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Comments from ACCA
November 2006

The Association of Chartered Certified Accountants (ACCA) is pleased to have this opportunity to comment on the Discussion Paper "Preliminary views on an improved conceptual framework for financial reporting: the objective of financial reporting and qualitative characteristics of decision-useful financial reporting information" which was considered by ACCA's Financial Reporting Committee.

Objectives of financial reporting

We note that paragraph OB2 limits the aim of financial reporting to the economic decision-making of the investors and creditors. We agree with the alternative view paragraphs that this should be an aim in addition to that of providing a report of the management's stewardship of the enterprise and a record of the performance and position for which they are accountable to the owners. We would go further and say that this latter should be the primary purpose of general purpose financial statements and this would make a difference to the sorts of requirements that are in the standards.

The undue emphasis on the provision of information which is useful as input to investing or credit decisions is the source of much of the explosion of disclosure requirements that has rendered the accounts both lengthy and very hard to understand. It may also be the source of much of the measurement complexity that has characterised recent developments in IFRS which many would see as a barrier to the further harmonisation of accounting based on IFRS and as a barrier to the understanding of the financial statements.

We agree that there are in practice a wide range of users of general purpose financial statements as identified in OB6. We also agree that there is a large common element to the information that these various users require, but that to satisfy all of the needs of all of these different users might be difficult. We agree therefore that ultimately the needs of certain user groups will have to be the limiting factor in setting standards. Shareholders and creditors (lenders) are the groups most dependent on general purpose financial statements and so their needs should be the critical factor.

We note, however, that there will be cases where there might need to be choices between providing the right information for investors or providing the right information for creditors. It is not clear how the conceptual framework will resolve these. It is possible that the recent exposure draft on financial instruments puttable at fair value might be an instance of this. The proposal seemed to put the investors' view ahead of that of creditors.

We consider that for the financial statements of SMEs, user needs might be rather different, mainly because the balance between different user groups changes as compared to listed companies. Non-management owners become less important and the needs of lenders and other groups such as trading partners become more relatively more important. We therefore challenge:

• the statements in BC1.24 for example and BC1.27 for similar reasons
• the idea that other users' needs can be satisfied by accounts designed for investors and creditors with suitable extra disclosures, even though it may be an expedient and convenient position to adopt.

Paragraph OB10 would promote the entity perspective as opposed to that of the shareholders of the holding company. We agree with this as long as the general objective of stewardship/accountability is recognised in addition to providing input for economic decision-making.

There are a number of significant matters that are covered by the text of the two chapters set out here, but are noted in the preface as undecided by the Boards as yet. For example it seems that the following have not been resolved:

• status of the framework within the hierarchy of guidance to preparers in interpreting the standards or in dealing with gaps in the standards
  
• whether the framework applies to financial statements or some wider concept of financial reporting
  
• the applicability of the framework to reporting by not-for-profit entities.

These are fundamental questions and until they are resolved all constituents' views and Board decisions must remain preliminary. The final exposure of the framework as a whole therefore is a very important step and that the draft must be open potentially to comment and change on all matters.

Our views on the first of those subjects are that the framework is useful in interpretation of the standards and in dealing with other subjects not covered by a standard. It should remain therefore part of the hierarchy.

Qualitative characteristics

Paragraphs QC43 to 46 discuss the relationships between the different characteristics as a logical order in which they should be considered. We think there is merit in the framework discussing the relationships, however we are not convinced that the tension between them can be summarised quite so neatly in such a decision-tree.

Reliability has been replaced by the concept of faithful representation (encompassing verifiability, neutrality and completeness).Verifiability has not been fully explained, for example the discussion in QC23 of direct and indirect verification does not seem to help much to explain or evaluate the concept of verifiability. There seems a risk that if a valuation model for example can be shown to exist, be used by some people and that the specified inputs have been made, then that measure will meet the verifiability test. We have therefore some sympathy with the alterative view.

We are not satisfied that the characteristic of substance-over-form has been given sufficient emphasis and is fully incorporated in the idea of representational faithfulness. It is sufficiently important to merit a separate characteristic.

We do not either agree with all reference to prudence as a concept being eliminated, even simply as an appropriate degree of caution in the face of uncertainty. Users of financial statements would be happier with a pleasant surprise of a better than expected outturn, than with the reverse. We also think there is a continuing perception among users that financial statements do indeed reflect this degree of caution, and there is currently plenty of evidence for this in the existing standards. There is therefore a risk that users could be misled if that element of prudence is no longer there or is removed in certain areas.

Paragraphs QC30 and 31 should not form part of any framework. They do not further explain the concept of neutrality and seem to be self-justificatory additions relating to standards on share-based payments that have been issued or revised recently. The conceptual framework should be a general document that will stand for some time and therefore such contemporary references are inappropriate.

We consider that the main text does not honestly address the limitations of cost/benefit constraint and this is only properly discussed in the basis for conclusions. This risks raising expectations unrealistically in terms for example of the question of whether the IASB should be able to include regulatory impact assessments as part of its due process.

In QC58 the last sentence should not refer to costs and benefits being balanced but to benefits outweighing costs.

IAS1 currently refers to fair presentation. As IAS1 is currently being redrafted in part, we think that IASB should consider amending this to faithful representation.

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