerns about the proposed new definitions of an asset and a liability, and related recognition criteria. In paragraph BC8-BC12 the IASB only discusses transition for changes to accounting policies resulting from the proposed amendments to the Conceptual Framework. The recognition of (and/or disclosure of unrecognised) new assets or liabilities should be applied prospectively. Question 3 Other comments Do you have any other comments on the proposals? We have no other comments. 9