Our Ref.: C/FRSCSent electronically through the IASB Website (www.ifrs.org)
24 April 2019Mr Hans HoogervorstInternational Accounting Standards BoardColumbus Building7 Westferry CircusCanary WharfLondon E14 4HDUnited KingdomDear Hans,IASB Exposure Draft ED/2018/2Onerous Contracts – Cost of Fulfilling a ContractThe Hong Kong Institute of Certified Public Accountants (HKICPA) is the only bodyauthorised by law to set and promulgate standards relating to financial reporting,auditing and ethics for professional accountants, in Hong Kong. We are grateful for theopportunity to provide you with our views on this Exposure Draft (ED).Overall the HKICPA supports the directly related cost approach proposed in the EDbecause it would provide a more faithful representation of the costs of fulfilling acontract than the incremental cost approach and requiring a single approach wouldreduce diversity in practice. In addition, the HKICPA suggests the IASB takes thisopportunity to clarify the meaning of 'directly related costs' and how the term relates toother terminologies such as 'direct costs' and 'directly attributable costs' that are usedin other IFRS Standards.The HKICPA notes that questions also arise about the meaning of 'economic benefits'in the IAS 37 definition of an onerous contract. The HKICPA understands the IASB'sreasoning for not addressing these questions as part of this project. However, theHKICPA recommends that the IASB considers clarifying what constitutes 'economicbenefits' in its wider project to review IAS 37.HKICPA's responses to the questions raised in this ED are explained in more detail inthe attached Appendix.If you have any questions regarding the matters raised in this letter, please contact meor Carmen Ho (carmenho@hkicpa.org.hk), Associate Director of the Standard SettingDepartment.Sincerely,Christina NgDirector, Standard Setting DepartmentAPPENDIXWork undertaken by HKICPA in forming its views:
The HKICPA:
(a) issued an Invitation to Comment on the ED on 12 December 2018 to ourstakeholders and received specific comments from the Hong Kong Association ofBanks; and(b) developed its views through its Financial Reporting Standards Committee, havingreflected on its stakeholder feedback. The Committee comprises of academics,preparer representatives from various industry sectors, regulators, and technicaland industry experts from small, medium and large accounting firms.Question 1The Board proposes to specify in paragraph 68 of IAS 37 that the cost of fulfilling acontract comprises the costs that relate directly to the contract (rather than only theincremental costs of the contract). The reasons for the Board's decisions areexplained in paragraphs BC16-BC28.Do you agree that paragraph 68 of IAS 37 should specify that the cost of fulfilling acontract comprises the costs that relate directly to the contract? If not, why not, andwhat alternative do you propose?The HKICPA supports the IASB proposal to specify in paragraph 68 of IAS 37 that thecost of fulfilling a contract comprises the costs that relate directly to the contract (i.e.includes both incremental costs and an allocation of other costs) for the reasons statedin paragraphs BC18 to BC23.The HKICPA notes that the terms 'direct costs', 'directly attributable costs', 'directlyrelated', and 'incremental costs' are used extensively in IFRS Standards for themeasurement of assets. To avoid potential confusion and misinterpretation of theintended meanings, the HKICPA recommends that the IASB clarifies how these termsare related, for example:
(a) define the 'directly related costs' in paragraph 68 of IAS 37 as incremental costsplus an allocation of costs directly incurred in activities required to fulfil the contract;
and(b) clarify whether fixed and variable production overheads, which are considered as'indirect costs' but included in the measurement of inventories via systematicallocation in paragraph 12 of IAS 2 Inventories, are 'directly related costs' underIAS 37 in the context of onerous contracts.(c) clarify if the allocations of costs under the proposed paragraph 68A(c) should bebased on the entity operating at normal capacity as referred to in paragraph 13 ofIAS 2.Question 2The Board proposes to add paragraphs 68A-68B which would list costs that do, anddo not, relate directly to a contract.Do you have any comments on the items listed?Are there other examples that you think the Board should consider adding to thoseparagraphs? If so, please provide those examples.The HKICPA supports the examples of costs provided in paragraphs 68A and 68B ofthe ED, which are based on the guidance on contract costs in paragraphs 97 and 98(a)
of IFRS 15 Revenue from Contracts with Customers.Nevertheless the HKICPA notes that the examples in paragraph 68A focus on acontract to provide goods or services. The IASB might also consider providingexamples of costs for other contracts, for example short term and low value leasesunder IFRS 16 Leases.Question 3Do you have any other comments on the proposed amendments?The HKICPA agrees with the proposed transitional provisions for the reasons stated inparagraphs BC31–BC37 of the ED.The HKICPA notes that questions also arise about the meaning of 'economic benefits'in the IAS 37 definition of an onerous contract and considers that the IASB shouldprovide clarification. For example, should the recovery of previously written offoverheads be considered part of the economic benefits expected under a contract?And to what extent should the expected economic benefits include indirect benefitssuch as profits from probable future contracts that would arise from the current contract?The IASB has proposed not to expand the scope of the project to clarify the meaning of'economic benefits' because of the urgency to clarify the 'cost of fulfilling' a contractfollowing the withdrawal of IAS 11 Construction Contracts. However, the HKICPAnotes that the IASB has an active project to make targeted improvements to IAS 37and recommends that the IASB clarifies the meaning of 'economic benefits' in thatproject.~ End ~
IASB Exposure Draft ED/2018/2 Onerous Contracts – Cost of Fulfilling a Contract
下载原件Our Ref.: C/FRSCSent electronically through the IASB Website (www.ifrs.org)
24 April 2019Mr Hans HoogervorstInternational Accounting Standards BoardColumbus Building7 Westferry CircusCanary WharfLondon E14 4HDUnited KingdomDear Hans,IASB Exposure Draft ED/2018/2Onerous Contracts – Cost of Fulfilling a ContractThe Hong Kong Institute of Certified Public Accountants (HKICPA) is the only bodyauthorised by law to set and promulgate standards relating to financial reporting,auditing and ethics for professional accountants, in Hong Kong. We are grateful for theopportunity to provide you with our views on this Exposure Draft (ED).Overall the HKICPA supports the directly related cost approach proposed in the EDbecause it would provide a more faithful representation of the costs of fulfilling acontract than the incremental cost approach and requiring a single approach wouldreduce diversity in practice. In addition, the HKICPA suggests the IASB takes thisopportunity to clarify the meaning of 'directly related costs' and how the term relates toother terminologies such as 'direct costs' and 'directly attributable costs' that are usedin other IFRS Standards.The HKICPA notes that questions also arise about the meaning of 'economic benefits'in the IAS 37 definition of an onerous contract. The HKICPA understands the IASB'sreasoning for not addressing these questions as part of this project. However, theHKICPA recommends that the IASB considers clarifying what constitutes 'economicbenefits' in its wider project to review IAS 37.HKICPA's responses to the questions raised in this ED are explained in more detail inthe attached Appendix.If you have any questions regarding the matters raised in this letter, please contact meor Carmen Ho (carmenho@hkicpa.org.hk), Associate Director of the Standard SettingDepartment.Sincerely,Christina NgDirector, Standard Setting DepartmentAPPENDIXWork undertaken by HKICPA in forming its views:
The HKICPA:
(a) issued an Invitation to Comment on the ED on 12 December 2018 to ourstakeholders and received specific comments from the Hong Kong Association ofBanks; and(b) developed its views through its Financial Reporting Standards Committee, havingreflected on its stakeholder feedback. The Committee comprises of academics,preparer representatives from various industry sectors, regulators, and technicaland industry experts from small, medium and large accounting firms.Question 1The Board proposes to specify in paragraph 68 of IAS 37 that the cost of fulfilling acontract comprises the costs that relate directly to the contract (rather than only theincremental costs of the contract). The reasons for the Board's decisions areexplained in paragraphs BC16-BC28.Do you agree that paragraph 68 of IAS 37 should specify that the cost of fulfilling acontract comprises the costs that relate directly to the contract? If not, why not, andwhat alternative do you propose?The HKICPA supports the IASB proposal to specify in paragraph 68 of IAS 37 that thecost of fulfilling a contract comprises the costs that relate directly to the contract (i.e.includes both incremental costs and an allocation of other costs) for the reasons statedin paragraphs BC18 to BC23.The HKICPA notes that the terms 'direct costs', 'directly attributable costs', 'directlyrelated', and 'incremental costs' are used extensively in IFRS Standards for themeasurement of assets. To avoid potential confusion and misinterpretation of theintended meanings, the HKICPA recommends that the IASB clarifies how these termsare related, for example:
(a) define the 'directly related costs' in paragraph 68 of IAS 37 as incremental costsplus an allocation of costs directly incurred in activities required to fulfil the contract;
and(b) clarify whether fixed and variable production overheads, which are considered as'indirect costs' but included in the measurement of inventories via systematicallocation in paragraph 12 of IAS 2 Inventories, are 'directly related costs' underIAS 37 in the context of onerous contracts.(c) clarify if the allocations of costs under the proposed paragraph 68A(c) should bebased on the entity operating at normal capacity as referred to in paragraph 13 ofIAS 2.Question 2The Board proposes to add paragraphs 68A-68B which would list costs that do, anddo not, relate directly to a contract.Do you have any comments on the items listed?Are there other examples that you think the Board should consider adding to thoseparagraphs? If so, please provide those examples.The HKICPA supports the examples of costs provided in paragraphs 68A and 68B ofthe ED, which are based on the guidance on contract costs in paragraphs 97 and 98(a)
of IFRS 15 Revenue from Contracts with Customers.Nevertheless the HKICPA notes that the examples in paragraph 68A focus on acontract to provide goods or services. The IASB might also consider providingexamples of costs for other contracts, for example short term and low value leasesunder IFRS 16 Leases.Question 3Do you have any other comments on the proposed amendments?The HKICPA agrees with the proposed transitional provisions for the reasons stated inparagraphs BC31–BC37 of the ED.The HKICPA notes that questions also arise about the meaning of 'economic benefits'in the IAS 37 definition of an onerous contract and considers that the IASB shouldprovide clarification. For example, should the recovery of previously written offoverheads be considered part of the economic benefits expected under a contract?And to what extent should the expected economic benefits include indirect benefitssuch as profits from probable future contracts that would arise from the current contract?The IASB has proposed not to expand the scope of the project to clarify the meaning of'economic benefits' because of the urgency to clarify the 'cost of fulfilling' a contractfollowing the withdrawal of IAS 11 Construction Contracts. However, the HKICPAnotes that the IASB has an active project to make targeted improvements to IAS 37and recommends that the IASB clarifies the meaning of 'economic benefits' in thatproject.~ End ~