The IASB/FASB Conceptual Framework Project

A Public Sector Perspective

Kevin Simpkins

Outline

• Concepts – Why they matter

• Overview of the Project

• Progress to Date

• Some Public Sector Issues

• Concluding Thoughts

Concepts – Why they Matter (generally)

• The Basis for Accounting Standards Development

• A Key Element in “Principles-based” Standard setting

• An antidote to vested interests (or just preconceived conclusions!)

• To enhance efficiency in standard-setting

Concepts – Why this project matters

• Key to IASB/FASB Convergence• New concepts will have significant

influence internationally• IPSASB’s implicit framework is that of the

IASB• IASB/FASB work will be a key reference

source for the IPSASB(Note that IPSASB is considering its strategy for a Conceptual Framework at its meeting this month)

Overview of the IASB/FASB Project - Objective

“…to develop a common conceptual framework that is both complete and internally consistent…

…a sound foundation for developing future accounting standards…”

Overview of the IASB/FASB Project - Process

• Building on the Existing Frameworks

• Concentrating on environmental changes and omissions from existing frameworks

• Prioritising cross-cutting issues that affect a number of projects

• Initially considering private sector business entities only

Overview of the IASB/FASB Project – The Phases

Phase A TopicA Objectives and qualitative characteristics

B Elements, recognition and measurement attributes

C Initial and subsequent measurement

D Reporting entity

E Presentation and disclosure, including financial reporting boundaries

F Framework purpose and status in GAAP hierarchy

G Applicability to the not-for-profit sector

H Entire framework

The IASB/FASB Project – Progress to Date

• Phase A – Objectives and Qualitative Characteristics– Exposure draft due in near future

• Phase B – Elements, recognition etc.– Early work done on asset and liability

definitions

• Phase D – Reporting Entity– Planning and Preliminary Analysis done

The IASB/FASB Project – Some Public Sector Issues

• Timing of Consideration of Not-for-Profits– Creates risk NFP context will not be well

considered– Is delivering some concepts that are not

broadly applicable– Inefficient as a standard-setting approach– A challenge for “neutrality” – both transactions

and sectors

The IASB/FASB Project –Some Public Sector Issues (cont)

• Stewardship/Accountability is not a Separate Objective of Financial Reporting– The objective is to assist investors and others in

making investment, credit and similar decisions– Too narrow for the public sector – accountability is at

least a separate objective– A risk – the pervasive impact of an incomplete

objective because “all things are related”

An aside: Whither prospective information?

The IASB/FASB Project –Some Public Sector Issues (cont)

• Too narrow a Primary User Group– Primary User Group is present and potential

investors and creditors– In the public sector legislation and funders are

key users who cannot be excluded

• No recognition of Compliance

The IASB/FASB Project –Some Public Sector Issues (cont)

• Pervasive Focus is on Assessing Cash Flow Prospects– Cash Flows are relevant to the public sector

but not always– Service performance is a more important

focus for the public sector environment– The focus extends deeply such as into the

asset definition area

The IASB/FASB Project –Some Public Sector Issues (cont)

• Changes to the Qualitative Characteristics– A process approach – new for all– But does not encourage consideration of

differences between entities– Relevance relates to “economic decisions of

users”– Materiality is also related to “economic

decisions” of users

The IASB/FASB Project –Some Public Sector Issues (cont)

• Asset Definition too Narrow– Economic Benefits again!– Benefits “to the entity”– The notion of stand ready assets (and

liabilities) is new and needs careful consideration

– No help with the tough issues – social policy obligations especially

Concluding Thoughts

• This project is important as are the others being worked on internationally

• The potential impacts are significant and likely to be enduring

• The public sector needs to monitor the work of both IASB and IPSASB and your own national bodies and comment