At the May meeting a significant amount of time was spent re-debating issues arising from feedback on the discussion paper on the Conceptual Framework. This had originally proposed defining an asset as something that was capable of generating economic benefits, whereas the existing definition says it must be probable that it will generate cash flows for the entity. Constituents’ feedback had been to express concern that the IASB was trying to increase the number of assets that were recognised.

IASB technical director Peter Clark said that was not the case, it was simply trying to find a more operational definition. Assets did not always generate positive cashflows, so it thought that ‘economic benefits’ was more accurate. The probability criterion for recognition was an on/off switch that was difficult to apply, and not conceptually based.

Preparers should consider the information value in reporting a possible asset and report it if that was relevant to investors. The IASB eventually agreed that it would support the staff’s direction of travel, but asked them to do some more work on drafting the new recognition criteria.

The IASB revised the qualitative characteristics chapter of the Conceptual Framework in 2010 as part of convergence with the US Financial Accounting Standards Board (FASB). During that process it removed the notion of prudence from the IASB framework and switched the reliability characteristic for representational faithfulness. Although constituents were asked not to review those decisions, they did so anyway, asking for them to be reinstated.

The board decided that it would bring prudence back, defining this as neither overstating nor understating assets or liabilities when measuring under conditions of uncertainty. However, it refused to do anything about reliability, saying it had removed it because there were different ideas about what it meant, and that was still the case. Stewardship was also given greater prominence as an objective of financial reporting, alongside the aim of giving providers of capital information that is useful in making investment decisions. The standard-setter hopes to be able to complete re-deliberations and issue an exposure draft by the end of this year.

A contentious proposal on equity

The new research team at IASB also proposed a review of the use of the equity method. Board members seemed divided between those who thought that there did not seem to be a problem, so there was no need to fix it, and those who thought it was an outdated technique that does not give useful information to investors.

Staff said that the 2011 agenda consultation had supported the idea of reviewing the use of the equity method and put forward a programme to consider for what purposes it was used and whether these could be better met in any other way. They cited a 2002 paper by professor Christopher Nobes (Royal Holloway, University of London) which analysed the different reasons for the use of the method over time. They argued that while the IASB is in the process of agreeing its use in the separate financial statements of a parent company, its use in consolidated statements was open to question.

Board member Amaro Gomes said the research team needed to be explicit about what the problem was – his sense was that there was no problem. Of the respondents to the agenda consultation who had mentioned the equity method, very few had actually asked for it to be reconsidered.

Hans Hoogervorst, IASB chairman, remarked that they had an accounting method. The problem seemed to be: why did they have it? To an outsider that might seem comical.

On the other hand, board member Mary Tokar thought it was appropriate to step back and ask, did they really need an intermediate method of accounting for an equity interest that was between a subsidiary and an investment? Alan Teixeira, senior technical director, said it was important for investors to understand the drivers behind the single number.

Former analyst Pat Finnegan commented that in outreach he had found that investors were not really enamoured of the equity method for joint ventures. He wondered whether with hindsight they might find it had been a mistake to do away with proportionate consolidation.

Eventually the board agreed the research project should go ahead. Those close to the problem say the equity method is open to the criticism that as a form of simplified consolidation, it does not meet the criterion of control which underlies consolidation. Others would argue that it is not either a good guide to forecasting cashflows to the parent.

Peter Walton PhD, FCCA is an emeritus professor at the Open University Business School