IASB Request for Information Third Agenda Consultation

Page 1 of 5Our Ref.: C/FRSCSent electronically through the IASB Website (www.ifrs.org)

13 September 2021Dr Andreas BarckowInternational Accounting Standards BoardColumbus Building7 Westferry CircusCanary WharfLondon E14 4HDUnited KingdomDear Andreas,IASB Request for InformationThird Agenda ConsultationThe Hong Kong Institute of Certified Public Accountants (HKICPA) is the only body authorisedby law to set and promulgate standards relating to financial reporting, auditing and ethics forprofessional accountants in Hong Kong. We are grateful for the opportunity to provide ourcomments and those of our stakeholders on this Request for Information (RFI).We welcome the IASB agenda consultation and believe that the consultation will help identify theneeds of users and strengthen the transparency of the agenda setting process.In terms of the financial reporting issues that could be added to the IASB’s work plan, we considerthat the following three projects should be high priority projects as they help to address fourproblematic accounting topics relevant in Hong Kong (commodity transactions, cryptocurrenciesand related transactions, intangible assets, as well as variable and contingent consideration):

•Develop a Standard to set out accounting requirements for a range of non-financial tangibleor intangible assets held solely for investment purposes.•Undertake a comprehensive review of IAS 38 Intangible Assets, including the recognition andmeasurement requirements.•Specify the accounting for transactions that involve variable or contingent consideration.We understand the scope of any project that would be added to the IASB’s work plan is yet to bedetermined. However, the projects prioritised by us may related to each other, e.g.cryptocurrencies and intangible assets. Hence, we suggest that the IASB should seek synergiesand consider where projects may be conducted in parallel.Our detailed comments are provided in the Appendix.If you have any questions regarding the matters raised in this letter, please contact me(ceciliakwei@hkicpa.org.hk) or Anthony Wong (anthonylwwong@hkicpa.org.hk), AssociateDirector of the Standard Setting Department.Sincerely,Cecilia KweiDirector, Standard Setting DepartmentPage 2 of 5Work undertaken by HKICPA in forming its viewsThe HKICPA:

(i)

issued an Invitation to Comment on the RFI on 31 March 2021 to its members and otherstakeholders;

(ii) sought input from its Working Group for the IASB’s Third Agenda Consultation, which mainlycomprised of technical and industry experts;

(iii) developed its views through its Financial Reporting Standards Committee, having reflectedon its stakeholder views. The Committee comprises academics, preparer representativesfrom various industry sectors, regulators, as well as technical and industry experts from small,medium and large accounting firms.Detailed comments on the RFIStrategic direction and balance of the IASB’s activities (refer to RFI Question 1)

1.The HKICPA and its respondents consider the IASB should leave its current level of focusfor each main activity unchanged, given its resources will remain substantially unchangedfrom 2022 to 2026. The IASB has been able to deliver timely and quality improvements tofinancial reporting over the years. Hence, increasing the resources allocated to one activitywill mean that fewer resources are available for others. In addition, we do not consider thatthe IASB should undertake any other activities within the current scope of its work.Criteria for assessing the priority of financial reporting issues that could be added to theIASB’s work plan (refer to RFI Question 2)

2.We have the following comments on the criteria used by the IASB and do not propose anyadditional criteria.IASB proposed criteriaComments#1The importance of the matter toinvestorsThe IASB should consider the importance ofthe matter to ‘stakeholders’ instead of onlyto ‘investors’, given that investors are notthe sole stakeholders of financial reports.#2Whether there is any deficiency inthe way companies report the typeof transaction or activity in financialreports‘Deficiency’ may inappropriately imply‘wrongdoing’, and the IASB can henceconsider to use the term ‘significantdivergence’ instead.#3The potential project’s interactionwith other projects on the work planThe IASB should clarify the consequencesto priority if the potential project has moreinteraction with other projects on the workplan. For example, does more interactionwith other projects mean a higher or lowerpriority will be set?However, we suggest that the IASB shouldbe cautious of repeatedly deferringimportant issues in financial reporting on thebasis that the issue has interaction withother projects on the IASB's work plan. Thissort of rationale has the potential to result insignificant issues being unaddressed formany years.AppendixPage 3 of 5Financial reporting issues that could be added to the IASB’s work plan (refer to RFIQuestion 3)

3.As mentioned in our cover letter, we categorise the following three projects as high priorityas on an overall basis they are related to four accounting topics relevant in Hong Kong. Ourcomments on each of the three high priority projects are summarised below.•Develop a Standard to set out accounting requirements for a range of non-financial tangible or intangible assets held solely for investment purposes(Commodity transactions & Cryptocurrencies and related transactions)

Our respondents generally noted commodity transactions, in particular commodity loans,have been quite pervasive in Hong Kong. Application questions are arising and diversityin practice is observed (e.g. some companies account for commodity loan transactionsthat involve gold using IFRS 9 Financial Instruments; IAS 2 Inventories; IFRS 15Revenue from Contracts with Customers; or the Conceptual Framework for FinancialReporting) as no specific accounting standard governs such transactions. Hence thereis a need to develop requirements for common types of commodity transactions—forexample, commodity loans. Furthermore, it is worth setting out the range of non-financialtangible or intangible assets to which the proposed commodity loan requirements wouldapply.In addition, we believe that accounting for cryptocurrencies under IAS 2 or IAS 38 maynot provide relevant information when these items are held for speculative or investmentpurposes. Given the increasing prevalence of cryptocurrency transactions we believethere is a need for more robust measurement, recognition as well as presentation anddisclosure requirements that faithfully represent the underlying transactions.Alternatively, the IASB may consider amending the scope of IFRS 9 to includecryptocurrencies. However, existing standards like IFRS 9 were not written to specificallyaddress crypto-related issues. Hence, the application of IFRS 9 to cryptocurrencies mayonly be a short-term fix.Hence, we consider that a Standard to set out accounting requirements for a range ofnon-financial tangible or intangible assets held solely for investment purposes is needed.•Undertake a comprehensive review of IAS 38, including the recognition andmeasurement requirements (Intangible assets)

IAS 38 was published around two decades ago and does not adequately addresscommon transactions encountered in this knowledge-based era with frequent andmaterial transactions involving information technologies and intellectual properties.As such, we believe a fundamental review of IAS 38 is warranted in terms of:

(i)

scope, e.g. how to cope with new types of intangibles both unrecognized (e.g.internally generated intangibles) and recognized (e.g. crypto and polluting permits),(ii)

recognition and measurement, and(iii) disclosure requirements.In particular, similar to the concerns raised in paragraphs B49 and B50 of the RFI, someof our respondents believe that the IASB should revisit the reasons for the difference inrecognition criteria for separately acquired intangible assets and internally generatedintangible assets.Quite a few of our local preparers in the pharmaceutical industry have expressed seriousconcern with capitalising separately acquired in-process research and development(IPR&D) projects in accordance with IAS 38.25 when the probability of success of suchPage 4 of 5projects is very low on the date of acquisition. They challenge the basis for the differenttreatment between separately acquired intangible assets and those that are internallydeveloped which are subject to more stringent capitalisation requirements per IAS 38.57.Furthermore, these stakeholders believe that capitalising IPR&D on the date ofacquisition while expensing subsequent internally incurred R&D costs (which arguablyincreases the probability of success of the project as it progresses) is counter-intuitiveand does not provide useful information to the users of the financial statements. Suchaccounting may also give rise to structuring opportunities, particularly with related partieswhere an entity may outsource R&D activities to related parties rather than develop themin-house in order to capitalise such costs despite the project’s having a low probabilityof success.This issue is becoming more prevalent in the new technology industries (TMT, pharma,fintech) and we recommend the IASB consider this as part of the comprehensive reviewof IAS 38.In addition, some stakeholders have requested an introduction of a requirement similarto that in paragraph 68A of IAS 16 Property, Plant and Equipment during the consultationof the Tentative Agenda Decision - Player Transfer Payments (IAS 38). Such anamendment would provide an exception to the general derecognition requirements inIAS 38.113 for the disposal of intangible assets that, after being used by the entity for aperiod of time, are sold to customers in the ordinary course of business. Instead, entitieswould transfer those intangible assets to inventory when they are held for sale in theordinary course of business—the entity would then recognise any proceeds received onthat sale as revenue applying IFRS 15.•Specify the accounting for transactions that involve variable or contingentconsideration (Variable and contingent consideration)

This has been a growing issue for quite some time (e.g. transactions involvingperformance linked purchase prices for assets) which currently lacks clear requirements.Our respondents observed diversity in practice as identified in paragraph B81 of the RFI(e.g. initial accounting—when and at what amount, subsequent accounting—capitalisedor charged/credited to profit or loss). We believe that targeted changes to the relevantStandards would be a quick fix.

4.In addition, we suggest the IASB consider the following four medium or small-sized potentialprojects as lower priority items.•Undertake a comprehensive review of the accounting requirements forgovernment grantsGovernment grants are common in certain industries in Hong Kong, especially due toCOVID-19. Our respondents observed diversity in practice in terms of the treatment forthe items as identified in paragraph B40 of the RFI (e.g. recognised as deferred incomeor deducted to arrive the carrying amount of the asset; presented as income or deductedfrom the related expense). In addition, guidance could be developed on how todifferentiate whether the government is acting as the government, or more as ashareholder or customer.•Undertake a targeted project to improve aspects of the statement of cash flows,including information about non-cash movements, such as arising from supplychain financing arrangementsThere is a lack of guidance on certain areas as identified in paragraph B76 of the RFI,e.g. non-cash movements arising from supply chain financing arrangements (reversePage 5 of 5factoring – which may be addressed in the upcoming IASB’s exposure draft on SupplierFinance Arrangements). More specific disclosure requirements would improveconsistent application.•Undertake a targeted project to improve, clarify or simplify aspects of IAS 23Borrowing CostsWe generally agree with the problems noted in paragraph B6 of the RFI. In particular, itwould be useful to clarify IAS 23.6(e) regarding which exchange differences arising fromforeign currency borrowings are eligible for capitalisation. In addition, it is often difficultto determine the amount of borrowing costs that is eligible for capitalisation and theappropriate capitalisation rate when a qualifying asset is funded from general borrowings.Therefore, further guidance in this area would be useful.•Clarify what transition disclosures are required in interim financial statements inthe first year of applying a new Standard or major amendmentOur respondents observed diversity in practice due to lack of guidance in this area.~ End ~