Conceptual Framework for Financial Reporting Comments to be received by 25 November 2015

Transcription

1 Exposure Draft Conceptual Framework for Financial Reporting Comments to be received by 25 November 2015 Securities and Exchange Board of India (SEBI) welcomes the opportunity to respond to the above Exposure Draft. SEBI is capital market regulator of India. India presently uses Indian GAAP as accounting standards. However, India is committed to converge its accounting standards with IFRS. IFRSconverged Indian Accounting Standards (Ind-AS) have already been released and the same will become applicable from FY 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? Page 1 of 9

2 We welcome the re-introduction of the concept prudence, which is described in the conceptual framework to mean caution rather than conservatism. We welcome the re-introduction of the concept stewardship, as an indication of how well management has discharged its responsibilities to make efficient and effective use of entity s resources. However, some constituents view stewardship to be synonymous with the accountability of management for an entity s performance. Considering the objective of general purpose financial reporting, we do not believe it is the intention of IASB to deal with management accountability in general purpose financial report. This aspect should be properly clarified. 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? From the exposure draft, it is noted that the proposed description of reporting entity consciously excludes from its scope the non-controlled entities such as associates and joint venture. In this regard, it is felt that if Conceptual Framework is to become guiding source for preparation of accounting standards on consolidated financial statements, then it is more logical to include suitable reference to the contribution of non-controlled entities in financial statements of the reporting entity. The way indirect control is described is potentially conflicting and confusing with the concept of control used in existing standards. The concept of control should be aligned with existing standards. Further, the IASB has not touched upon the concept of reporting entity in the context of Associates and Joint Ventures in view of the fact that it has embarked upon the research project on equity method of accounting. The outcome of the project may result in deciding Page 2 of 9

3 whether the equity method is a measurement basis or it is a manner of consolidation. In case it is the latter, only then it may impact the reporting entity aspect. However, we believe that the Conceptual Framework should refer to the issue and why it is not being touched upon should be explained properly. The Conceptual Framework uses the notions of direct control and indirect control. These terms are used in the context that in case of direct control only the unconsolidated financial statements are prepared whereas in case of both direct control and indirect control the consolidated financial statements are prepared. It is commonly understood that when an entity directly controls another entity even then the consolidated financial statements are prepared. However, the draft Conceptual Framework uses the terms differently than commonly understood. Accordingly, it needs to be considered that whether such terms should be used in the Conceptual Framework which are not as those commonly understood. 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? We have no disagreement with the proposed definitions of elements contained in the exposure draft. However, we do note that the conceptual framework does miss out on providing conceptual guidance on what is equity by choosing to define it as a residual category. Whilst it is a missed opportunity, we do appreciate that the ongoing FICE project will deal with this Page 3 of 9

4 thoroughly but would need substantial time to conclude and it would be inappropriate to keep the Conceptual Framework document on hold till such time FICE is completed. Considering the significant time gap after which the IASB reviews the Conceptual Framework, it is suggested that IASB may consider addressing the aforesaid fundamental issue relating to the elements of financial statements. 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 would like to highlight that the description of a present obligation which focusses on the practical ability to avoid transfers of resources creates potential conflicts with the way in which the concept of economic compulsion has been applied in practice while dealing with equity/ liability classification issues relating to financial instruments that may not create an unavoidable obligation but in practice do create economic compulsions to make payments / transfer resources. We note that the proposed description will not provide any additional assistance in resolving this area of interpretation. IASB may consider addressing the aforesaid suggestions by reviewing the proposed description of a present obligation. The Conceptual Framework does not provide any guidance on recognition of a liability where variable payments are made for acquisition of an asset. For example, an operator may acquire an intangible asset from the grantor, for which, payments would be made to the grantor over future periods determined as a percentage of revenue. In this case, it is debatable whether the past event is the acquisition of the intangible asset or when the revenue is earned. In these circumstances, there are mixed practices on when the liability is recognized; i.e. either on acquisition of the intangible asset or when the annual revenue is earned. 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. Page 4 of 9

5 We have no comments on the proposed guidance on the elements. 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 agree with the proposed approach to recognition. 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 with the proposed discussion of 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 IASB has correctly identified the measurement bases that should be described in the Conceptual Framework. However, we note a potential conflict with how the fair value of financial liabilities repayable on demand are accounted for and the current value concepts articulated in the exposure drafts. 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? Page 5 of 9

6 We believe that IASB has correctly identified the factors to consider when selecting a measurement basis. 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 agree in general with the approach of more than one relevant measurement basis. 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? We agree in general with the discussion on the objective and scope of financial statements and communication. We believe that disclosures in financial statements should necessarily focus on material aspects and those critical to the understanding of the financial statements and be principal based and not only an outcome of mechanistic compliance. However, we believe that materiality is not restricted only to quantum but also depend upon the business of reporting entity. Too much information provided by strictly following materiality thresholds may, at times, obscure critical information. 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 indicated in our earlier comment on the definition of equity; we believe that the ED misses an important opportunity of providing a definition of profit or loss and addressing the Page 6 of 9

7 conceptual differences between OCI and P&L. We think that the current discussion on P&L and OCI in the ED, would be of limited help in guiding the Board in future standard-setting activities. We feel that the Board should spend more time considering and defining performance reporting. 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 do not agree with the proposed approach that there is a rebuttable presumption that all items in the OCI will be recycled to the P&L. Question 14 Recycling Do you agree that the Conceptual Framework should include the rebuttable presumption described above? Why or why not? If you disagree, what do you propose instead and why? We do not agree with the rebuttable presumption for recycling as mentioned in the preceeding response. We believe that there is no necessity that every item in other comprehensive income has to be recycled to profit and loss. Further, we would like to suggest that fundamental proposition for inclusion of an item in other comprehensive income should be that it does not pertain to reporting period instead of recyclability. For example, other items such as sale of assets, revaluation of liability, retirement benefits etc. should be part of other comprehensive income. However, same may not be recycled to P&L. Other Comprehensive Income is expected to segregate items of income & expenses which do not pertain to the reporting period from P&L. Page 7 of 9

8 P&L also guides for basis on which future assessment is made and hence it is more appropriate to include items pertaining to other periods in other comprehensive income. 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? Yes, we agree in general with the analysis and support a phased transition period. However, we believe that the approach of basing only new IFRS standards on revised conceptual framework may result into inconsistency of approach between new IFRSs and existing IFRSs. We suggest that after finalization of revised conceptual framework, all the existing IFRSs should be reviewed and aligned with revised conceptual framework. Question 16 Business activities Do you agree with the proposed approach to business activities? Why or why not? We agree with the analysis and the proposed approach. Question 17 Long-term investment Do you agree with the IASB s conclusions on long-term investment? Why or why not? We believe that long term investment and financing decisions are made based on a variety of considerations. Until such time as the practical impacts of the conceptual framework are not made clear through application in specific standards, it is unlikely to be significantly impacted by the proposed changes contained in the exposure draft. We also believe that if financial performance is properly defined, and the conceptual basis of OCI is established, the information reported in P&L would naturally serve both long-term and short-term investors needs. Question 18 Other comments Page 8 of 9

9 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. We have no other comments. Page 9 of 9