Exposure Draft Conceptual Framework for Financial Reporting

November 26 th, 2015 International Accounting Standards Board 30 Cannon Street, London EC4M 6XH United Kingdom Dear IASB members, Exposure Draft Conceptual Framework for Financial Reporting The Israel Accounting Standards Board welcomes the opportunity to comment on the IASB's Exposure Draft Conceptual Framework for Financial Reporting published in May 2015. We concur with the decision to review the Conceptual Framework and believe that it will improve the usefulness of financial reporting. Please find below our detailed comments for some of the questions raised in the ED: Question 1 Proposed changes to Chapters 1 and 2 Do you support the proposals? (b) to reintroduce an explicit reference to the notion of prudence (described as caution when making judgments under conditions of uncertainty) and to state that prudence is important in achieving neutrality? We agree with the proposal, in particular due to the addition of the last sentence that requires balance in exercising prudence and ensures neutrality ("Equally, the exercise of prudence does not allow for the understatement of assets and income or the overstatement of liabilities and expenses, because such mis-statements can lead to the overstatement of income or the understatement of expenses in future periods"). רח'גרוזappleברג 14, ת"א 65811,טל. Tel,97235109977 14 Gruzenberg st., Tel-Aviv 65811, פקס. 97235109988,Fax. www.iasb.org.il, E-mail: iasb@iasb.org.il

(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? Why or why not? Relevance is one of the fundamental qualitative characteristics. According to paragraphs 2.6 and 2.7 relevant financial information is capable of making a difference in the decisions made by users and information is capable of making a difference in decisions if it has predictive value, confirmatory value or both. Paragraphs 2.12 and 2.13 dealing with measurement uncertainty were added as part of Relevance. However, we don't understand how "measurement uncertainty" is related to predictive value or confirmatory value of information. We believe that a more appropriate location for these paragraphs is as another qualitative characteristic that enhance the usefulness of information that is relevant and faithfully represented (as part of paragraphs 2.22-2.35). 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? (a) We agree with the proposed description of the reporting entity. (b) We generally agree with the discussion of the boundary of a reporting entity. However, we would like to comment on a few issues: (i) Paragraph 3.15(a) introduces a new term "unconsolidated financial statements". This term is not defined in the ED. In a footnote to paragraph BC3.12 the IASB states "The Exposure Draft uses the term 'unconsolidated financial statements' instead of the term 'separate financial statements', which is defined in IAS 27 Separate Financial Statements to cover specific circumstances." We believe that a definition of unconsolidated financial statements is required. (ii) Paragraph 3.17 acknowledges the possible use of combined financial statements for two or more entities that do not have a parent-subsidiary relationship. We believe that the use of combined financial statements should have some conceptual boundaries in the Conceptual Framework or in other relevant standard, as at the moment there are no 2

guidelines regarding combined financial statements, ie what are the circumstances that allow presenting combined financial statements and what are the combining procedures. Otherwise, entities may combine financial information of separate entities under any reasoned argument that the information is useful to a limited group of primary users of the financial statements. We note the Board s reference in BC 19 that combined financial statements can provide useful information to users in some circumstances. While we acknowledge the Board s reference to a standards level project, we believe that it is necessary to set some boundaries in the Conceptual Framework to the circumstances in which combined financial statements could be appropriate. (iii) Paragraph 3.23 states "Consequently, in general, consolidated financial statements are more likely to provide useful information to users of financial statements than unconsolidated financial statements." We believe that this assertion should not be included in the Conceptual Framework and that there are more than a few cases in which the separate financial statements provide useful information to users of financial statements, not less than the consolidated financial statements. (iv) Paragraph 3.25 states " To enable users to receive the information they need about all the economic resources the parent controls, both directly and indirectly, and about claims against both the parent and its subsidiaries, it is necessary to disclose in the unconsolidated financial statements how users may obtain the consolidated financial statements." This is a disclosure requirement that should not be included in the Conceptual Framework. 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? 3

Although we agree to the proposed definitions of elements in the ED, we would like to comment on a few issues: Definition of an Asset Paragraph 4.12 of the ED states "In many cases, the set of rights arising from legal ownership of a physical object is accounted for as a single item. Conceptually, the economic resource is the set of rights not the physical object. Nevertheless, describing the set of rights as the physical object will often provide the most concise, clear and understandable information." We agree. Yet, this statement emphasizes the legal form. In our opinion, since faithful representation provides information about the substance of an economic phenomenon instead of merely providing information about its legal form, this paragraph should clarify that in many cases, where the legal form is not different than the economic substance, the set of rights arising from legal ownership of a physical object is accounted for as a single item. It should also be clarified that in other cases, where the legal form differs from the economic substance the set of rights arising from legal ownership of a physical object might be accounted for as more than a single item. Additional definitions required Income is defined as increases in assets or decreases in liabilities that result in increases in equity, other than those relating to contributions from holders of equity claims. We believe that a definition to contributions from holders of equity claims is necessary if this term is used in the definition of income and a definition to distributions to holders of equity claims is necessary if this term is used in the definition of expenses. The IASB does not propose changes to the distinction between liabilities and equity (BCIN.25) due to its research project on Financial Instruments with Characteristic of Equity. However, paragraph 4.30 states " It follows that an obligation of an entity to transfer its own equity claims to another party is not an obligation to transfer an economic resource." This determination contradicts paragraph 21 of IAS 32. Since the IASB is currently dealing with this issue in its project regarding the distinction between liability and equity, in our opinion this sentence should be omitted. 4

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? Paragraph 4.55 deals with terms that have no commercial substance and provides an example of rights (including options) that the holder will not have the practical ability to exercise. The term practical ability is also mentioned in the definition of present obligation and paragraphs 4.32-4.35 provide guidelines for the term "no practical ability to avoid the transfer". We believe that guidelines are also required for the term "practical ability to exercise" mentioned in paragraph 4.55. 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? In the Discussion Paper the IASB presented the control approach which is to derecognise assets when the recognition criteria are no longer met. For consistency between recognition criteria and derecognition criteria, we believe that such a statement should be included in the Conceptual Framework. 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? Paragraph 6.69 has the title 'transactions with holders of equity claims'. Paragraph 6.69 deals only with a transaction where the entity receives an asset from a holder of an equity claim. We believe this section should also deal with transactions where the entity undertakes a liability from a holder of an equity claim and transactions where a holder of an equity claim receives an asset or a liability from the entity. 5

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? 1. Paragraph 7.2 states that "The scope of financial statements is determined by their objective, which is to provide information about an entity's assets, liabilities, equity, income and expenses that is useful to users of 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 (see paragraph 3.4). That information is provided: (a) In the statement of financial position and the statement(s) of financial performance, (b) In other parts of the financial statements, including the notes to the financial statements " Paragraph 10 of IAS 1 determines the scope of financial statements which includes, in addition to the statement of financial position and the statement(s) of financial performance, the statement of cash flows and the statement of changes in equity. Therefore, in our opinion, a reference to these statements should be added. 2. Paragraph 7.4 discusses forward-looking information. It states that forward-looking information is included in the financial statements 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 not recognised) or income and expenses for the period. In our opinion, the criterion for including forward-looking information in the financial statements is not clear and there is a lack of clarity about which forward-looking information can be included in the financial statements. In our opinion, forward-looking information should be included in management commentary rather than in the financial statements. Question 13 Reporting items of income and 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? Paragraph 7.23 states that " there is a presumption that all income and all expenses will be included in the statement of profit or loss " Paragraph 7.24 prescribes the circumstances in 6

which that presumption can be rebutted. It states "The presumption that all income and all expenses will be included in the statement of profit or loss can only be rebutted if: (a) the income or expenses (or components of them) relate to assets or liabilities measured at current values and are not of the type described in paragraph 7.23(b); (b) excluding those income or expenses (or components of them) from the statement of profit or loss would enhance the relevance of the information in that statement for the period." We support the IASB's intention to limit items of other comprehensive income by prescribing that presumption and to set the criteria for classifying items to other comprehensive income. However, we believe that the emphasis given to relevance (paragraph 7.24(b)) weakens the criteria needed to rebut that presumption and allows including more items in other comprehensive income. We also believe that currently some Standards are not in line with these criteria. Here are some examples: (a) investment in a foreign entity is not measured at current value according to IAS 21 and hence exchange differences arising from that investment would not qualify as other comprehensive income. (b) Some components of remeasurments of the net defined benefit liability (asset) would not qualify as other comprehensive income. (c) depreciation of the carrying value of a revalued property, plant and equipment item is an expense that is included in profit or loss while the revaluation itself is an item of other comprehensive income. Another example that raises a similar concern about how that presumption is rebutted is investments in equity instruments that the entity has elected on initial recognition to present their fair value changes in OCI according to paragraph 5.7.5 of IFRS 9. In this example, there is another presumption that should be rebutted the presumption that income and expenses that are included in OCI in one period, will be reclassified into the statement of profit or loss in some future period. According to IFRS 9, gains or losses upon disposal of those investments are not recycled to the statements of profit or loss. Question 16 Business activities Do you agree with the proposed approach to business activities? Why or why not? We support the IASB's intention to combine the business model in the ED. However, in our opinion, the Conceptual Framework should include a general discussion on business model, its 7

definition and the effect of the business model on financial reporting. For example, the effect of the business model of an entity on the classification and measurement of vehicles. In many cases, the vehicles are either property, plant and equipment or inventory. Yet, in some cases, for entities that are engaged in leasing of vehicles, the business model affects the classification and measurement of those vehicles and thus their classification is changed from property, plant and equipment to inventory when they cease to be rented and become held for sale (paragraph 68A of IAS 16). 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 ). (a) Paragraph 6.80 states that "Although total equity is not measured directly, some individual classes or categories of equity may be measured directly " In our opinion, it is important that the Conceptual Framework will provide guidelines on initial recognition and measurement principles of equity claims. (b) Paragraph BCIN.23 states that the IASB considers that concepts relating to the equity method of accounting would be best dealt with if the IASB were to carry out a project to consider revising the Standard on this topic. We support the IASB's decision and we encourage the IASB to consider the possibility to completely cancel the equity method. We would like to mention that the measurement basis of the equity method is neither historical cost nor current value. We appreciate the opportunity to provide our comments. Sincerely, Dov Sapir, CPA, Chairman Israel Accounting Standards Board 8