Page 1 of 5Our Ref.: C/FRSCSent electronically through the IASB Website (www.ifrs.org)
28 January 2015International Accounting Standards Board30 Cannon StreetLondon EC4M 6XHUnited KingdomDear Sirs,IASB Exposure Draft Measuring Quoted Investments in Subsidiaries, JointVentures and Associates at Fair ValueThe Hong Kong Institute of Certified Public Accountants is the only body authorised bylaw to promulgate financial reporting, auditing and ethical standards for professionalaccountants in Hong Kong. We welcome the opportunity to provide you with ourcomments on this Exposure Draft (ED). Our responses to the questions raised in the EDare set out in the Appendix for your consideration.We support the proposal in the ED that the unit of account for investments in subsidiaries,joint ventures and associates is the investment as a whole.However, we think that the proposed amendments for the fair value measurement ofquoted investments in subsidiaries, joint ventures or associates as the product of thequoted price multiplied by the quantity of financial instruments held would be inconsistentwith the proposed unit of account being the investment as a whole. We think that thisproposal ignores adjustments that reflect the nature of the investment as a whole whichmay include, for example, premiums for control or having the right to board representation.If you have any questions regarding the matters raised in our comment letter, pleasecontact Ben Lo, our Associate Director of Standard Setting at ben@hkicpa.org.hk.Yours faithfully,Christina NgHead of Financial ReportingCN/BLEncl.Page 2 of 5Comment on IASB Exposure Draft Measuring Quoted Investments inSubsidiaries, Joint Ventures and Associates at Fair ValueQuestion 1 – The unit of account for investments in subsidiaries, joint venturesand associatesThe IASB concluded that the unit of account for investments within the scope ofIFRS 10, IAS 27 and IAS 28 is the investment as a whole rather than theindividual financial instruments included within that investment (see paragraphsBC3-BC7).Do you agree with this conclusion? If not, why and what alternative do youpropose?Yes, we support the proposed clarification that the unit of account for investments insubsidiaries, joint ventures and associates is the investment as a whole instead of theindividual financial instruments that make up the investment for the reason contained inparagraph BC6 (that is, the relationship with an investee is the relevant characteristicfor such an investment to be included within the scope of IFRS 10 ConsolidatedFinancial Statements, IAS 27 Separate Financial Statements and IAS 28 Investmentsin Associates and Joint Ventures and that characteristic indicates the appropriate unitof account for such an investment should be the investment as a whole).In this connection, we suggest that the IASB should include the rationale in paragraphBC6 of the ED in the body of the relevant standards rather than simply embedding it inthe basis for conclusions.Moreover, we recommend that the IASB should make a more holistic assessment ofhow the proposal could impact other standards and consider consequentialamendments to those standards, such as:
i.investments that are classified as held-for-sale (IFRS 5 Non-current AssetsHeld for Sale and Discontinued Operations), and investments to be distributedto owners (paragraph 11 of IFRIC 17 Distributions of Non-cash Assets toOwners);
ii.previously-held interests in acquirees in business combinations achieved instages (paragraph 42 of IFRS 3), business combinations in which the acquireeis listed including fair value measurements of non-controlling interests onacquisition of a listed subsidiary (paragraphs 19 and 33 of IFRS 3); andiii.the retained interests in the scope of IAS 28 following a loss of control(paragraph 25 of IFRS 10 and paragraph 22 of IAS 28).Question 2 – Interaction between Level 1 inputs and the unit of account forinvestments in subsidiaries, joint ventures and associatesThe IASB proposes to amend IFRS 10, IFRS 12, IAS 27 and IAS 28 to clarify thatthe fair value measurement of quoted investments in subsidiaries, joint venturesand associates should be the product of the quoted price (P) multiplied by thequantity of financial instruments held (Q), or P x Q, without adjustments (seeparagraphs BC8-BC14).Page 3 of 5Do you agree with the proposed amendments? If not, why and what alternativedo you propose? Please explain your reasons, including commenting on theusefulness of the information provided to users of financial statements.No. We believe that the proposed amendments may be operationally simpler forpreparers to apply and a quoted price is a more objective measure. However, we thinkthat the proposed amendments would not be consistent with the unit of account beingthe investment as a whole. Moreover, the proposed amendments would create aninconsistency for fair value measurement between quoted and unquoted investments.As the unit of account for such investments is the investment as a whole, the individualinstruments' Level 1 input need not be the sole determinant of the fair value of theinvestments. While we acknowledge that in some circumstances the mathematicalproduct P x Q would be an objective measurement or a good starting point for fairvalue measurement of such investments, the proposals ignore adjustments that takeinto account the characteristics of the investment as a whole (for example, the pricepaid for such an investment may include premiums for control or having the right toboard representation), which may or may not be reflected in the quoted price of theindividual financial instruments. In this connection, the IASB should also address apossible conflict stemming from the current wording of paragraph 69 of IFRS 13regarding the unit of account and how to differentiate between 'a premium or discount'and 'a blockage factor'.Having said that, we acknowledge that such adjustment on the basis of unit of accountwould be highly judgmental and there is difference in views with regards to theexistence and extent of applying a premium or a discount on investments. As such, ifthe IASB agrees with our view that adjustments to Level 1 fair value measurementshould be allowed to reflect control premiums, for example, we also suggest that theIASB requires additional disclosure that explains the reason for such adjustments, aswell as the basis and assumptions adopted.Question 3 – Measuring the fair value of a CGU that corresponds to a quotedentityThe IASB proposes to align the fair value measurement of a quoted CGU to thefair value measurement of a quoted investment. It proposes to amend IAS 36 toclarify that the recoverable amount of a CGU that corresponds to a quoted entitymeasured on the basis of fair value less costs of disposal should be the productof the quoted price (P) multiplied by the quantity of financial instruments held(Q), or P x Q, without adjustments (see paragraphs BC15-BC19). To determinefair value less costs of disposal, disposal costs are deducted from the fair valueamount measured on this basis.Do you agree with the proposed amendments? If not, why and what alternativedo you propose?Similar to our comments in Question 2, we disagree with these proposed amendmentsbecause the proposed measurement basis (i.e., P x Q) for a CGU is contrary to thecore principles contained in IFRS 13 (i.e., to measure fair value of an asset on a basisthat is consistent with its appropriate unit of account).The ED refers to CGUs that correspond to a quoted entity. IAS 36 defines a CGU asPage 4 of 5the smallest identifiable group of assets that generates cash inflows that are largelyindependent of the cash inflows from other assets or group of assets. Even if a CGU islargely consistent with a listed entity, the CGU would likely exclude items such asliabilities and tax. As such, situations where CGUs are identical to listed entities maybe rare. Furthermore, the use of the term ‘corresponds’ in the ED is not clear.Accordingly, it is unclear as to whether the IASB intends for the proposed requirementsto apply to:
only those situations where the CGU is identical to the listed entity; orin some, or all, situations where a CGU is similar to, but not necessarily identical to,a listed entity.Question 4 – PortfoliosThe IASB proposes to include an illustrative example to IFRS 13 to illustrate theapplication of paragraph 48 of that Standard to a group of financial assets andfinancial liabilities whose market risks are substantially the same and whose fairvalue measurement is categorised within Level 1 of the fair value hierarchy. Theexample illustrates that the fair value of an entity's net exposure to market risksarising from such a group of financial assets and financial liabilities is to bemeasured in accordance with the corresponding Level 1 prices.Do you think that the proposed additional illustrative example for IFRS 13illustrates the application of paragraph 48 of IFRS 13? If not, why and whatalternative do you propose?We think that the proposed example for IFRS 13 illustrates the application ofparagraph 48, however, we suggest that the IASB should also include a clarification inthe body of IFRS 13, such as in the application guidance.Question 5 – Transition provisionsThe IASB proposes that for the amendments to IFRS 10, IAS 27 and IAS 28, anentity should adjust its opening retained earnings, or other component of equity,as appropriate, to account for any difference between the previous carryingamount of the quoted investment(s) in subsidiaries, joint ventures or associatesand the carrying amount of those quoted investment(s) at the beginning of thereporting period in which the amendments are applied. The IASB proposes thatthe amendments to IFRS 12 and IAS 36 should be applied prospectively.The IASB also proposes disclosure requirements on transition (see paragraphsBC32-BC33) and to permit early application (see paragraph BC35).Do you agree with the transition methods proposed (see paragraphs BC30-BC35)? If not, why and what alternative do you propose?If the IASB agrees with our view in Question 2, we do not agree with the proposedtransition provisions. We think that fair value measurement is an estimate by natureand the proposed amendments would result in changes in estimates. Therefore, wesuggest the IASB should require prospective application for all amendments proposedPage 5 of 5in this ED which we consider as consistent with the prospective applicationrequirement of IFRS 13 when entities first applied the standard.On the other hand, we agree with the proposed transition provisions if the IASB wereto finalise the amendments proposed in Question 2 (that is, if the IASB were toconclude that there is no better way than P x Q to measure the fair value of aninvestment in a subsidiary, joint venture or associate quoted in active market) in orderto provide comparable information to users.Other commentsAlong with our request to allow adjustments to Level 1 prices of an investee andinclude a requirement to disclose the reasons for, and the basis and assumptions ofsuch adjustments in Question 2 above, we note that in general there is no specificdisclosure requirement on the fair value measurement of assets and liabilities initiallyrecognised at fair value (and subsequently carried as deemed cost) upon theapplication of acquisition accounting. In some cases, such fair value measurementcould have a significant impact to the income statement, e.g. business combination inexchange for non-monetary consideration and remeasurement of previously heldinterest, etc. We therefore suggest the IASB to consider developing disclosurerequirements (either in IFRS 3 or IFRS 13) for fair value determination on application ofacquisition accounting to provide users with relevant financial information.In addition, the current proposals highlight the need for establishing very clear unit ofaccount principles in the Conceptual Framework.~ End ~