IASB Discussion Paper DP/2017/1 Disclosure Initiative—Principles of Disclosure

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

17 October 2017Mr Hans HoogervorstInternational Accounting Standards Board30 Cannon StreetLondon EC4M 6XHUnited KingdomDear Hans,IASB Discussion Paper DP/2017/1Disclosure Initiative—Principles of DisclosureThe 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 Discussion Paper.The HKICPA supports the IASB initiative and effort to improve the content andstructure of financial reporting. However, the HKICPA observes that the preliminaryideas in the DP can be deduced from existing IFRS standards and pronouncementsfrom regulators, as reflected by the best practices of some listed companies withstrong corporate governance. At this early stage of the standard-setting process, theHKICPA would like to see more forward-looking ideas in the DP as it notes theinformation needs of users today have evolved and advanced from what traditionalfinancial reporting provides. In addition, traditional financial statements do not providesufficient linkage between the line items and a company's business model and strategy.The HKICPA is aware that the shortfall of traditional financial reports could have playeda role in the demand for wider corporate reporting initiatives, which appear to providethe value-added information that investors are seeking.Accordingly, the HKICPA recommends that the IASB considers:

a)

how the principles of recognition, measurement and disclosures under the widercorporate reporting frameworks differ from the IFRS framework; how useful arethe additional information provided under the wider corporate reportingframeworks; and whether an entity could disclose those additional information thatare not currently required by IFRS Standards using the principles underpinningthe IFRS Conceptual Framework; andb)

how the Board would respond to reporting trends given the advancements oftechnology and the impacts on the IASB's project on digital reporting.Page 2 of 18The HKICPA also recommends making it clearer in its Better Communication theme,the IASB's role in the future of corporate reporting and how the Board plans to fulfil thatrole alongside the bodies that are promulgating the wider corporate reportingframeworks. The IASB's preliminary views in this DP, particularly on the location ofinformation, could be seen as extending the boundary of traditional financial reporting,but it is not clear whether this is the IASB's intention. Notwithstanding its intention, theIASB should also clarify how the Board views the interaction between the financialreport and the other reports/digital platforms outside the financial report.The HKICPA is aware that this DP represents one project under the IASB's BetterCommunication theme. The HKICPA acknowledges the benefits of making gradualimprovements on this subject, albeit through separate projects. Nevertheless, theHKICPA thinks that if the wider initiative is conducted in piecemeal, stakeholders maymiss the big picture of how these projects interact with one another and whatconstitutes better communication. For example, while the DP was considered, themateriality practice statement was still underway and a further consultation on'materiality' was in the pipeline—our stakeholders had difficulties piecing together themateriality concept with the principles outlined in the DP. The HKICPA stronglyrecommends that the IASB takes a step back and considers how stakeholders shouldholistically assess, integrate and implement the ideas underlying the BetterCommunication theme.Finally, the HKICPA thinks that behavioral causes of the disclosure problem will bedifficult to tackle solely through this DP or any other written publication. The HKICPAconsiders that behavioral changes require a paradigm shift in the mindset of all parties;

including preparers, auditors and regulators, in order for them to embrace their roles inenhancing the relevance and usefulness of financial information. This requires asignificant educational and coordination effort by the IASB, IAASB, IAESB and nationalstandard-setters—the HKICPA would be prepared to assist/support this in any way itcan.Our responses to the questions raised in DP/2017/1 are explained in more detail in theAppendix.If you have any questions regarding the matters raised in this letter, please contact me,Eky Liu (eky@hkicpa.org.hk) or Kam Leung (kamleung@hkicpa.org.hk), AssociateDirectors of the Standard Setting Department.Sincerely,Christina NgDirector, Standard Setting DepartmentEncl.APPENDIXPage 3 of 18Work undertaken by HKICPA in forming its viewsThe Hong Kong Institute of Certified Public Accountants:

(i)

issued an Invitation to Comment on DP/2017/1 on 3 April 2017 to our membersand other stakeholders;

(ii)

held a roundtable discussion for preparers on 31 August 2017, comprisingrepresentatives of listed companies from various industries including utilities,shipping, pharmaceuticals, banking and insurance, and conglomerates. IASBstaff Mariela Isern and Arjuna Dangalla joined through video conference;

(iii)

held a roundtable discussion for investors and analysts on 5 September 2017,comprising representatives from asset managers, research houses, andinvestment and securities firms. IASB head of investor engagement, FredNieto, facilitated the roundtable discussion in person and IASB staff ArjunaDangalla joined through tele-conference;

(iv)

met with representatives from the audit, the securities and the listing regulatorybodies of Hong Kong;

(v)

sought input from its Disclosure Initiative Advisory Panel and Small-mediumPractitioners Technical Issues Working Group comprising technical andindustry experts and auditors from large as well as small-medium accountingfirms (collectively, Practitioners);

(vi)

developed its views through its Financial Reporting Standards Committee,having reflected on its stakeholder views. The Committee comprisesacademics, preparer representatives from various industry sectors, regulators,as well as technical and industry experts from small, medium and largeaccounting firms.This submission outlines HKICPA's views as well as most of our stakeholders'comments on DP/2017/1.Detailed comments on IASB DP/2017/1The Disclosure ProblemQuestion 1Paragraphs 1.5–1.8 describe the disclosure problem and provide an explanation of itscauses.(a) Do you agree with this description of the disclosure problem and its causes? Why orwhy not? Do you think there are other factors contributing to the disclosure problem?(b) Do you agree that the development of disclosure principles in a general disclosurestandard (ie either in amendments to IAS 1 or in a new general disclosure standard)

would address the disclosure problem? Why or why not?Question 2Sections 2–7 discuss specific disclosure issues that have been identified by the Board andprovide the Board’s preliminary views on how to address these issues. Are there any otherdisclosure issues that the Board has not identified in this Discussion Paper that you thinkshould be addressed as part of this Principles of Disclosure project? What are they andwhy do you think they should be addressed?APPENDIXPage 4 of 18Stakeholder views

1.Our stakeholders generally agree with the disclosure problem, its root causes andother specific disclosure issues identified in the DP.

2.Some preparers commented that accountants are accustomed to, or comfortablewith, reporting information using checklists. This could be attributed from theaccounting education system or the 'cost efficient' mindset that underpinsaccountants in general. In these preparers' experience, the tone from the top isnecessary to involve change in the reporting mindset and behavior. Without thedirection and support of senior management, preparers of financial reports wouldnot have the mandate to convey the 'real' economic story of the company.

3.Preparers also note that the disclosure problem could also be a product offinancial reporting and prudential regulator requirements who themselves may beapplying the 'checklist' mindset. These preparers have been requested byregulators to provide particular information to maintain 'reporting consistency' inthe industry, even though it may not be relevant or significant to the company.This issue is amplified for multinational companies that operate in differentjurisdictions.

4.Small-medium preparers and practitioners commented that current disclosurerequirements are too complex and are too costly to handle. Therefore, preparersresort to preparing generic and boilerplate disclosures. They recommend that theIASB assess the costs and benefits to small-medium entities when settingdisclosure requirements.

5.Our auditor regulator commented that there are many Hong Kong preparers thatare large family-owned businesses with operations in mainland China. For manyof these businesses, the preparers and their auditors do not necessarilyunderstand the underlying spirit of the standards and the objective of thecorresponding disclosures.

6.In general, all stakeholders consider that issuance of any further requirements orwritten publication alone will not solve the disclosure problem. Instead, educationis crucial. Our auditor regulator recommends that preparer education forumswould be useful, where accountants in businesses that are role models in highquality reporting can share their experience and methods for applying thedisclosure requirements.HKICPA analysis and recommendation

7.The HKICPA agrees with the three main concerns about disclosures in financialstatements and the root causes of the problem. The HKICPA thinks that it will bedifficult to tackle the behavioral issues solely through this DP or any other writtenpublication.

8.The HKICPA thinks that behavioral changes require a paradigm shift in themindset of all parties, including preparers, auditors and regulators in order forthem to embrace their roles in enhancing the relevance and usefulness offinancial information. This requires significant education and coordination effort,at least by the IASB, IAASB, IAESB and national standard-setters. The HKICPAwould be prepared to assist/support in any way it can.APPENDIXPage 5 of 18Principles of effective communicationQuestion 3The Board’s preliminary view is that a set of principles of effective communication thatentities should apply when preparing the financial statements as described in paragraph 2.6should be developed. The Board has not reached a view on whether the principles ofeffective communication should be prescribed in a general disclosure standard or describedin non-mandatory guidance. The Board is also of the preliminary view that it should developnon-mandatory guidance on the use of formatting in the financial statements that builds onthe guidance outlined in paragraphs 2.20–2.22.(a) Do you agree that the Board should develop principles of effective communication thatentities should apply when preparing the financial statements? Why or why not?(b) Do you agree with the principles listed in paragraph 2.6? Why or why not? If not, whatalternative(s) do you suggest, and why?(c) Do you think that principles of effective communication that entities should apply whenpreparing the financial statements should be prescribed in a general disclosurestandard or issued as non-mandatory guidance?(d) Do you think that non-mandatory guidance on the use of formatting in the financialstatements should be developed? Why or why not? If you support the issuance of non-mandatory guidance in Question 3(c) and/or (d), please specify the form of non-mandatory guidance you suggest (see paragraph 2.13(a)–(c)) and give your reasoning.Stakeholder views

9.Our stakeholders generally support the seven principles of disclosure outlined inthe DP, and support incorporating them in a general disclosure standard. Toenhance the effectiveness of the seven principles, they think that the IASB shouldspecify how to apply the concept of materiality to the principles; and how theprinciples should interact with each other and apply to individual standardrequirements.

10.Preparers generally think that the principles of 'clear and simple' and 'free fromunnecessary duplication' are considered the most important. A few preparerscommented that the principle of 'entity-specific' is difficult to apply in practice, asthere is the risk of disclosing too much entity-specific information to competitors.Preparers also think it is important that the volume of information disclosed shouldbe controlled.

11.On top of the seven principles, a few practitioners consider that it is important todisclose 'timely' information. That is, information should be prepared andavailable soon after the reporting date to be more relevant and useful to users.Nevertheless, these practitioners also acknowledge that the preparation offinancial statements and, hence the availability of ‘timely’ information, is oftenrestricted by the filing requirements of local laws and regulations.

12.A few practitioners commented that there is a tension between the principles'entity-specific' and 'comparable', and urge the IASB to incorporate guidance onhow to prioritise the principles in the event of conflict between the principles.

13.Investors and analysts think that 'transparency', in terms of having a meaningfulbreakdown, is very important and should be an additional principle. Mostinvestors welcomed the principle ‘linked’ as it enhances integration of informationbut one investor cautioned that inappropriate use of cross-referencing could makeAPPENDIXPage 6 of 18the financial report difficult to read, particularly in a digital format. Investors andanalysts think that using graphs/charts as a visual aid to help identify the trend ofrecurring earnings is helpful.

14.Our auditor regulator thinks that information that is 'relevant to the entity' shouldbe another principle of effective communication. That is, entities should considerwhether a particular information is relevant to the entity in the context of itsoperating activities. For example, unless a significant event has occurred, theproperty, plant and equipment of a bank may not be as relevant to a bank'soperating activities as compared to a manufacturing company. The financialinstruments and corresponding financial risk management of a bank is morerelevant in the context of a bank's operating activities. Therefore, entities shouldprioritise and provide more information pertaining to items that are more relevantto the entity.

15.Our listing regulator commented that a few listed entities have adopted widercorporate reporting frameworks and noted that the use of these frameworks havedriven better quality reporting. However, the regulator thinks that information thatrequire more judgement should be reported in a standardised and neutral manneracross all entities, for example, information on intangible assets and impairment.

16.In relation to the principle of 'appropriate format', our securities regulator thinksthat if an entity chooses to use graphs or charts, they should also disclose theactual numbers to ensure the numerical precision is not lost.HKICPA analysis and recommendation

17.HKICPA observes that the preliminary ideas in the DP already reflect the bestpractices of some listed companies with strong corporate governance. At thisearly stage of the standard-setting process, the HKICPA would like to see moreforward-looking ideas in the DP as it notes that the information needs of userstoday have evolved and advanced from what traditional financial reportingprovides1. For example, internally-generated brands or human talent pools, whichcould be key contributors to the long-term value creation of a modern business,are not recognised in financial statements but are deemed as valuable informationto the investor community. As businesses grow more complex and multi-faceted,it is also pertinent for users to understand what the line items in traditionalfinancial statements mean, in the larger context of a company’s business modeland strategy—however, there appears to be insufficient linkage between the two.

18.Wider corporate reporting frameworks seem to fill this gap in IFRS reports, as itseeks to explain the long-term value creation ability of a business. The issue withwider corporate reporting frameworks is there is no one global leader driving theinitiative.

19.The HKICPA recommends that the IASB considers:

a) as a first step, how the principles of recognition, measurement and disclosuresunder the wider corporate reporting frameworks differ from the IFRS framework;

how useful are the additional information provided under the wider corporate1 https://blogs.cfainstitute.org/marketintegrity/2017/03/28/implications-of-the-widening-spectrum-of-useful-corporate-information/APPENDIXPage 7 of 18reporting frameworks; and whether an entity could disclose those additionalinformation that are not currently required by IFRS Standards using theprinciples underpinning the IFRS Conceptual Framework; andb) how the Board would respond to reporting trends given the advancements oftechnology and the impacts on the IASB's project on digital reporting.

20.The IASB should also make it clearer in its Better Communication theme, theBoard's role in the future corporate reporting and how the Board plans to fulfil thatrole alongside the bodies that are promulgating the wider corporate reportingframeworks. The IASB's preliminary views in this DP, particularly on the locationof information, could be seen as extending the boundary of traditional financialreporting, but it is not clear whether this is the IASB's intention. Notwithstandingits intention, the IASB should also clarify how the Board views the interactionbetween the financial report and the other reports/digital platforms outside thefinancial report.

21.With regards to the seven proposed principles of effective communication outlinedin the DP, the HKICPA agrees with them. The HKICPA also thinks that the IASBcan consider adding the principles of 'relevance', 'transparency' and 'timely' assuggested by our stakeholders.

22.Notwithstanding our support, the HKICPA notes that there is a conflict betweensome of the principles: for example, information that are entity-specific versuscomparable. Whilst the DP acknowledges that in some instances, a trade-off maybe required in applying these principles, the HKICPA thinks that the IASB shouldprovide illustrations/guidelines on how the principles should be prioritised toachieve the goal of better communication. The HKICPA recommends that theIASB seeks further feedback on how users would like to see these principlesprioritised in the financial statements.

23.The existing requirements about materiality and qualitative characteristics ofuseful financial information in the Conceptual Framework are also importantconsiderations of effective communication. However, the DP does not explain howthese concepts, together with the proposed seven principles, interact with eachother and how they apply in practice. The IASB should elaborate on theinteraction between the materiality and qualitative characteristics concepts andthe principles of effective communication.

24.The HKICPA sees limited benefit in developing non-mandatory guidance toenhance effective communication because, based on our observations in HongKong, not many preparers use non-mandatory guidance in any way. As such, theHKICPA thinks that the principles in the DP should be mandatory.Role of primary financial statements and notesQuestion 4The Board’s preliminary views are that a general disclosure standard should:

․specify that the ‘primary financial statements’ are the statements of financial position,financial performance, changes in equity and cash flows;

․describe the role of primary financial statements and the implications of that role as setout in paragraphs 3.22 and 3.24;

․describe the role of the notes as set out in paragraph 3.28, as well as provideAPPENDIXPage 8 of 18examples of further explanatory and supplementary information, as referred to inparagraphs 3.26–3.27; and․include the guidance on the content of the notes proposed in paragraphs 7.3–7.7 ofthe Conceptual Framework Exposure Draft, as described in paragraph 3.7.In addition, the Board’s preliminary views are that:

․it should not prescribe the meaning of ‘present’ as presented in the primary financialstatements and the meaning of ‘disclose’ as disclosed in the notes; and․if it uses the terms ‘present’ and ‘disclose’ when describing where to provideinformation in the financial statements when subsequently drafting IFRS Standards, itshould also specify the intended location as either ‘in the primary financial statements’or ‘in the notes’.Do you agree with the Board’s preliminary views? Why or why not? If you do not agree,what do you suggest instead, and why?Stakeholder views

25.Our stakeholders generally think that the DP does not propose any newideas/changes to the roles of primary financial statements and the notes.Therefore, specifying their roles does not help preparers in deciding where topresent the information in the financial statements.

26.Our stakeholders do not think that the meaning or the intended location of'present' and 'disclose' should be specified. Doing so would make disclosuresoverly prescriptive. Companies should be allowed to apply professionaljudgement to determine where to present/disclose the information according tothe entities' circumstances.HKICPA analysis and recommendation

27.The HKICPA agrees with the IASB's preliminary views regarding the roles ofprimary financial statements and the notes. HKICPA considers they areconsistent with current practice.

28.The HKICPA also agrees with the IASB's preliminary views not to prescribe themeaning of 'present' and 'disclose’. The HKICPA thinks that specifying theintended location of 'present' and 'disclose' would not solve the disclosureproblem and would make disclosures overly perspective—similar to a checklisttemplate.Location of information: IFRS information outside the financial statementsQuestion 5The Board’s preliminary view is that a general disclosure standard should include a principlethat an entity can provide information that is necessary to comply with IFRS Standardsoutside financial statements if the information meets the requirements in paragraphs 4.9(a)–(c).(a) Do you agree with the Board’s preliminary view? Why or why not? If you do not agree,what alternative(s) do you suggest, and why?(b) Can you provide any examples of specific scenarios, other than those currently includedin IFRS Standards (see paragraphs 4.3–4.4), for which you think an entity should orshould not be able to provide information necessary to comply with IFRS StandardsAPPENDIXPage 9 of 18outside the financial statements? Why? Would those scenarios meet the criteria inparagraphs 4.9(a)–(c)?Stakeholder views

29.Most of our stakeholders welcome the principles regarding location of informationoutside the financial statements as the principles can encourage entities toholistically integrate information in the annual report.

30.A few small-medium practitioners think that placing IFRS compliant informationoutside financial statements may increase the auditor's responsibilities andpotential liabilities.

31.Our auditor regulator would prefer to prohibit companies from disclosing IFRSinformation outside the financial statements in order to prevent any confusionabout what is audited financial information versus management commentary andperformance indicators. The regulator thinks that an annual report with excessivecross-references might be unhelpful to users and investors, and questions thebenefits of cross-referencing.

32.Investors and analysts generally find such presentation helpful in understandingthe financial statements as they highlight relationships between pieces ofinformation within the annual reports.HKICPA analysis and recommendation

33.The HKICPA welcomes the principles discussed in the DP on disclosing IFRSinformation outside the financial statements. The HKICPA notes that some listedentities in Hong Kong are already applying some of the principles suggested inthe DP (e.g. the use of cross-reference). If cross-referencing is appliedappropriately, the HKICPA believes that annual reports including financial reportswould be useful and the issue with clutter in financial reports would be addressed.Location of information: non-IFRS information inside the financial statementsQuestion 6The Board’s preliminary view is that a general disclosure standard:

․should not prohibit an entity from including information in its financial statements that ithas identified as ‘non-IFRS information’,․or by a similar labelling, to distinguish it from information necessary to comply withIFRS Standards; but․should include requirements about how an entity provides such information asdescribed in paragraphs 4.38(a)–(c).Do you agree with the Board’s preliminary view? Why or why not? If you do not agree, whatalternative(s) do you suggest, and why?Stakeholder views

34.Preparers welcome the principles regarding location of information inside thefinancial statements. Some preparers think that this would enable them to betterrepresent their company's story. Currently, they think that financial statementsonly provide some information about the company whereas the other parts of theannual report provide more insight into the company's story.

35.Preparers commented that it is difficult for them to better communicate with itsAPPENDIXPage 10 of 18investors when non-IFRS information are not permitted inside financial reports. Inmost cases, auditors do not allow non-IFRS information to be presented insidefinancial statements.

36.Investors and analysts generally welcome the idea of having guidelines for thelocation of information. They also welcome some form of auditor assurance thatthe non-IFRS information, if disclosed inside financial reports, are not misleading.

37.Some investors and analysts consider that financial reports should provideinformation that help users of financial reports better understand why that financialinformation is important to them. However, financial reports to date only providethe 'end results', and not the drivers of those end results which they considercould be useful information.

38.A small number of investors and analysts think that non-IFRS information shouldonly be allowed in an MD&A or a Chairman's message so that such information isnot represented as audited information.

39.From an audit perspective, some practitioners think that non-IFRS information thatare not extracted from a company's financial systems should be prohibited fromthe financial statements, as auditors may not be able to provide assurance oversuch information. Additionally, including non-IFRS information in the financialstatements would increase an auditor's responsibilities and potential liabilities.

40.However, a few practitioners disagree, and commented that the auditingstandards / auditing profession need to evolve and align with users needs.

41.Our listing regulator observes that top listed Hong Kong companies havevoluntarily provided independent limited assurance on their Environmental, Socialand Governance reports, in accordance with International Standards onAssurance Engagements 3000 and 3410. Therefore, it is possible for auditors toprovide some level of assurance on non-IFRS information.

42.Our securities regulator thinks that the IASB should clarify the definition of non-IFRS information. The regulator thinks that non-IFRS information which areprepared under a basis inconsistent with or not acceptable by IFRS, should not beallowed in the financial statements. Our auditor regulator prefers non-IFRSinformation to be disclosed separately from financial statements.HKICPA analysis and recommendation

43.The HKICPA is aware that investors and analysts in Hong Kong generally find ituseful having non-IFRS information disclosed within financial statements. TheHKICPA therefore thinks that when done appropriately, disclosing non-IFRSinformation within financial statements can provide relevant and faithfullyrepresented information about a company.

44.The HKICPA thinks that the principles outlined in the DP are appropriate startingpoints for incorporating non-IFRS information in financial statements. However, arecent CFA Institute survey found that 80.8% of its respondents in general areexpecting some form of assurance over the non-IFRS information that arepresented within financial statements2.2 Bridging the Gap: Ensuring Effective Non-GAAP and Performance Reporting, NovemberAPPENDIXPage 11 of 18

45.The HKICPA is also aware of auditors' concerns on potentially extending theauditor's responsibilities and liabilities beyond non-IFRS information. TheHKICPA therefore considers that support from the audit profession is necessary inorder to enhance the usefulness and reliability of non-IFRS information. Theremay be a need to consider the role of auditors, and the audit and assurancestandard requirements for non-IFRS information. In this regard, the HKICPAstrongly recommends that the IASB collaborates with the IAASB to assess theaudit implications of disclosing non-IFRS information within financial statements.Location of information: prohibiting additional informationQuestion 7The Board did not discuss whether any specific information—for example, information thatis inconsistent with IFRS Standards—should be required to be identified as described inparagraphs 4.38(a)–(c) or should be prohibited from being included in the financialstatements.Do you think the Board should prohibit the inclusion of any specific types of additionalinformation in the financial statements? If so, which additional information, and why?Stakeholder views

46.Our stakeholders think that the IASB should not prohibit entities from disclosingspecific types of information in the financial statements. They think that thecurrent requirements under IAS 1 Presentation of Financial Statements issufficient, and that preparers should judge, based on materiality, whether suchinformation is relevant and faithfully representative.HKICPA analysis and recommendation

47.The HKICPA agrees with its stakeholder views as prohibiting entities fromdisclosing a specific non-IFRS information may limit their ability to provideinformation that is relevant to users.Use of performance measuresQuestion 8The Board’s preliminary views are that it should:

․clarify that the following subtotals in the statement(s) of financial performance complywith IFRS Standards if such subtotals are presented in accordance with paragraphs85–85B of IAS 1:

․the presentation of an EBITDA subtotal if an entity uses the nature of expensemethod; and․the presentation of an EBIT subtotal under both a nature of expense method and afunction of expense method.․develop definitions of, and requirements for, the presentation of unusual orinfrequently occurring items in the statement(s) of financial performance, as describedin paragraphs 5.26–5.28.(a) Do you agree with the Board’s preliminary views? Why or why not? If you do not agree,what alternative action do you suggest, and why?APPENDIXPage 12 of 18(b) Should the Board prohibit the use of other terms to describe unusual and infrequentlyoccurring items, for example, those discussed in paragraph 5.27?(c) Are there any other issues or requirements that the Board should consider in addition tothose stated in paragraph 5.28 when developing requirements for the presentation ofunusual or infrequently occurring items in the statement(s) of financial performance?The feedback on Question 8 will be considered as part of the Board’s Primary FinancialStatements project.Question 9The Board’s preliminary view is that a general disclosure standard should describe howperformance measures can be fairly presented in financial statements, as described inparagraph 5.34.Do you agree with the Board’s preliminary view? Why or why not? If you do not agree, whatalternative action do you suggest, and why?Stakeholder views(a) Fair presentation of performance measures

48.Our stakeholders agree with the general requirements for the fair presentation ofperformance measures discussed in paragraph 5.34 of the DP.

49.Consistent with the views expressed in question 6 about non-IFRS information,investors and analysts generally consider that there should be some oversight byauditors on quantitative performance measures so that information is notmisleading or unreliable.(b) Presentation of EBITDA and EBIT

50.Most practitioners think that, in general, entities are already following the generalrequirements as suggested in the DP when disclosing performance measures likeEBITDA and EBIT in financial statements. They consider that these performancemeasures are usually reconcilable to IFRS information and therefore the proposedprinciples of fair presentation and current requirements in IAS 1 are sufficient.There is no need to prescribe additional requirements.

51.Preparers from banks commented that these two performance measures are notapplicable to banks, and therefore, suggest that they should be treated as 'non-IFRS information'.(c) Separate presentation of unusual or infrequently occurring items

52.Our stakeholders, generally, consider that there is no need for the separatepresentation of unusual or infrequently occurring items because:

a) they are concerned that the definition of 'unusual or infrequently occurring'creates opportunities for disclosures that are not neutral and may lead tounintended consequences – similar to the inappropriate presentation of'extraordinary items' in the past.b) they consider that it is important that financial information is disclosed in atransparent way instead of defining a separate category of line items. Forexample, there should be sufficient disaggregation of items provided in theAPPENDIXPage 13 of 18financial statements so that users can better understand the type oftransactions performed by the entity for their own analysis.c) some practitioners think that the current requirements under IAS 1, which allowentities to add additional line items and use appropriate descriptions, alreadyprovide the flexibility for entities to explain the elements of financialperformance according to the entities' circumstances.HKICPA analysis and recommendation

53.The HKICPA broadly agrees with the general requirements for fair presentation ofall performance measures outlined in the DP. The HKICPA observes that listedentities in Hong Kong that disclose performance measures in financial statementsare already following these principles.

54.Of all the principles, the HKICPA thinks that 'neutrality' is the most subjective. Anentity's interpretation of 'neutral' may be different from its investor's interpretationof 'neutral'. The HKICPA therefore thinks that 'neutrality' must be accompanied bythe principles 'transparent' and 'understandable' as well as qualitative explanationfor why management considers adjustments are necessary to achieve 'neutrality'.

55.The HKICPA thinks that EBITDA/EBIT should already reflect a fair presentation aslong as entities follow the general requirements for fair presentation ofperformance measures. Therefore, the HKICPA does not consider there is a needto prescribe additional requirements for the presentation of EBITDA and EBIT asdiscussed in the DP.

56.The HKICPA disagrees with the IASB's proposals on developing definitions of,and requirements for, separate presentation of 'unusual or infrequently occurringitems' in the statement(s) of financial performance for the following reasons:

a) Paragraphs 85 to 86 of IAS 1, which permits entities to add additional lineitems and use appropriate labels or descriptions, already exist.b) To achieve entity-specific disclosures, entities should be allowed to applyjudgement as to what to disclose, where to disclose it, and how to describesuch item appropriately based on the entities' circumstances.c) It may be subjective as to what items are considered 'unusual' or 'infrequentlyoccurring'. Instead, the HKICPA thinks that it would be more useful if entitieswere required to clearly describe the nature of the transactions/events. Thiswould enable investors to form their own view and make an assessment onwhether it should be included in forecasting future financial performance andcash flows.d) It would be confusing to encourage entities to separately present 'unusual orinfrequently occurring items' when IAS 1 prohibits the presentation of'extraordinary' items. The HKICPA does not see how the two terms 'unusual'and 'extraordinary' are different in practice.APPENDIXPage 14 of 18Disclosure of accounting policiesQuestion 10The Board’s preliminary views are that:

․a general disclosure standard should include requirements on determining whichaccounting policies to disclose as described in paragraph 6.16; and․the following guidance on the location of accounting policy disclosures should beincluded either in a general disclosure standard or in non-mandatory guidance (or in acombination of both):

the alternatives for locating accounting policy disclosures, as described inparagraphs 6.22–6.24; andthe presumption that entities disclose information about significant judgementsand assumptions adjacent to disclosures about related accounting policies,unless another organisation is more appropriate.(a) Do you agree with the Board’s preliminary view that a general disclosure standardshould include requirements on determining which accounting policies to disclose asdescribed in paragraph 6.16? Why or why not? If you do not agree, what alternativeproposal(s) do you suggest, and why?(b) Do you agree with the Board’s preliminary view on developing guidance on the locationof accounting policy disclosures? Why or why not? Do you think this guidance shouldbe included in a general disclosure standard or non-mandatory guidance (or in acombination of both)? Why?If you support the issuance of non-mandatory guidance in Question 10(b), please specifythe form of non-mandatory guidance you suggest (listed in paragraphs 2.13(a)–(c)) and giveyour reasoning.Stakeholder views

57.Preparers generally agree with the three categories of accounting policies andconsider that they are helpful in disclosing accounting policies. Preparers alsoagree that significant accounting policies should not be obscured by those thatare insignificant. However, they consider that entities should have the flexibility tochoose the location of accounting policies.

58.Practitioners consider that only category 1 accounting policies should be requiredto be disclosed, and that the significant judgements and assumptions used in thepolicy should also be disclosed alongside that particular policy. They suggest thataccounting policies not in category 1 should be disclosed in a separate part of thefinancial report, e.g. as an appendix to the report.

59.Investors and analysts consider that accounting policies are useful, should bedisclosed in financial reports, and should be cross-referenced or clearly linked tothe relevant notes.

60.Our securities regulator considers that all accounting policies that are applicableto an entity should be required to be disclosed as potential investors and newusers may not be familiar with the entity.

61.Our auditor regulator considers that it is important to clarify who are the primaryusers of the financial statements in order to determine what and how accountingpolicies should be disclosed. Also on the assumption that users of financialstatements should have a reasonable degree of accounting knowledge, financialAPPENDIXPage 15 of 18analysis experience and a willingness to study the information with reasonablediligence, there is no need to disclose all the accounting policies in the financialstatements. Only policies that are relevant to the understanding of the entity andits business/transactions could be required.

62.In addition, all stakeholders think that entities should also clearly explain howaccounting policies were applied in practice, instead of simply summarising therequirements in the standards.HKICPA analysis and recommendation

63.The HKICPA considers that the categorisation of accounting policies, asdiscussed in the DP, is useful. However, the categories do not address theunderlying issue noted by our stakeholders—that is, preparers tend to disclosegeneric or 'boilerplate' accounting policies.

64.The HKICPA thinks that even if entities were to disclose significant accountingpolicies in a prominent place in financial reports, they would not be useful if thepolicies are only a summary of the requirements in the standards. The HKICPAthinks that educating preparers on 'how' to draft accounting policies is moreimportant. In connection with the principles of effective communication (discussedearlier), the HKICPA considers that the IASB should explain how to apply thoseprinciples when disclosing accounting policies.Centralised disclosure objectiveQuestion 11The Board’s preliminary view is that it should develop a central set of disclosure objectives(centralised disclosure objectives) that consider the objective of financial statements andthe role of the notes. Centralised disclosure objectives could be used by the Board as abasis fordeveloping disclosure objectives and requirements in Standards that are more unified andbetter linked to the overall objective of financial statements.Do you agree that the Board should develop centralised disclosure objectives? Why or whynot? If you do not agree, what alternative do you suggest, and why?Stakeholders' views and HKICPA analysis and recommendation

65.The HKICPA and our stakeholders support the development of centraliseddisclosure objectives as they help entities exercise judgement about what specificinformation to communicate to users of financial statements.Methods in developing centralised disclosures objectivesQuestion 12The Board has identified, but not formed any preliminary views about, the following twomethods that could be used for developing centralized disclosure objectives and thereforeused as the basis for developing and organising disclosure objectives and requirements inStandards:

․focusing on the different types of information disclosed about an entity’s assets,liabilities, equity, income and expenses (Method A); or․focusing on information about an entity’s activities to better reflect how usersAPPENDIXPage 16 of 18commonly assess the prospects for future net cash inflows to an entity andmanagement’s stewardship of that entity’s resources (Method B).(a) Which of these methods do you support, and why?(b) Can you think of any other methods that could be used? If you support a differentmethod, please describe your method and explain why you think it might be preferableto the methods described in this section.Methods A and B are in the early stages of development and have not been discussed indetail by the Board. We will consider the feedback received on this Discussion Paper abouthow centralised disclosure objectives might best be developed before developing themfurther.Question 13Do you think that the Board should consider locating all disclosure objectives andrequirements in IFRS Standards within a single Standard, or set of Standards, fordisclosures? Why or why not?Stakeholders' views

66.Most preparers and small-medium practitioners prefer method A as it is moreconsistent with the current disclosure approach. They are concerned thatdramatic changes in the method of disclosure may lead to unintendedconsequences. These preparers prefer accessing applicable disclosureobjectives in the respective standards instead of accessing all disclosureobjectives within a single standard.

67.One preparer considers that method B can better link the disclosures to theoperating activities of an entity and therefore, help preparers assess whether aparticular disclosure is relevant and necessary. That preparer thinks that methodB would encourage a paradigm shift in the mindset of preparers – every entity islikely to have different operating activities/models and it may be more difficult todevelop a checklist template following this method. In addition, this preparerthinks that such method can encourage more integrated reporting between thefinancial statements and other parts of the annual report.

68.Practitioners from large accounting firms generally consider that there cannot be a'one-size fits all' disclosure objective. In addition, drafting disclosures based oneither method A or B would presume what users find useful. One practitionerthinks that the IASB could consider providing preparers with the flexibility ofapplying either method A or B.HKICPA analysis and recommendation

69.The HKICPA notes that the development of disclosure requirements focusing onan entity's activities (i.e. method B) is still at the conceptual phase. Therefore,stakeholders may not be able to visualise what information would look like undermethod B and accordingly, assess their costs and benefits. The HKICPArecommends that the IASB provides example disclosures of what informationunder methods A and B would look like.

70.The HKICPA sees the pros and cons of locating centralised disclosure objectivesAPPENDIXPage 17 of 18either within a single standard or set of standards. The HKICPA does not haveany particular comments about the location of centralized disclosure objectives atthe moment, given methods A and B are in the early stage of development.NZASB staff's approach to drafting disclosure requirements in IFRS StandardsQuestion 14This section describes an approach that has been suggested by the NZASB staff fordrafting disclosure objectives and requirements in IFRS Standards.(a) Do you have any comments on the NZASB staff’s approach to drafting disclosureobjectives and requirements in IFRS Standards described in this section (the mainfeatures of the approach are summarised in paragraph 8.2 of this section)?(b) Do you think that the development of such an approach would encourage moreeffective disclosures?(c) Do you think the Board should consider the NZASB staff’s approach (or aspects of theapproach) in its Standards-level Review of Disclosures project? Why or why not?Note that the Board is seeking feedback on the NZASB staff’s overall approach, rather thanfeedback on the detailed drafting of the paragraphs on the use of judgement in the NZASBstaff’s example 1 or the detailed drafting of the specific disclosure requirements andobjectives included in the NZASB staff’s examples 2 and 3. In addition, the Board is notseeking feedback on where specific disclosure objectives and requirements should belocated in IFRS Standards (except as specifically requested in Question 13).Stakeholder views

71.Stakeholders who supported using method A in drafting disclosure requirementssee the merits of the NZASB staff's proposals as it clearly states the objectives ofdisclosure requirements. However, they do not think that it can solve thedisclosure problem if we do not address the mindset/behavioural problems oftreating financial reporting as a compliance exercise.

72.Small-medium practitioners made the following suggestions on the NZASB's staffproposals:

a) The draft text seems repetitive and cumbersome. For example, in the NZASBstaff example 2, the disclosure objective for IAS 16 Property, Plant andEquipment is stated in paragraph 16.x1. However, similar wordings arerepeated in each of the later paragraphs when describing the exact disclosurerequirements. The NZASB staff can consider streamlining the objectives byusing concise wordings or preparing one overarching disclosure objective foreach standard.b) References could be made to the approach used in IFRS 7 FinancialInstruments: Disclosures by using different headings or sub-headings to showclearly what types of information an entity needs to disclose or consider todisclose.HKICPA analysis and recommendation

73.The HKICPA considers that method A may not be able to fully address thedisclosure problem, as it promotes a similar disclosure approach as currentlypractised.APPENDIXPage 18 of 18

74.The HKICPA considers that behavioral causes of the disclosure problem will bedifficult to tackle solely through incorporating disclosure objectives into IFRSStandards. Instead, it requires a paradigm shift in the mindset of all parties,including preparers, auditors and regulators, in order for them to embrace theirroles in enhancing the relevance and usefulness of financial information. Thisrequires a significant education and coordination effort, at least by the IASB,IAASB and IAESB. The HKICPA would be prepared to assist/support this in anyway it can.

75.If the IASB were to further develop the NZASB staff proposals, the HKICPArecommends that the IASB considers the suggestions made by our small-mediumpractitioners when drafting disclosure objectives and provide further education asmentioned above.Question 15Some stakeholders say that the way that disclosures are drafted in IFRS Standards mightcontribute to the ‘disclosure problem’, as described in Section 1. Some cite in particular theabsence of clear disclosure objectives and the presence of long lists of prescriptively writtendisclosure requirements in Standards (see paragraph 8.4). Nevertheless, otherstakeholders observe that specific disclosure requirements might be simpler to use thanapplying judgement when determining how to meet disclosure objectives.Do you think the way the Board currently drafts IFRS Standards contributes to thedisclosure problem? Please give your reasoning. If you think the current drafting contributesto the disclosure problem, please provide examples of where drafting in Standards could beimproved and why.Stakeholder views and HKICPA analysis and recommendationPlease refer to our responses to Questions 1 and 2.~ End ~