The Financial Reporting Council (FRC) is urging the International Accounting Standards Board (IASB) to re-introduce the concepts of prudence, stewardship and reliability in its proposed revision of the international accounting standards Conceptual Framework, saying they are fundamental to financial reporting say Harris & Co accountants Northampton.
The FRC’s comments come in response to the IASB’s discussion paper on its Conceptual Framework, released in July 2013, which identifies principles for the IASB to use when it develops and revises International Financial Reporting Standards (IFRSs).
While FRC the discussion paper is ‘detailed and thoughtful’ but challenges the IASB over its treatment of the ideas of prudence, stewardship (or ‘accountability’) and reliability which it says have been downplayed since earlier changes to the framework in 2010.
It says that the chapters on ‘Objectives and qualitative characteristics’ should be revised to emphasise the importance of these concepts, which have been the subject of several bulletins put out by FRC and the European Financial Reporting Advisory Group (EFRAG).
In addition, the FRC would like these chapters to ‘acknowledge that financial statements should provide information that assists in an assessment of the entity’s business model’, arguing that ‘financial statements should not simply provide an inventory of assets and liabilities and information on changes in them, but should portray how the entity uses its assets and liabilities to create value’.
The FRC’s response also suggested that a more fundamental analysis of issues relating to measurement of assets and liabilities than that provided in the discussion paper is required, and that the objective of the statement of profit or loss needs to be specified.
Regarding the discussion of measurement, the FRC comments that it ‘fails to provide the depth of analysis that is necessary if the Conceptual Framework is to provide useful guidance to the IASB for the development of accounting standards’ and says ‘the discussion of specific measurement bases is superficial and incomplete’.
However, the FRC welcomes IASB’s commitment to revisit the Conceptual Framework and says it agrees with a number of proposals. These include the equal emphasis placed on the statement of profit or loss and OCI and the statement of financial position, and the recognition of the statement of cash flows as a primary financial statement, and IASB’s preliminary view that a single measurement basis may not provide the most relevant information, and that the selection of a measurement basis should depend upon how an asset or liability contributes to future cash flows.
Other proposals which the FRC supports are the retention of a total (or sub-total) for profit or loss as a primary source of information about the return an entity has made on its economic resources in a period; the retention of the current definition of equity; and the inclusion of principles on presentation and disclosure as the first step of the IASB’s disclosure initiative.
Melanie McLaren, FRC executive director, codes and standards said:
‘The IASB’s Discussion Paper makes a number of valuable and thoughtful suggestions. In particular we welcome the emphasis placed on the importance of the profit and loss account as well as the balance sheet, and the recognition that financial reporting should not be based entirely on market values. As future standards will be developed from the Conceptual Framework, it is essential that the Conceptual Framework is of the highest quality possible. We hope that our suggestions will assist the IASB in achieving that.’