Accounting Standaards Advisory Forum meetinngConceptual Framewo
ork
December 2013

Profit or Losss/OCI
and Measure
ement

Ikuo Nish
hikawaChairmman, Accounting Standards Board ofo JapanThis paper haas been prepared by the ASBJ for the December 2013 ASSAF meeting.

Introduction
1.

On 18 July 2013, the IASB published for public comment a Discussion Paper, A
Review of the Conceptual Framework for Financial Reporting (hereinafterreferred to as “the DP”). The ASBJ highly appreciates the IASB’s efforts on theConceptual Framework project.

2.

In the DP, Section 6 discusses measurement and Section 8 discusses thepresentation of profit or loss and other comprehensive income (hereinafterreferred to as “OCI”).

In this paper, the ASBJ focuses on analysing therelationship between Section 6 and Section 8 of the DP. In many respects the
ASBJ shares common views with the proposals outlined in the DP. However,the ASBJ thinks that there are several areas where the DP could be improved.
3.

In order to contribute to the development of the revised Conceptual Framework,
the ASBJ discusses the following topics in this paper:
Chapter 1: Definitions of comprehensive income, profit or loss and OCI
Chapter 2: Nature of profit or loss
Chapter 3: Using two measurement bases for the same item
Chapter 4: Recycling
Supplementary considerations:・ Additional commentary on how to determine the measurement bases

・ Analysis of OCI items under existing IFRSs

Page 1 of 34

Executive Summary:
Chapter 1: Definitions of comprehensive income, profit or loss and OCI・ The ASBJ suggests defining comprehensive income, profit or loss and OCI as
separate elements of financial statements in the following manner:(a) Comprehensive income is the change in net assets during a period except
those changes resulting from transactions with owners in their capacity
as owners, whereby the recognised assets and liabilities comprising the
net assets are measured using measurement bases that are relevant fromthe perspective of reporting an entity’s financial position.
(b) Profit or loss is the change in net assets during a period except thosechanges resulting from transactions with owners in their capacity as
owners, whereby the recognised assets and liabilities comprising the net
assets are measured using measurement bases that are relevant from theperspective of reporting an entity’s financial performance.
(c) OCI is “the linkage factor” that is used when the measurements that are
relevant from the perspective of reporting an entity’s financial positiondiffer from the measurements that are relevant from the perspective ofreporting an entity’s financial performance.
・ The ASBJ’s view is that the difference between comprehensive income andprofit or loss is essentially a timing difference and conceptually theaccumulated amount of profit or loss for all accounting periods should equal theaccumulated amount of comprehensive income for all accounting periods.
Chapter 2: Nature of profit or loss
・ The ASBJ suggests describing the nature of profit or loss as follows:
Profit or loss represents an all-inclusive measure of irreversible outcomes ofan entity’s business activities in a certain period.
The phrase “irreversible outcomes of an entity’s business activities”
means that the uncertainty regarding the outcomes of an entity’sbusiness activities is reduced to the point where the outcomes are
irreversible or deemed irreversible.
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Executive Summary (continued):
Chapter 3: Using two measurement bases for the same item
・ The ASBJ thinks that two different measurement bases should be used for thesame item and thus OCI should be used as the linkage factor, when:(a) it is relevant from the perspective of reporting an entity’s financial
position to remeasure assets and liabilities that are exposed to certain
risks by using the information updated at the reporting date; but(b) such remeasurements are not relevant from the perspective of reporting an
entity’s financial performance.
・ There may be cases where using measurements that reflect the risk factors at
the reporting date are relevant from the perspective of reporting an entity’s
financial position, but the effects of these remeasurements are not relevant fromthe perspective of reporting an entity’s financial performance when theuncertainty regarding the outcomes of an entity’s business activities has notbeen reduced to the point where the outcomes are irreversible or deemed
irreversible. Such situations often occur when the time horizon is long.
Chapter 4: Recycling
・ The ASBJ’s view is that recycling would be achieved automatically as amechanism and, therefore, non-recycling items would not exist.
・ The ASBJ thinks that recycling occurs when:(a) related assets or liabilities are derecognised;(b) impairment losses are recognised for related assets; or(c) a natural reverse occurs with the passage of time.

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Chapter 1: Definitions of comprehensive income, profit or loss and OCI
4.

Section 2 of the DP discusses the elements of financial statements. The DP
proposes defining asset, liability, equity, income and expense as elements offinancial statements, while leaving comprehensive income, profit or loss andOCI undefined.

5.

However, the ASBJ suggests defining comprehensive income and profit or loss
as separate elements of financial statements in the following manner:(a)Comprehensive income is the change in net assets during a period
except those changes resulting from transactions with owners in theircapacity as owners, whereby the recognised assets and liabilities
comprising the net assets are measured using measurement bases thatare relevant from the perspective of reporting an entity’s financial
position.

(b)

Profit or loss is the change in net assets during a period except thosechanges resulting from transactions with owners in their capacity as
owners, whereby the recognised assets and liabilities comprising the net
assets are measured using measurement bases that are relevant from theperspective of reporting an entity’s financial performance.

6.

The definitions in the preceding paragraph are suggested under the premise that
two measurements would be used for certain assets and liabilities, although asingle measurement would be used for most assets and liabilities.
Measurements of assets and liabilities that are relevant from the perspective ofreporting an entity’s financial position (and are used to determine
comprehensive income) are presented in the statement of financial position.
Measurements of assets and liabilities that are relevant from the perspective ofreporting an entity’s financial performance (and are used to determine profit orloss) can be different from the measurements presented in the statement ofPage 4 of 34

financial position. In Chapter 3 of this paper, the ASBJ explores the situations
where two different measurement bases should be used for the same item.
7.

When comprehensive income is different from profit or loss, OCI is used as “thelinkage factor.” The ASBJ suggests that OCI be defined as an element offinancial statements in the following manner:
OCI is “the linkage factor” that is used when the measurements that are
relevant from the perspective of reporting an entity’s financial positiondiffer from the measurements that are relevant from the perspective ofreporting an entity’s financial performance.

8.

In the following paragraphs, the ASBJ considers (a) the elements of financial
statements (paragraphs 9 through 12 of this paper), and (b) the use of two
different measurement bases (paragraphs 13 through 15 of this paper).

9.

The ASBJ thinks that asset, liability, equity, profit or loss, comprehensive
income and OCI should all be treated as elements of financial statements1. The
ASBJ thinks that the elements of financial statements should be determined inlight of the objective of financial reporting. In particular, the ASBJ thinks thatthe following paragraphs in the IASB’s Conceptual Framework should beconsidered when elements of financial statement are determined:(a) General purpose financial reports provide information about the financial
position of a reporting entity, which is information about the entity’s
economic resources and the claims against the reporting entity. (OB12)(b) Changes in a reporting entity’s economic resources and claims result fromthat entity’s financial performance and from other events or transactions
such as issuing debt or equity instruments. (OB15)

1

The ASBJ thinks that income and expense may not necessarily need to be treated as elements of financial
statements if profit or loss, comprehensive income and OCI are elements and presented in the financial statements.

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(c) Information about a reporting entity’s financial performance helps users tounderstand the return that the entity has produced on its economic resources.
(OB16)
10.

Some elements of financial statements should be determined directly in light ofthe objective of financial reporting while other elements should be determinedconsidering the interrelation between the elements of financial statements(hereinafter referred to as “articulation”).

11.

First, the ASBJ thinks that asset, liability, equity and profit or loss should betreated as elements of financial statements that are derived directly from theobjective of financial reporting. The ASBJ thinks that the totals of assets,
liabilities and equity provide the most relevant information from the perspectiveof reporting an entity’s financial position and thus should be treated as elementsof financial statements. In addition, the ASBJ thinks that profit or loss provides
the most relevant information to report an entity’s financial performance2.

12.

Secondly, the ASBJ thinks that comprehensive income and OCI should betreated as elements of financial statements in order to represent the interrelation
between the elements of financial statements. When equity is treated as anelement of financial statements, it is necessary that comprehensive income isalso treated as an element of financial statements due to articulation3. OCI isalso needed as an element of financial statements due to articulation 4 when
profit or loss and comprehensive income are treated as elements of financial
statements.

2

The reason why profit or loss provides more relevant information than comprehensive income is described inparagraph 28 of this paper.
3
Investments by and distributions to owners also should be treated as elements of financial statements. Theinterrelation between the elements of financial statements can be illustrated as follows:
Equity at beginning of the period + Comprehensive income + Investments by and distributions to owners =Equity at end of the period.
4
The interrelation between the elements of financial statements can be illustrated as follows:
Comprehensive income – Profit or loss = OCIPage 6 of 34

13.

The ASBJ thinks that the view that two different measurement bases can be used
for certain assets and liabilities is consistent with the DP. Specifically, the DP
states the following:(a) Paragraph 6.15 of the DP states that measurement affects both the statementof financial position and the statement(s) of profit or loss and OCI;(b) Paragraph 6.76 of the DP states that one possible way of dealing withuncertainty about how an asset will contribute to future cash flows would be
to provide more than one measure of the asset and this could be done byusing one measure in the statement of financial position and using a
different measure to determine the amounts recognised in profit or loss; and(c) Paragraph 8.55 of the DP states that the IASB may occasionally decide thatan asset or a liability should be remeasured, but that information in profit orloss should be based on a measurement that differs from the one used in thestatement of financial position provided both measurements are meaningful,understandable and clearly describable.

14.

The DP classifies OCI items into three categories, namely “bridging items,”“mismatched remeasurements” and “transitory remeasurements.” However, the
ASBJ suggests a single category, namely “the linkage factor,” based on thedefinition suggested in paragraph 7 of this paper.

15.

Some may argue that comprehensive income can be determined systematically
based on the changes in net assets but that profit or loss cannot. However, the
ASBJ takes a different view that the difference between comprehensive income
and profit or loss arises solely from the differences in the measurement bases
used for certain assets and liabilities, and that both comprehensive income andprofit or loss are systematically determined based on the changes in net assets.
Accordingly, the difference between comprehensive income and profit or loss isessentially a timing difference and conceptually the accumulated amount ofPage 7 of 34

profit or loss for all accounting periods should equal the accumulated amount ofcomprehensive income for all accounting periods.

Page 8 of 34

Chapter 2: Nature of profit or loss
16.

In paragraph 5 of this paper, the ASBJ suggested defining profit or loss in thefollowing manner:
Profit or loss is the change in net assets during a period except thosechanges resulting from transactions with owners in their capacity as
owners, whereby the recognised assets and liabilities comprising the net
assets are measured using measurement bases that are relevant from theperspective of reporting an entity’s financial performance.

17.

The definition suggested in the preceding paragraph explains the mechanism
used to determine profit or loss, while leaving the nature of profit or loss
unexplained. In this Chapter, the ASBJ discusses the nature of profit or loss.

18.

The ASBJ suggests describing the nature of profit or loss in the following
manner:Profit or loss represents an all-inclusive measure of irreversible
outcomes of an entity’s business activities in a certain period.

19.

The ASBJ thinks that the key concepts in describing the nature of profit or loss
are “irreversible outcomes of an entity’s business activities” and “all-inclusive.”
In the following paragraphs, the ASBJ discusses these two key concepts in moredetail.

Irreversible outcomes of an entity’s business activities

20.

The phrase “irreversible outcomes of an entity’s business activities” means thatthe uncertainty regarding the outcomes of an entity’s business activities isreduced to the point where the outcomes are irreversible or deemed irreversible.

Page 9 of 34

21.

Users of financial statements need information to help them assess the prospects
for future net cash inflows to an entity5. Information about a reporting entity’s
past financial performance and how its management discharged its
responsibilities is usually helpful in predicting the entity’s future returns on its
economic resources6.

22.

The ASBJ thinks that profit or loss should represent the “irreversible outcomesof an entity’s business activities” that reflect an entity’s past financial
performance in order to help users assess the prospects for future net cash
inflows to the entity. It is important to report on “irreversible outcomes of anentity’s business activities” because information is not sufficiently robust if
profit or loss includes the outcomes of an entity’s business activities whose
uncertainty has not been reduced to the point where the outcomes are
irreversible or deemed irreversible and such information may mislead users inassessing the prospects for future net cash inflows to the entity.

23.

When an entity enters into business activities, the entity has an expectation thatcertain future cash flows will be generated. However, the outcomes of anentity’s business activities normally are initially uncertain. The ASBJ thinksthat profit or loss should be recognised when the uncertainty regarding theoutcomes of an entity’s business activities is reduced to the point where theoutcomes are irreversible or deemed irreversible7.

24.

For example, in the case of debt securities, an entity could generate cash flows
equivalent to the current market price of the asset if it sold the assets at thereporting date, but the entity may not be sure whether it will hold them for5

Paragraph OB3 of the IASB’s Conceptual Framework.
Paragraph OB16 of the IASB’s Conceptual Framework.
7
For example, profit or loss should be recognised when an asset is sold because the uncertainty regarding theoutcomes of an entity’s business activities is totally extinguished through the transfer of control. In addition, the
ASBJ thinks that recognising expenses can be explained using this concept. For example, depreciation of property,
plant and equipment should be recognised in profit or loss because the uncertainty regarding the outcomes of anentity’s business activities is reduced to the point where the outcomes are deemed irreversible to the extent that theasset’s economic benefits have been consumed.
6

Page 10 of 34

collection according to terms or sell them. In this case, the uncertainty regarding
how the asset contributes to future cash flows (that is, either holding it forcollection according to terms or selling it) has not been reduced to the point
where the outcomes are irreversible or deemed irreversible. Accordingly, gains
or losses from remeasurements that reflect the changes in the current market
price should not be recognised in profit or loss. On the other hand, when theassets are sold, the uncertainty is extinguished and thus profit or loss should berecognised.
25.

The phrase “irreversible outcomes of an entity’s business activities” does notsuggest cash-based accounting. What would be considered as the outcomes ofan entity’s business activities can vary depending on the initial expectations
when the entity enters into business activities.

26.

For example, in cases where investments are made for trading purposes, theoutcomes of an entity’s business activities are deemed irreversible because it ispresumed that the entity willingly accepted the uncertainty regarding thefluctuations in the current market price and thus the changes between cost andcurrent market price represent the outcomes of the business activities in light ofthe purpose of such investments. Accordingly, the changes in the current market
price should be recognised in profit or loss as they occur.

27.

In addition, the ASBJ thinks that the robustness of profit or loss is also
necessary from the perspective of stewardship 8 .

When an entity provides

information regarding how its management discharged its responsibilities, the
ASBJ thinks that it is important to report profit or loss in instances where theuncertainty regarding the outcomes of an entity’s business activities is reduced
to the point where the outcomes are irreversible or deemed irreversible.

8

Paragraph OB4 of the IASB’s Conceptual Framework.

Page 11 of 34

28.

As discussed in Chapter 1 of this paper, the ASBJ thinks that bothcomprehensive income and profit or loss should be treated as elements offinancial statements. Comprehensive income is an important element required
to understand the relationships between primary financial statements, but
comprehensive income may not be sufficiently meaningful from the perspectiveof reporting an entity’s financial performance because comprehensive income,as suggested in paragraph 5 of this paper, would be determined based on themeasurements which are relevant from the perspective of reporting an entity’s
financial position. Furthermore, when measuring certain items to determine
comprehensive income, the uncertainty regarding the outcomes of an entity’sbusiness activities may not have been reduced to the point where the outcomes
are irreversible or deemed irreversible because the measurement bases are
determined from the perspective of reporting the entity’s financial position. On
the other hand, profit or loss provides information about an entity’s pastfinancial performance through the selection of appropriate measurement bases.
Accordingly, the ASBJ thinks that profit or loss, apart from comprehensive
income, is necessary.

All-inclusive29.

The phrase “all-inclusive” suggests that all transactions and events that occur ina certain period are taken into consideration.

30.

As described in paragraph 15 of this paper, the ASBJ thinks that the difference
between comprehensive income and profit or loss is essentially a timing
difference and conceptually the accumulated amount of profit or loss for all
accounting periods should equal the accumulated amount of comprehensive
income for all accounting periods.

31.

In addition, the ASBJ thinks that the accumulated amount of profit or loss for all
accounting periods should equal the accumulated amount of net cash flows,
Page 12 of 34

other than net cash flows resulting from transactions with owners in theircapacity as owners, for all accounting periods. When assessing the value of anentity, users of financial statements normally depend on flow information toassess the prospects for future net cash inflows to that entity9. Users of financial
statement have suggested that profit or loss is one of the most useful indicatorsthat they can refer to. However, these users may find it difficult to refer to profit
or loss if the integrity of profit or loss information is not supported by theconsistency with cash flows.
32.

The concept of “all-inclusive” suggests that both expected and unexpected
outcomes are explicitly included in profit or loss. In the course of businessactivities both expected outcomes and unexpected outcomes, or windfalls which
had not been initially expected, can occur. By requiring the concept of “allinclusive,” the so-called “windfall” will be included in profit or loss.

33.

In addition, the ASBJ thinks that the concept of “all-inclusive” is consistent withthe stewardship notion.

From the perspective of stewardship, financial

statements should be all-inclusive and any profit or loss should be disclosed
even if certain transactions or events are considered non-recurring because thisinformation has implications for assessing management competence.
34.

Profit or loss is different from operating income because it considers alltransactions and events that occur in a certain period. The concept of “allinclusive” ensures the integrity of profit or loss as the primary source of
information about the return an entity has generated on its economic resources.
The ASBJ thinks that operating income is useful in predicting future sustainable
income. However, the ASBJ thinks that operating income is useful only as longas it is disclosed as a subset of profit or loss which in-turn is consistent with cash
flows.

9

Stock information can be also useful in assessing future net cash inflows to an entity. In particular, this isapplicable to assets that generate cash flows by themselves.

Page 13 of 34

Chapter 3: Using two measurement bases for the same item
35.

The discussion in Chapter 1 of this paper presumes that two different
measurement bases can be used for certain assets and liabilities, although asingle measurement basis would be used for most assets and liabilities. In this
Chapter, the ASBJ discusses when two different measurement bases should be
used for the same item 10. In addition, further analysis, separately discussing
assets and liabilities, is provided later in this paper.

36.

The ASBJ thinks that two different measurement bases should be used for thesame item and thus OCI should be used as “the linkage factor,” when:(a)

it is relevant from the perspective of reporting an entity’s financial
position to remeasure assets and liabilities that are exposed to certain
risks by using the information updated at the reporting date; but(b)such remeasurements are not relevant from the perspective of reportingan entity’s financial performance.

37.

Assets and liabilities are exposed to various risks, including market risk andcredit risk.

Market risk includes the effects of changes in macroeconomic

factors, including interest rates, foreign exchange rates and stock prices.
Appendix A of this paper illustrates the relationships between existing OCI
items and risk exposures.
38.

Approaches to reflect such risk exposures may include:(a)10

measuring assets or liabilities by using current market prices;

Consistent with the proposals in the DP, this paper groups measurements into three categories:(a) cost-based measurement;(b) current market price; and(c) cash-flow-based measurement.

Fair value is included in current market price under this categorisation.

Page 14 of 34

(b)measuring assets or liabilities by using other cash-flow-based
measurements where inputs are updated at the reporting date; and

(c)
39.

disclosing risk exposure information in the notes to financial statements.

The ASBJ thinks that oftentimes approaches (a) and (b) described in thepreceding paragraph are relevant from the perspective of reporting an entity’s
financial position. This is because cost-based measurements or other cash-flowbased measurements based on information available at initial recognition are
sometimes “stale” when users of the statement of financial position assess theamount, timing and uncertainty of future net cash inflows to the entity.
Accordingly, there are cases where using measurements that reflect risk
exposures at the reporting date can be more relevant.

40.

However, the effects of remeasurements are not relevant from the perspective ofreporting an entity’s financial performance when the uncertainty regarding theoutcomes of an entity’s business activities has not been reduced to the point
where the outcomes are irreversible or deemed irreversible. Such situations
often occur when the time horizon is long.

41.

The effects of remeasurements are not relevant from the perspective of reportingan entity’s financial performance because the effects of remeasurements thatreflect the risk factors (for example, market risks including interest rate risk andstock price risk) at the reporting date may not immediately suggest ultimate cash
flows or such factors could significantly fluctuate before the ultimate cash flows
occur. In these situations, the effects of remeasurements should not be includedin the returns that an entity has generated on its economic resources.
Accordingly, the ASBJ thinks that such effects of remeasurements should not be
included in profit or loss.

Page 15 of 34

42.

The ASBJ’s view described above is similar to the characteristics of “transitory
remeasurements” proposed in paragraphs 8.88 and 8.89 of the DP11. In the DP,transitory remeasurements and bridging items are independently different
classifications, but the ASBJ thinks that it is the characteristics of transitory
remeasurements that are the factors which necessitate the use of OCI as thelinkage factor.

43.

The ASBJ’s view that OCI should be associated with risk exposures is
consistent with the findings of the research on the use of OCI, which was carriedout by the ASBJ and presented to the IASB at the February 2013 IASB Board
meeting. The findings of the research indicated that the ratios of OCI to profit
or loss (or the ratios of accumulated OCI to total equity) were high when thetime horizon was long and macroeconomic factors fluctuated significantly.

11

Paragraph 8.88 of the DP states that the IASB should consider recognising items of income and expense in OCI ifthey have all of the following characteristics:(a) the asset will be realised, or the liability will be settled, over the long-term;(b) the current period remeasurement is likely to reverse fully, or significantly change (in either direction), overthe holding period of the asset or the liability; and(c) recognising the current period remeasurement fully or partly in OCI enhances the relevance andunderstandability of profit or loss as the primary indicator of the return that the entity has made on its economic
resources.

Page 16 of 34

Chapter 4: Recycling
44.

Based on the definitions of comprehensive income, profit or loss and OCI
suggested in this paper (Please refer to paragraphs 5 and 7 of this paper), the
ASBJ discusses how and when items should be recycled.

45.

Paragraph 7 of IAS 1 Presentation of Financial Statements defines
reclassification adjustments (recycling) as follows:
Reclassification adjustments are amounts reclassified to profit or loss in thecurrent period that were recognised in other comprehensive income in thecurrent or previous periods.

46.

The ASBJ thinks that OCI is used because although both comprehensive income
and profit or loss figures are determined based on the changes in net assets,different measurement bases are used for certain assets and liabilities indetermining these figures. In cases where the measurement bases are different
from the perspectives of reporting an entity’s financial position and financial
performance, the ASBJ thinks that recycling occurs when:

47.

(a)

related assets or liabilities are derecognised;(b)

impairment losses are recognised for related assets; or(c)a natural reverse occurs with the passage of time.

When assets or liabilities are derecognised, the carrying amounts of the assets or
liabilities would be reduced to zero. If different measurements are used from theperspectives of reporting an entity’s financial position and financial
performance, comprehensive income will vary from profit or loss by the amountequal to the difference between the amounts those assets or liabilities had
previously been recognised at when such assets or liabilities are derecognised.
As a result, recycling would be achieved automatically.

Page 17 of 34

48.

An example of the situation referred to in paragraph 46(b) of this paper would
be when impairment losses are recognised for available-for-sale securities under
IAS 39 Financial Instruments: Recognition and Measurement, where thedifferent measurement bases are used from the perspectives of reporting an
entity’s financial position and financial performance. When impairment losses
are recognised, both measurements would be reduced to fair value and thus
comprehensive income would differ from profit or loss by the amount equal tothe difference between the amounts the assets had previously been recognised at.
As a result, recycling would be achieved automatically.

49.

An example of the situation referred to in paragraph 46(c) of this paper would be
OCI items under the Revised Exposure Draft (ED/2013/7) Insurance Contracts.
The difference between the effects of discounting cash flows at a current rate at
the end of the period, and the effects of discounting those same cash flows at therate that applied at initial recognition would be recognised in othercomprehensive income and would unwind automatically over time.

50.

Under all of the situations referred to in paragraph 46 of this paper, recycling
would be achieved automatically as a mechanism and, therefore, non-recycling
items would not exist. Accordingly, the difference between comprehensive
income and profit or loss is essentially a timing difference and conceptually theaccumulated amount of profit or loss for all accounting periods should equal theaccumulated amount of comprehensive income for all accounting periods.

Page 18 of 34

Supplementary considerations: Additional commentary on how todetermine the measurement bases
51.

In Chapter 3 of this paper, the ASBJ discusses using two different measurement
bases for the same item. In the following paragraphs, the ASBJ will explore
when two different measurement bases should be used for the same item,
discussing separately assets and liabilities.

Assets52.

Paragraph 6.73 of the DP explains that the IASB’s preliminary view is that themeasurement used for a particular asset should depend on how the asset
contributes to future cash flows.

Four general ways in which an asset

contributes to future cash flows are explained below:
How the asset contributes to future cash flows
Using it in business operations to generate

Likely measurement basis
Cost-based measurement

revenues or income
Selling it

Current market price

Holding it for collection according to terms

Cost-based measurement (but notfor derivatives)

Charging others for rights to use it

Cost-based measurement orcurrent market price

53.

The ASBJ agrees with the view that the measurement basis used for a particularasset should depend on how the asset contributes to future cash flows. For eachcategory, the ASBJ discusses the measurement bases that are relevant from theperspective of reporting an entity’s financial position and the measurement
bases that are relevant from the perspective of reporting an entity’s financial
performance.
Page 19 of 34

Using an asset in business operations to generate revenues or income

54.

The ASBJ thinks that cost-based measurement is relevant from the perspectivesof reporting both an entity’s financial position and financial performance
because the changes in current market prices do not have any relationship to the
future cash flows that will be generated from using the assets in businessactivities.

55.

It can be argued that management always has the option to sell the assets orcontinue to use them in order to generate revenues or income in business
operations and whether assets should be measured at current market prices inorder to report the basis for the management’s decisions to continue to use theassets should be considered from the perspective of reporting an entity’s
financial position.

Although the current market price or cash-based

measurement may be relevant from the perspective of reporting an entity’s
financial position, it is difficult to uniquely determine the current market price or
cash-flow-based measurement because such measurement can vary dependingon the other assets to be combined with when an asset is used together withother assets to generate cash flows. Accordingly, cost-based measurements
would be the only feasible option for these types of assets.
Selling an asset

56.

The ASBJ thinks that the current market price is relevant for an asset held to be
sold, provided that the assets classified in this category are limited to thoseinvestments held for trading.

57.

In this case, the ASBJ thinks that the current market price is relevant from theperspective of reporting an entity’s financial position because the entity cangenerate cash flows that are equivalent to the current market price. Furthermore,
the ASBJ thinks that the current market price is relevant from the perspective ofreporting an entity’s financial performance because the outcomes of the entity’s
Page 20 of 34

business activities are deemed irreversible and the changes between cost andcurrent market price represent the outcomes of the investment in light of the
purpose of the transactions.
58.

In the ASBJ’s view, derivatives except for those used in cash flow hedges 12
should be classified in this category. Accordingly, the current market price isrelevant from the perspectives of both reporting an entity’s financial position
and financial performance for such items.
Holding an asset for collection according to terms

59.

The ASBJ agrees with the proposals in the DP that cost-based interest income,along with bad debt expenses as estimated by management, is likely to provide
relevant information.

The ASBJ thinks that this is applicable from theperspectives of reporting both an entity’s financial position and financial
performance.
60.

However, there may be cases where management intends either (a) to hold anasset for collection according to terms or (b) to sell the asset where an entity has
the practical ability to do so. In this case, the ASBJ thinks that the current
market price is relevant from the perspective of reporting an entity’s financial
position because the entity can generate cash flows equivalent to the current
market price if it wishes to do so. From the perspective of reporting an entity’s
financial performance, cost-based measurement is relevant because theuncertainty regarding whether the cash flows will actually occur at current
market price has not been reduced to the point where the outcomes are
irreversible or deemed irreversible.

12

Paragraphs 77 and 78 of this paper discuss the treatment of cash flow hedges.

Page 21 of 34

Charging others for rights to use an asset

61.

The ASBJ thinks that cost-based measurement is relevant from the perspectiveof reporting an entity’s financial position when management primarily intends toearn rental income. This is because the current market price does not have any
relationship with future cash flows that will generated from charging others forrights to use the assets.

62.

However, there may be cases where management intends either (a) to earn rental
income or (b) to sell the asset where an entity has the practical ability to do so.
In this case, the ASBJ thinks that the current market price is relevant from theperspective of reporting an entity’s financial position because the entity cangenerate cash flows equivalent to the current market price if it wishes to do so.
From the perspective of reporting an entity’s financial performance, the ASBJ
thinks that cost-based measurement is relevant because the uncertainty regarding
the outcomes of the entity’s business activities is not reduced to the point where
the outcomes are irreversible or deemed irreversible when the entity bears therisk relating to any fluctuations in the residual value of the assets.
Assets: Summary63.

The following table summarises the ASBJ’s views discussed in paragraphs 52
through 62 of this paper.13

13

Although it is not included in the table, it is necessary to determine whether impairment has occurred in order toensure that its assets are carried at no more than their recoverable amount. When impairment losses are recognised,current market price or cash-flow-based measurement will be used from the perspectives of reporting an entity’s
financial position and financial performance.

Page 22 of 34

How the asset contributes to future
cash flows

Likely measurement basis
From the perspective

From the perspectiveof reporting anof reporting an

entity’s financial

entity’s financial

position

performance

Using an asset in business

Cost-based

Cost-based

operations to generate revenues ormeasurement

measurement

Selling an asset (held for trading)Current market price

Current market price

Holding an asset for collection

Cost-based

Cost-based

according to terms

measurement

measurement

Either holding an asset for

Current market priceCost-based

incomecollection according to terms or

measurement

selling it
Charging others for rights to use an

Cost-based

Cost-based

asset

measurement

measurement

Either charging others for rights to

Current market priceCost-based

use an asset or selling it

measurement

Liabilities

64.

Regarding the appropriate measurement bases for liabilities, the DP states thefollowing:(a)Paragraph 6.97 of the DP states that the nature of a liability and the way
it will be settled are important in identifying the appropriate
measurement for that liability. Paragraph 6.98 goes on to say thatliabilities fall into two groups – those with stated terms and those
without stated terms.

Page 23 of 34

(b)Paragraph 6.99 of the DP states that cash-flow-based measurement may
be the only possible option for liabilities without stated terms.

(c)Paragraph 6.100 of the DP states that for some types of contractual
liabilities that have stated terms but highly uncertain settlement
amounts that have not yet been determined (for example, insurance
contracts and post-employment benefits), a cash-flow-based
measurement may also provide the most relevant information.

(d)Paragraph 6.101 of the DP states that liabilities with stated terms arethose that come from contracts, statutes or regulations that state either asettlement amount or the method for determining the settlement amountand there are three ways in which an entity might settle a liability withstated terms.

65.

The following table summarises the proposals in the DP.
How the liability is settled or fulfilled

Likely measurement basis

Liabilities without stated terms

Cash-flow-based measurement

Liabilities which have stated terms but

Cash-flow-based measurement

highly uncertain settlement amounts
that have not yet been determined
Paying cash or delivering other assets

Cost-based measurement (but not foraccording to the stated terms

derivatives)

Being released by the creditor on

Current market pricetransferring the obligation to another
party
Performing services or paying others to

Cost-based measurement

perform services
66.

The ASBJ generally agrees with the proposals described above. The ASBJ
thinks that the current market price would not be relevant unless the liability canPage 24 of 34

be transferred because the current market price has no relationship with actual
cash flows.

Therefore, for liabilities other than derivatives 14 , a cost-based

measurement or cash-flow-based measurement should be used, depending on theterms of the liability.
67.

The ASBJ thinks that although a single measurement basis should be used formost liabilities, two different measurement bases can be used for liabilities
which have stated terms but highly uncertain settlement amounts that have notyet been determined15.
Liabilities which have stated terms but highly uncertain settlement amounts that have
not yet been determined

68.

When a liability has stated terms but a highly uncertain settlement amount thathas not yet been determined is remeasured by using a cash-flow-based
measurement, it may be relevant to use inputs that are updated at the reporting
date from the perspective of reporting an entity’s financial position.

For

example, in the case of remeasuring insurance liabilities, using the discount rate
at the reporting date may more faithfully represent insurance liabilities thanusing the discount rate at initial recognition.
69.

However, from the perspective of reporting an entity’s financial performance, it
may not be relevant to recognise gains or losses using inputs that are updated at
the reporting date. For example, in the case of remeasuring insurance liabilities,
recognising gains or losses due to changes in discount rates may not be relevant
because the effects of discounting do not have any relationship with actual cash
flows. In this case, using the inputs applied at initial recognition can be relevant.

14

Measurement of derivatives is not considered in this paper.
In addition, paragraphs 84 through 87 of this paper discuss the change in fair value due to the issuer's own credit
risk relating to financial liabilities designated at fair value through profit or loss, where two measurements should be
used for the same item.
15

Page 25 of 34

70.

Based on the discussions above, two different measurement bases can be used
when remeasuring liabilities which have stated terms but highly uncertain
settlement amounts that have not yet been determined due to different inputs.
Liabilities: Summary71.

The table below summarises the ASBJ’s views that are discussed in paragraphs
64 through 70 of this paper.
How the liability is settled orfulfilled

Liabilities without statedterms
Liabilities
which havestated terms
but highly
uncertain
settlement
amounts thathave not yet
been
determined

In principle

Exception

Paying cash or deliveringother assets according to thestated terms

Likely measurement basis
From the perspective ofFrom the perspective ofreporting an entity’sreporting an entity’s

financial position

financial performanceCash-flow-based

Cash-flow-based

measurement

measurement

Cash-flow-based

Cash-flow-based

measurement

measurement

Cash-flow-based

Cash-flow-based

measurement (using

measurement (using

inputs updated at the

inputs at initialreporting date)recognition)

Cost-based

Cost-based

measurement (but notmeasurement (but notfor derivatives)

for derivatives)

Being released by the creditor Current market priceon transferring the obligation
to another party

Current market price

Performing services or paying Cost-based
others to perform services
measurement

Cost-based
measurement

Page 26 of 34

Supplementary considerations: Analysis of OCI items under existing
IFRSs
72.

In paragraph 5 of this paper, the ASBJ suggested definitions of comprehensive
income and profit or loss. Following on from these definitions, in paragraph 7of this paper, the ASBJ suggested defining OCI as “the linkage factor” that isused when the measurements that are relevant from the perspective of reportingan entity’s financial position differ from the measurements that are relevantfrom the perspective of reporting an entity’s financial performance.

73.

Because justification of existing accounting standards is not its objective, theConceptual Framework under review does not necessarily need to be consistent
with existing accounting standards. However, the ASBJ believes that OCI items
under existing IFRSs can generally be explained as the linkage factor that links
comprehensive income and profit or loss. The linkage factor concept is similar
to the “bridging items” concept in the DP. Accordingly, the ASBJ will focus its
discussions on the OCI items that are proposed as “mismatched remeasurements”
and “transitory remeasurements” in the DP.

Net investment in foreign operations

74.

The DP classifies the exchange differences relating to foreign operations as
mismatched remeasurements. However, the ASBJ thinks that this OCI item canbe explained as a linkage factor.

75.

IAS 21 The Effects of Changes in Foreign Exchange Rates requires that assets
and liabilities for each statement of financial position presented be translated at
the closing rate at the date of that statement of financial position to depict anentity’s financial position. Additionally, the standard requires that income andexpenses for each statement presenting profit or loss and other comprehensive
income be translated at exchange rates at the dates of the transactions to depict
an entity’s financial performance.
Page 27 of 34

76.

Although the DP does not explicitly discuss foreign currency translation, the
ASBJ thinks that the relationship between foreign currency translation andmeasurement should be clarified. Regardless of how the relationship will beclarified, considering the figures after translation, the ASBJ thinks that using
two sets of different exchange rates (that is, the rates that are used to translate
assets and liabilities in the statement of financial position and the rates that areused to translate income and expenses in the statement of profit or loss and othercomprehensive income) can be treated in the same way as using two different
measurement bases. In this case, the ASBJ thinks that the exchange differences
relating to foreign operations can be explained as a linkage factor.

Cash flow hedges

77.

The DP classifies the OCI item arising from cash flow hedges as mismatchedremeasurements. However, the ASBJ thinks that, in general, the OCI item
arising from cash flow hedges can be explained as a linkage factor16.

78.

From the perspective of reporting an entity’s financial position, the current
market price is relevant in order to help users assess the prospects of future net
cash flows to an entity. On the other hand, from the perspective of reporting an
entity’s financial performance, the current market price is not relevant and,instead, the hedging instrument should continue to be measured at zero17 until
the hedged transactions occur. When the hedged transactions occur, the hedging
instrument should be measured at the amount that effectively offsets gains orlosses of the associated hedged item. The ASBJ thinks that the difference
between the two measurements should be recognised in OCI as a linkage factor.

16
The ASBJ acknowledges that, in the case of a hedge of a forecasted transaction which subsequently results in therecognition of a non-financial asset or non-financial liability under paragraph 98 (a) of IAS 39 Financial
Instruments: Recognition and Measurement, accumulated OCI balances would remain even after the hedging
instruments are derecognised. In such cases, the ASBJ thinks that two different measurement bases are not used and,accordingly, such cash flow hedges cannot be explained as a linkage factor.
17This assumes that the entity initially recognises the hedging instrument at nil.

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Revaluations of property, plant and equipment and intangible assets

79.

The ASBJ thinks that taking into account the objectives of the revaluation model,
the use of OCI should be reconsidered for revaluations of property, plant andequipment and intangible assets. Adjusting the gains and losses as an equity
component, not as an OCI item, could be appropriate if the objective of therevaluation model was to address fluctuations of prices based on the concept ofcapital maintenance. The ASBJ will not explore this issue further because thediscussion of capital maintenance is beyond the scope of this paper.
Nevertheless, the ASBJ thinks that this item should not be discussed under thepremise that it should be accounted for as an OCI item.

Pensions

80.

Paragraphs 8.72 through 8.74 of the DP discuss the treatment of pensions. The
DP does not classify the remeasurement of a net defined benefit pension asset or
liability in accordance with IAS 19 Employee Benefits as a bridging item nor asa mismatched remeasurement.

The DP explains that this item cannot beclassified as a bridging item due to the issues relating to resetting discount rates
and recycling. Under Approach 2B of the DP, this item is classified as atransitory remeasurement.
81.

The ASBJ thinks that a thorough analysis of the accounting for defined benefit
plans is beyond the purpose of this paper. Accordingly, the ASBJ will focus on
the recycling of the remeasurements of defined benefit assets or liabilities
without discussing other accounting treatments.

82.

Agenda Paper 10H (a) for the April 2013 IASB Board meeting discussed therecycling of remeasurements of defined benefit assets or liabilities. That paper
considered several alternatives to recycle the remeasurements of defined benefit
assets or liabilities. Alternatives in that paper included:

Page 29 of 34

(a)recycling would occur at the termination of each individual
contract; and(b)recycling would occur when the scheme itself is disposed of orclosed.

83.

Although it may be difficult to determine an appropriate recycling model, the
ASBJ thinks that an acceptable recycling model can be developed and thus
remeasurements of defined benefit assets or liabilities can be explained as a
linkage factor.

Financial liabilities designated at fair value through profit or loss

84.

Changes in the fair value of financial liabilities designated at fair value throughprofit or loss, that are due to the issuer's own credit risk, are classified by the DP
as possibly mismatched remeasurements under Approach 2A of the DP and astransitory remeasurements under Approach 2B of the DP.

85.

Paragraphs 6.128 through 6.130 of the DP discuss the entity’s own credit risk.
These paragraphs discuss whether gains should be recognised when a liability is
discounted at a higher rate either because an entity’s credit standing isdeteriorating or because there has been an increase in the market price forbearing the risk of changes in the probability of default.

86.

The ASBJ thinks that this item can be explained as a linkage factor that is used
when the measurements that are relevant from the perspective of reporting an
entity’s financial position differ from the measurements that are relevant fromthe perspective of reporting an entity’s financial performance.

87.

When financial liabilities are measured at fair value, such fair value would
reflect the entity’s own credit. The ASBJ thinks that reflecting all risks isrelevant from the perspective of reporting an entity’s financial position.
However, it may not be relevant from the perspective of reporting an entity’s

Page 30 of 34

financial performance because it is unreasonable to recognise gains due to thedeteriorations of the entity’s credit standing.

Accordingly, two different

measurement bases should be used for this item and, therefore, OCI would be
used as a linkage factor.

Designated investments in equity instruments

88.

The DP states that designated investments in equity instruments are unlikely to
be classified as either bridging items or mismatched remeasurements unless anoperational impairment model can be developed under Approach 2A. Under
Approach 2B, this item is classified as a transitory remeasurement.

89.

The ASBJ thinks that different accounting treatments should be applied
depending on the purpose of the equity investments.

90.

As discussed in paragraphs 56 through 58 of this paper, for equity instruments
held for trading that will contribute to future cash flows by “selling an asset,” the
ASBJ thinks that the current market price is relevant from the perspectives ofreporting both an entity’s financial position and financial performance.
Accordingly, a single measurement basis should be used and thus OCI would
not be used.

91.

Table 8.2 of the DP states that fair value is generally regarded as the most
relevant measure of performance for equity instruments, except, arguably, forsome strategic investments. Although it may be difficult to define strategic
investments, the ASBJ thinks that the scope of such type of investments can be
identified18.

18

The ASBJ does not think that all investments in equity instruments other than those held for trading may qualify as
strategic investments. For example, it may be useful to identify the scope of strategic investments considering thefollowing factors:(a) The objective of the investment is not to gain capital appreciation, but to retain or strengthen business ties
with investees.
(b) The performance of the investment is not evaluated primarily based on changes in its fair value.
(c) Normally, the holding period of the investment is long.

Page 31 of 34

92.

If a strategic investment has the objective of retaining or strengthening businessties with the investee, the ASBJ thinks that, theoretically, a cost-based
measurement is relevant from the perspectives of reporting both an entity’s
financial position and financial performance because the investments cangenerate cash flows through the enhanced relationships with investees together
with other assets used in the entity’s business activities. However, the current
market price may be relevant from the perspective of reporting an entity’s
financial position considering the fact that these investments are financial
instruments. In this case, OCI would be used as a linkage factor.

Page 32 of 34

Appendix A: Relationship between OCI items under existing IFRSs andrisk exposures
IFRS orproposed
IFRS

Recognised
asset or liability

OCI item

Type of risk
exposures

Relatedmacroeconomic
factors

IFRS 92012 ED

Financial assets
measured at fairvalue through
OCI

Changes in fairvalue

Market risk

Interest rates

Insurance
Contracts2013 ED

Insurance
contracts

Changes in
discount rate

Market risk

Interest rates

IAS 16,
IAS 38,IFRS 6

Property, plant
Revaluationand equipment, gain or
intangible assets reversals
and explorationand evaluation
assetsMarket risk

Prices of property,
plant andequipment etc.

IAS 19Pensions net
defined benefit
assets or
liabilities

Remeasurement Market risk

IAS 21

Net investment
in foreign
operations (andhedges)Exchangedifferences

Market risk

Exchange rates

IFRS 92010 ED

Cash flow
hedging
instruments

Effective
portion ofchange in fairvalue

Market risk

Exchange rates,interest rates

IFRS 9Financialliabilities
designated atfair value
through profit
or loss

Change in fairvalue due toissuer’s own
credit risk

Credit risk

N/A

IFRS 9Designatedinvestments inequityinstruments

Change in fairvalue

Market risk

Stock prices

Stock prices,interest rates

Page 33 of 34

Contacts
Ikuo Nishikawa

Chairman,ikuo.nishikawa@asb.or.jp

Accounting Standards Board of Japan
Takao Kamiya

Director of Technical Activities,

t.kamiya@asb.or.jp

Accounting Standards Board of Japan

Page 34 of 34