You manage what you measure, as the old saying goes. Modern accounting standards measure business performance more effectively than ever before. Because of those standards, derivative financial instruments—famously labelled by Warren Buffett as financial weapons of mass destruction—are no longer swept under the carpet and stock options held by senior management must be reported clearly to investors. Pension liabilities are now routinely discussed in the boardroom, and soon, liabilities incurred through lease contracts will be fully reported on the balance sheet and not buried in opaque footnotes.
Existing International Financial Reporting Standards (IFRS), set by the International Accounting Standards Board (IASB), bring transparency, accountability, and efficiency to capital markets in more than 100 countries around the world—and they do that pretty well. But the standards can be improved, and so can the conceptual building blocks on which they are based. The IASB has published a Conceptual Framework consultation document seeking feedback on our suggestions for improving those conceptual building blocks.
For example, when should assets and liabilities be measured at cost and when should they be measured at fair value? When should income and expenses be included in profit or loss and when should they be reported in a different statement, as part of “Other Comprehensive Income”? These are some of the questions touched on in the exposure draft, in which we introduce a new chapter on measurement that describes the various measurement bases and factors to consider when determining which basis should be used. The proposals also state that profit or loss is the primary source of information about a company’s performance and refine the definitions of the basic building blocks of financial statements: assets, liabilities, equity, income, and expenses.
Furthermore, our consultation revisits some areas of continuing debate, such as the role that financial statements play in showing how management has carried out its stewardship of a company’s resources, and the relationship between prudence and neutral financial information. These topics are fundamental to the usefulness of financial information, on which investors and global capital markets depend.
The Conceptual Framework for IFRS will provide a reference point for the development of all future standards and interpretations. However, it will not only be useful for us as the standard setter. It will also help companies develop their accounting policies and assist in the general understanding and interpretation of accounting standards. When we consulted on our work agenda in 2011, stakeholders asked us to prioritize the Conceptual Framework. We have listened to that feedback and plan to issue a final Conceptual Framework in 2016 (see the work plan web page for more detail).
This is a great opportunity to have a proper discussion on the big picture questions in financial reporting. Over the next few months, we will have outreach meetings around the world to discuss the proposals with a wide range of stakeholders who are interested in our work. And on June 17, we will organize a live web presentation to introduce the proposals, followed by an opportunity to ask us questions. You can register for the webinar at http://www.ifrs.org/Meetings/Pages/Live-web-presentation-on-proposed-changes-to-the-Conceptual-Framework-June-2015.aspx.
We look forward to hearing your views.