Our Ref.: C/FRSCSent electronically through the IASB Website (www.ifrs.org)
31 December 2015Mr Hans HoogervorstInternational Accounting Standards Board30 Cannon StreetLondon EC4M 6XHUnited KingdomDear Hans,IASB Request for Views 2015 Agenda ConsultationThe Hong Kong Institute of Certified Public Accountants is the only body authorised bylaw to set and promulgate standards relating to financial reporting, auditing and ethicsfor professional accountants in Hong Kong. We are grateful for the opportunity toprovide you with our comments on this Request for Views.We welcome the IASB agenda consultation and believe that such consultation wouldhelp the IASB identify the needs of the IFRS users and strengthen the transparency ofthe IASB's agenda setting process.In terms of the current workplan, we believe that the IASB's main priority is to issue theupcoming standard on Leases and complete the Insurance Contracts project afterundertaking comprehensive effects analysis. The two cross-cutting projects,Conceptual Framework and Disclosure Initiative, should also be the IASB's highpriorities as they are fundamental to the preparation of financial statements.As for the IASB's research activities, we consider that the IASB should prioritise thefollowing projects as they are either highly integral to the Conceptual Framework or theDisclosure Initiative, or they require urgent and fundamental review of the relevantstandards:
․Financial instruments with characteristics of equity;
․Equity method;
․Disclosure initiative – Principle of disclosure; and․Primary Financial Statements.Other research projects that should be the IASB's high priority, after taking intoaccount the urgency and importance of the issues involved, include:
․Goodwill and impairment;
․Business combinations under common control;
․Definition of a business; and․Provisions, contingent liabilities and contingent assets.Our response to the questions raised in this Request for Views are explained in moredetail in the Appendix.Page 2 of 12Finally, we would like the IASB to consider a short-term project that assesses theusefulness of the exemption criteria for preparing consolidated financial statementsunder IFRS 10 Consolidated Financial Statements. We believe that the condition setout in paragraph 4(a)(iv) of IFRS 10 appears to have no clear rationale and isinconsistent with the thinking reflected in paragraph 3.24 of the IASB's Exposure DraftED/2015/3 Conceptual Framework for Financial Reporting in relation to the boundaryof a reporting entity. We consider that such inconsistency and the lack of clearprinciple for consolidation exemption could hinder the use of IFRS in jurisdictionswhere IFRS is not mandatory to be used for preparing statutory financial statements.We, therefore, request that the IASB adds this project to its workplan and, considerswhether the condition in paragraph 4(a)(iv) of IFRS 10 should be deleted entirely.If you have any questions regarding the matters raised in this letter, please contact meorEkyLiu,AssociateDirectoroftheStandardSettingDepartment(eky@hkicpa.org.hk).Yours sincerely,Christina NgHead of Financial ReportingCN/ELEnclPage 3 of 12Detailed comments on IASB Request for Views 2015 Agenda ConsultationQuestion 1The IASB's work plan includes five main areas of technical projects:
(a) its research programme;
(b) its Standards-level programme;
(c) the Conceptual Framework;
(d) the Disclosure Initiative; and(e) maintenance and implementation projects.What factors should the IASB consider in deciding how much of its resourcesshould be allocated to each area listed above?We consider that the factors set out in paragraph 55 of the Request for Views areappropriate for the IASB to consider when prioritising individual projects on its workplan and allocating resources to the projects. Having said that, we suggest that theIASB clearly communicates how it assesses and weighs those factors when prioritisingthe projects.Question 2The IASB's research programme is laid out in paragraph 32 and a furtherpotential research topic on IFRS 5 is noted in paragraph 33.Should the IASB:
(a) Add any further projects to its research programme? Which projects, andwhy? Please also explain which current research projects should be given alower priority to create the capacity for the IASB to make progress on theproject(s) that you suggested adding.(b) Remove from its research programme the projects on foreign currencytranslation (see paragraphs 39 – 41) and high inflation (see paragraphs 42 –43)? Why or why not?(c) Remove any other projects from its research programme?New research projectsWe do not have any new projects that we would like to add to the IASB's researchprogramme.Removal of inactive research projectsWe do not object to removing the projects on foreign currency translation and highinflation from the research programme as these two projects are not pervasive in ourjurisdiction at the moment.For the same reason, we do not object to removing the project on extractiveactivities/intangible assets/research and development from the research programme.We think that the IASB should be cautious in undertaking projects that mainly focus ona specific industry especially in light of its resource constraints. In view of this, werecommend the IASB focuses on completing the Conceptual Framework and ifnecessary, revisits the principles of relevant standards, e.g. IAS 38 Intangible Assets toAPPENDIXPage 4 of 12ensure that the principles of the standard are clear and there is sufficient applicationguidance to supplement those principles.Question 3For each project on the research programme, including any new projectssuggested by you in response to Question 2, please indicate its relativeimportance (high/medium/low) and urgency (high/medium/low).Please also describe the factors that led you to assign those rankings,particularly for those items you ranked as high or low.The table below summarises our proposed prioritisation of research projects based onthe relative importance and urgency.HighMediumLowHigh․ FinancialInstruments withCharacteristics ofEquity․ Equity method․ DisclosureInitiative – Principlesof Disclosure․ Primary FinancialStatements․Goodwill andImpairment․BusinessCombinations underCommon Control․Definition of aBusiness․Provisions,Contingent Liabilitiesand ContingentAssetsMedium․Share-basedPayment․ Discount Rates․ Income TaxesLow․ Pollutant PricingMechanisms․ Post-employmentBenefits․ Dynamic RiskManagementProjects that we support removing from the research programme for the time being:
․Foreign Currency Translation․High Inflation․Extractive Activities/Intangible Assets/Research and DevelopmentProjects of high importance and high urgencyProjects that are high-importance-high-urgency are either fundamental to thepreparation of financial statements or in need of an urgent and fundamental review ofexisting standards. We consider that resources should be prioritised for these projectsfirst. Our reasons are outlined below.․Financial instruments with characteristics of equityThis project is highly integral to the Conceptual Framework project in relation tothe notion of liability versus equity. The project should not just focus on thecurrent application issues of IAS 32 Financial Instruments: Presentation. Instead,UrgencyImportancePage 5 of 12the IASB should do a fundamental review of the concepts (or requirements)
underpinning the standard.Because we see this project as an extension of the Conceptual Frameworkproject, it would make sense that the IASB expedites this project following thecompletion of its Conceptual Framework project.In particular, we would like to draw the IASB's attention to the following two issuesunder IAS 32:
1.Economic compulsion: The application of the principles and rules in IAS 32sometimes results in an inconsistent distinction between equity instrumentsand non-equity instruments. The emphasis on the existence of a contractualobligation to deliver cash or other financial assets, while ignoring economiccompulsion, may lead to instruments with economic characteristics ofliabilities being classified as equity.
2.'Fixed for fixed' rule: The current 'fixed for fixed' rule in IAS 32.16(b)(ii) insome situations does not result in a faithful representation of the economiccharacteristics of equity-linked instruments. One typical example is where theconversion option of a convertible bond denominated in a foreign currency isrequired to be classified as a derivative liability, even though the vastmajority of the fair value movement on remeasurement may be attributable tomovements in the underlying equity price.․Equity methodThere have long been conceptual issues and practical difficulties in applying theequity method to account for investments in associates and this has increasedwith recent piecemeal amendments which lacked a consistent conceptual basis.Concerns have been raised about the complexity of the equity method in terms ofthe use of many relevant consolidation procedures and impairment testing. Thelevel of information required to apply the equity method also poses practicaldifficulties to apply the method properly. This is particularly the case when onelisted entity is an investor in another listed entity and there may be restrictionsover the amount and timing of release of price sensitive information.In addition, we note a growing number of preference shares with various features(ordinarily accounted for under IAS 32 and IAS 39 Financial Instruments:
Recognition and Measurement by the issuer as liabilities) that provide theinvestors with certain rights that could result in the investor having significantinfluence over the investee. This further undermines any conceptual basis for arequirement to use the equity method whenever there is significant influencepresent, irrespective of the level of equity interest.We understand that the IASB is undertaking, in the short term, a narrow-scopeproject to simplify the equity method and address the implementation issuesidentified by the Interpretations Committee and, in the longer term, a morefundamental assessment of the objective and principles of the equity method.While we initially agreed with the approach taken by the IASB, we now believethat there is an urgency for a fundamental review of the objective of the equitymethod (the 'why') before the IASB undertakes any more narrow-scope ortemporary improvements to the 'how' of the equity method. That is, the focusPage 6 of 12should as a matter of urgency be on whether the equity method serves any usefulpurpose in the sense of providing faithful and decision-useful information at areasonable cost and if so, whether this useful purpose is only apparent insituations of joint control, rather than significant influence. Related to thisfundamental question is the question of what the equity method is trying to portray:
is it a form of one-line consolidation (as appears to be its original intent, asarticulated in paragraph 26 of IAS 28 Investments in Associates and JointVentures) or is it a way to measure the carrying value of an investment which fallsoutside the scope of IAS 39 (as implied in paragraphs BCZ45-46 of IAS 28)? Untilthe IASB has articulated the need for or the objective of the equity method, we areconcerned that any amendments to the method might further complicate theaccounting without any comparable benefit or conceptual basis. We, therefore,think that the IASB should place a high priority on the fundamental review of theobjective of the equity method of accounting.․'Disclosure initiative – Principles of disclosure' and 'Primary financial statements'We can foresee the significant beneficial outcomes of the IASB's DisclosureInitiative project, including the Primary Financial Statements project. We think thatthese projects will contribute to a widespread improvement in reporting qualityglobally. Therefore, these projects should be prioritised.Projects of high importance and medium urgencyWe consider that the following projects are of high importance but less urgentthan the projects mentioned directly above if the availability of resources is anissue.․Goodwill and impairmentDespite changing the accounting for goodwill (particularly from amortisation toimpairment-only model) for conceptual reasons just 10 years ago, we believe thatthere is enough issues in practice that warrant the IASB's attention to revisit theaccounting for goodwill.Conceptually, we consider that the current approach fails to address the fact that,over time, purchased goodwill in most cases is inevitably replaced by goodwill thatis generated internally. We also note the practical difficulties and challenges in theexisting requirements of goodwill accounting, including the application of IAS 36Impairment of Assets for goodwill, the tension on the identification and valuationof intangible assets from goodwill during business combinations and the arbitraryallocation of goodwill to cash-generating units, especially when a group re-organizes or makes partial disposals many years after the original acquisition.These issues are explained in more detail in our submission on the IASB's Post-Implementation Review: IFRS 3 Business Combinations1.Goodwill and impairment accounting affects a wide range of entities and users offinancial reports globally. We also consider it inevitable that, the longer the non-1 The Institute's submission on the IASB's Post-Implementation Review: IFRS 3 Business Combinations isavailable athttp://www.hkicpa.org.hk/file/media/section6_standards/standards/FinancialReporting/submission-pdf/2014/sub_ifrs3.pdf.Page 7 of 12amortisation model remains in place, the more apparent it will become that themodel is flawed, as any connection between the unamortized purchased goodwilland the performance of the business will become increasingly detached andarbitrary. Accordingly, we think that this project is of high importance.We believe that the IASB could potentially speed up the progress of this project asit has received feedback on the accounting for goodwill and impairment from itspost-implementation review of IFRS 3. In addition, we understand that EuropeanFinancial Reporting Advisory Group (EFRAG), and the standard setters of Italyand Japan have conducted a joint research on goodwill accounting in 20142. Wethink that the findings of such research may have some merit for the IASB'sconsideration.․Business combinations under common controlBusiness combinations under common control are a regular occurrence in HongKong and around the region. Currently, such transactions are excluded from thescope of IFRS 3 Business Combinations and other IFRS standards do notaddress the issue explicitly. Because of the frequency of such transactions inHong Kong, the Institute developed Accounting Guideline 5 Merger Accounting forCommon Control Combinations that gives guidance on how to apply the mergeraccounting concept for recognising a common control combination. We note thatthe International Organisation of Securities Commissions has identified divergentaccounting treatments relating to common control transactions. We believe thatgood standard-setting entails providing the appropriate requirements or guidancefor the accounting of a common issue such as this. Our view expressed above isconsistent with our submission on the IASB's Request for Views AgendaConsultation 20113.We understand that some jurisdictions in the Asian-Oceanian region also sharethe same concern and consider that this research project should be a high priority.In light of the above, we believe that development of a global standard which setsout the principles for accounting for business combinations under common controlis needed in view of the widespread impact to users of financial reports globally.․Definition of a businessDue to the different accounting consequences under IFRS for the acquisition of a'business' as opposed to a group of assets, the definition of a 'business' is animportant gating concept which comes under pressure from preparers. However,there is only limited guidance about the definition of a business in IFRS 3 whichmay lead to diversity in practice.2 The joint research on goodwill accounting conducted by EFRAG, and the standard setters of Italy andJapan can be accessed at http://www.efrag.org/Front/n1-1440/EFRAG--the-OIC-and-the-ASBJ-have-published-a-feedback-statement-that-summarises-the-responses-received-on-the-Discussion-Paper--Should-Goodwill-Still-Not-Be-Amortised----Accounting-and-Disclosure-for-Goodwill.aspx3 The Institute's submission on the IASB's Request for Views Agenda Consultation 2011 is available athttp://www.hkicpa.org.hk/file/media/section6_standards/standards/FinancialReporting/submission-pdf/2011/agenda%20cons.pdfPage 8 of 12We note that the IASB collected feedback on this issue from the post-implementation review of IFRS 3 and is considering whether to address this issueby clarifying the existing definition of a business or by eliminating the differencesbetween the two accounting treatments. We, therefore, believe that the IASBshould continue with the project as a matter of priority, in order to reduce diversityin practice.․Provisions, contingent liabilities and contingent assetsIn our submission on the IASB's Exposure Draft ED/2015/3 ConceptualFramework for Financial Report4, we highlighted an issue on the inconsistency inthe notion of liabilities between IAS 37 Provisions, Contingent Liabilities andContingent Assets and ED/2015/3. To prevent any diversity in practice in applyingthe liability notion, we think that the IASB should address the inconsistency as ahigh priority.Having said that, we think that IAS 37 is still largely operational and therefore, interms of urgency, this project is classified as medium urgency while it is of highimportance.Projects of medium priorityWe are aware that there are certain application issues with the relevant standardsassociated with the Share-based Payment, Discount Rates, and Income Taxesprojects.We think that if the IASB were to undertake research on these topics, the researchshould be a comprehensive review of the existing requirements, and therefore willrequire a significant level of resources. Furthermore, we think that the existingstandards associated with these projects are still largely operational, and therefore,these projects are not as important nor urgent as those that we classify as high priority.Projects of low priorityIn Hong Kong, we have not had any major implementation issues on the relevantstandards, or major need for the projects, outlined below.․Pollutant pricing mechanisms․Post-employment benefits․Dynamic risk managementHaving said that, we understand that some of these projects are pervasive in a fewjurisdictions. We, therefore, think that the IASB and the national standard-setters(NSSs) of these jurisdictions should work together in dealing with these projects. TheIASB could potentially request the help of these NSSs to undertake a significant aspectof the research first before deciding what, and how much, resources the IASB needson these projects.4The Institute's submission on the IASB's Exposure Draft Conceptual Framework for Financial Reporting isavailable athttp://www.hkicpa.org.hk/file/media/section6_standards/standards/FinancialReporting/submission-pdf/2015/sub_1503.pdf.Page 9 of 12Question 4Do you have any comments on the IASB’s current work plan for major projects?We welcome the expected issuance of the upcoming standards on Leases andInsurance Contracts and support the IASB’s decision to devote time and resources tothese projects. We also support the IASB’s decision to focus on making progress onthe Conceptual Framework and Disclosure Initiative projects.The IASB should be prepared for the high possibility of having to provide resources toattend to questions about, or requests to clarify, the standards during theimplementation period of the major standards, including IFRS 9 Financial Instruments,IFRS 15 Revenue from Contracts with Customers and the upcoming standards onLeases and Insurance Contracts.Question 5Are the IASB and the Interpretations Committee providing the right mix ofimplementation support to meet stakeholders’ needs and is that supportsufficient (see paragraphs 19-23 and 50-53)?We are concerned about the IASB’s current approach in issuing major standards andsubsequently tinkering with them by issuing narrow-scope amendments immediatelyafter the major standards are issued. For example, subsequent amendments weremade to IFRS 10 Consolidated Financial Statements, IFRS 11 Joint Arrangements andIFRS 15 Revenue from Contracts with Customers immediately after the standardswere issued. This may create an impression that there are shortcomings with theIASB's standard-setting process, for example, a lack of sufficient effects analysis.Furthermore, multiple versions of a standard immediately after it is first issued mayconfuse the users of IFRS.We are aware that the IASB’s due process already includes a formal consultationperiod, and for more complex projects, further consultation with targeted preparers,practitioners, financial statement users and NSSs prior to issuing new standards. Weare also aware that the issuance of new standards is subject to the Due ProcessOversight Committee’s requirements. But the IASB could consider conducting furtherextended consultation with targeted stakeholders or provide more time for preparersand practitioners to make fatal flaw comments at the final stage in drafting thestandards. We understand the possible negative implications in providing more time forconsultation as it may result in delay in issuing standards, but we would prefer waitingfor a higher quality standard to be issued, than to have to contend with a flawedstandard followed by amendments. We also believe that many of our constituentswould share this view.In terms of the activities to support the consistency of application and implementationof IFRS, we found the transition resource groups (TRG) to be helpful in supportingpreparers and practitioners in understanding the new standards. The TRG processalso provides a public platform for stakeholders to discuss and exchange views onpotential implementation issues of the new standards, which is educational forconstituents. However, we believe that a TRG would be even more useful if it were setup earlier as part of the standard’s due process stages so that the TRG could helpPage 10 of 12perform fatal flaw review of the near-final draft standard, and any implementationissues raised by the TRG could be dealt with by the IASB before the issuance of thestandard. This may in turn reduce the problem of having subsequent narrow-scopeamendments.There should also be a mechanism for regular consultation between the IASB or theInterpretations Committee and the NSSs and regulators for reporting IFRSimplementation/application issues in practice. For example, the IASB could make useof the International Forum of Accounting Standard Setters meeting as a platform byrequesting NSSs to report on any issues in practice. The IASB and NSSs could alsodevelop a documented and agreed process for reporting IFRS implementation issuesin practice on an ongoing basis.In terms of education initiative, we are cautious about having educational materialswhich go beyond the IASB published material as we are concerned that readers mayassume that the educational materials are authoritative and have been through theIASB's formal due process. We believe that the current approach of incorporatingapplication guidance and illustrative examples in the standards is the most useful andappropriate way to support the consistency of application and implementation of IFRS.However, we support the issuance of educational materials which seek to introduceand explain the text of the material issued by the IASB. Although such educationalmaterial may not be providing new guidance, it is useful to have slide decks andspeaker notes based on the IASB issued text available off-the-shelf as this saves re-inventing the wheel and promotes consistency in understanding.Question 6Does the IASB’s work plan as a whole deliver change at the right pace and at alevel of detail that is appropriate to principle-based standard-setting? Why orwhy not?We think that the major projects are delivered at the right pace; however, as mentionedin our response to question 5, there have been too many narrow-scope amendmentsto standards immediately after issuance.We are satisfied with the level of detail for principle-based standard-setting but wouldurge the IASB to use simpler and more direct / straightforward English language in thestandards and to provide robust application guidance to supplement the principle of thestandards. Application guidance should include fact patterns that are both simple andmore complex to cater for developing, emerging and developed economies.Question 7Do you have any other comments on the IASB’s work plan?We would like the IASB to consider a short-term project that assesses the usefulnessof the exemption criteria for preparing consolidated financial statements under IFRS 10.We think that this project could be added to the IASB's maintenance andimplementation programme but understand if further research may be necessary toconsider this request. That said, we think that any necessary research would notPage 11 of 12require significant resources.The Institute submitted a letter5 to the IASB in 2014 regarding the proposal above todelete paragraph 4(a)(iv) of IFRS 10. This paragraph sets out one of the conditions forwhen a parent entity is not required to present consolidated financial statements:
'its ultimate or any intermediate parent produces consolidatedfinancial statements that are available for public use and complywith International Financial Reporting Standards.'As stated in our letter, there appears to be no clear rationale for the above condition.We believe that the test for any conditions set must be whether the resultinginformation from passing or failing those tests is useful to those users to help themunderstand the financial performance and financial position of the reporting entity (here:
an intermediate holding company (IHC)). However, concerning paragraph 4(a)(iv) ofIFRS 10, we cannot see the relevance of the type or availability of financial statementsprepared by the ultimate parent to the question of the usefulness of company levelinformation prepared by the IHC. We also note that our view appears consistent withthe thinking reflected in paragraph 3.24 of the IASB's Exposure Draft ED/2015/3Conceptual Framework for Financial Reporting, which states that 'consolidatedfinancial statements of the parent are not intended to provide information to users of asubsidiary's financial statements'. Our views on this issue are explained in more detailin our letter to the IASB in response to ED/2015/3.We believe that the above inconsistency and lack of clear principle for this part of theconsolidation exemption could hinder the use of IFRS in jurisdictions where IFRS is notmandatory to be used for preparing statutory financial statements. Therefore, werequest that the IASB adds this project to its maintenance and implementationprogramme and, consider whether paragraph 4(a)(iv) of IFRS 10 should be deletedentirely.Question 8Because of the time needed to complete individual major projects, the IASBproposes that a five year interval between Agenda Consultations is moreappropriate than the three year interval currently required. Do you agree? Whyor Why not?If not, what interval do you suggest? Why?We agree with the IASB's proposal to extend the current three-year consultation cycleto five years. We believe that the proposed five year interval between agendaconsultations is an appropriate timeframe to take stock on the IASB's workplan whenmajor projects usually take more than three years to complete.5 The Institute's letter to the IASB regarding the proposal to delete paragraph 4(a)(iv) of IFRS 10 isavailable athttp://www.hkicpa.org.hk/file/media/section6_standards/standards/FinancialReporting/submission-pdf/2014/sub_ifrs10.pdf.Page 12 of 12However, if the IASB were to proceed with a five-year consultation cycle, we suggestthat the IASB reports back on the progress of its projects on an annual basis, andconsiders an interim consultation that is of a smaller scale, when necessary, forexample, when there is a change in economic environment that warrants a change indirection of its projects or that leads to an emerging issue.~ End ~
IASB Request for Views 2015 Agenda Consultation
下载原件Our Ref.: C/FRSCSent electronically through the IASB Website (www.ifrs.org)
31 December 2015Mr Hans HoogervorstInternational Accounting Standards Board30 Cannon StreetLondon EC4M 6XHUnited KingdomDear Hans,IASB Request for Views 2015 Agenda ConsultationThe Hong Kong Institute of Certified Public Accountants is the only body authorised bylaw to set and promulgate standards relating to financial reporting, auditing and ethicsfor professional accountants in Hong Kong. We are grateful for the opportunity toprovide you with our comments on this Request for Views.We welcome the IASB agenda consultation and believe that such consultation wouldhelp the IASB identify the needs of the IFRS users and strengthen the transparency ofthe IASB's agenda setting process.In terms of the current workplan, we believe that the IASB's main priority is to issue theupcoming standard on Leases and complete the Insurance Contracts project afterundertaking comprehensive effects analysis. The two cross-cutting projects,Conceptual Framework and Disclosure Initiative, should also be the IASB's highpriorities as they are fundamental to the preparation of financial statements.As for the IASB's research activities, we consider that the IASB should prioritise thefollowing projects as they are either highly integral to the Conceptual Framework or theDisclosure Initiative, or they require urgent and fundamental review of the relevantstandards:
․Financial instruments with characteristics of equity;
․Equity method;
․Disclosure initiative – Principle of disclosure; and․Primary Financial Statements.Other research projects that should be the IASB's high priority, after taking intoaccount the urgency and importance of the issues involved, include:
․Goodwill and impairment;
․Business combinations under common control;
․Definition of a business; and․Provisions, contingent liabilities and contingent assets.Our response to the questions raised in this Request for Views are explained in moredetail in the Appendix.Page 2 of 12Finally, we would like the IASB to consider a short-term project that assesses theusefulness of the exemption criteria for preparing consolidated financial statementsunder IFRS 10 Consolidated Financial Statements. We believe that the condition setout in paragraph 4(a)(iv) of IFRS 10 appears to have no clear rationale and isinconsistent with the thinking reflected in paragraph 3.24 of the IASB's Exposure DraftED/2015/3 Conceptual Framework for Financial Reporting in relation to the boundaryof a reporting entity. We consider that such inconsistency and the lack of clearprinciple for consolidation exemption could hinder the use of IFRS in jurisdictionswhere IFRS is not mandatory to be used for preparing statutory financial statements.We, therefore, request that the IASB adds this project to its workplan and, considerswhether the condition in paragraph 4(a)(iv) of IFRS 10 should be deleted entirely.If you have any questions regarding the matters raised in this letter, please contact meorEkyLiu,AssociateDirectoroftheStandardSettingDepartment(eky@hkicpa.org.hk).Yours sincerely,Christina NgHead of Financial ReportingCN/ELEnclPage 3 of 12Detailed comments on IASB Request for Views 2015 Agenda ConsultationQuestion 1The IASB's work plan includes five main areas of technical projects:
(a) its research programme;
(b) its Standards-level programme;
(c) the Conceptual Framework;
(d) the Disclosure Initiative; and(e) maintenance and implementation projects.What factors should the IASB consider in deciding how much of its resourcesshould be allocated to each area listed above?We consider that the factors set out in paragraph 55 of the Request for Views areappropriate for the IASB to consider when prioritising individual projects on its workplan and allocating resources to the projects. Having said that, we suggest that theIASB clearly communicates how it assesses and weighs those factors when prioritisingthe projects.Question 2The IASB's research programme is laid out in paragraph 32 and a furtherpotential research topic on IFRS 5 is noted in paragraph 33.Should the IASB:
(a) Add any further projects to its research programme? Which projects, andwhy? Please also explain which current research projects should be given alower priority to create the capacity for the IASB to make progress on theproject(s) that you suggested adding.(b) Remove from its research programme the projects on foreign currencytranslation (see paragraphs 39 – 41) and high inflation (see paragraphs 42 –43)? Why or why not?(c) Remove any other projects from its research programme?New research projectsWe do not have any new projects that we would like to add to the IASB's researchprogramme.Removal of inactive research projectsWe do not object to removing the projects on foreign currency translation and highinflation from the research programme as these two projects are not pervasive in ourjurisdiction at the moment.For the same reason, we do not object to removing the project on extractiveactivities/intangible assets/research and development from the research programme.We think that the IASB should be cautious in undertaking projects that mainly focus ona specific industry especially in light of its resource constraints. In view of this, werecommend the IASB focuses on completing the Conceptual Framework and ifnecessary, revisits the principles of relevant standards, e.g. IAS 38 Intangible Assets toAPPENDIXPage 4 of 12ensure that the principles of the standard are clear and there is sufficient applicationguidance to supplement those principles.Question 3For each project on the research programme, including any new projectssuggested by you in response to Question 2, please indicate its relativeimportance (high/medium/low) and urgency (high/medium/low).Please also describe the factors that led you to assign those rankings,particularly for those items you ranked as high or low.The table below summarises our proposed prioritisation of research projects based onthe relative importance and urgency.HighMediumLowHigh․ FinancialInstruments withCharacteristics ofEquity․ Equity method․ DisclosureInitiative – Principlesof Disclosure․ Primary FinancialStatements․Goodwill andImpairment․BusinessCombinations underCommon Control․Definition of aBusiness․Provisions,Contingent Liabilitiesand ContingentAssetsMedium․Share-basedPayment․ Discount Rates․ Income TaxesLow․ Pollutant PricingMechanisms․ Post-employmentBenefits․ Dynamic RiskManagementProjects that we support removing from the research programme for the time being:
․Foreign Currency Translation․High Inflation․Extractive Activities/Intangible Assets/Research and DevelopmentProjects of high importance and high urgencyProjects that are high-importance-high-urgency are either fundamental to thepreparation of financial statements or in need of an urgent and fundamental review ofexisting standards. We consider that resources should be prioritised for these projectsfirst. Our reasons are outlined below.․Financial instruments with characteristics of equityThis project is highly integral to the Conceptual Framework project in relation tothe notion of liability versus equity. The project should not just focus on thecurrent application issues of IAS 32 Financial Instruments: Presentation. Instead,UrgencyImportancePage 5 of 12the IASB should do a fundamental review of the concepts (or requirements)
underpinning the standard.Because we see this project as an extension of the Conceptual Frameworkproject, it would make sense that the IASB expedites this project following thecompletion of its Conceptual Framework project.In particular, we would like to draw the IASB's attention to the following two issuesunder IAS 32:
1.Economic compulsion: The application of the principles and rules in IAS 32sometimes results in an inconsistent distinction between equity instrumentsand non-equity instruments. The emphasis on the existence of a contractualobligation to deliver cash or other financial assets, while ignoring economiccompulsion, may lead to instruments with economic characteristics ofliabilities being classified as equity.
2.'Fixed for fixed' rule: The current 'fixed for fixed' rule in IAS 32.16(b)(ii) insome situations does not result in a faithful representation of the economiccharacteristics of equity-linked instruments. One typical example is where theconversion option of a convertible bond denominated in a foreign currency isrequired to be classified as a derivative liability, even though the vastmajority of the fair value movement on remeasurement may be attributable tomovements in the underlying equity price.․Equity methodThere have long been conceptual issues and practical difficulties in applying theequity method to account for investments in associates and this has increasedwith recent piecemeal amendments which lacked a consistent conceptual basis.Concerns have been raised about the complexity of the equity method in terms ofthe use of many relevant consolidation procedures and impairment testing. Thelevel of information required to apply the equity method also poses practicaldifficulties to apply the method properly. This is particularly the case when onelisted entity is an investor in another listed entity and there may be restrictionsover the amount and timing of release of price sensitive information.In addition, we note a growing number of preference shares with various features(ordinarily accounted for under IAS 32 and IAS 39 Financial Instruments:
Recognition and Measurement by the issuer as liabilities) that provide theinvestors with certain rights that could result in the investor having significantinfluence over the investee. This further undermines any conceptual basis for arequirement to use the equity method whenever there is significant influencepresent, irrespective of the level of equity interest.We understand that the IASB is undertaking, in the short term, a narrow-scopeproject to simplify the equity method and address the implementation issuesidentified by the Interpretations Committee and, in the longer term, a morefundamental assessment of the objective and principles of the equity method.While we initially agreed with the approach taken by the IASB, we now believethat there is an urgency for a fundamental review of the objective of the equitymethod (the 'why') before the IASB undertakes any more narrow-scope ortemporary improvements to the 'how' of the equity method. That is, the focusPage 6 of 12should as a matter of urgency be on whether the equity method serves any usefulpurpose in the sense of providing faithful and decision-useful information at areasonable cost and if so, whether this useful purpose is only apparent insituations of joint control, rather than significant influence. Related to thisfundamental question is the question of what the equity method is trying to portray:
is it a form of one-line consolidation (as appears to be its original intent, asarticulated in paragraph 26 of IAS 28 Investments in Associates and JointVentures) or is it a way to measure the carrying value of an investment which fallsoutside the scope of IAS 39 (as implied in paragraphs BCZ45-46 of IAS 28)? Untilthe IASB has articulated the need for or the objective of the equity method, we areconcerned that any amendments to the method might further complicate theaccounting without any comparable benefit or conceptual basis. We, therefore,think that the IASB should place a high priority on the fundamental review of theobjective of the equity method of accounting.․'Disclosure initiative – Principles of disclosure' and 'Primary financial statements'We can foresee the significant beneficial outcomes of the IASB's DisclosureInitiative project, including the Primary Financial Statements project. We think thatthese projects will contribute to a widespread improvement in reporting qualityglobally. Therefore, these projects should be prioritised.Projects of high importance and medium urgencyWe consider that the following projects are of high importance but less urgentthan the projects mentioned directly above if the availability of resources is anissue.․Goodwill and impairmentDespite changing the accounting for goodwill (particularly from amortisation toimpairment-only model) for conceptual reasons just 10 years ago, we believe thatthere is enough issues in practice that warrant the IASB's attention to revisit theaccounting for goodwill.Conceptually, we consider that the current approach fails to address the fact that,over time, purchased goodwill in most cases is inevitably replaced by goodwill thatis generated internally. We also note the practical difficulties and challenges in theexisting requirements of goodwill accounting, including the application of IAS 36Impairment of Assets for goodwill, the tension on the identification and valuationof intangible assets from goodwill during business combinations and the arbitraryallocation of goodwill to cash-generating units, especially when a group re-organizes or makes partial disposals many years after the original acquisition.These issues are explained in more detail in our submission on the IASB's Post-Implementation Review: IFRS 3 Business Combinations1.Goodwill and impairment accounting affects a wide range of entities and users offinancial reports globally. We also consider it inevitable that, the longer the non-1 The Institute's submission on the IASB's Post-Implementation Review: IFRS 3 Business Combinations isavailable athttp://www.hkicpa.org.hk/file/media/section6_standards/standards/FinancialReporting/submission-pdf/2014/sub_ifrs3.pdf.Page 7 of 12amortisation model remains in place, the more apparent it will become that themodel is flawed, as any connection between the unamortized purchased goodwilland the performance of the business will become increasingly detached andarbitrary. Accordingly, we think that this project is of high importance.We believe that the IASB could potentially speed up the progress of this project asit has received feedback on the accounting for goodwill and impairment from itspost-implementation review of IFRS 3. In addition, we understand that EuropeanFinancial Reporting Advisory Group (EFRAG), and the standard setters of Italyand Japan have conducted a joint research on goodwill accounting in 20142. Wethink that the findings of such research may have some merit for the IASB'sconsideration.․Business combinations under common controlBusiness combinations under common control are a regular occurrence in HongKong and around the region. Currently, such transactions are excluded from thescope of IFRS 3 Business Combinations and other IFRS standards do notaddress the issue explicitly. Because of the frequency of such transactions inHong Kong, the Institute developed Accounting Guideline 5 Merger Accounting forCommon Control Combinations that gives guidance on how to apply the mergeraccounting concept for recognising a common control combination. We note thatthe International Organisation of Securities Commissions has identified divergentaccounting treatments relating to common control transactions. We believe thatgood standard-setting entails providing the appropriate requirements or guidancefor the accounting of a common issue such as this. Our view expressed above isconsistent with our submission on the IASB's Request for Views AgendaConsultation 20113.We understand that some jurisdictions in the Asian-Oceanian region also sharethe same concern and consider that this research project should be a high priority.In light of the above, we believe that development of a global standard which setsout the principles for accounting for business combinations under common controlis needed in view of the widespread impact to users of financial reports globally.․Definition of a businessDue to the different accounting consequences under IFRS for the acquisition of a'business' as opposed to a group of assets, the definition of a 'business' is animportant gating concept which comes under pressure from preparers. However,there is only limited guidance about the definition of a business in IFRS 3 whichmay lead to diversity in practice.2 The joint research on goodwill accounting conducted by EFRAG, and the standard setters of Italy andJapan can be accessed at http://www.efrag.org/Front/n1-1440/EFRAG--the-OIC-and-the-ASBJ-have-published-a-feedback-statement-that-summarises-the-responses-received-on-the-Discussion-Paper--Should-Goodwill-Still-Not-Be-Amortised----Accounting-and-Disclosure-for-Goodwill.aspx3 The Institute's submission on the IASB's Request for Views Agenda Consultation 2011 is available athttp://www.hkicpa.org.hk/file/media/section6_standards/standards/FinancialReporting/submission-pdf/2011/agenda%20cons.pdfPage 8 of 12We note that the IASB collected feedback on this issue from the post-implementation review of IFRS 3 and is considering whether to address this issueby clarifying the existing definition of a business or by eliminating the differencesbetween the two accounting treatments. We, therefore, believe that the IASBshould continue with the project as a matter of priority, in order to reduce diversityin practice.․Provisions, contingent liabilities and contingent assetsIn our submission on the IASB's Exposure Draft ED/2015/3 ConceptualFramework for Financial Report4, we highlighted an issue on the inconsistency inthe notion of liabilities between IAS 37 Provisions, Contingent Liabilities andContingent Assets and ED/2015/3. To prevent any diversity in practice in applyingthe liability notion, we think that the IASB should address the inconsistency as ahigh priority.Having said that, we think that IAS 37 is still largely operational and therefore, interms of urgency, this project is classified as medium urgency while it is of highimportance.Projects of medium priorityWe are aware that there are certain application issues with the relevant standardsassociated with the Share-based Payment, Discount Rates, and Income Taxesprojects.We think that if the IASB were to undertake research on these topics, the researchshould be a comprehensive review of the existing requirements, and therefore willrequire a significant level of resources. Furthermore, we think that the existingstandards associated with these projects are still largely operational, and therefore,these projects are not as important nor urgent as those that we classify as high priority.Projects of low priorityIn Hong Kong, we have not had any major implementation issues on the relevantstandards, or major need for the projects, outlined below.․Pollutant pricing mechanisms․Post-employment benefits․Dynamic risk managementHaving said that, we understand that some of these projects are pervasive in a fewjurisdictions. We, therefore, think that the IASB and the national standard-setters(NSSs) of these jurisdictions should work together in dealing with these projects. TheIASB could potentially request the help of these NSSs to undertake a significant aspectof the research first before deciding what, and how much, resources the IASB needson these projects.4The Institute's submission on the IASB's Exposure Draft Conceptual Framework for Financial Reporting isavailable athttp://www.hkicpa.org.hk/file/media/section6_standards/standards/FinancialReporting/submission-pdf/2015/sub_1503.pdf.Page 9 of 12Question 4Do you have any comments on the IASB’s current work plan for major projects?We welcome the expected issuance of the upcoming standards on Leases andInsurance Contracts and support the IASB’s decision to devote time and resources tothese projects. We also support the IASB’s decision to focus on making progress onthe Conceptual Framework and Disclosure Initiative projects.The IASB should be prepared for the high possibility of having to provide resources toattend to questions about, or requests to clarify, the standards during theimplementation period of the major standards, including IFRS 9 Financial Instruments,IFRS 15 Revenue from Contracts with Customers and the upcoming standards onLeases and Insurance Contracts.Question 5Are the IASB and the Interpretations Committee providing the right mix ofimplementation support to meet stakeholders’ needs and is that supportsufficient (see paragraphs 19-23 and 50-53)?We are concerned about the IASB’s current approach in issuing major standards andsubsequently tinkering with them by issuing narrow-scope amendments immediatelyafter the major standards are issued. For example, subsequent amendments weremade to IFRS 10 Consolidated Financial Statements, IFRS 11 Joint Arrangements andIFRS 15 Revenue from Contracts with Customers immediately after the standardswere issued. This may create an impression that there are shortcomings with theIASB's standard-setting process, for example, a lack of sufficient effects analysis.Furthermore, multiple versions of a standard immediately after it is first issued mayconfuse the users of IFRS.We are aware that the IASB’s due process already includes a formal consultationperiod, and for more complex projects, further consultation with targeted preparers,practitioners, financial statement users and NSSs prior to issuing new standards. Weare also aware that the issuance of new standards is subject to the Due ProcessOversight Committee’s requirements. But the IASB could consider conducting furtherextended consultation with targeted stakeholders or provide more time for preparersand practitioners to make fatal flaw comments at the final stage in drafting thestandards. We understand the possible negative implications in providing more time forconsultation as it may result in delay in issuing standards, but we would prefer waitingfor a higher quality standard to be issued, than to have to contend with a flawedstandard followed by amendments. We also believe that many of our constituentswould share this view.In terms of the activities to support the consistency of application and implementationof IFRS, we found the transition resource groups (TRG) to be helpful in supportingpreparers and practitioners in understanding the new standards. The TRG processalso provides a public platform for stakeholders to discuss and exchange views onpotential implementation issues of the new standards, which is educational forconstituents. However, we believe that a TRG would be even more useful if it were setup earlier as part of the standard’s due process stages so that the TRG could helpPage 10 of 12perform fatal flaw review of the near-final draft standard, and any implementationissues raised by the TRG could be dealt with by the IASB before the issuance of thestandard. This may in turn reduce the problem of having subsequent narrow-scopeamendments.There should also be a mechanism for regular consultation between the IASB or theInterpretations Committee and the NSSs and regulators for reporting IFRSimplementation/application issues in practice. For example, the IASB could make useof the International Forum of Accounting Standard Setters meeting as a platform byrequesting NSSs to report on any issues in practice. The IASB and NSSs could alsodevelop a documented and agreed process for reporting IFRS implementation issuesin practice on an ongoing basis.In terms of education initiative, we are cautious about having educational materialswhich go beyond the IASB published material as we are concerned that readers mayassume that the educational materials are authoritative and have been through theIASB's formal due process. We believe that the current approach of incorporatingapplication guidance and illustrative examples in the standards is the most useful andappropriate way to support the consistency of application and implementation of IFRS.However, we support the issuance of educational materials which seek to introduceand explain the text of the material issued by the IASB. Although such educationalmaterial may not be providing new guidance, it is useful to have slide decks andspeaker notes based on the IASB issued text available off-the-shelf as this saves re-inventing the wheel and promotes consistency in understanding.Question 6Does the IASB’s work plan as a whole deliver change at the right pace and at alevel of detail that is appropriate to principle-based standard-setting? Why orwhy not?We think that the major projects are delivered at the right pace; however, as mentionedin our response to question 5, there have been too many narrow-scope amendmentsto standards immediately after issuance.We are satisfied with the level of detail for principle-based standard-setting but wouldurge the IASB to use simpler and more direct / straightforward English language in thestandards and to provide robust application guidance to supplement the principle of thestandards. Application guidance should include fact patterns that are both simple andmore complex to cater for developing, emerging and developed economies.Question 7Do you have any other comments on the IASB’s work plan?We would like the IASB to consider a short-term project that assesses the usefulnessof the exemption criteria for preparing consolidated financial statements under IFRS 10.We think that this project could be added to the IASB's maintenance andimplementation programme but understand if further research may be necessary toconsider this request. That said, we think that any necessary research would notPage 11 of 12require significant resources.The Institute submitted a letter5 to the IASB in 2014 regarding the proposal above todelete paragraph 4(a)(iv) of IFRS 10. This paragraph sets out one of the conditions forwhen a parent entity is not required to present consolidated financial statements:
'its ultimate or any intermediate parent produces consolidatedfinancial statements that are available for public use and complywith International Financial Reporting Standards.'As stated in our letter, there appears to be no clear rationale for the above condition.We believe that the test for any conditions set must be whether the resultinginformation from passing or failing those tests is useful to those users to help themunderstand the financial performance and financial position of the reporting entity (here:
an intermediate holding company (IHC)). However, concerning paragraph 4(a)(iv) ofIFRS 10, we cannot see the relevance of the type or availability of financial statementsprepared by the ultimate parent to the question of the usefulness of company levelinformation prepared by the IHC. We also note that our view appears consistent withthe thinking reflected in paragraph 3.24 of the IASB's Exposure Draft ED/2015/3Conceptual Framework for Financial Reporting, which states that 'consolidatedfinancial statements of the parent are not intended to provide information to users of asubsidiary's financial statements'. Our views on this issue are explained in more detailin our letter to the IASB in response to ED/2015/3.We believe that the above inconsistency and lack of clear principle for this part of theconsolidation exemption could hinder the use of IFRS in jurisdictions where IFRS is notmandatory to be used for preparing statutory financial statements. Therefore, werequest that the IASB adds this project to its maintenance and implementationprogramme and, consider whether paragraph 4(a)(iv) of IFRS 10 should be deletedentirely.Question 8Because of the time needed to complete individual major projects, the IASBproposes that a five year interval between Agenda Consultations is moreappropriate than the three year interval currently required. Do you agree? Whyor Why not?If not, what interval do you suggest? Why?We agree with the IASB's proposal to extend the current three-year consultation cycleto five years. We believe that the proposed five year interval between agendaconsultations is an appropriate timeframe to take stock on the IASB's workplan whenmajor projects usually take more than three years to complete.5 The Institute's letter to the IASB regarding the proposal to delete paragraph 4(a)(iv) of IFRS 10 isavailable athttp://www.hkicpa.org.hk/file/media/section6_standards/standards/FinancialReporting/submission-pdf/2014/sub_ifrs10.pdf.Page 12 of 12However, if the IASB were to proceed with a five-year consultation cycle, we suggestthat the IASB reports back on the progress of its projects on an annual basis, andconsiders an interim consultation that is of a smaller scale, when necessary, forexample, when there is a change in economic environment that warrants a change indirection of its projects or that leads to an emerging issue.~ End ~