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MORE VIEWPOINTS FROM JANE FULLER

Debate has begun on the conceptual framework for financial reporting, including the ‘mixed attribute’ model of using both market prices and cost. Jane Fuller dons her thinking cap

This article was first published in the September UK edition of Accounting and Business magazine.

It was with relief this summer that I turned from a boring book about austerity economics to A Review of the Conceptual Framework for Financial Reporting, a discussion paper from the International Accounting Standards Board (IASB).

Although the early sections suffer from a legalistic level of detail, there are many points in the 238-page paper that will stir up overdue debate on key elements of financial statements.

An important one is that the ‘mixed attribute’ model – using measurements based on both market prices and cost – is here to stay. The ‘preliminary view’, put forward in section 6, is that the selection of measurement method for an asset ‘should depend on how it contributes to future cashflows’, and for a liability ‘on how the entity will settle or fulfll that liability’. Amen to that.


But having let the flexible genie out of the bottle, the IASB tries to limit the options to current market price and historic cost. Despite all the rhetoric about investors needing information to help forecast cashflows, the standards-setter is nervous about the custom-designed nature of cashflow measures. Yet these are integral to a fundamental approach to valuation.


The dualist approach sets the scene for some radical proposals, notably on the income statement and where to draw the line between profit and loss (P&L) and other comprehensive income (OCI).

This goes some way to tackling the problems that arise from the muddle between income and expenses from operating activities and various other gains and losses, especially those arising from the remeasurement of asset and liability values.

Yet it is still a stretch to claim that the items in comprehensive income collectively depict the company’s return on its economic resources. This rings hollow for knowledge-based companies, where important internally generated intangible assets are missing from measured ‘resources’. More generally, the IASB continues to skirt round the information needed to analyse operating cashflows and profit margins.

More detail in the income statement would help, with different sections for different levels of ‘profit’. This happens at present as an uneasy compromise between preparers and analysts, with an inevitable lack of discipline.

Instead, and in response to popular demand for attention to the P&L, the IASB is tackling some of the issues – but in a roundabout way. The P&L becomes the primary part of the income statement by default. So anything not permitted in OCI is P&L.

This turns the spotlight on what is permitted in OCI:

  • bridging items, where the (cost-based) measure in the P&L is different from (fair value in) the balance sheet
  • mismatched remeasurements of linked assets, liabilities
    and/or transactions
  • transitory remeasurements, recognising the long-term nature of the asset or liability.

The last is an exciting new category that goes with the anti-short-term zeitgeist. Unlike the other two, it includes gains and losses that may never be ‘recycled’ to P&L after some relevant trigger such as realisation.

So, we are heading for an OCI that is better defined than the P&L. But I am uneasy about the use of this section to reconcile two different approaches to accounting: cost-based and current market price. Sometimes they are irreconcilable and the real question is the correct way to account for an item, such as own credit risk or hold-to-collect loans. Better to plump for one method and provide the other perspective in the notes.

This is just a taste of the issues to debate between now and January. Time to put on the thinking cap.

Jane Fuller is former financial editor of the Financial Times and co-director of the Centre for the Study of Financial Innovation think-tank

Last updated: 17 Dec 2013