IFRS Foundation Conceptual Framework for Financial Information: Approval and Basis for Conclusions Chapter 1

Documents published by the IASB to accompany the Conceptual Framework for Financial Information The Conceptual Framework for Financial Information (the Conceptual Framework) was issued by the International Accounting Standards Board. It superseded the Framework for the Preparation and Presentation of Financial Statements in September 2010. The text of the Conceptual Framework is contained in Part A of this edition. This part presents the following complementary documents: APPROVAL BY THE BOARD OF THE 2010 CONCEPTUAL FRAMEWORK BASIS FOR CONCLUSIONS ON CHAPTERS 1 AND 3 CROSS-REFERENCE TABLE Conceptual Framework IFRS Foundation B1 Accounting Framework for Insurance Institutions Resolution No. CD-SIBOIF-1028-1-NOV21-2017 PART B IFRS Version 2017

Approval by the Board of the Conceptual Framework for Financial Information issued in September 2010 The Conceptual Framework for Financial Information was approved for publication by the fifteen members of the International Accounting Standards Board. Sir David Tweedie Chairman Stephen Cooper Philippe Danjou Jan Engström Patrick Finnegan Robert P Garnett Gilbert Gélard Amaro Luiz de Oliveira Gomes Prabhakar Kalavacherla James J Leisenring Patricia McConnell Warren J McGregor John T Smith Tatsumi Yamada Wei-Guo Zhang Conceptual Framework B2 IFRS Foundation Accounting Framework for Insurance Institutions Resolution No. CD-SIBOIF-1028-1-NOV21-2017 PART B IFRS Version 2017

INDEX from paragraph BASIS FOR CONCLUSIONS ON CHAPTER 1: THE OBJECTIVE OF GENERAL PURPOSE FINANCIAL INFORMATION INTRODUCTION FC1.1 Background FC1.3 General purpose financial information FC1.4 Information of the reporting entity FC1.8 PRIMARY USERS FC1.9 Should there be a primary user group? FC1.14 Why are existing and potential investors, lenders and other creditors considered the primary users? FC1.15 Should there be a hierarchy of users? FC1.18 Information needs of other users who are not in the group of primary users FC1.19 USEFULNESS FOR DECISION MAKING FC1.24 The objective of financial information for different types of entities FC1.29 INFORMATION ABOUT THE ECONOMIC RESOURCES, CREDITOR RIGHTS AND THEIR CHANGES OF THE REPORTING ENTITY FC1.31 The importance of information about financial performance FC1.31 Financial position and solvency FC1.34 Conceptual Framework IFRS Foundation B3 Accounting Framework for Insurance Institutions Resolution No. CD-SIBOIF-1028-1-NOV21-2017 PART B IFRS Version 2017

Basis for Conclusions on Chapter 1: The objective of general purpose financial information These Basis for Conclusions accompany Chapter 1, but do not form part of it. Introduction FC1.1 These Basis for Conclusions summarize the considerations of the International Accounting Standards Board in reaching the conclusions of Chapter 1 The objective of general purpose financial information. It includes the reasons for accepting some alternatives and rejecting others. Each of the individual members of the Board weighed the various factors differently. FC1.2 The Board developed this chapter together with the Financial Accounting Standards Board of the US (FASB). Consequently, these Basis for Conclusions also include some references to FASB literature. Background FC1.3 The Board began the process of developing the financial information objective by reviewing its own conceptual framework and concepts, as well as those of other standard setters. In July 2006, the Board issued for public comment a discussion paper on this topic. That same document was also published by the FASB. The Board and the FASB received 179 responses. In their new deliberations on the issues of this topic, the Board considered all the comments received and information obtained from the scope of other initiatives. In May 2008, the Board and the FASB jointly published a proposed standard. The boards received 142 responses. The Board reconsidered all the issues on this topic. This document is the result of those reconsiderations. General purpose financial information FC1.4 Consistent with the Board's responsibilities, the Conceptual Framework establishes an objective of financial information and not just of financial statements. Financial statements are a central part of financial information, and most of the issues addressed by the Board affect financial statements. Although the scope of FASB Statement of Financial Concepts No. 1 Objectives of Financial Information by Enterprises was financial information, the other FASB concepts documents focused on financial statements. The scope of the Board's Framework for the Preparation and Presentation of Financial Statements, which was published by the Board's predecessor body in 1989 [hereinafter referred to as the Conceptual Framework (1989)], deals only with financial statements. Therefore, for both boards, the scope of the Conceptual Framework is broader. FC1.5 Some constituents suggested that advances in technology may render general purpose financial information obsolete. New technologies, for example the use of eXtensible Business Reporting Conceptual Framework B4 IFRS Foundation Accounting Framework for Insurance Institutions Resolution No. CD-SIBOIF-1028-1-NOV21-2017 PART B IFRS Version 2017

Language (XBRL), may make it viable in the future for reporting entities to prepare or make available the information necessary for different users to prepare diverse financial reports to satisfy their individual information needs. FC1.6 Providing different reports for different users, or making available all the information that users would need to prepare their own custom-designed reports, would be costly. Requiring users of financial information to prepare their own reports may also be unreasonable, because numerous users would need to have a greater understanding of accounting than they currently have. Therefore, the Board concluded that for now a general purpose financial report is still the most efficient and effective way to satisfy the information needs of a variety of users. FC1.7 In the discussion paper, the Board used the term general purpose external financial information. External was intended to express that internal users such as management were not the intended beneficiaries for general purpose financial information as established by the Board. During the new deliberations, the Board concluded that this term was redundant. Therefore, Chapter 1 uses general purpose financial information. Information of the reporting entity FC1.8 Some of those who responded to the proposed standard said that the reporting entity is not separable from its equity investors or a subset of them. This opinion is based on the days when most businesses were individual traders and personal partnerships that were managed by their owners who had unlimited liability for debts incurred in the course of business. Over time, the separation between businesses and their owners has increased. The vast majority of current businesses have a separate legal essence from their owners by virtue of the legal form of the organization, numerous investors with limited legal liability, and professional managers separate from the owners. Therefore, the Board concluded that financial reports should reflect that separation through entity accounting (and its economic resources and creditor rights) rather than its primary users and their interests in the reporting entity. Primary users FC1.9 The objective of financial information in paragraph OB2 refers to existing and potential investors, lenders, and other creditors. The description of primary users in paragraph OB5 refers to existing and potential investors, lenders, and other creditors who cannot require the reporting entities to provide them with information directly. Paragraph OB10 states that "regulators and the public other than investors, lenders, and creditors" may find general purpose financial report information useful, but clearly states that these are not the parties to whom general purpose financial reports are primarily directed. Conceptual Framework IFRS Foundation B5 Accounting Framework for Insurance Institutions Resolution No. CD-SIBOIF-1028-1-NOV21-2017 PART B IFRS Version 2017

FC1.10 Paragraph 9 of the Conceptual Framework (1989) stated that, in the phrase of paragraph OB2, it was intended to encompass all users included in "existing and potential investors, lenders, and other creditors", (and the subsequently added advisors in the debate on investors' needs). Paragraph 9 of the Conceptual Framework (1989) also included a list of other potential users such as, customers, governments and their agencies, and the public, which is similar to the list of paragraph OB10, of those who may be interested in financial reports but are not primary users. FC1.11 Paragraph 10 of the Conceptual Framework (1989) stated that "investors are the providers of risk capital to the entity, the information contained in the financial statements that cover their needs, will also cover many of the needs that other users expect to satisfy in such financial statements" which could have been interpreted as limiting the scope only to investors. However, paragraph 12 explicitly states that the objective of financial statements is to provide information "that is useful to a wide range of users for making economic decisions". Therefore, the Conceptual Framework (1989) focuses on the needs of investors as representative of the needs of a wide range of users but did not identify a group of primary users. FC1.12 FASB Statement of Financial Concepts 1 referred to "existing and potential investors and creditors and other users in making rational investment, credit, and similar decisions" (paragraph 34). It also stated that "the principal groups of investors are holders of equity and debt securities" and "the principal groups of creditors are suppliers of goods and services that extend credit, customers and employees with claims, lending institutions, individual lenders, and holders of debt securities" (paragraph 35). A difference in the emphasis of the Conceptual Framework (1989), which highlighted risk capital providers, is that Statement of Financial Concepts 1 referred to "both those who desire investment security and those who desire to accept risk to obtain high rates of return" (paragraph 35). However, like the Conceptual Framework (1989), Statement of Financial Concepts 1 stated that the terms investors and creditors "may also encompass securities analysts and advisors, brokers, lawyers, regulatory agencies, and others who advise or represent the interests of investors and creditors or who in other ways are interested in how investors and creditors fare" (paragraph 35). FC1.13 Paragraphs OB3, OB5, and OB10 differ from the Conceptual Framework (1989) and Statement of Financial Concepts 1 for two reasons – to eliminate differences between the Conceptual Framework and Statement of Financial Concepts 1 and to be more direct by focusing on user decision-making regarding the provision of resources (but not excluding advisors). The reasons are discussed in paragraphs FC1.15 to FC1.24. Should there be a primary user group? FC1.14 The discussion paper and the proposed standard proposed identifying a group of primary users of financial reports. Some of those who responded to the proposed standard said that other users who have not provided, and are not considering providing resources to the entity, use financial reports for a variety of reasons. The Board Conceptual Framework B6 IFRS Foundation Accounting Framework for Insurance Institutions Resolution No. CD-SIBOIF-1028-1-NOV21-2017 PART B IFRS Version 2017

understood their information needs but concluded that without a defined group of primary users, the Conceptual Framework risked becoming excessively abstract or imprecise. Why are existing and potential investors, lenders, and other creditors considered the primary users? FC1.15 Some of those who responded to the discussion paper and the proposed standard suggested that the primary user group should be limited to existing shareholders or majority shareholders of the controlling entity. Others pointed out that the primary users should be existing shareholders and creditors, and that financial reports should focus on their needs. FC1.16 The reasons why the Board concluded that the primary user group must be the existing and potential investors, lenders, and other creditors of the reporting entity are: (a) Existing and potential investors, lenders, and other creditors have the most critical and immediate need to be informed in financial reports, and many cannot require the entity to provide them with information directly. (b) The responsibilities of the Board and the FASB require them to focus on the needs of participants in capital markets, which includes not only existing investors but also potential ones, and existing and potential lenders and other creditors. (c) The information that satisfies the needs of the specified primary users is likely the one that addresses the needs of users in both jurisdictions with a corporate governance model defined in the context of shareholders and those with a corporate governance model defined in the context of all types of stakeholder groups. FC1.17 Some of those who responded expressed the opinion that the specified primary user group was excessively broad and would result in too much information in financial reports. However, too much is a subjective judgment. In developing financial information requirements that satisfy the objective of such information, the boards will rely on qualitative characteristics and the cost constraint of useful financial information to discipline and avoid providing too much information. Should there be a hierarchy of users? FC1.18 Some of those who responded to the proposed standard who supported the composition of the primary user group also recommended that the Board should establish a hierarchy of primary users because investors, lenders, and other creditors have different information needs. However, the Board observed that individual users may have information needs and desires that are different from those of other users, and possibly in conflict with them, with the same type of interest in the reporting entity. General purpose financial reports intend to provide information common to users and cannot Conceptual Framework IFRS Foundation B7 Accounting Framework for Insurance Institutions Resolution No. CD-SIBOIF-1028-1-NOV21-2017 PART B IFRS Version 2017

accommodate all information requests. The Board will try to achieve the set of information that intends to satisfy the needs of the maximum number of users in cost-benefit terms. Information needs of other users who are not in the group of primary users Management information needs FC1.19 Some constituents asked about the interaction between general purpose financial information and management needs. The Board noted that certain information directed at primary users will likely satisfy some management needs but not all. However, management has the ability to access additional financial information, and therefore, general purpose financial information does not need to be explicitly directed at it. Regulator information needs FC1.20 Some constituents said that maintaining financial stability in capital markets (the stability of a country or region's economy or financial system) should be an objective of financial information. They pointed out that financial information should focus on the needs of regulators and fiscal policy makers who are responsible for maintaining financial stability. FC1.21 Other constituents opposed establishing an objective of maintaining fiscal stability. They said that financial statements should present the economic reality of the reporting entity with as little bias as possible, but that this presentation is not necessarily inconsistent with an objective of financial stability. By presenting economic reality, financial statements would lead to more informed decision-making and in that way support financial stability, even if that is not the primary objective.1 FC1.22 However, advocates of a financial stability objective were thinking of different consequences. They did not encourage the Board to require reporting entities to provide information for use by regulators and policy makers. Instead, they recommended that the Board consider the consequences of new financial information standards for the stability of global economies and financial systems, at least on occasions, assigning greater weight to that objective than to the information needs of investors, lenders, and other creditors. FC1.23 The Board recognized that the interests of investors, lenders, and other creditors usually overlap with those of regulators. However, 1 A group that expressed that opinion was the Financial Crisis Advisory Group (FCAG). The FCAG is composed of approximately 20 personalities with extensive experience in international financial markets interested in the transparency of financial information presentation. The FCAG was formed in 2009 to advise the Board and the FASB on the implications of the financial crisis for standard setting and potential changes in the global regulatory environment. Conceptual Framework B8 IFRS Foundation Accounting Framework for Insurance Institutions Resolution No. CD-SIBOIF-1028-1-NOV21-2017 PART B IFRS Version 2017

expanding the objective of financial information to include maintaining financial stability could, at times, create conflicts between objectives that the Board is not well prepared to resolve. For example, some may be of the opinion that the best way to maintain financial stability is to require entities not to report, or to delay reporting, changes in asset or liability values. That requirement would almost certainly deprive investors, lenders, and other creditors of information they need. The only way to avoid conflicts would be to eliminate or mitigate the existing objective of providing information to investors, lenders, and other creditors. The Board concluded that eliminating that objective would be inconsistent with its basic mission, which is to serve the information needs of capital market participants. The Board also highlighted that providing relevant and faithfully represented financial information can improve user confidence in the information, and thus contribute to promoting financial stability. Usefulness for decision making FC1.24 Both the Board's and the FASB's previous conceptual frameworks focus on providing information that is useful in making economic decisions as the fundamental objective of financial information. Those conceptual frameworks also noted that financial information that is useful in making economic decisions would also be useful for assessing how management has satisfied its responsibility as stewards. FC1.25 The discussion paper that led to Chapter 1 noted that the objective of financial information should focus on resource allocation decisions. Although most of those who responded to the discussion paper agreed that providing information useful for decision making was the appropriate objective, they pointed out that investors, lenders, and other creditors make other decisions supported by the presented financial information, in addition to resource allocation decisions. For example, shareholders voting on whether to retain or replace directors, and on how management members should be remunerated for their services, need information on which to base their decisions. Shareholder decision-making processes may include assessing how the entity's management works with management of competing entities in similar circumstances. FC1.26 The Board agreed with those who responded and highlighted that, in most cases, information designed for resource allocation decision making would also be useful for assessing management performance. Therefore, in the proposed standard that led to Chapter 1, the Board proposed that the objective of financial information is to provide financial information about the reporting entity that is useful to existing and potential investors, lenders, and other creditors in making decisions in their capacity as capital providers. The proposed standard also describes the role that financial statements may have in underpinning decisions related to the administration of an entity's resources. FC1.27 The proposed standard treated the Objective of Financial Information and Usefulness for Decisions in separate sections. The Board merged those two sections into Chapter 1 because usefulness for decision making is the objective of financial information. Therefore, both sections addressed the same points and provided more detail than was necessary. The merging of those two sections resulted in the elimination of separate sub-sections on usefulness in evaluating cash flow prospects and usefulness in assessing management stewardship. The Board did not intend