Response to the Conceptual Framework Exposure Draft 2

Paris, le
Ms Stephenie FOX
Technical director of IASB
77 Wellington Street, 4th floor
Toronto, Ontario M5V 3H2 CANADA
Object: Response to the Conceptual Framework Exposure Draft 2: Elements and
recognition in financial statements
I am writing on behalf of “Direction Générale des Finances Publiques” (DGFiP) to express
our views on the mentioned above the Conceptual Framework Exposure Draft 2, “CF-ED2”
on elements and recognition in financial statements.
Pour le Directeur général des finances publiques,
le Chef de service
David LITVAN
DIRECTION GÉNÉRALE DES FINANCES PUBLIQUES
Service comptable de l’État / Service des collectivités locales
Mission Doctrine comptable et contrôle interne comptable
120 Rue de Bercy - Télédoc 787
75572 PARIS cedex 12
Affaire suivie par Stéphanie LEDOUX et Florence GUY
stephanie.ledou[email protected].gouv.fr
[e-mail]
 01 53 18 78 26  01 53 18 62 36
Référence : 2013/04/6314

2/18
1. GENERAL COMMENTS
The “Direction générale des finances publiques” (the French Directorate of Public Finances)
welcomes the publication of the exposure draft (“the ED”), which takes into account the
comments made in our response to the previous Consultation Paper on Phase 2 of the
Conceptual Framework.
However, we do not think the ED takes sufficient account of the characteristics specific to
the public sector, principally those of the State stemming from its sovereign power. These
characteristics are mainly:
 The predominance of non-exchange transactions, related to the State’s mandate as an
economic and social regulator. These transactions make up the State’s main and regular
activity and have no equivalent in the private sector,
 The nature of its revenue, most of which cannot be equated with the sale of goods or
services, but which is related to the State’s capacity to levy taxes. This is an asset that
goes unrecognised in its accounts,
 The assets stemming from sovereign power that can result from non-exchange
transactions, such as the power to levy taxes, but also from exchange transactions in the
case of assets associated with the right to occupy or use public property, such as the
radio spectrum. These assets have no equivalent in the private sector, and
 The State’s role as “insurer of last resort”.
The specific characteristics of the other public-sector entities are narrower in scope because
they do not have the attribute of sovereignty.
The principal difficulty raised in, but not dealt with by, the ED lies not in the definition of
these specific assets and liabilities but in the lack of a clear definition of the recognition
criteria, which are essential to ensure the consistency, transparency, intelligibility and quality
of public accounts over time. In this respect, we do not think the qualitative characteristics
set forth in Chapters 1 to 4 of the Conceptual Framework published on 11 January 2013
provide an adequate definition of the recognition criteria.

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Regarding non-exchange transactions, the only way to ensure consistency is to clearly
separate liabilities from off balance sheet commitments indicated in the notes. This
underscores the importance of developing the concept of off balance sheet commitments,
and providing a clear definition of them in the Conceptual Framework.
We also think it important to remind you of the following:
 as is the case for business enterprises, the financial statements of public entities are
usually prepared in accordance with the going-concern principle, i.e. on the assumption
that the entity will continue to operate (i.e. not be liquidated), and with the accrual
principle,
 the notes are an integral part of the financial statements. Consequently, the information
contained in the notes is no less important than that reported in the other components of
the financial statements.
According to these principles, the effects of the transactions should be recorded in the
financial statements in the period when they occur, even if the related inflows or outflows
occur in a different period. Conversely, the financial statements cannot record liabilities
representing future expenses that public entities will commit as part of their routine activities.
If such an approach were applied to the private sector, a business would have to set aside
provisions for production costs that will be committed in future periods, on the grounds that
this commitment is necessary to ensure continuity of business.
2. COMMENTS ON THE SPECIFIC MATTERS FOR COMMENT
 Specific Matter for Comment 1
Do you agree with the definition of an asset? If not, how would you modify it?
The definition proposed by IPSASB is consistent with the definition of assets used in French
accounting standards applicable to the public sector.

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As discussed in our general comments and in the response to Specific matter for Comment
7, with respect to intangible assets stemming from sovereign power, we think the main
difficulty lies in determining the recognition criteria. In this respect, we do not think the
qualitative characteristics set forth in Chapters 1 to 4 of the Conceptual Framework
published on 11 January 2013 provide an adequate definition of the recognition criteria.
 Specific Matter for Comment 2
(a) Do you agree with the definition of a liability? If not, how would you modify it?
The definition of liabilities used in Paragraph 3.1 is not suitable for the characteristics
specific to the public sector, particularly when accounting for non-exchange transactions.
These are transfers
1
that are part of the public sector’s ordinary, routine activity.
The transfers related to the State’s remit as an economic and social regulator differ from
routine transactions in the private sector because they are payments made to beneficiaries
but unrelated to goods or services supplied by those beneficiaries.
The key difficulty in determining the appropriate accounting treatment for these transactions
lies in defining the triggering event that distinguishes between:
 present obligations, which must be recognised as liabilities, and
 potential obligations, i.e. only potential liabilities, which must be indicated in the notes
to the accounts.
The latest version of the ED raises this difficulty but does not provide an adequate response
to it. Only a clear definition of the recognition criteria would resolve this difficulty.
In this respect, we feel it important to stress that public entities financial statements differ
from those of private organisations solely because of the specific characteristics of what
these entities do. In particular, their financial statements are based on the going-concern
and accrual principles, which are the same as those of private entities.
1
These transfers are distributions of aid or support for various categories of beneficiaries (public
entities, not-for-profit institutions, and households) and are usually multi-year in nature.

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According to these principles, the effects of the transactions should be recorded in the
financial statements in the period in which they occur, even if the related inflow or outflow
occurs in a different year. Conversely, the financial statements cannot record liabilities
representing future expenses that will be committed by public entities as part of their routine
activities. If such an approach were applied to the private sector, a business would have to
set aside a provision for production costs that will be committed in future periods, on the
grounds that this commitment is necessary to ensure continuity of business.
The information recognised in the financial statements can be used to analyse the past
performance of an organisation, but does not predict future performance.
In France, the financial statement producer and the accounting standards setter have
resolved the difficulty involved in defining the triggering event for transfers. The triggering
event is considered to be the fulfilment of conditions (“service rendered”). For expenses
related to transfers (generally on a multi-year basis), this means fulfilling all the conditions on
which the beneficiary’s entitlement is contingent, in the period relating to the fiscal year
ended.
Consequently, in the case of contingent transfers, if the beneficiary does not fulfil the
conditions of eligibility for the benefit on the closing date of the fiscal year, the State has a
commitment to that third party, and this information is indicated in the section dedicated to
commitments in the notes to the State’s financial statements.
This is the case, for example, of multi-year transfers subject to annual means-testing. The
amounts to be paid in future years are State commitments, not liabilities.
The above arguments stress the importance of commitments in public accounting. We would
therefore like the discussion on the definition of liabilities to continue, in order to develop the
concept of commitments, which should be indicated in the notes to the statements.
(b) Do you agree with the description of non-legal binding obligations? If not, how would you
modify it?
According to the ED, the concept of non-legal binding obligations refers to liabilities other
than those relating to legal and contractual obligations. This kind of obligations can be
considered as a liability if: