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 characteristicsB Elements, recognition and measurement

attributesC Initial and subsequent measurementD Reporting entityE Presentation and disclosure, including

financial reporting boundariesF Framework purpose and status in GAAP

hierarchyG Applicability to the not-for-profit sectorH 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