!!!!!!!!!!!!!! 29 September Contribution to IASB consultation on Exposure Draft Conceptual Framework for Financial Reporting

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1 Avenue Milcamps 105 BE Brussels VAT: BE TeL September 2015 Contribution to IASB consultation on Exposure Draft Conceptual Framework for Financial Reporting International Accounting Standards Board IASB 30 Cannon Street London EC4M 6XH United Kingdom Comment letter on IASB s Exposure Draft ED/2015/3 Conceptual Framework for Financial Reporting Dear Mr Hoogervorst, Thank you the possibility to comment on the above Exposure Draft. The comments we delivered to the Discussion Paper DP/2013/1 are displayed and discussed in the Basis for Conclusions to ED/2015/3. We welcome the transparent evaluation of stakeholder s views and show gratitude to you and your staff for this work. We generally agree to numerous proposals to amend the Conceptual Framework (CF). Nevertheless, we would like to point out some suggestions not yet included in ED/2015/3.

2 Comments on Chapters 1 and 2 The objective of general purpose financial reporting and the qualitative characteristics of useful financial information We support this proposal regarding the importance on information about the management s stewardship. Many Cooperative laws require cooperatives to conduct regular management audits. But the subject of those management audits goes beyond the stewardship for the management of the entity s resources. It is more a compliance audit whether the statutory purpose of the entity providing economic, social or cultural benefits to members has been fulfilled properly. This broader sense of stewardship could be added. Though we support the re-installation of the notion of prudence we disagree to enforce an interpretation in the sense of so called cautious prudence (BC2.9). The different meanings of prudence have often been discussed. The draft rejects the European understanding of prudence in the sense of accounting conservatism by calling it asymmetric prudence and a way to manipulate financial information in order to generate presentations favourably or unfavourably for users. These paragraphs of the ED are biased and unhelpful. Nevertheless we see no merit to restart this discussion again. We recommend widening the framework for the issue of different accounting traditions and their impact on accounting. The revision of the IFRS framework gives rise to seek for a stable and thorough standard setting approach to integrate the financial reporting issues of cooperative entities into the IFRS Conceptual Framework. As expressed in previous comments we recommend storing the relevant features of cooperatives and according application principles in a specific section or appendix to the IFRS framework. Below we explain our petition. 2

3 Comments on chapter 4 - The elements of financial statements We query the decision scoping out from the ED et al questions regarding the classification of redeemable equity of cooperatives, one of the key issues for the faithful presentation of cooperative s balance sheet and income statement. The Basis for Conclusions to this ED reflects some of the suggestions we supplied in our comments to the discussion paper DP/2013/1 (see paragraphs BCIN.25-BCIN.26 and BC4.94-BC4.103). On that basis the IASB decided to outsource those questions in the research project Financial Instruments with Characteristics of Equity (FICE). The ED expects that form this project no subsequent changes to the liability definition will result (ED p. 12). We doubt whether this strategy is suitable. Subsequent changes to the definitions of liabilities and equity must be possible. The liability/equity distinction is a core framework issue and should be addressed there. The IASB already has sufficient knowledge about the main concepts to distinguish liabilities from equity. With regard to shares of cooperative entities IFRIC 2 embodies the relevant principles. Regarding the classification of cooperative share capital as equity we recommend that the revised IFRS framework should at least perpetuate the current situation in IAS 32 accompanied by IFRIC 2. Thus we recommend including in the revised framework the concept of IFRIC 2 and the conditions under which a cooperative has no present obligation to redeem capital to its members. After more than a decade of application of IAS 32 and IFRIC 2 users and preparers have endorsed this reporting convention for cooperatives. Additionally, the scope of the FICE research project is too narrow. While we support the general motivation of the project it is limited to very specific questions around a few equity instruments. Instead, fundamental reporting principles of cooperatives have never been investigated by the IASB. We delivered all relevant information on cooperatives several times but the outcome is low. 3

4 Thus we encourage the IASB to establish a separate research project about financial reporting of cooperative entities and ways to integrate it in the IFRSs. Furthermore the ED excludes distributions on equity from its definition of expenses (4.49 and 4.50). However in some jurisdictions it is best practice for interest paid to members as a percentage of their equity holding to be treated as a business expense or cost of capital, not a distribution of surplus. This is intended to further divorce interest paid on member capital from profit distribution. As a result what is proposed in the ED is potentially at odds with how some cooperatives are required to set, pay, and account for interest on member capital. This appears to be another example of how co-operative capital defies standard categorizations and frameworks: in most businesses distributions on equity are driven by profits, but not for co-operatives. This would suggest that more effort is taken to accommodate some key particulars of the co-operative model. Comments on Chapter 8 Concepts of capital and capital maintenance Regarding the relevance of different business models for providing financial information we think the ED does not reflect the importance of the issue properly. BCIN.34 states that the IASB did not identify any situations in which consideration of an entity s business activities would be relevant to the recognition of assets and liabilities. Instead, we remind you on the existence of the IFRS fo SMEs, somehow easier standards for smaller entities. This is a good example for reporting standards applicable by a specific group showing homogeneous features regarding size, business or typical financing and owner structure. In general, we think that information needs follow preferences in specific markets, jurisdictions and different business models. In the case of cooperatives the business model does not simply change the way how an entity conducts its business activities (BCIN.28), but it can not in all, but in many cases change the purpose of the overall business target from generating returns on the capital invested rather to providing economic, cultural or social benefits to members and customers, one of the identifying features of cooperatives. This impacts e.g. the performance measures focusing on aspects of member value. In member s view a cooperative can perform very well even when profits or dividends are low because the member benefits from the cooperation in other ways, like reduced costs, access to resources and finance. Financial reporting of cooperatives focuses on information about what management is undertaking and how it succeeded to support the economic, social and cultural needs of the members of the cooperative. 4

5 Overall, we see additional high level guidance in the Framework being an essential prerequisite for applying consistent accounting methods. Last but not least this is also a question of the acceptance of IFRS by cooperatives. Once more we advise the IASB to anchor the specific reporting needs of cooperatives on a solid basis. There is a general need for enhanced guidance for the IASB respecting the characteristics of cooperatives. We stand ready for any support describing the relevant features of cooperatives in a specific section or appendix to the framework. Therefore a separate research project could be helpful to organize this work. Contacts Agnès Mathis Deputy Director T: a.mathis@coopseurope.coop Mirko Nodari Communications Officer T: m.nodari@coopseurope.coop 5