Page 1 of 18Our Ref.: C/FRSCSent electronically through the IASB Website (www.ifrs.org)
28 September 2020Mr Hans HoogervorstInternational Accounting Standards BoardColumbus Building7 Westferry CircusCanary WharfLondon E14 4HDUnited KingdomDear Hans,IASB Exposure Draft ED/2019/7General Presentation and DisclosuresThe 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 theopportunity to provide you with our views on this Exposure Draft (ED).The HKICPA appreciates the IASB's efforts to improve how information is communicatedin the financial statements, with a focus on information about performance in thestatement of profit or loss. The HKICPA generally agrees with the IASB’s proposals torequire more comparable information in the statement of profit or loss and a moredisciplined and transparent approach to the reporting of management-definedperformance measures.However, most of our stakeholders do not agree with allowing an accounting policychoice under paragraph 51 of the ED because the option in paragraph 51(b) of the EDmay distort the financial performance of non-financial institution entities that providefinancing to customers as one of their main business activities. The HKICPA suggeststhat non-financial institution entities, which provide financing to customers as one of theirmain business activities, should classify income and expenses from financing activities,and from cash and cash equivalents that relate to the provision of financing to customers,in the operating category unless impracticable to do so. We also recommend the IASBprovide illustrative examples relevant to non-financial institution entities on the allocationof income and expenses from financing activities, and from cash and cash equivalentsbetween the operating and financing categories, in order to help these entities to applythe requirements under paragraph 51(a) of the ED consistently.In addition, some of our stakeholders questioned the usefulness of the IASB’s proposalfor the split of ‘integral’ and ‘non-integral’ associates/joint ventures and considered thatthe related cost, complexity and potential inconsistencies to preparers of providing thesplit may outweigh the value to users of financial statements, given there are alreadyrequirements under IFRS 12 Disclosure of Interests in Other Entities to discloseinformation related to significant associates/joint ventures. The HKICPA recommendsthe IASB consider strengthening the existing disclosure requirements in IFRS 12 torequest an entity to provide more information about the main business activities of theassociates/joint ventures, the subtotals of the statement of profit or loss and the natureof unusual items of the associates/joint ventures, instead of requiring the split of ‘integral’and ‘non-integral’ associates/joint ventures.Page 2 of 18Many stakeholders raised concerns that the proposed definition of unusual income andexpenses in paragraph 100 of the ED is unclear and highly judgemental. Although theIASB has explained in paragraph BC136 of the ED why past occurrence of income orexpense is not considered in the proposed definition, some of our stakeholders stillquestioned why the proposed definition focuses only on forward-looking information,which may reduce application consistency and increase difficulties for audit andenforcement. The HKICPA recommends the IASB to reconsider incorporating historicaloccurrence as a relevant factor for the determination of unusual income and expenses,and to provide more illustrative examples on the identification of unusual items.The HKICPA welcomes the IASB’s proposal to define management performancemeasures (MPM) to address the need of users of financial statements. However, manystakeholders expressed their views that the scope of MPM in paragraph 103 of the EDis too restrictive. Therefore, we recommend the IASB to consider broadening the scopeof MPM to cover other financial-related non-GAAP measures which are derived fromnumbers measured in accordance with IFRSs, to enhance comparability and reduceaudit difficulties. We also suggest the IASB should articulate in the Standard clearly therelationship between MPM and the management measures disclosed for segmentreporting under IFRS 8 Operating Segments to avoid diversity in practice in MPMdisclosures.Some of our stakeholders raised concerns that the principles for classification of fairvalue gains and losses on derivatives and of foreign exchange differences, assummarised in paragraphs 56-58 and B39-B40 of the ED, are complicated andsignificantly increase the workload for preparers, and also provide limited information toinvestors. The HKICPA recommends that the IASB reconsiders the costs and benefitsof these proposals before pursuing them.Our detailed responses to the questions raised in this ED are in the Appendix.If you have any questions regarding the matters raised in this letter, please contact JoniKan (jonikan@hkicpa.org.hk) or Katherine Leung (katherineleung@hkicpa.org.hk)
Associate Directors of the Standard Setting Department.Sincerely,Chris JoyExecutive Director, Standards and RegulationsPage 3 of 18Work undertaken by HKICPA in forming its viewsThe Hong Kong Institute of Certified Public Accountants:
(i)
issued an Invitation to Comment on ED/2019/7 on 19 December 2019 to ourmembers and other stakeholders;
(ii)
met with representatives from Hong Kong's financial reporting, securities andlisting regulatory bodies;
(iii)
sought input from its Disclosure Initiative Advisory Panel, Financial InstrumentsAdvisory Panel and Small and Medium Practitioners Technical Issues WorkingGroup, which are mainly comprised of technical and industry experts from largeas well as small and medium accounting firms (collectively, Practitioners);
(iv)
held a roundtable discussion on 23 June 2020, comprising investors, analysts,preparers and practitioners, with IASB staff participation;
(v)
developed its views through its Financial Reporting Standards Committee,having reflected on its stakeholder views. The Committee comprises academics,preparer representatives from various industry sectors, regulators, as well astechnical and industry experts from small, medium and large accounting firms;
(vi)
conducted research in the following areas in 35 companies listed on the MainBoard in Hong Kong (including in industries such as property and construction,telecommunications, information technology, industrials, energy, banks, andinsurance) to better understand current reporting preferences in Hong Kong. Thisresearch included analysis of:
a)
structure and content of the statement of financial performance;
b)
presentation of operating profit, EBIT and EBITDA;
c)
presentation of share of results of associates/joint ventures; andd)
use of management performance measures.This submission outlines the HKICPA's views as well as most of our stakeholders'comments on the ED/2019/7. You may access our stakeholder responses to theED/2019/7 here:
https://www.hkicpa.org.hk/en/Standards-and-regulation/Standards/Our-views/pcd/financial-reporting-submissions/2020Detailed comments on IASB ED/2019/7Structure of the statement of profit or lossQuestion 1—operating profit or lossQuestion 2—the operating categoryQuestion 3—the operating category: income and expenses from investmentsmade in the course of an entity’s main business activitiesStakeholders’ views
1.Most stakeholders did not agree with the IASB proposal to define the operatingcategory as a default/residual category, noting that it would be difficult for an entity(especially for a conglomerate entity) to determine what income and expensesshould be included in the operating category without a specific and direct definition.
2.As determination of an entity’s main business activities is an important factor in theclassification of all three proposed categories, most stakeholders recommendedthe IASB should define the ‘entity’s main business activities’ and provide guidanceon determining the ‘entity’s main business activities’.
3.Stakeholders shared the following examples in particular to illustrate their concerns.AppendixPage 4 of 18These examples show how the fair value change of an investment property coulddistort operating profit if the entity considers the property rental is part of the entity’smain business activities:
a) A trading/manufacturing company that holds an investment property for rentalpurposes. The fair value change may be large and could distort operating profit,which could significantly impact how a user of financial statements interpretsthe trading/manufacturing company’s performance.b) A real estate company may present the changes in the fair value of aninvestment property in the operating category under the proposals, instead ofpresenting it below operating profit as would generally be the case under currentpractice. Economically this is an unrealised gain, and including it in theoperating category could affect how an investor assesses the operating profitof the entity, because many investors in practice view operating profit asrealised profit.HKICPA analysis and recommendation
4.The HKICPA considers that determination of an entity’s main business activities isan important factor in determining what income and expenses should be classifiedin operating category. We recommend the IASB to provide clear guidance ondetermining the ‘entity’s main business activities’ (e.g. consider using the definitionof business in IFRS 3 Business Combinations or ordinary activities in IFRS 15Revenue from Contracts with Customers to provide guidance on an entity’s mainbusiness activities).Question 4—the operating category: an entity that provides financing tocustomers as a main business activityStakeholders’ views
5.Most stakeholders considered that the IASB’s proposed requirements inparagraphs 48 and 51 of the ED, and the proposed illustrative example of astatement of profit or loss for an investment and retail bank, are generally consistentwith the current practice of banks and investment funds. Most stakeholders apartfrom a group of banking industry preparers generally supported the IASB’s proposalto give banks the accounting policy choice in paragraph 51 of the ED.
6.However, a group of banking industry preparers disagreed with having a freeaccounting policy choice, and considered that companies should be required toapply a policy that is appropriate to their business models. They considered thatthe accounting policy choice should only be allowed for companies providingfinance to customers as the sole main business activity.
7.Most stakeholders considered that allowing such an accounting policy choice for anon-financial institution entity that provides financing to customers as a mainbusiness activity, for example a manufacturing entity or property development entity,could distort that entity’s financial information.
8.Some financial instruments expert practitioners considered that for companies witha central treasury (which raises funding for all the company’s activities, and bothprovides financing to customers and makes investments in the course of thecompany’s main business activities), it may be subjective and arbitrary to allocateexpenses from financing activities. For example, allocating interest expense fromfund raising between providing financing to customers and investing in equityPage 5 of 18instruments. They understand that the IASB has noted this difficulty in paragraphBC66 of the ED, and recommended the IASB provide more guidance to helpcompanies perform the allocation in order to apply the option in paragraph 51(a) ofthe ED consistently.
9.Some stakeholders considered that instead of having an accounting policy choice,a viable alternative might be to have an impracticable exemption−i.e. require anentity that provides financing to customers as a main business activity to classifythe income and expenses from financing activities and from cash and cashequivalents that relate to the provision of financing to customers in the operatingcategory, unless impracticable to do so. If impracticable, then all such income andexpenses should be classified in the operating category.HKICPA analysis and recommendation
10.The HKICPA generally supports the IASB’s proposal to give banks and otherfinancial institution entities an accounting policy choice for the classification ofincome and expenses from financing activities, and from cash and cash equivalents,and we note from our stakeholders that the IASB’s proposed requirements inparagraphs 48 and 51 of the ED, and the illustrative example of a statement of profitor loss for an investment and retail bank, is consistent with our understanding ofthe current practice of banks and investment funds. As the determination of anentity’s main business activities is also an important factor in the proposals inparagraphs 48 and 51 of the ED, we recommend the IASB consider our commentsin paragraph 4 above.
11.However, we are of the view that the accounting policy choice under paragraph 51of the ED will reduce the comparability of the financial performance between non-financial institution entities that provide financing to customers as the entity’s mainbusiness activity, and those that do not. Therefore, the HKICPA suggests that non-financial institution entities that provide financing to customers as one of the entity’smain business activities, should be required to classify income and expenses fromfinancing activities, and from cash and cash equivalents, that relate to the provisionof financing to customers, in the operating category unless impracticable to do so.If impracticable, then all such income and expenses should be classified in theoperating category. We also recommend the IASB to provide illustrative examplesfor a non-financial institution entity on the allocation of income and expenses fromfinancing activities, and from cash and cash equivalents, between operating andfinancing categories in order to help these entities apply the requirements underparagraph 51(a) of the ED consistently.Question 5—the investing categoryStakeholders’ views
12.Stakeholders generally support the proposal. Some stakeholders howeverconsidered that applying paragraphs 47-48 of the ED would be subjective anddifficult without clear guidance on how to interpret ‘largely independently’ and‘entity’s main business activities’.HKICPA analysis and recommendation
13.The HKICPA is generally supportive of the proposals in the ED. As noted above,we do however recommend clear guidance on determining the ‘entity’s mainbusiness activities’.Page 6 of 18Question 6—profit or loss before financing and income tax and the financingcategoryStakeholders’ views
14.Stakeholders generally support the proposal. Some stakeholders considered itwould be helpful for the IASB to provide clarification of the following:
a)
Why interest expenses on lease liabilities are classified in the financingcategory in cases where the leased assets are used in the production of goods.b)
How to classify the effect of financing for a contract that has a significantfinancing component under IFRS 15.HKICPA analysis and recommendation
15.The HKICPA is generally supportive of the proposals in the ED and supports ourstakeholders’ suggestion in paragraph 14 that the IASB should provide clarificationof those examples in order to help the stakeholders to apply the proposalconsistently.Integral and non-integral associates and joint venturesQuestion 7—integral and non-integral associates and joint venturesStakeholders’ views
16.Regulators and preparers generally supported the proposed split of integral andnon-integral associates and joint ventures, but acknowledged judgement would berequired and that the proposed definition and indicators in proposed new paragraph20D of IFRS 12 Disclosure of Interests in Other Entities are insufficient forcompanies to be able to distinguish between integral and non-integralassociates/joint ventures. To ensure consistent application between entities, thesestakeholders recommended that the IASB should develop sufficient guidance tohelp preparers distinguish between integral and non-integral associates/jointventures, and help practitioners/investors assess how that distinction has beenapplied.
17.Investors and practitioners also considered that it would be difficult for preparers tosplit a portfolio of associates and joint ventures between integral and non-integral,particularly for a conglomerate company that has different businesses, which wouldincrease the complexity of performing the split and would likely lead to diversity inpractice.
18.A preparer recommended that the IASB should clarify whether finance costsincurred on a loan to integral associates and joint ventures (that forms part of thecarrying amount of the net investment in these associates/joint ventures) should begrouped and presented above the proposed subtotal of operating profit and incomeand expenses from integral associates and joint ventures in the statement of profitor loss.
19.Some stakeholders questioned the usefulness of the distinction between ‘integral’and ‘non-integral’ associates/joint ventures and the presentation and disclosurerequirements. Some stakeholders considered that the related cost, complexity andpotential inconsistencies may outweigh the usefulness of the resulting informationgiven there are already requirements under IAS 24 Related Party Disclosures andIFRS 12 to disclose material related party relationships and information related toPage 7 of 18significant associates/joint ventures.
20.An investor suggested the IASB should instead develop better disclosures aboutthe characteristics and risk profile of associates/joint ventures in the notes. Thisstakeholder also commented that the proposed subtotal of operating profit andincome and expenses from integral associates and joint ventures is misleading tousers of the financial statements because the company does not have control overthose investees.
21.A practitioner considered that the IASB’s proposals do not fit all industries andbusiness models and shared an example of a shipping company which jointlyoperates all of its ships through joint ventures. Applying the proposals, the shippingcompany would be required to present the income and expenses from joint venturesbelow operating profit. As a result, only the company’s operating expenses will beclassified in the operating category, which may result in an operating loss that ismeaningless and misleading to the users of financial statements. It was noted thatalthough the IASB has proposed a new subtotal ‘operating profit or loss and incomeand expenses from integral associates and joint ventures’, users often focus onoperating profit or loss first, and as such, that manner of presentation could createunnecessary confusion.HKICPA analysis and recommendation
22.The HKICPA appreciates the IASB’s proposed split of ‘integral’ and ‘non-integral’associates/joint ventures to reduce the diversity in practice in the presentation ofan entity’s share of profit or loss of associates/joint ventures. However, we considerthat the IASB’s proposal for the split of ‘integral’ and ‘non-integral’ associates/jointventures will add burden for preparers, especially for entities that have a portfolioof associates/joint ventures, and the cost of the proposals may outweigh theirbenefit.
23.The HKICPA recommends the IASB considers strengthening the existingdisclosure requirements in IFRS 12 to require entities to provide more informationon the main business activities of associates/joint ventures (e.g. nature of thebusiness), and the subtotal of the statement of profit or loss and nature of unusualitems of the associates/joint ventures, instead of proposing the split of ‘integral’ and‘non-integral’, in order to help users of financial statements understand how thecompany invests in the associates and joint ventures to develop its business.
24.If the IASB were to proceed with its proposal on the split of ‘integral’ and ‘non-integral’ associates/joint ventures, the HKICPA strongly recommends that the IASBshould provide more guidance on how to do the split, and provide more key andcommonly used indicators, other than significant interdependency as provided inparagraph 20D of IFRS 12 in the ED, that the entity should consider whenassessing whether an associate or joint venture is integral or non-integral to anentity’s main business. Such indicators could include the investment objective inthe associate or joint venture and how management evaluates the performance ofthe associate or joint venture.Page 8 of 18Roles of financial statements, aggregation and disaggregationQuestion 8—roles of the primary financial statements and the notes, aggregationand disaggregationStakeholders’ views
25.A regulator supported the proposed principles and requirements for the aggregationand disaggregation of information because they often encounter difficulties inunderstanding the significant line items named ’others’ in the financial statements.The proposals would allow them to understand the nature and amount of the itemsincluded in ‘others’ more clearly.
26.Another regulator commented that:
a) the IASB should define the term ‘characteristics’ in order to avoid differentunderstanding of the intended meaning of this term and diversity in practice asmany stakeholders may find it novel to determine whether items can beaggregated by using the term ‘characteristics’; andb) the IASB’s proposed disclosure requirements for groups of immaterial items inparagraph 28 of the ED is difficult to apply without a quantitative threshold forseparate disclosure of the immaterial items and expressed concern aboutdifficulties in the enforcement of the disaggregation principles and requirements.
27.Some practitioners considered that the cost of the IASB’s proposed disclosurerequirements for groups of immaterial items in paragraph 28 of the ED will outweighthe benefits to the users of the financial statements.HKICPA analysis and recommendation
28.The HKICPA generally supports the proposed description of the roles of the primaryfinancial statements and the notes and the IASB’s proposal to improvedisaggregation of information in the financial statements which could help users ofthe financial statements to understand the nature and amount of the items. Weagree with the reasons stated in paragraph BC26 of the ED for not providingquantitative thresholds for disaggregation.Question 9—Analysis of operating expensesStakeholders’ views
29.Stakeholders generally supported the IASB’s proposals about the analysis ofoperating expenses and the corresponding application guidance, including theproposed disclosure requirements for the analysis of operating expenses by naturein the notes if an entity presents its operating expenses by function in the statementof profit or loss.
30.A group of banking industry preparers agreed with the IASB’s proposals.Nonetheless, they would like further guidance in a form of illustrative examples fromthe IASB on distinguishing the nature of expense and function of expense methods,in order to eliminate existing confusion over the distinction between these methods.
31.Investors generally considered that primary statements should not be overlydetailed. An investor questioned why the option to present the analysis of operatingexpenses in the notes is proposed to be removed in the ED. He noted that investorsPage 9 of 18usually analyse the primary statements together with the corresponding notes, andso the detailed analysis should be disclosed in the notes so that the statement ofprofit or loss could be more concise and uncluttered. This investor also suggestedthe IASB should provide additional examples to illustrate the minimum line items tobe presented in the statement of profit or loss (i.e. an example which shows onlythe required line items in the statement of profit or loss without presenting additionalline items).HKICPA analysis and recommendation
32.The HKICPA supports the IASB’s proposed requirements in paragraphs 68 andB45-47 of the ED to present an analysis of operating expenses using the singlemethod that would provide the most useful information to the users of financialstatements, including the corresponding application guidance.
33.The HKICPA also agrees with the proposed disclosure requirements in paragraphs72 and B48 of the ED to provide analysis by nature in the notes for an entity thatprovides analysis of operating expenses by function in the statement of profit orloss to facilitate investors in performing forecasts.Question 10—Unusual income and expensesStakeholders’ viewsDefinition
34.Stakeholders generally considered the proposed definition of unusual income andexpenses in paragraph 100 of the ED is unclear, highly judgemental and subject tointerpretation. They observed that unusual income and expenses vary acrossentities and this is subject to manipulation because management might exercisebias on these items in order to present a better performance of the entity.
35.Many stakeholders questioned why the identification of unusual income andexpenses focuses only on forward-looking information. A few stakeholderssuggested the identification of unusual items should be based on their nature andamount. The management’s rationale for such identification should be clearlydisclosed in the financial statements.
36.A regulator acknowledged that the IASB considered past occurrence in theidentification of unusual items as explained in BC136 of the ED, but commentedthat the proposed definition’s focus on the future may reduce applicationconsistency and increase the difficulties for enforcement by regulators. Thisregulator recommended the IASB should re-consider whether past occurrence ofan item can be a relevant factor for the identification of unusual income andexpenses.
37.Practitioners shared similar comments as the regulator on the proposed forward-looking definition of unusual income and expenses, and noted that it may lead toloss of comparability among entities given that identification involves significantjudgement. They also expressed concerns on how these items would be audited.A practitioner also commented that the introduction of unusual items addscomplexity for preparers that may not justify the benefits of the resulting information.
38.On the other hand, an investor said he welcomed the IASB’s proposals, particularlythe determination of unusual income and expenses being based on forward-lookinginformation, which is consistent with how investors use forward-looking informationPage 10 of 18for their cash flow forecasts. This investor also shared his observations that anincreasing number of entities are disclosing non-recurring or similarly describeditems in their financial statements, and users would find it helpful to have areconciliation of those items to the IFRS specified totals or subtotals to facilitate anunderstanding of how those items are determined.
39.Stakeholders generally recommended the IASB should provide more guidance orexamples to illustrate and clarify how to apply the guidance for identification ofunusual income and expenses to increase consistent application and reduceinterpretation. Specific comments and suggestions included:
a) During the outbreak of Covid-19, certain additional costs incurred in the currentyear may or may not continue to be incurred in future years. It is difficult to makepredictions under the current uncertain situation and hence determine whetherthese costs would meet the proposed definition of unusual items. For example,an entity may determine the additional costs incurred related to Covid-19 areunusual expenses in 2020 because it is expected that Covid-19 is unlikely toreoccur in the following few years. However, if there is an outbreak of Covid-19again in 2021, it is unclear whether the entity should continue to classify therelated additional costs as unusual. Classifying those costs as unusual in 2020would therefore be inappropriate and require a prior year adjustment to bemade.b) Requests to clarify the meaning of ‘several future reporting periods’ in theapplication guidance through example scenarios.Disclosures
40.Nevertheless, stakeholders generally agreed with the proposed requireddisclosures of the unusual income and expenses as summarised in paragraph 101of the ED. However, a group of banking industry preparers did not support theIASB’s proposal considering there are disclosure requirements with similarpurposes (i.e. to require provision of information to facilitate users of financialstatements to understand more about the entity’s financial performance), forexample, IFRS 8 Operating Segments requires explanation of the measurement ofsegment information and reconciliation between segment information and theentity’s financial performance reporting under IFRS standards.
41.These stakeholders suggested the IASB considers other means of disclosure, suchas presentation as part of the management performance measures (MPM) andnarratives.
42.A preparer and a practitioner also showed support for the suggestion that the IASBshould include unusual income and expenses as part of the scope of MPM insteadof separately defining it, due to its unclear and highly judgemental definition.HKICPA analysis and recommendation
43.The HKICPA appreciates the IASB’s proposal to define unusual income andexpenses and its proposed disclosure requirements because this would increasethe transparency and comparability across entities, and reduce entities’opportunistic classification of expenses as unusual. In view of the comments fromstakeholders on the proposed definition in paragraph 100 of the ED, we suggestthe IASB should take into account both the past occurrence and the futureexpectations of an item for determination of unusual income and expenses, andclearly state in the Basis for Conclusions that the past occurrence is not a decisivePage 11 of 18factor. This could help to reduce interpretation which would improve comparabilityacross entities, and reduce difficulties for audit and enforcement.
44.The HKICPA also recommends the IASB to provide more illustrative examples (assuggested by our stakeholders in paragraph 39) on how the determination ofunusual income and expenses should be made in order to improve the applicationconsistency.Management performance measuresQuestion 11—Management performance measuresStakeholders’ viewsScoping
45.Many stakeholders raised concerns that the scope of MPM in paragraph 103 of theED is too restrictive as it only focuses on subtotals of income and expenses, whichmay reduce the benefits to investors. Stakeholders shared their observations thatentities disclosed other performance measures (e.g. current ratios), including non-financial performance measures.
46.Regulators shared their observations and expressed the following concerns aboutthe IASB’s proposals on MPM:
a) Management disclose many measures, other than those covered by theproposed definition of MPM, for example, measures related to the financialposition and cash flows of an entity. It is considered that all these measuresshould also be subject to the MPM requirements.b) Organisations such as the Hong Kong Stock Exchange Limited (HKEx) and theBoard of the International Organisation of Securities Commissions have issuedguidance on the presentation of non-GAAP measures. It is recommended theIASB should widen the scope of MPM to cover all non-GAAP measures to havea consistent presentation and disclosures, and to enhance the comparabilityamong entities.c)
The proposed definition of MPM does not restrict measures to those only basedon amounts recognised and measured in accordance with IFRSs. Allowing theuse of MPM prepared on a different basis or in conflict with IFRSs may raisedifficulties for verification of the adjustments by auditors and how much auditwork should be performed to assure the reliability and fairness of theinformation presented. Allowing the use of MPM prepared not in accordancewith IFRSs may also be abused by entities and it is questioned how such usagecould be safeguarded.d) It is acknowledged that the IASB explains in paragraph BC155 of the ED thereasons why limited restrictions have been applied in the proposals, however,such proposals are inconsistent with the guidance issued by the HKEx on thepresentation of non-GAAP measures. The guidance states ‘a listing applicantshould not use individually tailored accounting principles, including certainadjusted revenue measures’. For example, it is observed that one of thereconciling items for the MPM is revenue adjustment in Note 2 of pages 11-13of the illustrative examples accompanying the ED, which is not allowed underPage 12 of 18the guidance from the HKEx. There hence may be unintended regulatoryconsequences from such proposals.
47.Preparers also shared similar comments that the scope of MPM is notcomprehensive as it only forms a sub-set of the Alternative Performance Measuresas defined in ESMA Guidelines on Alternative Performance Measures. Preparersalso considered there is insufficient knowledge and time for users of financialstatements to understand how MPM proposals would provide them with usefulinformation and comment on the proposals. Preparers suggested the IASB shouldcarry out a separate project to broaden the scope of MPM, and should provide moretargeted education about the current use of MPM to users and allow sufficient timefor their feedback.
48.Some practitioners expressed concerns that the proposals cover all publiccommunications (used in the definition of MPM) is too wide and may lead to auditdifficulties and recommended the IASB should restrict the public communicationsto those published together with the annual/interim reports and covering the samereporting period as the audit/review. A practitioner recommended the IASB shouldexplain in the Basis for Conclusions whether other measures, which do not meetthe proposed definition of MPM, could be presented in the financial statements andwhether the IASB has any plan to address these measures.Disclosures
49.Some stakeholders suggested the IASB should articulate in the Standard clearlythe relationship between MPM and the management measures disclosed undersegment reporting to avoid diversity in practice in MPM disclosures.
50.A group of banking industry preparers agreed with the IASB’s proposal to includeMPM in the financial statements and the proposed disclosure requirements, whichwould be useful for all users including those who previously had no knowledge onhow to derive those measures. However, they would like the IASB to considerwhether to implement these disclosures as voluntary requirements for:
a) highly regulated entities (e.g. authorised institutions supervised by the HongKong Monetary Authority) which have already made other extensive regulatorydisclosures reflecting various aspects of their performance and publishedconcurrently with the financial statements; andb) unlisted entities where the cost of preparing such additional disclosures mayexceed their benefit.
51.This group of stakeholders also suggested the IASB should consider providing aspecific list of required disclosures for MPM to promote consistency among entitiesand consider other commonly used performance measures other than sub-totalsonly.
52.Some practitioners from small and medium firms shared similar thoughts that theproposed requirements for MPM should only apply to public entities, and not toprivate companies.
53.Preparers commented that the proposed disclosure requirements in paragraph 106of the ED are excessive and would significantly increase the workload and costs forthem. A preparer shared that although entities may provide additional disclosuresto sophisticated analysts and investors to address their needs, providing suchPage 13 of 18extensive disclosures to less sophisticated users would be overwhelming and maybe confusing for them as they are less familiar with IFRSs.
54.Preparers also raised concerns about the practical difficulties and complexity inproviding sufficient information about how MPM is calculated for auditors’verification.
55.Investors have split views on the MPM proposals. Even though the proposals onMPM may provide some useful information to investors, the extent of details shouldbe balanced with the incremental costs incurred by preparers. It is noted that themost critical disclosure would be the reconciliation from MPM to the nearest IFRSspecified total or subtotal, which could provide users with a better understanding ofthe underlying performance of the business.
56.An investor commented that it is currently difficult to understand the MPM disclosedby entities. This investor is also sceptical of the usefulness of MPM as they couldbe easily manipulated by management.HKICPA analysis and recommendation
57.The HKICPA appreciates the IASB’s proposal to define MPM to provide insight toinvestors on how management views and manages an entity’s financialperformance. To address the comments from stakeholders that the proposed scopeof MPM in paragraph 103 of the ED is too narrow, we recommend the IASB to widenthe scope to cover other financial-related non-GAAP measures which are derivedfrom numbers measured in accordance with IFRSs, to reduce audit difficulties andenhance the comparability among entities with required disclosures for all MPM.
58.The HKICPA also suggests the IASB restricts the ‘public communications’ criterionof the definition of MPM to those communications published together with theannual/interim reports and covering the same reporting period to minimise auditdifficulties, given the current proposed scope of public communications appearsvery wide.
59.Furthermore, the HKICPA recommends the IASB to clarify the linkage betweenMPM and segment reporting under IFRS 8 to avoid diversity in practice in MPMdisclosures, as the relationship is not clear in paragraph B83 of the ED. We alsosuggest the IASB clarifies whether a change in the adjustment for unusual items,for example when new items meet the proposed definition of unusual items,constitutes a change in calculation of the MPM (if MPM adjusts for unusual items).Question 12—EBITDAStakeholders’ views
60.Stakeholders shared mixed views on whether the IASB should define EBITDA.Some stakeholders noted that EBITDA and EBIT are widely used and there isdiversity in practice in how to calculate these measures. Defining EBITDA or EBITcould reduce the diversity and misleading use of the terms. On the other hand,some stakeholders noted it is not necessary to define EBITDA because how it isdetermined is clear from the MPM required disclosures.
61.An investor supported the IASB’s proposals not to define EBITDA, but suggestedthe IASB should instead identify ‘operating profit or loss before depreciation,amortisation and impairment’ as an IFRS specified subtotal to provide users withbetter insight on the free cash flows of an entity.Page 14 of 18HKICPA analysis and recommendation
62.The HKICPA supports the IASB not to define EBITDA for the reasons explained inparagraphs BC172 and BC173 of the ED.Statement of cash flowsQuestion 13—Statement of cash flowsStakeholders’ views
63.Stakeholders generally supported the IASB’s proposed targeted improvements tothe statement of cash flows and the proposed clarification of financing activities inIAS 7 Statement of cash flows.
64.A group of banking industry preparers considered the principle for classification ofthe cash flow statement should align with the classification of the correspondingincome or expenses in the statement of profit or loss. These stakeholderssuggested the IASB clarifies whether all interest and dividend cash flows should beclassified as operating if an entity provides financing to customers as a mainbusiness activity and selects the accounting policy choice under paragraph 51(a)
of the ED, and update the relevant Illustrative Example accompanying the ED uponclarification.
65.The financial instruments expert practitioners generally supported the IASB’sproposals to remove the accounting policy choice and require entities with particularbusiness activities, including banks, to classify cash flows from interestreceived/paid and dividends received depending on the classification of the relatedincome and expenses in the statement of profit or loss, and classify cash flows fromdividends paid as cash flows from financing activities.
66.Some financial instruments expert practitioners recommended the IASB shouldreview IAS 7 more broadly to align its categorisation with the statement of profit orloss for consistency purposes, and to further clarify the definition of cash and cashequivalents given the current definition is unclear (i.e. what does it mean by readilyconvertible to a known amount of cash and subject to an insignificant risk ofchanges in value), particularly when practitioners attempt to apply it to the varietyof modern types of money market funds.
67.Some practitioners shared their observations that the IASB’s proposal may changethe classification of the following related cash flows:
a) cash flows related to Tier 2 instruments that are not classified as equity forbanks would potentially change from the financing to operating category; andb) cash flows related to interest paid on loans would potentially change from theoperating to financing category.
68.An investor commented that it is helpful to have the split of dividends paid fromintegral and non-integral associates and joint ventures, but that the cost versusbenefits of this proposal should be considered carefully.Page 15 of 18HKICPA analysis and recommendation
69.The HKICPA supports the IASB’s proposals on the targeted improvements to thestatement of cash flows, particularly to eliminate options for the classification ofinterest and dividend cash flows under IAS 7 to improve comparability acrossentities. In addition, we recommend the IASB should review IAS 7 as a separateproject to align the categorisation in the statement of cash flows with those used inthe statement of profit or loss, and reconsider the definition of cash and cashequivalents.OthersQuestion 14—Other commentsStakeholders’ viewsStructure of the statement of profit or loss
70.Some stakeholders commented that the three proposed categories in the statementof profit or loss are named similarly to the three activities in the statement of cashflows and this may confuse preparers and users of financial statements.
71.Some stakeholders considered that the IASB should clearly identify the linkage anddifferences between each of the categories in these two statements in the Basis forConclusions (e.g. as done for the investing category in paragraph BC51 of the ED).A preparer suggested clarifying this within the Standard, not just in the Basis forConclusions, to ensure clarity. In addition, a group of banking industry preparerssuggested the IASB consider altering the category names in the statement of profitor loss to distinguish them from those in the statement of cash flows.Classification of fair value gains and losses on derivatives and of exchange differences
72.A group of financial instruments expert practitioners generally agreed with theproposals in paragraphs 56-59 of the ED. The proposals are considered to beconceptually sensible, though it may not be very clear in practice how to apply theprinciples in the ED in some scenarios. Some of these practitioners shared similarviews that further guidance in a form of illustrative examples on classification forfair value gains and losses on derivatives and hedging instruments would beappreciated.
73.Examples suggested by the financial instruments expert practitioners to be clarifiedby the IASB include:
a)
Whether the classification of fair value gains and losses on embeddedderivatives (e.g. conversion option separately accounted for and not classifiedas equity in a convertible bond) follows the general proposal for derivatives ordepends on where the embedded derivatives originate (e.g. because the fairvalue gains and losses originate from a convertible bond, so it should beclassified as financing).b)
How to classify the fair value gains and losses of a hybrid financial instrumentwhich has been designated as a fair value through profit or loss financialinstrument as a whole.Page 16 of 18c)
For an interest rate swap with two legs separated and designated for differentpurposes, whether the corresponding changes in fair value of the interest rateswap should be classified according to the risks being managed by the entityor wholly recognised under the investing category, e.g. whether part of thechange in fair value of the swap goes into one line item of the statement ofprofit or loss and the other part goes through a different line item.d)
Whether the ineffective portion of the fair value changes of a qualified hedginginstrument should be classified in a different line item in the same category asthe effective portion, or in the investing category by default.
74.A financial instruments expert practitioner raised concerns about how tooperationalise the ‘undue cost or effort’ exemption in paragraph 58 of the ED, inparticular from an audit perspective. This practitioner thought that an entity shouldbe expected to understand the objectives of holding derivatives, and hence shouldnot have to incur undue cost or effort to determine the classification of thecorresponding fair value gains and losses. The practitioner recommended the IASBto provide more clarity in the application of the proposed requirements.
75.A group of banking industry preparers considered the proposed requirements inparagraph 58 of the ED for derivatives used to manage risks but not designated ashedging instruments could effectively imply an introduction of a new category of‘hedging’ which could create confusion and complication in the existing hedgeaccounting framework, and could result in inconsistency in application andinterpretation. They suggested the IASB reconsiders the cost and benefit of theproposal and whether it should be pursued.
76.This group of stakeholders also considered the proposed requirements inparagraphs 56 and B39 of the ED would require significant and complicatedchanges to accounting systems in order to allocate foreign exchange differencesbased on the originating activity for which it arises. Foreign exchange risks are oftenbe managed centrally (e.g. by a central treasury function) even though the foreignexchange exposure arises from various types of activities. Presenting all foreignexchange differences in an aggregated total could be equally relevant, if not moreappropriate, for users of the financial statements as that can better reflect the actualrisk management activities and resulting economic position of an entity. Theysuggested the IASB revisiting the cost and benefit of the proposal and whether itshould be pursued.
77.A preparer raised concerns that the principles for the classification of fair valuegains and losses on derivatives and of exchange differences in paragraphs B39-B40 of the ED are complicated and difficult to understand. This preparer questionedwhy the presentation of fair value gains and losses on derivatives would not bedifferentiated based on whether the derivatives are designated as hedginginstruments (i.e. fair value changes on derivatives used to manage risks and notdesignated as hedging instrument should follow different classification principle withthose fair value changes on derivatives designated as hedging instruments),meaning such presentation may not be useful to investors. This preparerconsidered the existing disclosure requirements under IFRS 7 FinancialInstruments: Disclosures on financial risk management are sufficient for investorsto understand the hedging relationships designated by an entity and howmanagement manages the financial risks of the entity. Moreover, this preparer alsocommented that the incremental costs incurred by preparers to perform theproposed separate classification appeared to outweigh the benefits to users, unlessthere is a strong need for such information by users.Page 17 of 18
78.Investors generally agreed with the preparer’s view (paragraph 77) and consideredthat the proposals for classification of fair value gains and losses on derivatives andof exchange differences would provide limited benefits to them. An investorcommented that a balance should be made between the information needs ofinvestors, the work done by preparers, and the competitive disadvantages ofdisclosing too much information to the public, particularly for public interest entities.Other comments
79.Some practitioners noted changes in terminology used in the ED, for example‘equity shareholders of the company’ used under IAS 1 Presentation of FinancialStatements is replaced by ‘holders of claims against parent classified as equity’ inpage 6 of the illustrative examples accompanying the ED. They questioned thereasons for the change as this increases the difficulties in understanding thefinancial statements and creates confusion for users.HKICPA analysis and recommendationStructure of the statement of profit or loss
80.Based on the HKICPA’s research on the presentation of the statement of profit orloss in Hong Kong, the HKICPA observed that operating profit or loss is one of themost commonly used subtotals. We also observed that various different subtotalsare used by companies in the statement of profit or loss, and there is diversity inpractice in the labelling and calculation of these subtotals. Therefore, we supportthe IASB’s proposals for introduction of subtotals and categories in the statementof profit or loss to reduce the diversity in practice and improve the comparability offinancial information between entities.
81.The HKICPA understands that the IASB is not seeking full alignment between thecategories in the statement of profit or loss and those in the statement of cash flows.However, in view of our stakeholders’ concerns above about the similarly namedcategories in both statements, we suggest the IASB should explain more clearlythe linkage and differences between each category in these two statements in theBasis for Conclusions.Classification of fair value gains and losses on derivatives and of exchange differences
82.Based on the stakeholders’ feedback, the HKICPA considers the proposalssummarised in paragraphs 56-59 and B39-B40 of the ED are complicated andsignificantly increase the workload for preparers, but provide limited information toinvestors. We recommend the IASB aim to balance the costs and benefits andreconsider whether to pursue the proposals.
83.We also recommend the IASB to carefully consider the points noted from ourstakeholders with regard to the classification of fair value gains and losses onderivatives noted in paragraphs 73-75 to ensure that entity’s risk managementactivities are appropriately and consistently represented.Page 18 of 18Other comments
84.The HKICPA generally agrees with the stakeholders’ recommendations.Particularly, we recommend the IASB should minimise the change in terminologyas mentioned in paragraph 79 to reduce misunderstanding, and if necessary,explain clearly the reasons for such change in the Standard.~ End ~
IASB Exposure Draft ED/2019/7 General Presentation and Disclosures
下载原件Page 1 of 18Our Ref.: C/FRSCSent electronically through the IASB Website (www.ifrs.org)
28 September 2020Mr Hans HoogervorstInternational Accounting Standards BoardColumbus Building7 Westferry CircusCanary WharfLondon E14 4HDUnited KingdomDear Hans,IASB Exposure Draft ED/2019/7General Presentation and DisclosuresThe 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 theopportunity to provide you with our views on this Exposure Draft (ED).The HKICPA appreciates the IASB's efforts to improve how information is communicatedin the financial statements, with a focus on information about performance in thestatement of profit or loss. The HKICPA generally agrees with the IASB’s proposals torequire more comparable information in the statement of profit or loss and a moredisciplined and transparent approach to the reporting of management-definedperformance measures.However, most of our stakeholders do not agree with allowing an accounting policychoice under paragraph 51 of the ED because the option in paragraph 51(b) of the EDmay distort the financial performance of non-financial institution entities that providefinancing to customers as one of their main business activities. The HKICPA suggeststhat non-financial institution entities, which provide financing to customers as one of theirmain business activities, should classify income and expenses from financing activities,and from cash and cash equivalents that relate to the provision of financing to customers,in the operating category unless impracticable to do so. We also recommend the IASBprovide illustrative examples relevant to non-financial institution entities on the allocationof income and expenses from financing activities, and from cash and cash equivalentsbetween the operating and financing categories, in order to help these entities to applythe requirements under paragraph 51(a) of the ED consistently.In addition, some of our stakeholders questioned the usefulness of the IASB’s proposalfor the split of ‘integral’ and ‘non-integral’ associates/joint ventures and considered thatthe related cost, complexity and potential inconsistencies to preparers of providing thesplit may outweigh the value to users of financial statements, given there are alreadyrequirements under IFRS 12 Disclosure of Interests in Other Entities to discloseinformation related to significant associates/joint ventures. The HKICPA recommendsthe IASB consider strengthening the existing disclosure requirements in IFRS 12 torequest an entity to provide more information about the main business activities of theassociates/joint ventures, the subtotals of the statement of profit or loss and the natureof unusual items of the associates/joint ventures, instead of requiring the split of ‘integral’and ‘non-integral’ associates/joint ventures.Page 2 of 18Many stakeholders raised concerns that the proposed definition of unusual income andexpenses in paragraph 100 of the ED is unclear and highly judgemental. Although theIASB has explained in paragraph BC136 of the ED why past occurrence of income orexpense is not considered in the proposed definition, some of our stakeholders stillquestioned why the proposed definition focuses only on forward-looking information,which may reduce application consistency and increase difficulties for audit andenforcement. The HKICPA recommends the IASB to reconsider incorporating historicaloccurrence as a relevant factor for the determination of unusual income and expenses,and to provide more illustrative examples on the identification of unusual items.The HKICPA welcomes the IASB’s proposal to define management performancemeasures (MPM) to address the need of users of financial statements. However, manystakeholders expressed their views that the scope of MPM in paragraph 103 of the EDis too restrictive. Therefore, we recommend the IASB to consider broadening the scopeof MPM to cover other financial-related non-GAAP measures which are derived fromnumbers measured in accordance with IFRSs, to enhance comparability and reduceaudit difficulties. We also suggest the IASB should articulate in the Standard clearly therelationship between MPM and the management measures disclosed for segmentreporting under IFRS 8 Operating Segments to avoid diversity in practice in MPMdisclosures.Some of our stakeholders raised concerns that the principles for classification of fairvalue gains and losses on derivatives and of foreign exchange differences, assummarised in paragraphs 56-58 and B39-B40 of the ED, are complicated andsignificantly increase the workload for preparers, and also provide limited information toinvestors. The HKICPA recommends that the IASB reconsiders the costs and benefitsof these proposals before pursuing them.Our detailed responses to the questions raised in this ED are in the Appendix.If you have any questions regarding the matters raised in this letter, please contact JoniKan (jonikan@hkicpa.org.hk) or Katherine Leung (katherineleung@hkicpa.org.hk)
Associate Directors of the Standard Setting Department.Sincerely,Chris JoyExecutive Director, Standards and RegulationsPage 3 of 18Work undertaken by HKICPA in forming its viewsThe Hong Kong Institute of Certified Public Accountants:
(i)
issued an Invitation to Comment on ED/2019/7 on 19 December 2019 to ourmembers and other stakeholders;
(ii)
met with representatives from Hong Kong's financial reporting, securities andlisting regulatory bodies;
(iii)
sought input from its Disclosure Initiative Advisory Panel, Financial InstrumentsAdvisory Panel and Small and Medium Practitioners Technical Issues WorkingGroup, which are mainly comprised of technical and industry experts from largeas well as small and medium accounting firms (collectively, Practitioners);
(iv)
held a roundtable discussion on 23 June 2020, comprising investors, analysts,preparers and practitioners, with IASB staff participation;
(v)
developed its views through its Financial Reporting Standards Committee,having reflected on its stakeholder views. The Committee comprises academics,preparer representatives from various industry sectors, regulators, as well astechnical and industry experts from small, medium and large accounting firms;
(vi)
conducted research in the following areas in 35 companies listed on the MainBoard in Hong Kong (including in industries such as property and construction,telecommunications, information technology, industrials, energy, banks, andinsurance) to better understand current reporting preferences in Hong Kong. Thisresearch included analysis of:
a)
structure and content of the statement of financial performance;
b)
presentation of operating profit, EBIT and EBITDA;
c)
presentation of share of results of associates/joint ventures; andd)
use of management performance measures.This submission outlines the HKICPA's views as well as most of our stakeholders'comments on the ED/2019/7. You may access our stakeholder responses to theED/2019/7 here:
https://www.hkicpa.org.hk/en/Standards-and-regulation/Standards/Our-views/pcd/financial-reporting-submissions/2020Detailed comments on IASB ED/2019/7Structure of the statement of profit or lossQuestion 1—operating profit or lossQuestion 2—the operating categoryQuestion 3—the operating category: income and expenses from investmentsmade in the course of an entity’s main business activitiesStakeholders’ views
1.Most stakeholders did not agree with the IASB proposal to define the operatingcategory as a default/residual category, noting that it would be difficult for an entity(especially for a conglomerate entity) to determine what income and expensesshould be included in the operating category without a specific and direct definition.
2.As determination of an entity’s main business activities is an important factor in theclassification of all three proposed categories, most stakeholders recommendedthe IASB should define the ‘entity’s main business activities’ and provide guidanceon determining the ‘entity’s main business activities’.
3.Stakeholders shared the following examples in particular to illustrate their concerns.AppendixPage 4 of 18These examples show how the fair value change of an investment property coulddistort operating profit if the entity considers the property rental is part of the entity’smain business activities:
a) A trading/manufacturing company that holds an investment property for rentalpurposes. The fair value change may be large and could distort operating profit,which could significantly impact how a user of financial statements interpretsthe trading/manufacturing company’s performance.b) A real estate company may present the changes in the fair value of aninvestment property in the operating category under the proposals, instead ofpresenting it below operating profit as would generally be the case under currentpractice. Economically this is an unrealised gain, and including it in theoperating category could affect how an investor assesses the operating profitof the entity, because many investors in practice view operating profit asrealised profit.HKICPA analysis and recommendation
4.The HKICPA considers that determination of an entity’s main business activities isan important factor in determining what income and expenses should be classifiedin operating category. We recommend the IASB to provide clear guidance ondetermining the ‘entity’s main business activities’ (e.g. consider using the definitionof business in IFRS 3 Business Combinations or ordinary activities in IFRS 15Revenue from Contracts with Customers to provide guidance on an entity’s mainbusiness activities).Question 4—the operating category: an entity that provides financing tocustomers as a main business activityStakeholders’ views
5.Most stakeholders considered that the IASB’s proposed requirements inparagraphs 48 and 51 of the ED, and the proposed illustrative example of astatement of profit or loss for an investment and retail bank, are generally consistentwith the current practice of banks and investment funds. Most stakeholders apartfrom a group of banking industry preparers generally supported the IASB’s proposalto give banks the accounting policy choice in paragraph 51 of the ED.
6.However, a group of banking industry preparers disagreed with having a freeaccounting policy choice, and considered that companies should be required toapply a policy that is appropriate to their business models. They considered thatthe accounting policy choice should only be allowed for companies providingfinance to customers as the sole main business activity.
7.Most stakeholders considered that allowing such an accounting policy choice for anon-financial institution entity that provides financing to customers as a mainbusiness activity, for example a manufacturing entity or property development entity,could distort that entity’s financial information.
8.Some financial instruments expert practitioners considered that for companies witha central treasury (which raises funding for all the company’s activities, and bothprovides financing to customers and makes investments in the course of thecompany’s main business activities), it may be subjective and arbitrary to allocateexpenses from financing activities. For example, allocating interest expense fromfund raising between providing financing to customers and investing in equityPage 5 of 18instruments. They understand that the IASB has noted this difficulty in paragraphBC66 of the ED, and recommended the IASB provide more guidance to helpcompanies perform the allocation in order to apply the option in paragraph 51(a) ofthe ED consistently.
9.Some stakeholders considered that instead of having an accounting policy choice,a viable alternative might be to have an impracticable exemption−i.e. require anentity that provides financing to customers as a main business activity to classifythe income and expenses from financing activities and from cash and cashequivalents that relate to the provision of financing to customers in the operatingcategory, unless impracticable to do so. If impracticable, then all such income andexpenses should be classified in the operating category.HKICPA analysis and recommendation
10.The HKICPA generally supports the IASB’s proposal to give banks and otherfinancial institution entities an accounting policy choice for the classification ofincome and expenses from financing activities, and from cash and cash equivalents,and we note from our stakeholders that the IASB’s proposed requirements inparagraphs 48 and 51 of the ED, and the illustrative example of a statement of profitor loss for an investment and retail bank, is consistent with our understanding ofthe current practice of banks and investment funds. As the determination of anentity’s main business activities is also an important factor in the proposals inparagraphs 48 and 51 of the ED, we recommend the IASB consider our commentsin paragraph 4 above.
11.However, we are of the view that the accounting policy choice under paragraph 51of the ED will reduce the comparability of the financial performance between non-financial institution entities that provide financing to customers as the entity’s mainbusiness activity, and those that do not. Therefore, the HKICPA suggests that non-financial institution entities that provide financing to customers as one of the entity’smain business activities, should be required to classify income and expenses fromfinancing activities, and from cash and cash equivalents, that relate to the provisionof financing to customers, in the operating category unless impracticable to do so.If impracticable, then all such income and expenses should be classified in theoperating category. We also recommend the IASB to provide illustrative examplesfor a non-financial institution entity on the allocation of income and expenses fromfinancing activities, and from cash and cash equivalents, between operating andfinancing categories in order to help these entities apply the requirements underparagraph 51(a) of the ED consistently.Question 5—the investing categoryStakeholders’ views
12.Stakeholders generally support the proposal. Some stakeholders howeverconsidered that applying paragraphs 47-48 of the ED would be subjective anddifficult without clear guidance on how to interpret ‘largely independently’ and‘entity’s main business activities’.HKICPA analysis and recommendation
13.The HKICPA is generally supportive of the proposals in the ED. As noted above,we do however recommend clear guidance on determining the ‘entity’s mainbusiness activities’.Page 6 of 18Question 6—profit or loss before financing and income tax and the financingcategoryStakeholders’ views
14.Stakeholders generally support the proposal. Some stakeholders considered itwould be helpful for the IASB to provide clarification of the following:
a)
Why interest expenses on lease liabilities are classified in the financingcategory in cases where the leased assets are used in the production of goods.b)
How to classify the effect of financing for a contract that has a significantfinancing component under IFRS 15.HKICPA analysis and recommendation
15.The HKICPA is generally supportive of the proposals in the ED and supports ourstakeholders’ suggestion in paragraph 14 that the IASB should provide clarificationof those examples in order to help the stakeholders to apply the proposalconsistently.Integral and non-integral associates and joint venturesQuestion 7—integral and non-integral associates and joint venturesStakeholders’ views
16.Regulators and preparers generally supported the proposed split of integral andnon-integral associates and joint ventures, but acknowledged judgement would berequired and that the proposed definition and indicators in proposed new paragraph20D of IFRS 12 Disclosure of Interests in Other Entities are insufficient forcompanies to be able to distinguish between integral and non-integralassociates/joint ventures. To ensure consistent application between entities, thesestakeholders recommended that the IASB should develop sufficient guidance tohelp preparers distinguish between integral and non-integral associates/jointventures, and help practitioners/investors assess how that distinction has beenapplied.
17.Investors and practitioners also considered that it would be difficult for preparers tosplit a portfolio of associates and joint ventures between integral and non-integral,particularly for a conglomerate company that has different businesses, which wouldincrease the complexity of performing the split and would likely lead to diversity inpractice.
18.A preparer recommended that the IASB should clarify whether finance costsincurred on a loan to integral associates and joint ventures (that forms part of thecarrying amount of the net investment in these associates/joint ventures) should begrouped and presented above the proposed subtotal of operating profit and incomeand expenses from integral associates and joint ventures in the statement of profitor loss.
19.Some stakeholders questioned the usefulness of the distinction between ‘integral’and ‘non-integral’ associates/joint ventures and the presentation and disclosurerequirements. Some stakeholders considered that the related cost, complexity andpotential inconsistencies may outweigh the usefulness of the resulting informationgiven there are already requirements under IAS 24 Related Party Disclosures andIFRS 12 to disclose material related party relationships and information related toPage 7 of 18significant associates/joint ventures.
20.An investor suggested the IASB should instead develop better disclosures aboutthe characteristics and risk profile of associates/joint ventures in the notes. Thisstakeholder also commented that the proposed subtotal of operating profit andincome and expenses from integral associates and joint ventures is misleading tousers of the financial statements because the company does not have control overthose investees.
21.A practitioner considered that the IASB’s proposals do not fit all industries andbusiness models and shared an example of a shipping company which jointlyoperates all of its ships through joint ventures. Applying the proposals, the shippingcompany would be required to present the income and expenses from joint venturesbelow operating profit. As a result, only the company’s operating expenses will beclassified in the operating category, which may result in an operating loss that ismeaningless and misleading to the users of financial statements. It was noted thatalthough the IASB has proposed a new subtotal ‘operating profit or loss and incomeand expenses from integral associates and joint ventures’, users often focus onoperating profit or loss first, and as such, that manner of presentation could createunnecessary confusion.HKICPA analysis and recommendation
22.The HKICPA appreciates the IASB’s proposed split of ‘integral’ and ‘non-integral’associates/joint ventures to reduce the diversity in practice in the presentation ofan entity’s share of profit or loss of associates/joint ventures. However, we considerthat the IASB’s proposal for the split of ‘integral’ and ‘non-integral’ associates/jointventures will add burden for preparers, especially for entities that have a portfolioof associates/joint ventures, and the cost of the proposals may outweigh theirbenefit.
23.The HKICPA recommends the IASB considers strengthening the existingdisclosure requirements in IFRS 12 to require entities to provide more informationon the main business activities of associates/joint ventures (e.g. nature of thebusiness), and the subtotal of the statement of profit or loss and nature of unusualitems of the associates/joint ventures, instead of proposing the split of ‘integral’ and‘non-integral’, in order to help users of financial statements understand how thecompany invests in the associates and joint ventures to develop its business.
24.If the IASB were to proceed with its proposal on the split of ‘integral’ and ‘non-integral’ associates/joint ventures, the HKICPA strongly recommends that the IASBshould provide more guidance on how to do the split, and provide more key andcommonly used indicators, other than significant interdependency as provided inparagraph 20D of IFRS 12 in the ED, that the entity should consider whenassessing whether an associate or joint venture is integral or non-integral to anentity’s main business. Such indicators could include the investment objective inthe associate or joint venture and how management evaluates the performance ofthe associate or joint venture.Page 8 of 18Roles of financial statements, aggregation and disaggregationQuestion 8—roles of the primary financial statements and the notes, aggregationand disaggregationStakeholders’ views
25.A regulator supported the proposed principles and requirements for the aggregationand disaggregation of information because they often encounter difficulties inunderstanding the significant line items named ’others’ in the financial statements.The proposals would allow them to understand the nature and amount of the itemsincluded in ‘others’ more clearly.
26.Another regulator commented that:
a) the IASB should define the term ‘characteristics’ in order to avoid differentunderstanding of the intended meaning of this term and diversity in practice asmany stakeholders may find it novel to determine whether items can beaggregated by using the term ‘characteristics’; andb) the IASB’s proposed disclosure requirements for groups of immaterial items inparagraph 28 of the ED is difficult to apply without a quantitative threshold forseparate disclosure of the immaterial items and expressed concern aboutdifficulties in the enforcement of the disaggregation principles and requirements.
27.Some practitioners considered that the cost of the IASB’s proposed disclosurerequirements for groups of immaterial items in paragraph 28 of the ED will outweighthe benefits to the users of the financial statements.HKICPA analysis and recommendation
28.The HKICPA generally supports the proposed description of the roles of the primaryfinancial statements and the notes and the IASB’s proposal to improvedisaggregation of information in the financial statements which could help users ofthe financial statements to understand the nature and amount of the items. Weagree with the reasons stated in paragraph BC26 of the ED for not providingquantitative thresholds for disaggregation.Question 9—Analysis of operating expensesStakeholders’ views
29.Stakeholders generally supported the IASB’s proposals about the analysis ofoperating expenses and the corresponding application guidance, including theproposed disclosure requirements for the analysis of operating expenses by naturein the notes if an entity presents its operating expenses by function in the statementof profit or loss.
30.A group of banking industry preparers agreed with the IASB’s proposals.Nonetheless, they would like further guidance in a form of illustrative examples fromthe IASB on distinguishing the nature of expense and function of expense methods,in order to eliminate existing confusion over the distinction between these methods.
31.Investors generally considered that primary statements should not be overlydetailed. An investor questioned why the option to present the analysis of operatingexpenses in the notes is proposed to be removed in the ED. He noted that investorsPage 9 of 18usually analyse the primary statements together with the corresponding notes, andso the detailed analysis should be disclosed in the notes so that the statement ofprofit or loss could be more concise and uncluttered. This investor also suggestedthe IASB should provide additional examples to illustrate the minimum line items tobe presented in the statement of profit or loss (i.e. an example which shows onlythe required line items in the statement of profit or loss without presenting additionalline items).HKICPA analysis and recommendation
32.The HKICPA supports the IASB’s proposed requirements in paragraphs 68 andB45-47 of the ED to present an analysis of operating expenses using the singlemethod that would provide the most useful information to the users of financialstatements, including the corresponding application guidance.
33.The HKICPA also agrees with the proposed disclosure requirements in paragraphs72 and B48 of the ED to provide analysis by nature in the notes for an entity thatprovides analysis of operating expenses by function in the statement of profit orloss to facilitate investors in performing forecasts.Question 10—Unusual income and expensesStakeholders’ viewsDefinition
34.Stakeholders generally considered the proposed definition of unusual income andexpenses in paragraph 100 of the ED is unclear, highly judgemental and subject tointerpretation. They observed that unusual income and expenses vary acrossentities and this is subject to manipulation because management might exercisebias on these items in order to present a better performance of the entity.
35.Many stakeholders questioned why the identification of unusual income andexpenses focuses only on forward-looking information. A few stakeholderssuggested the identification of unusual items should be based on their nature andamount. The management’s rationale for such identification should be clearlydisclosed in the financial statements.
36.A regulator acknowledged that the IASB considered past occurrence in theidentification of unusual items as explained in BC136 of the ED, but commentedthat the proposed definition’s focus on the future may reduce applicationconsistency and increase the difficulties for enforcement by regulators. Thisregulator recommended the IASB should re-consider whether past occurrence ofan item can be a relevant factor for the identification of unusual income andexpenses.
37.Practitioners shared similar comments as the regulator on the proposed forward-looking definition of unusual income and expenses, and noted that it may lead toloss of comparability among entities given that identification involves significantjudgement. They also expressed concerns on how these items would be audited.A practitioner also commented that the introduction of unusual items addscomplexity for preparers that may not justify the benefits of the resulting information.
38.On the other hand, an investor said he welcomed the IASB’s proposals, particularlythe determination of unusual income and expenses being based on forward-lookinginformation, which is consistent with how investors use forward-looking informationPage 10 of 18for their cash flow forecasts. This investor also shared his observations that anincreasing number of entities are disclosing non-recurring or similarly describeditems in their financial statements, and users would find it helpful to have areconciliation of those items to the IFRS specified totals or subtotals to facilitate anunderstanding of how those items are determined.
39.Stakeholders generally recommended the IASB should provide more guidance orexamples to illustrate and clarify how to apply the guidance for identification ofunusual income and expenses to increase consistent application and reduceinterpretation. Specific comments and suggestions included:
a) During the outbreak of Covid-19, certain additional costs incurred in the currentyear may or may not continue to be incurred in future years. It is difficult to makepredictions under the current uncertain situation and hence determine whetherthese costs would meet the proposed definition of unusual items. For example,an entity may determine the additional costs incurred related to Covid-19 areunusual expenses in 2020 because it is expected that Covid-19 is unlikely toreoccur in the following few years. However, if there is an outbreak of Covid-19again in 2021, it is unclear whether the entity should continue to classify therelated additional costs as unusual. Classifying those costs as unusual in 2020would therefore be inappropriate and require a prior year adjustment to bemade.b) Requests to clarify the meaning of ‘several future reporting periods’ in theapplication guidance through example scenarios.Disclosures
40.Nevertheless, stakeholders generally agreed with the proposed requireddisclosures of the unusual income and expenses as summarised in paragraph 101of the ED. However, a group of banking industry preparers did not support theIASB’s proposal considering there are disclosure requirements with similarpurposes (i.e. to require provision of information to facilitate users of financialstatements to understand more about the entity’s financial performance), forexample, IFRS 8 Operating Segments requires explanation of the measurement ofsegment information and reconciliation between segment information and theentity’s financial performance reporting under IFRS standards.
41.These stakeholders suggested the IASB considers other means of disclosure, suchas presentation as part of the management performance measures (MPM) andnarratives.
42.A preparer and a practitioner also showed support for the suggestion that the IASBshould include unusual income and expenses as part of the scope of MPM insteadof separately defining it, due to its unclear and highly judgemental definition.HKICPA analysis and recommendation
43.The HKICPA appreciates the IASB’s proposal to define unusual income andexpenses and its proposed disclosure requirements because this would increasethe transparency and comparability across entities, and reduce entities’opportunistic classification of expenses as unusual. In view of the comments fromstakeholders on the proposed definition in paragraph 100 of the ED, we suggestthe IASB should take into account both the past occurrence and the futureexpectations of an item for determination of unusual income and expenses, andclearly state in the Basis for Conclusions that the past occurrence is not a decisivePage 11 of 18factor. This could help to reduce interpretation which would improve comparabilityacross entities, and reduce difficulties for audit and enforcement.
44.The HKICPA also recommends the IASB to provide more illustrative examples (assuggested by our stakeholders in paragraph 39) on how the determination ofunusual income and expenses should be made in order to improve the applicationconsistency.Management performance measuresQuestion 11—Management performance measuresStakeholders’ viewsScoping
45.Many stakeholders raised concerns that the scope of MPM in paragraph 103 of theED is too restrictive as it only focuses on subtotals of income and expenses, whichmay reduce the benefits to investors. Stakeholders shared their observations thatentities disclosed other performance measures (e.g. current ratios), including non-financial performance measures.
46.Regulators shared their observations and expressed the following concerns aboutthe IASB’s proposals on MPM:
a) Management disclose many measures, other than those covered by theproposed definition of MPM, for example, measures related to the financialposition and cash flows of an entity. It is considered that all these measuresshould also be subject to the MPM requirements.b) Organisations such as the Hong Kong Stock Exchange Limited (HKEx) and theBoard of the International Organisation of Securities Commissions have issuedguidance on the presentation of non-GAAP measures. It is recommended theIASB should widen the scope of MPM to cover all non-GAAP measures to havea consistent presentation and disclosures, and to enhance the comparabilityamong entities.c)
The proposed definition of MPM does not restrict measures to those only basedon amounts recognised and measured in accordance with IFRSs. Allowing theuse of MPM prepared on a different basis or in conflict with IFRSs may raisedifficulties for verification of the adjustments by auditors and how much auditwork should be performed to assure the reliability and fairness of theinformation presented. Allowing the use of MPM prepared not in accordancewith IFRSs may also be abused by entities and it is questioned how such usagecould be safeguarded.d) It is acknowledged that the IASB explains in paragraph BC155 of the ED thereasons why limited restrictions have been applied in the proposals, however,such proposals are inconsistent with the guidance issued by the HKEx on thepresentation of non-GAAP measures. The guidance states ‘a listing applicantshould not use individually tailored accounting principles, including certainadjusted revenue measures’. For example, it is observed that one of thereconciling items for the MPM is revenue adjustment in Note 2 of pages 11-13of the illustrative examples accompanying the ED, which is not allowed underPage 12 of 18the guidance from the HKEx. There hence may be unintended regulatoryconsequences from such proposals.
47.Preparers also shared similar comments that the scope of MPM is notcomprehensive as it only forms a sub-set of the Alternative Performance Measuresas defined in ESMA Guidelines on Alternative Performance Measures. Preparersalso considered there is insufficient knowledge and time for users of financialstatements to understand how MPM proposals would provide them with usefulinformation and comment on the proposals. Preparers suggested the IASB shouldcarry out a separate project to broaden the scope of MPM, and should provide moretargeted education about the current use of MPM to users and allow sufficient timefor their feedback.
48.Some practitioners expressed concerns that the proposals cover all publiccommunications (used in the definition of MPM) is too wide and may lead to auditdifficulties and recommended the IASB should restrict the public communicationsto those published together with the annual/interim reports and covering the samereporting period as the audit/review. A practitioner recommended the IASB shouldexplain in the Basis for Conclusions whether other measures, which do not meetthe proposed definition of MPM, could be presented in the financial statements andwhether the IASB has any plan to address these measures.Disclosures
49.Some stakeholders suggested the IASB should articulate in the Standard clearlythe relationship between MPM and the management measures disclosed undersegment reporting to avoid diversity in practice in MPM disclosures.
50.A group of banking industry preparers agreed with the IASB’s proposal to includeMPM in the financial statements and the proposed disclosure requirements, whichwould be useful for all users including those who previously had no knowledge onhow to derive those measures. However, they would like the IASB to considerwhether to implement these disclosures as voluntary requirements for:
a) highly regulated entities (e.g. authorised institutions supervised by the HongKong Monetary Authority) which have already made other extensive regulatorydisclosures reflecting various aspects of their performance and publishedconcurrently with the financial statements; andb) unlisted entities where the cost of preparing such additional disclosures mayexceed their benefit.
51.This group of stakeholders also suggested the IASB should consider providing aspecific list of required disclosures for MPM to promote consistency among entitiesand consider other commonly used performance measures other than sub-totalsonly.
52.Some practitioners from small and medium firms shared similar thoughts that theproposed requirements for MPM should only apply to public entities, and not toprivate companies.
53.Preparers commented that the proposed disclosure requirements in paragraph 106of the ED are excessive and would significantly increase the workload and costs forthem. A preparer shared that although entities may provide additional disclosuresto sophisticated analysts and investors to address their needs, providing suchPage 13 of 18extensive disclosures to less sophisticated users would be overwhelming and maybe confusing for them as they are less familiar with IFRSs.
54.Preparers also raised concerns about the practical difficulties and complexity inproviding sufficient information about how MPM is calculated for auditors’verification.
55.Investors have split views on the MPM proposals. Even though the proposals onMPM may provide some useful information to investors, the extent of details shouldbe balanced with the incremental costs incurred by preparers. It is noted that themost critical disclosure would be the reconciliation from MPM to the nearest IFRSspecified total or subtotal, which could provide users with a better understanding ofthe underlying performance of the business.
56.An investor commented that it is currently difficult to understand the MPM disclosedby entities. This investor is also sceptical of the usefulness of MPM as they couldbe easily manipulated by management.HKICPA analysis and recommendation
57.The HKICPA appreciates the IASB’s proposal to define MPM to provide insight toinvestors on how management views and manages an entity’s financialperformance. To address the comments from stakeholders that the proposed scopeof MPM in paragraph 103 of the ED is too narrow, we recommend the IASB to widenthe scope to cover other financial-related non-GAAP measures which are derivedfrom numbers measured in accordance with IFRSs, to reduce audit difficulties andenhance the comparability among entities with required disclosures for all MPM.
58.The HKICPA also suggests the IASB restricts the ‘public communications’ criterionof the definition of MPM to those communications published together with theannual/interim reports and covering the same reporting period to minimise auditdifficulties, given the current proposed scope of public communications appearsvery wide.
59.Furthermore, the HKICPA recommends the IASB to clarify the linkage betweenMPM and segment reporting under IFRS 8 to avoid diversity in practice in MPMdisclosures, as the relationship is not clear in paragraph B83 of the ED. We alsosuggest the IASB clarifies whether a change in the adjustment for unusual items,for example when new items meet the proposed definition of unusual items,constitutes a change in calculation of the MPM (if MPM adjusts for unusual items).Question 12—EBITDAStakeholders’ views
60.Stakeholders shared mixed views on whether the IASB should define EBITDA.Some stakeholders noted that EBITDA and EBIT are widely used and there isdiversity in practice in how to calculate these measures. Defining EBITDA or EBITcould reduce the diversity and misleading use of the terms. On the other hand,some stakeholders noted it is not necessary to define EBITDA because how it isdetermined is clear from the MPM required disclosures.
61.An investor supported the IASB’s proposals not to define EBITDA, but suggestedthe IASB should instead identify ‘operating profit or loss before depreciation,amortisation and impairment’ as an IFRS specified subtotal to provide users withbetter insight on the free cash flows of an entity.Page 14 of 18HKICPA analysis and recommendation
62.The HKICPA supports the IASB not to define EBITDA for the reasons explained inparagraphs BC172 and BC173 of the ED.Statement of cash flowsQuestion 13—Statement of cash flowsStakeholders’ views
63.Stakeholders generally supported the IASB’s proposed targeted improvements tothe statement of cash flows and the proposed clarification of financing activities inIAS 7 Statement of cash flows.
64.A group of banking industry preparers considered the principle for classification ofthe cash flow statement should align with the classification of the correspondingincome or expenses in the statement of profit or loss. These stakeholderssuggested the IASB clarifies whether all interest and dividend cash flows should beclassified as operating if an entity provides financing to customers as a mainbusiness activity and selects the accounting policy choice under paragraph 51(a)
of the ED, and update the relevant Illustrative Example accompanying the ED uponclarification.
65.The financial instruments expert practitioners generally supported the IASB’sproposals to remove the accounting policy choice and require entities with particularbusiness activities, including banks, to classify cash flows from interestreceived/paid and dividends received depending on the classification of the relatedincome and expenses in the statement of profit or loss, and classify cash flows fromdividends paid as cash flows from financing activities.
66.Some financial instruments expert practitioners recommended the IASB shouldreview IAS 7 more broadly to align its categorisation with the statement of profit orloss for consistency purposes, and to further clarify the definition of cash and cashequivalents given the current definition is unclear (i.e. what does it mean by readilyconvertible to a known amount of cash and subject to an insignificant risk ofchanges in value), particularly when practitioners attempt to apply it to the varietyof modern types of money market funds.
67.Some practitioners shared their observations that the IASB’s proposal may changethe classification of the following related cash flows:
a) cash flows related to Tier 2 instruments that are not classified as equity forbanks would potentially change from the financing to operating category; andb) cash flows related to interest paid on loans would potentially change from theoperating to financing category.
68.An investor commented that it is helpful to have the split of dividends paid fromintegral and non-integral associates and joint ventures, but that the cost versusbenefits of this proposal should be considered carefully.Page 15 of 18HKICPA analysis and recommendation
69.The HKICPA supports the IASB’s proposals on the targeted improvements to thestatement of cash flows, particularly to eliminate options for the classification ofinterest and dividend cash flows under IAS 7 to improve comparability acrossentities. In addition, we recommend the IASB should review IAS 7 as a separateproject to align the categorisation in the statement of cash flows with those used inthe statement of profit or loss, and reconsider the definition of cash and cashequivalents.OthersQuestion 14—Other commentsStakeholders’ viewsStructure of the statement of profit or loss
70.Some stakeholders commented that the three proposed categories in the statementof profit or loss are named similarly to the three activities in the statement of cashflows and this may confuse preparers and users of financial statements.
71.Some stakeholders considered that the IASB should clearly identify the linkage anddifferences between each of the categories in these two statements in the Basis forConclusions (e.g. as done for the investing category in paragraph BC51 of the ED).A preparer suggested clarifying this within the Standard, not just in the Basis forConclusions, to ensure clarity. In addition, a group of banking industry preparerssuggested the IASB consider altering the category names in the statement of profitor loss to distinguish them from those in the statement of cash flows.Classification of fair value gains and losses on derivatives and of exchange differences
72.A group of financial instruments expert practitioners generally agreed with theproposals in paragraphs 56-59 of the ED. The proposals are considered to beconceptually sensible, though it may not be very clear in practice how to apply theprinciples in the ED in some scenarios. Some of these practitioners shared similarviews that further guidance in a form of illustrative examples on classification forfair value gains and losses on derivatives and hedging instruments would beappreciated.
73.Examples suggested by the financial instruments expert practitioners to be clarifiedby the IASB include:
a)
Whether the classification of fair value gains and losses on embeddedderivatives (e.g. conversion option separately accounted for and not classifiedas equity in a convertible bond) follows the general proposal for derivatives ordepends on where the embedded derivatives originate (e.g. because the fairvalue gains and losses originate from a convertible bond, so it should beclassified as financing).b)
How to classify the fair value gains and losses of a hybrid financial instrumentwhich has been designated as a fair value through profit or loss financialinstrument as a whole.Page 16 of 18c)
For an interest rate swap with two legs separated and designated for differentpurposes, whether the corresponding changes in fair value of the interest rateswap should be classified according to the risks being managed by the entityor wholly recognised under the investing category, e.g. whether part of thechange in fair value of the swap goes into one line item of the statement ofprofit or loss and the other part goes through a different line item.d)
Whether the ineffective portion of the fair value changes of a qualified hedginginstrument should be classified in a different line item in the same category asthe effective portion, or in the investing category by default.
74.A financial instruments expert practitioner raised concerns about how tooperationalise the ‘undue cost or effort’ exemption in paragraph 58 of the ED, inparticular from an audit perspective. This practitioner thought that an entity shouldbe expected to understand the objectives of holding derivatives, and hence shouldnot have to incur undue cost or effort to determine the classification of thecorresponding fair value gains and losses. The practitioner recommended the IASBto provide more clarity in the application of the proposed requirements.
75.A group of banking industry preparers considered the proposed requirements inparagraph 58 of the ED for derivatives used to manage risks but not designated ashedging instruments could effectively imply an introduction of a new category of‘hedging’ which could create confusion and complication in the existing hedgeaccounting framework, and could result in inconsistency in application andinterpretation. They suggested the IASB reconsiders the cost and benefit of theproposal and whether it should be pursued.
76.This group of stakeholders also considered the proposed requirements inparagraphs 56 and B39 of the ED would require significant and complicatedchanges to accounting systems in order to allocate foreign exchange differencesbased on the originating activity for which it arises. Foreign exchange risks are oftenbe managed centrally (e.g. by a central treasury function) even though the foreignexchange exposure arises from various types of activities. Presenting all foreignexchange differences in an aggregated total could be equally relevant, if not moreappropriate, for users of the financial statements as that can better reflect the actualrisk management activities and resulting economic position of an entity. Theysuggested the IASB revisiting the cost and benefit of the proposal and whether itshould be pursued.
77.A preparer raised concerns that the principles for the classification of fair valuegains and losses on derivatives and of exchange differences in paragraphs B39-B40 of the ED are complicated and difficult to understand. This preparer questionedwhy the presentation of fair value gains and losses on derivatives would not bedifferentiated based on whether the derivatives are designated as hedginginstruments (i.e. fair value changes on derivatives used to manage risks and notdesignated as hedging instrument should follow different classification principle withthose fair value changes on derivatives designated as hedging instruments),meaning such presentation may not be useful to investors. This preparerconsidered the existing disclosure requirements under IFRS 7 FinancialInstruments: Disclosures on financial risk management are sufficient for investorsto understand the hedging relationships designated by an entity and howmanagement manages the financial risks of the entity. Moreover, this preparer alsocommented that the incremental costs incurred by preparers to perform theproposed separate classification appeared to outweigh the benefits to users, unlessthere is a strong need for such information by users.Page 17 of 18
78.Investors generally agreed with the preparer’s view (paragraph 77) and consideredthat the proposals for classification of fair value gains and losses on derivatives andof exchange differences would provide limited benefits to them. An investorcommented that a balance should be made between the information needs ofinvestors, the work done by preparers, and the competitive disadvantages ofdisclosing too much information to the public, particularly for public interest entities.Other comments
79.Some practitioners noted changes in terminology used in the ED, for example‘equity shareholders of the company’ used under IAS 1 Presentation of FinancialStatements is replaced by ‘holders of claims against parent classified as equity’ inpage 6 of the illustrative examples accompanying the ED. They questioned thereasons for the change as this increases the difficulties in understanding thefinancial statements and creates confusion for users.HKICPA analysis and recommendationStructure of the statement of profit or loss
80.Based on the HKICPA’s research on the presentation of the statement of profit orloss in Hong Kong, the HKICPA observed that operating profit or loss is one of themost commonly used subtotals. We also observed that various different subtotalsare used by companies in the statement of profit or loss, and there is diversity inpractice in the labelling and calculation of these subtotals. Therefore, we supportthe IASB’s proposals for introduction of subtotals and categories in the statementof profit or loss to reduce the diversity in practice and improve the comparability offinancial information between entities.
81.The HKICPA understands that the IASB is not seeking full alignment between thecategories in the statement of profit or loss and those in the statement of cash flows.However, in view of our stakeholders’ concerns above about the similarly namedcategories in both statements, we suggest the IASB should explain more clearlythe linkage and differences between each category in these two statements in theBasis for Conclusions.Classification of fair value gains and losses on derivatives and of exchange differences
82.Based on the stakeholders’ feedback, the HKICPA considers the proposalssummarised in paragraphs 56-59 and B39-B40 of the ED are complicated andsignificantly increase the workload for preparers, but provide limited information toinvestors. We recommend the IASB aim to balance the costs and benefits andreconsider whether to pursue the proposals.
83.We also recommend the IASB to carefully consider the points noted from ourstakeholders with regard to the classification of fair value gains and losses onderivatives noted in paragraphs 73-75 to ensure that entity’s risk managementactivities are appropriately and consistently represented.Page 18 of 18Other comments
84.The HKICPA generally agrees with the stakeholders’ recommendations.Particularly, we recommend the IASB should minimise the change in terminologyas mentioned in paragraph 79 to reduce misunderstanding, and if necessary,explain clearly the reasons for such change in the Standard.~ End ~