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IASB restores concept of prudence to financial reporting

THE concept of prudence will be reintroduced to financial reporting as part long-awaited revisions to the framework that underpins the setting of global accounting rules.

Bowing to pressure from investors, politicians and members of the profession, the IASB has published plans to reintroduce an explicit reference to prudence, explaining clearly what it means.

The global standard-setter is calling for feedback on a number of changes to the conceptual underpinning of financial reporting, which include placing more emphasis on the importance of providing information needed for investors to assess management’s stewardship.

Among the enhancements to the conceptual framework, the IASB has proposed a new chapter on measurement, confirmed that the statement of profit or loss is the primary source of information about a company’s performance, and added guidance on when income and expenses could be reported outside the statement of profit or loss, in other comprehensive income (OCI); and refined the definitions of the basic building blocks of financial statements-assets, liabilities, equity, income and expenses.

“Two particularly important areas of the proposals published today are the clarification of the key role of profit or loss as an indicator of a company’s financial performance, and the chapter that describes the information provided by historical cost and current value measurements,” said Hans Hoogervorst (pictured), chair of the IASB.

Commenting on the exposure draft, Nigel Sleigh-Johnson, head of ICAEW’s Financial Reporting Faculty, said IASB must not let the real issues of the conceptual framework be overshadowed by noise around prudence.

“It is critical that fundamental issues – the nuts and bolts of financial reporting – are not overshadowed by more controversial areas that have so far dominated the debate. For example, a lot of attention will, understandably, be directed towards areas like prudence, stewardship and reliability,” he said.

“The discussion should now be wider. Topics like definitions of assets and liabilities, bases of measurement, recognition and derecognition criteria, and how to decide what goes into the income statement may not always take centre-stage. However, they are the very foundation for what goes into the financial reporting standards that drive transparency for investors.”

The deadline for commenting on the exposure draft is 26 October 2015.

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