| 12 | As noted above, the IASB described the change in terminology from reliability to faithful representation as essentially a matter of semantics. However, if this is the case, the question arises as to why an issue of substance such as a potential trade-off between qualitative characteristics that was addressed in the previous Framework has been eliminated. |
| 13 | The trade-off between relevance and reliability is not simply a one-off comment in the previous IASB Framework. The importance that was previously attributed to this trade-off is illustrated by the following references to US documents. In its predecessor to the revised Framework, Statements of Concepts 2, the FASB acknowledged that "… reliability may suffer when an accounting method is changed to gain relevance, and vice versa"2. In October 2002 the FASB acknowledged that the "FASB Statement of Concepts N° 2 does not provide conceptual guidance necessary (emphasis added) for making trade-offs in accounting standards focusing on, among other things, the primary characteristics of relevance and reliability…"3. In July 2003 the U.S. SEC stated: "Thus, a key responsibility (emphasis added) of the standard setters is to make the determination as to the trade-offs among the qualitative characteristics of accounting information… In practice, making these trade-offs in setting standards is closely intertwined … with the use of the asset-liability view to standard-setting"4. |
| 14 | It is not clear what has occurred since 2003 to make the issue of a trade-off between relevance and reliability irrelevant. |
| 15 | In fact, rather than just being a change in terminology, an important aspect of reliability as described in the pre-2010 Framework has been diluted in the move to faithful representation: measurement uncertainty. The pre-2010 Framework stated clearly that 'in certain cases, the measurement of the financial effects of items could be so uncertain that entities generally would not recognise them in financial statements', giving internally-generated goodwill as an example. This discussion of measurement uncertainty leads directly to the recognition criterion that elements should be recognised only if they have a cost or value that can be measured with reliability. The 2010 Framework notes that 'if the level of uncertainty in an estimate is sufficiently large, that estimate will not be particularly useful'. However, it also states that 'a representation of [an] estimate can be faithful if the amount is described clearly and accurately as being an estimate, the nature and limitations of the estimating process are explained, and no errors have been made in selecting and applying an appropriate process for developing the estimate' and that 'if there is no alternative representation that is more faithful, that estimate may provide the best available information'. |
| 16 | The view that a reliable measurement base – be it cost or fair value – is always available is also reflected in standards. Despite the emphasis put in the Framework on reliability as a recognition criterion, individual Standards have been issued with no or little regard for reliability of measurement. Although Standards often repeat recognition criterion, over the years the Standards have concluded that by and large reliability is a non-issue. For example: |
| (a) | Of all the standards that include reliability of measurement as a recognition criterion (IAS 16, IAS 36, IAS 37, IAS 38, IAS 39, IAS 40, IAS 41, IFRS 2, IFRS 7, IFRS 9) only IAS 38 concludes that the measurement of some items (internally-generated goodwill and internally-generated research) may not be sufficiently reliable to permit recognition.5 |
| (b) | IFRS 13 raises only once the question of the reliability of fair value, and it is not to cast doubt on the reliability of the measurement of fair value in certain cases, but it is to conclude that quoted prices in active markets provide the most reliable evidence of fair value.6 |
| (c) | The IASB particularly in IFRS 13 views the reliability of measurement as a matter for disclosure, not a matter for recognition. The IASB makes the presumption that numbers should be reported in the primary financial statements and that concerns with the reliability of these numbers are better addressed in the notes to the financial statements. |
| 17 | Related to this lack of concern over reliability is the relegation in the 2010 Framework of verifiability to an enhancing, rather than fundamental, characteristic.7 Some also worry that the meaning of verifiability has also been weakened in that it requires only a consensus between different knowledgeable and independent observers, rather than a reasonable level of certainty over the measurement of the financial effects of the item. A crucial aspect of the context in which financial information is used is that financial statements are audited. Information in financial statements therefore has to be capable of some level of verification. |
| 18 | There is substantial academic literature that supports the view that reliability is an important and desirable characteristic of financial information. This view was also illustrated in the IASB Discussion Paper on extractive activities, which explained that users do not find fair value information about oil reserves useful because of the lack of reliability in their measurement. Further, there is academic evidence that supports the view that information disclosed in the notes to the financial statements does not have the same predictive value as that which is reported in the primary financial statements. |
| 19 | The replacement of reliability with faithful representation significantly weakens the importance attached to linked ideas of measurement uncertainty and verifiability. In doing so the revised Framework ignores important aspects of the role of financial statements. |
| 2 FASB Statement of Concepts N° 2, paragraph 90. Although the IASB Framework does not include the same statement, it is consistent with the idea of the trade-off described in paragraph 5 above. |
| 3 FASB Proposal: Principles-Based Approach to U.S. Standards Setting. October 21, 2002. |
| 4 Study Pursuant to Section 108 (d) of the Sarbanes-Oxley Act of 2002 on the Adoption by the United States Financial Reporting System of a Principles-based Accounting System. U.S. SEC. July 25, 2003, page 23. |
| 5 IAS 37 includes an acknowledgment that a liability should not be recognised when no reliable estimate can be made but states that this will only be in extremely rare cases. |
| 6 IFRS13, BC168. |
| 7 As explained in the Basis of Conclusions to the 2010 Framework, the previous Framework (1989) did not explicitly include verifiability as an aspect of reliability, but [FASB] Concepts Statement 2 did. However, the two frameworks are not as different as it might appear because the definition of reliability in the Framework (1989) contained the phrase 'and can be depended upon by users', which implies that users need assurance on the information.' |
|
|
Licence and copyright | © 2018, LexisNexis Group a division of Reed Elsevier (UK) Ltd. All rights reserved. |