sérgio de iudícibus nelson carvalho eric...

Academics Researching/Teaching Financial Accounting, International Accounting and/or Accounting Theory in Brazilian

Universities’ Master Degree and PhD Programs

January 13, 2014

To the

International Accounting Standards Board 30 Cannon Street London EC4M 6XH United Kingdom

RE: Comment letter – Discussion Paper on “Conceptual Framework”

Dear Sirs,

A voluntary group of academics engaged in research and in teaching Financial Accounting, International Accounting, and/or Accounting Theory, in several Brazilian universities is pleased to submit this Comment Letter on IASB’s Discussion Paper exploring possible changes to its Conceptual Framework for Financial Reporting.

The academics that submit this letter welcome the opportunity to respond the Request for Comment on above mentioned Discussion Paper and support IASB’s initiative in considering this revision of the Framework.

On behalf of the voluntary group of academics of Brazil,

Sérgio de Iudíc ibus

Nelson Carvalho

Eric Martins Group coordinators

Academics Researching/Teaching Financial Accounting, International Accounting and/or Accounting Theory in Brazilian

Universities’ Master Degree and PhD Programs

The academics that constituted the voluntary group that developed this comment letter are:

PhD Adriano Rodrigues – Federal University of Rio de Janeiro (UFRJ)

PhD Ariovaldo dos Santos – University of São Paulo (USP)

PhD Bruno Salotti – University of São Paulo (USP)

MsC Diana Lúcia de Almeida – University of São Paulo (USP)

PhD Edilson Paulo – Federal University of Paraíba (UFPB)

PhD Eliseu Martins – Professor Emeritus, University of São Paulo (USP)

PhD Eric Aversari Martins – University of São Paulo (USP)

PhD Fernando Dal-Ri Murcia – University of São Paulo (USP)

PhD Isabel Lourenço – Superior Institute of Labor and Enterprise Sciences – University Institute of Lisbon, Portugal (ISCTE / IUL), and University of São Paulo (USP)

MsC. Janaína Senra – Brazilian Institute of Capital Markets (IBMEC) and Presbyterian University Mackenzie (FGV)

PhD Jorge Vieira da Costa – State University of Rio de Janeiro (UERJ)

PhD Natan Szuster – Federal University of Rio de Janeiro (UFRJ) and State University of Rio de Janeiro (UERJ)

PhD Nelson Carvalho – University of São Paulo (USP)

MsC Paulo Roberto Gonçalves Ferreira – Pontifical Catholic University of Rio de Janeiro (PUC RJ) and Federal University of Rio de Janeiro (UFRJ)

PhD Ricardo Lopes Cardoso – Getulio Vargas Foundation (FGV) and State University of the State of Rio de Janeiro (UERJ)

PhD Sérgio de Iudícibus – Professor Emeritus, University of São Paulo (USP) and Professor, Pontifical Catholic University, São Paulo (PUC SP)

PhD Tânia Relvas – University of São Paulo (USP)

Academics researching teaching Financial Accounting, International Accounting and/or Accounting Theory in Brazilian

universities

1

INDEX

SECTION 1 - INTRODUCTION 3

QUESTION 1 3

SECTION 2 – ELEMENTS OF FINANCIAL STATEMENTS 4

QUESTION 2 4 QUESTION 3 7 QUESTION 4 9

SECTION 3 – ADDITIONAL GUIDANCE TO SUPPORT THE ASSET AND LIABILITY DEFINITIONS 10


SECTION 4 – RECOGNITION AND DERECOGNITION 13

QUESTION 8 13 QUESTION 9 14

SECTION 5 - DEFINITION OF EQUITY AND DISTINCTION BETWEEN LIABILITIES AND EQUITY INSTRUMENTS 15

QUESTION 10 15

SECTION 6 - MEASUREMENT 17

QUESTION 11 17 QUESTION 12 18 QUESTION 13 19 QUESTION 14 20 QUESTION 15 21

SECTION 7 – PRESENTATION AND DISCLOSURE 22



universities

2

ADDITIONAL COMMENTS RELATED TO PRESENTATION AND DISCLOSURE 27

SECTION 8 – PRESENTATION IN THE STATEMENT OF COMPREHENSIVE INCOME – PROFIT OR LOS AND OTHER COMPREHENSIVE INCOME 28

AP2/SP - QUESTION 1 28 AP2/SP – QUESTION 4 29 QUESTION 19 30 QUESTION 21 32 QUESTION 20 33 ADDITIONAL COMMENTS RELATED (DIRECT OR INDIRECTLY) TO OCI MATTERS 34

SECTION 9 – OTHER ISSUES 35

QUESTION 22 35 QUESTION 23 37 QUESTION 24 38 QUESTION 25 39 QUESTION 26 40


universities

3

Section 1 - Introduction

Question 1

Paragraphs 1.25–1.33 set out the proposed purpose and status of the Conceptual Framework. The IASB’s preliminary views are that:

(a) the primary purpose of the revised Conceptual Framework is to assist the IASB by identifying concepts that it will use consistently when developing and revising IFRSs; and

(b) in rare cases, in order to meet the overall objective of financial reporting, the IASB may decide to issue a new or revised Standard that conflicts with an aspect of the Conceptual Framework. If this happens the IASB would describe the departure from the Conceptual Framework, and the reasons for that departure, in the Basis for Conclusions on that Standard.

Do you agree with these preliminary views? Why or why not?

We partially agree with question 1(b). In fact, a departure of a Standard from the Conceptual Framework, in theory, should be rare. Of course, economic events, market conditions are so variable in the business world that a Conceptual Framework is likely unable to comfortably accommodate each and every standard. This is the reason why we would prefer a more concise Conceptual Framework, containing only basic concepts.

Also, we agree with the proposal of a substitution of a long list of possible uses of the Conceptual Framework by a small list of primary objectives (fundamental ones). Nevertheless, in the present Conceptual Framework there is an objective that we understand should be maintained, and not omitted nor treated in a secondary way in a future revised Framework, which it is:

“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;”

Our suggestion is to maintain that objective.


universities

4

Section 2 – Elements of financial statements

Question 2

The definitions of an asset and a liability are discussed in paragraphs 2.6–2.16. The IASB proposes the following definitions:

(a) an asset is a present economic resource controlled by the entity as a result of past events.

(b) a liability is a present obligation of the entity to transfer an economic resource as a result of past events.

(c) an economic resource is a right, or other source of value, that is capable of producing economic benefits.

Do you agree with these definitions? Why or why not? If you do not agree, what changes do you suggest, and why?

a) We do not fully agree with the proposed definition of asset. In our view, the agent, or the economic resource, should not be confounded with the services (economic benefits) that will arise from the use of the resource in connection with management action or other resources. We prefer, for a definition of asset, the term “resource”, only. A definition should be able to be ready for future improvement when measurement and recognition of accounting complex items, not currently known or available, become more advanced. “Resources” encompass financial, tangible, intangible or even human resources. The expression “economic” resource is limitative and to many economists it means “objects or rights that have immediate market value”. An intangible item sometimes may not have an immediate market value but it would still be a resource. We would prefer a definition stating that:

Assets are economic benefits accrued to an entity as a result of the individual or combined use of resources controlled by such entity.

We do not think it is essential the reference to past events.

In this sense, as we propose that the asset is the economic benefit and not the resource itself, it is important to highlight that the resource is used as a proxy for the recognition, classification, aggregation and disclosure of the asset, but it does not represent the asset itself. IASB’s proposed definition is related to the cost of the asset, and not its actual value. Thus, we do not agree with the statement on paragraph 2.14 that “the asset is the resource” and not the ultimate future inflow: we sustain that the asset is the ultimate future inflow, represented on the financial


universities

5

statements by means of the resource. How such future inflows will be measured is not an issue of asset definition, but asset measurement.

To clarify our position, let us consider some examples presented on paragraph 2.14. Example a) mentions a call option and argues “the resource is the contractual right to buy the underlying asset, not the asset itself.” That is correct, however, it must be considered that the contractual right only has value if it represents a future inflow of assets or benefits. If the underlying asset is not expected to create any positive future inflows, the option does not have a market value, nobody will want to buy the option, and the owner will not want to execute such option and buy the asset. Notice, then, that what gives the resource value, is the possibility of future inflows.

Example d), on the other hand, argues that “on pharmaceutical research that is in progress, the resource is the know-how, not the economic benefits that will arise if the research is successful.” That is also correct but eventually incomplete, as it does not consider that such resource shall only have value if it can be converted into products that will generate, ultimately, future inflows. Just like the mentioned example a), the relevant part is the existence of the future inflows.

Finally, in example e) the lottery ticket is mentioned as the resource, and not the cash prize. That is also correct, but the lottery ticket is not the asset, it is the possibility of gaining the future inflow that the prize might bring that is the asset. If such lottery ticket has, for some hypothetical contractual definition, an obligation to deliver the prize to a third party without any benefit to the owner, it is not an asset because it does not embody the possibility of future inflows.

This is in line with the definition of the asset having to be an economic resource, i.e., a resource that may deliver future inflows. And the need to mention “economic” resources is due to the fact that not all resources deliver economic benefits, and that is done to differentiate resources that have economic benefits embodied, from those that do not.

Considering all that was mentioned, if what makes a resource to be an asset is the existence of future economic benefits, the essence of the asset is the very economic benefit, and not the resource itself. If an economic resource has to be differentiated from other resources in order to be an asset, the essence of the asset is whatever differentiates such resources from themselves. Thus, the asset is the economic benefit, and not the resource.

The benefit will arise from the use (combined or not) of a resource, and the resource is used, in accounting, to represent the economic benefit. Using the notion of economic resource can lead to the misunderstanding that for an asset to exist, only the resource is necessary, which is not true.

b) Taking into account our previous comment, we partially agree with the definition of liability and suggest the following alternative: “a liability is a present obligation of the


universities

6

entity, the settlement of which involves transfer of entity’s resources capable of producing economic benefits”.

c) We agree that an economic resource is a right, or other source of value, that is capable of producing economic benefits. But these economic benefits are not necessarily a spontaneous consequence of the fact that economic resources exist, per se, but they need, in general, managerial (administrative) action and, eventually, the use of other resources.


universities

7

Question 3

Whether uncertainty should play any role in the definitions of an asset and a liability, and in the recognition criteria for assets and liabilities, is discussed in paragraphs 2.17–2.36. The IASB’s preliminary views are that:

(a) the definitions of assets and liabilities should not retain the notion that an inflow or outflow is ‘expected’. An asset must be capable of producing economic benefits. A liability must be capable of resulting in a transfer of economic resources.

(b) the Conceptual Framework should not set a probability threshold for the rare cases in which it is uncertain whether an asset or a liability exists. If there could be significant uncertainty about whether a particular type of asset or liability exists, the IASB would decide how to deal with that uncertainty when it develops or revises a Standard on that type of asset or liability.

(c) the recognition criteria should not retain the existing reference to probability.

Do you agree? Why or why not? If you do not agree, what do you suggest, and why?

We still support our revised definition of assets and liabilities because, in the case of assets, the real ones are the economic benefits produced by resources in general and not the economic resource by itself.

Notice that in our definition of asset, there is no need for a discussion of the capability of the resource to generate economic benefits; once the asset is the very economic benefit, the asset will only exist when the resource has fulfilled its capability of generating economic benefits. Thus, the probability that has to be considered, under our definition of asset, is the probability of the resource fulfilling such capability

However, under IASB´s proposed definition, on the matter of probability, we understand that the expression “capable” (of producing economic benefits) is sufficient and adequate. In other words, the definition proposed by IASB leaves clear that, in order to be an economic resource, it is not required that it should be absolutely certain that those benefits will be created, but will be capable of producing such benefits.

On the other hand, we also understand that if a situation will occur in which exists significant uncertainty relating to the existence or not of an asset or liability at all, this should be considered when discussing recognition criteria, as stated in question 8, and when developing or reformulating IFRS´s standards. In essence, the probability of the occurrence of the economic benefits should not be part of the definition of assets


universities

8

and/or liabilities, either under our definition or IASB´s proposed one; this is a recognition issue.


universities

9

Question 4

Elements for the statement(s) of profit or loss and OCI (income and expense), statement of cash flows (cash receipts and cash payments) and statement of changes in equity (contributions to equity, distributions of equity and transfers between classes of equity) are briefly discussed in paragraphs 2.37–2.52. Do you have any comments on these items? Would it be helpful for the Conceptual Framework to identify them as elements of financial statements?

We think a clarification in the Conceptual Framework for those statements would be helpful for users of financial statements better understand the relationships and the differences among them.

So, although we agree that net profit or loss of a period and other comprehensive income are not elements of financial statements, but only totals or subtotals, those items should be treated in detail in a specific standard (like IAS 1-Presentation of Financial Statements), and we still urge such subtotals are relevant to the point of deserving a conceptual description, because they represent dimensions of economic and financial performance resulting from items of financial statements.

So, we think it is pertinent to have a conceptual view of the relevant parts of the formation of profit or loss (of the period and total comprehensive), as well as of the cash flows (operational, investment and financial operation) and of the changes in equity (capital, capital reserves, retained income, other comprehensive income and share of minorities). All of this would direct the reader to IAS 1 for further details and complementation.


universities

10

Section 3 – Additional guidance to support the asset and liability definitions

Question 5

Constructive obligations are discussed in paragraphs 3.39–3.62. The discussion considers the possibility of narrowing the definition of a liability to include only obligations that are enforceable by legal or equivalent means. However, the IASB tentatively favours retaining the existing definition, which encompasses both legal and constructive obligations - and adding more guidance to help distinguish constructive obligations from economic compulsion. The guidance would clarify the matters listed in paragraph 3.50.

Do you agree with this preliminary view? Why or why not?

We agree to retain the existing definition, which embodies both legal and constructive obligations. Constructive obligations are an important kind of liability since they are consequence of the competitive economic environment of today business in which enterprises cannot fall short of other competitors in providing and fulfilling certain obligations.

We would like to stress that the definition of a liability in paragraphs 36 and 40 of the FASB Concepts Statement # 6 (Elements of Financial Statements) unites legal, and constructive obligations, including obligations that are not legally enforceable. However, IASB (existing and proposed) Conceptual Framework refers only to legal and constructive obligations. To such respect, we would like to suggest a clarification if “equitable obligations” provided in the FASB standards are or are not contained in the expression “constructive obligations” or if the scope of obligations in the proposed Conceptual Framework is deliberately less comprehensive than that of the FASB.


universities

11

Question 6

The meaning of ‘present’ in the definition of a liability is discussed in paragraphs 3.63–3.97. A present obligation arises from past events. An obligation can be viewed as having arisen from past events if the amount of the liability will be determined by reference to benefits received, or activities conducted, by the entity before the end of the reporting period. However, it is unclear whether such past events are sufficient to create a present obligation if any requirement to transfer an economic resource remains conditional on the entity’s future actions. Three different views on which the IASB could develop guidance for the Conceptual Framework are put forward:

(a) View 1: a present obligation must have arisen from past events and be strictly unconditional. An entity does not have a present obligation if it could, at least in theory, avoid the transfer through its future actions.

(b) View 2: a present obligation must have arisen from past events and be practically unconditional. An obligation is practically unconditional if the entity does not have the practical ability to avoid the transfer through its future actions.

(c) View 3: a present obligation must have arisen from past events, but may be conditional on the entity’s future actions.

The IASB has tentatively rejected View 1. However, it has not reached a preliminary view in favour of View 2 or View 3. Which of these views (or any other view on when a present obligation comes into existence) do you support? Please give reasons.

We agree with the opinion of the IASB to reject view 1 by which only obligations strictly unconditional would be considered by the expression “present obligation”.

We are in favor of the other views, especially view 3. To such respect, we are favorable to the notion that past events are sufficient to give way to a present obligation, and not being necessary such obligation be unconditional (strictly or practically). Nevertheless, we understand a liability should not be recognized in cases the entity has an unconditional right to avoid future outflows of economic benefits in order to settle the obligation. View 3, being more practical, will result in more useful information to users of financial statements, but, certainly, this principle must be detailed in specific standards in order to avoid the accretion of undue liabilities. Additionally, we would like to suggest all examples and orientations related to principles and definitions of the conceptual framework to be included in an Application Guidance.


universities

12

Question 7

Do you have comments on any of the other guidance proposed in this section to support the asset and liability definitions?

In the Guidance for Constructive Obligations (paragraphs 3-39 to 3-62) it is not stated if Constructive Obligations comprehend what some authors call Equitable (or Equitative) Obligations. We interpreted as a yes. Nevertheless, we suggest making this explicit, as mentioned on our answer to question 5 above.


universities

13

Section 4 – Recognition and derecognition

Question 8

Paragraphs 4.1–4.27 discuss recognition criteria. In the IASB’s preliminary view, an entity should recognize all its assets and liabilities, unless the IASB decides when developing or revising a particular Standard that an entity need not, or should not, recognize an asset or a liability because:

(a) recognizing the asset (or the liability) would provide users of financial statements with information that is not relevant, or is not sufficiently relevant to justify the cost; or

(b) no measure of the asset (or the liability) would result in a faithful representation of both the asset (or the liability) and the changes in the asset (or the liability), even if all necessary descriptions and explanations are disclosed.

Do you agree? Why or why not? If you do not agree, what changes do you suggest, and why?

We partially agree. The general principle – to recognize all assets and liabilities in the Statement of Financial Position – will increase relevance and faithful representation (for instance by incorporating into the balance sheet some of the off-balance sheet items).

However, the existing concept of probability in the present Conceptual Framework should be maintained in order to cover situations like contingent assets and contingent liabilities.


universities

14

Question 9

In the IASB’s preliminary view, as set out in paragraphs 4.28–4.51, an entity should derecognize an asset or a liability when it no longer meets the recognition criteria. (This is the control approach described in paragraph 4.36(a)). However, if the entity retains a component of an asset or a liability, the IASB should determine when developing or revising particular Standards how the entity would best portray the changes that resulted from the transaction. Possible approaches include:

(a) enhanced disclosure;

(b) presenting any rights or obligations retained on a line item different from the line item that was used for the original rights or obligations, to highlight the greater concentration of risk; or

(c) continuing to recognise the original asset or liability and treating the proceeds received or paid for the transfer as a loan received or granted.


Yes, we agree. We believe that a derecognition principle based on the control approach is coherent with the recognition principle (mirror image) and also will tend to increase comparability between entities as it treats identical rights and obligations in the same way, regardless of whether they were previously recognized.

We also agree that there should be specific requirements whenever an entity retains a component of an asset or a liability. We believe the best approach is a combination of (a) enhancing disclosure and (b) presenting the rights and obligations retained in a different line item, as:

(i) Only enhancing disclosure is not sufficient as, the failure to derecognize an item that qualifies for derecognition will not be rectified by disclosure of footnotes, and

(ii) Enhancing disclosure will increase comprehensibility of the transaction or event being reported.

We do not agree with approach (c) because that is not a derecognition approach, since the entity will continue to recognize an item that meets the derecognition criteria.

Finally, we believe that DP makes progress in the issue, since the existing Conceptual Framework does not address derecognition.


universities

15

SECTION 5 - Definition of equity and distinction between liabilities and equity instruments

Question 10

The definition of equity, the measurement and presentation of different classes of equity, and how to distinguish liabilities from equity instruments are discussed in paragraphs 5.1–5.59. In the IASB’s preliminary view:

(a) the Conceptual Framework should retain the existing definition of equity as the residual interest in the assets of the entity after deducting all its liabilities.

(b) the Conceptual Framework should state that the IASB should use the definition of a liability to distinguish liabilities from equity instruments. Two consequences of this are:

(i) obligations to issue equity instruments are not liabilities; and

(ii) obligations that will arise only on liquidation of the reporting entity are not liabilities (see paragraph 3.89(a)).

(c) an entity should:

(i) at the end of each reporting period update the measure of each class of equity claim. The IASB would determine when developing or revising particular Standards whether that measure would be a direct measure, or an allocation of total equity.

(ii) recognise updates to those measures in the statement of changes in equity as a transfer of wealth between classes of equity claim.

(d) if an entity has issued no equity instruments, it may be appropriate to treat the most subordinated class of instruments as if it were an equity claim, with suitable disclosure. Identifying whether to use such an approach, and if so, when, would still be a decision for the IASB to take in developing or revising particular Standards.


a) We agree with this definition. Some elements of equity are not directly measured as their measurement depends on the measurement of assets and liabilities. A different view of this definition would imply in establishing recognition and measurement criteria for the equity elements.

b) This choice is based on the strict obligation approach, which is consistent with the view of the entity (IASB will need to revisit the Entity Project, suspended in 2010, to


universities

16

avoid inconsistencies with the Conceptual Framework). This approach considers more items in Equity than in Liabilities. In this view, only the obligations to deliver economic resources are classified as a liability. Thus, this approach is consistent with the new concept of liability and privileges information to the shareholder about potential dilutions of investor’s shares.

The other approach, named narrow equity approach, considers more items in Liabilities than in Equity. Then, the equity is supposed to be cleaner, which is an approach closer to the owner perspective. But the use of this approach implies in reviewing the new concept of liability.

Considering that we partially support the new concept of liability (see comments of section 2), we agree that the strict obligation approach would be adequate, although we consider that this approach could bring more complexity to the understanding of equity and may encourage the creation of structured products in high leveraged companies.

c) We believe that the re-measurement and transfers of wealth between equity claims brings excessive complexity to a residual element of the Statement of Financial Position.

d) We have no comments about this question.


universities

17

Section 6 - Measurement

Question 11

How the objective of financial reporting and the qualitative characteristics of useful financial information affect measurement is discussed in paragraphs 6.6–6.35. The IASB’s preliminary views are that:

(a) the objective of measurement is to contribute to the faithful representation of relevant information about:

(i) the resources of the entity, claims against the entity and changes in resources and claims; and

(ii) how efficiently and effectively the entity’s management and governing board have discharged their responsibilities to use the entity’s resources.

(b) a single measurement basis for all assets and liabilities may not provide the most relevant information for users of financial statements;

(c) when selecting the measurement to use for a particular item, the IASB should consider what information that measurement will produce in both the statement of financial position and the statement(s) of profit or loss and OCI;

(d) the relevance of a particular measurement will depend on how investors, creditors and other lenders are likely to assess how an asset or a liability of that type will contribute to future cash flows. Consequently, the selection of a measurement:

(i) for a particular asset should depend on how that asset contributes to future cash flows; and

(ii) for a particular liability should depend on how the entity will settle or fulfil that liability.

(e) the number of different measurements used should be the smallest number necessary to provide relevant information. Unnecessary measurement changes should be avoided and necessary measurement changes should be explained; and

(f) the benefits of a particular measurement to users of financial statements need to be sufficient to justify the cost.

Do you agree with these preliminary views? Why or why not? If you disagree, what alternative approach to deciding how to measure an asset or a liability would you support?

Yes, we agree with these preliminary views.


universities

18

Question 12

The IASB’s preliminary views set out in Question 11 have implications for the subsequent measurement of assets, as discussed in paragraphs 6.73–6.96. The IASB’s preliminary views are that:

(a) if assets contribute indirectly to future cash flows through use or are used in combination with other assets to generate cash flows, cost-based measurements normally provide information that is more relevant and understandable than current market prices.

(b) if assets contribute directly to future cash flows by being sold, a current exit price is likely to be relevant.

(c) if financial assets have insignificant variability in contractual cash flows, and are held for collection, a cost-based measurement is likely to provide relevant information.

(d) if an entity charges for the use of assets, the relevance of a particular measure of those assets will depend on the significance of the individual asset to the entity.

Do you agree with these preliminary views and the proposed guidance in these paragraphs? Why or why not? If you disagree, please describe what alternative approach you would support.

We agree only partially with the preliminary view. In the item d) we believe that there has to be further discussions. In line with our answer to questions number 23 and 24, the use of the significance of the individual asset in order to determine which must be the measurement criteria goes against the business model idea. The criteria should follow the business model that the companies adopts, and not depend on how significant it is. Also, the text on the mentioned item d) does not indicate which criteria should be used if the asset is significant (should it be fair value through exit price or discounted cash flow? Cost?). We believe that there should be some additional guidance in this sense linking the measurement criteria with the business model.


universities

19

Question 13

The implications of the IASB’s preliminary views for the subsequent measurement of liabilities are discussed in paragraphs 6.97–6.109. The IASB’s preliminary views are that:

(a) cash-flow-based measurements are likely to be the only viable measurement for liabilities without stated terms.

(b) a cost-based measurement will normally provide the most relevant information about:

(i) liabilities that will be settled according to their terms; and

(ii) contractual obligations for services (performance obligations).

(c) current market prices are likely to provide the most relevant information about liabilities that will be transferred.

Do you agree with these preliminary views and the proposed guidance in these paragraphs? Why or why not? If you disagree, please describe what alternative approach you would support.

Yes, we agree with the preliminary view.

However, item c) deserves special attention. In some countries, like in Brazil, there is not a very active market for liabilities, which can make it very difficult to calculate their current market prices. In such cases, there can be challenges to the reliability of the information. Also, we also sustain that such specific situations should not be treated in the Conceptual Framework, but rather in individual standards, as applicable.


universities

20

Question 14

Paragraph 6.19 states the IASB’s preliminary view that for some financial assets and financial liabilities (for example, derivatives), basing measurement on the way in which the asset contributes to future cash flows, or the way in which the liability is settled or fulfilled, may not provide information that is useful when assessing prospects for future cash flows. For example, cost-based information about financial assets that are held for collection or financial liabilities that are settled according to their terms may not provide information that is useful when assessing prospects for future cash flows:

(a) if the ultimate cash flows are not closely linked to the original cost;

(b) if, because of significant variability in contractual cash flows, cost-based measurement techniques may not work because they would be unable to simply allocate interest payments over the life of such financial assets or financial liabilities; or

(c) if changes in market factors have a disproportionate effect on the value of the asset or the liability (ie the asset or the liability is highly leveraged).

Do you agree with this preliminary view? Why or why not?

Yes, we agree with the preliminary view.


universities

21

Question 15

Do you have any further comments on the discussion of measurement in this section?

Yes, we do have further comments.

First, we consider that the discussion of the measurement criteria without discussing the capital maintenance all along can be problematic. One important issue that arises is when considering revaluation of fixed assets. In such cases, the definition of fair value as exit price does not appear to make sense, especially when considering physical capital maintenance. In such cases, it should be the entry value, and not the exit value. Thus, we sustain that the conceptual framework should not define fair value as exit price, leaving that definition for specific standards. As an alternative, at least the conceptual framework should make an exception for the revaluation of assets and/or when using physical capital maintenance.

Second, the conceptual framework should consider the possibility of recognizing inflationary effects that are only considered in one specific standard. The recognition of such effects should be a conceptual guidance.

Third, even though this is not a conceptual framework issue, we believe that it is necessary to address the issue of the measurements of deferred tax assets and liabilities that should be allowed to be discounted to their present value. Uncertainties regarding the possibility of their realization, be it due to question about their value or due to the time they shall be realized is not an adequate argument. Impairment tests, fair value measurements and many other elements have the same or even greater uncertainties and are still used in practice. There is, in our view, no justification to keep such assets and liabilities registered at their original cost without any discounting.

Fourth, we believe that the board should address the issue of the problem that arises when assets are financed with liabilities that are contractually adjusted for inflation. In such cases, there is a mismatch between the asset and the liability, once the asset is measured in a cost basis and does not consider the growth of the related liability. And whenever such assets are financed by both shareholders and by debt, such mismatch is even greater. This issue of measurement affects many long term assets and distort the entities´ net results of many sectors, like, for instance, on public utilities companies.

Finally, we believe that the discussion presented on paragraphs 6.128 through 6.130 regarding own credit risk should not be considered as it is on the Conceptual Framework. They present neither a conclusion nor a guidance and therefore should not be kept on the final document unless further discussion on what will be presented on this topic is carried out.


universities

22

Section 7 – Presentation and disclosure

Question 16

This section sets out the IASB’s preliminary views about the scope and content of presentation and disclosure guidance that should be included in the Conceptual Framework. In developing its preliminary views, the IASB has been influenced by two main factors:

(a) the primary purpose of the Conceptual Framework, which is to assist the IASB in developing and revising Standards (see Section 1); and

(b) other work that the IASB intends to undertake in the area of disclosure (see paragraphs 7.6–7.8), including:

(i) a research project involving IAS 1, IAS 7 and IAS 8, as well as a review of feedback received on the Financial Statement Presentation project;

(ii) amendments to IAS 1; and

(iii) additional guidance or education material on materiality.

Within this context, do you agree with the IASB’s preliminary views about the scope and content of guidance that should be included in the Conceptual Framework on:

(a) presentation in the primary financial statements, including:

(i) what the primary financial statements are;

(ii) the objective of primary financial statements;

(iii) classification and aggregation;

(iv) offsetting; and

(v) the relationship between primary financial statements.

(b) disclosure in the notes to the financial statements, including:

(i) the objective of the notes to the financial statements; and

(ii) the scope of the notes to the financial statements, including the types of information and disclosures that are relevant to meet the objective of the notes to the financial statements, forward-looking information and comparative information.

Why or why not? If you think additional guidance is needed, please specify what additional guidance on presentation and disclosure should be included in the Conceptual Framework.


universities

23

a.i) Yes, we agree with the idea and what the primary financial statements are. However, we believe that a special attention should be paid on the term “primary” financial statements. We strongly feel that using the term “primary” might give the user the idea that the notes to the financial statements are a less important part, or “secondary”. As stated on paragraph 7.31, with which we fully agree with, there must not be a hierarchy of financial statements, and the notes should also be considered in the same level as the financial statements. Therefore, the use of the term “primary” may lead to a different understanding. We suggest using the terms “financial statements” (when referring to the statement of financial position, income statement, cash flow statement and statement of changes in equity), “notes to the financial statements” and “financial report” (for the complete set of financial statements and notes) in order to leave it clear that there is no “hierarchy” among them.

a.ii) Yes, we agree with the objective of the primary financial statements. Also, we highlight the importance of keeping on the final document the discussion that the financial statements represent a summarized view of all relevant information about the entity. In this sense, we sustain that the view must be complete regarding all relevant information, although may be considered incomplete facing the whole set of existing information.

a.iii) First, we believe that this is a level of detail that should not be on the Conceptual Framework and should be considered on IAS 1 or a new statement regarding disclosure details. A special care must be taken in order not to leave too much detail on a conceptual document.

Second, we believe that the classification and aggregation of information must be cohesive with the business model and unit of account, as mentioned in answers to questions 23 and 24.

Third, we believe that, as discussed in paragraph 7.25, there should be a hierarchy when considering classification and aggregation in two levels: first, nature or function must be used, and then the measurement criteria. Not defining such hierarchy may lead to using the measurement criteria as primary guidance for aggregation if the nature and/or function of elements are different, which makes no sense.

a.iv) In line with the answer to the last item, even though we agree with the discussion presented regarding offsetting, especially in the sense that it must be the adopted practice whenever the result better represents the economic essence of the entity, we believe that it should not be part of the Conceptual Framework and should be considered on IAS 1 or a new statement regarding disclosure details.

a.v) In line with the answer to the last two items, even though we agree with the discussion presented regarding the relationship between primary financial statements, we believe that it should not be part of the Conceptual Framework and should be considered on IAS 1 or a new statement regarding disclosure details.


universities

24

Also, how such relationship is to be done must be further discussed. We believe that a simple cross-reference should suffice and great care must be taken in order not to pollute too much the financial statements presentation.

b.i) We agree with the objectives of the notes to financial statements. We highlight the importance of mentioning that they present recognized and, also, unrecognized assets and liabilities.

b.ii) We believe that there is too much detail regarding disclosures on the notes to the financial statements being considered on the conceptual framework and, in line with the prior answers, we believe that all details on this section should be considered on IAS 1 or a new standard regarding disclosure issues (for example, the discussion about comparative information and types of information is absolutely unnecessary in the conceptual framework).

Even though we agree with the idea of recalculation, we believe that there should be guidance in order to allow the user to clearly see the relation: final balance = initial balance + additions - deductions. Such requirement for every unit of account would facilitate the understanding of the flow of resources within the entity.

Also, the discussion of the relationship between primary financial statements (mentioned on the answer to item a) v)) must be also considered on the notes, and guidance on how such statements relate to the notes must be also given.

In paragraph 7.39, when discussing forward looking information, the text “assets and liabilities that existed at the end of the reporting period” seems to allow an interpretation of assets and liabilities that are recognized at the end of the reporting period. We suggest highlighting that the such assets that exist can be recognized and unrecognized in order to minimize the possibilities of the misinterpretation that only recognized assets give forward looking information.


universities

25

Question 17

Paragraph 7.45 describes the IASB’s preliminary view that the concept of materiality is clearly described in the existing Conceptual Framework. Consequently, the IASB does not propose to amend, or add to, the guidance in the Conceptual Framework on materiality. However, the IASB is considering developing additional guidance or education material on materiality outside of the Conceptual Framework project.

Do you agree with this approach? Why or why not?

We agree with the discussion presented regarding materiality. Also, we strongly suggest that the concept that “only what is material must be disclosed” should be treated as a disclosure principle on the Conceptual Framework due to its importance. Treating materiality (as discussed on the DP, and not its definition, which we agree that should not be modified) as a disclosure principle may give it the relevance it needs to guide the issue of too much unnecessary information or omission of necessary information on the financial statements. This does not imply that we consider unnecessary any other additional guidance or education material besides the conceptual framework.


universities

26

Question 18

The form of disclosure requirements, including the IASB’s preliminary view that it should consider the communication principles in paragraph 7.50 when it develops or amends disclosure guidance in IFRSs, is discussed in paragraphs 7.48–7.52.

Do you agree that communication principles should be part of the Conceptual Framework? Why or why not?

If you agree they should be included, do you agree with the communication principles proposed? Why or why not?

We agree that communication principles must be a part of the conceptual framework, with the due care not to create too many detailed guidance and requirement that must be addressed on IAS 1 or a new standard regarding disclosure issues.

As presented on paragraph 7.50, we fully agree with principles a) and b).

As for the principle presented on item c) we suggest that an order of risk should be considered to present the information: the first pieces of information presented should be the ones that most affect the risk of the entity, and so forth.

As for principles d), e) and f), we fully agree with their content, however, we believe that they should not be given the status of principles because they are more operational details and should be considered as guidance or requirements on IAS 1 or a new standard regarding disclosure issues.

Finally, we strongly suggest, as presented on our answer to question 17, that the materiality issues considered on the DP should be treated as a disclosure principle due to their importance.


universities

27

Additional comments related to presentation and disclosure

We suggest that the Financial Statements Presentation Project be resumed with special emphasis on the cohesiveness concept, where the statement of financial position, income statement and cash flow statement are all presented with the same subheadings.

Also, regarding the mentioned deferred tax assets and liabilities on question 15, we also believe that they should be allowed to be registered on current assets and liabilities. For instance, deferred taxes that are resulting from temporary differences based upon provision for doubtful accounts should be kept along the main account on current assets. Also, deferred taxes that will be paid or offset on the next period with a certain degree of certainty also should be classified as current assets.


universities

28

Section 8 – Presentation in the statement of comprehensive income – profit or los and other comprehensive income

Considering that the Staff Paper Conceptual Framework Roundtable, which occurred in São Paulo, October 18th, 2013, presented some questions with no equivalent question on the Discussion Paper, we include the answer to two of those questions, which we consider contain relevant issues that must be addressed.

AP2/SP - Question 1

In the Discussion Paper, the IASB does not define financial performance. Do you agree that the IASB should not define financial performance?

If you think that the IASB should define financial performance, how should it be defined? Do you think that, for example, financial performance should be equated with profit or loss?

It would be desirable that the IASB defines “financial performance”; but we do not consider it a fundamental point. Additionally, we acknowledge that it is not an easy task, and we do not have a suggested definition.

However, we consider that defining “profit or loss” is a fundamental issue for the Conceptual Framework. Please, se comments below – answer to question 4 (AP2/SP).


universities

29

AP2/SP – Question 4

The Discussion Paper suggests distinguishing between profit or los and OCI by describing the items that could be recognised in OCI. This approach means that profit or loss is treated as the default category. Do you agree with this approach?

If you disagree, how would you define profit or loss?

Notice that, as presented above (answer to AP2/SP-question 1), we think it is not necessary to define “financial performance”, but we do think it is necessary to define “profit or loss”.

Also notice that we agree with:

(1) P&L should be treated as the default category, and (2) Describing which items should (or could) be recognised in OCI is desired.

However, we believe that it is not sufficient.

Hence, we do encourage the IASB to define P&L. And we suggest that it should be defined as “the difference between revenue and expenses recognised by an entity during an accounting period”.

Some may argue that this definition does not solve the problem of distinguishing P&L from OCI; or that this definition is not conceptually-based, but mechanical. We may agree with these critics, but we highlight that, mechanical definitions are widely used in the IFRS literature, including in the Conceptual Framework (e.g., equity – CF item 4.4(c); income – CF item 4.25(a); expenses – CF item 4.25(b); non-current assets – IAS 1 item 66; non-current liabilities – IAS 1 item 69; operating activities – IAS 7 item 6). Additionally, if the suggested definition of P&L does not solve the classification problem (distinguishing P&L from OCI), maybe it is because the terms “revenue” and “expenses” are not appropriately (conceptually-based) defined in the actual Conceptual Framework, but mechanically defined (i.e., change in assets or change in liabilities that changes equity). Therefore, the IASB should take one step back and redefine “revenue” and “expenses”.


universities

30

Question 19

The IASB’s preliminary view that the Conceptual Framework should require a total or subtotal for profit or loss is discussed in paragraphs 8.19–8.22.

Do you agree? Why or why not?

If you do not agree do you think that the IASB should still be able to require a total or subtotal profit or loss when developing or revising particular Standards?

Yes, we support IASB's preliminary views. The IASB shall require the presentation of Profit or Loss as a subtotal, apart from the amounts of items classified as other comprehensive income. P&L is a traditional concept widely used by managers, analysts, regulators and users in general. Also, in some jurisdictions, such as in Brazil, P&L (net income) is the basic figure for dividend distribution and income tax calculation. Therefore, the IASB should keep P&L as a total or subtotal of the "income statement" and clarify what P&L is (and is not). In stating this preference, we are actually suggesting that the “current operating concept” of net income is adopted, rather than the “all inclusive concept”.

Additionally, we suggest that the IASB revises IAS 1 after concluding this Conceptual Framework Project, specifically items 90-105 of IAS 1, and includes a required structure for presenting the Statement of Other Comprehensive Income. We suggest that such structure should represent the classification of the items of OCI, for example:

Statement of Other Comprehensive Income 20X1 20X0 A Profit or Loss for the period B (+/-) Mismatched remeasurements items recognised in this period C (+/-) Mismatched remeasurements items recognised in previous periods,

recycled in this period

D=B+C Total Mismatched remeasurements OCI items E (+/-) Bridging items recognised in this period F (+/-) Bridging items recognised in previous periods, recycled in this period

G=E+F Total Bridging OCI items H (+/-) Transitory remeasurements items recognised in this period I (+/-) Transitory remeasurements items recognised in previous periods,

recycled in this period

J=H+I Total Transitory remeasurements OCI items K=D+G+J Other Comprehensive Income for the period

L=A+K Total Comprehensive Income for the period


universities

31

For reasons of coherence, we suggest to discuss which items should (or could) be classified in OCI before discussing which items once classified in OCI should (or could) be recycled to P&L. Therefore, first we answer question 21, and then we answer question 20.


universities

32

Question 21

In this Discussion Paper, two approaches are explored that describe which items could be included in OCI: a narrow approach (Approach 2A described in paragraphs 8.40–8.78) and a broad approach (Approach 2B described in paragraphs 8.79–8.94).

Which of these approaches do you support, and why?

If you support a different approach, please describe that approach and explain why you believe it is preferable to the approaches described in this Discussion Paper.

We support an intermediary approach (i.e., none of those suggested in the DP). Under this intermediary approach (intermediary between the narrow and the broad approaches), the IASB would have freedom to and the responsibility for defining the classification of items between profit or loss, and other comprehensive income, on a project-basis (as it issues each IFRS or improvements to existing IFRSs). Notice that accounting is a social construction, and so, it might be dynamic to accomplish with the substance of transactions in the real-world. Therefore, we believe that establishing a constraint in the Conceptual Framework would not be the best decision at this point in time.


universities

33

Question 20

The IASB’s preliminary view that the Conceptual Framework should permit or require at least some items of income and expense previously recognised in OCI to be recognized subsequently in profit or loss, ie recycled, is discussed in paragraphs 8.23–8.26.

Do you agree? Why or why not? If you agree, do you think that all items of income and expense presented in OCI should be recycled into profit or loss? Why or why not?

If you do not agree, how would you address cash flow hedge accounting?

Notwithstanding intrinsic complexity, we agree that recycling must be required in some circumstances and for certain items (not all of them). Recycling might be required (not only allowed) whenever it improves the quality of accounting information.

One circumstance that, in our perspective, should not the recycled is related to events which realization is uncertain and/or may (or will) occur in a “very long term”. For instance...

Example (1): actuarial gains and losses associated with defined pension plans (employees’ benefits). In this case, both circumstances are identified: uncertainty and “very long term”.

Example (2): an entity abandons the cost and measures a non-monetary asset at fair value through OCI – for example, see IAS 40, item 62(b)(ii) – such surplus is not a profit made available to distribution to owners, but an amount needed by the entity to maintain its physical capital; under the going concern assumption. In this case, the “very long term” circumstance is identified.


universities

34

Additional comments related (direct or indirectly) to OCI matters

a) We suggest that the resulting exchange differences that arise from the translation to the presentation currency related to investments of the parent in any foreign operation (a subsidiary, associate or joint arrangement) which is recognised in OCI in accordance with IAS 21 (items 18 and 39(c)) should be recycled once the parent recognizes dividends received (or receivable) from such foreign operation. However, only the amount of the exchange differences related to the profits that originated such dividends must be recycled.

b) When preparing (editing) the Exposure Draft (and final version) of the Conceptual Framework, please, first present which items shall or must be classified in OCI, and only after that, present which items (once classified in OCI) shall or must be recycled. In other words, we suggest the IASB to invert the order of questions 20 and 21.

c) Revising (or at least, updating) IAS 1 in regard to “other comprehensive income” is a fundamental action the IASB should take after concluding this phase of the Conceptual Framework project.


universities

35

SECTION 9 – Other issues

Question 22

Paragraphs 9.2–9.22 of the DP address the chapters of the existing Conceptual Framework that were published in 2010 and how those chapters treat the concepts of stewardship, reliability and prudence. The IASB will make changes to those chapters if work on the rest of the Conceptual Framework highlights areas that need clarifying or amending. However, the IASB does not intend to fundamentally reconsider the content of those chapters.

Do you agree with this approach? Please explain your reasons.

If you believe that the IASB should consider changes to those chapters (including how those chapters treat the concepts of stewardship, reliability and prudence), please explain those changes and the reasons for them, and please explain as precisely as possible how they would affect the rest of the Conceptual Framework.

Our opinion is that Chapter 1 of the Conceptual Framework should be revised.

We recognise that the concept of stewardship is implicit on Chapter 1, but we consider relevant the explicit use of that expression in the Conceptual Framework.

In Brazil, we use to maintain terms like stewardship in English due to translation difficulties; and we consider that this facilitates a universal communication.

We also have the opinion that stewardship should have the same level of importance on the definition of the objective of financial statements as the one given to the forecasting of future cash flows.

But also, the term accountability should also be introduced. For example, both terms could be inserted in the existing phrasing:

“To assess an ........, and how efficiently and effectively the entity’s management and governing board have discharged (accountability) their responsibilities to use the entity’s resources (stewardship).”

As for faithful representation, we prefer this term. We believe that it embodies the idea of reliability. Hence, we consider that reliability should return to the Conceptual Framework, but as part of the concept of faithful representation.

The concept of prudence must be urgently reintroduced on the Conceptual Framework, especially because it is impossible to dissociate it from accounting. However, in order to avoid misuse of the term, we suggest the substitution of the term “prudence” by “caution” as a way to dissociate the idea of conservatism that one might attribute to prudence. (And we are in favour of never using the term “conservatism”).


universities

36

Besides all of this, the concepts of caution and neutrality can and must peacefully coexist.


universities

37

Question 23

The business model concept is discussed in paragraphs 9.23–9.34. This DP does not define the business model concept. However, the IASB’s preliminary view is that financial statements can be made more relevant if the IASB considers, when developing or revising particular Standards, how an entity conducts its business activities.

Do you think that the IASB should use the business model concept when it develops or revises particular Standards? Why or why not?

If you agree, in which areas do you think that the business model concept would be helpful?

Should the IASB define ‘business model’? Why or why not? If you think that ‘business model’ should be defined, how would you define it?

Apparently, the use of the concept of business model fits very well into the issuance and revision of standards. But we are not entirely convinced that the use of the business model approach by the preparers in order to choose between accounting policies will allow the attaining of the proposed objectives.

However, we consider a valid attempt because, if a reasonable practice is achieved, we consider it to be a possible strong increment in the usefulness of the financial statements. This concept can be used in practically all economic segments.

Also, we consider important the attempt to define business model. However, if such a consensual formal definition is not reached, an explanation of the concepts that are embodied on the expression business model should suffice (such as well presented on paragraphs 9.25 through 9.28 on the Discussion Paper).

Another issue that must be addressed is the importance of linking the concept of business model to the unit of account, as mentioned on the answer to next question.


universities

38

Question 24

The unit of account is discussed in paragraphs 9.35–9.41. The IASB’s preliminary view is that the unit of account will normally be decided when the IASB develops or revises particular Standards and that, in selecting a unit of account, the IASB should consider the qualitative characteristics of useful financial information.

Do you agree? Why or why not?

We agree with IASB’s preliminary view on unit of account. We believe that a fairly generic definition of the term should be given (as in item 9.35 of the Discussion Paper), and nothing more than that.

It is important to link the concept of unit of account to the one of business model, since only the combined use of both will make the financial statements show the view that the preparers have of the entity they manage.


universities

39

Question 25

Going concern is discussed in paragraphs 9.42–9.44 of the DP. The IASB has identified three situations in which the going concern assumption is relevant (when measuring assets and liabilities, when identifying liabilities and when disclosing information about the entity).

Are there any other situations where the going concern assumption might be relevant?

We agree with the situations identified and have no further suggestions.


universities

40

Question 26

Capital maintenance is discussed in paragraphs 9.45–9.54 of the DP. The IASB plans to include the existing descriptions and the discussion of capital maintenance concepts in the revised Conceptual Framework largely unchanged until such time as a new or revised Standard on accounting for high inflation indicates a need for change.

Do you agree? Why or why not? Please explain your reasons.

We strongly agree with IASB’s view of first revising its position regarding inflationary effects on accounting and financial information for general purpose. The inflation effects, even on one digit a year inflation economies, are relevant in many situations and have been strong reducers of accounting’s informative power. Thus it is very important to deepen and seriously consider the concept of monetary capital maintenance, which has not been occurring under the use of the existing standards.

Only after a thorough review of this matter should IASB turn its attention to the issue of physical capital maintenance.

sérgio de iudícibus nelson carvalho eric...

Documents