Page 1 of 9Our Ref.: C/FRSCSent electronically through the IASB Website (www.ifrs.org)
11 March 2025Dr Andreas BarckowInternational Accounting Standards BoardColumbus Building7 Westferry CircusCanary WharfLondon E14 4HDUnited KingdomDear Andreas,IASB Exposure DraftProvisions—Targeted Improvements(Proposed amendments to IAS 37)
The Hong Kong Institute of Certified Public Accountants (HKICPA) is the only bodyauthorised by law to set and promulgate standards relating to financial reporting, auditing,ethics and sustainability disclosures for professional accountants in Hong Kong. We aregrateful for the opportunity to provide you with our comments on this Exposure Draft(ED).We appreciate the IASB’s endeavours in formulating proposals that aim at improving therequirements in IAS 37 Provisions, Contingent Liabilities and Contingent Assets forrecognising and measuring provisions. Nevertheless, we have concerns about certainaspects of the proposals. We provide detailed comments in the Appendix andsummarise our primary concerns and recommendations below.Transfer conditionWe are concerned that paragraph 14L of the ED introduces new concepts of ‘transfer’and ‘exchange’ of economic resources into IAS 37, which are neither defined in theGlossary nor elaborated upon further in IAS 37. Some respondents questioned whethertypical payments, such as levies, are considered as ‘transfer’ or ‘exchange’ of economicresources under the ED. Others expressed concerns that in situations where the natureof the transaction is unclear, the ambiguity surrounding the definitions of ‘transfer’ and‘exchange’ could create challenges in determining whether the transfer condition is met,and thus whether a present obligation exists.To enhance clarity and support consistent application, we strongly recommend that theIASB clarify these concepts in IAS 37. This could be achieved by incorporating theprinciple of considering any future economic benefits of the asset or service received asa result of payment, as illustrated in Examples 3, 7 and 11B in the Guidance onimplementing IAS 37 (Guidance), into the body of IAS 37.Past-event conditionWe have significant concerns regarding the proposed requirements for the past-eventcondition in paragraphs 14O to 14Q of the ED. The ED lacks clarity on how theseparagraphs interact and how they apply to scenarios involving multiple conditions.Additionally, the application of the concepts introduced in these paragraphs to certainPage 2 of 9illustrative examples in the Guidance is confusing. For instance, it is unclear why theoutcomes of Examples 13B and 13C are different (two separate actions versus oneaction) when they illustrate similar fact patterns.Determining what constitutes an ‘action’ under these paragraphs becomes particularlychallenging in complex fact patterns involving multiple conditions in a contract orlegislation. This complicates an entity’s assessment of whether the conditions representone action, two (or more) separate actions, a continuation of an activity, or ameasurement base for the provision. As a result, it is unclear whether paragraphs 14O,14P or 14Q of the ED should be applied, which would affect the timing of recognisingthe provision.In light of the above, we strongly recommend that the IASB clearly illustrate theinteraction between paragraphs 14O to 14Q in the final amendments, particularlywhether, and if so, which requirement would take precedence if they are relevant to thesame fact pattern. Furthermore, we recommend that the IASB enhance the relevantillustrative examples in the Guidance to ensure consistent application of the proposedrequirements across different fact patterns. We also recommend that the IASB test theseproposals further to understand their impact and assess whether the outcomes areappropriate.Measurement – Future operating costsThe ED proposes deleting paragraph 18 of IAS 37, which specifies that no provision isrecognised for costs that need to be incurred to operate in the future, without explanationin the Basis for Conclusions (BC). This creates confusion regarding whether futureoperating costs should be included in measuring a provision under the proposedparagraph 40A of the ED when those costs are directly related to settling the obligations.We believe that the IASB does not intend to change this general measurement principlewhich is applicable for all types of provisions. Therefore, we strongly recommend thatthe IASB either reinstate this paragraph or clearly specify this principle in the‘measurement’ section of the final amendments.Other commentsAs noted above, although this ED is characterised by the IASB as targetedimprovements or clarifications, it may have a broader impact on current accountingpractices than initially anticipated. To ensure a comprehensive understanding of thepotential effects of the ED, we recommend that the IASB conduct further outreach withstakeholders when developing the final amendments.If you have any questions regarding the matters raised in this letter, please contactGeorge Au (georgeau@hkicpa.org.hk) or Shiro Lam (shirolam@hkicpa.org.hk),Associate Directors of the Standard Setting Department.Sincerely,Cecilia KweiDirector of Standard SettingPage 3 of 9Work undertaken by the HKICPA in forming its views:
The HKICPA:
(a) issued an Invitation to Comment on the ED on 14 November 2024 to its membersand other stakeholders;
(b) sought input from its Task Force for the ED, which comprises technical experts fromlarge accounting firms; and(c) developed its views through its Financial Reporting Standards Committee, havingreflected on its respondents’ views. The Committee comprises preparerrepresentatives from various industry sectors, regulators, as well as technical andindustry experts from small, medium and large accounting firms.Detailed comments on the IASB EDQuestion 1: Present obligation recognition criterion
1.We generally support the IASB’s proposals to align the definition of a liability inIAS 37 and the wording of the present obligation recognition criterion with thedefinition of a liability in the Conceptual Framework for Financial Reporting (CF).However, we noted areas requiring further clarification by the IASB. Our detailedcomments and recommendations are provided below.A.Name of the criterion
2.Some respondents were concerned that the terminology ‘present obligationrecognition criterion’ in the ED could be misleading. This is because the proposalsin paragraphs 14A to 16 of the ED relate only to the present obligation criterion,which is one of the three criteria 1 for recognising a provision. The proposedterminology may create confusion, suggesting that a provision will be recognised assoon as the ‘present obligation recognition criterion’ (paragraph 14A of the ED) ismet, without assessing the probability of transfer and the reliability of measuring theobligation under paragraphs 14(b) and (c) of the ED. Accordingly, we recommendthat the IASB revise the terminology by removing the word ‘recognition’ from the‘present obligation recognition criterion’ in the ED to prevent any misinterpretation.B.Transfer condition
3.Paragraph 14L of the ED states that an obligation to exchange resources is not anobligation to transfer an economic resource unless the terms of exchange areunfavourable to the entity. We consider that this paragraph introduces new conceptsof ‘transfer’ versus ‘exchange’ of economic resources into IAS 37, which are neitherdefined in the Glossary nor elaborated upon further in the standard. Althoughparagraph 4.39(c) of the CF illustrates this distinction with an example of a forwardcontract, the differentiation between these two concepts is not always clear. Somerespondents questioned whether typical payments, such as levies, sales-basedroyalties and milestone payments in pharmaceutical industry, are considered as‘transfer’ or ‘exchange’ of economic resources under the ED. Others expressedconcerns that in situations where the nature of the transaction is unclear, theambiguity surrounding the definitions of ‘transfer’ and ‘exchange’ can create furtherchallenges in determining whether the transfer condition is met, and thus whethera present obligation exists.1 All three criteria in paragraph 14 of IAS 37 (i.e. present obligation, probability of transfer and reliablemeasurement) must be met for a provision to be recognised.AppendixPage 4 of 9
4.We observed that Examples 3, 7 and 11B proposed in the Guidance illustrate theconsideration of ‘transfer’ versus ‘exchange’ of economic resources. In these threeexamples, the IASB takes into consideration whether the entity is entitled to futureeconomic benefits from the asset or service received as a result of a payment whendistinguishing between ‘transfer’ and ‘exchange’. However, this consideration is notincluded in the body of IAS 37.
5.To improve clarity and avoid diversity in practice, we strongly recommend that theIASB clarify the differences between ‘transfer’ and ‘exchange’ of economicresources by incorporating the principle of considering any future economic benefitsof the asset or service received as a result of payment, as introduced in theillustrative examples, into the body of IAS 37. In addition, we suggest explaining theapplication of this principle to common payments as mentioned in paragraph 3above through illustrative examples.C. Past-event condition
6.We have significant concerns regarding the interaction and application of theproposed requirements for the past-event condition in paragraphs 14O to 14Q ofthe ED. It is unclear whether paragraphs 14P and 14Q of the ED are intended toprovide additional guidance to paragraph 14O of the ED when addressing scenariosinvolving multiple conditions. We also find it difficult to understand how the conceptsintroduced in these paragraphs apply to the following illustrative examples in theGuidance.Example 2B – Contaminated land and constructive obligation:
7.This example lacks clarity regarding how an entity applies paragraphs 14O to 14Qof the ED to identify the relevant ‘action(s)’ in the fact pattern. In particular, it isunclear whether the contamination of land should be considered as:
(a)
an action taken over time and hence the resulting present obligation to cleanup the contaminated land accumulates over time under paragraph 14O of theED; or(b)
individual actions (say 12 actions for 12 months), in which case the presentobligation would be recognised according to paragraph 14Q of the ED whenthe entity has taken the first action (i.e. contaminating the land in the firstmonth of the year) and has no practical ability to avoid taking the remainingactions.Examples 13B – A levy on an entity operating as a bank on the last day of itsannual reporting period and 13C – A property tax:
8.These two examples illustrate similar fact patterns, but they result in differentconclusions. Example 13B concludes that there are two separate actions (i.e.operating as a bank in its current reporting period and operating on the last day ofthat period) and the provision is recognised over time by applying paragraphs 14Oand 14Q of the ED. In contrast, Example 13C concludes that only one action isidentified (i.e. owning and holding the land and buildings for business use at theyear end). Accordingly, the full amount of the provision for property tax is recognisedat the end of the year according to paragraph 14N of the ED.
9.It is unclear why the accounting outcomes of these two examples are different. Webelieve an argument can be made in Example 13B that operating as a bankthroughout the current reporting period is not an action; rather, it serves as themeasurement base for the levy and so only one action is identified (i.e. operatingas a bank on the last day of the reporting period) in that example. On the other hand,Page 5 of 9it could be argued that two separate actions can be identified in Example 13C, i.e.owning the land and buildings for business use throughout the year and holdingthem for business use at the end of the year. Therefore, the provision for propertytax should be accrued over time if the entity does not have the practical ability toavoid holding the property for business use at the end of the year.
10.Based on the above, we note that determining what constitutes an ‘action’ becomesparticularly challenging in complex fact patterns involving multiple conditions in acontract or legislation. This difficulty complicates an entity’s assessment of whetherthe conditions represent one action, two (or more) separate actions, a continuationof an activity, or a measurement base for the provision. As a result, it is unclearwhether paragraphs 14O (over-time recognition), 14P (threshold-triggered costs)
and 14Q (obligations triggered only if an entity takes two or more separate actions)
of the ED should be applied. This uncertainty would, in turn, affect the timing ofrecognising the provision.
11.In light of the above, we strongly recommend that the IASB:
(a)
Clearly illustrate the interaction between paragraphs 14O to 14Q of the ED inthe final amendments, particularly whether, and if so, which requirementwould take precedence if they are relevant to the same fact pattern;
(b)
Enhance Examples 2B, 13B and 13C in the Guidance to ensure the proposedrequirements in paragraphs 14O to 14Q of the ED are applied consistentlyacross different fact patterns;
(c)
Test the proposed requirements in paragraphs 14O to 14Q of the ED furtherto understand their impact on current accounting practices and assesswhether the outcomes are appropriate; and(d)
Relocate the example concerning threshold-triggered costs, which is currentlylocated after paragraph 14P of the ED, and present it under a similar structureas other illustrative examples in the Guidance (i.e. analysing each of therecognition criteria separately) to demonstrate how the relevant requirementsshould be applied.D. Uncertainty about whether the present obligation recognition criterion is met
12.Some respondents expressed concerns about the first sentence of paragraph 15 ofthe ED. They questioned which of the three conditions in the present obligationrecognition criterion (i.e. an obligation condition, a transfer condition or a past-eventcondition) is considered unclear to be met in the rare cases as referred to inparagraph 15 of the ED.
13.We observe that the proposed rewording in paragraph 15 of the ED, as explainedin Appendix A of the BC, ensures that the requirements allow for the possibility thatthe uncertainty could relate to any of the three conditions within the presentobligation recognition criterion. This concept is also illustrated in the proposed newdecision tree in Diagram B1 of the Guidance. However, given that the presentobligation recognition criterion has been split into three distinct conditions under theIASB’s proposals, merely rewording paragraph 15 of the ED as currently proposedis insufficient for users to fully understand the underlying rationale. This could createconfusion regarding whether one or all three conditions need to be unclear in orderto apply paragraph 15 of the ED in assessing whether an obligation is deemed toexist.Page 6 of 9
14.To address the above concerns, we recommend that the IASB:
(a)
Refine the wording of paragraph 15 of the ED to include the key concept thatthe uncertainty could pertain to any of the three conditions in the presentobligation recognition criterion; and(b)
Enhance the decision trees in Diagrams B1 to B3 in the Guidance (as detailedin paragraph 28 below) to clarify the application of paragraph 15 of the ED.E. Restructuring
15.We acknowledge the reasoning behind why IAS 37 should not refer to ‘aconstructive obligation to restructure’ as explained in BC50 of the ED, and we agreewith the proposal to replace ‘constructive obligation’ with ‘present obligation’regarding restructuring costs. However, we are concerned that the wording ‘raiseda valid expectation’ in paragraphs 72 to 75 of the ED may create the impressionthat only constructive obligations apply to restructuring. Accordingly, werecommend that the IASB amend the relevant wording as appropriate or explain inthe BC the rationale for retaining the current wording.Question 2: Measurement – Expenditure required to settle an obligationA.Existing requirements in IAS 37
16.We support the proposed clarification of the costs to be included in themeasurement of a provision. However, some respondents found it unclear whetherfuture operating costs (e.g. salaries of employees in the claims department to beincurred for a particular claim) should be included in measuring a provision underparagraph 40A(b) of the ED when those costs are directly related to settling theobligations.
17.This is particularly the case as we observed that paragraph 18 of IAS 37, whichspecifies that no provision is recognised for costs that need to be incurred to operatein the future, is proposed to be deleted in the ED without explanation in the BC. Webelieve the IASB does not intend to change this general measurement principlewhich is applicable for all types of provisions. Therefore, we recommend that theIASB either reinstate paragraph 18 of IAS 37 or clearly specify this principle in the‘measurement’ section of the final amendments.B.Examples and guidance
18.Some respondents observed that the scenario in Example 14 – ‘Negative low-emission vehicle credits’ proposed in the Guidance is common in Mainland China.Application issues often arise regarding how to allocate and measure the costsrequired for generating positive credits through production. It is also unclear howthis allocation and measurement align with the principle in paragraph 18 of IAS 37.However, the current drafting of Example 14 does not address the measurement ofthe provision.
19.In addition, we noted that other IFRS Accounting Standards provide examples ofthe types of costs that are included or excluded in the measurement requirements,for example, paragraphs 97 and 98 of IFRS 15 Revenue from Contracts withCustomers, and paragraphs 16 to 19 of IAS 16 Property, Plant and Equipment.However, paragraph 40A of the ED does not provide any examples.Page 7 of 9
20.To improve clarity of the proposed requirements and support consistent application,we recommend that the IASB:
(a)
Provide examples and guidance on the types of costs to be included inmeasuring a provision, such as by expanding Example 14 in the Guidance toillustrate the costs that should be included in the measurement of the provisionunder paragraph 40A of the ED; and(b)
Include an example of the allocation of other costs in paragraph 40A(b) of theED, similar to that in paragraph 68A(b) of IAS 37, to align the costs used inmeasuring a provision with those for fulfilling an onerous contract.Question 3: Discount rates
21.We support the proposals for discounting a provision using a rate that excludes non-performance risk, as well as for disclosing the discount rates used and the approachfor determining those rates. However, some respondents observed that whileparagraph 47A of the ED explicitly excludes non-performance risk in the discountrate when measuring a provision, the ED does not specify whether the non-performance risk of an entity should be excluded from the expected cash flows ofthe related provision. Therefore, we recommend that the IASB clarify in the finalamendments that the non-performance risk of an entity should not be reflected inthe expected cash flows of the provisions if it is not reflected in the discount rates.
22.Additionally, our respondents questioned whether, in cases where an entity is jointlyand severally liable for an obligation, the non-performance risk of a co-obligorshould be factored into the measurement of a provision. We are of the view that aco-obligor with weak credit standing may result in a higher liability for the entitycompared to one with strong credit standing. Therefore, we recommend that theIASB clarify the implications of the non-performance risk of co-obligors on theapplication of paragraph 29 of IAS 37 regarding the amount of provision to berecognised by an entity and the amount of contingent liabilities to be disclosed forthe portion of the obligation expected to be met by the co-obligors.
23.Furthermore, some respondents expressed concerns about the last two sentencesin BC82 of the ED. They considered that those sentences may imply that entitiesare not expected to adjust the discount rate for differences between the durationand liquidity of the investment and those of the provision in all instances, which webelieve should not be the case. To improve clarity, we recommend that the IASBamend the wording as follows:
‘In some cases, it would be necessary for an entity might to adjust that yield – forexample, to compensate for differences between the duration and liquidity of theinvestment and those of the provision. However, the IASB does not expect allentities to make such adjustments.’Question 4(a): Transition requirements
24.We broadly support the proposed retrospective application of the amendments inthe ED. However, we have concerns about the following two simplifying exceptions:
(a)
Changes in cost measurement: a modified retrospective approach is requiredto be applied at the date of initial application; and(b)
Changes in discount rates: a simplified retrospective approach is permitted tobe applied at the transition date. Entities that do not select this simplifiedapproach are required to apply the full retrospective approach.Page 8 of 9
25.We consider that the different requirements of these two exceptions in terms ofapplication date (date of initial application versus transition date) and the extent offlexibility (required versus permitted) could create complexity and potentialconfusion. In addition, the choice of whether to apply the simplifying exception forchanges in discount rates could reduce the comparability of financial information.Accordingly, we recommend that the IASB carefully consider whether the samemodified retrospective approach should be applied for both amendments.Question 6: Guidance on implementing IAS 37A.Decision tree (section B of the Guidance)
26.We support the proposal for expanding the decision tree in the Guidance. However,our respondents found the following aspects confusing:
(a)
Whether the assessment of ‘more likely than not’ is needed for the presentobligation recognition criterion under Diagram B2 before proceeding toDiagram B3 which requires another assessment of probability of transfer;
(b)
How to apply the decision tree to Examples 1 and 10 in the Guidance toconclude that the present obligation recognition criterion is deemed ‘morelikely than not’ to be met; and(c)
How each step in the decision tree relates to the relevant requirements inIAS 37.
27.We are of the view that Diagram B2 is an additional step needed for the rare caseswhen it is unclear whether the present obligation recognition criterion is met(paragraphs 15 and 16 of the ED). In all other cases, there is no need to performthe ‘more likely than not met’ assessment in Diagram B2 before assessing whetherthe transfer of economic resources is probable and the measurement is reliableunder paragraphs 14(b) and 14(c) of the ED. However, we acknowledge that thecurrent splitting of the decision tree into Diagrams B2 and B3, along with the unclearlinkage between the decision tree and the relevant requirements in IAS 37, maycreate confusion.
28.To facilitate consistent application, we recommend that the IASB enhance thedecision tree in the following ways:
(a)
Integrate Diagrams B1 to B3 to provide a comprehensive view of the decisionflows;
(b)
Specify the pertinent steps in the decision tree related to the ‘more likely thannot met’ assessment in the analysis for Examples 1 and 10 in the Guidance;
and(c)
Add references to the relevant paragraphs of IAS 37 for each step in thedecision tree.B.Illustrative examples (section C of the Guidance)
29.In addition to the comments on some of the illustrative examples in the Guidanceas detailed in our responses to Questions 1 and 2 above, some respondents alsofound Example 6(b) – ‘Legal requirement to fit smoke filters’ confusing. They areuncertain whether the assessment of the ‘probability of incurring fines andpenalties by non-compliant operation’ in the analysis is carried out under:
(a) Paragraph 15 of the ED regarding the uncertainty about whether the presentobligation recognition criterion is met (i.e. the decision tree in Diagram B2 ofthe ED); orPage 9 of 9(b) Paragraphs 14(b), 23 and 24 of IAS 37 regarding the probability of outflow ofresources embodying economic benefits (i.e. the decision tree in Diagram B3of the ED).
30.We note that the example assesses and concludes that the present obligationrecognition criterion under paragraph 14(a) of the ED (i.e. the three conditionsunder paragraph 14A of the ED) is met, so there is no need to perform the ‘morelikely than not’ assessment under paragraph 15 of the ED. Furthermore, theexample indicates that the evaluation of the ‘probability of incurring fines andpenalties by non-compliant operation’ has been carried out under the transfer ofeconomic resources criterion (i.e. paragraph 14(b) of the ED) in the analysis.Nonetheless, we recognise that potential confusion could still arise, as entitiesmight misinterpret this assessment as relevant to the transfer condition in thepresent obligation recognition criterion (i.e. paragraph 14A(b) of the ED),particularly since the conclusion paragraph in the analysis includes the phrase‘more likely than not to be imposed’.
31.To avoid potential misinterpretation and improve clarity of the analysis in thisillustrative example, we recommend that the IASB clearly specify in the finalamendments that:
(a) The present obligation recognition criterion under paragraph 14(a) of the EDis met;
(b) The assessment of the ‘probability of incurring fines and penalties by non-compliant operation’ is conducted under paragraphs 14(b), 23 and 24 ofIAS 37; and(c) A provision is recognised for any fines that are probable to be imposed and toavoid the phrase ‘more likely than not to be imposed’ in the conclusion, whichis related to the assessment under paragraph 15 of the ED.Other questions in the ED
32.We do not have any specific comments on Question 4(b) regarding the effectivedate, and Questions 5 and 7 of the ED.~ End ~
IASB Exposure Draft Provisions—Targeted Improvements (Proposed amendments to IAS 37)
下载原件Page 1 of 9Our Ref.: C/FRSCSent electronically through the IASB Website (www.ifrs.org)
11 March 2025Dr Andreas BarckowInternational Accounting Standards BoardColumbus Building7 Westferry CircusCanary WharfLondon E14 4HDUnited KingdomDear Andreas,IASB Exposure DraftProvisions—Targeted Improvements(Proposed amendments to IAS 37)
The Hong Kong Institute of Certified Public Accountants (HKICPA) is the only bodyauthorised by law to set and promulgate standards relating to financial reporting, auditing,ethics and sustainability disclosures for professional accountants in Hong Kong. We aregrateful for the opportunity to provide you with our comments on this Exposure Draft(ED).We appreciate the IASB’s endeavours in formulating proposals that aim at improving therequirements in IAS 37 Provisions, Contingent Liabilities and Contingent Assets forrecognising and measuring provisions. Nevertheless, we have concerns about certainaspects of the proposals. We provide detailed comments in the Appendix andsummarise our primary concerns and recommendations below.Transfer conditionWe are concerned that paragraph 14L of the ED introduces new concepts of ‘transfer’and ‘exchange’ of economic resources into IAS 37, which are neither defined in theGlossary nor elaborated upon further in IAS 37. Some respondents questioned whethertypical payments, such as levies, are considered as ‘transfer’ or ‘exchange’ of economicresources under the ED. Others expressed concerns that in situations where the natureof the transaction is unclear, the ambiguity surrounding the definitions of ‘transfer’ and‘exchange’ could create challenges in determining whether the transfer condition is met,and thus whether a present obligation exists.To enhance clarity and support consistent application, we strongly recommend that theIASB clarify these concepts in IAS 37. This could be achieved by incorporating theprinciple of considering any future economic benefits of the asset or service received asa result of payment, as illustrated in Examples 3, 7 and 11B in the Guidance onimplementing IAS 37 (Guidance), into the body of IAS 37.Past-event conditionWe have significant concerns regarding the proposed requirements for the past-eventcondition in paragraphs 14O to 14Q of the ED. The ED lacks clarity on how theseparagraphs interact and how they apply to scenarios involving multiple conditions.Additionally, the application of the concepts introduced in these paragraphs to certainPage 2 of 9illustrative examples in the Guidance is confusing. For instance, it is unclear why theoutcomes of Examples 13B and 13C are different (two separate actions versus oneaction) when they illustrate similar fact patterns.Determining what constitutes an ‘action’ under these paragraphs becomes particularlychallenging in complex fact patterns involving multiple conditions in a contract orlegislation. This complicates an entity’s assessment of whether the conditions representone action, two (or more) separate actions, a continuation of an activity, or ameasurement base for the provision. As a result, it is unclear whether paragraphs 14O,14P or 14Q of the ED should be applied, which would affect the timing of recognisingthe provision.In light of the above, we strongly recommend that the IASB clearly illustrate theinteraction between paragraphs 14O to 14Q in the final amendments, particularlywhether, and if so, which requirement would take precedence if they are relevant to thesame fact pattern. Furthermore, we recommend that the IASB enhance the relevantillustrative examples in the Guidance to ensure consistent application of the proposedrequirements across different fact patterns. We also recommend that the IASB test theseproposals further to understand their impact and assess whether the outcomes areappropriate.Measurement – Future operating costsThe ED proposes deleting paragraph 18 of IAS 37, which specifies that no provision isrecognised for costs that need to be incurred to operate in the future, without explanationin the Basis for Conclusions (BC). This creates confusion regarding whether futureoperating costs should be included in measuring a provision under the proposedparagraph 40A of the ED when those costs are directly related to settling the obligations.We believe that the IASB does not intend to change this general measurement principlewhich is applicable for all types of provisions. Therefore, we strongly recommend thatthe IASB either reinstate this paragraph or clearly specify this principle in the‘measurement’ section of the final amendments.Other commentsAs noted above, although this ED is characterised by the IASB as targetedimprovements or clarifications, it may have a broader impact on current accountingpractices than initially anticipated. To ensure a comprehensive understanding of thepotential effects of the ED, we recommend that the IASB conduct further outreach withstakeholders when developing the final amendments.If you have any questions regarding the matters raised in this letter, please contactGeorge Au (georgeau@hkicpa.org.hk) or Shiro Lam (shirolam@hkicpa.org.hk),Associate Directors of the Standard Setting Department.Sincerely,Cecilia KweiDirector of Standard SettingPage 3 of 9Work undertaken by the HKICPA in forming its views:
The HKICPA:
(a) issued an Invitation to Comment on the ED on 14 November 2024 to its membersand other stakeholders;
(b) sought input from its Task Force for the ED, which comprises technical experts fromlarge accounting firms; and(c) developed its views through its Financial Reporting Standards Committee, havingreflected on its respondents’ views. The Committee comprises preparerrepresentatives from various industry sectors, regulators, as well as technical andindustry experts from small, medium and large accounting firms.Detailed comments on the IASB EDQuestion 1: Present obligation recognition criterion
1.We generally support the IASB’s proposals to align the definition of a liability inIAS 37 and the wording of the present obligation recognition criterion with thedefinition of a liability in the Conceptual Framework for Financial Reporting (CF).However, we noted areas requiring further clarification by the IASB. Our detailedcomments and recommendations are provided below.A.Name of the criterion
2.Some respondents were concerned that the terminology ‘present obligationrecognition criterion’ in the ED could be misleading. This is because the proposalsin paragraphs 14A to 16 of the ED relate only to the present obligation criterion,which is one of the three criteria 1 for recognising a provision. The proposedterminology may create confusion, suggesting that a provision will be recognised assoon as the ‘present obligation recognition criterion’ (paragraph 14A of the ED) ismet, without assessing the probability of transfer and the reliability of measuring theobligation under paragraphs 14(b) and (c) of the ED. Accordingly, we recommendthat the IASB revise the terminology by removing the word ‘recognition’ from the‘present obligation recognition criterion’ in the ED to prevent any misinterpretation.B.Transfer condition
3.Paragraph 14L of the ED states that an obligation to exchange resources is not anobligation to transfer an economic resource unless the terms of exchange areunfavourable to the entity. We consider that this paragraph introduces new conceptsof ‘transfer’ versus ‘exchange’ of economic resources into IAS 37, which are neitherdefined in the Glossary nor elaborated upon further in the standard. Althoughparagraph 4.39(c) of the CF illustrates this distinction with an example of a forwardcontract, the differentiation between these two concepts is not always clear. Somerespondents questioned whether typical payments, such as levies, sales-basedroyalties and milestone payments in pharmaceutical industry, are considered as‘transfer’ or ‘exchange’ of economic resources under the ED. Others expressedconcerns that in situations where the nature of the transaction is unclear, theambiguity surrounding the definitions of ‘transfer’ and ‘exchange’ can create furtherchallenges in determining whether the transfer condition is met, and thus whethera present obligation exists.1 All three criteria in paragraph 14 of IAS 37 (i.e. present obligation, probability of transfer and reliablemeasurement) must be met for a provision to be recognised.AppendixPage 4 of 9
4.We observed that Examples 3, 7 and 11B proposed in the Guidance illustrate theconsideration of ‘transfer’ versus ‘exchange’ of economic resources. In these threeexamples, the IASB takes into consideration whether the entity is entitled to futureeconomic benefits from the asset or service received as a result of a payment whendistinguishing between ‘transfer’ and ‘exchange’. However, this consideration is notincluded in the body of IAS 37.
5.To improve clarity and avoid diversity in practice, we strongly recommend that theIASB clarify the differences between ‘transfer’ and ‘exchange’ of economicresources by incorporating the principle of considering any future economic benefitsof the asset or service received as a result of payment, as introduced in theillustrative examples, into the body of IAS 37. In addition, we suggest explaining theapplication of this principle to common payments as mentioned in paragraph 3above through illustrative examples.C. Past-event condition
6.We have significant concerns regarding the interaction and application of theproposed requirements for the past-event condition in paragraphs 14O to 14Q ofthe ED. It is unclear whether paragraphs 14P and 14Q of the ED are intended toprovide additional guidance to paragraph 14O of the ED when addressing scenariosinvolving multiple conditions. We also find it difficult to understand how the conceptsintroduced in these paragraphs apply to the following illustrative examples in theGuidance.Example 2B – Contaminated land and constructive obligation:
7.This example lacks clarity regarding how an entity applies paragraphs 14O to 14Qof the ED to identify the relevant ‘action(s)’ in the fact pattern. In particular, it isunclear whether the contamination of land should be considered as:
(a)
an action taken over time and hence the resulting present obligation to cleanup the contaminated land accumulates over time under paragraph 14O of theED; or(b)
individual actions (say 12 actions for 12 months), in which case the presentobligation would be recognised according to paragraph 14Q of the ED whenthe entity has taken the first action (i.e. contaminating the land in the firstmonth of the year) and has no practical ability to avoid taking the remainingactions.Examples 13B – A levy on an entity operating as a bank on the last day of itsannual reporting period and 13C – A property tax:
8.These two examples illustrate similar fact patterns, but they result in differentconclusions. Example 13B concludes that there are two separate actions (i.e.operating as a bank in its current reporting period and operating on the last day ofthat period) and the provision is recognised over time by applying paragraphs 14Oand 14Q of the ED. In contrast, Example 13C concludes that only one action isidentified (i.e. owning and holding the land and buildings for business use at theyear end). Accordingly, the full amount of the provision for property tax is recognisedat the end of the year according to paragraph 14N of the ED.
9.It is unclear why the accounting outcomes of these two examples are different. Webelieve an argument can be made in Example 13B that operating as a bankthroughout the current reporting period is not an action; rather, it serves as themeasurement base for the levy and so only one action is identified (i.e. operatingas a bank on the last day of the reporting period) in that example. On the other hand,Page 5 of 9it could be argued that two separate actions can be identified in Example 13C, i.e.owning the land and buildings for business use throughout the year and holdingthem for business use at the end of the year. Therefore, the provision for propertytax should be accrued over time if the entity does not have the practical ability toavoid holding the property for business use at the end of the year.
10.Based on the above, we note that determining what constitutes an ‘action’ becomesparticularly challenging in complex fact patterns involving multiple conditions in acontract or legislation. This difficulty complicates an entity’s assessment of whetherthe conditions represent one action, two (or more) separate actions, a continuationof an activity, or a measurement base for the provision. As a result, it is unclearwhether paragraphs 14O (over-time recognition), 14P (threshold-triggered costs)
and 14Q (obligations triggered only if an entity takes two or more separate actions)
of the ED should be applied. This uncertainty would, in turn, affect the timing ofrecognising the provision.
11.In light of the above, we strongly recommend that the IASB:
(a)
Clearly illustrate the interaction between paragraphs 14O to 14Q of the ED inthe final amendments, particularly whether, and if so, which requirementwould take precedence if they are relevant to the same fact pattern;
(b)
Enhance Examples 2B, 13B and 13C in the Guidance to ensure the proposedrequirements in paragraphs 14O to 14Q of the ED are applied consistentlyacross different fact patterns;
(c)
Test the proposed requirements in paragraphs 14O to 14Q of the ED furtherto understand their impact on current accounting practices and assesswhether the outcomes are appropriate; and(d)
Relocate the example concerning threshold-triggered costs, which is currentlylocated after paragraph 14P of the ED, and present it under a similar structureas other illustrative examples in the Guidance (i.e. analysing each of therecognition criteria separately) to demonstrate how the relevant requirementsshould be applied.D. Uncertainty about whether the present obligation recognition criterion is met
12.Some respondents expressed concerns about the first sentence of paragraph 15 ofthe ED. They questioned which of the three conditions in the present obligationrecognition criterion (i.e. an obligation condition, a transfer condition or a past-eventcondition) is considered unclear to be met in the rare cases as referred to inparagraph 15 of the ED.
13.We observe that the proposed rewording in paragraph 15 of the ED, as explainedin Appendix A of the BC, ensures that the requirements allow for the possibility thatthe uncertainty could relate to any of the three conditions within the presentobligation recognition criterion. This concept is also illustrated in the proposed newdecision tree in Diagram B1 of the Guidance. However, given that the presentobligation recognition criterion has been split into three distinct conditions under theIASB’s proposals, merely rewording paragraph 15 of the ED as currently proposedis insufficient for users to fully understand the underlying rationale. This could createconfusion regarding whether one or all three conditions need to be unclear in orderto apply paragraph 15 of the ED in assessing whether an obligation is deemed toexist.Page 6 of 9
14.To address the above concerns, we recommend that the IASB:
(a)
Refine the wording of paragraph 15 of the ED to include the key concept thatthe uncertainty could pertain to any of the three conditions in the presentobligation recognition criterion; and(b)
Enhance the decision trees in Diagrams B1 to B3 in the Guidance (as detailedin paragraph 28 below) to clarify the application of paragraph 15 of the ED.E. Restructuring
15.We acknowledge the reasoning behind why IAS 37 should not refer to ‘aconstructive obligation to restructure’ as explained in BC50 of the ED, and we agreewith the proposal to replace ‘constructive obligation’ with ‘present obligation’regarding restructuring costs. However, we are concerned that the wording ‘raiseda valid expectation’ in paragraphs 72 to 75 of the ED may create the impressionthat only constructive obligations apply to restructuring. Accordingly, werecommend that the IASB amend the relevant wording as appropriate or explain inthe BC the rationale for retaining the current wording.Question 2: Measurement – Expenditure required to settle an obligationA.Existing requirements in IAS 37
16.We support the proposed clarification of the costs to be included in themeasurement of a provision. However, some respondents found it unclear whetherfuture operating costs (e.g. salaries of employees in the claims department to beincurred for a particular claim) should be included in measuring a provision underparagraph 40A(b) of the ED when those costs are directly related to settling theobligations.
17.This is particularly the case as we observed that paragraph 18 of IAS 37, whichspecifies that no provision is recognised for costs that need to be incurred to operatein the future, is proposed to be deleted in the ED without explanation in the BC. Webelieve the IASB does not intend to change this general measurement principlewhich is applicable for all types of provisions. Therefore, we recommend that theIASB either reinstate paragraph 18 of IAS 37 or clearly specify this principle in the‘measurement’ section of the final amendments.B.Examples and guidance
18.Some respondents observed that the scenario in Example 14 – ‘Negative low-emission vehicle credits’ proposed in the Guidance is common in Mainland China.Application issues often arise regarding how to allocate and measure the costsrequired for generating positive credits through production. It is also unclear howthis allocation and measurement align with the principle in paragraph 18 of IAS 37.However, the current drafting of Example 14 does not address the measurement ofthe provision.
19.In addition, we noted that other IFRS Accounting Standards provide examples ofthe types of costs that are included or excluded in the measurement requirements,for example, paragraphs 97 and 98 of IFRS 15 Revenue from Contracts withCustomers, and paragraphs 16 to 19 of IAS 16 Property, Plant and Equipment.However, paragraph 40A of the ED does not provide any examples.Page 7 of 9
20.To improve clarity of the proposed requirements and support consistent application,we recommend that the IASB:
(a)
Provide examples and guidance on the types of costs to be included inmeasuring a provision, such as by expanding Example 14 in the Guidance toillustrate the costs that should be included in the measurement of the provisionunder paragraph 40A of the ED; and(b)
Include an example of the allocation of other costs in paragraph 40A(b) of theED, similar to that in paragraph 68A(b) of IAS 37, to align the costs used inmeasuring a provision with those for fulfilling an onerous contract.Question 3: Discount rates
21.We support the proposals for discounting a provision using a rate that excludes non-performance risk, as well as for disclosing the discount rates used and the approachfor determining those rates. However, some respondents observed that whileparagraph 47A of the ED explicitly excludes non-performance risk in the discountrate when measuring a provision, the ED does not specify whether the non-performance risk of an entity should be excluded from the expected cash flows ofthe related provision. Therefore, we recommend that the IASB clarify in the finalamendments that the non-performance risk of an entity should not be reflected inthe expected cash flows of the provisions if it is not reflected in the discount rates.
22.Additionally, our respondents questioned whether, in cases where an entity is jointlyand severally liable for an obligation, the non-performance risk of a co-obligorshould be factored into the measurement of a provision. We are of the view that aco-obligor with weak credit standing may result in a higher liability for the entitycompared to one with strong credit standing. Therefore, we recommend that theIASB clarify the implications of the non-performance risk of co-obligors on theapplication of paragraph 29 of IAS 37 regarding the amount of provision to berecognised by an entity and the amount of contingent liabilities to be disclosed forthe portion of the obligation expected to be met by the co-obligors.
23.Furthermore, some respondents expressed concerns about the last two sentencesin BC82 of the ED. They considered that those sentences may imply that entitiesare not expected to adjust the discount rate for differences between the durationand liquidity of the investment and those of the provision in all instances, which webelieve should not be the case. To improve clarity, we recommend that the IASBamend the wording as follows:
‘In some cases, it would be necessary for an entity might to adjust that yield – forexample, to compensate for differences between the duration and liquidity of theinvestment and those of the provision. However, the IASB does not expect allentities to make such adjustments.’Question 4(a): Transition requirements
24.We broadly support the proposed retrospective application of the amendments inthe ED. However, we have concerns about the following two simplifying exceptions:
(a)
Changes in cost measurement: a modified retrospective approach is requiredto be applied at the date of initial application; and(b)
Changes in discount rates: a simplified retrospective approach is permitted tobe applied at the transition date. Entities that do not select this simplifiedapproach are required to apply the full retrospective approach.Page 8 of 9
25.We consider that the different requirements of these two exceptions in terms ofapplication date (date of initial application versus transition date) and the extent offlexibility (required versus permitted) could create complexity and potentialconfusion. In addition, the choice of whether to apply the simplifying exception forchanges in discount rates could reduce the comparability of financial information.Accordingly, we recommend that the IASB carefully consider whether the samemodified retrospective approach should be applied for both amendments.Question 6: Guidance on implementing IAS 37A.Decision tree (section B of the Guidance)
26.We support the proposal for expanding the decision tree in the Guidance. However,our respondents found the following aspects confusing:
(a)
Whether the assessment of ‘more likely than not’ is needed for the presentobligation recognition criterion under Diagram B2 before proceeding toDiagram B3 which requires another assessment of probability of transfer;
(b)
How to apply the decision tree to Examples 1 and 10 in the Guidance toconclude that the present obligation recognition criterion is deemed ‘morelikely than not’ to be met; and(c)
How each step in the decision tree relates to the relevant requirements inIAS 37.
27.We are of the view that Diagram B2 is an additional step needed for the rare caseswhen it is unclear whether the present obligation recognition criterion is met(paragraphs 15 and 16 of the ED). In all other cases, there is no need to performthe ‘more likely than not met’ assessment in Diagram B2 before assessing whetherthe transfer of economic resources is probable and the measurement is reliableunder paragraphs 14(b) and 14(c) of the ED. However, we acknowledge that thecurrent splitting of the decision tree into Diagrams B2 and B3, along with the unclearlinkage between the decision tree and the relevant requirements in IAS 37, maycreate confusion.
28.To facilitate consistent application, we recommend that the IASB enhance thedecision tree in the following ways:
(a)
Integrate Diagrams B1 to B3 to provide a comprehensive view of the decisionflows;
(b)
Specify the pertinent steps in the decision tree related to the ‘more likely thannot met’ assessment in the analysis for Examples 1 and 10 in the Guidance;
and(c)
Add references to the relevant paragraphs of IAS 37 for each step in thedecision tree.B.Illustrative examples (section C of the Guidance)
29.In addition to the comments on some of the illustrative examples in the Guidanceas detailed in our responses to Questions 1 and 2 above, some respondents alsofound Example 6(b) – ‘Legal requirement to fit smoke filters’ confusing. They areuncertain whether the assessment of the ‘probability of incurring fines andpenalties by non-compliant operation’ in the analysis is carried out under:
(a) Paragraph 15 of the ED regarding the uncertainty about whether the presentobligation recognition criterion is met (i.e. the decision tree in Diagram B2 ofthe ED); orPage 9 of 9(b) Paragraphs 14(b), 23 and 24 of IAS 37 regarding the probability of outflow ofresources embodying economic benefits (i.e. the decision tree in Diagram B3of the ED).
30.We note that the example assesses and concludes that the present obligationrecognition criterion under paragraph 14(a) of the ED (i.e. the three conditionsunder paragraph 14A of the ED) is met, so there is no need to perform the ‘morelikely than not’ assessment under paragraph 15 of the ED. Furthermore, theexample indicates that the evaluation of the ‘probability of incurring fines andpenalties by non-compliant operation’ has been carried out under the transfer ofeconomic resources criterion (i.e. paragraph 14(b) of the ED) in the analysis.Nonetheless, we recognise that potential confusion could still arise, as entitiesmight misinterpret this assessment as relevant to the transfer condition in thepresent obligation recognition criterion (i.e. paragraph 14A(b) of the ED),particularly since the conclusion paragraph in the analysis includes the phrase‘more likely than not to be imposed’.
31.To avoid potential misinterpretation and improve clarity of the analysis in thisillustrative example, we recommend that the IASB clearly specify in the finalamendments that:
(a) The present obligation recognition criterion under paragraph 14(a) of the EDis met;
(b) The assessment of the ‘probability of incurring fines and penalties by non-compliant operation’ is conducted under paragraphs 14(b), 23 and 24 ofIAS 37; and(c) A provision is recognised for any fines that are probable to be imposed and toavoid the phrase ‘more likely than not to be imposed’ in the conclusion, whichis related to the assessment under paragraph 15 of the ED.Other questions in the ED
32.We do not have any specific comments on Question 4(b) regarding the effectivedate, and Questions 5 and 7 of the ED.~ End ~