Paragraphs 1.2-1.4 of the IASB’s Conceptual Framework for Financial Reporting are written so densely that some people do not succeed in unpacking what they say. To make unpacking the meaning of those paragraphs easier, the IASB staff recommended in 2017 that the IASB should add a flowchart to the Conceptual Framework. This post summarises the staff recommendations and why the IASB rejected it. The post also highlights where readers can find a draft flowchart that they may find helpful.
Paragraphs 1.2-1.4 of the IASB’s Conceptual Framework for Financial Reporting describe the link between the objective of general purpose financial reporting and the information needed to meet that objective. From 2012 to 2018, when the IASB was developing the new version of the Conceptual Framework published in 2018, it became clear that many people were taking parts of those paragraphs out of context. For example, many people were writing that the objective of financial reporting is to provide information about future cash flows.
Are paragraphs 1.2-1.4 clear enough?
The IASB staff team working on the project came to the conclusion that the drafting of those paragraphs is clear, but that this drafting is very dense. For that reason, the IASB staff recommended in 2017 that the IASB should add a flowchart to Chapter 1 of the revised Conceptual Framework. The flowchart would illustrate the link between the objective of general purpose financial reporting and the information needed to meet that objective.
The IASB rejected that recommendation because:
- the IASB wanted to avoid making unnecessary changes to the text of chapters 1 and 2, because the focus of that project was on the other chapters.
- IASB Board members generally feel that examples and other illustrative material do not belong in IFRS Standards and the Conceptual Framework. They prefer to place such material in accompanying guidance or in educational material.
I understand the IASB’s reasons for this decision and I agree that they are valid. But I do think the IASB missed an opportunity by not adding a flowchart to the body of the Conceptual Framework. In my view, adding such a flowchart would have made it much easier for readers to unpack the dense chain of logic in paragraphs 1.2-1.4.
A draft flowchart does exist
As far as I know, the IASB has not produced educational material containing such a flowchart. But the IASB staff did produce a draft flowchart and a slide. I think some readers of the Conceptual Framework might find these helpful, so I reproduce them below.
The IASB staff included the following flowchart as appendix A to agenda paper 10B for the IASB meeting in October 2017 https://www.ifrs.org/content/dam/ifrs/meetings/2017/october/iasb/conceptual-framework/ap10b-sweep-issue-flowchart-chapter1.pdf
The IASB staff included this to show roughly what a flowchart might look like, but did not intend this as a definite recommendation for the detailed drafting.
Note: The flowchart refers to resources where the final published text of paragraphs 1.2-1.4 refers to economic resources.
The IASB staff included the following slide in a presentation for the World Standard Setters’ Conference in 2018. https://www.ifrs.org/content/dam/ifrs/meetings/2018/october/wss/wss4-conceptual-framework-overview.pdf This slide isn’t formatted as a flowchart, but includes brief wording that could have been used in a flowchart.
Note: the 2nd line of the slide lists the types of decision that primary uses of financial reports might make: buying, holding or selling equity or debt instruments, providing or settling loans [or other forms of credit]; or voting on (or influencing) management decisions that affect the use of the entity’s resources.
Readers of the Conceptual Framework may find it helpful to look at the above flowchart or slide when they read paragraphs 1.2-1.4. Of course, reading the flowchart or slide is not a substitute for reading those paragraphs carefully and in full. I reproduce those paragraphs below.
Paragraphs 1.2-1.4 of the Conceptual Framework
1.2 The objective of general purpose financial reporting is to provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions relating to providing resources to the entity. Those decisions involve decisions about:
(a) buying, selling or holding equity and debt instruments;
(b) providing or settling loans and other forms of credit; or
(c) exercising any rights to vote on, or otherwise influence, management’s actions that affect the use of the entity’s economic resources.
1.3 The decisions described in paragraph 1.2 depend on returns that existing and potential investors, lenders and other creditors expect, for example, dividends, principal and interest payments or market price increases. 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 and on their assessment of management’s stewardship of the entity’s economic resources. Existing and potential investors, lenders and other creditors need information to help them make those assessments.
1.4 To make the assessments described in paragraph 1.3, existing and potential investors, lenders and other creditors need information about:
(a) the economic resources of the entity, claims against the entity, and changes in those resources and claims (see paragraphs 1.12–1.21); and
(b) how efficiently and effectively the entity’s management and governing board have discharged their responsibilities to use the entity’s economic resources (see paragraphs 1.22–1.23).