FRC and ICAEW critical of IASB's efforts to reinstate prudence into its conceptual framework
GLOBAL accounting standard setter the IASB has been told to reconsider its proposed conceptual framework so that it “properly reflects the importance of stewardship, prudence and reliability”, which it describes as cornerstones of the framework.
In comments made in response to the IASB’s exposure draft on its conceptual framework, which underpins how it sets IFRS, UK reporting watchdog the FRC said the IASB had “missed the point” in its changes to the framework.
In May, the IASB revealed that it would reintroduce the concept of prudence to financial reporting as part of long-awaited revisions to its framework. Bowing to pressure from investors, politicians and members of the profession, the IASB published plans to reintroduce an explicit reference to prudence, explaining clearly what it means.
The FRC though is unhappy with the IASB’s conclusions. “By describing prudence merely as taking a cautious approach to accounting, the IASB has missed the point: prudence requires a greater readiness to recognise losses than profits,” said Melanie McLaren, FRC executive director, codes and standards.
“It is particularly odd that the IASB acknowledges that this is reflected in current accounting standards, but has omitted it from its draft framework.”
The FRC’s response also suggests that a more fundamental analysis than that provided in the exposure draft is required of the reporting of financial performance and the measurement of assets and liabilities.
Further criticism of the IASB’s efforts to reinstate prudence came from the ICAEW. The institute said it “strongly supports” proposed reinstatement of prudence in the conceptual framework but disagrees with the IASB’s suggestions as to how this should be done.
“The ED’s proposals would exclude ‘asymmetric prudence’ (greater readiness to recognise losses rather than gains) from the framework, which we think should be added,” said Nigel Sleigh-Johnson, head of the financial reporting faculty at ICAEW.
“However, we want to be clear that making this change is not supposed to stop the use of fair value measurements in appropriate circumstances, or the recognition of fair value gains in financial statements.”
The ICAEW also recommended that the concept of ‘true and fair view’ should be included in the framework, clarifying that it is equivalent to ‘fair presentation’. At the moment, IFRS standards refer only to the latter but in many jurisdictions, including the EU, there is an overriding and very important requirement to give a ‘true and fair’ view in financial statements.
“Clarification is something long overdue,” Sleigh-Johnson said.