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.

Conceptual Framework Discussion Paper: Notable Comment Letter from the INSTITUT DER WIRTSCHAFTSPRÜFER

Conceptual Framework Discussion Paper: Notable Comment Letter from the INSTITUT DER WIRTSCHAFTSPRÜFER

The IDW notes:

"The IDW appreciates the opportunity to comment on the IASB Discussion 
Paper 2013/1 ‘A Review of the Conceptual Framework for Financial Reporting.

In general, we welcome the Board’s decision to reinitiate the Conceptual 
Framework project. However, we believe that the timing of the publication of the Discussion Paper is inopportune as the Board is still working on its four main standard projects (revenue recognition, leases, insurance contracts and 
financial instruments). It is essential to ensure that these long-term projects are consistent with one another and completed with priority. Upon completion of these projects, the Board should use the insights gained for revising the 
Conceptual Framework.

We agree with the Board’s decision to develop a complete set of proposals for a revised Conceptual Framework, i.e. not to continue with the phased approach.

Given the complexity as well as the interdependency of the various issues
addressed in the Conceptual Framework project, a phased approach would
necessarily result in unintended consequences and could lead to new 
inconsistencies. However, we had expected the Board to undertake a 
fundamental and comprehensive review of the Conceptual Framework rather 
than merely ‘updating, improving and filling in gaps’. Currently it seems to us 
that the IASB is only proposing a quick fix solution.

We doubt whether the proposals in the Discussion Paper reflect the significance of the Conceptual Framework appropriately. Many of the proposed approaches (e.g. to profit and loss and recycling or for the distinction between equity and liabilities) seem only ‘half-baked’. Moreover, in some cases the dividing line between the principles in the Conceptual Framework and the provisions in IAS 1 is not readily identifiable (e.g. in the case of going concern). Obviously, much more time is needed, and we urge the IASB to take the time necessary to revise the Framework in such a way that it can provide both, a consistent and sound conceptual basis for financial reporting under IFRS and be of real assistance to the IASB in developing or amending future Standards. 

Although the specific provisions at the Standards level should always take 
precedence over the principles of the Conceptual Framework, the Conceptual 
Framework must be generally binding when the IASB develops or amends 
Standards. Therefore, we recommend that – going forward – the IASB’s 
adherence to the final provisions of the Conceptual Framework should be 
monitored. This would also contribute to improving the accountability of the 
entire IASB’s standard-setting process. A departure from the Conceptual 
Framework should only be possible in rare cases." 

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

IASB believes that capital maintenance is only required during high inflation and hyperinflation

The constant purchasing power (real value) of capital needs to be maintained constant during low inflation and deflation and not only during high inflation and hyperinflation as it is generally accepted.


‘It is essential to the credibility of financial reporting to recognize that the recovery of the real cost of investment is not earnings — that there can be no earnings unless and until the purchasing power of capital is maintained.’


FAS 33 1979: 24

The above statement refers to low inflation and deflation too.

The following is Question 26 regarding Capital Maintenance in the IASB´s Discussion Paper on the Conceptual Framework:

Question 26 - Other Issues:

Capital maintenance

Capital maintenance is discussed in paragraphs 9.45–9.54. The IASB plans to include the existing descriptions and the discussion of capital maintenance concepts in the revised Conceptual Framework largely unchanged until such time as a new or revised Standard on accounting for high inflation indicates a need for change.

Do you agree? Why or why not? Please explain your reasons

The IASB clearly implies above that capital maintenance in units of constant purchasing power (which would maintain the real value of equity) is only required as from the onset of high inflation. The IASB luckily also discovered recently (in June 2013 after I had pointed it out to them) that capital maintenance in units of constant purchasing power was actually required in IAS 29 Financial Reporting in Hyperinflationary Economies even though the Board had authorised it twenty four years ago in 1989. The IASB staff recently (April 2013) still mistakenly stated that there is no guidance in IFRS regarding capital maintenance in units of constant purchasing power. The IASB is by now at least well aware that IAS 29 requires capital maintenance in units of constant purchasing power in terms of the monthly published CPI. 

Entities - including the IASB - operating during low inflation and deflation generally believe that Capital Maintenance in Units of Constant Purchasing Power as authorised in the Conceptual Framework, Par. 4.59 (a) at all levels of inflation and deflation does not need to be applied to ensure the maintenance of the real value (constant purchasing power) of equity during low inflation and deflation. This is the case despite the fact that financial capital maintenance in nominal monetary units (HCA) during continuous 2% annual inflation results in the erosion / destruction of 51% of the real value of that portion of equity not covered by the real value of net assets over 35 years. 

No company in the world knows whether it maintained in the past and currently maintains the constant purchasing power of its capital constant during low and high inflation and deflation. No company in the world does that calculation during low and high inflation and deflation. No-one knows.

Financial capital maintenance in nominal monetary units during 2 percent annual inflation - mistakenly regarded as price stability in the US and European Monetary Union (and everywhere else) - results in the erosion (destruction) of the constant purchasing power (real value) of equity in that portion of equity that is not covered by the REAL value of net assets. 100% of equity being equal to 100% of net assets IN NOMINAL MONETARY TERMS (i.e., balancing the books under financial capital maintenance in nominal monetary units under the Historical Cost Accounting model) does not guarantee that the real value (constant purchasing power) of equity is being maintained constant during low and high inflation and deflation. 

The following are the answers of some respondents to Question 26. It can be seen that they mistakenly believe that capital maintenance only applies as from the onset of high inflation and that it is not required during low inflation.


1. AUSTRALASIAN COUNCIL OF AUDITORS‐GENERAL

ACAG has no view on this issue. The Australian public sector has not been in a high inflation environment for many years and the capital maintenance paragraphs in the existing Conceptual Framework are rarely used.

It is very clear from the above that concepts of capital maintenance are rarely used during low inflation in Australasia.

This view that the capital maintenance paragraphs in the existing Conceptual Framework are rarely used is a very good overall summary regarding capital maintenance during low inflation and deflation, not only in Australasia, but also in the world economy.

2. INSTITUT DER WIRTSCHAFTSPRUFER

We agree with the Board´s view to deliberate the appropriate capital maintenance concept when discussing accounting for high inflation. 

Capital maintenance - maintaining the real value of equity - during low inflation is obviously not considered important in Germany.

3. EUROPEAN SECURITIES AND MARKET AUTHORITY

ESMA is not aware of any issues with IAS 29 Financial Reporting in Hyperinflationary Economies but would welcome a clearer reference in the ED as ESMA agrees that something could be done in the revised CF. 

4. THE HONG KONG ASSOCIATION OF BANKS

We agree with the IASB to defer revision or refinement until it is needed, because we have 

not encountered high inflation issues. 

The Hong Kong Association of Banks clearly also believes no capital maintenance is required during low inflation.

5. THE CERTIFIED GENERAL ACCOUNTANTS ASSOCIATION OF CANADA

We agree that the IASB should defer its work on capital maintenance until it develops new provisions or revises the extant Standard (IAS 29) on accounting for hyperinflation. 

See also: IASB has "a lack of understanding about the fundamental role a capital maintenance concept has within the accounting framework"

Nicolaas Smith Copyright (c) 2005-2013 Nicolaas J Smith. All rights reserved. No reproduction without permission.

Conceptual Framework Discussion Paper: Notable Comment Letter from The Linde Group

Conceptual Framework Discussion Paper: Notable Comment Letter from The Linde Group

Question 26 - Other Issues:

Capital maintenance

Capital maintenance is discussed in paragraphs 9.45–9.54. The IASB plans to include the existing descriptions and the discussion of capital maintenance concepts in the revised Conceptual Framework largely unchanged until such time as a new or revised Standard on accounting for high inflation indicates a need for change.

Do you agree? Why or why not? Please explain your reasons

"The concept of capital maintenance drives virtually all recognition and measurement rules that exist in a set of accounting rules (except for most disclosure requirements). Therefore the prescription of capital maintenance philosophy behind is the nucleus of all that follows and should be named and illustrated at the beginning of the framework. The theoretically most relevant sort of capital maintenance is the maintenance of earnings power. 

This means that a net gain is only given if the dcf value of the company has changed positively. Given that such a concept of capital maintenance is impracticable, IFRS should at least aim at an approximation to this und the restriction of inter-subjective provability. This means that cost accounting for a machine for instance represents an approximation of the earnings power of this machine if you assume that – at the time of acquisition the maximum purchase price for the machine from the company’s perspective was determined on the basis of a rationale decision process and state of the art valuation techniques in place so that the acquisition cost do not exceed the earning potential within the company. Under these conditions the price paid by the company for the acquisition of the machine represents an observable and therefore verifiable minimum earnings contribution of the asset to the overall earning power of the company. Depreciation then represents a – also very rough but well verifiable – roll forward of this approximated earning contribution value. Once there is evidence that this value is overstated it has to be corrected to the correct amount in the way of impairment. 

In the light of such a capital maintenance concept that only sacrifices earning power contribution for sake of verifiability, the definition of unit of account can be refined more precisely and the basic assumptions for definition and recognition can be derived. Therefore we would plead for giving this point more prominence." 

The complete comment letter is available HERE dated 2013-12-09 on Page 1.

Conceptual Framework Discussion Paper: Notable Comment Letter from the Australian Heads of Treasuries Accounting and Reporting Advisory Commitee

Conceptual Framework Discussion Paper: Notable Comment Letter from the Australian Heads of Treasuries Accounting and Reporting Advisory Committee

The HoTARAC notes:

"HoTARAC has significant concerns on the discussion in a number of areas.

HoTARAC does not believe the discussion of topics proceeds in a logical progression from a coherent set of core principles. In HoTARAC´s view, this, at least in part, derives from:

• insufficient consideration of the objectives of financial reporting and their application to the topics at hand, and reliance on the existing chapters of the conceptual framework;
• delegation of core concepts, often fundamental to the topic discussed, to other projects; and
• the framework being developed to justify current practice, rather than from a sound conceptual basis.

The framework also appears to be developed in isolation from advances in related disciplines, such as communication, finance, economics and valuation with a consequent risk of loss of relevance.

Additionally, HoTARAC is concerned that the framework is being developed without consideration of the future direction of financial reporting, including the development of standards for the not-for-porfit and public sectors."

The complete comment letter is available HERE dated 2013-12-02 on Page 1.

Venezuela is NOT in hyperinflation according to lunatic fringe economist Prof. Steve Hanke

Venezuela is NOT in hyperinflation according to lunatic fringe economist Prof. Steve Hanke: see 

Venezuela’s Playbook: The Communist Manifesto

Millions of accountants and economists world wide follow the International Accounting Standard Board´s definition of 100% cumulative inflation over three years. That is 26% annual inflation for three years in a row. 

Venezuela has thus been officially in hyperinflation since November 2009 and has officially been implementing IAS 29 Financial Reporting in Hyperinflationary Economies for that year end and all following financial periods till today. Steve Hanke simply ignores that.

Venezuela is currently at about 5% monthly inflation or 54% official annual inflation. Hanke puts Venezuela´s implied annual inflation currently at 297% - still far away from his 13 000% annual inflation threshold before hyperinflation takes hold in Venezuela - according to the lunatic fringe crowd.

Lunatic fringe Steve Hanke is waiting for Venezuela to reach 50% monthly inflation, i.e., 13 000 percent annual inflation before he will agree that Venezuela is in hyperinflation. 

Only he, his students (obviously) and a handful other lunatic fringe economists think like that.

The lunatic fringe Professor derides Maduro´s economic policies while Hanke himself refuses to acknowledge the generally accepted, globally implemented definition of hyperinflation.

I would not recommend Hanke for any advice regarding hyperinflation. He also continues to peddle his obsolete and extremely costly Dollarization and Currency Board solutions (which also removes a country´s independent monetary policy capability) to fight hyperinflation. 

Daily Indexing (Capital Maintenance in Units of Constant Purchasing Power in terms of a Daily CPI) is free as well as authorized in International Financial Reporting Standards and US GAAP. 

Nicolaas Smith Copyright (c) 2005-2013 Nicolaas J Smith. All rights reserved. No reproduction without permission.

Computation of the Daily CPI in Turkey

Computation of the Daily CPI in Turkey

The Daily CPI is a lagged, daily interpolation of the monthly published CPI. 

All countries issuing government capital inflation-indexed bonds calculate Daily CPIs. Daily CPIs can be one to four month lagged, daily interpolations. 

Turkey uses a three-month lagged daily interpolation of its monthly published CPI.

Computation of the Daily CPI in Turkey

The Turkish Daily CPI is available HERE. (Click on Reference Indices under 

CPI Indexed Government Bonds)

Turkey can use the above Daily CPI to implement Capital Maintenance in Units of Constant Purchasing Power in terms of a Daily CPI during low inflation as authorised in IFRS in the Conceptual Framework (2010), Par. 4.59 (a) which states:

"Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power." 

CMUCPP in terms of a Daily CPI would automatically maintain the constant purchasing power of capital (equity) constant for an indefinite period of time - ceteris paribus - in all entities that at least break even in real value at all levels of inflation and deflation.


Nicolaas Smith

Copyright (c) 2005-2013 Nicolaas J Smith. All rights reserved. No reproduction without permission.