IASB Request for Information of Post-Implementation Review: IFRS 13 Fair Value Measurement

Page 1 of 13Our Ref.: C/FRSCSent electronically through the IASB Website (www.ifrs.org)

29 September 2017Mr Hans HoogervorstInternational Accounting Standards Board30 Cannon StreetLondon EC4M 6XHUnited KingdomDear Hans,IASB Request for Information of Post-Implementation Review:

IFRS 13 Fair Value MeasurementThe Hong Kong Institute of Certified Public Accountants ("HKICPA") is the only bodyauthorised by law to set and promulgate standards relating to financial reporting, auditingand ethics for professional accountants, in Hong Kong. We are grateful for the opportunity toprovide you with our comments on this Request for Information (RFI).Overall, the HKICPA considers IFRS 13 generally worked well. However, the followingdifficulties were noted:

Analysing the disclosure of aggregated Level 3 fair value information;

Applying the highest and best use concept; andDetermining whether a market is active.The HKICPA noted other factors outside of IFRS 13 that affected the usefulness of fair valueinformation and the application of fair values:

Education on the concept of and need for fair values;

Shortage of specialised professionals in agriculture business and high quality valuationexperts for financial reporting in general; andThe lack of regulation of the valuation industry for financial reporting and auditoreducation in auditing valuation estimates.The HKICPA's and our stakeholders' responses to the questions raised in this RFI areexplained in more detail in the Appendix.If you have any questions regarding the matters raised in this letter, please contact me orAnthonyWong,AssociateDirectoroftheStandardSettingDepartment(anthonylwwong@hkicpa.org.hk).Yours sincerely,Christina NgDirector, Standard Setting DepartmentPage 1 of 13Page 2 of 13APPENDIXQuestion 1A - Your backgroundPlease tell us:

(a) your principal role in relation to fair value measurement. For example, are you apreparer of financial statements, an auditor, a valuation specialist, a user of financialstatements, a regulator, a standard-setter, an academic, or a professionalaccounting body? If you are a user of financial statements, what kind of user are you(forexample,buy-sideanalyst,sell-sideanalyst,creditratinganalyst,creditor/lender, asset or portfolio manager)?(b) your principal jurisdiction and industry. If you are a user of financial statements,which geographical regions and industries do you follow or invest in?The HKICPA is the only body authorised by law to set and promulgate standards relating tofinancial reporting for professional accountants in Hong Kong.In collecting feedback on IFRS 13, the HKICPA:

(i) issued a public Invitation to Comment on RFI on 1 June 2017 and received responsesfrom a preparer from the insurance industry and a preparer from the banking industry;

(ii) met and discussed with:

HKICPA's Valuations Advisory Panel, which comprise valuation experts from largevaluation and accounting firms, as well as an acadamic;

HKICPA's Small and Medium Practitioners Committee Technical Working Group,which comprise auditors from small and medium-sized accounting firms;

HKICPA's audit regulatory department; andmembers of The Hong Kong Society of Financial Analysts.The HKICPA also discussed the RFI and our stakeholders' feedback with its FinancialReporting Standards Committee. The Committee comprises academics, preparerrepresentatives from various industry sectors, regulators, as well as technical experts fromsmall, medium and large accounting firms.This submission outlines HKICPA's feedback as well as our stakeholders' comments.Page 3 of 13Question 1B - Your experienceHow extensive is your experience in relation to the measurement of the followingitems at fair value (including the measurement of their recoverable amount on thebasis of fair value less costs of disposal)?The table below reflects our stakeholders' experience with fair value measurements.Type of itemThe extent of your experience with fair value measurementsLittleSomeMuchProperty, plant andequipmentVIntangible assets includinggoodwillVInvestment propertiesVBiological assetsVInvestments in subsidiaries,joint ventures or associatesVFinancial instrumentsVOther (please specify which)

N/AQuestion 2 - Fair value measurement disclosures(a) How useful do you find the information provided about Level 3 fair valuemeasurements? Please comment on what specific information is useful, and why.(b) In your experience of Level 3 fair value measurements:

(i) how do aggregation and generic disclosure affect the usefulness of theresulting information? Please provide examples to illustrate your response.(ii) are you aware of any other factors (either within or outside IFRS requirements)

affecting the usefulness of the information? Please provide examples to illustrateyour response.(iii) do you have suggestions on how to prevent such factors from reducing theusefulness of the information provided?(c) Which Level 3 fair value measurement disclosures are the most costly toprepare? Please explain.(d) Is there information about fair value measurements that you think would beuseful and that IFRS 13 does not require entities to disclose? If yes, please explainwhat that information is and why you think it would be useful. Please provide anyexamples of disclosure of such information.Page 4 of 13Usefulness of Level 3 fair value information and aggregation disclosure:

(A) Stakeholders' viewsAll stakeholders who responded consider that information provided about Level 3 fair valuemeasurement is useful. However, most stakeholders agree that aggregation has affectedthe usefulness of Level 3 fair value information. They recommend to require disclosures on"material" assets/liabilities only.Some investors found the reconciliation of Level 3 assets/liabilities useful as it explains themovements between two financial periods. Some preparers questioned the benefits ofproviding such a reconciliation.Investors and a preparer from the insurance industry recommended that entities be requiredto disclose valuation assumptions of "material" investments only, for example, investmentsthat constitute more than 10%-15% of that class of investment. This would enhance theusefulness and understanding of the fair value information.(B) HKICPA's analysis and recommendationThe HKICPA considers that the Level 3 fair value information is useful as it provides anunderstanding of the valuation approach, significant unobservable inputs and the 'sensitivityto change'. The HKICPA also considers that there needs to be a good balance ofaggregation and disaggregation – it may be unreasonable to expect excessivedisaggregation for businesses that have high volumes of transactions that involve Level 3fair value measurements.The HKICPA is aware that, in practice, preparers are providing the required information forall Level 3 assets/liabilities. However, the HKICPA thinks that the usefulness of the fairvalue information could be influenced by the format of presentation. The HKICPA also thinksthat IFRS 1 already permits an entity not to disclose all 'required' information if theinformation is not material.The HKICPA therefore thinks that a possible issue here is preparers need further educationor guidance from the IASB on how to apply the aggregation disclosure requirementsappropriately.1 Paragraph 31 of IAS 1 Presentation of Financial Statements: An entity need not provide a specific disclosure required by anIFRS if the information resulting from that disclosure is not material. This is the case even if the IFRS contains a list of specificrequirements or describes them as minimum requirements.Page 5 of 13Following the concept of principle-based standards, the HKICPA supports our stakeholders'feedback about disclosing material assumptions or Level 3 fair value measurement so thatsuch information is more meaningful. However, we do not support adding bright-linemateriality threshold to IFRS.Suggestions to increase the usefulness of fair value information and suggesteddisclosure:

(A) Stakeholders' viewsInvestors commented that disclosing an aggregated range of unobservable inputs (e.g.discount rate from 10%-30%) is not useful. An average or mean of inputs would providemore meaningful information to analysts.Valuation experts and auditors recommended that the IASB provides:

guidance/examples, in addition to those in paragraph 92 of IFRS 13, on determiningwhich types of investments can be aggregated for disclosure;

examples of key assumptions/inputs that should be disclosed for common types ofinvestments. Currently, limited examples are provided in paragraph B36 of IFRS 13.The following are information that our stakeholders think would be useful and that IFRS 13does not currently require.Name, company and accreditation details of a company's valuation expert.Reason(s) for specific valuation technique chosen and rationale for the inputs wherejudgement may be required.Basis of assumption (e.g. why a specific discount rate, and not another discount rate, isused).Reason(s) for change in assumptions between financial years.Significant assumption(s) such as risk factors (e.g. possibility of renewing an operatinglicense), default rate for financial instruments, volatility of financial instruments andgrowth rate for unlisted investments.Similar information required under paragraph 93 of IFRS 13 when non-monetaryassets are initially recognised at fair value. This would include the information on initialrecognition of assets and liabilities as part of acquisition accounting and non-monetaryexchange of assets (e.g. disposal of assets/business in exchanges of shares and/orother items).Separate line items of unrealised gains/losses arising from Level 3 valuations, whenthey are material.Page 6 of 13(B) HKICPA's analysis and recommendationThe HKICPA supports the above suggestions made by our stakeholders. We stronglyrecommend that the IASB considers them.Most costly Level 3 disclosure:

(A) Stakeholders' viewsOther than providing Level 3 information for all assets/liabilities, valuation experts andauditors also find the following to be most costly.The quantitative sensitivity analysis on significant unobservable inputs if it involves verycomplicated financial modelling. In Hong Kong, it is observed that valuers imposeadditional charge for such a sensitivity analysis.Time and cost in determining what are the key assumptions for disclosure and indiscussing the classification of an input as Level 2 or Level 3. Preparers tend to avoidclassifying an input as Level 3.(B) HKICPA's analysis and recommendationThe HKICPA does not have any comments.Question 3 - Prioritising Level 1 inputs or the unit of account(a) Please share your experience to help us assess:

(i) how common it is for quoted investments in subsidiaries, joint ventures andassociates, and quoted cash-generating units to be measured at fair value (pleasesupport your comments with examples).(ii) whether there are material differences between fair value amounts measuredon the basis of P×Q alone (when P is the quoted price for an individual instrumentand Q is the quantity of financial instruments held) and fair value amountsmeasured using other valuation techniques. Please provide any examples,including quantitative information about the differences and reasons for thedifferences.(iii) if there are material differences between different measurements, whichtechniques are used in practice and why.Please note whether your experience is specific to a jurisdiction, a region or a typeof investment.Page 7 of 13(b) The Board has undertaken work in this area in the past. Is there anything elserelating to this area that you think the Board should consider?(A) Stakeholders' viewsMost preparers and auditors who responded consider it is uncommon to measure at fairvalue, quoted investments in subsidiaries, joint ventures and associates, and quotedcash-generating units. Joint ventures and associates are usually measured at cost incompany-level financial statements and equity accounted in consolidated financialstatements.Some auditors consider fair value measurement is relevant when considering purchaseprice allocation and impairment using the value-in-use model.Most stakeholders consider that valuing investments in subsidiaries, joint ventures andassociates as a whole reflects a better picture of an entity's investment as it incorporates theprospects of holding such investments. Valuation experts and auditors shared the followingobservations:

The share price of listed entities with low market capitalization can be high while theentities are loss-making in practice.The share price of a listed entity may be affected by a significant transaction (e.g.merger, acquisition or disposal and that impact could be temporary).The share price of a listed entity may reflect the value of the listed shell company andnot the underlying operations.The share price may not reflect the liquidity of a listed entity.(B) HKICPA's analysis and recommendationTheoretically, the nature of and intention of holding an investment (akin to a business modelapproach) would dictate the unit of account and therefore how the investment is measured.For example, an entity that holds shares in a company for short-term trading would find itmore appropriate to measure those shares using the PxQ method. For entities that holdshares in a company for long-term strategic reasons and have control or influence over thecompany's business, the unit of account of the investment as a whole would be moreappropriate and relevant.Following this line of thinking, HKICPA maintains its view provided in response to the IASBED/2014/4 Measuring Quoted Investments in Subsidiaries, Joint Ventures and Associatesat Fair Value. That is, investments in subsidiaries, joint ventures and associates, should bePage 8 of 13measured at investment as a whole.IFRS 13, however, considers the measurement of fair values from the perspective of marketparticipants, not the entity. This therefore creates a tension in applying the standard.Question 4 - Application of the concept of highest and best use for non-financialassetsPlease share your experience to help us assess:

(a) whether the assessment of an asset’s highest and best use is challenging, andwhy. Please provide examples to illustrate your response.(b) whether the current uses of many assets are different from their highest and bestuse, and in which specific circumstances the two uses vary.(c) whether, when applying highest and best use to a group of assets and using theresidual valuation method, the resulting measurement of individual assets in thegroup may be counter-intuitive. If so, please explain how this happens, and in whichcircumstances.(d) whether there is diversity in practice relating to the application of the concept ofhighest and best use, and when and why this arises.Please note whether your experience is specific to a jurisdiction, a region or a typeof asset.(A) Stakeholders' viewsValuation experts and auditors who responded generally think that it is challenging to applythe highest and best use concept more so in jurisdictions that apply land-use-rights as theremay be legal restrictions imposed by a government.A preparer from the banking industry does not have significant issues in dealing with theconcept of “the highest and best use for non-financial assets”, and believes that the existingguidance in IFRS 13 is sufficient.Valuation experts and auditors also think that the residual value method could producecounter-intuitive results. A typical example they observed in practice: a factory on a land iscurrently valued at $5 million but the highest and best use of the land only is $6 million. Thecounter-intuitive result is the value of the factory is nil and therefore, the highest and bestuse is to knock down the factory.Some auditors noted a diversity in how preparers apply the highest and best usePage 9 of 13assessment. In particular, they question how much work is required to determine the highestand best use.(B) HKICPA's analysis and recommendationThe HKICPA thinks that the challenge with the highest and best use concept is whether itshould apply to a single asset or a group of assets. Having said that, the HKICPA believesthere is merit in providing such information to investors in order for them to assessmanagement's stewardship and opportunity cost. The HKICPA therefore recommends thatthe IASB considers the overall cost-benefits of making this assessment. If the concept wereto be retained, the concept and the objective of the concept needs to be better explained inIFRS 13.Question 5 - Applying judgements required for fair value measurementsPlease share your experience to help us assess the challenges in applyingjudgements when measuring fair value:

(a) is it challenging to assess whether a market for a asset or a liability is active?Why, or why not?(b) is it challenging to assess whether an input is unobservable and significant to theentire measurement? Why, or why not?Please provide specific examples to illustrate your response and note whether yourexperience is specific to a jurisdiction or a region or a type of asset or liability.(A) Stakeholders' viewsMost stakeholders found that IFRS 13 has sufficient guidance on whether an input isunobservable and thus have not found this to be a challenge. However, they found itchallenging to assess whether some markets are active and whether an input is significantto the entire measurement.Valuation experts and auditors generally consider it subjective in determining whether amarket for an asset or liability is inactive. For example:

How to determine whether thinly-traded or infrequently transacted instruments areinactive?Whether the listed bond market in Hong Kong is active? There are only limited listedbond transactions in Hong Kong as compared to Europe.One regulator and one preparer found that it is difficult to judge whether over-the-counter(OTC) markets are active and whether OTC instruments should be classified as Level 1 orPage 10 of 13Level 2 investment.One regulator observed that auditors have used 'audit materiality' to determine whether aninput is significant in a valuation. However, the materiality threshold may be different invaluation practices. They would like clarification on what the standard means by a"significant" input.(B) HKICPA's analysis and recommendationThe HKICPA also thinks that the concept of an active market can be judgemental andrecommends IASB to provide further education/guidance (e.g. a list of criteria that preparerscan use to assess whether the market is active or better explain the concept and theapplication).In addition, we consider that the following areas need further clarification.Paragraph 73 of IFRS 13 requires the hierarchy of inputs (Level 1 – Level 3) to bedetermined based on the lowest level input that is significant to the entire measurement.However, paragraphs 76-77 of IFRS 13 require a Level 1 fair value only if 'the onlyinput’ is an unadjusted quoted price for identical items in an active market. This createsa conflict in assessing the valuation of a unit fund. For example, in Hong Kong, thereare unit funds that invest in quoted shares only (measured as Level 1 investment) andhave few (if any) other assets/liabilities. Investors of unit funds typically determine thevalue of the funds using 'net asset value'. The issue here is whether net asset valuecan be considered Level 1 input following paragraphs 73 and 76-77 of IFRS 13.Paragraph 70 states that the use of bid price and ask price is permitted but not requiredwhen measuring an asset and a liability, respectively. However, paragraph BC163 ofIFRS 13 suggests that judgement is used in determining which price in the bid/askrange is most representative of fair value.In the context of comparable transactions (e.g. refer to paragraph B37), what is meantby 'recent' or 'relevant'. For example, how recent is 'recent' (e.g. 1 to 24 months) andhow relevant is 'relevant' (e.g. similar credit characteristics)?Question 6A - Education on measuring biological assets at fair valuePlease describe your experience of measuring the fair value of biological assets:

(a) are any aspects of the measurement challenging? Why, or why not? Pleaseprovide examples to illustrate your response.(b) what, if any, additional help would be useful in applying IFRS 13? In which areas?Page 11 of 13Question 6B - Education on measuring unquoted equity instruments at fair valuePlease describe your experience of measuring the fair value of unquoted equityinstruments:

(a) in 2012, the IFRS Foundation Education Initiative published Unquoted equityinstruments within the scope of IFRS 9 Financial Instruments. Have you used thiseducation material? If so, how did this material help you to measure the fair value ofunquoted equity instruments?(b) do you have questions not covered in Unquoted equity instruments within thescope of IFRS 9 Financial Instruments? Do you think that additional help would beuseful in applying the requirements? Why, or why not? Please provide examples toillustrate your response.(A) Stakeholders' viewsValuation experts and auditors who responded consider that accounting for biologicalassets is a highly specialised area and requires agriculture experts to be involved whenvaluing such assets. It may not be possible for the IASB or IFRS 13 to assist further. Thechallenge faced when valuing biological assets is the availability of high quality agricultureexperts.One valuation expert commented that valuers found it difficult to assess the quality, quantity,yield and stage of growth of biological assets. Agriculture experts may be required to helpthem verify the inputs for valuation.Some stakeholders are not aware of the IASB's educational material Unquoted equityinstruments within the scope of IFRS 9 Financial Instruments.Some preparers already experience difficulty in fair valuing unquoted equity instruments dueto the lack of available information about privately-held entities. Immediate guidance isneeded to help preparers measure such investments as the cost exemption is no longeravailable under IFRS 9.(B) HKICPA's analysis and recommendationThe HKICPA does not have any comments.Page 12 of 13Question 7 - Effects and convergence(a) Please share your experience of the overall effect of IFRS 13:

(i) what effect did IFRS 13 have on users’ ability to assess future cash flows? If youare a user of financial statements, please provide us with examples of how youuse information provided by entities about their fair value measurements and anyadjustments you make to the measurements.(ii) what effect did IFRS 13 have on comparability of fair value measurementsbetween different reporting periods for an individual entity and between differententities in the same reporting period?(iii) what effect did IFRS 13 have on compliance costs; specifically, has theapplication of any area of IFRS 13 caused considerable costs to stakeholders andwhy?(b) Please comment on how you are affected by the fact that the requirements for fairvalue measurement in IFRS 13 are converged with US GAAP; and please commenton how important it is to maintain that convergence.(A) Stakeholders' viewsValuation experts and auditors do not consider that IFRS disclosure can help assess anentity's future cash flows as financial reports are meant to reflect the financial position as ata balance sheet date only.A preparer from the insurance industry think that IFRS 13 enhances the comparability of fairvalue measurements between different reporting periods for an individual entity. However,the measurements may not be comparable between different entities, especially if entitiesuse different valuation techniques.(B) HKICPA's viewsThe HKICPA considers it is desirable to have converged standards. However, the HKICPAurges the IASB to prioritise a standard that is high quality, understandable andprinciple-based, rather than compromise on the principles for the sake of convergence.If IFRS 13 is no longer converged with the US equivalent standard, HKICPA stronglysuggests that the IASB adds a table of comparison to IFRS 13 that explains the text that areno longer the same and whether and why the Boards think they would or would not lead tothe same accounting outcome.Page 13 of 13Question 8 - Other mattersShould the Board be aware of any other matters as it performs the PIR of IFRS 13? Ifso, please explain why and provide examples to illustrate your response.The HKICPA supports the use of fair values in financial reporting as it provides usefulinformation to primary users of financial reports. However, such information is useful onlywhen there is proper support (and this could require jurisdictional effort) to facilitate theprovision of high quality valuations.The HKICPA considers that an accounting standard on its own is not sufficient to ensurethat fair value measurements are applied/reported correctly.The HKICPA considers that a centralised body that regulates the valuation industry as wellas more informed auditors (on auditing estimations) are also necessary for the use of fairvalues to be successful. To the extent possible, the IFRS Foundation could considerleveraging its relationships with global regulators and the IAASB, and consider how to worktogether to improve valuations globally.The IASB could also consider initiating more education programs on the concept of andneed for fair values in financial reporting – the HKICPA would be happy to assist/support thisin any way we can.~ End ~