Mark Vaessen, KPMG’s Global IFRS network leader, says: “In the aftermath of the global financial crisis there has been much discussion about whether global accounting standards are still fit for purpose. This IASB consultation is timely to address concerns that have been expressed about IFRS in recent times, including the growing complexity in financial reporting. Questions have also been raised about fundamental issues such as the stewardship role of financial statements, the extent of fair value accounting in IFRS and what ‘performance’ actually means. It is vital that stakeholders from every part of the financial reporting chain around the world provide input to the IASB. We mustn’t miss this opportunity.”
Vaessen continues: “For those who have been concerned about developments in IFRS accounting, the IASB’s discussion paper on the Conceptual Framework provides a welcome opportunity to set out the fundamental principles of accounting necessary to develop robust and consistent standards. Whilst it may not have the immediacy of other proposals, it will be a long-term influence on the direction of accounting.”
“Take performance reporting,” explains Vaessen. “At the moment some gains and losses flow through the profit and loss account and some through other comprehensive income – i.e. below the level at which earnings per share are struck. For example, some financial instruments gains and losses and re-measurements on defined benefit pensions are recorded below the ‘bottom line’; some of these are later recycled through the profit and loss account and some are not. It is difficult to identify any consistent principle behind those treatments. The Conceptual Framework is an opportunity to devise – and get stakeholders’ ‘buy in’ to – a principle for where gains and losses are recognised. We shouldn’t under-estimate the difficulty of that though. Performance reporting is an emotive subject for many, because it relates to how a company communicates its performance. Whatever the ultimate solution may be, we would hope that it would do more than codify the collection of current treatments, each of which was a narrow response to a specific issue.”
“Valuation of assets and liabilities will be another major focus of interest. The discussion paper proposes a mixed model – for example, sometimes fair value, sometimes cost – and some high-level criteria to help the IASB make the choices in the future. A key question for many will be whether these criteria give a clear enough signal whether the IASB intends an increase or decrease in the use of fair value accounting,” noted Vaessen.
“Another question is non-financial assets: can they be ‘sliced and diced’ from an accounting perspective in the same way as financial instruments today?” continues Vaessen. “In the case of an airplane, does the number on the balance sheet represent the airplane itself? The discussion paper proposes that it does not – instead it represents rights that can be cut up with several entities each reporting a slice of the airplane. In fact, this is what the IASB is already proposing to put into practice in its May 2013 exposure draft on leasing, at a cost of much accounting complexity and inconsistency – a lessee would book a slice of the airplane covering the lease term, and the lessor may or may not cut a piece of the airplane off its balance sheet.”
“Tests for when to keep assets, or parts of assets, on balance sheet and when to take them off balance sheet are also particularly important” notes Vaessen. “The question here is whether to replace the current concept based on the loss of the economic risks and benefits of the asset with the concept based on the loss of control over the legal rights comprised in the asset. Take, for example, a scenario in which a bank sells some securities to another party but has an obligation to repurchase the same securities at a later date (a ‘repo’ transaction). Applying a new concept based on control over the legal rights could result in the securities going off the bank’s balance sheet.”
Aura Giurcaneanu, Head of Audit and Assurance in KPMG in Romania, comments, “Today’s long-awaited proposals respond to stakeholders’ requests to make the Conceptual Framework into a blueprint for developing consistent, high-quality, principles-based accounting standards. It is a unique opportunity for dialogue about the whole of IFRS: for the IASB to explain its core principles and seek ‘buy in’; and for constituents to help shape the future of IFRS.”
Angela Manolache, Director in KPMG in Romania’s Advisory Departmentadds: ”Given that Romanian credit institutions and public companies apply IFRS as a basis of accounting, and that they will be joined by insurance companies, investment funds and other categories of entities, it is important for those involved in the preparation of IFRS financial statements, but also for the users of financial statements – shareholders, creditors and investors, as well as the regulatory authorities- to analyse the specific issues arising in the context of the Romanian market and regulatory framework and bring them to the attention of international bodies involved in the process of defining the Conceptual Framework and the International Financial Reporting Standards applicable in the EU – IASB as well as EFRAG, the European Financial Reporting Advisory Group.”
The Discussion Paper A Review of the Conceptual Framework for Financial Reporting was published in July 2013 and is open for comment until 14 January 2014.