Re: Exposure Draft ED/2015/3 Conceptual Framework for Financial Reporting

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1 Mr Hans Hoogervorst Chairman International Accounting Standards Board 30 Cannon Street London EC4M 6XH United Kingdom 9 November 2015 Re: Exposure Draft ED/2015/3 Conceptual Framework for Financial Reporting Dear Mr Hoogervorst, On behalf of RSM International Limited, a worldwide network of independent audit, tax and consulting firms, we are pleased to comment on the IASB s Exposure Draft ED/2015/3 Conceptual Framework for Financial Reporting ( the ED ). Overall, we welcome the proposals in the ED addressing guidance that is missing or insufficient in the current Conceptual Framework (such as measurement bases, presentation and disclosure, etc.). While we broadly agree with the content of the ED, we disagree with some of the proposed solutions. As noted previously in our comment letter to the 2013 Discussion Paper A Review of the Conceptual Framework for Financial Reporting, we strongly believe that the revision of the Conceptual Framework should not be influenced by the requirements of existing Standards or the amount of time and effort that would be required to revise Standards that are not conceptually appropriate. In addition, we reiterate our disappointment that the ED fails to define clearly what profit or loss and other comprehensive income are, in particular their respective differentiating characteristics. Our comments and detailed responses to the questions set out in the Invitation to Comment section of the ED are detailed hereafter. We would be pleased to respond to any questions the Board or its staff may have about any of our comments. Please do not hesitate to contact me or Joelle Moughanni at Sincerely, Robert Dohrer Global Leader - Quality and Risk RSM International

2 Question 1 Proposed changes to Chapters 1 and 2 Do you support the proposals: (a) to give more prominence, within the objective of financial reporting, to the importance of providing information needed to assess management s stewardship of the entity s resources; (b) to reintroduce an explicit reference to the notion of prudence (described as caution when making judgements under conditions of uncertainty) and to state that prudence is important in achieving neutrality; (c) to state explicitly that a faithful representation represents the substance of an economic phenomenon instead of merely representing its legal form; (d) to clarify that measurement uncertainty is one factor that can make financial information less relevant, and that there is a trade-off between the level of measurement uncertainty and other factors that make information relevant; and (e) to continue to identify relevance and faithful representation as the two fundamental qualitative characteristics of useful financial information? Why or why not? (a) We support the greater prominence given to the assessment of management s stewardship of the entity s resources in the description of the objective of financial reporting in the ED. (b) We are not in favour of reintroducing an explicit reference to the notion of prudence to support the meaning of neutrality. We agree with Patrick Finnegan s alternative view (paragraph AV16 of the ED) that financial information possessing the characteristic of neutrality is already free from bias, and that reinstating prudence would on the contrary introduce bias and confusion. We believe that the same arguments that led the Board in 2010 to remove reference to prudence from the previous Conceptual Framework (as reminded in paragraph BC2.2 of the Basis for Conclusions on the ED) i.e. the term could be interpreted in ways that are inconsistent with neutrality and lead to inconsistent application - are still true. We are concerned that, despite the Board s effort to define it as cautious prudence, the term is culturally synonymous with conservatism in many jurisdictions (e.g. France and Germany), thus leading to asymmetric prudence (i.e. understating assets and overstating liabilities). However, if the Board decides to reintroduce prudence in the Conceptual Framework, we suggest that prudence be described as the general exercise of care in making judgements under conditions of uncertainty, as we consider care to infer a more balanced approach than caution. (c) We agree with the introduction of an explicit reference to substance over form for a faithful representation. (d) We agree that the level of measurement uncertainty might affect, amongst other factors, the relevance of financial information, and that there is a trade-off between the level of measurement uncertainty and other factors that make information relevant. (e) We support the Conceptual Framework continuing to identify relevance and faithful representation as the two fundamental qualitative characteristics of useful financial information. Question 2 Description and boundary of a reporting entity Do you agree with: (a) the proposed description of a reporting entity in paragraphs ; and (b) the discussion of the boundary of a reporting entity in paragraphs ? Why or why not? We believe that the proposed description and boundary of a reporting entity are not sufficiently clear. We are uncertain about how to deal with financial statements that are neither consolidated nor combined or individual financial statements, in particular if the reporting entity is not a legal entity but only a portion of an entity (as discussed in paragraphs 3.12 and 3.18 of the ED). Would such carvedout financial statements be considered general purpose financial statements according to the Conceptual Framework?

3 In particular, there might be practical problems when setting the boundary referred to in paragraph 3.18 of the ED when the reporting entity is not a legal entity (e.g. certain costs of a branch of a foreign company that are borne by the head office, situations where IFRS require legal rights such as for offsetting, taxes, etc.). We also believe that the distinction between a reporting entity and a legal entity could be expressed in a clearer manner, perhaps by adding a definition of legal entity and rewording the definition of reporting entity in paragraph 3.12 of the ED as follows: A reporting entity is not necessarily a legal entity. It can comprise a portion of an a legal entity, or two or more legal entities. Question 3 Definitions of elements Do you agree with the proposed definitions of elements (excluding issues relating to the distinction between liabilities and equity): (a) an asset, and the related definition of an economic resource; (b) a liability; (c) equity; (d) income; and (e) expenses? Why or why not? If you disagree with the proposed definitions, what alternative definitions do you suggest and why? Overall, we agree with the proposed definitions, as they are clear, concise, and easy to understand and thus reduce the risk of inconsistent interpretations. However, as noted in our 14 January 2014 comment letter to the Discussion Paper DP/2013/1 A Review of the Conceptual Framework for Financial Reporting ( the DP ), we would prefer that present be removed from the definition of liability and not added to the definition of asset, leaving it to be implicit. The key phrase in both definitions - that determines whether an economic resource or obligation is present - is that it is as a result of past events ; in our view, including the word present is unnecessary and just introduces confusion. The best example is a deferred tax liability, which is very clearly an obligation that will be settled in the future but needs to be recognised now because it arises as a result of past events. Question 4 Present obligation Do you agree with the proposed description of a present obligation and the proposed guidance to support that description? Why or why not? We agree. Question 5 Other guidance on the elements Do you have any comments on the proposed guidance? Do you believe that additional guidance is needed? If so, please specify what that guidance should include. We have no additional comments. Question 6 Recognition criteria Do you agree with the proposed approach to recognition? Why or why not? If you do not agree, what changes do you suggest and why? We broadly agree with the proposed approach to recognition. However, we are concerned that the guidance proposed is insufficient to ensure consistent standardsetting in particular on when recognising an asset where there is existence uncertainty or a low probability of an inflow or an outflow would not result in relevant information.

4 Question 7 Derecognition Do you agree with the proposed discussion of derecognition? Why or why not? If you do not agree, what changes do you suggest and why? We agree. However, we believe that modifications should be covered in a separate section, rather than as a subcomponent of derecognition. Our reasoning is that modifications can give rise to the recognition of new assets and liabilities as well as the derecognition of existing assets and liabilities. Furthermore, modifications could impact measurement as well. Chapter 5 would then be titled Recognition, Modification and Derecognition. Question 8 Measurement bases Has the IASB: (a) correctly identified the measurement bases that should be described in the Conceptual Framework? If not, which measurement bases would you include and why? (b) properly described the information provided by each of the measurement bases, and their advantages and disadvantages? If not, how would you describe the information provided by each measurement basis, and its advantages and disadvantages? We believe that measurement bases are correctly identified and described in the ED. Also, the information provided by each of the measurement bases and their advantages and disadvantages are properly described. Question 9 Factors to consider when selecting a measurement basis Has the IASB correctly identified the factors to consider when selecting a measurement basis? If not, what factors would you consider and why? We believe that the factors to consider when selecting a measurement basis are correctly identified in the ED. Question 10 More than one relevant measurement basis Do you agree with the approach discussed in paragraphs and BC6.68? Why or why not? We believe that more discussion and explanation of the need for different measurement bases to be used for the statement of financial position and the statement of profit or loss is required. The ED merely states that this may make the information more relevant without giving any indication of why this might be so (not even in the Basis for Conclusions). Question 11 Objective and scope of financial statements and communication Do you have any comments on the discussion of the objective and scope of financial statements, and on the use of presentation and disclosure as communication tools? Overall, we agree with the discussions in the ED. Question 12 Description of the statement of profit or loss Do you support the proposed description of the statement of profit or loss? Why or why not? If you think that the Conceptual Framework should provide a definition of profit or loss, please explain why it is necessary and provide your suggestion for that definition. As we have already pointed out in our comment letter on the DP, we believe that the Conceptual Framework should define clearly what profit or loss and other comprehensive income are, in particular their respective differentiating characteristics, that is, what distinguishes items of income

5 and expense that are recognised in profit or loss from those recognised in OCI, and why the distinction is necessary to provide faithful representation? However, we still find that the ED presents no robust principles and rationale behind such split of profit or loss versus other comprehensive income. Consequently, this does not serve the Conceptual Framework s primary purpose, i.e., to assist the IASB by identifying concepts that it will use consistently when developing and revising IFRSs. In this respect, we agree with Stephen Cooper s and Patrick Finnegan s alternative view, in particular as set out in paragraphs AV2-AV4 of the ED. Question 13 Reporting items of income or expenses in other comprehensive income Do you agree with the proposals on the use of other comprehensive income? Do you think that they provide useful guidance to the IASB for future decisions about the use of other comprehensive income? Why or why not? If you disagree, what alternative do you suggest and why? We disagree. See our response to Question 12. Question 14 Recycling Do you agree that the Conceptual Framework should include the rebuttable presumption described in paragraphs and BC7.51 BC7.57? Why or why not? If you disagree, what do you propose instead and why? Similar to our response to Question 12, despite some improvement since the DP, we still do not find robust principles and rationale behind the recycling versus no-recycling concept. We do not agree with the proposed rebuttable presumption of reclassification. In the absence of overarching principles, deciding if and when reclassifying items of income and expenses included in OCI into the statement of profit or loss enhances the relevance of the information included in the statement of profit or loss for a future period is somewhat arbitrary. Also, as expressed in our comment letter on the DP, we are supportive of the arguments against recycling as they were very well expressed in paragraph 8.25 of the DP. Question 15 Effects of the proposed changes to the Conceptual Framework Do you agree with the analysis in paragraphs BCE.1 BCE.31? Should the IASB consider any other effects of the proposals in the Exposure Draft? We have no comments on this analysis as we believe it is too early in the process to assess the effect on existing Standards. Question 16 Business activities Do you agree with the proposed approach to business activities? Why or why not? Instead of discussing merely business activities, we believe that the business model concept should be taken into account in financial statements for their relevance and faithful representation, because it provides insights into how the entity s business activities are managed. Business models play a role in recognition, measurement (including for selecting the appropriate measurement basis), presentation and disclosure. As such it cannot be ignored and should be defined in the Conceptual Framework. Also, we believe it is already applied implicitly in some situations by the IASB. For example, defining investment property as property held for rent and/or capital appreciation is another way of referring to a business model in which property is held for those purposes. The term business model has also been introduced with IFRS 9 Financial Instruments.

6 We approved of the general definition as the chosen system of inputs, business activities, outputs and outcomes that aims to create value over the short, medium and long term that was included in paragraph 9.29(a) of the DP. As such, it should be retained and described for financial reporting purposes, instead of being replaced with the term business activities in the ED because the term business model is used with different meanings by various organisations (paragraph BCIN.31 of the Basis for Conclusions on the ED). Question 17 Long-term investment Do you agree with the IASB s conclusions on long-term investment? Why or why not? We agree with the principle that the Conceptual Framework should contain sufficient and appropriate discussion of primary users and their information needs, and the objective of general purpose financial reporting, to address appropriately the needs of any investors. Therefore, if financial statements provide useful information to make decisions to buy, hold and sell and to assess stewardship of management, all investors needs are fulfilled, without the need to differentiate them by their horizon of investment. Question 18 Other comments Do you have comments on any other aspect of the Exposure Draft? Please indicate the specific paragraphs or group of paragraphs to which your comments relate (if applicable). As previously noted, the IASB is not requesting comments on all parts of Chapters 1 and 2, on how to distinguish liabilities from equity claims (see Chapter 4) or on Chapter 8. In our view, the discussion around the unit of account in paragraphs of the ED should be shortened. We share the Board s view that selecting a unit of account should be a Standards-level decision (as already agreed at the Discussion Paper level and as per paragraph BC4.115 of the Basis for Conclusions on the ED). Therefore, we recommend that the Conceptual Framework only stresses the importance of the unit of account for the IASB to specifically and systematically consider at the Standards level. However, detailed explanations and examples at the Conceptual Framework level might be confusing, as detailed discussion on the issue of selecting a unit of account only makes sense in the context of specific standards. END OF DOCUMENT