International Financial Reporting Standards
Conceptual Framework
for Financial Reporting
Meeting with investors
The views expressed in this presentation are those of the presenter,
not necessarily those of the IASB or IFRS Foundation.
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Session overview
Prudence
Measurement
Proposals on profit or loss and OCI*
*Other comprehensive income
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2
A brief history of prudence
Deliberate understatement
of assets or income, or
overstatement of liabilities
or expenses is not permitted
as it is inconsistent with
neutrality
1989
Framework
Includes explicit
reference to
prudence
3
Prudence - the exercise of
caution under conditions of
uncertainty - helps make
financial statements useful
to investors
2010
Conceptual
Framework
Reference to
prudence
removed
Removed because of
concerns that it could lead
to ‘cookie jar’ reserves and
earnings manipulation
© IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
2013
Discussion
Paper
Call (from some)
for reintroduction
2015
Exposure Draft
Proposes
reintroduction
What did investors say about prudence?
Some investors stated the
Conceptual Framework
should refer to prudence
Some investors stated the
Conceptual Framework
should not refer to prudence
Some investors were
indifferent
4
•  These investors argue that prudence is needed to make
financial statements useful
•  These investors argue that prudence could lead to
subjectivity and bias in financial statements
•  These investors argue that reintroducing prudence would
make very little difference to the financial statements
Among those investors who support bringing back a reference to
prudence there were different interpretations of what prudence means:
•  Some believe prudence it is the exercise of caution under conditions of uncertainty (see
slide 4)
•  Others advocate asymmetric prudence (see slide 5)
© IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
What is prudence?
5
Does not prohibit
recognition of
unrealised gains - if
that information is
useful
Prudence - the
exercise of
caution when
making
judgements
under conditions
of uncertainty
•  Supports neutrality:
•  means that assets and income are not
overstated and liabilities and expenses
are not understated
•  does not allow for the understatement
of assets and income or the
overstatement of liabilities and
expenses
No ‘cookie jar’
reserves
© IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
IASB rejects asymmetric prudence
Asymmetric
prudence
6
•  systematically requiring more evidence to support
the recognition of gains(or assets) than of losses
(or liabilities)
•  systematically requiring the selection of costbased measurements
The IASB supports neutrality and rejects
asymmetric prudence because:
•  Introducing a conservative bias in
measurement would increase the subjectivity
of financial statements (how much bias is a
good thing?) and reduce comparability
•  Measuring assets and liabilities at current
value, even if those current values need to be
estimated, can provide useful information (eg
many financial instruments)
© IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Questions for investors
7
•  Do you support reintroducing a reference to prudence in the
Conceptual Framework? Why or why not?
•  Do you agree with the proposed description of prudence as
the need to exercise caution when making judgements under
conditions of uncertainty?
•  Do you agree that the exercise of prudence:
–  means that assets and income are not overstated and liabilities and
expenses are not understated?
–  does not allow for the understatement of assets and income or the
overstatement of liabilities and expenses?
•  Should the discussion of prudence in the Conceptual
Framework address any other points?
© IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Measurement bases
8
Measurement bases
Historical cost
Uses information derived from the
transaction or event that created
the asset or liability.
Current value
Uses information that is updated to
reflect conditions at the
measurement date.
Measurement based on:
Market participant’s
assumptions
Fair Value
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Entity-specific
assumptions
•  Value in use (assets)
•  Fulfilment value
(liabilities)
Factors when selecting a measurement basis
9
Relevance
•  Information produced in both statement of financial position
and statement(s) of financial performance
•  How an asset or liability contributes to future cash flows
‒  depends in part on business activities being conducted
•  Characteristics of asset or liability
‒  eg nature or extent of variability in cash flows, sensitivity
to risks etc
•  Level of uncertainty
‒  but sometimes a measurement with a high degree of
uncertainty is the only relevant measurement
© IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Factors when selecting a measurement basis
10
Faithful representation
•  Consider how best to portray link between items
Others
•  Understandability
‒  Using new or different measurement bases could reduce
understandability
‒  Avoid unnecessary changes in measurement bases
•  Cost constraint
‒  Benefit of providing useful information should always
exceed the cost of doing so
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How should business activities impact
measurement?
11
Example – reporting of real estate
•  Real estate can contribute to cash flows in different ways:
–  Can be used in combination with other assets, liabilities and
resources (eg an office building)
–  Can generate cash flows directly from sale or rental income
(investment property)
•  Should all real estate be measured using the same
measurement basis (cost or current value)?
•  Should the measurement basis used vary depending on how the
real estate contributes to future cash flows?
© IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Dual measurement
Dual
measurement
12
•  a current value measurement basis for the asset or
the liability in the statement of financial position; and
•  a different measurement basis to determine the
related income or expenses in the statement of profit
or loss.
•  difference is included in OCI
For example, FVOCI for financial assets
Statement of financial
position
•  Fair value
Statement of profit or
loss
•  Amortised cost
OCI
•  Difference between fair value and amortised cost
© IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Questions for investors
13
•  Has the IASB identified the right factors to consider when
selecting a measurement basis?
•  Do you think the IASB should add additional factors that could
facilitate the selection of a measurement basis?
•  Do you agree with the approach that sometimes more than one
measurement basis could provide useful information (dual
measurement)?
© IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Proposals on presentation in profit or loss
This statement is
the primary, but
not the only,
source of
information
about an entity’s
financial
performance in
the period
Statement of profit or loss
Revenue from customers
Cost of sales
…
Taxes
…
Profit or loss is a
required total or
subtotal
14
Profit (loss) for the year
20X5
20X4
234,439
212,367
(112,764)
(106,259)
…
…
(21,546)
(20,587)
…
…
18,897
16,763
Rebuttable presumption that
income and expenses are
included in profit or loss
© IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Proposals on presentation in OCI
Income and
expenses
included in
OCI only if
that
enhances
relevance of
profit or loss
in the period
Statement of comprehensive income
20X5
20X4
18,897
16,763
68
(51)
(2,764)
6,259
…
…
(215)
87
Other comprehensive income for the year
(2,546)
4,253
Total comprehensive income for the year
16,351
21,016
Profit (loss) for the year
Currency translation
FV adjustment cash flow hedging
…
Presumption
that income
and expenses
included in OCI
in one period
are
subsequently
included in
profit or loss
(recycled)
15
Taxes
OCI only for some income and
expenses from changes in current
measures of assets and liabilities
© IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
OCI items are also a
source of information
about performance
for the period
Use of OCI in existing Standards – examples
16
A change in a
current measure
of asset / liability?
Use of OCI
enhances
relevance of
profit or loss?
Rebuttable
presumption
on recycling?
Effective portion of changes in fair value
of cash flow hedging instruments
!
!
!
‘Own credit risk’ when fair value option
used for financial liabilities
!
!
"
Exchange differences on net
investments in foreign operations
!
?
!
Remeasurement of net defined benefit
pension assets or liabilities
!
?
"
© IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Questions for investors
17
•  Do you agree with describing profit or loss as the primary source
of information about financial performance for the period? If not,
how would you describe, or define profit or loss instead?
•  Do you agree that the rebuttable presumption on recycling would
result in better information for investors?
•  Overall, do you believe that the proposals would result in more
consistent requirements for reporting financial performance and
would assist users of financial statements in understanding
entities’ performance?
© IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org