Project Director Seema Jamil-O’Neill reports progress on the debate that has been generated by the joint project by the IASB and US FASB to revisit their conceptual frameworks.

As reported previously in Inside Track, the International Accounting Standards Board (IASB) and the US Financial Accounting Standards Board (FASB) are developing a common conceptual framework that they can both use in preparing new and revised accounting standards.

ASB response to the first Discussion Paper

The first Discussion Paper (DP) was published on 6 July, setting out the preliminary views of the IASB and FASB on the objective of financial reporting and the qualitative characteristics of decision-useful financial reporting information. As reported in Inside Track 49, this has generated a good deal of debate. The ASB responded to the DP in November. A copy of the response is available on the website via the following link http://www.frc.org.uk/asb/publications/other.cfm.

The response sets out the ASB’s fundamental concerns with the proposals as follows:

• The converged framework specifies resource allocation decisionusefulness as the only objective of general purpose external financial reporting. The ASB believes that stewardship should be given more prominence as an objective of financial reporting.
• The primary users of general purpose external financial reporting have been identified as “present and potential investors and creditors (and their advisers)”. The DP does not discuss the problems arising from choosing this set of primary users and the ASB considers that further research is necessary before any conclusions can be reached.
• The DP proposes replacing the qualitative characteristic of “reliability” in the current Framework with “faithful representation”. The ASB is concerned that faithful representation is a softer notion and could lead to a number of problems. It would prefer that the IASB and FASB clarify the definition of “reliability” rather than removing it altogether.
• The DP notes that the Framework being developed will apply to general purpose external financial reporting, which is broader than just financial statements. The ASB is not yet convinced that the Framework can be widened to cover all financial reporting and has recommended that financial reporting should be defined as soon as possible.

The ASB also suggested that:

• The implications for not-for-profit entities should be considered as the project progresses instead of the later stage suggested in the DP. We have been working on this issue with our fellow standard-setters from Australia, Canada and New Zealand and a paper on the implications of the views in the DP for such entities is attached to our response.
• The IASB and FASB should try to ensure that the final Framework is not so theoretical and long that it acts only as a reference manual for standard setters and alienates preparers and auditors.

The ASB response clearly states that given the fundamental concerns with the DP it does not consider the proposals in the DP fit to proceed to an exposure draft (ED), and that if they do the ASB could not support them. At the time of going to press, there were 179 responses to the DP on the IASB website, which show that the ASB is by no means alone in voicing the above concerns.

Europe gets engaged

One of the projects under the European PAAinE initiative (see page 10) concerns the conceptual framework. The French standard-setter, the CNC, is leading a working group on this issue, in which the ASB is participating. A PAAinE Discussion Paper ‘The Conceptual Framework: Starting from the Right Place?’ has been issued for comment.

While the paper is not a direct response to the first IASB DP, it covers some fundamental questions which the group believes the IASB and FASB need to consider, in particular: what is the purpose and status of the Framework?; which users should the Framework focus on?; which entities should come within the Framework?; and what should be the scope of financial reporting?

The paper is a useful contribution to the debate on the conceptual framework project and a copy can be accessed from the EFRAG website at: www.efrag.org. The comment period ends on 18 March 2007.

The project moves on

The IASB and FASB continue to discuss further phases of the project, in particular those concerned with the elements of financial reporting and the reporting entity. DPs on both phases are planned for the second quarter of this year.

The two Boards are also starting to consider the measurement phase of the project, and are holding public roundtable meetings on the issue, including in London on 29 January.

The ASB will continue to monitor the IASB and FASB’s progress on this project and provide further details in future editions of Inside Track.