Page 1 of 13Our Ref.: C/FRSCSent electronically through the IASB Website (www.ifrs.org)
10 May 2021Mr Hans HoogervorstInternational Accounting Standards BoardColumbus Building7 Westferry CircusCanary WharfLondon E14 4HDUnited KingdomDear Hans,IASB Request for InformationPost-implementation Review of IFRS 10 Consolidated Financial Statements,IFRS 11 Joint Arrangements and IFRS 12 Disclosure of Interests in Other EntitiesThe Hong Kong Institute of Certified Public Accountants (HKICPA) is the only bodyauthorised by law to set and promulgate standards relating to financial reporting, auditingand ethics for professional accountants in Hong Kong. We are grateful for the opportunityto provide our comments and the comments of our stakeholders on this Request forInformation (RFI).The HKICPA has carefully reviewed the RFI and performed outreach with localstakeholders to seek feedback. We provide detailed comments in the Appendix, andsummarise our primary suggestions and observations below.OverallThe HKICPA considers the application of IFRS 10, IFRS 11 and IFRS 12 can bechallenging and often involves significant judgement. We suggest that the IASB reiteratethe need for preparers to disclose clearly any significant judgements made whenapplying the entity’s accounting policies in accordance with paragraph 122 of IAS 1Presentation of Financial Statements.Control assessment under IFRS 10The HKICPA considers the principle of control in IFRS 10 has been operating largely asintended. However, we noted practical difficulties in the following areas related toperforming the control assessment under IFRS 10:
•determination of whether rights are substantive or protective;
•assessment of de facto control;
•assessment of whether a decision maker is a principal or an agent; and•assessment of the existence of de facto agency relationships.We observed that challenges are more pervasive in some industries, and complexityincreases when special purpose entities are involved. We provide examples wherecomplexity arises in the Appendix.While we appreciate that the existing guidance in IFRS 10 on these areas are helpful toa certain extent, there are limited application examples. Having said that, weacknowledge that challenges faced in practice often relate to fact-specific cases and thatit is unavoidable that judgement will have to be exercised to arrive at the appropriateaccounting. Nevertheless, there are some relatively common examples where moreguidance would be appreciated. We particularly recommend the IASB developingPage 2 of 13additional non-industry specific examples to illustrate the principles in the above areasto facilitate application.Accounting for a loss of controlThe HKICPA has observed diversity in practice in accounting for a partial disposal of asubsidiary that results in a loss of control where the subsidiary does not constitute abusiness. Some companies remeasure the retained interest at fair value while othersadopt a cost-based approach.Questions also arise as to the interaction between IFRS 10.25(b) and the recognition ofgain or loss in other Standards when accounting for transactions involving single-assetentities/corporate wrappers; in particular, whether the accounting should be driven bysubstance or form. Accordingly, the HKICPA recommends that the IASB consider theaccounting for transactions involving single-asset entities/corporate wrappers moreholistically, including whether the requirement in IFRS 10.25(b) is applicable to disposalsof a subsidiary when the subsidiary does not constitute a business and how it interactswith the recognition of gain or loss in other Standards.Accounting for collaborative arrangements and classifying joint arrangementsThe HKICPA recommends that the IASB develop clear principles for collaborativearrangements outside the scope of IFRS 11 to better reflect their substance. There iscurrently a lack of guidance in this area and challenges arise in determining how tocharacterise or classify such arrangements, with resulting diversity in practice. Theaccounting treatments used in practice do not always provide relevant or usefulinformation for such arrangements.The HKICPA also recommends that the IASB provide more detailed guidance on theapplication of the ‘other facts and circumstances’ guidance in IFRS 11, for which wehave observed challenges in applying in practice.If you have any questions regarding the matters raised in this letter, please contact me(ceciliakwei@hkicpa.org.hk) or Eky Liu (eky@hkicpa.org.hk), Associate Director of theStandard Setting Department.Sincerely,Cecilia KweiDirector, Standard Setting DepartmentPage 3 of 13Detailed comments on IASB Request for Information (RFI) on the Post-implementation Review (PIR) of IFRS 10 Consolidated Financial Statements, IFRS11 Joint Arrangements, and IFRS 12 Disclosure of Interests in Other EntitiesBackgroundQuestion 1: Background
1.The Hong Kong Institute of Certified Public Accountants (HKICPA) is the only bodyauthorised by law to set and promulgate standards relating to financial reporting forprofessional accountants in Hong Kong.
2.In collecting feedback on the RFI, the HKICPA:
•issued an Invitation to Comment on the RFI on 10 December 2020 to itsmembers and other stakeholders;
•consulted its Quality and Assurance Department and read through their annualreports on practice review findings;
•sought input from its Business Combinations and Reporting Entity AdvisoryPanel, and Small and Medium Practitioners Working Group on TechnicalIssues, which are mainly comprised of technical and industry experts fromlarge as well as small and medium accounting firms (collectively, Practitioners);
and•held a public roundtable discussion on 8 April 2021, comprising investors,analysts, preparers and practitioners, with IASB Board member and staffparticipation.
3.The HKICPA also discussed the RFI and the respondents’ feedback with itsFinancial Reporting Standards Committee, which comprises academics, preparerrepresentatives from various industry sectors, regulators, as well as technical andindustry experts from small, medium and large accounting firms.
4.This submission summarises our respondents’ feedback and our comments on theRFI.IFRS 10 Consolidated Financial StatementsQuestion 2(a): Power over an investee—Relevant activities
5.The HKICPA observed that identification of relevant activities is generally not asignificant issue for preparers and auditors, particularly after they understood thecommercial rationale and business model of the investee.
6.Respondents did however consider that identifying relevant activities involvessignificant judgement in complex situations. The following scenarios were shared:
•A government is a shareholder of a company (e.g. utilities or public transportcompany) and the price setting arrangement of the entity is regulated by thegovernment. Questions arise as to whether price setting is a relevant activityof the company, and whether the regulation of pricing by the governmentshould be interpreted as the government acting in its capacity as a shareholderor as a regulatory body.•Two or more investors direct different relevant activities at different timesAppendixPage 4 of 13during a contractual period. For example, in a real estate company, one partydirects the construction and the other party directs the sale of properties, or ina pharmaceutical company, one party is responsible for research anddevelopment of a new drug while another party is responsible formanufacturing and sales of the new drug. There seems to be a change inrelevant activities, and therefore a shift of power, over the life cycle. Difficultiesare noted in identifying relevant activities throughout the life cycle anddetermining the time of shift of power over the life cycle.•Multiple parties have different responsibilities in an arrangement. This iscommon among state-owned enterprises, franchise arrangements and just-in-time processing arrangements. For example, one party determines themanufacturing decisions and the other party determines the selling decisions.This creates challenges in determining which relevant activities should begiven greater weight in the assessment of control.•When special purpose entities (SPE) are involved in an arrangement.
7.Having said that, the HKICPA noted judgement is unavoidable in these situations.We generally consider the current related requirements and application guidancein IFRS 10 are sufficient and working as intended.Question 2(b): Power over an investee—Rights that give an investor power
8.The HKICPA observed that the determination of whether rights are substantive orprotective is challenging. We noted from our respondents that challenges are oftenseen in the real estate industry, asset management industry and when investmenttrusts or SPE are involved.
9.Some respondents, mainly practitioners, had split views on whether the conceptsof substantive rights and protective rights are adequate and useful. Some of thesupporters of the existing requirements agreed with the principles in IFRS 10.B22-B24 and B26-B33, and considered the factors listed in IFRS 10.B23 are easy toapply and helpful in conducting the assessment; particularly for cases involving theexercise of options and potential voting rights (though application requiresjudgement).
10.In contrast, a few practitioners considered the concepts are unclear, andcommented that all rights (including substantive rights) may be viewed as protectingthe investors. As IFRS 10.13 states that the ability to direct the activities that mostsignificantly affect the returns of the investee confers power, these few practitionersbelieve that all rights therefore have to be considered in determining whether aninvestor has power regardless of the type of rights. These respondents consideredthe current requirement to identify whether rights are protective or substantive maybe unnecessary, and that the definition of protective rights is unclear and could beimproved upon.
11.The following scenarios were shared by some of our respondents as beingchallenging to assess:
•In the property development industry, borrowing decisions over a certainthreshold often have to be approved by all shareholders, including non-controlling shareholders, while other key activities such as constructiondecisions are solely determined by the major shareholders. Questions ariseas to whether the right over such borrowing decisions is a substantive right.•It is often observed that a lender could obtain control over the investee upondefault, and it is difficult to evaluate in practice whether, and at which point intime, the lender’s rights become substantive—i.e. at the inception of thePage 5 of 13contract (when the lender entitles to the rights) or upon default (when the rightsare crystallized).•Diversity in practice is noted in determining whether a veto right on investmentdecisions of the borrower (a SPE) entitled to by the lender (usually a financialinstitution) is substantive or protective. IFRS 10.B28(a) would imply such aright is protective. However, as the investment decisions are significant to thereturns of the SPE, such a right could also be viewed as substantive.•Regulatory bodies often mandate certain requirements regarding the roles ofa trustee to protect minority shareholders. Questions arise as to whether thoserequirements would result in substantive rights for the trustee, in which casethe trust manager might have no power to control the trust (and would only bean agent or have joint control of the trust with the trustee).•Due to different regulatory or corporate governance requirements in differentjurisdictions and/or industries, the board of directors of some companiesincludes both executive directors (ED) and independent non-executivedirectors (INED). These INED have voting rights to protect the interests of theshareholders. Questions arise as to whether the rights held by the INED aresubstantive or protective (i.e. the purpose of the INED is to protect the minorityshareholders; however, the rights held by the INED may not be solelyprotective and rather considered as substantive from an accountingperspective). Complexity increases if the number of ED and INED iscomparable.•Challenges arise when applying IFRS 10.B31 to determine whether the rightsof a franchisor are substantive or protective in nature. In particular, it iscommon for franchisors to have rights over activities that may serve to bothprotect the brand’s reputation as well as significantly affect the returns offranchisees, e.g. pricing, sales and marketing activities, and staff training.
12.The HKICPA considers the principle of differentiating rights into substantive andprotective rights and the related application guidance in IFRS 10 useful. However,based on our respondents’ feedback, we consider that the guidance could bedifficult to apply and highly judgmental, and it is practically challenging in somecases to assess whether rights are substantive or protective.
13.Accordingly, the HKICPA recommends the IASB consider clarifying the definition ofprotective rights and providing further guidance, for instance in the form ofillustrative examples, on how to determine whether rights (e.g. rights to participatein borrowing decisions and veto rights) are substantive or protective using similarscenarios as shared by our respondents in paragraph 11 above.Question 2(c): Power over an investee—Control without a majority of the votingrights
14.The HKICPA noted that challenges in assessing de facto control arise regularly inHong Kong and mainland China. The increasing use of sophisticated structures isexacerbating this problem in addition to placing more pressure on the generalcontrol assessment.
15.Respondents generally agreed with the principles in the application guidance. Themajority of our respondents commented that significant judgement is involved in defacto control assessments and questions may arise as to whether that judgementis appropriate.
16.Respondents shared the following practically challenging situations:
•An investor has de facto control over an investee originally; however, thePage 6 of 13percentage of shareholding held by the investor decreases over time due todilution, and there are no other changes in facts and circumstances. Theassessment becomes subjective and highly judgemental for determining whenthe investor loses control over the investee.•An investor makes a new investment and concludes that there is no de factocontrol over the investee based on IFRS 10.B46 initially because there isinsufficient information to demonstrate it has de facto control at the time ofpurchase. Due to the passage of time, more evidence arises to support thatthe investor has de facto control since the time of purchase. Some peoplequestioned then whether the initial assessment and conclusion that there wasno de facto control is appropriate.•Company A invests in 40% equity interest in another company B. Some of theshareholders of company B were rarely involved in voting historically, and theoverall voting participation is around 70%-80%. Hence, managementconcludes that company A effectively has voting rights of 50%-57% and hasde facto control over company B. However, as the voting pattern and theshareholders in company B change over time, it is practically difficult andburdensome for company A to carry out the control reassessment continuously.Questions also arise as to whether company A loses or obtains controlwhenever the voting pattern or the shareholdings in company B changes.•A company has only a few shareholders that are all state-owned enterprises,each holding 10% to 20% of the shares of the company. After consideringcontractual arrangements with other shareholders, de facto agentrelationships and/or representation on the board, it may be concluded that themajor shareholder has power over the company despite its low percentageshareholding. Questions nevertheless arise as to whether a minimum level ofshareholding is required in order to establish de facto control, and if so howsuch a level could be determined.
17.Respondents also shared that de facto control assessments sometimes link withthe de facto agent assessments, which increases complexity. Examples include:
•How to apply the requirements appropriately among group companies whereone company has a substantial interest (42%) in an investee, and anotherrelated company has a minority interest stake (5%) in the same investee.Questions may arise as to whether one of the group companies is alwaysacting as a de facto agent of the other, and whether they collectively have defacto control over the investee when none have de facto control individually.•An individual A holds 60% equity interest in company P. Company P holds48% equity interest in company Q. Some people argue that company P doesnot have de facto control over company Q because company P is merelyacting as the de facto agent of individual A. However, it is questionablewhether a company that holds equity interests in another company can beregarded as acting as a de facto agent of its controlling shareholder.
18.The HKICPA noted IFRS 10 does not provide a minimum level of voting rightsneeded to achieve de facto control, and requires companies to look at all facts andcircumstances. Hence, application of the requirements and guidance in IFRS 10 ishighly judgemental and similar fact patterns could be interpreted differently.
19.The HKICPA suggests the IASB provide more comprehensive examples toillustrate factors for consideration to support a holistic assessment (e.g. to cover acombination of factors for consideration as listed in IFRS 10.B38 in a singleexample), and clarify whether de facto control exists in some of the scenarios asshared by our respondents in paragraphs 16 and 17.Page 7 of 13Question 3(a): The link between power and returns—Principals and agents
20.The HKICPA observed that it can be challenging and highly judgemental to assesswhether the decision maker is a principal or an agent, particularly in the fund andasset management industries. Examples shared by our respondents include:
•In a limited partnership fund structure, the limited partners (LP) usually providemost of the funding through debt instruments earning a fixed return while thegeneral partner (GP) provides a much lower level of funding through holdingsignificant equity interests that are subject to significant variability. The assetmanager typically would have minimal equity interests in the fund but isexposed to potentially significant variable returns through remuneration that islinked to the performance of the fund. Questions arise as to whether the assetmanager is a principal or an agent given its minimal equity interests butpotentially significant variability in returns.•In practice, if the asset manager in the structure described above isdetermined to be an agent and the investors delegate all their investmentdecision making power to the asset manager, then the investors seem to haveno power. It is unclear from the application guidance in IFRS 10 whether theinvestors should consider the power of their delegate (i.e. the asset manager)
when carrying out the control assessment. The IFRS InterpretationsCommittee (IFRIC) discussed a related issue in 2017 in respect of whether thedecision-making authority held by a fund manager in the capacity of an agentshould be taken into account when assessing whether the fund manager hassignificant influence over a fund. No conclusion was reached in thecorresponding agenda decision1.•At the inception of a fund, where there are only a few or no other investors, thefund manager may provide the initial seed money to the fund. The seed moneyinvestor would then be, at inception, the majority shareholder of the fund (withup to 100% ownership). However, by design and as time passes, there wouldbe other investors, and the fund manager’s relative interest in the fund wouldbe reduced to the point where the fund manager becomes a minorityshareholder, or has no shareholding as the seed money is ejected. In suchcases, questions arise as to who the principal is and who has control over thelife of the fund, and when the fund manager should deconsolidate the fund.
21.A few practitioners considered that assessing the exposure to variability of returnsfrom other interests inevitably involves judgement, and there is limited guidance onwhether more emphasis should be placed on magnitude or the variability of thereturns, and how the different nature of returns impacts that assessment (IFRS
10.B72). For example, in the asset management industry, there are cases wherethe absolute amount of returns is small while the variability is still substantial.Questions may arise as to whether other factors should also be considered, e.g.the amount as a percentage of the total expected returns. In addition, respondentsquestioned whether the magnitude of the return should be a probability weightedamount, e.g. whether the likelihood of reaching a hurdle for a fund manager to beentitled to a performance fee should be considered, and then multiplying theprobability percentage with the performance fee to arrive at the magnitude of thereturns.
22.While some practitioners considered the existing examples on this topic in IFRS 10helpful, a few noted these examples are specific to investment funds and suggestedthe IASB provide other non-industry specific examples to illustrate the principles.Others however thought that specific examples may lead to unintended1 https://cdn.ifrs.org/content/dam/ifrs/supporting-implementation/agenda-decisions/ias-28-fund-managers-assessment-of-significant-march-2017.pdfPage 8 of 13consequences, such that stakeholders may interpret the examples as a ‘bright line’in determining whether the decision maker is a principal or an agent givencompanies often seek to find a threshold for this assessment. In practice this woulddepend heavily on facts and circumstances and examples may not be suitable forall jurisdictions or industries. They hence suggested the IASB consider working withlocal standard-setters to develop local examples.
23.Respondents, mainly preparers, also shared that additional clarification in thefollowing areas would be helpful:
•In the asset management industry, an investor engages a fund manager anddelegates investment decision rights to the fund manager. The examplesaccompanying IFRS 10 (examples 13-15) illustrate the application of theguidance to identify whether the investor or the fund manager is the principalwhen assessing the link between power and returns. In the case that the fundmanager is determined to be an agent, the investor then has to consider againwhether it has power over the investee and its exposure to variable returnsbefore concluding whether it has control. This overall flow of assessment isnot well aligned to what is being assessed, and it seems like the assessmentis looping from the third element of control (the link between power and returns)
back to the first element (power). Further clarification/additional guidance forthe investor to assess whether it has power in the first place could be provided.This may involve considering the link between power and returns upfront insuch cases.•In the context of exposure to variability of returns from other interests, it is notclear how a company should consider financial guarantees and whether theyshould be treated as a credit enhancement (IFRS 10.B71-B72). Factors forconsideration could be provided through illustrative examples.•More guidance could be provided for how to consider the impact of indirectinterests, such as interests held by an intermediary in which the investor hasan interest, but which it does not control.
24.In light of the above, the HKICPA recommends the IASB should provide clarificationor develop non-industry specific examples to illustrate how to perform theassessment.Question 3(b): The link between power and returns—Non-contractual agencyrelationships
25.The HKICPA generally observed that de facto agency relationships are commonamong group companies, in the asset management industry, and when SPE areinvolved. Challenging examples encountered by some of our respondents are asfollows:
•Where multiple group companies each hold a small percentage ofshareholdings in an investee and collectively hold a majority of the shares ofthe investee. If there is no contractual arrangement between these groupcompanies, questions arise as to whether there is a non-contractual agencyrelationship such that these group companies collectively control the investee.•In closely held funds or private equity structures, power and returns may besplit between different parties for structuring reasons, e.g. regulatory or taxpurposes. It is difficult to carry out the de facto agency assessment in this case.
26.Some respondents, mainly practitioners, believed that the de facto agencyguidance is intended to be helpful and discourages structuring opportunities as thesubstance of the arrangement and relationships between parties have to beconsidered even there is no contractual arrangement between them. Nevertheless,Page 9 of 13the guidance can be hard to operationalize, and it is difficult to rely only on theguidance to support whether an investor has control over an investee and otherwiseprove the existence of a de facto agency relationship.
27.Some practitioners commented that non-contractual agency relationships do existin practice but are difficult and controversial to assess. A few of them suggestedthat it may be helpful to set a rebuttable presumption that there is a de facto agencyrelationship in certain situations (e.g. where the asset manager has minimalvariability and over 99% of the variability of returns is held by the investors; or whenthe structure involves entities that are under common control), unless provenotherwise. On the other hand, others disagreed that a rebuttable presumption wouldbe helpful because contractual rights and obligations are the key factors in thecontrol assessment. Those who disagreed with the rebuttable presumptionconsidered that the non-contractual agency relationship guidance should notconstitute an overriding principle.
28.The HKICPA agrees with our respondents that it is practically difficult to determinewhether a de facto agency relationship exists in the absence of a contractualarrangement. We believe that the de facto agency guidance is well-meant, but it ishard to operationalise and highly judgemental to apply in practice.
29.The HKICPA suggests the IASB consider whether it would be appropriate to set arebuttable presumption in certain circumstances or a principle for assessingwhether there is a non-contractual agency relationship in an arrangement tominimise structuring opportunities. We also recommend the IASB considerdeveloping illustrative examples to improve consistent application of the guidancein IFRS 10.B73-B75.Question 4(a): Investment entities—Criteria for identifying an investment entity
30.The HKICPA does not find the application of the investment entities consolidationexception to be common among Hong Kong entities. Having said that, some firmsdo audit investment entities (mostly as intermediate holding companies) that areincorporated overseas.
31.A few practitioners observed that there is diversity in practice in how ‘investment-related services’ and ‘management services’ in IFRS 10.B85C and IFRS 10.B85Dhave been interpreted, particularly in real estate investment trusts. They would alsolike more guidance on the extent of documentation required to provide evidencethat the investment entity has an exit strategy for its investments, and whether thereare any requirements (e.g. an upper limit) for how long an investment entity couldhold the investments in order to show that there is an exit strategy.
32.Others generally considered that there are no significant issues with the criteria foridentifying an investment entity.Question 4(b): Investment entities—Subsidiaries that are investment entities
33.The HKICPA noted the following comments made by our respondents:
• A few respondents considered that requiring an investment entity to measurean investment in a subsidiary that is an investment entity itself at fair valueresults in a loss of information about the intermediate subsidiary. Thisinformation is considered useful and cannot be adequately compensated for byproviding additional disclosures. This is particularly the case for wholly-ownedintermediate subsidiaries that are set up solely for tax purposes. ThesePage 10 of 13respondents considered that in such cases, the intermediate subsidiaries areextensions of the investment entities, and therefore should be consolidated.They suggested that the IASB reconsider the accounting for the intermediatesubsidiaries for these cases.• However, some other respondents noted that certain companies providevoluntary disclosures about intermediate subsidiaries to meet users’ informationneeds, and users generally find the additional information useful. Accordingly,they suggested that the IASB consider requiring companies to provide additionaldisclosures about the intermediate subsidiaries to enhance comparabilityamong companies instead of changing the existing measurement approach.
34.The HKICPA noted that the IASB and the IFRIC had considered this issue2, andnoted difficulties in identifying a conceptual basis or a practical way to distinguishdifferent types of subsidiaries that are investment entities. In this regard, weconsidered that additional disclosure requirements would be helpful to address thepotential loss of information on intermediate subsidiaries, and that the IASB couldfurther explore what information would be useful to users.Question 5(a): Accounting requirements—Change in the relationship between aninvestor and an investee
35.The HKICPA observed that there is diversity in practice in accounting for a partialdisposal of a subsidiary that results in a loss of control where the subsidiary doesnot constitute a business. Some companies remeasure the retained interest (beingan associate or a joint venture) at fair value applying IFRS 10.25(b), while othersadopt a cost-based approach (i.e. no remeasurement of the retained interest).The reasons for companies applying a cost-based approach are:
•They think there should be symmetry between how an acquirer and a selleraccount for such a transaction – either as a purchase/sale of shares or apurchase/sale of assets, with the assessment of whether the subsidiaryconstitutes a business driving that decision:
o If the subsidiary constitutes a business, then it should be accounted for as apurchase/sale of shares in which case IFRS 3 Business Combinations andIFRS 10 apply;
o If the subsidiary does not constitute a business, then the transaction shouldbe accounted for as a purchase/sale of assets in which case neither IFRS 3nor IFRS 10 applies.•Even though the guidance in IFRS 10.25(b) and B98(b)(iii) does not distinguishbetween subsidiaries that are businesses from those that are not, practice hasemerged to take this factor into account in part due to the introduction of the‘business or non-business’ concept from a seller’s perspective in the Sale orContribution of Assets between an Investor and its Associate or Joint Venture(Amendments to IFRS 10 and IAS 28 Investments in Associates and JointVentures).We believe that the IASB should clarify this issue.
36.We further observed that transactions involving single-asset entities/corporatewrappers (i.e. a company that is set up solely to hold an asset) are common in thereal estate industry in Hong Kong and mainland China. Questions often arise as towhether a company that sells its properties through a corporate wrapper shouldaccount for the transaction as sale of properties under IFRS 15 Revenue from2 Paragraph BC272 of IFRS 10 and IFRIC March 2014 Agenda Decision on Investment EntitiesAmendments – the definition of investment-related services or activities (IFRS 10)
Page 11 of 13Contracts with Customers (which reflects the substance of the transaction) or as adisposal of a subsidiary under IFRS 10 (which follows the form of the transaction).Some of our respondents considered that applying IFRS 10.25(b) in such cases torecognise a net gain/loss instead of applying IFRS 15 to recognise gross revenueand the related costs of sale may not always provide useful information.
37.We noted similar topics were discussed at IASB and IFRIC meetings onsubmissions about the sale of a subsidiary to a customer3, and sale and leasebackof an asset in a single-asset entity 4. Many respondents considered that theunderlying question in both situations is similar – i.e. whether the form of atransaction (sale of an equity interest in a single-asset entity rather than a directsale of the asset within the entity) should result in any difference in accounting.These respondents questioned the technical basis and the apparent lack ofconsistency between the IFRIC’s preliminary conclusions on these two issues.
38.In light of the above, we recommend that the IASB carry out a fundamental reviewof the accounting for transactions involving single-asset entities/corporate wrappers,including whether the requirement in IFRS 10.25(b) is applicable to disposals of asubsidiary when the subsidiary does not constitute a business and how it interactswith the recognition of gain or loss in other Standards.Question 5(b): Accounting requirements—Partial acquisition of a subsidiary thatdoes not constitute a business
39.The HKICPA does not find this accounting issue to be persuasive in Hong Kong.IFRS 11 Joint ArrangementsQuestion 6: Collaborative arrangements outside the scope of IFRS 11
40.Collaborative arrangements that are outside the scope of IFRS 11 are common inpharmaceutical, technology, entertainment, media and increasingly in thetelecommunications industries in Hong Kong.
41.Based on respondents’ feedback, the HKICPA considers that it is often very difficultto characterise collaborative arrangements appropriately, i.e. is it a jointarrangement, an associate, an equity investment under IFRS 9 FinancialInstruments, a debt-type loan, a supplier-customer relationship, a prepayment forfuture expenditure, etc?
42.In some cases, these collaborative arrangements are not joint arrangementsbecause the contractual terms imply one party has control and another hassignificant influence (despite the arrangement being collaborative in nature); orthere are other factors that affect the voting power of the arrangement (for example,when regulation requires votes to be cast by independent directors or others whoare not shareholders of the arrangement).
43.These arrangements are often project-based and may not necessarily be structuredthrough a separate legal entity, which amplifies the challenges for characterisingthe arrangement. In practice, collaborative arrangements are often accounted for3 https://cdn.ifrs.org/-/media/feature/meetings/2020/june/iasb/ap12a-maintenance-and-consistent-application.pdf4 https://cdn.ifrs.org/-/media/feature/meetings/2021/february/ifric/ap02-sale-and-leaseback-of-an-asset-in-a-single-asset-entity.pdfPage 12 of 13under IAS 28 (analogising to associates), IFRS 11 (analogising to a party thatparticipates in but does not have joint control of a joint operation), IFRS 15(depending on whether the arrangement is housed in a legal structure) or IFRS 9,depending on facts and circumstances. Respondents however considered thatsuch accounting outcomes do not provide useful information. A few practitionersquestioned whether it is appropriate to apply equity method accounting to acollaborative arrangement if it is not structured through a separate legal entity.Some respondents considered that accounting for commonly seen collaborativearrangements similarly to joint operations would more faithfully represent thesubstance of those arrangements.
44.Given the challenges noted above, and that it is expected that these arrangementswill be more pervasive in the future (particularly in the telecommunications industry),the HKICPA recommends that the IASB develop clear principles for collaborativearrangements to better reflect the substance of those arrangements.Question 7: Classifying joint arrangements
45.Respondents shared that it is common to consider ‘other facts and circumstances’in IFRS 11 to determine the classification of joint arrangements in the oil and gasindustry, real estate industry and telecommunications industry.
46.However, respondents generally found the consideration of ‘other facts andcircumstances’ in IFRS 11.B29-B32 challenging to apply as it is subjective. It alsoopens up structuring opportunities by allowing/requiring management to lookbeyond the contractual provisions. For example, by asserting through other factsand circumstances that the parties to an arrangement have or do not have rights tothe net assets, the joint venture/joint operation classification could be made toachieve a desired outcome (e.g. a company could argue there had been a changein facts and circumstances to reclassify a loss-making joint operation to a jointventure to stop recognising further losses under equity method accounting).
47.Classification challenges also arise when arrangements are structured through aseparate vehicle and the legal form is not clearly representative of the underlyingeconomics. Preparer and practitioner respondents noted there are cases where itis difficult for ‘other facts and circumstances’ to override the legal form, particularlywhen an arrangement is structured through a separate vehicle but multiple entitiesshare directly in the underlying assets and liabilities of the arrangement (e.g. wheremultiple real estate developers are entitled to the full rights and obligations attachedto different portions of a big piece of land, but that land can be legally held only byone company). There are debates as to whether ‘silo accounting’ under IFRS 10 oraccounting for joint operations under IFRS 11 could be applied. Preparers may findit challenging to draft appropriate contractual terms that can enable sucharrangements to be accounted for as a joint operation. It is also often difficult forauditors to use ‘other facts and circumstances’ to challenge management’sclassification based on the legal form and contractual terms of the arrangement.
48.Given the complexity of these arrangements in practice, it is often challenging todetermine whether the arrangements are primarily designed for the provision ofoutput to the parties, or that the parties in essence have an obligation for theliabilities relating to the arrangement.
49.In light of the above, the HKICPA recommends that the IASB provide more detailedguidance that can be objectively applied in this regard.Page 13 of 13Question 8: Accounting requirements for joint operations
50.The HKICPA noted from the respondents that joint operations are common only inspecific industries and therefore application issues of accounting for joint operationsare not pervasive in Hong Kong.
51.The HKICPA notes that there is a lack of guidance on how to determine the jointoperator’s share of assets, liabilities, revenue and expenses. This is particularly thecase when the joint operator’s share of output purchased differs from its share ofownership interest in a joint operation (the IFRIC March 2015 Agenda Decision5only highlighted the importance of understanding the difference between the twowithout providing further guidance) or if the share of output is not specified, whichmay lead to diversity in practice.IFRS 12 Disclosure of Interests in Other EntitiesQuestion 9: Disclosure of interests in other entities
52.The HKICPA agrees with respondents’ feedback that the disclosure requirementsin IFRS 12 are adequate and there is not a need to further expand the disclosurerequirements.
53.Be that as it may, a preparer noted that it is common to have customer-supplierrelationships in the aircraft leasing industry arranged through a structured entity.Depending on how the arrangement is structured, a typical customer-supplierrelationship may not meet the definition of interest in other entities and will not fallinto the disclosure requirements in IFRS 12. The difference in actual circumstances,and in some cases maybe inconsistent application of the Standards, have led todiversity in practice as regards the extent of disclosures provided in terms of IFRS12 (i.e. whether excluded or included as structured entities). We suggest that theIASB consider clarifying this matter.~ End ~5 https://www.ifrs.org/content/dam/ifrs/supporting-implementation/agenda-decisions/ifrs-11-accounting-by-the-joint-operator-the-accounting-treatment.pdf
IASB Request for Information Post-implementation Review of IFRS 10 Consolidated Financial Statements, IFRS 11 Joint Arrangements and IFRS 12 Disclosure of Interests in Other Entities
下载原件Page 1 of 13Our Ref.: C/FRSCSent electronically through the IASB Website (www.ifrs.org)
10 May 2021Mr Hans HoogervorstInternational Accounting Standards BoardColumbus Building7 Westferry CircusCanary WharfLondon E14 4HDUnited KingdomDear Hans,IASB Request for InformationPost-implementation Review of IFRS 10 Consolidated Financial Statements,IFRS 11 Joint Arrangements and IFRS 12 Disclosure of Interests in Other EntitiesThe Hong Kong Institute of Certified Public Accountants (HKICPA) is the only bodyauthorised by law to set and promulgate standards relating to financial reporting, auditingand ethics for professional accountants in Hong Kong. We are grateful for the opportunityto provide our comments and the comments of our stakeholders on this Request forInformation (RFI).The HKICPA has carefully reviewed the RFI and performed outreach with localstakeholders to seek feedback. We provide detailed comments in the Appendix, andsummarise our primary suggestions and observations below.OverallThe HKICPA considers the application of IFRS 10, IFRS 11 and IFRS 12 can bechallenging and often involves significant judgement. We suggest that the IASB reiteratethe need for preparers to disclose clearly any significant judgements made whenapplying the entity’s accounting policies in accordance with paragraph 122 of IAS 1Presentation of Financial Statements.Control assessment under IFRS 10The HKICPA considers the principle of control in IFRS 10 has been operating largely asintended. However, we noted practical difficulties in the following areas related toperforming the control assessment under IFRS 10:
•determination of whether rights are substantive or protective;
•assessment of de facto control;
•assessment of whether a decision maker is a principal or an agent; and•assessment of the existence of de facto agency relationships.We observed that challenges are more pervasive in some industries, and complexityincreases when special purpose entities are involved. We provide examples wherecomplexity arises in the Appendix.While we appreciate that the existing guidance in IFRS 10 on these areas are helpful toa certain extent, there are limited application examples. Having said that, weacknowledge that challenges faced in practice often relate to fact-specific cases and thatit is unavoidable that judgement will have to be exercised to arrive at the appropriateaccounting. Nevertheless, there are some relatively common examples where moreguidance would be appreciated. We particularly recommend the IASB developingPage 2 of 13additional non-industry specific examples to illustrate the principles in the above areasto facilitate application.Accounting for a loss of controlThe HKICPA has observed diversity in practice in accounting for a partial disposal of asubsidiary that results in a loss of control where the subsidiary does not constitute abusiness. Some companies remeasure the retained interest at fair value while othersadopt a cost-based approach.Questions also arise as to the interaction between IFRS 10.25(b) and the recognition ofgain or loss in other Standards when accounting for transactions involving single-assetentities/corporate wrappers; in particular, whether the accounting should be driven bysubstance or form. Accordingly, the HKICPA recommends that the IASB consider theaccounting for transactions involving single-asset entities/corporate wrappers moreholistically, including whether the requirement in IFRS 10.25(b) is applicable to disposalsof a subsidiary when the subsidiary does not constitute a business and how it interactswith the recognition of gain or loss in other Standards.Accounting for collaborative arrangements and classifying joint arrangementsThe HKICPA recommends that the IASB develop clear principles for collaborativearrangements outside the scope of IFRS 11 to better reflect their substance. There iscurrently a lack of guidance in this area and challenges arise in determining how tocharacterise or classify such arrangements, with resulting diversity in practice. Theaccounting treatments used in practice do not always provide relevant or usefulinformation for such arrangements.The HKICPA also recommends that the IASB provide more detailed guidance on theapplication of the ‘other facts and circumstances’ guidance in IFRS 11, for which wehave observed challenges in applying in practice.If you have any questions regarding the matters raised in this letter, please contact me(ceciliakwei@hkicpa.org.hk) or Eky Liu (eky@hkicpa.org.hk), Associate Director of theStandard Setting Department.Sincerely,Cecilia KweiDirector, Standard Setting DepartmentPage 3 of 13Detailed comments on IASB Request for Information (RFI) on the Post-implementation Review (PIR) of IFRS 10 Consolidated Financial Statements, IFRS11 Joint Arrangements, and IFRS 12 Disclosure of Interests in Other EntitiesBackgroundQuestion 1: Background
1.The Hong Kong Institute of Certified Public Accountants (HKICPA) is the only bodyauthorised by law to set and promulgate standards relating to financial reporting forprofessional accountants in Hong Kong.
2.In collecting feedback on the RFI, the HKICPA:
•issued an Invitation to Comment on the RFI on 10 December 2020 to itsmembers and other stakeholders;
•consulted its Quality and Assurance Department and read through their annualreports on practice review findings;
•sought input from its Business Combinations and Reporting Entity AdvisoryPanel, and Small and Medium Practitioners Working Group on TechnicalIssues, which are mainly comprised of technical and industry experts fromlarge as well as small and medium accounting firms (collectively, Practitioners);
and•held a public roundtable discussion on 8 April 2021, comprising investors,analysts, preparers and practitioners, with IASB Board member and staffparticipation.
3.The HKICPA also discussed the RFI and the respondents’ feedback with itsFinancial Reporting Standards Committee, which comprises academics, preparerrepresentatives from various industry sectors, regulators, as well as technical andindustry experts from small, medium and large accounting firms.
4.This submission summarises our respondents’ feedback and our comments on theRFI.IFRS 10 Consolidated Financial StatementsQuestion 2(a): Power over an investee—Relevant activities
5.The HKICPA observed that identification of relevant activities is generally not asignificant issue for preparers and auditors, particularly after they understood thecommercial rationale and business model of the investee.
6.Respondents did however consider that identifying relevant activities involvessignificant judgement in complex situations. The following scenarios were shared:
•A government is a shareholder of a company (e.g. utilities or public transportcompany) and the price setting arrangement of the entity is regulated by thegovernment. Questions arise as to whether price setting is a relevant activityof the company, and whether the regulation of pricing by the governmentshould be interpreted as the government acting in its capacity as a shareholderor as a regulatory body.•Two or more investors direct different relevant activities at different timesAppendixPage 4 of 13during a contractual period. For example, in a real estate company, one partydirects the construction and the other party directs the sale of properties, or ina pharmaceutical company, one party is responsible for research anddevelopment of a new drug while another party is responsible formanufacturing and sales of the new drug. There seems to be a change inrelevant activities, and therefore a shift of power, over the life cycle. Difficultiesare noted in identifying relevant activities throughout the life cycle anddetermining the time of shift of power over the life cycle.•Multiple parties have different responsibilities in an arrangement. This iscommon among state-owned enterprises, franchise arrangements and just-in-time processing arrangements. For example, one party determines themanufacturing decisions and the other party determines the selling decisions.This creates challenges in determining which relevant activities should begiven greater weight in the assessment of control.•When special purpose entities (SPE) are involved in an arrangement.
7.Having said that, the HKICPA noted judgement is unavoidable in these situations.We generally consider the current related requirements and application guidancein IFRS 10 are sufficient and working as intended.Question 2(b): Power over an investee—Rights that give an investor power
8.The HKICPA observed that the determination of whether rights are substantive orprotective is challenging. We noted from our respondents that challenges are oftenseen in the real estate industry, asset management industry and when investmenttrusts or SPE are involved.
9.Some respondents, mainly practitioners, had split views on whether the conceptsof substantive rights and protective rights are adequate and useful. Some of thesupporters of the existing requirements agreed with the principles in IFRS 10.B22-B24 and B26-B33, and considered the factors listed in IFRS 10.B23 are easy toapply and helpful in conducting the assessment; particularly for cases involving theexercise of options and potential voting rights (though application requiresjudgement).
10.In contrast, a few practitioners considered the concepts are unclear, andcommented that all rights (including substantive rights) may be viewed as protectingthe investors. As IFRS 10.13 states that the ability to direct the activities that mostsignificantly affect the returns of the investee confers power, these few practitionersbelieve that all rights therefore have to be considered in determining whether aninvestor has power regardless of the type of rights. These respondents consideredthe current requirement to identify whether rights are protective or substantive maybe unnecessary, and that the definition of protective rights is unclear and could beimproved upon.
11.The following scenarios were shared by some of our respondents as beingchallenging to assess:
•In the property development industry, borrowing decisions over a certainthreshold often have to be approved by all shareholders, including non-controlling shareholders, while other key activities such as constructiondecisions are solely determined by the major shareholders. Questions ariseas to whether the right over such borrowing decisions is a substantive right.•It is often observed that a lender could obtain control over the investee upondefault, and it is difficult to evaluate in practice whether, and at which point intime, the lender’s rights become substantive—i.e. at the inception of thePage 5 of 13contract (when the lender entitles to the rights) or upon default (when the rightsare crystallized).•Diversity in practice is noted in determining whether a veto right on investmentdecisions of the borrower (a SPE) entitled to by the lender (usually a financialinstitution) is substantive or protective. IFRS 10.B28(a) would imply such aright is protective. However, as the investment decisions are significant to thereturns of the SPE, such a right could also be viewed as substantive.•Regulatory bodies often mandate certain requirements regarding the roles ofa trustee to protect minority shareholders. Questions arise as to whether thoserequirements would result in substantive rights for the trustee, in which casethe trust manager might have no power to control the trust (and would only bean agent or have joint control of the trust with the trustee).•Due to different regulatory or corporate governance requirements in differentjurisdictions and/or industries, the board of directors of some companiesincludes both executive directors (ED) and independent non-executivedirectors (INED). These INED have voting rights to protect the interests of theshareholders. Questions arise as to whether the rights held by the INED aresubstantive or protective (i.e. the purpose of the INED is to protect the minorityshareholders; however, the rights held by the INED may not be solelyprotective and rather considered as substantive from an accountingperspective). Complexity increases if the number of ED and INED iscomparable.•Challenges arise when applying IFRS 10.B31 to determine whether the rightsof a franchisor are substantive or protective in nature. In particular, it iscommon for franchisors to have rights over activities that may serve to bothprotect the brand’s reputation as well as significantly affect the returns offranchisees, e.g. pricing, sales and marketing activities, and staff training.
12.The HKICPA considers the principle of differentiating rights into substantive andprotective rights and the related application guidance in IFRS 10 useful. However,based on our respondents’ feedback, we consider that the guidance could bedifficult to apply and highly judgmental, and it is practically challenging in somecases to assess whether rights are substantive or protective.
13.Accordingly, the HKICPA recommends the IASB consider clarifying the definition ofprotective rights and providing further guidance, for instance in the form ofillustrative examples, on how to determine whether rights (e.g. rights to participatein borrowing decisions and veto rights) are substantive or protective using similarscenarios as shared by our respondents in paragraph 11 above.Question 2(c): Power over an investee—Control without a majority of the votingrights
14.The HKICPA noted that challenges in assessing de facto control arise regularly inHong Kong and mainland China. The increasing use of sophisticated structures isexacerbating this problem in addition to placing more pressure on the generalcontrol assessment.
15.Respondents generally agreed with the principles in the application guidance. Themajority of our respondents commented that significant judgement is involved in defacto control assessments and questions may arise as to whether that judgementis appropriate.
16.Respondents shared the following practically challenging situations:
•An investor has de facto control over an investee originally; however, thePage 6 of 13percentage of shareholding held by the investor decreases over time due todilution, and there are no other changes in facts and circumstances. Theassessment becomes subjective and highly judgemental for determining whenthe investor loses control over the investee.•An investor makes a new investment and concludes that there is no de factocontrol over the investee based on IFRS 10.B46 initially because there isinsufficient information to demonstrate it has de facto control at the time ofpurchase. Due to the passage of time, more evidence arises to support thatthe investor has de facto control since the time of purchase. Some peoplequestioned then whether the initial assessment and conclusion that there wasno de facto control is appropriate.•Company A invests in 40% equity interest in another company B. Some of theshareholders of company B were rarely involved in voting historically, and theoverall voting participation is around 70%-80%. Hence, managementconcludes that company A effectively has voting rights of 50%-57% and hasde facto control over company B. However, as the voting pattern and theshareholders in company B change over time, it is practically difficult andburdensome for company A to carry out the control reassessment continuously.Questions also arise as to whether company A loses or obtains controlwhenever the voting pattern or the shareholdings in company B changes.•A company has only a few shareholders that are all state-owned enterprises,each holding 10% to 20% of the shares of the company. After consideringcontractual arrangements with other shareholders, de facto agentrelationships and/or representation on the board, it may be concluded that themajor shareholder has power over the company despite its low percentageshareholding. Questions nevertheless arise as to whether a minimum level ofshareholding is required in order to establish de facto control, and if so howsuch a level could be determined.
17.Respondents also shared that de facto control assessments sometimes link withthe de facto agent assessments, which increases complexity. Examples include:
•How to apply the requirements appropriately among group companies whereone company has a substantial interest (42%) in an investee, and anotherrelated company has a minority interest stake (5%) in the same investee.Questions may arise as to whether one of the group companies is alwaysacting as a de facto agent of the other, and whether they collectively have defacto control over the investee when none have de facto control individually.•An individual A holds 60% equity interest in company P. Company P holds48% equity interest in company Q. Some people argue that company P doesnot have de facto control over company Q because company P is merelyacting as the de facto agent of individual A. However, it is questionablewhether a company that holds equity interests in another company can beregarded as acting as a de facto agent of its controlling shareholder.
18.The HKICPA noted IFRS 10 does not provide a minimum level of voting rightsneeded to achieve de facto control, and requires companies to look at all facts andcircumstances. Hence, application of the requirements and guidance in IFRS 10 ishighly judgemental and similar fact patterns could be interpreted differently.
19.The HKICPA suggests the IASB provide more comprehensive examples toillustrate factors for consideration to support a holistic assessment (e.g. to cover acombination of factors for consideration as listed in IFRS 10.B38 in a singleexample), and clarify whether de facto control exists in some of the scenarios asshared by our respondents in paragraphs 16 and 17.Page 7 of 13Question 3(a): The link between power and returns—Principals and agents
20.The HKICPA observed that it can be challenging and highly judgemental to assesswhether the decision maker is a principal or an agent, particularly in the fund andasset management industries. Examples shared by our respondents include:
•In a limited partnership fund structure, the limited partners (LP) usually providemost of the funding through debt instruments earning a fixed return while thegeneral partner (GP) provides a much lower level of funding through holdingsignificant equity interests that are subject to significant variability. The assetmanager typically would have minimal equity interests in the fund but isexposed to potentially significant variable returns through remuneration that islinked to the performance of the fund. Questions arise as to whether the assetmanager is a principal or an agent given its minimal equity interests butpotentially significant variability in returns.•In practice, if the asset manager in the structure described above isdetermined to be an agent and the investors delegate all their investmentdecision making power to the asset manager, then the investors seem to haveno power. It is unclear from the application guidance in IFRS 10 whether theinvestors should consider the power of their delegate (i.e. the asset manager)
when carrying out the control assessment. The IFRS InterpretationsCommittee (IFRIC) discussed a related issue in 2017 in respect of whether thedecision-making authority held by a fund manager in the capacity of an agentshould be taken into account when assessing whether the fund manager hassignificant influence over a fund. No conclusion was reached in thecorresponding agenda decision1.•At the inception of a fund, where there are only a few or no other investors, thefund manager may provide the initial seed money to the fund. The seed moneyinvestor would then be, at inception, the majority shareholder of the fund (withup to 100% ownership). However, by design and as time passes, there wouldbe other investors, and the fund manager’s relative interest in the fund wouldbe reduced to the point where the fund manager becomes a minorityshareholder, or has no shareholding as the seed money is ejected. In suchcases, questions arise as to who the principal is and who has control over thelife of the fund, and when the fund manager should deconsolidate the fund.
21.A few practitioners considered that assessing the exposure to variability of returnsfrom other interests inevitably involves judgement, and there is limited guidance onwhether more emphasis should be placed on magnitude or the variability of thereturns, and how the different nature of returns impacts that assessment (IFRS
10.B72). For example, in the asset management industry, there are cases wherethe absolute amount of returns is small while the variability is still substantial.Questions may arise as to whether other factors should also be considered, e.g.the amount as a percentage of the total expected returns. In addition, respondentsquestioned whether the magnitude of the return should be a probability weightedamount, e.g. whether the likelihood of reaching a hurdle for a fund manager to beentitled to a performance fee should be considered, and then multiplying theprobability percentage with the performance fee to arrive at the magnitude of thereturns.
22.While some practitioners considered the existing examples on this topic in IFRS 10helpful, a few noted these examples are specific to investment funds and suggestedthe IASB provide other non-industry specific examples to illustrate the principles.Others however thought that specific examples may lead to unintended1 https://cdn.ifrs.org/content/dam/ifrs/supporting-implementation/agenda-decisions/ias-28-fund-managers-assessment-of-significant-march-2017.pdfPage 8 of 13consequences, such that stakeholders may interpret the examples as a ‘bright line’in determining whether the decision maker is a principal or an agent givencompanies often seek to find a threshold for this assessment. In practice this woulddepend heavily on facts and circumstances and examples may not be suitable forall jurisdictions or industries. They hence suggested the IASB consider working withlocal standard-setters to develop local examples.
23.Respondents, mainly preparers, also shared that additional clarification in thefollowing areas would be helpful:
•In the asset management industry, an investor engages a fund manager anddelegates investment decision rights to the fund manager. The examplesaccompanying IFRS 10 (examples 13-15) illustrate the application of theguidance to identify whether the investor or the fund manager is the principalwhen assessing the link between power and returns. In the case that the fundmanager is determined to be an agent, the investor then has to consider againwhether it has power over the investee and its exposure to variable returnsbefore concluding whether it has control. This overall flow of assessment isnot well aligned to what is being assessed, and it seems like the assessmentis looping from the third element of control (the link between power and returns)
back to the first element (power). Further clarification/additional guidance forthe investor to assess whether it has power in the first place could be provided.This may involve considering the link between power and returns upfront insuch cases.•In the context of exposure to variability of returns from other interests, it is notclear how a company should consider financial guarantees and whether theyshould be treated as a credit enhancement (IFRS 10.B71-B72). Factors forconsideration could be provided through illustrative examples.•More guidance could be provided for how to consider the impact of indirectinterests, such as interests held by an intermediary in which the investor hasan interest, but which it does not control.
24.In light of the above, the HKICPA recommends the IASB should provide clarificationor develop non-industry specific examples to illustrate how to perform theassessment.Question 3(b): The link between power and returns—Non-contractual agencyrelationships
25.The HKICPA generally observed that de facto agency relationships are commonamong group companies, in the asset management industry, and when SPE areinvolved. Challenging examples encountered by some of our respondents are asfollows:
•Where multiple group companies each hold a small percentage ofshareholdings in an investee and collectively hold a majority of the shares ofthe investee. If there is no contractual arrangement between these groupcompanies, questions arise as to whether there is a non-contractual agencyrelationship such that these group companies collectively control the investee.•In closely held funds or private equity structures, power and returns may besplit between different parties for structuring reasons, e.g. regulatory or taxpurposes. It is difficult to carry out the de facto agency assessment in this case.
26.Some respondents, mainly practitioners, believed that the de facto agencyguidance is intended to be helpful and discourages structuring opportunities as thesubstance of the arrangement and relationships between parties have to beconsidered even there is no contractual arrangement between them. Nevertheless,Page 9 of 13the guidance can be hard to operationalize, and it is difficult to rely only on theguidance to support whether an investor has control over an investee and otherwiseprove the existence of a de facto agency relationship.
27.Some practitioners commented that non-contractual agency relationships do existin practice but are difficult and controversial to assess. A few of them suggestedthat it may be helpful to set a rebuttable presumption that there is a de facto agencyrelationship in certain situations (e.g. where the asset manager has minimalvariability and over 99% of the variability of returns is held by the investors; or whenthe structure involves entities that are under common control), unless provenotherwise. On the other hand, others disagreed that a rebuttable presumption wouldbe helpful because contractual rights and obligations are the key factors in thecontrol assessment. Those who disagreed with the rebuttable presumptionconsidered that the non-contractual agency relationship guidance should notconstitute an overriding principle.
28.The HKICPA agrees with our respondents that it is practically difficult to determinewhether a de facto agency relationship exists in the absence of a contractualarrangement. We believe that the de facto agency guidance is well-meant, but it ishard to operationalise and highly judgemental to apply in practice.
29.The HKICPA suggests the IASB consider whether it would be appropriate to set arebuttable presumption in certain circumstances or a principle for assessingwhether there is a non-contractual agency relationship in an arrangement tominimise structuring opportunities. We also recommend the IASB considerdeveloping illustrative examples to improve consistent application of the guidancein IFRS 10.B73-B75.Question 4(a): Investment entities—Criteria for identifying an investment entity
30.The HKICPA does not find the application of the investment entities consolidationexception to be common among Hong Kong entities. Having said that, some firmsdo audit investment entities (mostly as intermediate holding companies) that areincorporated overseas.
31.A few practitioners observed that there is diversity in practice in how ‘investment-related services’ and ‘management services’ in IFRS 10.B85C and IFRS 10.B85Dhave been interpreted, particularly in real estate investment trusts. They would alsolike more guidance on the extent of documentation required to provide evidencethat the investment entity has an exit strategy for its investments, and whether thereare any requirements (e.g. an upper limit) for how long an investment entity couldhold the investments in order to show that there is an exit strategy.
32.Others generally considered that there are no significant issues with the criteria foridentifying an investment entity.Question 4(b): Investment entities—Subsidiaries that are investment entities
33.The HKICPA noted the following comments made by our respondents:
• A few respondents considered that requiring an investment entity to measurean investment in a subsidiary that is an investment entity itself at fair valueresults in a loss of information about the intermediate subsidiary. Thisinformation is considered useful and cannot be adequately compensated for byproviding additional disclosures. This is particularly the case for wholly-ownedintermediate subsidiaries that are set up solely for tax purposes. ThesePage 10 of 13respondents considered that in such cases, the intermediate subsidiaries areextensions of the investment entities, and therefore should be consolidated.They suggested that the IASB reconsider the accounting for the intermediatesubsidiaries for these cases.• However, some other respondents noted that certain companies providevoluntary disclosures about intermediate subsidiaries to meet users’ informationneeds, and users generally find the additional information useful. Accordingly,they suggested that the IASB consider requiring companies to provide additionaldisclosures about the intermediate subsidiaries to enhance comparabilityamong companies instead of changing the existing measurement approach.
34.The HKICPA noted that the IASB and the IFRIC had considered this issue2, andnoted difficulties in identifying a conceptual basis or a practical way to distinguishdifferent types of subsidiaries that are investment entities. In this regard, weconsidered that additional disclosure requirements would be helpful to address thepotential loss of information on intermediate subsidiaries, and that the IASB couldfurther explore what information would be useful to users.Question 5(a): Accounting requirements—Change in the relationship between aninvestor and an investee
35.The HKICPA observed that there is diversity in practice in accounting for a partialdisposal of a subsidiary that results in a loss of control where the subsidiary doesnot constitute a business. Some companies remeasure the retained interest (beingan associate or a joint venture) at fair value applying IFRS 10.25(b), while othersadopt a cost-based approach (i.e. no remeasurement of the retained interest).The reasons for companies applying a cost-based approach are:
•They think there should be symmetry between how an acquirer and a selleraccount for such a transaction – either as a purchase/sale of shares or apurchase/sale of assets, with the assessment of whether the subsidiaryconstitutes a business driving that decision:
o If the subsidiary constitutes a business, then it should be accounted for as apurchase/sale of shares in which case IFRS 3 Business Combinations andIFRS 10 apply;
o If the subsidiary does not constitute a business, then the transaction shouldbe accounted for as a purchase/sale of assets in which case neither IFRS 3nor IFRS 10 applies.•Even though the guidance in IFRS 10.25(b) and B98(b)(iii) does not distinguishbetween subsidiaries that are businesses from those that are not, practice hasemerged to take this factor into account in part due to the introduction of the‘business or non-business’ concept from a seller’s perspective in the Sale orContribution of Assets between an Investor and its Associate or Joint Venture(Amendments to IFRS 10 and IAS 28 Investments in Associates and JointVentures).We believe that the IASB should clarify this issue.
36.We further observed that transactions involving single-asset entities/corporatewrappers (i.e. a company that is set up solely to hold an asset) are common in thereal estate industry in Hong Kong and mainland China. Questions often arise as towhether a company that sells its properties through a corporate wrapper shouldaccount for the transaction as sale of properties under IFRS 15 Revenue from2 Paragraph BC272 of IFRS 10 and IFRIC March 2014 Agenda Decision on Investment EntitiesAmendments – the definition of investment-related services or activities (IFRS 10)
Page 11 of 13Contracts with Customers (which reflects the substance of the transaction) or as adisposal of a subsidiary under IFRS 10 (which follows the form of the transaction).Some of our respondents considered that applying IFRS 10.25(b) in such cases torecognise a net gain/loss instead of applying IFRS 15 to recognise gross revenueand the related costs of sale may not always provide useful information.
37.We noted similar topics were discussed at IASB and IFRIC meetings onsubmissions about the sale of a subsidiary to a customer3, and sale and leasebackof an asset in a single-asset entity 4. Many respondents considered that theunderlying question in both situations is similar – i.e. whether the form of atransaction (sale of an equity interest in a single-asset entity rather than a directsale of the asset within the entity) should result in any difference in accounting.These respondents questioned the technical basis and the apparent lack ofconsistency between the IFRIC’s preliminary conclusions on these two issues.
38.In light of the above, we recommend that the IASB carry out a fundamental reviewof the accounting for transactions involving single-asset entities/corporate wrappers,including whether the requirement in IFRS 10.25(b) is applicable to disposals of asubsidiary when the subsidiary does not constitute a business and how it interactswith the recognition of gain or loss in other Standards.Question 5(b): Accounting requirements—Partial acquisition of a subsidiary thatdoes not constitute a business
39.The HKICPA does not find this accounting issue to be persuasive in Hong Kong.IFRS 11 Joint ArrangementsQuestion 6: Collaborative arrangements outside the scope of IFRS 11
40.Collaborative arrangements that are outside the scope of IFRS 11 are common inpharmaceutical, technology, entertainment, media and increasingly in thetelecommunications industries in Hong Kong.
41.Based on respondents’ feedback, the HKICPA considers that it is often very difficultto characterise collaborative arrangements appropriately, i.e. is it a jointarrangement, an associate, an equity investment under IFRS 9 FinancialInstruments, a debt-type loan, a supplier-customer relationship, a prepayment forfuture expenditure, etc?
42.In some cases, these collaborative arrangements are not joint arrangementsbecause the contractual terms imply one party has control and another hassignificant influence (despite the arrangement being collaborative in nature); orthere are other factors that affect the voting power of the arrangement (for example,when regulation requires votes to be cast by independent directors or others whoare not shareholders of the arrangement).
43.These arrangements are often project-based and may not necessarily be structuredthrough a separate legal entity, which amplifies the challenges for characterisingthe arrangement. In practice, collaborative arrangements are often accounted for3 https://cdn.ifrs.org/-/media/feature/meetings/2020/june/iasb/ap12a-maintenance-and-consistent-application.pdf4 https://cdn.ifrs.org/-/media/feature/meetings/2021/february/ifric/ap02-sale-and-leaseback-of-an-asset-in-a-single-asset-entity.pdfPage 12 of 13under IAS 28 (analogising to associates), IFRS 11 (analogising to a party thatparticipates in but does not have joint control of a joint operation), IFRS 15(depending on whether the arrangement is housed in a legal structure) or IFRS 9,depending on facts and circumstances. Respondents however considered thatsuch accounting outcomes do not provide useful information. A few practitionersquestioned whether it is appropriate to apply equity method accounting to acollaborative arrangement if it is not structured through a separate legal entity.Some respondents considered that accounting for commonly seen collaborativearrangements similarly to joint operations would more faithfully represent thesubstance of those arrangements.
44.Given the challenges noted above, and that it is expected that these arrangementswill be more pervasive in the future (particularly in the telecommunications industry),the HKICPA recommends that the IASB develop clear principles for collaborativearrangements to better reflect the substance of those arrangements.Question 7: Classifying joint arrangements
45.Respondents shared that it is common to consider ‘other facts and circumstances’in IFRS 11 to determine the classification of joint arrangements in the oil and gasindustry, real estate industry and telecommunications industry.
46.However, respondents generally found the consideration of ‘other facts andcircumstances’ in IFRS 11.B29-B32 challenging to apply as it is subjective. It alsoopens up structuring opportunities by allowing/requiring management to lookbeyond the contractual provisions. For example, by asserting through other factsand circumstances that the parties to an arrangement have or do not have rights tothe net assets, the joint venture/joint operation classification could be made toachieve a desired outcome (e.g. a company could argue there had been a changein facts and circumstances to reclassify a loss-making joint operation to a jointventure to stop recognising further losses under equity method accounting).
47.Classification challenges also arise when arrangements are structured through aseparate vehicle and the legal form is not clearly representative of the underlyingeconomics. Preparer and practitioner respondents noted there are cases where itis difficult for ‘other facts and circumstances’ to override the legal form, particularlywhen an arrangement is structured through a separate vehicle but multiple entitiesshare directly in the underlying assets and liabilities of the arrangement (e.g. wheremultiple real estate developers are entitled to the full rights and obligations attachedto different portions of a big piece of land, but that land can be legally held only byone company). There are debates as to whether ‘silo accounting’ under IFRS 10 oraccounting for joint operations under IFRS 11 could be applied. Preparers may findit challenging to draft appropriate contractual terms that can enable sucharrangements to be accounted for as a joint operation. It is also often difficult forauditors to use ‘other facts and circumstances’ to challenge management’sclassification based on the legal form and contractual terms of the arrangement.
48.Given the complexity of these arrangements in practice, it is often challenging todetermine whether the arrangements are primarily designed for the provision ofoutput to the parties, or that the parties in essence have an obligation for theliabilities relating to the arrangement.
49.In light of the above, the HKICPA recommends that the IASB provide more detailedguidance that can be objectively applied in this regard.Page 13 of 13Question 8: Accounting requirements for joint operations
50.The HKICPA noted from the respondents that joint operations are common only inspecific industries and therefore application issues of accounting for joint operationsare not pervasive in Hong Kong.
51.The HKICPA notes that there is a lack of guidance on how to determine the jointoperator’s share of assets, liabilities, revenue and expenses. This is particularly thecase when the joint operator’s share of output purchased differs from its share ofownership interest in a joint operation (the IFRIC March 2015 Agenda Decision5only highlighted the importance of understanding the difference between the twowithout providing further guidance) or if the share of output is not specified, whichmay lead to diversity in practice.IFRS 12 Disclosure of Interests in Other EntitiesQuestion 9: Disclosure of interests in other entities
52.The HKICPA agrees with respondents’ feedback that the disclosure requirementsin IFRS 12 are adequate and there is not a need to further expand the disclosurerequirements.
53.Be that as it may, a preparer noted that it is common to have customer-supplierrelationships in the aircraft leasing industry arranged through a structured entity.Depending on how the arrangement is structured, a typical customer-supplierrelationship may not meet the definition of interest in other entities and will not fallinto the disclosure requirements in IFRS 12. The difference in actual circumstances,and in some cases maybe inconsistent application of the Standards, have led todiversity in practice as regards the extent of disclosures provided in terms of IFRS12 (i.e. whether excluded or included as structured entities). We suggest that theIASB consider clarifying this matter.~ End ~5 https://www.ifrs.org/content/dam/ifrs/supporting-implementation/agenda-decisions/ifrs-11-accounting-by-the-joint-operator-the-accounting-treatment.pdf