Bringing clarity to the Conceptual Framework

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  1. Some of the classification requirements of IAS 32 Financial Instruments: Presentation, are inconsistent with both the existing Conceptual Framework definitions and the proposed definitions of liability and equity. What has the IASB decided as regards the distinction between liabilities and equity as currently defined?

  2. Many respondents to the Discussion Paper felt that the IASB should define and use the term business model as an overarching concept to be employed throughout the Conceptual Framework, as the business model could affect the measurement of assets and liabilities. Other respondents disagreed, saying that by referring to the business model, management bias could be introduced into financial reporting. What has the IASB decided as regards the role of the business model in financial reporting when issuing the ED?

  3. Chapter 1 identifies the primary users of financial reports. Who are the primary users of financial reports in the opinion of the ED?

  4. The current definition of an asset is ‘a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity’ and that of a liability is ‘a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits.’ Why has the IASB has found that confusion can arise over the existing definitions of assets and liabilities?

  5. The recognition criteria in the existing Conceptual Framework is based partially upon the probability that any future economic benefit associated with the item will flow to or from the entity. However, some Standards do not apply a probability recognition criterion and those that do apply such a criterion use terms, which imply different thresholds of probability. What does the IASB propose regarding the criteria for recognition?

  6. The existing Conceptual Framework does not define or describe the occurrence of derecognition, and as a result the Standards have adopted different approaches. What approach do the IASB propose as regards the derecognition of an asset or liability?

  7. The IASB felt that conceptual guidance on the use of the statement of profit or loss and OCI is urgently needed. However, no single characteristic can be used to separate items of income and expenses. Therefore the IASB has concluded that high-level guidance should be given. Which of the following statements is not included in the ‘high level’ guidance given by the IASB in the ED.?

  8. The IASB removed the reference to prudence in the Discussion Paper because of the possible inconsistency with the concept of neutrality. However, it was felt by many that a reference to prudence should be reinstated. What was the main reason why the reference to prudence was reinstated?

  9. The IASB proposes the following definitions in the ED - (a) an asset is a present economic resource controlled by the entity as a result of past events; (b) a liability is a present obligation of the entity to transfer an economic resource as a result of past events; and (c) an economic resource is a right that has the potential to produce economic benefits. What are the main changes from the existing definitions of asset and liability?

  10. The existing Conceptual Framework does not include an explicit reference to substance over form and the IASB agrees that making this statement explicit would add clarity. What does the ED propose as regards substance over form?

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