The IASB and US FASB have, this month, issued a preliminary views discussion paper on the first phase of their joint project to revisit their conceptual frameworks. Acting Technical Director and Secretary David Loweth gives a summary of the big issues that will need to be debated.

As reported previously in Inside Track, the goal of the IASB and FASB project is to develop a common conceptual framework that both Boards can use in developing new and revised accounting standards. The ASB continues to monitor closely the project and we will provide updates on developments.

The first discussion paper sets out the preliminary views of the IASB and the FASB on the objective of financial reporting and the qualities that make the information useful for decisionmaking. While the framework is not an accounting standard, it will form the basis for the development of future standards and so will have far-reaching practical implications. The proposals in this first phase will also influence later phases of the project, for example measurement, where the debate on fair value has already started in earnest.

While much of the discussion paper covers ground that is already reflected in the UK Statement of Principles for Financial Reporting, the ASB has concerns with a number of the proposals which it will be considering further during the comment period, which runs to 3 November.

The objective of financial reporting

The major issue for the ASB is the proposal that the objective of financial reporting should focus only on decisionusefulness, with stewardship being subsumed within this rather than being referred to as a specific part of the objective, or a separate objective. In the ASB's Statement of Principles the objective refers specifically to stewardship.

The IASB and FASB acknowledge that providing information using in assessing management's stewardship is of significant interest to users of financial reports who are interested in making resource allocation decisions. However, two IASB Board members disagree with the proposal and have set out an alternative view in the discussion paper to argue that stewardship should be identified as a separate objective. This alternative view reflects the concerns expressed by constituents in the UK. One of the purposes of financial reporting is to provide shareholders with the information they need to make decisions as owners of the business. These decisions are not merely whether to hold shares, or buy more, but include their rights, as owners, to change the direction of the business.

Financial statements, or financial reporting?

The focus of the IASB and FASB discussion paper is on financial reporting. The two Boards have concluded that the objective should be broad enough to encompass information that might eventually be provided by financial reporting outside the financial statements. Consideration of specific issues concerning the boundaries of financial reporting and distinctions between financial statements and other parts of financial reporting is to be deferred to a later phase of the project.

While the ASB's Statement of Principles refers to 'financial reporting' in its title, its purpose is stated clearly as setting out the principles that should underlie the preparation and presentation of general purpose financial statements. The IASB and FASB state clearly that financial statements are a central element of financial reporting, but there are concerns that widening the application of the framework to encompass all financial reporting will give rise to problems, in that it may be attempting to outline the concepts that underpin two fundamentally different things: financial statements and financial reporting.

Who should be the primary users?

The IASB and FASB have identified as the primary users of financial reports "present and potential investors and creditors, and their advisors". In the ASB's Statement of Principles, the defining class of user is identified as "present and potential investors", which is narrower than that proposed by the two Boards. Some constituents believe that the definition of a primary user should be narrowed still further to focus on the existing shareholders in a company.

Qualitative characteristics: whither reliability?

The main change in the discussion paper is the proposal to replace reliability with faithful representation. The IASB and FASB are proposing this change on the grounds that there have have been "longstanding problems with the qualitative characteristic of reliability" and the existence of a variety of notions of what the concept means.

The IASB and FASB take the view that the use of the term faithful representation better conveys what the framework means by reliability. However, concerns have been expressed as to whether the change is simply one of terminology, or something more substantial, in particular when considering the Boards' proposal not to identify substance over form as a component of faithful representation. The current IASB Framework includes substance over form as a component of reliability, but the proposal from the Boards is to drop this reference in the converged framework, on the grounds that it would be redundant, given that the quality of faithful representation is incompatible with representations that subordinate substance to form.

The Boards are proposing to introduce the notion of verifiability as a component of faithful representation. Verifiability implies that different qualified observers would reach general consensus, if not complete agreement, on information in financial reports. One IASB Board member has written an alternative view to stress that the description of verifiability should additionally specify that any consensus should be based on reliable evidence.

What about public benefit entities?

The IASB and the FASB project is focusing initially on for-profit entities in the private sector. The Boards plan to consider the applicability of the concepts to other entities at a later stage, rather than continuously throughout the project.

The ASB is participating in a group of chairs and senior staff members of standard-setters (the others being from Australia, Canada and New Zealand) that is monitoring the applicability to not-for-profit entities in the private and public sector (ie public benefit entities) of the concepts proposed in the preliminary views discussion paper. A report on key issues is available on the website at http://www.frc.org.uk/asb/technical/projects/project0061.html.

On the objective of financial reporting, the report highlights three issues:

• an insufficient emphasis on accountability/stewardship;
• a need to broaden the identified users and establish an alternative primary user group; and
• the inappropriateness of the pervasive cash flow focus.

Some of these issues are also pertinent to the proposed qualitative characteristics.

To facilitate debate on the issues raised in the IASB and FASB discussion paper, the ASB is to hold a public meeting in London on the morning of Thursday 21 September 2006 on the proposals in the preliminary views discussion paper. The event will be open to the public, but places are limited and will be allocated on a first-come, first-served basis. Anyone interested in attending should indicate their interest by emailing Mary Evans at the ASB on m.evans@frc-asb.org.uk.