9th January 2014
FRC Crown
Chairman: Ms Lynn Wood
c/- The Treasury
Langton Crescent
Canberra ACT 2600
Email: chairman@frc.gov.au

Secretariat: c/- The Treasury
Langton Crescent
Canberra ACT 2600

(02) 6263 3144

(02) 6263 2770



9 January 2014 International Accounting Standards Board 30 Cannon Street London EC4M 6XH United Kingdom

Submission on the Review of the Conceptual Framework

Dear Ladies and Gentlemen

Thank you for the opportunity to comment on your review of the IASB Conceptual Framework.

The Australian Financial Reporting Council (FRC) has oversight of the accounting and auditing standards setting processes for the public and private sectors, provides strategic advice in relation to the quality of audits conducted by Australian auditors, and advises the Assistant Treasurer on these and related matters to the extent that they affect the financial reporting framework in Australia.

The FRC monitors the development of international accounting and auditing standards, works to further the development of a single set of accounting and auditing standards for world-wide use and promotes the adoption of these standards.

We note that the review has been framed in terms of a series of 26 specific questions. However as a body with a mandate to provide high level strategic oversight of accounting standards, it is more appropriate for the FRC to leave to other stakeholder bodies the task of commenting on most of the specific accounting issues.

The FRC is aware that the Australian Accounting Standards Board (AASB) will make a submission to the review addressing each of your questions, and we encourage the IASB to consider the AASB submission, which we understand reflects a detailed analysis of the discussion paper’s preliminary views. We also draw your attention to the submissions of FRC members, including a joint submission by CPA Australia and Institute of Chartered Accountants Australia (ICAA); the Heads of Treasuries Accounting and Reporting Advisory Committee (HoTARAC); and the External Reporting Board’s New Zealand Accounting Standards Board.

As you are aware Australia was an early adopter of International Financial Reporting Standards (IFRS) from 1 January 2005, and has enthusiastically promoted a single set of high quality global accounting standards. In Australia we have adopted a transaction-neutral framework, with IFRS used as the basis of accounting standards in the for-profit, not-for-profit and public sectors. In our view it is important that the Conceptual Framework continues to allow for this integration of accounting standards across the economy. Therefore, the FRC encourages the IASB to use sector-neutral expression in the Conceptual Framework wherever possible, and to maximise its liaison with the International Public Sector Accounting Standards Board (IPSASB) regarding the Boards’ respective conceptual framework projects, in the context of the Memorandum of Understanding between the IASB and the International Federation of Accountants (IFAC) dated 22 November 2011.

The FRC strongly supports the IASB in its objective of ensuring that the Conceptual Framework sets out the concepts that underlie the preparation and presentation of financial statements, with a focus on providing information for economic decision making purposes. An effective conceptual framework provides an important foundation for assisting in the development and revision of IFRS.

It would be useful to have the Conceptual Framework publicly available on the IFRS website. At present the Framework can only be accessed by paying subscribers. In our view this is not appropriate, as the Conceptual Framework is meant to explain the conceptual basis on which IFRS are developed and understood. We recommend the IASB make the Conceptual Framework freely available to better inform users of the conceptual foundation of financial reports based on IFRS.

We understand that the Conceptual Framework project is designed to improve financial reporting by providing a complete and updated set of concepts to use as the IASB develops and revises standards. The FRC acknowledges both the importance of the Conceptual Framework in the development of high quality IFRS, as well as the limitations identified by the IASB in relation to the existing Framework’s scope and comprehensiveness.

In the process of evaluating the proposed amendments to the Conceptual Framework, the FRC has identified some concerns as to whether the options presented in the consultation paper are appropriate in the context of IASB objectives. We would like to acknowledge the valuable contribution of the paper The conceptual framework: cornerstone of high quality financial reporting written by Jan McCahey and Warren McGregor (September 2013). The paper highlights the importance of a conceptual framework and explains why the IASB’s decision to reactivate the Conceptual Framework project is warranted. In particular, we would like to note the FRC’s support for further work being completed to address the gaps identified in the existing Framework, especially where these relate to the scope of financial reporting and presentation and disclosure issues, in addition to the importance of the identified concepts being ‘transaction neutral’, that is, capable of being applied by all reporting entities.

In the context of the FRC agreement with the issues raised in the paper, this submission considers the following:

  • the purpose of the Conceptual Framework;
  • the importance of ensuring that the concepts used remain relevant;
  • the extent to which concepts should have regard to their practical application when developing and revising IFRSs; and
  • the overall usefulness of the proposed changes to the Conceptual Framework.

Purpose of the Conceptual Framework

A conceptual framework is essential to the production of high quality financial reports that meet the common needs of their users for economic decision making. The challenge in developing a conceptual framework is for it to be broad enough to allow individual accounting standards to be developed, but specific enough to ensure that they achieve consistent objectives.

The existing Conceptual Framework sets out the concepts that underlie the preparation and presentation of financial statements. It is designed to assist the IASB when developing and revising IFRSs. The FRC’s submission to the International Integrated Reporting Council (IIRC) in December 2011 (see Appendix) sets out very clearly how we think the IASB should go about developing the Conceptual Framework.

The Conceptual Framework should seek to develop principles that are relevant to IFRS

The summary of the IASB consultation paper notes that one of the underlying motivations for this project is to address “aspects of the existing Conceptual Framework that are out of date and fail to reflect the current thinking of the IASB.” We believe that it is important that the IASB completes a regular review of the Conceptual Framework to ensure the ongoing relevance of the principles underpinning IFRS. Nevertheless, for this to happen the principles should be focussed at such a level as to be not unduly affected by current practices.

The Conceptual Framework is designed to articulate the key concepts and principles that form the foundation of IFRS as principles-based financial reporting standards. These should be articulated in such a way as to maintain their relevance when developing and revising IFRS, without introducing redundant or confusing detail that may detract from the underlying concepts. Such detail could appear to amount to the de facto enunciation of principles, but ones which are either:

  • insufficiently general; or
  • more appropriately developed into regulatory principles, by the relevant regulatory authorities e.g. the International Organization of Securities Commissions, rather than principles underlying the reporting of financial information to an entity’s stakeholders.

The Conceptual Framework should not seek practical application at expense of consistency

One of the stated purposes of the Conceptual Framework project is to improve its practicality. However, an undue focus on the practicality of the Framework risks blurring the distinction between the framework underpinning the standards and the standards themselves. A useful Conceptual Framework articulates the overarching principles needed to guide the development of IFRS, whereas individual standards have their own objectives. As such, exceptions to underlying concepts should occur within the standards themselves, accompanied by the appropriate rationale. The practicality of the Framework could instead be enhanced by making an introductory part of the Conceptual Framework:

  1. simpler (perhaps in plainer language) and designed to be read by key financial report stakeholders such as directors; and
  2. preferably shorter.

Alternatively, an abbreviated rendition of an introductory part of the Conceptual Framework could be developed as an executive summary for those stakeholders and issued as a complement to the Conceptual Framework. Such a document could usefully clarify that general purpose financial reporting is not intended to include all financial information about an entity and, in that context, could delineate more clearly the boundaries of general purpose financial reporting.

The recently released IIRC Framework has achieved both the above goals.

Specifying alternatives or exceptions within the Conceptual Framework rather than in the standards potentially compromises its relevance as a conceptual tool. We understand that exceptions listed within the Framework reflect perceptions about the acceptability or practicality of concepts, however the Framework should reflect principles that are unaffected by such perceptions. The Framework should focus on principle-based comprehensive concepts only.

The Framework should ensure that the principles underpinning IFRS are consistent, whereas specific standards are designed with sufficient detail to be applied in practice.

The Conceptual Framework project is a useful process to re-evaluate key accounting principles

The ongoing strength of the Conceptual Framework is attributed, in part, to the IASB review processes. These processes ensure that the underlying concepts remain relevant and, to the extent implied by the comments immediately above, practical.

It is critical that the Conceptual Framework includes sufficiently comprehensive principles to support the IASB’s decision making when it develops or reviews IFRS. The IASB risks considering issues in an ad hoc, repetitive manner where these issues are not properly articulated in or omitted from the underlying framework, with potentially inconsistent outcomes.

The IASB should ensure that, on an ongoing occasional basis, key issues are assessed where appropriate and that relevant changes within the financial reporting environment are accommodated within the Conceptual Framework. To better accommodate changes in the financial reporting environments as they occur, the proposed amendments to the Framework should clarify and broaden the concepts underpinning IFRS. The IASB should take extreme care to ensure that amendments to the Conceptual Framework are not extended to the codification of current practice. The FRC welcomes the inclusion of basic principles regarding presentation and disclosure in the Conceptual Framework, since these are key matters for financial reports, and are matters where stakeholders have existing concerns. However we believe this would be more successful in the context of exploring the implications of the economic decision making objective of general purpose financial reporting for the types of information likely to be necessary to meet the common information needs of users of financial reports.

If you would like further information on this matter from the FRC, please contact the FRC Secretary, frcsecretary@treasury.gov.au or + 61 2 6263 3144.

Yours faithfully


Lynn Wood
Financial Reporting Council