Our Ref.: C/FRSCSent electronically through the IASB Website (www.ifrs.org)
2 December 2015Mr Hans HoogervorstInternational Accounting Standards Board30 Cannon StreetLondon EC4M 6XHUnited KingdomDear Hans,IASB Exposure Draft ED/2015/3 Conceptual Framework for Financial ReportingThe Hong Kong Institute of Certified Public Accountants is the only body authorised bylaw to set and promulgate standards relating to financial reporting, auditing, and ethics forprofessional accountants, in Hong Kong. We are grateful for the opportunity to provideyou with our comments on ED/2015/3.We appreciate the IASB's effort to initiate a comprehensive revision of the ConceptualFramework. We are pleased to note that the IASB has responded to some of ourrecommendations in response to the Discussion Paper DP/2013/1 A Review of theConceptual Framework for Financial Reporting.We have raised a number of concerns on matters that we consider the IASB has notsufficiently addressed in ED/2015/3 or that we consider should be a priority. In particular:
In our response to question 3, we consider the distinction between liabilities andequity is a fundamental conceptual issue that needs to be better addressed in theConceptual Framework project as a matter of priority. We are aware that the IASB isundertaking a separate project to deal with this issue and urge the IASB to expeditethis separate project.In our response to question 4 regarding the proposed description of a presentobligation, we have serious concerns on what 'no practical ability to avoid thetransfer' means in practice and how it is intended to differ from the requirementscontained in IAS 37 Provisions, Contingent Liabilities and Contingent Assets.In our response to question 5, we request that the IASB provides additional guidanceon how preparers can deal with the potential conflicting views between the revisedConceptual Framework and existing standards. When determining which view shouldtake precedent, we suggest that cross-reference should be made to the hierarchy inparagraph 11 of IAS 8 Accounting Policies, Changes in Accounting Estimates andErrors instead of directly to the revised Conceptual Framework.In our response to question 12, we urge the IASB to attempt to define what is meantby 'profit or loss' and provide a principle for what items should be included in OCI.We also consider that putting too much emphasis on a single measure is the sourceof the problems in reporting financial performance and that greater emphasis shouldPage 2 of 12therefore be placed on disaggregation within the performance statement, rather thanon a single measure of profit or loss.Our responses to the questions raised in the ED are explained in more detail in theAppendix.If you have any questions regarding the matters raised in this letter, please contact me orBen Lo, Associate Director in the Standard Setting Department, at ben@hkicpa.org.hk.Yours sincerely,Christina NgHead of Financial Reporting, Standard Setting DepartmentCN/BLEncl.Page 3 of 12APPENDIXDetailed comments on IASB ED/2015/3 Conceptual Framework for FinancialReportingQuestion 1 – Proposed changes to Chapter 1 and 2Do you support the proposals:
(a) to give more prominence, within the objective of financial reporting, to theimportance of providing information needed to assess management'sstewardship of the entity's resources;
(b) to reintroduce an explicit reference to the notion of prudence (described ascaution when making judgements under conditions of uncertainty) and tostate that prudence is important in achieving neutrality;
(c) to state explicitly that a faithful representation represents the substance ofan economic phenomenon instead of merely representing its legal form;
(d) to clarify that measurement uncertainty is one factor that can make financialinformation less relevant, and that there is a trade-off between the level ofmeasurement uncertainty and other factors that make information relevant;
and(e) to continue to identify relevance and faithful representation as the twofundamental qualitative characteristics of useful financial information?Why or why not?
1.We consider the IASB has addressed the Institute's comments in response toDP/2013/1 A Review of the Conceptual Framework for Financial Reporting.Therefore, we support the IASB's proposals to:
give more prominence to the objective of assessing stewardship;
reintroduce an explicit reference to the notion of prudence as a supportingfactor of neutrality and as defined in paragraph 2.18 as the exercise of cautionwhen making judgements under conditions of uncertainty. We also support thatthe exercise of prudence means the assets/income are neither overstated norunderstated and liabilities/expenses are neither understated nor overstated;
and reintroduce substance over form as a necessary component of faithfulrepresentation.
2.While we agree with the proposal to clarify that measurement uncertainty is onefactor that can make financial information less relevant [Question 1(d)], we haveconcerns with the term 'capable' as used in paragraph 2.6. We think that incorrectfinancial information is also capable of 'making a difference in the decisions madeby users' and therefore 'capable of making a difference in the decisions made byusers' is not a unique identifier of relevant information.Page 4 of 12
3.Therefore, we consider the IASB should re-consider whether the term capable isappropriate in such circumstance. Instead, we suggest that 'relevance' should beassociated with whether the information is 'appropriately useful' in decision-making.Question 2 – Description and boundary of a reporting entityDo you agree with:
(a) the proposed description of a reporting entity in paragraphs 3.11 – 3.12; and(b) the discussion of the boundary of a reporting entity in paragraphs 3.13 –
3.25?Why or why not?
4.We generally agree with the discussion contained in the ED regarding theproposed description and the boundary of a reporting entity.
5.In particular, we welcome the discussion contained in paragraph 3.24, which statesthat "consolidated financial statements of the parent are not intended to provideinformation to users of a subsidiary's financial statements". We consider thisstatement provides justification to the Institute's request1 to the IASB in 2014 todelete paragraph 4(a)(iv) of IFRS 10 Consolidated Financial Statements 2. Ourrationale for deleting the paragraph in IFRS 10 is we 'cannot see the relevance ofthe type or availability of financial statements prepared by the ultimate parent to thequestion of the usefulness of company level information prepared by theintermediate holding companies (IHC). In many cases, specific financial informationrelating to the IHC or its subsidiaries will not be identifiable from the consolidatedfinancial statements of the ultimate parent as the IHC is just one of many sub-groups within the larger group, and in all cases any intra group transactionsinvolving the IHC or its subsidiaries and the larger group will be eliminated in thoseultimate parent financial statements. This lack of information pertaining to the IHCsub-group will typically be the case irrespective of whether or not the ultimateparent follows IFRS or some other GAAP.' Accordingly, we request that the IASBamends IFRS 10 in due course to reflect the thinking contained in paragraph 3.24.
6.While we consider the principles for the boundary of reporting entity in paragraph
3.18 are sound, we suggest that:
(a) parameters should be set in paragraph 3.17 as to when it is appropriate toprepare combined financial statements. In practice, combined financialstatements are typically prepared to reflect common control group or capital re-organisations in a capital transaction (for example, for pre-IPOs when the group1 The Institute's letter to the IASB regarding the proposal to delete paragraph 4(a)(iv) of IFRS 10 isavailable at <http://www.hkicpa.org.hk/file/media/section6_standards/standards/FinancialReporting/submission-pdf/2014/sub_ifrs10.pdf >.2 Paragraph 4(a)(iv) of IFRS 10 states that one of the conditions that a parent need not presentconsolidated financial statements is 'its ultimate or any intermediate parent produces consolidatedfinancial statements that are available for public use and comply with IFRSs'.Page 5 of 12to be listed will be headed by a newly incorporated company which was not inexistence as of the latest reporting date in the IPO track record period); and(b) some discussion in paragraph 3.18 on circumstances where there is no parent-subsidiary relationship, and how that relates to the boundary of reporting entity,would be useful. A common circumstance where there is no parent-subsidiaryrelationship is joint control. The discussion in the ED seems to concentrate onthe element of direct and indirect control but we consider some discussion onjoint control is relevant for the accounting for joint operations and joint ventures.Question 3 – Definitions of elementsDo you agree with the proposed definitions of elements (excluding issuesrelating to the distinction between liabilities and equity):
(a) an asset, and the related definition of an economic resource;
(b) a liability;
(c) equity;
(d) income; and(e) expenses?Why or why not? If you disagree with the proposed definitions, what alternativedefinitions do you suggest and why?
7.We generally agree with the proposed definitions of elements except for theguidance on assets arising from a constructive obligation of another party (pleaserefer to our explanation in response to question 4).
8.However, we note that paragraph 4.30 seems to imply that an obligation to transfereconomic resources for a variable number of shares would be considered as anequity claim. This is contrary to existing accounting principles, under which such anobligation would represent a financial liability. We are therefore concerned thatsuch a statement appears to be pre-empting the outcome of the IASB’s researchproject (Financial Instruments with Characteristics of Equity). The IASB shouldtherefore expedite its FICE research project and should not restrict its scope tocurrent application issues that have arisen in relation to IAS 32 FinancialInstruments: Presentation as is implied in paragraphs AV8-AV14 of the Basis forConclusions accompanying ED/2015/3.Question 4 – Present obligationDo you agree with the proposed description of a present obligation and theproposed guidance to support that description? Why or why not?
9.We found the proposed new definition of 'present obligation' to be problematic andcan be interpreted in more than one way.Page 6 of 12
10.In particular, we have serious concerns on what 'no practical ability to avoid thetransfer' means in practice and how it is intended to differ from the requirementscontained in IAS 37 Provisions, Contingent Liabilities and Contingent Assets. Theproposed wording in paragraphs 4.31-4.35 appears to be intended to be verydefinitive on when a present obligation would be said to arise and that it wouldinclude situations involving economic compulsion or obligations that are in theoryavoidable but only by ceasing to operate.
11.One way to interpret the intention of paragraphs 4.31-4.35 is, for example,immediately on entering into a stand ready arrangement such as a guarantee or abank overdraft facility, the guarantor/bank would be considered as having nopractical ability to avoid the transfer an economic resource. Following the ED, itcould be argued that the guarantor/bank would be required to recognise andmeasure the guaranteed amount or the overdraft facility immediately upon issuingthese arrangements. If this were the case, we would not agree with thisunderstanding and consider this would contradict existing IFRS requirements.
12.It is also clear from paragraphs BCE9-BCE10 that the IASB has intentionallyproposed the 'present obligation' definition to be different from the recently issuedIFRIC 21 Levies. While the IASB presumably has some intended change in mindbehind the proposed definition, there is no testing of the wording mentioned inparagraph 11 of this Appendix against common fact patterns (for example, in theexamples in IAS 37) to communicate how the IASB would intend practice tochange. Therefore, as long as the IASB does not clarify the fundamental questionof when to recognise a liability, as opposed to when to regard an economicallyunavoidable situation as being part of future operating losses or when to regard thesituation as a contingent liability, we are uncomfortable with supporting suchwording in the ED.
13.Regarding the definition of an asset, we have concerns with paragraph 4.8(b), inparticular where it states that rights that constitute economic resources may arise'from a constructive obligation of another party'. If a constructive obligation is onewhich is not enforceable by law and simply rests on expectations of how an entityis likely to act, then it seems inconsistent to assert that a counterparty could have a'right', and therefore an asset, arising from such a situation.Question 5 – Other guidance on the elementsDo you have any comments on the proposed guidance?Do you believe that additional guidance is needed? If so, please specify whatthat guidance should include.
14.We consider the Conceptual Framework should be a high-level fundamentalconcepts and principles document with simple-to-understand objectives; and thatthe standards should be based on the Conceptual Framework, not the reverse.
15.In light of some conflicting views between the revised Conceptual Framework andexisting standards, in particular, regarding the proposed definition of a liability, werequest that the IASB provides additional guidance on how preparers should dealwith the conflicting views. For example, because the definition of a 'presentobligation' would be considered different from the requirements in IFRIC 21, wePage 7 of 12foresee a potential diversity in practice if preparers were to use the revisedConceptual Framework when designing accounting policies for such transactions,ahead of any revision to IAS 37.
16.If the IASB were to provide guidance as we suggested, the guidance shouldemphasise the need to follow the hierarchy in paragraph 11 of IAS 8 AccountingPolicies, Changes in Accounting Estimates and Errors. That is, preparers shouldmake reference to the requirements in existing IFRSs that deal with similar andrelated issues before referring to the revised Conceptual Framework (ourcomments here are consistent with our response to ED/2015/4 regarding the cross-reference to the revised Conceptual Framework).Question 6 – Recognition criteriaDo you agree with the proposed approach to recognition? Why or why not? Ifyou do not agree, what changes do you suggest and why?
17.We generally agree with the proposed recognition criteria. We think that detailedrecognition criteria should be considered at the standards level.
18.We note the international debate about the inconsistent guidance in the ED whenrecognising an asset when there is 'existence uncertainty' or 'a low probability of aninflow or an outflow of economic benefits'. We consider disclosures, instead ofrecognition, in financial statements would be appropriate in these circumstances.Question 7 - DerecognitionDo you agree with the proposed discussion of derecognition? Why or why not?If you do not agree, what changes do you suggest and why?
19.We generally agree with the IASB's view that derecognition should be consideredas the mirror image of recognition. While we note that the element of derecognitioncould be a challenging aspect of accounting, on balance, we consider the draftdiscussion in this area is reasonable at the Conceptual Framework level. Same asour response to question 6, we believe detailed derecognition criteria should beconsidered at the standards level.Question 8 – Measurement basesHas the IASB:
(a) correctly identified the measurement bases that should be described in theConceptual Framework? If not, which measurement bases would youinclude and why?(b) properly described the information provided by each of the measurementbases, and their advantages and disadvantages? If not, how would youdescribe the information provided by each measurement basis, and itsadvantages and disadvantages?
20.We agree with the discussion contained in the ED in relation to the identification ofmeasurement bases and their advantages and disadvantages.Page 8 of 12Question 9 – Factors to consider when selecting a measurement basisHas the IASB correctly identified the factors to consider when selecting ameasurement basis? If not, what factors would you consider and why?
21.We generally agree with the discussion in relation to the factors to consider whenselecting a measurement basis. However, the IASB should be careful with the wayparagraph 6.52 is written as it would advocate the use of a consistentmeasurement basis at both initial and subsequent recognition, which we think maynot be useful in all circumstances.
22.For the proposed measurement basis in paragraph 6.69 in relation to transactionswith holders of equity claims, we are of the view that the measurement basisshould be based on which item (the asset or the equity) has a more reliablemeasurement instead of measurement based on the current value of the assetreceived.Question 10 – More than one relevant measurement basisDo you agree with the approach discussed in paragraphs 6.74 – 6.77 and BC6.68?Why or why not?
23.We broadly agree with the IASB's view that it may be appropriate to use onemeasurement basis for the statement of financial position and a differentmeasurement basis for the statement of profit or loss. However, we strongly urgethe IASB to provide a conceptual justification for items that are eligible to berecognised in other comprehensive income by allowing different measurementbasis in different statements.
24.We consider the IASB should consider exploring the alternative views contained inparagraphs AV2-AV7 of the Basis for Conclusions accompanying ED/2015/3 orEFRAG's paper "Profit or Loss versus OCI"3 to provide justification for the use ofOCI.
25.As mentioned in our response to question 20 of DP/2013/1, we urge the IASB toaddress the inconsistency in accounting treatment for changes in fair value underthe revaluation model in IAS 16 Property, Plant and Equipment and the fair valuemodel in IAS 40 Investment Property as a matter of priority. This is explained inmore detail in our response to question 14 below.Question 11 – Objective and scope of financial statements and communicationDo you have any comments on the discussion of the objective and scope offinancial statements, and on the use of presentation and disclosure ascommunication tools?
26.We agree with the proposals included in the ED on the objective and scope offinancial statements and communication. However, we find it strange that chapter 73 EFRAG paper is available at <http://www.efrag.org/files/EFRAG%20public%20letters/Conceptual%20Framework/Bulletin%20Profit%20or%20loss%20versus%20OCI/EFRAG_Bulletin_Profit_or_loss_versus_OCI.pdf >.Page 9 of 12only refers to the statement of financial position and the statement of financialperformance (see e.g. paragraph 7.2), and does not refer to the statement of cashflows and the statement of changes in equity.Question 12 – Description of the statement of profit or lossDo you support the proposed description of the statement of profit or loss? Whyor why not?If you think that the Conceptual Framework should provide a definition of profitor loss, please explain why it is necessary and provide your suggestion for thatdefinition.
27.We acknowledge the challenges in defining what is meant by the term 'profit orloss'. But we would like to still urge the IASB to attempt to set out clearer principlesfor which items should be included in profit or loss and which items should beincluded in OCI, as we do not consider that paragraphs 7.19 to 7.27 are sufficientlyclear on the distinction between the two classifications.
28.For example, paragraph 7.20 states that the purpose of the statement of profit orloss is to "depict the return that an entity has made on its economic resources" andparagraph 7.21 states that "income and expenses included in the statement ofprofit or loss are the primary source of information about an entity's financialperformance for the period". Yet, per paragraph 7.24 income and expenses are tobe excluded from the statement of profit or loss and included in OCI if it would"enhance the relevance of the information that statement". We consider OCI shouldbe described in a more positive way and therefore a principle for what items to beincluded in OCI should be described, rather than describing what should beexcluded from 'profit or loss' to make it 'more relevant'. Such a negative descriptionreinforces the view that OCI is just a dumping ground/dark corner for volatility thatpreparers would prefer users not to think about.
29.Moreover, we consider that the use of a single EPS measure as required in IFRScould also be the reason why preparers have put strong emphasis on profit or lossand seek to have items which do not reflect well on their performance included inOCI. We believe that there could be more than one source of information about anentity's financial performance. In fact, we consider the statement of performanceshould provide a range of relevant and useful measures to assist users in makingdecisions so as to ease the concerns of some stakeholders, for example, includinga comprehensive income EPS measure that includes items of OCI.
30.In this regard, we agree with the following alternative views:
Paragraph AV2 of ED/2015/3 states that the ED does not provide "an adequatebasis for the IASB to make decisions about the presentation of income andexpenses, and in particular on what amounts should be reported in OCI andwhether and when they should be subsequently reclassified to profit or loss(recycled)". Paragraph AV3 states that, in particular, "identifying the statement of profit orloss as the primary source of information about financial performance, butwithout actually defining financial performance or specifying the characteristicsPage 10 of 12of income and expenses that require their presentation in OCI, will leave theIASB in effectively the same position that it is now".. Paragraph AV4 states that "the conceptual foundation for performancereporting should be based on principles of separate presentation of income andexpenses with different characteristics…such disaggregation should be donewithin profit or loss, either on the face of the statement or in the notes…theremay be some circumstances in which disaggregation may be best done byrecognising some components of income and expenses in OCI and not in profitor loss".Paragraph AV30 states that "the root of the debate between historical cost andcurrent value lies in the existing focus of preparers and users on the use of asingle statistic – profit or loss – to reflect performance for that period".
31.Other than the above-mentioned comments, we are of the view that the drafting ofChapter 7 of the ED seems to be putting too much emphasis on the element ofperformance whereas the discussion on other elements is limited. We also haveconcerns in paragraph 7.19 on why efficiency and effectiveness are considered asimportant attributes to communicate information about financial performance tousers. Instead, we consider the focus should be on qualitative characteristics ofuseful financial information.Question 13 – Reporting items of income or expenses in other comprehensiveincomeDo you agree with the proposals on the use of other comprehensive income? Doyou think that they provide useful guidance to the IASB for future decisionsabout the use of other comprehensive income? Why or why not?If you disagree, what alternative do you suggest and why?
32.As mentioned in our response to Question 12, we consider the IASB has missedthe opportunity on providing a conceptual justification for the use of OCI. Wecontinue to encourage the IASB to develop a principle on what items are eligible forrecognition in OCI and when they should be recognised.Question 14 – RecyclingDo you agree that the Conceptual Framework should include the rebuttablepresumption described above? Why or why not?If you disagree, what do you propose instead and why?
33.As the IASB has not developed a principle for what items should be included inOCI, we decline to comment on whether the Conceptual Framework should includethe rebuttable presumption or whether the rebuttable presumption is sound.
34.We do however consider that, if the IASB maintains the view that 'profit or loss' andOCI should be retained, then the revised Conceptual Framework should provide aconceptual justification for the use of recycling if recycling as a concept were toalso be retained. We consider that the ED currently lacks guidance on recycling.Page 11 of 12
35.As mentioned in our response to question 20 of DP/2013/1, we would like toreiterate to the IASB that there are currently some fundamental inconsistenciesbetween the accounting treatment for changes in fair value arising under therevaluation model in IAS 16 and the fair value model in IAS 40. These are:
(a) the requirement under IAS 16 to compute depreciation of a revalued assetbased on its revalued amount and to charge that depreciation to profit or loss,even though the revalued amount is required to be updated at each reportingdate with the surplus arising from the revaluation recognised in othercomprehensive income;
(b) the prohibition in IAS 16 on recycling the revaluation amounts accumulated inequity to profit or loss at the time of disposal of the asset; and(c) the requirement in IAS 40 to recognise revaluation gains on investmentproperties directly in profit or loss rather than initially in other comprehensiveincome until realised.We consider that it would be simpler and easier to understand if IAS 16 were toapply the full fair value model.Question 15 – Effects of the proposed changes to the Conceptual FrameworkDo you agree with the analysis in paragraphs BCE.1 – BCE.31? Should the IASBconsider any other effects of the proposals in the Exposure Draft?
36.We suggest the IASB should be prepared for how to deal with the situation asmentioned in paragraph BCE.27 (that is, when the Interpretations Committee isfaced with inconsistencies between a standard, including those developed on thebasis of the existing Conceptual Framework, and the concepts in the revisedConceptual Framework). This is particularly important as the changes proposed forthe definition of a liability would be intentionally contrary to some of the existingstandards and interpretations.
37.As noted in our response to question 5 of this ED and question 1 of the ED/2015/4,we consider that interpretative issues under the current accounting standardsshould refer primarily to the principles in IAS 8.11. That is, entities should refer toexisting IFRSs that deal with similar and related issues before making reference tothe Conceptual Framework.Question 16 – Business activitiesDo you agree with the proposed approach to business activities? Why or whynot?
38.We agree with the IASB's view contained in paragraphs BCIN.28-BCIN.34 thatbusiness activities is a relevant factor to consider in determining the unit of account,selection of a measurement basis and it might affect presentation and disclosure.We also believe that there is a role for business model at the standards level butnot at the Conceptual Framework level.Page 12 of 12~ End ~Question 17 – Long-term investmentDo you agree with the IASB's conclusions on long-term investment? Why or whynot?
39.We agree with the conclusion that the ED provides sufficient tools for the IASB tomake appropriate standard-setting decisions on long-term investment in future.Question 18 – Other commentsDo you have comments on any other aspect of the Exposure Draft? Pleaseindicate the specific paragraphs or group of paragraphs to which yourcomments relate (if applicable).As previously noted, the IASB is not requesting comments on all parts ofChapters 1 and 2, on how to distinguish liabilities from equity claims (seeChapter 4) or on Chapter 8.
40.We have no other comments on the proposals.
ED/2015/3 Conceptual Framework for Financial Reporting
下载原件Our Ref.: C/FRSCSent electronically through the IASB Website (www.ifrs.org)
2 December 2015Mr Hans HoogervorstInternational Accounting Standards Board30 Cannon StreetLondon EC4M 6XHUnited KingdomDear Hans,IASB Exposure Draft ED/2015/3 Conceptual Framework for Financial ReportingThe Hong Kong Institute of Certified Public Accountants is the only body authorised bylaw to set and promulgate standards relating to financial reporting, auditing, and ethics forprofessional accountants, in Hong Kong. We are grateful for the opportunity to provideyou with our comments on ED/2015/3.We appreciate the IASB's effort to initiate a comprehensive revision of the ConceptualFramework. We are pleased to note that the IASB has responded to some of ourrecommendations in response to the Discussion Paper DP/2013/1 A Review of theConceptual Framework for Financial Reporting.We have raised a number of concerns on matters that we consider the IASB has notsufficiently addressed in ED/2015/3 or that we consider should be a priority. In particular:
In our response to question 3, we consider the distinction between liabilities andequity is a fundamental conceptual issue that needs to be better addressed in theConceptual Framework project as a matter of priority. We are aware that the IASB isundertaking a separate project to deal with this issue and urge the IASB to expeditethis separate project.In our response to question 4 regarding the proposed description of a presentobligation, we have serious concerns on what 'no practical ability to avoid thetransfer' means in practice and how it is intended to differ from the requirementscontained in IAS 37 Provisions, Contingent Liabilities and Contingent Assets.In our response to question 5, we request that the IASB provides additional guidanceon how preparers can deal with the potential conflicting views between the revisedConceptual Framework and existing standards. When determining which view shouldtake precedent, we suggest that cross-reference should be made to the hierarchy inparagraph 11 of IAS 8 Accounting Policies, Changes in Accounting Estimates andErrors instead of directly to the revised Conceptual Framework.In our response to question 12, we urge the IASB to attempt to define what is meantby 'profit or loss' and provide a principle for what items should be included in OCI.We also consider that putting too much emphasis on a single measure is the sourceof the problems in reporting financial performance and that greater emphasis shouldPage 2 of 12therefore be placed on disaggregation within the performance statement, rather thanon a single measure of profit or loss.Our responses to the questions raised in the ED are explained in more detail in theAppendix.If you have any questions regarding the matters raised in this letter, please contact me orBen Lo, Associate Director in the Standard Setting Department, at ben@hkicpa.org.hk.Yours sincerely,Christina NgHead of Financial Reporting, Standard Setting DepartmentCN/BLEncl.Page 3 of 12APPENDIXDetailed comments on IASB ED/2015/3 Conceptual Framework for FinancialReportingQuestion 1 – Proposed changes to Chapter 1 and 2Do you support the proposals:
(a) to give more prominence, within the objective of financial reporting, to theimportance of providing information needed to assess management'sstewardship of the entity's resources;
(b) to reintroduce an explicit reference to the notion of prudence (described ascaution when making judgements under conditions of uncertainty) and tostate that prudence is important in achieving neutrality;
(c) to state explicitly that a faithful representation represents the substance ofan economic phenomenon instead of merely representing its legal form;
(d) to clarify that measurement uncertainty is one factor that can make financialinformation less relevant, and that there is a trade-off between the level ofmeasurement uncertainty and other factors that make information relevant;
and(e) to continue to identify relevance and faithful representation as the twofundamental qualitative characteristics of useful financial information?Why or why not?
1.We consider the IASB has addressed the Institute's comments in response toDP/2013/1 A Review of the Conceptual Framework for Financial Reporting.Therefore, we support the IASB's proposals to:
give more prominence to the objective of assessing stewardship;
reintroduce an explicit reference to the notion of prudence as a supportingfactor of neutrality and as defined in paragraph 2.18 as the exercise of cautionwhen making judgements under conditions of uncertainty. We also support thatthe exercise of prudence means the assets/income are neither overstated norunderstated and liabilities/expenses are neither understated nor overstated;
and reintroduce substance over form as a necessary component of faithfulrepresentation.
2.While we agree with the proposal to clarify that measurement uncertainty is onefactor that can make financial information less relevant [Question 1(d)], we haveconcerns with the term 'capable' as used in paragraph 2.6. We think that incorrectfinancial information is also capable of 'making a difference in the decisions madeby users' and therefore 'capable of making a difference in the decisions made byusers' is not a unique identifier of relevant information.Page 4 of 12
3.Therefore, we consider the IASB should re-consider whether the term capable isappropriate in such circumstance. Instead, we suggest that 'relevance' should beassociated with whether the information is 'appropriately useful' in decision-making.Question 2 – Description and boundary of a reporting entityDo you agree with:
(a) the proposed description of a reporting entity in paragraphs 3.11 – 3.12; and(b) the discussion of the boundary of a reporting entity in paragraphs 3.13 –
3.25?Why or why not?
4.We generally agree with the discussion contained in the ED regarding theproposed description and the boundary of a reporting entity.
5.In particular, we welcome the discussion contained in paragraph 3.24, which statesthat "consolidated financial statements of the parent are not intended to provideinformation to users of a subsidiary's financial statements". We consider thisstatement provides justification to the Institute's request1 to the IASB in 2014 todelete paragraph 4(a)(iv) of IFRS 10 Consolidated Financial Statements 2. Ourrationale for deleting the paragraph in IFRS 10 is we 'cannot see the relevance ofthe type or availability of financial statements prepared by the ultimate parent to thequestion of the usefulness of company level information prepared by theintermediate holding companies (IHC). In many cases, specific financial informationrelating to the IHC or its subsidiaries will not be identifiable from the consolidatedfinancial statements of the ultimate parent as the IHC is just one of many sub-groups within the larger group, and in all cases any intra group transactionsinvolving the IHC or its subsidiaries and the larger group will be eliminated in thoseultimate parent financial statements. This lack of information pertaining to the IHCsub-group will typically be the case irrespective of whether or not the ultimateparent follows IFRS or some other GAAP.' Accordingly, we request that the IASBamends IFRS 10 in due course to reflect the thinking contained in paragraph 3.24.
6.While we consider the principles for the boundary of reporting entity in paragraph
3.18 are sound, we suggest that:
(a) parameters should be set in paragraph 3.17 as to when it is appropriate toprepare combined financial statements. In practice, combined financialstatements are typically prepared to reflect common control group or capital re-organisations in a capital transaction (for example, for pre-IPOs when the group1 The Institute's letter to the IASB regarding the proposal to delete paragraph 4(a)(iv) of IFRS 10 isavailable at <http://www.hkicpa.org.hk/file/media/section6_standards/standards/FinancialReporting/submission-pdf/2014/sub_ifrs10.pdf >.2 Paragraph 4(a)(iv) of IFRS 10 states that one of the conditions that a parent need not presentconsolidated financial statements is 'its ultimate or any intermediate parent produces consolidatedfinancial statements that are available for public use and comply with IFRSs'.Page 5 of 12to be listed will be headed by a newly incorporated company which was not inexistence as of the latest reporting date in the IPO track record period); and(b) some discussion in paragraph 3.18 on circumstances where there is no parent-subsidiary relationship, and how that relates to the boundary of reporting entity,would be useful. A common circumstance where there is no parent-subsidiaryrelationship is joint control. The discussion in the ED seems to concentrate onthe element of direct and indirect control but we consider some discussion onjoint control is relevant for the accounting for joint operations and joint ventures.Question 3 – Definitions of elementsDo you agree with the proposed definitions of elements (excluding issuesrelating to the distinction between liabilities and equity):
(a) an asset, and the related definition of an economic resource;
(b) a liability;
(c) equity;
(d) income; and(e) expenses?Why or why not? If you disagree with the proposed definitions, what alternativedefinitions do you suggest and why?
7.We generally agree with the proposed definitions of elements except for theguidance on assets arising from a constructive obligation of another party (pleaserefer to our explanation in response to question 4).
8.However, we note that paragraph 4.30 seems to imply that an obligation to transfereconomic resources for a variable number of shares would be considered as anequity claim. This is contrary to existing accounting principles, under which such anobligation would represent a financial liability. We are therefore concerned thatsuch a statement appears to be pre-empting the outcome of the IASB’s researchproject (Financial Instruments with Characteristics of Equity). The IASB shouldtherefore expedite its FICE research project and should not restrict its scope tocurrent application issues that have arisen in relation to IAS 32 FinancialInstruments: Presentation as is implied in paragraphs AV8-AV14 of the Basis forConclusions accompanying ED/2015/3.Question 4 – Present obligationDo you agree with the proposed description of a present obligation and theproposed guidance to support that description? Why or why not?
9.We found the proposed new definition of 'present obligation' to be problematic andcan be interpreted in more than one way.Page 6 of 12
10.In particular, we have serious concerns on what 'no practical ability to avoid thetransfer' means in practice and how it is intended to differ from the requirementscontained in IAS 37 Provisions, Contingent Liabilities and Contingent Assets. Theproposed wording in paragraphs 4.31-4.35 appears to be intended to be verydefinitive on when a present obligation would be said to arise and that it wouldinclude situations involving economic compulsion or obligations that are in theoryavoidable but only by ceasing to operate.
11.One way to interpret the intention of paragraphs 4.31-4.35 is, for example,immediately on entering into a stand ready arrangement such as a guarantee or abank overdraft facility, the guarantor/bank would be considered as having nopractical ability to avoid the transfer an economic resource. Following the ED, itcould be argued that the guarantor/bank would be required to recognise andmeasure the guaranteed amount or the overdraft facility immediately upon issuingthese arrangements. If this were the case, we would not agree with thisunderstanding and consider this would contradict existing IFRS requirements.
12.It is also clear from paragraphs BCE9-BCE10 that the IASB has intentionallyproposed the 'present obligation' definition to be different from the recently issuedIFRIC 21 Levies. While the IASB presumably has some intended change in mindbehind the proposed definition, there is no testing of the wording mentioned inparagraph 11 of this Appendix against common fact patterns (for example, in theexamples in IAS 37) to communicate how the IASB would intend practice tochange. Therefore, as long as the IASB does not clarify the fundamental questionof when to recognise a liability, as opposed to when to regard an economicallyunavoidable situation as being part of future operating losses or when to regard thesituation as a contingent liability, we are uncomfortable with supporting suchwording in the ED.
13.Regarding the definition of an asset, we have concerns with paragraph 4.8(b), inparticular where it states that rights that constitute economic resources may arise'from a constructive obligation of another party'. If a constructive obligation is onewhich is not enforceable by law and simply rests on expectations of how an entityis likely to act, then it seems inconsistent to assert that a counterparty could have a'right', and therefore an asset, arising from such a situation.Question 5 – Other guidance on the elementsDo you have any comments on the proposed guidance?Do you believe that additional guidance is needed? If so, please specify whatthat guidance should include.
14.We consider the Conceptual Framework should be a high-level fundamentalconcepts and principles document with simple-to-understand objectives; and thatthe standards should be based on the Conceptual Framework, not the reverse.
15.In light of some conflicting views between the revised Conceptual Framework andexisting standards, in particular, regarding the proposed definition of a liability, werequest that the IASB provides additional guidance on how preparers should dealwith the conflicting views. For example, because the definition of a 'presentobligation' would be considered different from the requirements in IFRIC 21, wePage 7 of 12foresee a potential diversity in practice if preparers were to use the revisedConceptual Framework when designing accounting policies for such transactions,ahead of any revision to IAS 37.
16.If the IASB were to provide guidance as we suggested, the guidance shouldemphasise the need to follow the hierarchy in paragraph 11 of IAS 8 AccountingPolicies, Changes in Accounting Estimates and Errors. That is, preparers shouldmake reference to the requirements in existing IFRSs that deal with similar andrelated issues before referring to the revised Conceptual Framework (ourcomments here are consistent with our response to ED/2015/4 regarding the cross-reference to the revised Conceptual Framework).Question 6 – Recognition criteriaDo you agree with the proposed approach to recognition? Why or why not? Ifyou do not agree, what changes do you suggest and why?
17.We generally agree with the proposed recognition criteria. We think that detailedrecognition criteria should be considered at the standards level.
18.We note the international debate about the inconsistent guidance in the ED whenrecognising an asset when there is 'existence uncertainty' or 'a low probability of aninflow or an outflow of economic benefits'. We consider disclosures, instead ofrecognition, in financial statements would be appropriate in these circumstances.Question 7 - DerecognitionDo you agree with the proposed discussion of derecognition? Why or why not?If you do not agree, what changes do you suggest and why?
19.We generally agree with the IASB's view that derecognition should be consideredas the mirror image of recognition. While we note that the element of derecognitioncould be a challenging aspect of accounting, on balance, we consider the draftdiscussion in this area is reasonable at the Conceptual Framework level. Same asour response to question 6, we believe detailed derecognition criteria should beconsidered at the standards level.Question 8 – Measurement basesHas the IASB:
(a) correctly identified the measurement bases that should be described in theConceptual Framework? If not, which measurement bases would youinclude and why?(b) properly described the information provided by each of the measurementbases, and their advantages and disadvantages? If not, how would youdescribe the information provided by each measurement basis, and itsadvantages and disadvantages?
20.We agree with the discussion contained in the ED in relation to the identification ofmeasurement bases and their advantages and disadvantages.Page 8 of 12Question 9 – Factors to consider when selecting a measurement basisHas the IASB correctly identified the factors to consider when selecting ameasurement basis? If not, what factors would you consider and why?
21.We generally agree with the discussion in relation to the factors to consider whenselecting a measurement basis. However, the IASB should be careful with the wayparagraph 6.52 is written as it would advocate the use of a consistentmeasurement basis at both initial and subsequent recognition, which we think maynot be useful in all circumstances.
22.For the proposed measurement basis in paragraph 6.69 in relation to transactionswith holders of equity claims, we are of the view that the measurement basisshould be based on which item (the asset or the equity) has a more reliablemeasurement instead of measurement based on the current value of the assetreceived.Question 10 – More than one relevant measurement basisDo you agree with the approach discussed in paragraphs 6.74 – 6.77 and BC6.68?Why or why not?
23.We broadly agree with the IASB's view that it may be appropriate to use onemeasurement basis for the statement of financial position and a differentmeasurement basis for the statement of profit or loss. However, we strongly urgethe IASB to provide a conceptual justification for items that are eligible to berecognised in other comprehensive income by allowing different measurementbasis in different statements.
24.We consider the IASB should consider exploring the alternative views contained inparagraphs AV2-AV7 of the Basis for Conclusions accompanying ED/2015/3 orEFRAG's paper "Profit or Loss versus OCI"3 to provide justification for the use ofOCI.
25.As mentioned in our response to question 20 of DP/2013/1, we urge the IASB toaddress the inconsistency in accounting treatment for changes in fair value underthe revaluation model in IAS 16 Property, Plant and Equipment and the fair valuemodel in IAS 40 Investment Property as a matter of priority. This is explained inmore detail in our response to question 14 below.Question 11 – Objective and scope of financial statements and communicationDo you have any comments on the discussion of the objective and scope offinancial statements, and on the use of presentation and disclosure ascommunication tools?
26.We agree with the proposals included in the ED on the objective and scope offinancial statements and communication. However, we find it strange that chapter 73 EFRAG paper is available at <http://www.efrag.org/files/EFRAG%20public%20letters/Conceptual%20Framework/Bulletin%20Profit%20or%20loss%20versus%20OCI/EFRAG_Bulletin_Profit_or_loss_versus_OCI.pdf >.Page 9 of 12only refers to the statement of financial position and the statement of financialperformance (see e.g. paragraph 7.2), and does not refer to the statement of cashflows and the statement of changes in equity.Question 12 – Description of the statement of profit or lossDo you support the proposed description of the statement of profit or loss? Whyor why not?If you think that the Conceptual Framework should provide a definition of profitor loss, please explain why it is necessary and provide your suggestion for thatdefinition.
27.We acknowledge the challenges in defining what is meant by the term 'profit orloss'. But we would like to still urge the IASB to attempt to set out clearer principlesfor which items should be included in profit or loss and which items should beincluded in OCI, as we do not consider that paragraphs 7.19 to 7.27 are sufficientlyclear on the distinction between the two classifications.
28.For example, paragraph 7.20 states that the purpose of the statement of profit orloss is to "depict the return that an entity has made on its economic resources" andparagraph 7.21 states that "income and expenses included in the statement ofprofit or loss are the primary source of information about an entity's financialperformance for the period". Yet, per paragraph 7.24 income and expenses are tobe excluded from the statement of profit or loss and included in OCI if it would"enhance the relevance of the information that statement". We consider OCI shouldbe described in a more positive way and therefore a principle for what items to beincluded in OCI should be described, rather than describing what should beexcluded from 'profit or loss' to make it 'more relevant'. Such a negative descriptionreinforces the view that OCI is just a dumping ground/dark corner for volatility thatpreparers would prefer users not to think about.
29.Moreover, we consider that the use of a single EPS measure as required in IFRScould also be the reason why preparers have put strong emphasis on profit or lossand seek to have items which do not reflect well on their performance included inOCI. We believe that there could be more than one source of information about anentity's financial performance. In fact, we consider the statement of performanceshould provide a range of relevant and useful measures to assist users in makingdecisions so as to ease the concerns of some stakeholders, for example, includinga comprehensive income EPS measure that includes items of OCI.
30.In this regard, we agree with the following alternative views:
Paragraph AV2 of ED/2015/3 states that the ED does not provide "an adequatebasis for the IASB to make decisions about the presentation of income andexpenses, and in particular on what amounts should be reported in OCI andwhether and when they should be subsequently reclassified to profit or loss(recycled)". Paragraph AV3 states that, in particular, "identifying the statement of profit orloss as the primary source of information about financial performance, butwithout actually defining financial performance or specifying the characteristicsPage 10 of 12of income and expenses that require their presentation in OCI, will leave theIASB in effectively the same position that it is now".. Paragraph AV4 states that "the conceptual foundation for performancereporting should be based on principles of separate presentation of income andexpenses with different characteristics…such disaggregation should be donewithin profit or loss, either on the face of the statement or in the notes…theremay be some circumstances in which disaggregation may be best done byrecognising some components of income and expenses in OCI and not in profitor loss".Paragraph AV30 states that "the root of the debate between historical cost andcurrent value lies in the existing focus of preparers and users on the use of asingle statistic – profit or loss – to reflect performance for that period".
31.Other than the above-mentioned comments, we are of the view that the drafting ofChapter 7 of the ED seems to be putting too much emphasis on the element ofperformance whereas the discussion on other elements is limited. We also haveconcerns in paragraph 7.19 on why efficiency and effectiveness are considered asimportant attributes to communicate information about financial performance tousers. Instead, we consider the focus should be on qualitative characteristics ofuseful financial information.Question 13 – Reporting items of income or expenses in other comprehensiveincomeDo you agree with the proposals on the use of other comprehensive income? Doyou think that they provide useful guidance to the IASB for future decisionsabout the use of other comprehensive income? Why or why not?If you disagree, what alternative do you suggest and why?
32.As mentioned in our response to Question 12, we consider the IASB has missedthe opportunity on providing a conceptual justification for the use of OCI. Wecontinue to encourage the IASB to develop a principle on what items are eligible forrecognition in OCI and when they should be recognised.Question 14 – RecyclingDo you agree that the Conceptual Framework should include the rebuttablepresumption described above? Why or why not?If you disagree, what do you propose instead and why?
33.As the IASB has not developed a principle for what items should be included inOCI, we decline to comment on whether the Conceptual Framework should includethe rebuttable presumption or whether the rebuttable presumption is sound.
34.We do however consider that, if the IASB maintains the view that 'profit or loss' andOCI should be retained, then the revised Conceptual Framework should provide aconceptual justification for the use of recycling if recycling as a concept were toalso be retained. We consider that the ED currently lacks guidance on recycling.Page 11 of 12
35.As mentioned in our response to question 20 of DP/2013/1, we would like toreiterate to the IASB that there are currently some fundamental inconsistenciesbetween the accounting treatment for changes in fair value arising under therevaluation model in IAS 16 and the fair value model in IAS 40. These are:
(a) the requirement under IAS 16 to compute depreciation of a revalued assetbased on its revalued amount and to charge that depreciation to profit or loss,even though the revalued amount is required to be updated at each reportingdate with the surplus arising from the revaluation recognised in othercomprehensive income;
(b) the prohibition in IAS 16 on recycling the revaluation amounts accumulated inequity to profit or loss at the time of disposal of the asset; and(c) the requirement in IAS 40 to recognise revaluation gains on investmentproperties directly in profit or loss rather than initially in other comprehensiveincome until realised.We consider that it would be simpler and easier to understand if IAS 16 were toapply the full fair value model.Question 15 – Effects of the proposed changes to the Conceptual FrameworkDo you agree with the analysis in paragraphs BCE.1 – BCE.31? Should the IASBconsider any other effects of the proposals in the Exposure Draft?
36.We suggest the IASB should be prepared for how to deal with the situation asmentioned in paragraph BCE.27 (that is, when the Interpretations Committee isfaced with inconsistencies between a standard, including those developed on thebasis of the existing Conceptual Framework, and the concepts in the revisedConceptual Framework). This is particularly important as the changes proposed forthe definition of a liability would be intentionally contrary to some of the existingstandards and interpretations.
37.As noted in our response to question 5 of this ED and question 1 of the ED/2015/4,we consider that interpretative issues under the current accounting standardsshould refer primarily to the principles in IAS 8.11. That is, entities should refer toexisting IFRSs that deal with similar and related issues before making reference tothe Conceptual Framework.Question 16 – Business activitiesDo you agree with the proposed approach to business activities? Why or whynot?
38.We agree with the IASB's view contained in paragraphs BCIN.28-BCIN.34 thatbusiness activities is a relevant factor to consider in determining the unit of account,selection of a measurement basis and it might affect presentation and disclosure.We also believe that there is a role for business model at the standards level butnot at the Conceptual Framework level.Page 12 of 12~ End ~Question 17 – Long-term investmentDo you agree with the IASB's conclusions on long-term investment? Why or whynot?
39.We agree with the conclusion that the ED provides sufficient tools for the IASB tomake appropriate standard-setting decisions on long-term investment in future.Question 18 – Other commentsDo you have comments on any other aspect of the Exposure Draft? Pleaseindicate the specific paragraphs or group of paragraphs to which yourcomments relate (if applicable).As previously noted, the IASB is not requesting comments on all parts ofChapters 1 and 2, on how to distinguish liabilities from equity claims (seeChapter 4) or on Chapter 8.
40.We have no other comments on the proposals.