ASBJ Short Paper Series No.1
Conceptual Framework
May 2014

Is OCI Unnecessary?

Accounting Standards Board of Japan

Summary of the Paper
1. This paper is the first in a series of short discussion papers that the ASBJ plans to publish
in order to contribute to the global discussions regarding financial reporting standards.
2. This paper explores the possibility of abolishing or minimising the use of othercomprehensive income (OCI) in the financial statements1. In doing so, this paper firstconsiders the usefulness of financial information if we were asked to presume that thesame measurement basis must be used for measuring an asset or a liability both from theperspective of the entity’s financial performance and its financial position. In light ofthe decision-usefulness of financial information, this paper concludes that, if the samemeasurement basis were to be selected for measuring an asset or a liability, suchmeasurement basis should be determined solely from the perspective of the entity’s
financial performance.
3. At the same time, this paper also concludes the assumption to always use the samemeasurement basis for measuring an asset or a liability from the perspective of theentity’s financial performance and its financial position is unrealistic on the grounds thatusers have increasingly called for more information measured at current value on the faceof the balance sheet. In addition, the Conceptual Framework already indicates that the
purposes of balance sheets and income statements are not necessarily congruent witheach other, and that the use of two different measurement bases could promote theusefulness of financial information presented on the face of the financial statements.
Accordingly, this paper concludes that setting the unfounded goal to abolish or minimise
the use of OCI would be inappropriate or unfeasible, and the use of OCI as the “linkage
factor” is necessary to maintain the usefulness of financial information presented on theface of the financial statements.

1

This paper has been prepared on the presumption that the statement of profit or loss and OCI (the income statement) ispresented in a multi-layered format with appropriate subtotals. However, this paper does not specifically discuss whether
operating income should be presented in the income statement, or whether items should be separately presented in the income
statement based on whether those items are recurring or non-recurring in nature. In addition, this paper does not discuss
whether some or all of items presented in OCI should be subsequently recycled at some point in time.

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Background
Recent Developments

4. The IASB initiated the project to review the Conceptual Framework for Financial
Reporting (hereinafter referred to as the “Conceptual Framework”), in response to thecomments received on Agenda Consultation 2011. In July 2013, the IASB issued a
Discussion Paper, A Review of the Conceptual Framework for Financial Reporting(hereinafter referred to as the “IASB’s DP”). Among others, the IASB’s DP stated that,when selecting the measurement to use for a particular item, the IASB should consider
what information that measurement will produce in both the statement of financial
position and the statement(s) of profit or loss and OCI2.
5. The IASB’s DP also stated that one possible way to deal with the uncertainty about how
an asset will contribute to future cash flows would be:(a) using one measure in the primary financial statements and disclosing anothermeasure in the notes to the financial statements; or(b) using one measure in the statement of financial position and using a different
measure to determine the amounts recognised in profit or loss (presenting thedifference between the two measures in OCI)3.
6. The ASBJ prepared a paper titled “Profit or Loss / Measurement” (hereinafter referred toas the “ASBJ’s Paper”) for discussion at the December 2013 Accounting Standards
Advisory Forum (ASAF) meeting.

In summary, the ASBJ’s Paper suggested thefollowing:(a) Comprehensive income, profit or loss and OCI should be defined as separate
elements of financial statements in the following manner:(i) Comprehensive income 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
2
3

Paragraph 6.35 of the IASB’s DP
Paragraph 6.76 of the IASB’s DP

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measured using measurement bases that are relevant from the perspective ofreporting the entity’s financial position.
(ii) Profit or loss is the change in net assets during a period except those changes
resulting from transactions with owners in their capacity as owners, whereby therecognised assets and liabilities comprising the net assets are measured using
measurement bases that are relevant from the perspective of reporting theentity’s financial performance.
(iii) OCI is the “linkage factor” that is used when the measurements that are relevantfrom the perspective of reporting the entity’s financial position differ from themeasurements that are relevant from the perspective of reporting the entity’s
financial performance.
(b) Profit or loss represents an all-inclusive measure of irreversible outcomes of anentity’s business activities in a certain period.
(c) Two different measurement bases should be used for the same item and thus OCI
should be used as the linkage factor, when:(i) it is relevant from the perspective of reporting the entity’s financial position toremeasure assets and liabilities that are exposed to certain risks by using theinformation updated at the reporting date; but(ii) such remeasurements are not relevant from the perspective of reporting theentity’s financial performance.
7. At the December 2013 ASAF meeting, Mr. Hans Hoogervorst, the Chairman of the IASB,
showed his reluctance for the increased use of OCI.

Then, in February 2014, hedelivered a speech at a conference held in Tokyo, where he stated:
Summing up, Profit or Loss is an extremely important indicator of financial performance in atime period. To provide sufficient rigour, it should be as inclusive as possible. For that reason,
Profit or Loss is necessarily a bit rough around the edges. To protect the integrity of Profit orLoss, we have to be very cautious with OCI, which should only be used as an instrument oflast resort. If our ultimate conclusion were to be that OCI is more of an exception than a rule,
finding a conceptual basis for it will be very difficult. Obviously, these are personal and very

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preliminary thoughts, given the fact that the Board still needs to digest the very rich feedback
we have received thus far. [Emphasis added]

8. In March 2014, the ASAF discussed a paper titled “A Revised Model for Presentation in
the Statement(s) of Financial Performance: Potential Implications for Measurement”,
which was authored by Dr. Thomas J. Linsmeier, a Board member of the FASB. In thispaper, Dr. Linsmeier argued that there is no differentiating set of characteristics to define
what items are included in OCI rather than Net Income (or profit or loss) other than thatstandard setters decided for political reasons to present those items below the line net
income. This paper went on to propose a new model for presentation in the statement(s)of financial performance, which encompasses the following propositions:(a) To require the presentation of two separate statements of financial performance:(i)a Statement of Operating Income; and(ii)a Statement of Comprehensive Income (which begins with operating income
and presents all non-operating income items that yield comprehensive income
for the period).

(b) Either;(i)to require a per share number for both operating income and comprehensive
income; or(ii)

to provide users with the weighted average number of common shares
outstanding for the period so that users can calculate the income amounts per
share that they believe relevant to their decisions.

(c) To require separate presentation of income based on whether an item is recurring or
non-recurring, for each Statement in (a).

Comparison of Views Expressed

9. The IASB’s DP explained that both the effects on the statement of profit or loss and OCI(or the income statement) and the statement of financial position (or the balance sheet4)
should be considered when determining an appropriate measurement basis, but it did not
4

In this paper, the term “income statement” is used interchangeably with “the statement of profit or loss and OCI”, and theterm “balance sheet” is used interchangeably with “the statement of financial position”.

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explain the IASB’s preliminary view as to (i) whether the difference should be rare (ifany) and (ii) how the difference should be addressed.
10. Mr. Hoogervorst went a step further in his speech by indicating that the use of OCI
should be minimised, acknowledging that there may be limited cases where differences
would arise. However, Mr. Hoogervorst did not refer to how the measurement basis ofan asset or a liability should be determined.
11. On the other hand, in proposing the new reporting model, Dr. Linsmeier’s paperquestioned whether, and if so in what circumstances, decision-usefulness would beenhanced by differentiating some items from others (as OCI) within either operating
income or comprehensive income.

The paper also suggested that a measurement basis

for an asset or a liability should be determined from the income statement perspective(that is, on the basis of whether unrealised gains/losses provide decision-useful
information).
12. The ASBJ’s Paper stated that relevant measurement bases from the perspectives offinancial performance and financial position should be considered separately, and in thecase where the two measurement bases differ, OCI would be the “linkage factor” tobridge the two measurement bases. The ASBJ Paper explained that, although the two
measurement bases would be the same in many cases, there would be cases where theresulting relevant measurement bases would be different.
13. The difference in views can be summarised in the table below.
Table: Comparison of Views Expressed
Items

Mr. Hoogervorst’s

Dr. Linsmeier’s paper

ASBJ’s Paper

Minimise the use

No view was expressed,

Use of OCI isof OCIbut questioned if there

necessarycomment
Use of OCI

would be continued
demand for use of OCI
under the proposed newreporting model

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ItemsMr. Hoogervorst’s

Dr. Linsmeier’s paper

ASBJ’s Paper

Income statement under

Both financial

determinethe proposed new

performancemeasurement

reporting model(income statement)comment
Perspective

to

N/A

basis (or bases)

and financial
position (balance
sheet)

Numberof

Ideally one

Should be one under theConceptually two

Measurement

proposed new reporting

but the two are thebasis (or bases)

model

same in many cases

Possible Effect of Abolishing or Minimising the Use of OCI
Presumptions

14. In reviewing the Conceptual Framework, it has become apparent that many people
believe that “profit or loss” is very important for users to assess the entity’s financial
performance5.

For example, as quoted earlier in this paper, Mr. Hoogervorst stated in

his speech that “profit or loss is an extremely important indicator of financial
performance in a time period”.
15. At the same time, some argue that the use of OCI should be abolished or minimised. In
the following paragraphs, this paper will explore the consequences on the usefulness offinancial statements, if the use of OCI were to be abolished or minimised.

5

For example, paragraph 8.19 of the IASB’s DP stated that “the IASB has previously acknowledged that many investors,
creditors, preparers and others view profit or loss as a useful performance measure and that ‘profit or loss’ as a subtotal or aphrase is deeply ingrained in the economy, business and investors’ minds. Users from all sectors incorporate profit or loss intheir analyses, either as a starting point for further analysis or as the main indicator of an entity’s performance”.

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Possible Effects on the Usefulness of Financial Statements

16.

Abolishing the use of OCI would mean that it would be impossible to use two
measurement bases to measure the same asset or liability.

In such case, changes in themeasurement

recognisedofassetsandliabilities

would

be

in

profitorloss/comprehensive income without exception, unless such changes relate tocontributions from (or distributions to) equity participants.

Therefore, the amountpresented as profit or loss/comprehensive income would ultimately depend on themeasurement basis selected for each asset and liability.
17.

If we were to presume that the same measurement basis must be used for measuring an
asset or a liability both for the balance sheet and income statement purposes, the two
major alternatives regarding the perspective to be considered in determining ameasurement basis are:(a) to require the use of a measurement basis that is relevant solely from the perspectiveof reporting the entity’s financial performance; and(b) to require the use of a measurement basis that is relevant solely from the perspectiveof reporting the entity’s financial position.

18.

First, let us assume that the measurement bases are determined solely from theperspective of reporting the entity’s financial position. Changes in the measurementof assets and liabilities would be recognised in profit or loss/comprehensive income
without exception, and remeasurement gains or losses on items that are currently
measured using OCI would be recognised through profit or loss.

19.

For example, as part of the limited amendment to IFRS 9 Financial Instruments, the
IASB decided that financial instruments that meet both of the following criteria shall bemeasured at FV-OCI:(a) The asset is held in a business model in which assets are managed both in order tocollect contractual cash flows and for sale, andPage.8(b) The contractual terms of the financial asset give rise on specified dates to cash flowsthat are solely payments of principal and interest on the principal amountoutstanding.
20.

Recognising remeasurement gains or losses on such financial instruments through profit
or loss would mean that unrealised gains or losses would be recognised in profit or loss,
even when such instruments are held in a business model in which assets are managed
both in order to collect contractual cash flows and for sale.

In such situations,recognising remeasurement gains or losses through profit or loss would result in the lossof the amortised cost information in the income statement, although an entity’s
performance on such instruments will be ultimately affected by both their contractual
cash flows and the realisation of fair value6.
21.

The ASBJ believes that it is critical to ensure that remeasurement gains or losses on
assets and liabilities is not recognised in profit or loss when unrealised gains or losses
are irrelevant for predicting future cash inflows to the entity, because financial reporting
stakeholders (including users) have long advocated the utmost importance of the flow
information in making decisions about providing resources to the entity.

22.

Accordingly, if the ASBJ were asked to choose one perspective, from either theperspective of reporting the entity’s financial performance or the perspective ofreporting the entity’s financial position, on which to determine the measurement basesof assets and liabilities, similar to the proposition in Dr. Linsmeier’s paper, the ASBJ
would conclude that such measurement bases should be determined from theperspective of reporting the entity’s financial performance.

The role of general

purpose financial reports stated in the Conceptual Framework7 already indicates thatthe balance sheet in itself is not designed to show the value of a reporting entity (thus,
recognition of internally generated goodwill is precluded).

6

Please see paragraph BC22 of IASB’s ED/2012/4 Classification and Measurement: Limited Amendments to IFRS 9. The
IASB decided to finalise the limited amendments to IFRS 9 without significantly changing the requirements relating to the
FV-OCI category.
7
Paragraph OB7 of the existing Conceptual Framework states that, “General purpose financial reports are not designed toshow the value of a reporting entity; but they provide information to help existing and potential investors, lenders and othercreditors to estimate the value of the reporting entity”.

Page.923.

Yet, determining the measurement bases solely from the perspective of reporting theentity’s financial performance would mean that many items that are currently measured
at current value using OCI will be measured at cost-based measures both for balance
sheet and income statement purposes. This would represent the loss of the current
value information of such financial instruments from the balance sheet.

24.

It is possible for accounting standard setters to require that the fair value information ofsuch financial instruments be disclosed in the notes to financial statements, such that
financial statements as a whole continue to provide the two sets of information.

Some

may argue that whether information is presented on the face of the financial statements
or in the notes to financial statements does not matter, as long as the information isdisclosed in the financial statements.
25.

However, many believe that whether the information is required to be presented on theface of the financial statements or in the notes to financial statements would result indifferent levels of care and scrutiny in the measurement by preparers and auditors.

In

addition, in some jurisdictions, the information disclosed in the notes to financial
statements of public companies would be made available well after earnings releases aredisclosed 8 .

For these reasons, these stakeholders believe that the location of theinformation presented does matter.
26.

Moreover, in recent years, users of financial reports have increasingly called for morecurrent value information to be provided on the balance sheet.

Therefore, it is simply

unrealistic to assume that the user community would embrace the idea that many items
that are currently measured at current value using OCI should be measured using
cost-based measures, even if such current value information were to be presented in thenotes to financial statements.
27.

Accordingly, the ASBJ does not believe that abolishing or significantly reducing the useof OCI is a feasible goal to achieve.

8

For example, please see paragraph BC103 of the FASB’s proposed Accounting Standards Update, Accounting for
Financial Instruments and Revisions to the Accounting for Derivative Instruments and Hedging Activities.

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Promoting Usefulness of Financial Information
Purposes of the Income Statement and the Balance Sheet

28.

If the purposes of the income statement and the balance sheet were designed to beconsistent, measurement bases determined from the perspective of reporting an entity’s
financial performance and its financial position would also be consistent.

For

example, if the income statement were simply designed to provide information about“changes in the value of stock between two points in time”, the selection of relevantmeasurement bases from the perspective of the income statement (that is, the flow
information) and the balance sheet (that is, the stock information) would be the same.
29.

However, the ASBJ believes that the Conceptual Framework states otherwise. The
Conceptual Framework9 states that information about a reporting entity’s financial
performance during a period (which is primarily represented in the income statements)
is useful in assessing the entity’s ability to generate future net cash inflows into theentity10.

30.

It also acknowledges that such information is useful for users to understand the returnthat the entity has produced on its economic resources, and provides an indication of
how well management has discharged its responsibilities to make efficient and effective
use of the reporting entity’s resources (management’s accountability or stewardship)11.

31.

At the same time, the Conceptual Framework states that information about the nature
and amounts of a reporting entity’s economic resources and claims (which is primarily
represented on the balance sheet) can help users identify the reporting entity’s financial
strengths and weaknesses 12 , and to assess the reporting entity’s (a) liquidity andsolvency, (b) needs for additional financing and (c) how successful it is likely to be in
obtaining financing. In addition, the Conceptual Framework explains that resource
providers are interested in the information that would help them to assess returns thatthey expect.

9

Chapter 1: The objective of general purpose financial reporting
Paragraph OB18 of the Conceptual Framework
11
Paragraph OB16 of the Conceptual Framework
12
Paragraph OB13 of the Conceptual Framework
10

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32.

These various roles of general purpose financial reports demonstrate that the purpose of
the income statements is not simply to provide information about “changes in the valueof stock between two points in time”.

Accordingly, the ASBJ believes that the

selection of the measurement bases from the perspective of reporting an entity’s
financial performance and its financial position would inherently differ, and that thenatural conclusion derived from the Conceptual Framework is that it would beinappropriate or unfeasible to try to abolish or minimise the use of OCI.

Benefit of Using Two Different Measurement Bases for Presenting Balance Sheets and Income
Statements

33.

Having concluded that the purposes of the balance sheet and the income statement are
not necessarily congruent with each other, the following paragraphs consider whether,and if so how, using two different measurement bases for the purpose of reporting an
entity’s financial performance and financial position contribute to useful financial
information presented on the face of the financial statements.

34.

As explained in the ASBJ Paper, measurement bases relevant from the perspective ofreporting an entity’s financial performance and financial position would be the same inmany cases13.

However, the ASBJ believes that these different perspectives may leadto different conclusions on what would be the most relevant measurement basis for aparticular asset or liability, for example, when there is high degree of uncertainty14
regarding how an asset will contribute to future cash inflows to the entity or how aliability will be settled resulting in future cash outflows from the entity. When there issuch high degree of uncertainty regarding the manner in which future cash flows will be
realised, it would be almost impossible to specify a single measurement basis for an
asset or a liability that fulfils both perspectives at the same time.
35.

In this situation, when two different measurement bases are used for an asset or aliability, one measurement basis would help users assess the prospects for the future
cash inflows or outflows (that is, the amount and timing of future cash flows), and the13
14

Please see paragraph 12 of this paper.
Uncertainty in this paragraph does not refer to the level of uncertainty in estimates.

Page.12other measurement basis would help users assess the entity’s financial strengths andweaknesses.

In other words, financial information presented on the face of thefinancial statements would be most useful, when one measurement basis is used for theasset or liability to determine the amounts recognised in profit or loss, while anothermeasurement basis is used for the same asset or the liability in the balance sheet.
36.

This assertion may be further explained by analysing an illustrative example. For
example, if an entity holds debt financial instruments primarily to collect theircontractual cash flows but may sell those instruments depending on the circumstances,measuring the asset using amortised cost would help users assess the prospects for
future net cash inflows to the entity, because it would provide information about
contractual yields on the instruments. However, amortised cost information would not
be most helpful for users to assess the entity’s financial strengths and weaknesses,
because such information would not reflect current market trends. Rather, current
value information would be more helpful for users in that assessment, because suchinformation better reflects the updated information about the amount that the entity may
receive if it sold those instruments at the market.

37.

In addition, amortised cost information would also be helpful for users to assess how
efficiently

andeffectively

theentity’s

management

have

discharged

theirresponsibilities to use the entity’s resources. This is because gains or losses that will
be recognised on the sales of such instruments would reflect the differences between theentity’s prospects for future cash inflows based on the contractual yields and the actual
cash inflows attained upon the sales of those financial instruments, and unrealised gains
or losses presented in the balance sheet would reflect opportunity gains or losses thatthe entity might have recognised if it had sold those instruments at the market as of theend of the reporting period.
38.

Accordingly, the ASBJ believes that, in those cases described above, using two
different measurement bases for the balance sheet and the income statement would
promote usefulness of information presented on the face of financial statements as awhole.
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Decision Process of Measurement Bases
39.

During the December 2013 ASAF meeting, it was noted that if a measurement based ona particular measurement basis were argued to be too “soft” (which, we understand,means that the outcome is subject to a uncertainty that is too high) for the purpose ofreporting an entity’s financial performance, it may also be argued that suchmeasurement would be equally inappropriate for the purpose of presenting an entity’s
financial position, for the same reason that such a measurement basis would beconsidered to be too “soft”.

Following the comment, it was suggested thatmeasurement bases from the perspective of an entity’s financial position and theperspective of an entity’s financial performance should not be considered separately but
for in exceptional cases.
40.

However, as stated in paragraph 21 of this paper, the ASBJ believes that thedetermination of measurement bases should begin with the perspective of reporting an
entity’s financial performance, and the determination of measurement bases from theperspective of reporting an entity’s financial position should follow. OCI should be
used when, in response to the user’s call for current value information presented on theface of the financial statements, these measurement bases are found to be different.

41.

This standards-setter’s decision-process is different from that stated in paragraph 39 of
this paper. Therefore, the ASBJ is of the view that it is inappropriate to set a goal thatthe use of OCI should be minimised, with the assumption that measurement bases fromthe perspective of reporting an entity’s financial performance and its financial position
should not be considered separately.

Conclusion
42.

Based on the analysis in this paper, trying to measure an asset or a liability using thesame measurement basis for each asset and liability and to abolish or minimise the useof OCI is inappropriate or unfeasible.

Rather, greater conscience should be given to

the two different perspectives (that is, perspectives of reporting an entity’s financial
Page.14performance and its financial position) when determining measurement bases, althoughsuch measurement bases would be the same in many cases. If relevant measurement
bases are found to be different for fulfilling the differing purposes, it would benecessary to use OCI as the “linkage factor”, so as to maintain the usefulness offinancial information presented on the face of the financial statements.
43.

The approach explained in the previous paragraph would not justify every OCI item
currently required or permitted in the existing requirements in IFRSs; rather it could
give rise to inconsistencies between the principles that may be stated in the Conceptual
Framework and accounting requirements in individual standards.

Yet the ASBJ

believes that such inconsistencies would provide good opportunities for the IASB toconsider whether, and if so how, such inconsistencies should be addressed in the future
standard-setting process, which would ultimately contribute to the high quality financial
reporting in accordance with IFRSs.

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