Sunday, 25 July 2010

A future converged Conceptual Framework would not necessarily be better.

Comment on IFRS in Perspective blog on

Mr Pounder,

I agree with you that a common Conceptual Framework is essential. However, convergence of the FASB and IASB frameworks as the two Boards have been working on for the last 6 years does not necessarily mean the future converged Conceptual Framework will be better than the two individual ones. It may even be worse.

When a person reads the data available about their joint Conceptual Framework project to date, one notices that discussion of two of the most basic concepts, namely the concepts of capital and capital maintenance concepts (which determine the basic accounting model), do not form part of any of the eight phases of the joint project.

When I enquired about this a month or two ago, Kevin McBeth, the FASB project manager for the Measurement Phase of the joint project stated:
“I cannot speak for the Boards with respect to your query. I can only say that early on in the measurement phase the staff suggested that capital and capital maintenance be discussed in the measurement phase, as it was in the original FASB Conceptual Framework. However, to date the Boards have not taken a decision on where, or even whether, those topics will be included in the converged framework.”

I then put the same question to the US Financial Accounting Standards Board.

Ron Lott, the FASB director who is responsible for the joint FASB-IASB Conceptual Framework project responded by email:

“We are of course familiar with paragraphs 102 – 110 of the IASB Framework as well as paragraphs 45-48 of FASB Concepts Statement 5. Although not labeled as such, capital maintenance ideas have been raised at various points in the discussions of measurement concepts and will continue to be discussed until the board makes decisions about measurement concepts.

We do not know yet whether there will be a section in the yet-to-be-completed measurement concepts chapter labeled capital maintenance, but the concepts will almost certainly be discussed.”

Kevin McBeth stated the following by email:

“I believe that you may have misunderstood the discussions the FASB and IASB have had about measurement. Those discussions have used examples of various items, some of which you refer to as variable real value non-monetary items. That may have led you to believe that some of your concerns are being ignored. However, the scope of the measurement phase of the Conceptual Framework project does not exclude the items you refer to as constant real value non-monetary items. The Boards are concerned about the effects of selecting measurements on all elements of the financial statements.

Much remains to be done on this project. Although future discussions probably will not use the terminology and classification scheme that you are espousing, there is reason to expect that they will address the items of concern to you.”

As can be seen from the above "we do not know yet whether there will be a section in the yet-to-be-completed measurement concepts chapter labeled capital maintenance."

Imagine even contemplating leaving capital maintenance out of a common Conceptual Framework!

It has to be noted with alarm that after discussing measurement for the last 6 years on the joint Conceptual Framework project, units of constant purchasing power are not regarded as a candidate for primary measurement basis although the FASB has stated that capital maintenance will continue to be discussed in the future.

The current IASB Framework permits financial capital maintenance in units of constant purchasing power during low inflation and deflation while this is not allowed under US GAAP. A future converged Conceptual Framework that does not authorize financial capital maintenance in units of constant purchasing power will be fundamentally flawed as US GAAP are currently fundamentally flawed as a result of the absence of the only correct accounting model under inflation and deflation.

Kindest regards

Nicolaas Smith

Copyright © 2010 Nicolaas J Smith

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