D2 - T7 - Marco Conceptual - Mike Wells by INCP

International Financial Reporting Standards

The Conceptual Framework and IASB project Cartagena, November 2015

The views expressed in this presentation are those of the presenter, not necessarily those of the IASB or IFRS Foundation. ÂŠIFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

International Financial Reporting Standards

Why the Conceptual Framework matters to you The Conceptual Framework for Financial Reporting

The views expressed in this presentation are those of the presenter, not necessarily those of the IASB or IFRS Foundation ÂŠ IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Why the Conceptual Framework matters

• Concepts for the IASB to use when setting IFRS (cohesiveness) • IFRS ‘mindset’ – the lens through which IFRS judgements are made/audited/regulated

• Basis for developing accounting policy when no specific IFRS applies

Objective

Concepts

©IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Principles

Rules

If no IFRS specifically applies: develop policy by applying the ‘IAS 8 hierarchy’

• Objective = information relevant to resource allocation decisions by existing and potential investors, lenders and other creditors who cannot require information directly and that can be faithfully represented etc. • Process: • 1st try to analogise to requirements in IFRS dealing with similar and related issues; and • 2nd definitions, recognition criteria and measurement ‘concepts’ in Framework • may also use most recent pronouncements of others with similar conceptual framework, other accounting literature and accepted industry practices, to the extent that these do not conflict with the sources in 1 and 2 above. ©IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

What do you think? judgement

Question—how should an entity account for a grant from a nongovernmental philanthropist? Objective = relevant information. Select one of: 1)In accordance with IAS 20—similar and related to a government grant 2)In accordance with IAS 41.34 and .35—similar and related to a government grant 3)It depends—IAS 41 if the grant relates to an asset is carried at fair value; otherwise IAS 20—similar and related to a government grant 4)Another accounting policy in accordance with the definitions, recognition criteria and measurement ‘concepts’ in the Conceptual Framework—not similar and related to a government grant. ©IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

International Financial Reporting Standards

The objective of IFRS The Conceptual Framework for Financial Reporting

The views expressed in this presentation are those of the presenter, not necessarily those of the IASB or IFRS Foundation ÂŠ IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

What do you think? objective of IFRS financial information Question—today the objective/s of IFRS reporting is to provide financial information about the reporting entity that is useful to? Select one of: 1)existing and potential investors (including the controlling shareholder), lenders and other creditors in making resource allocation decisions (buy, sell, hold, provide loan/settle); 2)existing and potential investors, lenders and other creditors who cannot require reporting entities to provide information directly to them in making resource allocation decisions; 3)same as 2) PLUS a second equal objective—stewardship; or 4)a broad range of users who are not in a position to demand reports tailored to meet their particular information needs. ©IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Objective of IFRS financial reporting

Provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity (buy, sell, hold, provide loan/settle) (¶OB 2) …who cannot require reporting entities to provide information directly to them (¶OB 5) …who have a reasonable knowledge of business and economic activities and who review and analyse the information diligently (¶QC 32) ©IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Objective of IFRS financial reporting continued

• Investors’, lenders’ and other creditors’ expectations about returns depend on their assessment of the amount, timing and uncertainty of (the prospects for) future net cash inflows to the entity.

©IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Objective of IFRS financial reporting continued

• To assess an entity’s prospects for future net cash inflows, existing and potential investors, lenders and other creditors need information about: – the resources of the entity; – claims against the entity; and – stewardship—how efficiently and effectively the entity’s management and governing board have discharged their responsibilities to use the entity’s resources. – eg protecting the entity's resources from unfavourable effects of economic factors such as price and technological changes; and ensuring legal compliance. ©IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

What do you think? stewardship Questionâ&#x20AC;&#x201D;stewardship is best satisfied with? Select one of: 1.cash accounting (no accruals); 2.historical cost accounting (no depreciation; no impairment); 3.cost-impairment accounting (no depreciation); 4.cost-depreciation-impairment accounting; 5.fair value accounting (without some assets, eg brands); or 6.fair value accounting (with all assets). ÂŠIFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

IASB project—what do you think? stewardship Question—should the IASB give more prominence within the objective of financial reporting to stewardship? Select one of: 1.Yes; 2.No; or 3.I don’t know.

©IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

International Financial Reporting Standards

Qualitative Characteristics The Conceptual Framework for Financial Reporting

The views expressed in this presentation are those of the presenter, not necessarily those of the IASB or IFRS Foundation ÂŠ IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Qualitative characteristics

• If financial information is to be useful, it must be relevant and faithfully represent what it purports to represent (ie fundamental qualities). – Financial information without both relevance and faithful representation is not useful, and it cannot be made useful by being more comparable, verifiable, timely or understandable.

• The usefulness of financial information is enhanced if it is comparable, verifiable, timely and understandable (ie enhancing qualities—less critical but still highly desirable) – Financial information that is relevant and faithfully represented may still be useful even if it does not have any of the enhancing qualitative characteristics. ©IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Fundamental qualitative characteristics

• Relevance: capable of making a difference in users’ decisions – predictive value (input to process to predict future cash flows) – confirmatory value (confirm/disconfirm prior cash flow expectations) – materiality (entity-specific—could affect a user’s decision)

• Faithful representation: faithfully represents the phenomena it purports to represent – completeness (depiction including numbers and words) – neutrality (unbiased) – free from error (ideally) Note: faithful representation replaced reliability ©IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Accounting policies

• Objective = information relevant to resource allocation decisions by existing and potential investors, lenders and other creditors who cannot require information directly and that can be faithfully represented etc. • Principle = voluntary change of accounting policies only if results in more relevant information (IAS 8¶14) • Application guidance = it is highly unlikely that a change from

the fair value model to the cost model will result in a more relevant presentation. (IAS 40¶31)

©IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

What do you think? judgement: relevance

Question—can an entity justify voluntarily changing its accounting policy for a class of property, plant and equipment from the revaluation model to the cost model? Select one of: 1) Yes—the cost model will result in a more relevant presentation; 2) Highly unlikely—because it is highly unlikely that a change from the revaluation value model to the cost model will result in a more relevant information; or 3) No—the cost model will not result in a more relevant information.

©IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Enhancing qualitative characteristics

• Comparability: like things look alike; different things look different • Verifiability: knowledgeable and independent observers could reach consensus, but not necessarily complete agreement, that a depiction is a faithful representation – can be direct or indirect—check inputs, recalculate output

• Timeliness: having info in time to be capable of influencing decisions—generally older information is less useful • Understandability: classify, characterise, and present information clearly and concisely ©IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

What do you think? prudence

Question—in ‘IFRS speak’ prudence is? Select one of: 1) the inclusion of a degree of caution in the exercise of the judgements needed in making the estimates required under conditions of uncertainty (it does not permit bias); 2) a bias towards understating assets and income and to overstating liabilities and expenses (ie unconditional conservatism); 3) a bias towards the ‘more timely’ recognition of expenses and liabilities rather than income and assets (ie conditional conservatism); 4) a useful mechanism for smoothing profits over time (understate profits in good years and overstate profits in bad years); or 5) reporting profit at the number management would like it to be. ©IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

IASB project—what do you think? prudence

Question—should the IASB reintroduce an explicit reference to prudence and state that prudence is important in achieving neutrality? Select one of: 1)Yes; 2)No; or 3)I don’t know.

©IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Cost constraint

â&#x20AC;˘ Reporting financial information imposes costs, and it is important that those costs are justified by the benefits of reporting that information. â&#x20AC;˘ In applying the cost constraint, the IASB assesses whether the benefits of reporting particular information are likely to justify the costs incurred to provide and use that information.

ÂŠIFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

International Financial Reporting Standards

Elements The Conceptual Framework for Financial Reporting

The views expressed in this presentation are those of the presenter, not necessarily those of the IASB or IFRS Foundation ÂŠ IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Identifying elements Asset (see Conceptual Framework ¶4.4(a))

•resource controlled by the entity… •expected inflow of economic benefits Liability (¶4.4(b)) •present obligation… •expected outflow of economic benefits Equity (¶4.4(c))

•assets – liabilities

Income (¶4.25(a)) •recognised increase in asset/decrease in liability in current reporting period •that result in increased equity except… Expense (¶4.25(b)) •recognised decrease in asset/increase in liability in current period •that result in decreased equity except…

What do you think?

example 1—levy based on revenue

Facts

Question

Government charges levy on entities that supply electricity to a specific market.

What’s the economics? At 31/12/20x0 does the supplier have a liability?

Levy is charged on suppliers operating in market on 1 April each year. Levy is 10% of supplier’s revenue for the previous year ending 31 December. Entity’s revenue in 20x0 = CU100 million. Suppliers are permitted to enter or exit market at any time.

1)Yes; 2)No—no present obligation; 3)No—no expected economic benefit outflow; 4)No—neither present obligation nor expected outflow.

What do you think?

example 2—levy based on revenue

Facts Government charges levy on entities that supply electricity to a specific market. Levy is charged on suppliers operating in market on 1 April each year.

Question What’s the economics? At 31/12/20x0 does the supplier have a liability?

1)Yes—1 year’s levy; 2)Yes—100 years’ levies; The annual amount of the levy is fixed for 3)No—no present obligation; the next 10 years at 10% of supplier’s 4)No—no expected economic revenue for the year ending 31/12/20x0. benefit outflow; 5)No—neither present Entity’s revenue in 20x0 = CU100 million. obligation nor expected outflow. Suppliers are permitted to enter or exit

market at any time.

IASB project— proposed new liability definition

• A liability is a present obligation of the entity to transfer an economic resource as a result of past events. • An entity has a present obligation to transfer an economic resource if both: – the entity has no practical ability to avoid the transfer; and – the obligation has arisen from past events; in other words, the entity has received the economic benefits, or conducted the activities, that establish the extent of its obligation.

©IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

IASB project—what do you think?

example 2 (on ED)—levy based on revenue

ED applied to the facts Government charges levy on entities that supply electricity to a specific market.

Question

At 31/12/20x0 does the supplier have a liability? Levy is charged on suppliers operating in 1)Yes—1 year’s levy; 2)Yes—10 years’ levies; market on 1 April each year. 3)No—has practical ability to The annual amount of the levy is fixed for avoid; or the next 10 years at 10% of supplier’s 4)No—has not yet revenue for the year ending 31/12/20x0. conducted the activities, that Entity’s revenue in 20x0 = CU100 million. establish the extent of its obligation.

Suppliers are permitted to enter or exit market at any time.

IASB project—what do you think?

proposed description of present obligation Question—do you agree with the proposed ‘definition’ of a present obligation? Select one of: 1)Yes; 2)No; or 3)I don’t know.

©IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

IASB project—executory contract

A contract that is equally unperformed establishes a right and an obligation to exchange economic resources. That right, and the obligation to exchange economic resources, are interdependent and cannot be separated. Hence, the combined right and obligation constitute a single asset or liability. The entity has: –an asset if the terms of the exchange are favourable; –a liability if the terms of the exchange are unfavourable.

©IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

IASB project—what do you think?

asset or liability or both: executory contract

Question—do you agree that the combined right and obligation in an executory contracts constitute a single asset or liability? –an asset if the terms of the exchange are favourable; –a liability if the terms of the exchange are unfavourable. Select one of: 1)Yes; 2)No; or 3)I don’t know.

©IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

What do you think?

recognition and derecognition Conceptually, does failure to: •recognise an item that meets the definition of an element; or •derecognise an item that no longer satisfies the definition of an element result in relevant information? Select one of: 1)Yes; 2)No; or 3)I don’t know. ©IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

What do you think?

meaning of recognition criteria: probable What does probable mean? Select one of: 1)>0% probability; 2)>50% probability (ie more likely than not); 3)>75% probability; 4)100% probability; 5)a qualitative assessment; or 6)unspecified meaning.

ÂŠIFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

What do you think?

meaning of recognition criteria: reliability

What does measure with reliability mean? 1) complete, neutral and free from error (ie faithful representation); 2) the degree of measurement uncertainty associated with an item; 3) precision; or 4) different knowledgeable and independent observers could reach consensus, although not necessarily complete agreement, that a particular depiction is a faithful representation of what it purports to represent (ie verifiability). ÂŠIFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Derecognition concept?

• There is no explicit concept for derecognition in the Conceptual Framework. Consequently: – derecognition requirements are specified at the Standards level – inconsistencies exist between the derecognition requirements of different IFRSs – derecognition does not necessarily coincide with no longer meeting the requirements specified for recognition

Measurement

• Measurement is the process of determining the monetary amounts at which the recognised elements are carried. • IFRS measurements are largely based on estimates, judgements and models. • Conceptual Framework currently does NOT provide concepts for measurement. It only provides a list of measurement conventions (¶4.54–4.56)

What do you think?

most relevant measurement

Which of the measurements below, if used for all of the asest of all entities, would provide the most relevant information? Select one of: 1)historical cost (no depreciation; no impairment); 2)cost model (cost-depreciation-impairment); 3)fair value 4)revaluation model (fair value-depreciation-impairment) 5)value in use; 6)net realisable value; or 7)another measurement. ÂŠIFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

What do you think?

single measurement or mixed measurement

Should a single measurement basis be specified for all assets? Select one of: 1.Yes; 2.No; or 3.I donâ&#x20AC;&#x2122;t know.

ÂŠIFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

IASB project—measurement

• Consideration of the objective of financial reporting, the qualitative characteristics and the cost constraint is likely to result in different measurement bases for different items (paragraph 6.3 of IASB Exposure Draft Conceptual Framework for Financial Reporting) • The selection of a measurement (paragraph 6.35 of IASB Discussion Paper DP/2013/1 A Review of the Conceptual Framework for Financial Reporting) – for a particular asset should depend on how that asset contributes to future cash flows – for a particular liability should depend on how the entity will settle or fulfil that liability – the number of different measurements used should be the smallest number necessary to provide relevant information. © IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Presentation

• Presentation: financial statements portray financial effects of transactions and events by: – grouping into broad classes (eg liability) – sub-classifing liabilities by their nature (eg separate provisions from financial liabilities) and into current and non-current – analysing provisions by class – not offseting assets and liabilities (or income and expenses)

©IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Presentation: financial position why classify assets and claims?

• Information about the nature and amounts of a reporting entity’s economic resources and claims can help users to identify the reporting entity’s financial strengths and weaknesses. • That information can help users to: – assess the reporting entity’s liquidity and solvency – its needs for additional financing and how successful it is likely to be in obtaining that financing. (¶OB13)

Presentation: financial position why classify claims?

• Information about priorities and payment requirements of existing claims helps users to predict how future cash flows will be distributed among those with a claim against the reporting entity (¶OB13) • For example, if you are considering lending money to a company you need information in order to assess the likelihood that the company will be able to pay you interest and to repay your loan when those amounts fall due.

Presentation: financial performance profit or loss and OCI

• ¶81A to ¶105 of IAS 1 specify the statement of profit or loss and other comprehensive income (OCI). • Items of OCI that are reclassified subsequently to profit or loss (sometimes called recycling) are presented separately from those that are not. – not recycled include: income/expenses presented in OCI from revaluing PPE and some intangible assets and financial assets FVOCI. – recycled include: income/expenses presented in OCI from hedge accounting.

What do you think?

other comprehensive income (OCI)

Question 1â&#x20AC;&#x201D;is there a concept for OCI in the Conceptual Framework? Select one of: 1)Yes; 2)No; or 3)I donâ&#x20AC;&#x2122;t know.

What do you think?

other comprehensive income (OCI)

Question 2—is there a concept for ‘recycling’ in the Conceptual Framework? Select one of: 1)Yes; 2)No; or 3)I don’t know.

IASB project—presentation proposals profit or loss

• Profit or loss is the primary source of information about an entity’s performance for the period (¶7.21 and ¶ 7.23) that depicts the return that the entity has made on its economic resources (¶7.20(a)). • Present income and expenses in OCI only when that presentation enhances the relevance of profit or loss. • Presumption 1: all items of income and expense will be included in profit or loss – cannot rebut the presumption for performance of assets and liabilities measured at historical cost – can rebut for most items measured at current values if including such items in OCI would enhance the relevance of profit and loss.

IASB project—what do you think? profit or loss and OCI

Question 1—is the IASB proposing robust concepts for the distinction between profit and loss and OCI? Select one of: 1)Yes; 2)No; or 3)I don’t know.

IASB project—what do you think? profit or loss and OCI

Question 2—Can you think of concepts for the presentation of financial performance that might provide relevant information for primary users to use as a basis for making their resource allocation decisions? Select one of: 1)Yes; 2)No; or 3)I think so (let’s discuss).

IASB project—proposals ‘recycling’ OCI

All items of OCI will be ‘recycled’ in profit or loss. However, can rebut for example, if no clear basis identifying when reclassification would enhance the relevance of profit or loss. – may indicate item should not be included in OCI in the first place.

IASB project—what do you think? recycling OCI

Question 3—do you support the IASB’s proposals regarding the ‘recycling’ of OCI to profit or loss? Select one of: 1) Yes; 2) No; or 3) I don’t know.

International Financial Reporting Standards

Framework-based approach

The views expressed in this presentation are those of the presenter, not necessarily those of the IASB or IFRS Foundation ÂŠ IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Framework-based approach

• What is the economics of the phenomenon (eg transaction, event)? • What information about that economic phenomenon would primary users—existing and potential investors, lenders and other creditors that cannot demand information from the entity—find useful in making decisions about providing resources to the entity? • Then identify the relevant IFRS requirement/s and evaluate the requirement/s against the objective – is the requirement a principle rooted in the Conceptual Framework? – if not, understand why the rule does not maximise concepts (eg application of the cost constraint, reason often in Basis for Conclusions)

• Focus on making/auditing/regulating/analysing IFRS judgements and estimates ©IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

International Financial Reporting Standards

Debunking common ‘conceptual’ misunderstandings

The views expressed in this presentation are those of the presenter, not necessarily those of the IASB or IFRS Foundation © IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Common ‘conceptual’ misunderstandings Myth

Conceptual Framework = IFRS constitution

Clarification—the Conceptual Framework includes…

Conceptual Framework never overrides an IFRS (see purpose and status of Conceptual Framework). In absence of an IFRS, the Conceptual Framework is in hierarchy for developing an accounting policy (see IAS 8.11(b))

Common ‘conceptual’ misunderstandings continued Myth

Clarification—the Conceptual Framework includes…

Objective of IFRS Objective = provide financial financial information = information about the reporting entity inform entity’s tax return that is useful to primary users— existing and potential investors, lenders and other creditors who cannot demand information directly to them—in making decisions about providing resources to the entity (eg buy, sell, hold) (¶OB 2 and OB5) © IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Common ‘conceptual’ misunderstandings continued Myth

Clarification—the Conceptual Framework includes…

Measured with reliability Reliability = complete, neutral and = precise free from error (see ¶4.38)

Common ‘conceptual’ misunderstandings continued Myth

Matching expenses to income = underlying concept/qualitative characteristic in the Conceptual Framework

Clarification—the Conceptual Framework includes…

Expenses are only decreases in assets/increase in liabilities in current period that result in decreased equity except…(¶4.25(b)) Qualitative characteristics are only relevance and faithful representation (fundamental) and comparability, verifiability, timely and understandability (enhancing) (¶QC4)

Common ‘conceptual’ misunderstandings continued Myth

Materiality is based on size alone.

Clarification—the Conceptual Framework includes…

Information is material if omitting it or misstating it could influence decisions that users make on the basis of financial information about a specific reporting entity. In other words, materiality is an entity-specific aspect of relevance based on the nature or magnitude, or both, of the items to which the information relates in the context of an individual entity’s financial report. (QC¶11)

Common ‘conceptual’ misunderstandings continued Myth

An entity must account for immaterial items

Clarification

Financial statements do not comply with IFRS if they contain either material errors or immaterial errors made intentionally to achieve a particular presentation of an entity’s financial position, financial performance or cash flows (IAS 8¶41)

Common ‘conceptual’ misunderstandings continued Myth

An entity must disclose immaterial items

Clarification

An entity need not provide a specific disclosure required by an IFRS if the information is not material (IAS 1¶31)

Common ‘conceptual’ misunderstandings continued Myth

Comparability = uniformity

Clarification

For information to be comparable, like things must look alike and different things must look different. (QC¶23) Making unlike things look alike does not provide information that is most useful to primary users—existing and potential investors lenders and other creditors that cannot demand information from the entity.

Common ‘conceptual’ misunderstandings continued Clarification—the Conceptual Framework includes…

Myth

There are two measurement bases in IFRS— historical cost and fair value

The Conceptual Framework describes a number of observed measurement conventions including historical cost. (¶4.54–4.56) Standards provide further conventions—for example net realisable value, value in use, the equity method, adjustments for hedge accounting and first time adoption. IFRS 13 provides a measurement concept —fair value.

Thank you

ÂŠIFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org