The International Accounting Standards Board (IASB) and the US Financial Accounting Standards Board (FASB) are undertaking a joint project to develop a common conceptual framework that both Boards can use in developing new and revised accounting standards. This project is being undertaken in phases. The ASB is monitoring and contributing to the work of IASB and the FASB.

IASB publications

On 6 July 2006, the IASB and FASB issued the a preliminary views discussion paper on the first phase of the project ‘The Objective of Financial Reporting and Qualitative Characteristics of Decision-useful Financial Reporting Information’. The ASB’s response to the IASB’s discussion paper on the Objectives and Qualitative Characteristics of the framework were submitted on 2 November 2006 and can be downloaded here.

In May 2008, The IASB and FASB published two papers: an exposure draft of Chapters 1 and 2 of the proposed new conceptual framework for financial reporting; and a discussion paper on the reporting entity phase of the project.

IASB’s Exposure draft of Chapters 1 and 2 of the framework and Preliminary views on the reporting entity concept

The first document is an exposure draft (ED) of chapters 1 and 2 of the framework. It seeks views on the objective of financial reporting, the qualitative characteristics of information provided by financial reporting and constraints on the provision of that information. The draft reflected the boards’ updated proposals in the light of comments received on an initial discussion paper (DP) published in July 2006.

The ASB has now submitted its responses on these documents which can be downloaded here and here. In summary, the responses raise the following concerns with the proposals.

ASB response to Exposure draft of Chapters 1 and 2 of the framework

The key concerns on Chapters 1 and 2 of the framework include: the piecemeal finalisation of the Framework project; adoption of the entity perspective without an in depth discussion of the issues arising; boundaries of financial reporting have yet to be considered; the replacement of “reliability” with the notion of “faithful representation; the differentiation between fundamental and enhancing qualitative characteristics is artificial; and the qualitative characteristic of verifiability.

Preliminary views on the reporting entity concept

The ASB’s key concerns with the PV document on the reporting entity concept include: The key concerns raised in the ASB response to the DP on reporting entity include: concerns that by choosing not to develop the risks and rewards model at the conceptual level the IASB will be narrowing the focus of the conceptual framework in general and the consolidation of reporting entities in particular at too early a stage; the deficiencies in the definition of control; Adoption of the entity perspective; and applicability of the decisions in the DP to not-for-profit entities.

Working with Europe

EFRAG and the European national standard-setters are working together on a number of projects under the initiative known as 'Pro-active Accounting Activities in Europe' (PAAinE).

1. The French standard-setter, the CNC, is leading a working group on the conceptual framework, in which the ASB is participating.  A PAAinE Discussion Paper 'The Conceptual Framework: Starting from the Right Place?' has been issued for comment.  The paper is a useful contribution to the debate on the conceptual framework project and a copy can be accessed at: http://www.efrag.org/.  The ASB response to the PAAinE discussion paper was submitted on 6 March 2007 and can be downloaded here
   
   
2. On 25 June 2007, the European Financial Reporting Advisory Group (EFRAG), the Accounting Standards Board (ASB) and a number of other European accounting standard-setters published a brief discussion paper ‘Stewardship/accountability as an objective of financial reporting: A comment on the IASB/FASB conceptual framework project’. The paper discusses the rationale for including stewardship, or directors’ accountability to shareholders, as a separate objective of financial reporting.

The IASB and FASB proposed in their July 2006 Preliminary Views Discussion Paper that the converged framework should specify only one objective of financial reporting, that of “decision-usefulness” for resource allocation. They argued that this objective “encompasses providing information useful in assessing management’s stewardship”.

The paper seeks to demonstrate that:

• there is a broad consensus amongst the majority of the respondents that the stewardship/ accountability objective should be a separate objective of financial reporting;
• stewardship/accountability is linked to agency theory and is a broader notion than resource allocation as it focuses on both past performance and how the entity is positioned for the future. It should therefore be retained as a separate objective of financial reporting to ensure that there is appropriate emphasis on company performance as a whole and not just on potential future cash flows; and
• stewardship/accountability has implications for financial reporting which can be demonstrated by way of examples.

The paper aims to contribute to the international debate on incorporating the stewardship objective in the conceptual framework and a copy can be downloaded here.

Application to not-for-profit entities

As part of its work, 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 of the concepts proposed in the preliminary views discussion paper. A report on key issues is available and can be downloaded here.

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.

In July 2008, the group published a report on the implications for the not-for-profit entities of the IASB and FASB’s Exposure Draft ‘An improved Conceptual Framework of Financial Reporting: Chapter 1: The Objective of Financial Reporting, Chapter 2: Qualitative Characteristics and Constraints of Decision-useful Financial Reporting Information’ and Discussion Paper ‘Preliminary Views on an improved Conceptual Framework for Financial Reporting: The Reporting Entity’. The report can be downloaded here.

Section A of the group’s report raises issues in relation to the following aspects of the IASB and FASB exposure draft:

• The adequacy of the emphasis on accountability/ stewardship;
• A need to broaden the identified users and establish an alternative primary user group
  
  
• The overemphasis on cash flows; and
• The need for the qualitative characteristics and constraints to be reassessed for not-for-profit entities if a broader scope of financial reporting is agreed.

Section B of the group’s report raises issues in relation to the following aspects of the IASB and FASB discussion paper:

• The need for a different description of a reporting entity as a consequence of not-for-profit entities having a broader primary user group;
• The need to address some specific issues that arise in determining what is a reporting entity in the not-for-profit sector; and
• The possible need for the concept of control to be further developed so that it can apply more effectively in a not-for-profit context.

General

In August 2005, ASB staff submitted comments to the IASB/FASB Project Team on ‘Revisiting the Concepts’. The ASB’s comments may be downloaded here.