Friday, 27 December 2013

Conceptual Framework Discussion Paper: Notable Comment Letter from the New Zealand Accounting Standards Board

Conceptual Framework Discussion Paper: Notable Comment Letter from the New Zealand Accounting Standards Board

The NZASB notes:

"We regard the conceptual framework project to be a priority project and commend the IASB for taking the project on. We are pleased that the IASB is developing the Conceptual Framework as a whole; in a single phase, rather than in multiple phases as was originally planned. 

Completing the project in a single phase enables the links between different aspects of the framework to be considered and issues to be dealt with coherently and comprehensively. The Discussion Paper therefore is helpful in providing a collation of issues that the IASB seeks to consider in the project. 

Support for the project and taking an appropriate amount of time in order to be an improvement on the existing Conceptual Framework 

As noted above, we are pleased that the IASB is completing the conceptual framework project in a single phase. Although the Discussion Paper is under-developed in places, we support the IASB intention of inviting comments on an early draft so that early feedback can be obtained on the direction of the project. This will enable the IASB to further refine the scope, content and approach to the conceptual framework project.

However, given the extent of work required for that refinement, the range and complexity of the issues to be addressed and the divergence of views on those issues, if any new framework is going to be a sufficient improvement on the existing Conceptual Framework, more time will be required to debate and deal with the many issues that need to be addressed. Therefore, we strongly encourage the IASB to reconsider the timetable for the next phase of the project. 

While we understand the desire to avoid the project taking too long, the revised Conceptual Framework needs to be enduring and a significant improvement on the existing Conceptual Framework, as it is unlikely to be reviewed again in the near future. Therefore, we strongly encourage the IASB to take an appropriate amount of time to complete the project in order to achieve a higher quality Conceptual Framework. This is certainly preferable to completing the project in a short timeframe resulting in a framework that is not a significant improvement on the existing Conceptual Framework, or that is not comprehensive and/or contains concepts that are not sufficiently robust. In particular, we consider more time should be taken to further develop the following fundamental areas without which any revised Conceptual Framework 
would not be a sufficient improvement on the current Conceptual Framework: 

(a) the meaning of ‘financial performance’; 
(b) the distinction between profit or loss and OCI; 
(c) the meaning of ‘present obligation’; 
(d) recognition criteria (and how to deal with uncertainty); 
(e) measurement; and
(f) presentation and disclosure. 

The above points are discussed in more detail in the appendix to this letter, in our responses to the specific questions for respondents. In addition, in a number of areas, the discussion is too detailed and focused on particular items or issues in isolation. We consider that more time needs to be taken to consider the consistency of concepts across all aspects of the financial statements and to consider the coherence of the Conceptual Framework as a whole. We also consider that providing an executive summary of Conceptual Framework would be helpful to constituents given that the revised Conceptual Framework is likely to be a much longer document and preparing a summary would assist in considering the consistency and coherence of the Conceptual Framework as a whole

Role of the Conceptual Framework

It is important to be clear about the role of the Conceptual Framework, as it has a significant impact on the project, in particular, how issues are approached. We consider that the Conceptual Framework should continue to be a framework of accounting concepts - rather than accounting conventions, methods, or practical expedients. This does not mean that the Conceptual Framework is a highly idealistic document that has little application in the real world. On the contrary, accounting concepts should be based on real 
world economic phenomena. The Conceptual Framework provides the foundation for the preparation of General Purpose Financial Reports (GPFR). If those GPFR are to provide useful information to users, then the concepts need to be grounded in real world economic phenomena. Rather, the point is that the Conceptual Framework should contain concepts without compromises. Standards-level considerations (such as practical and/or political 
considerations) might result in the need for compromise but those compromises are dealt with at standards-level; they should not be embedded into the Conceptual Framework. 

If compromises are embedded into the Conceptual Framework it will fail to serve its purpose of providing a conceptual foundation for GPFR. For this reason, the Conceptual Framework project should not be used as an opportunity to codify or justify existing accounting treatments without 
adequate conceptual justification. We are concerned that there are parts of the Discussion Paper where this seems to be happening; there are places where the Discussion Paper catalogues existing accounting treatments in particular accounting standards, seemingly without any question of the underlying conceptual rationale for those treatments. 

In addition, the Conceptual Framework is not a standard and, therefore, should not be treated as such. For example, in most cases, the Conceptual Framework should describe accounting concepts, rather than precisely define them. Because the Conceptual Framework is not a standard, it does not contain any accounting requirements, which means that it is often not  necessary to include precise definitions or definitive specifications about the application of concepts. Also, because the Conceptual Framework is not a standard, it is not necessary or appropriate to build in ‘anti-abuse’ rules into the Conceptual Framework, such as the comments in paragraph 1.29 about restricting the use of guidance in the Conceptual Framework on when income or expense items would be presented in profit or loss or other comprehensive income (OCI). Any restrictions on the use of concepts should be dealt with at the standards-level, which is where requirements are established. 

Furthermore, the IASB aims to set principles-based standards, therefore, the Conceptual Framework too has to be principles-based.

Purpose of the Conceptual Framework

We consider that the Conceptual Framework is not there only to guide the IASB in standards-level projects. The concepts in the Conceptual Framework are pervasive – these concepts underlie the preparation and presentation of GPFR and therefore the concepts impact on all aspects of financial reporting. This includes – but is not limited to – the IASB’s role in setting accounting standards. The Conceptual Framework is used by the IASB but is also used by: 

(i) preparers and auditors to interpret and apply standards; 

(ii) users of GPFR to understanding the concepts and basis used to prepare GPFR; and 

(ii) all as the basis for communication of accounting concepts and issues using commonly understood accounting language. 

The list of uses and users of the Conceptual Framework is a reflection of this pervasiveness. Therefore, just because the IASB is a primary user of the Conceptual Framework does not mean that the Conceptual Framework should be focused on the IASB’s needs in setting standards. The IASB has an important role in setting standards, but that role is only one part of the financial reporting process. The Conceptual Framework has a much broader purpose, as is stated in the existing Conceptual Framework and it is important to keep this broader purpose in mind, because it provides the context for the Conceptual Framework, that is, the Conceptual Framework is a conceptual framework for general purpose financial reporting, not a toolkit for the IASB in setting standards.

Departures from the Conceptual Framework

We strongly support the proposal to explain any departures from the Conceptual Framework in any accounting standards. However, we consider that it is not helpful to refer to such departures as being ‘rare’. In any standards-level project, there are a variety of considerations that include, but are not 
limited to, the concepts in the Conceptual Framework. Other considerations, such as pragmatic and/or political considerations, might result in the need for a compromise in a particular standard. That does not mean that the Conceptual Framework is flawed or not sufficiently robust, it is simply a reflection of the reality of setting accounting standards. It is not realistic – 
or appropriate – to indicate the frequency with which departures might occur. 

Doing so has the following implications: 

(a) It treats the Conceptual Framework as some form of constitution but a constitution (such as a constitution of a company or a country) is essentially a governance document, which acts to place some constraints on a governing body (of the entity/country) in order to protect other parties (such as shareholders and citizens). We consider that the Conceptual Framework is not a governance document. 

(b) For departures to be rare, it would be necessary for either: 

(i) The IASB to look ahead and anticipate all the key standards-level considerations and all possible future types of transactions, so that they can be taken into account when developing the Conceptual Framework – this is not possible; and/or 

(ii) The Conceptual Framework would need to contain concepts that are at a very high level, vague or ambiguous, so that any standards-level requirements can be said to Instead of referring to ‘rare cases’, in our view, the key point is that the Conceptual Framework provides the conceptual foundation for setting standards and hence should always be the starting point in any standards project. In addition, any departures from (or conflicts with) the Conceptual Framework because of other standards-level factors need to be carefully considered and explained. 

Working with the IPSASB 

We encourage the IASB and the IPSASB to work closely together in developing their conceptual frameworks as the two Boards are likely to be considering similar issues. We consider that the development of the conceptual frameworks is too important for the two Boards to be working independently of each other. Ideally, the IASB and IPSASB frameworks should only contain 
different concepts in instances where there are differences between private and public sectors. 

Responses to specific questions for respondents

We consider that a number of issues discussed in the Discussion Paper are unresolved and further development and/or significant revision is required in a number of areas. Hence, there are some areas in which we consider that the specific questions for respondents are not necessarily focused on the right issues. Nevertheless, our responses to the specific questions for respondents are provided in the appendix to this letter.

The complete comment letter is available HERE dated 2013-12-20 on Page 1.