eric martins ricardo lopes cardoso -...

Academics Researching/Teaching Financial Accounting, International Accounting and/or Accounting Theory in Brazilian

Universities’ Master Degree and PhD Programs

November 25, 2015

To the

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

RE: Comment letter – Conceptual Framework Exposure Draft

Dear Sirs,

A voluntary group of academics engaged in research and in teaching Financial Accounting, International Accounting, and/or Accounting Theory, in several Brazilian universities is pleased to submit this Comment Letter on IASB’s Conceptual Framework Exposure Draft.

The academics that submit this letter welcome the opportunity to respond the Request for Comment on above mentioned Exposure Draft and support IASB’s initiative in considering this revision of the Framework.

On behalf of the voluntary group of academics of Brazil,

Eric Martins

Ricardo Lopes Cardoso Group coordinators



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The academics that constituted the voluntary group that developed this comment letter are:

PhD Adriano Rodrigues – Federal University of Rio de Janeiro (UFRJ)

PhD Bruno Salotti – University of São Paulo (USP)

MsC Diana Lúcia de Almeida – University of São Paulo (USP)

PhD Edilson Paulo – Federal University of Paraíba (UFPB)

MsC Eduardo Flores – Alvares Penteado Business School Foundation (FECAP)

PhD Eliseu Martins – Professor Emeritus, University of São Paulo (USP)

PhD Eric Aversari Martins - University of São Paulo (USP)

PhD Fernando Dal-Ri Murcia – University of São Paulo (USP)

PhD Flávia Rechtman Szuster – State University of Rio de Janeiro (UERJ)

MsC. Janaína Senra – Brazilian Institute of Capital Markets (IBMEC) and Presbyterian University Mackenzie (FGV)

PhD José Elias Feres de Almeida – Federal University of Espírito Santo (UFES)

PhD Jorge Vieira da Costa – State University of Rio de Janeiro (UERJ)

PhD Natan Szuster – Federal University of Rio de Janeiro (UFRJ) and State University of Rio de Janeiro (UERJ)

PhD Nelson Carvalho – University of São Paulo (USP)

MsC Paulo Roberto Gonçalves Ferreira – Pontifical Catholic University of Rio de Janeiro (PUC RJ) and Federal University of Rio de Janeiro (UFRJ)

PhD Ricardo Lopes Cardoso – Getulio Vargas Foundation (FGV) and State University of the State of Rio de Janeiro (UERJ)

PhD Sérgio de Iudícibus – Professor Emeritus, University of São Paulo (USP) and Professor, Pontifical Catholic University, São Paulo (PUC SP)



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INDEX

CHAPTERS 1 AND 2—THE OBJECTIVE OF GENERAL PURPOSE FINANCIAL REPORTING AND THE QUALITATIVE CHARACTERISTICS OF USEFUL FINANCIAL INFORMATION 5

QUESTION 1 - PROPOSED CHANGES TO CHAPTERS 1 AND 2 5

CHAPTER 3—FINANCIAL STATEMENTS AND THE REPORTING ENTITY 7

QUESTION 2—DESCRIPTION AND BOUNDARY OF A REPORTING ENTITY 7

CHAPTER 4—THE ELEMENTS OF FINANCIAL STATEMENTS 9

QUESTION 3—DEFINITIONS OF ELEMENTS 9QUESTION 4—PRESENT OBLIGATION 10QUESTION 5—OTHER GUIDANCE ON THE ELEMENTS 10

CHAPTER 5—RECOGNITION AND DERECOGNITION 12

QUESTION 6—RECOGNITION CRITERIA 12QUESTION 7 — DERECOGNITION 12

CHAPTER 6—MEASUREMENT 14

QUESTION 8—MEASUREMENT BASES 14QUESTION 9—FACTORS TO CONSIDER WHEN SELECTING A MEASUREMENT BASIS 16QUESTION 10—MORE THAN ONE RELEVANT MEASUREMENT BASIS 17

CHAPTER 7 – PRESENTATION AND DISCLOSURE 18

QUESTION 11 — OBJECTIVE AND SCOPE OF FINANCIAL STATEMENTS AND COMMUNICATION 18QUESTION 12 – DESCRIPTION OF THE STATEMENT OF PROFIT OR LOSS 18QUESTION 13 – REPORTING ITEMS OF INCOME OR EXPENSES IN OTHER COMPREHENSIVE INCOME 19QUESTION 14 – RECYCLING 19

OTHER QUESTIONS FOR RESPONDENTS 21

QUESTION 15 — EFFECTS OF THE PROPOSED CHANGES TO THE CONCEPTUAL FRAMEWORK 21QUESTION 16 — BUSINESS ACTIVITIES 21QUESTION 17 — LONG-TERM INVESTMENT 21



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QUESTION 18—OTHER COMMENTS 22



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Chapters 1 and 2—The objective of general purpose financial reporting and the qualitative characteristics of useful financial

information

Question 1 - Proposed changes to Chapters 1 and 2

Do you support the proposals:

(a) to give more prominence, within the objective of financial reporting, to the importance of providing information needed to assess management’s stewardship of the entity’s resources;

(b) to reintroduce an explicit reference to the notion of prudence (described as caution when making judgments under conditions of uncertainty) and to state that prudence is important in achieving neutrality;

(c) to state explicitly that a faithful representation represents the substance of an economic phenomenon instead of merely representing its legal form;

(d) to clarify that measurement uncertainty is one factor that can make financial information less relevant, and that there is a trade-off between the level of measurement uncertainty and other factors that make information relevant; and

(e) to continue to identify relevance and faithful representation as the two fundamental qualitative characteristics of useful financial information?

Why or why not?

a) We fully support the proposal, once the stewardship function is the main historical DNA of accounting. Stewardship is important to trace and report the management of the entity´s resources. However, stewardship and accountability are both integral components of financial reporting. Thus, we think that accountability should also be mentioned in the framework.

b) Terms like prudence and caution are very difficult concepts to apply to specific situations, since they have meanings that may vary from an individual to another. Conditions of uncertainty are the rule in the real world and not the exception. Of course, caution seems a more transitory condition than prudence. On the other hand, neutrality is an even more difficult term to explain in accounting. Often, it is something we would like to achieve as an ideal objective or goal. Anyhow, we still agree that prudence is important in trying to achieve neutrality. However, we suggest deleting last sentences from paragraph 2.18 (i.e., “The exercise of prudence means that assets and income are not overstated and liabilities and expenses are not understated. Equally, the exercise of prudence does not allow for the understatement of assets and income or the overstatement of liabilities and expenses, because such mis-



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statements can lead to the overstatement of income or the understatement of expenses in future periods.”), because it may suggest not caution, but the undesired bias of conservatism.

c) Of course the ideal world would be one in which the legal form explicitly reflects the economic event portrayed by the accounting representation. However, since this is almost rare to occur (maybe in Islamic accounting), we fully agree with the IASB view; nevertheless, stakeholders vested with social or environmental interests should not be forgotten.

d) We think that in spite of measurement uncertainty, financial information is always, at least in part, relevant to the informed decision maker, although more or less precise. The trade-off between the level of measurement uncertainty and other factors that make information relevant is well known by informed decision makers. After all, accounting measurement gives rise to a precise figure, not an exact one.

e) Yes, we agree because relevance and faithful representation are interrelated, since relevance, the essential quality of financial information, cannot be fully obtained without the faithful representation of the phenomenon portrayed.



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Chapter 3—Financial statements and the reporting entity

Question 2—Description and boundary of a reporting entity

Do you agree with:

(a) the proposed description of a reporting entity in paragraphs 3.11–3.12; and

(b) the discussion of the boundary of a reporting entity in paragraphs 3.13–3.25?

Why or why not?

We agree with the proposed description of a reporting entity in paragraphs 3.11-3.12. The notion that an entity does not have to be a legal one is very important, especially when defining its boundaries.

We also understand that the definition of the boundaries based on direct and or indirect control of assets and liabilities is adequate. However, it is noticeable that the Exposure Draft Conceptual Framework defines three different types of entities: direct control only, direct and indirect control and combined financial statements. We understand that these are not different types of financial statements of the same reporting entity (unconsolidated, consolidated or combined), but are actually different types of financial statements applied to different reporting entities, with different boundaries.

A parent company’s unconsolidated financial statement has different boundaries from the consolidated ones. In the first case, such boundaries do not reach the assets and liabilities of the subsidiaries, but only their net value represented by the subsidiaries equity, be them measured by fair value or equity method. The view that the unconsolidated financial statements presentation is limited to the parent company itself and subsidiaries are treated as investments. It does not embrace the subsidiaries as a whole.

On the other hand, the boundaries of a parent company’s consolidated financial statement are wider, more extended, with a bigger reach than the one used for the unconsolidated ones. They do not embrace only the subsidiary’s equity and/or treat them as investment, but reach the whole subsidiaries’ set of assets and liabilities. The view of the consolidated financial statements focus the group as a whole, as an economic unit, opposed to the view of the unconsolidated ones that focus exclusively on the parent company as a single self that has rights over its subsidiaries, however such rights are measured according to legal aspects on each jurisdiction.

Finally, combined financial statements have a different perspective from the other two, as they focus not only on the parent company and its subsidiaries, but whatever other companies that are part of the combined financial statements. In this type of



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statements, the focus is on companies that may or may not have control relations among themselves. Thus, the boundary also differs from the other two and their relative importance for decision-makers it’s not reduced.

What define the reporting entity are its boundaries. The parent company is an entity itself, as are the subsidiaries or any other companies that may be combined. However, the reporting entity may differ from those individual entities. Thus, it is necessary to differentiate an entity from the reporting entity.

The parent company is the reporting entity itself only in the case of the direct control view (unconsolidated financial statements). The boundaries of the reporting entity in the case of consolidated and combined financial statements go beyond the parent company as an individual entity.

In summary, we propose that the conceptual framework differentiates entity from reporting entity and clearly state that each set of financial statement represents one type of reporting entity, and that exists three types of reporting entities.



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Chapter 4—The elements of financial statements

Question 3—Definitions of elements

Do you agree with the proposed definitions of elements (excluding issues relating to the distinction between liabilities and equity):

(a) an asset, and the related definition of an economic resource;

(b) a liability;

(c) equity;

(d) income; and

(e) expenses?

Why or why not? If you disagree with the proposed definitions, what alternative definitions do you suggest and why?

We agree with the proposed definitions of liability, equity, income and expenses. However, the paragraph 4.30 should be better clarified. It sounds that there is a kind of conflict between paragraph 4.30 and the remark in the beginning of Chapter 4 (“The IASB is not proposing now to change the definitions of liabilities and equity to address the problems that arise in classifying instruments with characteristics of both liabilities and equity. It is exploring those problems in its Financial Instruments with the Characteristics of Equity research project”). Thus, what is the aim of the last sentence in paragraph 4.30 bellow? We suggest deleting it, as follows.

4.30. An equity claim does not contain an obligation to transfer economic resources. Furthermore, an equity claim is not an economic resource for the issuer. It follows that an obligation of an entity to transfer its own equity claims to another party is not an obligation to transfer an economic resource.

Even though we agree with the definitions afore mentioned, we do not fully agree with the definition of asset. As already mentioned in our comment letter to the Discussion Paper, we would prefer a definition stating that:

Assets are economic benefits accrued to an entity as a result of the individual or combined use of resources controlled by such entity.

In this sense, as we propose that the asset is the economic benefit and not the resource itself, it is important to highlight that the resource is used as a proxy for the recognition, classification, aggregation and disclosure of the asset, but it does not represent the asset itself. We do not agree with “the asset is the resource” and not the



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ultimate future inflow: we sustain that the asset is the ultimate future inflow, represented on the financial statements by means of the resource.

The economic benefit will arise from the use (combined or not) of a resource, and the resource is used, in accounting, to represent the economic benefit. Using the notion of economic resource can lead to the misunderstanding that for an asset to exist, only the resource is necessary, which is not true.

What makes a resource be an asset is the existence of future economic benefits, thus, the essence of the asset is the very economic benefit, and not the resource itself. If an economic resource has to be differentiated from other resources in order to be an asset, the essence of the asset is whatever differentiates such resources from themselves. Thus, the asset is the economic benefit, and not the resource.

We also believe that the notion of past events is not necessary to the concept of asset.

Finally, in line with our comment in question 18, we believe that the proposed conceptual framework is too detailed in its discussion and presentation of the concepts. It should focus mainly on principles and leave the details to the basis for conclusions or implementation guidance.

Question 4—Present obligation

Do you agree with the proposed description of a present obligation and the proposed guidance to support that description? Why or why not?

We agree with the proposed description of present obligation.

Question 5—Other guidance on the elements

Do you have any comments on the proposed guidance?

Do you believe that additional guidance is needed? If so, please specify what that guidance should include.

Even though we believe that guidance with illustrative examples would help understand the underlying concepts of the Conceptual Framework, we propose that such details are kept outside of the framework, which should attain to the main principles only.



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Additional guidance should be part of the basis for conclusion or, preferably, the statements and their implementation guidance.



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Chapter 5—Recognition and derecognition

Question 6—Recognition criteria

Do you agree with the proposed approach to recognition? Why or why not? If you do not agree, what changes do you suggest and why?

Yes, we partially agree with the proposed criteria.

We agree that the recognition criteria should be based on the fundamental qualitative characteristics of (a) “relevance” and (b) “faithful presentation”.

However, we believe that (c) “cost/benefit” should not be included in the recognition criteria, but instead as an “exception”, as a “restriction” to the proposed criteria.

In sum, we believe the “principle” that should lead recognition is that “items should be recognized in financial statements whenever they provide users of financial statements with relevant information and faithful representation of economic transaction.” The exception to this principle should be “that items don’t have to be recognized in financial statements whenever the cost of recognizing it outweigh the benefits.”

On the other hand, chapter 5 is so long and its content is redundant with other chapters of the ED (specially chapters 1 and 2); instead recognition criteria could be clearly and straightforward presented as follows: An item of asset, liability, equity, income or expense might be recognised if and only if it meets the respective definition. Comments on measurement uncertainty and faithful representation are unnecessary because these subjected are discussed in chapters 2 and 6. Exceptions, examples, illustrative examples and implementation guidance, if needed, should be presented only in standards, not in the CF.

Question 7 — Derecognition

Do you agree with the proposed discussion of derecognition? Why or why not? If you do not agree, what changes do you suggest and why?

Yes, we partially agree with the proposed criteria.

We agree that the derecognition criteria should be based on the fundamental qualitative characteristic of “faithful representation of (a) the assets/liabilities retained and (b) changes in assets/liabilities after the transaction or other event”.



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The last DP mentioned two approaches for derecognition: (a) a control approach — derecognition is simply the mirror image of recognition and (b) a risks-and-rewards approach—an entity would continue to recognize an asset or a liability until the entity is no longer exposed to most of the risks and rewards generated by that asset or liability.

In this new version, those approaches were taken out (at least explicitly) with the justification that the Board could not decide which one is better.

It would be helpful to link the new derecognition criteria with those two approaches. Also, the framework could better explicit in which circumstances one approach would be more desirable than the other.

Again, chapter 5 is too long and its content is redundant with other chapters of the ED (specially chapters 1 and 2). In our opinion the derecognition criteria could be clearly and straightforward presented as follows, stating the principle itself:

An item of asset, liability or equity, that has being already recognised, might be derecognised when it does not meet the respective definition anymore.



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Chapter 6—Measurement

Question 8—Measurement bases

Has the IASB:

(a) correctly identified the measurement bases that should be described in the Conceptual Framework? If not, which measurement bases would you include and why?

No.

We appreciate the effort to determine a short list of measurement bases that should be broadly defined in order to set a robust conceptual background to support the standard setting process.

Nevertheless, we believe that the ED could be improved in the following matters:

(a) Both current Conceptual Framework and the ED continue to fail in providing a robust definition of what is cost. All attempts to define cost usually work well in less complex trade transactions but fall short when transactions become more sophisticated. For instance, what is cost of acquisition of an airplane acquired as the result of exercising an option for which the entity has paid some cash in the past to have the option to acquire the airplane for a fixed price in the future? Is it the fixed price paid when the option is exercised? Is it the sum of the amount paid to have the option and the consideration paid as determined by the option? Or is it the fair value of the option plus the consideration paid to gain control of the aircraft? Does cost include estimations of asset retirement? What role estimates play in the determination of the cost of a transaction? We believe the ED fails to offer a robust concept and a definition for cost that are able to help the board address transactions that are more challenging in terms of determining what is cost.

(b) The ED completely ignores the fact that prices change systematically, ie economies are subject to inflation (less frequently deflation). It is clear that 'low' or 'medium' levels of inflation have a significant impact in reducing the usefulness of cost based measures particularly for long-lived non-monetary balance sheet items. How useful would it be to have a financial position that depicts the historical cost of a plot of land in the City of London acquired in the 80s? Even under very low levels of inflation, for instance, one per cent per calendar year, the cumulative effect of price changes will be over 30% in 30 years. A number of assets have long useful lives, measured in decades, and the effect of inflation cannot be ignored. Ignoring the impact of price changes in cost-based measures weakens the conceptual framework because it fails to provide elements to address a fact that affects not only emerging economies, not to mention that ignoring changes in prices makes the ED inconsistent with the financial capital maintenance



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concept provided in chapter 8. Last but not least, ignoring price changes in the conceptual framework leaves IAS 29 Hyperinflation in a conceptual vacuum.

Furthermore, as a general comment applicable to this and other parts of the ED, we understand that a conceptual framework should provide robust and clear concepts. As a consequence, a sound conceptual framework should be less detailed. We find the ED excessively detailed. Lengthy explanations of concepts can be a sign the concepts are not clear and further work should be devoted to smooth the edges.

(c) The ED is inconsistent with IFRS 9, when defining historical cost as "sometimes referred to as amortised cost”. Paragraph 6.9 states that “The historical cost of a financial asset (sometimes referred to as amortised cost) is initially the value of the consideration given to acquire the asset plus the transaction costs relating to the acquisition. The historical cost of a financial liability (again, sometimes referred to as amortised cost) is initially the value of the consideration received to take on the liability less the transaction costs incurred in taking it on.” Thus, the ED refers to amortised cost on the basis of an 'entry price' notion.

According to IFRS 9 (Paragraph 5.1.1), “at initial recognition, an entity shall measure a financial asset or financial liability at its fair value plus or minus, in the case of a financial asset or financial liability not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition or issue of the financial asset or financial liability.” As the standard mentions fair value in the initial measurement, appealing to the definition in IFRS 13 (Appendix A), we see that fair value is "the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date". Thus, IFRS 13 defines fair value on the basis of an 'exit price' notion.

Going further, IFRS 9 (Appendix A) defines amortised cost as “The amount at which the financial asset or financial liability is measured at initial recognition minus the principal repayments, plus or minus the cumulative amortization using the effective interest method of any difference between that initial amount and the maturity amount and, for financial assets, adjusted for any loss allowance.” Analyzing this definition, if amortised cost is based on the amount at which a financial instrument is measured at initial recognition and, as previously said, at initial recognition, an entity shall measure a financial instrument at its fair value, thus, the 'exit price' notion is used within the amortised cost definition in IFRS 9.

Summarising our view, although the definition of amortised cost is under the Historical Cost topic and that this consists in the value of the consideration given (received) to acquire (take on) a financial asset (liability), when the ED (Paragraph 6.9) refers to historical cost as "sometimes referred to as amortised cost”, it is possible to see a conflict in both definition, regarding the term “amortised cost”, which may cause misunderstandings and erroneous application. Thus, we believe that the IASB should avoid referring to historical cost of financial instruments as amortised cost, which is inconsistent with the definition presented in IFRS 9.



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(b) properly described the information provided by each of the measurement bases, and their advantages and disadvantages? If not, how would you describe the information provided by each measurement basis, and its advantages and disadvantages?

No.

Although in general terms we find it will be useful to board members to have a list of pros and cons to guide them in deciding in favour of one particular measure, the ED provides excessive level of details that seem to aim accommodating current standards rather than providing robust concept. One example concerns risk premiums within the fair value elements provided in the ED. Paragraphs 6.23 and 6.25 deal with the fact that the fair value reflect a risk premium. In developing the topic, the ED brings statements that are judgemental and observations from the practice rather than concentrating in the development of a robust concept (eg the supposedly counterintuitive effects of variations in risk premiums). The Conceptual Framework should not need to rely on observations from the practice and anecdotal elements to support its concepts. Furthermore, such observations from practice and anecdotes may be prevent users to exercise conceptually sound judgements, particularly when the development of accounting policies requires the use of IFRS concepts as determined by the 'IAS 8 hierarchy'.

Furthermore, as a general comment applicable to this and other parts of the ED, we understand that a conceptual framework should provide robust and clear concepts. As a consequence, a sound conceptual framework should be less detailed. We find the ED excessively detailed. Lengthy explanations of concepts can be a sign the concepts are not clear and further work should be devoted to smooth the edges.

Question 9—Factors to consider when selecting a measurement basis

Has the IASB correctly identified the factors to consider when selecting a measurement basis? If not, what factors would you consider and why?

Yes, we believe that the IASB has correctly identified the factors to consider when selecting a measurement basis.

Nevertheless, as a general comment applicable to this and other parts of the ED, we understand that a conceptual framework should provide robust and clear concepts. As a consequence, a sound conceptual framework should be less detailed. We find the



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ED excessively detailed. Lengthy explanations of concepts can be a sign the concepts are not clear and further work should be devoted to smooth the edges.

Question 10—More than one relevant measurement basis

Do you agree with the approach discussed in paragraphs 6.74–6.77 and BC6.68? Why or why not?

No.

We appreciate the approach provided in paragraphs 6.78 to 6.80 to address one of the consequences of a mixed measures model, ie the measurement of equity as a residual element will be affected by the different bases used to measure all other elements.

However, we find that this issue in the measurement of equity is also valid to any (or most of) totals or subtotals in the financial statements prepared under IFRS, eg total assets, gross profit, net income etc. We believe that if the IASB decides to retain paragraphs 6.78 to 6.80, a similar warning should be provided in discussing the option to accept more than one relevant measurement basis to provide relevant information.

Furthermore, in line with our comment to question 18, we find this part of the ED excessively detailed.



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Chapter 7 – Presentation and disclosure

Question 11 — Objective and scope of financial statements and communication

Do you have any comments on the discussion of the objective and scope of financial statements, and on the use of presentation and disclosure as communication tools?

We support the reference to risks and even suggest this aspect should be reinforced.

We firmly suggest the introduction of the accountability concept when stewardship is mentioned. Both are linked to each other and should be introduced together. After all, accounting is always linked to both.

Additionally, please, replace the colloquial term ‘boilerplate’ language from item 7.18(a), because it might be misunderstood by different cultures and mistranslated into different languages.

Question 12 – Description of the statement of profit or loss

Do you support the proposed description of the statement of profit or loss? Why or why not?

If you think that the Conceptual Framework should provide a definition of profit or loss, please explain why it is necessary and provide your suggestion for that definition.

As discussed in question 3, we agree with the definition of Equity as “the residual interest in the assets of the entity after deducting all its liabilities”; and with the definitions of Income and Expenses as changes in assets or liabilities that result in changes in equity other than those related to transactions with holders of equity claims. Based on the classification of financial performance presented in paragraph 7.19 (i.e., P&L and OCI), we suggest that IASB defines Total Comprehensive Income as the change in equity other than those relating to contributions from and distributions to holders of equity claims. Hence, total comprehensive income (i.e., the total) would be classified between subtotals (i.e., P&L and OCI).

In summary, we agree with the idea of the all-inclusive concept, where all income and expenses must be disclosed as Total Comprehensive Income, divided in P&L and OCI.



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Question 13 – Reporting items of income or expenses in other comprehensive income

Do you agree with the proposals on the use of other comprehensive income? Do you think that they provide useful guidance to the IASB for future decisions about the use of other comprehensive income? Why or why not?

If you disagree, what alternative do you suggest and why?

Question 14 – Recycling

Do you agree that the Conceptual Framework should include the rebuttable presumption described above? Why or why not?

If you disagree, what do you propose instead and why?

ANSWER TO QUESTIONS 13 AND 14

Chapter 7 is not clear in regard to IASB’s proposals for classifying total comprehensive income between P&L and OCI, and such a classification is not consistent with the suggestion for recycling. For instance, paragraph 7.24 bases the classification criteria between P&L and OCI on the measurement bases of assets and liabilities, and on the relevance of information provided by income and expenses. However, paragraph 7.27 bases the recycling criteria on the timing basis for recognising income and expenses in P&L. The three-fold criterion makes this section of the ED quite confusing.

We partially agree with the presumption stated in paragraph 7.23, that all income and all expenses shall be presented in P&L. However, we do not agree with the classification based on measurement criteria (historical cost versus current value) used in items (a) and (b) of paragraph 7.23 and item (a) of paragraph 7.24 to decide which income and expenses shall be presented in P&L or in OCI.

In our point of view, income/expense classification under OCI and its consequent recycling is not a matter of measurement criteria, but a matter of timing (i.e., in which point in time shall and entity recognise income and expenses in P&L) and nature of the income/expense.

We believe that there are two different natures of income/expense that should be classified on OCI: 1) items that arise from the adoption of the physical capital maintenance concept, and 2) items that represent income or expenses that shall be recognized in future periods.



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The first type of OCI represents income/expenses that arise from revaluation of assets due to the adoption of physical capital maintenance concept. In such cases, the increase on the value of the assets shall not ever be considered in (or recycled to) P&L. They are not a profit of the entity, but an increase in the value of the asset that will lead to withholding resources in the entity in order to replace the revaluated asset.

For instance, when a fixed asset is revaluated, the increase in its value is not a profit, and shall never be registered as such. However, the increase on the depreciation is helping to withhold resources in the entity to replace the revaluated fixed asset, and has to be considered in P&L.

Thus, all items that are part of a change in the capital maintenance concept (as paragraph 8.10 predicts) should be included in type one OCI and never be recycled to P&L.

The second type of OCI are those income/expenses that represent future periods P&L. All other OCIs other than those arising from revaluation of assets are classified under this type. In these cases, all of them have to be recycled to P&L at some point in time. And that leads to two subcategories: those that have clear bases for identifying the period when they should be recycled and those for which such bases are unclear.

When the bases are clear, they should be recycled normally. When the bases are not clear, entities should make use of the best estimate possible to identify the due period and perform the recycling.

In summary we propose the following treatment for OCI:



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Other questions for respondents

Question 15 — Effects of the proposed changes to the Conceptual Framework

Do you agree with the analysis in paragraphs BCE.1–BCE.31? Should the IASB consider any other effects of the proposals in the Exposure Draft?

Yes, we agree with the analysis in paragraphs BCE.1–BCE.31. We agree with IASB’s position to correct the existing and future inconsistencies after the new Conceptual Framework document is issued. However, according to our suggestion on answer to question 18, we believe that IASB should make the effort to correct such inconsistencies as soon as possible after the issuance of the new Conceptual Framework.

Question 16 — Business activities

Do you agree with the proposed approach to business activities? Why or why not?

We think that the use of business model concept could be useful in accounting. In reality, it is currently used to some extent (for example, when classifying vehicles as inventories or fixed assets), but we agree that this idea should be further discussed and studied before reaching a new status.

So, we agree with the more limited approach proposed.

Question 17 — Long-term investment

Do you agree with the IASB’s conclusions on long-term investment? Why or why not?

Not entirely. IASB has taken a very defensive position in discussing this matter in paragraphs BCIN.35–44, instead of discussing in depth some specific problems regarding long-term investments and long-term liabilities.



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The discussion was set eminently on long or short-term investors, and we think this is not the question.

For example, the problem of big currency oscillations on long-term liabilities influencing sometimes dramatically the income statement of one period, with the cash impact happening during the long term, and with the possibility of these effects being reversed later deserves a special attention of the regulator.

But we agree that the present Exposure Draft allows conditions for new approaches regarding long-term investments (liabilities) in the future.

Question 18—Other comments

Do you have comments on any other aspect of the Exposure Draft? Please indicate the specific paragraphs or group of paragraphs to which your comments relate (if applicable).

As previously noted, the IASB is not requesting comments on all parts of Chapters 1 and 2, on how to distinguish liabilities from equity claims (see Chapter 4) or on Chapter 8.

The main comment based on a generalized view of the proposed Conceptual Framework is that we understand that such document should provide robust and clear concepts. As a consequence, a sound conceptual framework should be less detailed. Lengthy explanations of concepts can be a sign the concepts are not clear and further work should be devoted to smooth the edges.

Thus, the CF must focus on the main principles, on the conceptual guidelines. The portraying of examples and lists of situations turn the focus away from a principle standard and tends to turn it into rules with the downside of misleading the reader to believe that only the situations presented on the CF are applicable.

The proposed CF as presented on the ED is too long, too detailed in its explanations and examples. For instance, when discussing fair value there is a too long of a list of examples, absolutely unnecessary for the understanding of the concept.

The fact that the new CF will eventually create more discrepancies between the CF and the standards should lead to the insertion of specific definitions on the CF in order to fill the gap between the framework and specific standards.

Examples and implementation guidance should be included on the basis for conclusion or, preferably, on each and every standard that requires them, and not be included on a framework that is supposed to be Conceptual, only!



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Such comment derives from our understanding that there is an exaggeration of the length of the document and, also, repetition of things on different places of the document.

Additionally, the IASB should avoid colloquial terms (e.g., see item 7.18(a) –‘boilerplate’ language), because they may have different meanings in different cultures; hence would rarely be translated with the same meaning suggested by the IASB. We remember that the IASB intended to use the term ‘vanilla financial instruments’ in IFRS 9, but (fortunately) avoided doing so for the reasons above.

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