The IASB overhauled its Conceptual Framework for Financial Reporting in a project carried out between 2012 and 2018. One topic the IASB addressed in a Discussion Paper in 2013 was the purpose of the Conceptual Framework. The IASB expressed a preliminary view that it should single out one use of the Conceptual Framework as its primary purpose: helping the IASB develop accounting standards.
There was widespread and strongly felt opposition to the idea of identifying a single use of the Conceptual Framework as primary. After considering the arguments made in the responses, the IASB decided that the stated purpose should continue to refer to various uses by various parties, without identifying any single use as primary.
The breadth and strength of that response was my biggest surprise in that project. In this post, I explain why I think people felt so strongly.
What the 2010 Conceptual Framework said
The version of the Conceptual Framework issued in 2010 said that the purpose of the Conceptual Framework was:
- to assist the IASB in the development of future IFRSs and in its review of existing IFRSs;
- to assist the IASB in promoting harmonisation of regulations, accounting standards and procedures relating to the presentation of financial statements by providing a basis for reducing the number of alternative accounting treatments permitted by IFRSs;
- to assist national standard-setting bodies in developing national standards;
- to assist preparers of financial statements in applying IFRSs and in dealing with topics that have yet to form the subject of an IFRS;
- to assist auditors in forming an opinion on whether financial statements comply with IFRSs;
- to assist users of financial statements in interpreting the information contained in financial statements prepared in compliance with IFRSs; and
- to provide those who are interested in the work of the IASB with information about its approach to the formulation of IFRSs.
2013 Discussion Paper
In 2012-13, the project team on the Conceptual Framework reached a preliminary view (and the IASB agreed) that:
- the primary purpose of the Conceptual Framework should be to assist the IASB by identifying concepts that it will use consistently when developing and revising Standards.
- the Conceptual Framework may also assist other parties to: (a) to understand and interpret existing Standards; and (b) to develop accounting policies when no Standard specifically applies to a particular transaction or event.
The project team (and the IASB) felt that addressing the Conceptual Framework primarily to the IASB itself would make it possible to draft the revised Conceptual Framework in a more focussed way. At the same time, mentioning use of the Conceptual Framework by other parties would avoid downplaying its importance to them.
The IASB published its preliminary view on this topic in 2013 in its Discussion Paper A Review of the Conceptual Framework for Financial Reporting. (The Discussion Paper also covered many other aspects of the Conceptual Framework)
Response to the Discussion Paper
To my surprise, many respondents to the Discussion Paper (both in comment letters and in outreach meetings) strongly opposed the preliminary view. They argued that the IASB should continue to address the Conceptual Framework to a broad group, rather than primarily to itself.
Respondents gave various reasons why the Conceptual Framework should not describe assisting the IASB to develop Standards as the Conceptual Framework’s primary purpose:
- the Conceptual Framework facilitates a common understanding of basic principles or concepts of financial reporting among all those who use the Standards.
- preparers use the Conceptual Framework through the hierarchy of pronouncements in paragraph 11 of IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors.
- the Conceptual Framework is prominent and important to other parties. For example: (a) auditors and regulators consider it when assessing the judgements made by preparers; and (b) the IFRS Interpretations Committee uses it when developing Interpretations.
- if the Conceptual Framework is a purely ‘technical document’, it may not meet the IFRS Foundation’s objective of promoting and facilitating the adoption of IFRS through convergence of national accounting standards and IFRS.
- the Conceptual Framework is a ‘behavioural code’ for all parties to follow.
The above summary of arguments is taken (with some edits) from the IASB staff paper prepared for the IASB’s discussion of this topic. https://www.ifrs.org/content/dam/ifrs/meetings/2014/april/iasb/conceptual-framework/ap10e-purpose-and-status-of-cf.pdf
What the Conceptual Framework 2018 says
Having considered the arguments, the IASB did not proceed with the idea of setting the development of Standards as the Conceptual Framework’s primary purpose. Instead, the IASB created a somewhat streamlined statement of the purpose. Thus, the current version of the Conceptual Framework (issued in 2018) states that its purpose is to:
- assist the IASB to develop IFRS Accounting Standards that are based on consistent concepts.
- assist preparers to develop consistent accounting policies when no Standard applies to a particular transaction or other event, or when a Standard allows a choice of accounting policy.
- assist all parties to understand and interpret the Standards.
Why did the response surprise me so much?
It was apparent both from comment letters and from outreach meetings I attended in 2013 that many people felt strongly that the Conceptual Framework should not treat the IASB as its primary addressee.
The breadth and depth of that reaction surprised me. For one thing, that reaction came even from many people who take a largely pragmatic approach to most issues and who are often dismissive of arguments that they view as too theoretical.
Also, I felt that preparers do not often need to make decisions using the Conceptual Framework. As paragraph SP1.2 of the Conceptual Framework explains, the Conceptual Framework is not a Standard and does not override any requirement in a Standard.
Using the Conceptual Framework directly
The most obvious case when a preparer may need to use the Conceptual Framework directly is when the preparer needs to develop or select an accounting policy:
- if no IFRS Accounting Standard specifically applies to a transaction, other event or condition and if, also, no IFRS Standard deals with similar and related issues; or
- if an IFRS Accounting Standard permits a choice of accounting policies.
For most preparers, that case does not arise for most items in their financial statements. Even if it does arise for an item, that case does not arise every year.
How to develop or select an accounting policy in such cases is discussed in Guide to Selecting and Applying Accounting Policies—IAS 8, published by the IFRS Foundation in 2019. https://www.ifrs.org/content/dam/ifrs/news/2019/november/guide-to-selecting-and-applying-accounting-policies-ias-8.pdf
Preparers might also find the Conceptual Framework helpful when they consider how to present information in the primary financial statements and in considering what information to disclose, and how to disclose that information.
Why did people feel so strongly?
In my view, respondents had 5 main reasons for feeling so strongly that the IASB should address the Conceptual Framework to a range of interested parties, and not primarily to the IASB itself:
- although the Conceptual Framework is not itself a Standard, it is an indispensable part of the whole package of IFRS Accounting Standards. It is the foundation on which the whole structure of Standards rests and is an integral part of that structure.
(Or, to use different metaphors, it is the apex on top of the pyramid of Standards, or the overarching roof sitting over the house of Standards.)
- people need to read the Standards with the Conceptual Framework in mind. Indeed, the rubric (boxed wording) in front of each Standard says that the Standard should be read in the context of the Conceptual Framework (and some other documents). Although preparers may not need to base many decisions on the Conceptual Framework directly, it does play a very important indirect role in colouring how preparers (and others, including auditors and regulators) read the Standards.
- the package of Standards is not an arbitrary collection of individual rules. It forms a coherent whole, bound together by the cement of the Conceptual Framework. Addressing the Conceptual Framework to all parties involved in using and applying the Standards emphasises that the package is coherent and that people need to apply the Standards in a coherent way. Also, addressing the Conceptual Framework to all parties makes it easier to base IFRS Accounting Standards on principles without trying to regulate in exhaustive detail how to deal with every type of transaction, event or condition.
- constant reference to the Conceptual Framework makes it easier for preparers and others to understand the aim of the Standards and to apply the Standards in a way consistent with that aim.
- the Conceptual Framework does not belong to the IASB alone. It belongs to the whole community of parties interested in IFRS Accounting Standards and in financial statements prepared using them.
Although the IASB’s Conceptual Framework may not determine many decisions by preparers directly, it does play an essential indirect role in helping people understand IFRS Accounting Standards and in helping them apply the Standards in a way consistent with their aims. The IASB was right to acknowledge this by not singling out itself as the primary user of the Conceptual Framework.
What do you think? Have I captured above:
- how people use the Conceptual Framework?
- why so many people feel so strongly that the IASB is not the primary user of the Conceptual Framework?