1. The views expressed in this presentation are those of the presenter, not necessarily those of the IASB or IFRS Foundation. International Financial Reporting Standards Conceptual Framework for Financial Reporting 23 September 2015 Joan Brown, Technical Principal Jelena Voilo, Assistant Technical Manager © IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

2. 2 Session overview © IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org Background Prudence Recognition Measurement, presentation and disclosure

3. International Financial Reporting Standards Background © IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

4. the IASB to develop Standards preparers to develop consistent accounting policies others to understand and interpret IFRS It will affect future Standards developed by the IASB What is the objective of financial reporting? What makes financial information useful? What are assets, liabilities, equity, income and expenses, when should they be recognised and how should they be measured, presented and disclosed? What is the Conceptual Framework? © IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org 4 It is a practical tool that assists: It underpins the decisions made by the IASB when setting Standards It addresses fundamental issues: It is not a Standard and does not override Standards

5. Why are we revising the Conceptual Framework? © IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org 5 The existing Conceptual Framework has proved useful but some improvements are needed Identified as a priority project by respondents to the IASB’s 2011 Agenda Consultation For example, it provides very little guidance on measurement or presentation and disclosure. For example, the existing guidance on when assets and liabilities should be recognised is out of date. For example, it is unclear what role measurement uncertainty should play in decisions about recognition and measurement. GapsOut of dateUnclear

6. History of the Conceptual Framework 6 1989 Framework 2013 Discussion Paper Presentation & disclosure Derecognition Recognition Measurement Elements Measurement Elements Objective Recognition Reporting entity Presentation & disclosure Derecognition Recognition Measurement Elements Objective 2015 Exposure Draft Qualitative characteristics 2010 Framework Measurement Elements Objective Recognition Qualitative characteristics Reporting entity Exposure Draft © IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

7. Timeline © IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org 7 2016 Revised Conceptual Framework May 2015 Exposure Draft 26 October 2015 ? (150 days) Comment deadline Separate Exposure Draft Updating References to Conceptual Framework also published - same comment deadline

8. International Financial Reporting Standards Prudence © IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

9. 1989 Framework Includes explicit reference to prudence 2010 Conceptual Framework Reference to prudence removed 2013 Discussion Paper Call (from some) for reintroduction 2015 Exposure Draft Proposes reintroduction A brief history of prudence © IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org 9 Removed because of concerns that it could lead to ‘cookie jar’ reserves and earnings manipulation Prudence - the exercise of caution under conditions of uncertainty - helps make financial statements useful Deliberate understatement of assets or income, or overstatement of liabilities or expenses is not permitted as it is inconsistent with neutrality

10. Why refer to prudence? © IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org 10 Including prudence in the Conceptual Framework can result in better information for users Helps the IASB set rigorous standards that counteract any management bias Helps preparers, auditors and regulators counter natural bias that management has towards optimism Helps reduce confusion about what prudence means

11. Supports neutrality: means that assets and income are not overstated and liabilities and expenses are not understated does not allow for the understatement of assets and income or the overstatement of liabilities and expenses Prudence - the exercise of caution when making judgements under conditions of uncertainty What is prudence? © IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org 11 No ‘cookie jar’ reserves Does not prohibit selection of accounting policies that treat assets/gains differently to liabilities/losses - if that information is useful

12. Prudence 12  Welcomes the re-introduction of prudence.  But the conclusions in the Basis for Conclusions should be included in the Conceptual Framework itself.  Agrees with the Basis for Conclusion that prudence may lead to asymmetry in the recognition of assets/income and liability/expenses without introducing any undesirable bias in financial reporting. EFRAG – document for public consultation

13. Prudence 13  Disagrees that prudence should be subservient to neutrality.  The focus should be on how it affects standard- setting rather than the behaviour of preparers of financial statements. EFRAG – document for public consultation

14. International Financial Reporting Standards Recognition © IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

15. Existing definitionsExposure Draft Asset (of an entity) 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. A present economic resource controlled by the entity as a result of past events. Liability (of an entity) 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. A present obligation of the entity to transfer an economic resource as a result of past events. Economic resource Not definedA right that has the potential to produce economic benefits. Elements: Definitions of assets and liabilities © IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org 15

16. Definitions of elements 16  Appears that the proposed definitions are easier to understand – but will test. EFRAG – document for public consultation

17. Recognition – existing criteria © IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org 17 Existing criteria Item meets definition of asset or liability. Probable that any future economic benefit associated with asset or liability will flow to or from entity. Asset or liability has a cost or value that can be measured reliably. Recognition is the process of capturing an asset or a liability for inclusion in the financial statements Changes are needed because: Probability criterion viewed as inappropriate for some assets and liabilities. ‘Reliability’ is not one of the qualitative characteristics.

18. Recognition – proposed concepts © IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org 18 Exposure Draft proposals Failure to recognise assets and liabilities makes financial statements less complete and can exclude useful information. But recognition of some items does not provide useful information. Recognition requirements may need to vary between Standards. An entity should recognise an asset or liability if doing so provides: relevant information; a faithful representation; and benefits that exceed costs. Recognition might not provide relevant information if: it is uncertain whether an asset or liability exists. there is only a low probability that an inflow or outflow of economic benefits will result. all available measures of the liability have a high level of measurement uncertainty.

19. Recognition and disclosure – proposed concepts © IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org 19  Di sclosures can enable a recognised amount to form part of a faithful representation of an asset, liability, equity claim, income or expense.  If an item is not recognised, important to consider how to make disclosures sufficiently visible to compensate for absence of item from summary. Disclosures about uncertainties may be needed whether or not item is recognised. Recognition of asset or liability may provide relevant information, especially if measurement reflects low probability and is accompanied by explanatory disclosures. Existence uncertainty Low probability of inflows or outflows Measurement uncertainty A faithful representation is achieved if estimates are described as such, and uncertainties are disclosed.

20. Recognition 20  Broadly agrees with the guidance on recognition.  In some areas, the guidance may be insufficient to ensure consistent standard-setting (e.g. unclear how uncertainty will affect recognition). EFRAG – document for public consultation

21. International Financial Reporting Standards Measurement © IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

22. Measurement bases © IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org 22 Measurement bases Fair Value Value in use (assets) Fulfilment value (liabilities) Uses information derived from the transaction or event that created the asset or liability. Uses information that is updated to reflect conditions at the measurement date. Current valueHistorical cost Measurement based on: Market participant’s assumptions Entity-specific assumptions

23. Cost constraint Selecting a measurement basis © IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org 23 RelevantFaithfully represented For information provided by a particular measurement basis to be useful, it must be: Enhancing characteristics Comparability Verifiability Timeliness Understandability Likely outcomeMixed measurement

24. Factors when selecting a measurement basis © IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org 24 Information produced in both statement of financial position and statement(s) of financial performance How an asset or liability contributes to future cash flows ‒ depends in part on business activities being conducted Characteristics of asset or liability ‒ eg nature or extent of variability in cash flows, sensitivity to risks etc Level of uncertainty ‒ but sometimes a measurement with a high degree of uncertainty is the only relevant measurement Relevance

25. Factors when selecting a measurement basis © IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org 25 Consider how best to portray link between items Faithful representation Understandability ‒ Using new or different measurement bases could reduce understandability ‒ Avoid unnecessary changes in measurement bases Cost constraint ‒ Benefit of providing useful information should always exceed the cost of doing so Others

26. Measurement 26  Broadly agrees with the categorisation of measurement bases.  Guidance on how to select a measurement bases is insufficient – outcomes in future standard setting will heavily rely on the IASB’s judgement of what ‘relevant’ information is.  Should have considered other market-consistent measurement bases than fair value.  Broadly agrees with the description of the information provided by each of the measurement bases. EFRAG – document for public consultation

27. Measurement 27  Asks constituents about the use of different measurement bases for the statement of financial position and the statement of profit or loss.  Ideas on measurement for consultation are also published in the Bulletin Profit or loss versus OCI. EFRAG – document for public consultation  Asks constituents how to select measurement bases when listed factors conflict.

28. International Financial Reporting Standards Profit or loss and other comprehensive income (OCI) © IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

29. Presentation in profit or loss © IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org 29 20X520X4 Revenue from customers234,439212,367 Cost of sales(112,764)(106,259) ……… Taxes(21,546)(20,587) ……… Profit (loss) for the year18,89716,763 Profit or loss is a required total or subtotal Statement of profit or loss This statement is the primary, but not the only, source of information about an entity’s financial performance in the period Rebuttable presumption that income and expenses are included in profit or loss

30. 20X520X4 Profit (loss) for the year18,89716,763 Currency translation68(51) FV adjustment cash flow hedging(2,764)6,259 ……… Taxes(215)87 Other comprehensive income for the year(2,546)4,253 Total comprehensive income for the year16,35121,016 Presentation in OCI © IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org 30 Statement of comprehensive income Presumption that income and expenses included in OCI in one period are subsequently included in profit or loss (recycled) Income and expenses included in OCI only if that enhances relevance of profit or loss in the period OCI only for some income and expenses from changes in current measures of assets and liabilities OCI items are also a source of information about performance for the period

31. Presentation and disclosures 31  Supports the description of the statement of profit or loss.  Should ensure a common understanding of ‘return on an entity’s economic resources’.  Profit or loss should not be “as inclusive as possible”.  Ideas on how OCI should be used are published in the Bulletin Profit or loss versus OCI.  Recycling should be based on a principle. EFRAG – document for public consultation

32. Bulletin Profit or loss versus OCI 32  The ED states that only income and expenses arising from remeasurements can be reported in OCI.  It presumes that all income and expenses go to P&L, unless excluding them makes P&L more relevant.  But it does not explain when the IASB should overcome the presumption.

33. Bulletin Profit or loss versus OCI 33  Extends and rationalises the ED proposals.  Aims at relevant performance reporting from a business model perspective.  Builds on debates held in the IASB Accounting Standards Advisory Forum (ASAF).

34. Bulletin Profit or loss versus OCI 34 Step 1: Identify business model  Price change  Transformation  Long-term investment  Liability driven. Step 2: Determine relevant measurement basis for primary performance (profit or loss) Step 3: Test whether this measurement basis is relevant for the statement of financial position – if not, the difference is reported in OCI.

35. Bulletin Profit or loss versus OCI 35 Potential outcomes:  Fewer options for PPE, inventories and investment properties.  No impact in profit or loss of revaluation of items in a long-term business model.  Changes in estimates of expected cash outflows in relation to pension liabilities are reported in profit or loss.  Business model could play a role for financial instruments which do not meet the SPPI test.

36. Questions 36 © IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

37. EFRAG receives financial support of the European Union - DG Financial Stability, Financial Services and Capital Markets Union. The contents of this presentation is the sole responsibility of EFRAG and can under no circumstances be regarded as reflecting the position of the European Union. 37 Comments on EFRAG’s draft comment letter should be submitted by 26 October 2015* to commentletters@efrag.orgcommentletters@efrag.org * The comment period may be extended should the IASB decide to extend its comment period.