Unless you are an actuary, trustee or policy wonk, it is unlikely that the IASB’s conceptual framework project – the basis for International Financial Reporting Standards (IFRS) – is high on your agenda.
Big mistake. If you have an interest in profit or loss and other income, this is one project you must follow. And that is despite the fact that you are, in all probability, overwhelmed by the challenge of implementing the 2011 ‘improvements’ to International Accounting Standard 19, Employee Benefits.
Back in 2011 (see IPE, June 2012), the IASB launched its consultation process. The result of that was a call to finalise its conceptual framework. In a December 2012 feedback statement, the IASB noted: “There is strong and broad support for the IASB to give priority to revising its Conceptual Framework. In May, we decided to restart the Conceptual Framework project, focusing on five topics: Reporting Entity, Presentation (including other comprehensive income), Disclosure, Elements and Measurement.
“We think that it should move as quickly as possible to set in place this important framework, which will shape its future work. We have therefore set an ambitious target, aiming to finalise the new sections of the Conceptual Framework by September 2015. The first major milestone is a Discussion Paper, which we plan to publish in June 2013.”
Bizarrely for an organisation that has yet to issue finalised IFRSs on revenue, insurance, financial instruments and leases – projects that David Tweedie committed to finish by June 2011 – the board has held itself hostage to an aggressive deadline for the framework. Why is anyone’s guess.
The risk of failure is so high that some of the IASB’s senior staff have begun to voice doubts. Speaking during a 12 March meeting, the chairman of the IFRS Interpretations Committee, Wayne Upton, said: “[I]f we make the deadline, which I think most of our constituents believe is optimistic, then we’d still have to reconsider standards because the framework doesn’t change standards.”
Fast forward to the April 2013 IASB meeting and staff on the conceptual framework project had developed three principles as a basis for OCI:
• Profit or loss is primary picture of financial performance;
• Presentation in profit or loss is preferred unless OCI presentation is a better depiction of an entity’s financial performance; and
• Entities must recycle OCI items.
It follows that if you apply those principles to today’s items of income and expense, it is possible to identify two categories: bridging items and mismatched remeasurements. A cynic might be excused for thinking that the staff are attempting to reverse-engineer principles on the back of decisions that have gone before about the use of OCI.
The proposals will appear in a paper on the conceptual framework that is due in June. The likelihood is that this will appear in July. That gives you plenty of time to think about how the IASB might justify pensions recycling, but what information that might deliver in an income statement.
Alongside the board’s preferred model for the presentation of items of comprehensive income, constituents can expect to see two alternatives. During the April meeting, it emerged that one of these options will be the single statement format (see IPE, January 2011). The plan is to present a spectrum of options between those two endpoints.
So what does chairman Hoogervorst make of it? He wants to see more discipline around the notion of profit or loss. “What is P&L?” he asked. “It is the accepted indicator of financial performance in the reporting period… And we need to be very disciplined about it. The irony is that the people who say they love P&L want to put as much as possible in OCI.”
Based on the outcome of the April 2013 board meeting, Hoogervorst is going to learn that the ‘What is P&L?’ question is much easier to ask than answer. But that is the danger of diving into the forest and defining OCI before you define P&L.