Page 1 of 9Our Ref.: C/FRSCSent electronically through the IASB Website (www.ifrs.org)
11 August 2021Dr Andreas BarckowInternational Accounting Standards BoardColumbus Building7 Westferry CircusCanary WharfLondon E14 4HDUnited KingdomDear Andreas,IASB Discussion Paper DP/2020/2Business Combinations under Common ControlThe Hong Kong Institute of Certified Public Accountants (HKICPA) is the only bodyauthorised by law to set and promulgate standards relating to financial reporting, auditingand ethics for professional accountants in Hong Kong. We are grateful for the opportunityto provide our comments and the comments of our stakeholders on this DiscussionPaper (DP).The HKICPA appreciates the IASB’s initiatives in exploring possible reportingrequirements for business combinations under common control (BCUCC). We agreethat neither the acquisition method nor a book-value method should be applied to allBCUCC, and so we welcome the IASB in drawing a clear line for when eachmeasurement method should be applied. We also welcome the IASB in specifying howa book-value method should be applied to reduce diversity in practice.That said, the HKICPA has significant concerns about the IASB’s preliminary view ofprohibiting a receiving company from restating pre-combination information whenapplying a book-value method, for the following reasons, among others:
•Applying the IASB’s preliminary view, the presentation of pre-combinationinformation would solely depend on how the BCUCC is legally structured. This wouldresult in different pre-combination information being presented for economicallysimilar transactions, which would impair the comparability of financial statements.Also, we question how to apply the IASB’s preliminary views to cases where it iseconomically unclear who the receiving company is, e.g. a merger of two equals.•The IASB’s preliminary view ignores the information needs of potential investors forBCUCC undertaken in preparation for an initial public offering (IPO). Potentialinvestors need information that helps them assess the prospects for future cashflows of the listing group and management’s stewardship of the listing group’seconomic resources. The HKICPA and its respondents consider that restating pre-combination information provides evidence of management’s track record of thelisting group as a whole, which meets the information needs of potential investors.•For many years, Hong Kong listing applicants have been applying a book-valuemethod to IPO cases and restating the pre-combination information in theirIFRS/HKFRS financial statements to meet both the information needs of potentialinvestors and the regulatory requirements in the Hong Kong Listing Rules. Suchpresentation is considered to be useful, effective and essential by investors formaking investment decisions and by regulators for assessing the eligibility of thePage 2 of 9applicants for listing. Given that Hong Kong was the number one IPO venue globallyin seven out of the past twelve years and was the second largest IPO market in theworld in 20201, the IASB’s preliminary view, if implemented, would inevitably createa significant negative impact to the investor community and the Hong Kong capitalmarket.Given the above, the HKICPA strongly recommends that the IASB provide an accountingpolicy choice for companies to choose whether to restate pre-combination informationto cater for the information needs of potential investors and regulators.In addition, the HKICPA has comments and recommendations on the following areas ofthe DP:
•Similar to non-controlling shareholders (NCS), not all related parties can alwaysaccess the internal information of the receiving company. For example, investorswith significant influence in associates often struggle to obtain internal financialinformation of the associates. In such cases, the information needs of related partiescould be the same as the NCS of the receiving company. Accordingly, werecommend that the IASB remove the related party exception so the optionalexemption would also apply to related parties.•The IASB should further explore whether, and if so, how the information needs ofholders of equity-like financial instruments that are not classified as equity under IAS32 Financial Instruments: Presentation should be captured in this project given theprevalence of these instruments in private or pre-IPO companies. This may interactwith the IASB’s project Financial Instruments with Characteristics of Equity (FICE),and so we recommend that the IASB consider this in the context of the FICE project.•While we acknowledge the IASB’s rationale of using the transferred company’s bookvalues to measure the assets and liabilities received when applying a book-valuemethod, we consider that there are situations where using the controlling party’sbook values would better reflect the economic substance of the transaction andmitigate structuring opportunities. For example, this could be the case when theBCUCC is undertaken solely to hide goodwill and intangible assets related to thetransferred company, and any associated impairment losses, arising from a pastbusiness combination. Accordingly, we recommend that the IASB provide anaccounting policy option for companies to use the controlling party’s book valueswhen such an approach would provide useful information, and require companies todisclose which book values they have used.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), Carmen Ho (carmenho@hkicpa.org.hk) or Eky Liu(eky@hkicpa.org.hk), Associate Directors of the Standard Setting Department.Sincerely,Cecilia KweiDirector, Standard Setting Department1 https://www.hkex.com.hk/Join-Our-Market/IPO/Listing-with-HKEX?sc_lang=enPage 3 of 9Work undertaken by HKICPA in forming its viewsThe HKICPA:
(i)
issued an Invitation to Comment on DP/2020/2 on 8 December 2020 to its membersand other stakeholders;
(ii) met with representatives from Hong Kong Exchanges and Clearing (HKEX), HongKong's listing regulatory body;
(iii) sought input from its Business Combinations and Reporting Entity Advisory Paneland Investment Circular Reporting Sub-Committee, which are mainly comprised oftechnical and industry experts from large as well as small and medium accountingfirms (collectively, Practitioners);
(iv) held a public roundtable discussion on 11 May 2021, comprising investors, analysts,preparers, practitioners and regulators, with IASB Board member and staffparticipation; and(v) developed its views through its Financial Reporting Standards Committee, havingreflected on its stakeholder views. The Committee comprises academics, preparerrepresentatives from various industry sectors, regulators, as well as technical andindustry experts from small, medium and large accounting firms.Detailed comments on IASB DP/2020/2Selecting the measurement method (refer to DP Questions 2 and 3)
Overall
1.BCUCC are common in Hong Kong and occur for different reasons, such as grouprestructuring, tax planning, or preparing for an IPO. The HKICPA and itsrespondents consider that not all BUCCC have the same nature or economicsubstance; some are similar to business combinations covered by IFRS 3 BusinessCombinations while others are not. Therefore, we agree that neither the acquisitionmethod nor a book-value method should be applied to all BCUCC, and welcomethe IASB in drawing a clear line for when each measurement method should beapplied.
2.However, our respondents expressed mixed views on the IASB’s preliminary viewson determining when to use which measurement approach based on whether thenon-controlling shareholders (NCS) of the receiving company are affected byBCUCC:
•Respondents who agreed with the IASB’s preliminary views generally supportedthe idea that transactions that affect NCS of companies whose shares arepublicly traded should be accounted for using the acquisition method becausethose BCUCC are normally conducted at an arm’s length basis, and minorityshareholders are often protected by local securities regulations. Also, listedcompanies usually have substantial NCS who are in a position to make votingdecisions independently of the controlling shareholders. Therefore, theseBCUCC are arguably similar to business combinations with a third party underIFRS 3.•Respondents who disagreed generally considered that:
o The measurement method should not be based solely on the informationneeds of NCS. Information needs of other users, such as lenders, creditors,and potential investors should also be considered.AppendixPage 4 of 9o The measurement method should not be restricted by what is useful to thegroup of users from only the receiving company’s perspective. Unlikebusiness combinations under IFRS 3, BCUCC are often directed orinfluenced by the controlling party, hence the controlling party’s informationneeds should also be considered.o The measurement method should not be driven by whether companies’shares are publicly listed or privately held because the substance of thetransaction may not always be determinable or distinguishable based solelyon listing status. Also, there are no existing IFRSs that determine theaccounting of a transaction based on a company’s listing status. Userswould find it difficult to understand the change in measurement method forBCUCC once a company’s status or shareholder composition changes.Moreover, under the IASB’s preliminary views on the term ‘receivingcompany’ in paragraph 1.18 of the DP, the same transaction could beaccounted for differently by the immediate receiving company and itsparents in a multi-layered group if their listing statuses are different.•Some respondents suggested that companies should be given a broad principleon which to apply their judgement to assess the nature and substance of aBCUCC, and apply accounting policies for similar transactions in a consistentmanner as required by IAS 8 Accounting Policies, Changes in AccountingEstimates and Errors.
3.The HKICPA acknowledges the respondents’ concerns above. However, we thinkit would be highly subjective to determine the measurement method of a BCUCCbased on solely the nature or substance as suggested by respondents. In particular,the terms ‘nature’ and ‘substance’ can be interpreted broadly, and different factorsthat influence the nature or substance of the transaction carry different weights indifferent circumstances. In addition, even if there is common understanding of thesetwo terms, companies still need to apply significant judgement to determine themeasurement method based on the specific facts and circumstances of eachtransaction. As a result, diversity in practice could still arise even under comparablefact patterns, and this would not provide useful information.
4.In addition, the HKICPA notes that although the respondents analyse BCUCC indifferent ways, they generally agreed with the overall conclusions that:
• The acquisition method should be applied for BCUCC that affect NCS of thereceiving company whose shares are publicly traded, because these BCUCC aremore akin to business combinations under IFRS 3.• A book-value method could be applied to:
o BCUCC for companies whose shares are privately held, as this takes intoaccount cost-benefit considerations and addresses information needs of otherfinancial statement users in addition to NCS; ando Internal group restructurings in IPO cases because these transactions do nothave real commercial substance. This would allow companies to continueapplying a book value method as per existing practice in Hong Kong.
5.The HKICPA agrees with the overall accounting outcomes resulting from the IASB’spreliminary views. In the absence of other viable and objective suggestions of how adistinction could be made to determine the measurement method for BCUCC andPage 5 of 9acknowledging that there is no perfect solution, we consider that the IASB’spreliminary views is an objective, balanced and practical approach.Related party exception
6.We and our respondents consider that similar to NCS, not all related parties canalways access the internal financial information of the receiving company. We haveheard from our stakeholders that sometimes investors with significant influence inassociates often struggle to obtain internal financial information of the associates. Insuch cases, the information needs of related parties could be the same as the NCSof the receiving company. This situation is particularly common in Hong Kong andChina given the persuasiveness of related party relationships among state-ownedenterprises. Therefore, we recommend that the IASB remove the related partyexception so the optional exemption would also apply to related parties.Optional exemption
7.Our respondents expressed mixed views on the optional exemption from theacquisition method.• Some respondents considered that the optional exemption would work well inpractice and did not raise any significant concerns.• Others considered that NCS may not always have the knowledge andcompetency to understand different types of measurement methods. Hence,these NCS may not understand the consequences of their decisions and whetheror not they should object to the use of a book-value method.• Some also noted that because this optional exemption is applied on a transaction-by-transaction basis and driven by the decision of the NCS, differentmeasurement methods could be applied in similar transactions. This would impairthe comparability of financial statements.• A few respondents considered that the NCS opt-out mechanism should not beanalogized to the consolidation exemption in paragraph 4(a)(i) of IFRS 10Consolidated Financial Statements as they are used in different contexts. Theconsolidation exemption in IFRS 10 affects the presentation of financialstatements, whereas the optional exemption affects the measurement method fora BCUCC.
8.We note that the objective of the optional exemption in the DP is so that the NCScan object to the company applying a book-value method and require the companyto provide fair value information if they consider that is more useful to them. Hence,we think the optional exemption takes into consideration the information needs ofNCS. It also takes into account the cost-benefit considerations of applying theacquisition method to privately held companies as discussed in paragraph 2.41 ofthe DP. In light of our respondents’ concerns above, we recommend that the IASBfurther explore and understand whether there are practical challenges withimplementing this proposal.
9.We and our respondents noted that in Hong Kong, private or pre-IPO companies areoften funded by a variety of complex financial instruments, such as preferenceshares or convertible bonds. Depending on the terms of these instruments, they maynot be classified as equity instruments under IAS 32 but may nevertheless haveequity-like features. However, it seems that the DP does not address the informationPage 6 of 9needs of holders of these financial instruments. Therefore, we suggest that the IASBfurther explore whether, and if so, how these information needs should be captured;
for example, whether they should be considered as NCS and what types of financialinstruments should be considered. We think that this part of the project would interactwith the IASB’s project Financial Instruments with Characteristics of Equity (FICE),and so recommend that the IASB consider this in the context of the FICE project.Applying a book-value method (refer to DP Questions 6 and 10)
Pre-combination information
10.We acknowledge that the IASB’s preliminary view to require the receiving companyto present only the pre-combination information of the receiving company (i.e.without restating pre-combination information) is consistent with the overall thoughtprocess of the DP that focuses on the perspective of the receiving company.
11.That said, we have significant concerns about the IASB’s preliminary views for thefollowing reasons:
• Applying the IASB’s preliminary views, the presentation of pre-combinationinformation would solely depend on the legal structure of the transaction, i.e.which entity is the receiving company. This would result in different pre-combination information for economically similar transactions, which wouldreduce comparability. For example, Diagram 2.4 of the DP presents possibleBCUCC in preparation for an initial public offering (IPO). Scenarios 2B, 2C and2D of Diagram 2.4 would provide different pre-combination information followingthe IASB’s preliminary views although the purpose of the BCUCC is the same –to list both company A and company B. Also, we question how to apply the IASB’spreliminary views to cases where it is economically unclear which entity is thereceiving company, for example, in a merger of two equals.• Unlike business combinations within the scope of IFRS 3, BCUCC undertaken forthe purpose of IPO are often internal group restructurings. Restating pre-combination information in such cases would meet the information needs ofpotential investors because it provides evidence of management’s track recordsof the listing group as a whole, which helps potential investors assess theprospects for future cash flows to the listing group and management’s stewardshipof the listing group’s economic resources2.• The HKEX Listing Rules require listing applicants to include an accountants’report in their prospectus. The accountants’ report is prepared based onunderlying IFRS/HKFRS financial statements and must provide historical financialinformation covering the preceding three financial years before listing.In Hong Kong, a group restructuring often takes place shortly before a listing, forexample, setting a new parent company as the listing vehicle. Listing applicantsnormally apply a book-value method to account for such transactions and restatethe pre-combination information in the primary financial statements to provide thethree-year historical financial information. Such presentation has existed for manyyears, and is considered to be useful, effective and essential by investors formaking investment decisions, and by regulators for assessing the eligibility ofapplicants for listing.2 Paragraph 1.3 of Conceptual Framework for Financial ReportingPage 7 of 9Given that the HKEX was the fifth largest stock exchange in the world by marketcapitalization of listed companies as of June 20213, and Hong Kong has been thenumber one IPO venue globally in seven out of the past twelve years and was thesecond largest IPO market in the world in 20201, the IASB’s preliminary view, ifimplemented, would inevitably create a significant negative impact to the investorcommunity and the Hong Kong capital market.If the IASB were to prohibit the presentation of restated pre-combinationinformation in the financial statements, this would necessarily result in otherparties such as capital market regulators setting relevant requirements, e.g. tohave such information presented as pro forma information in IPO prospectuses.We believe this would impair the quality and completeness of informationpresented under IFRS because under such an approach, useful information forinvestors and other users to make informed economic decisions would only bepresented outside IFRS financial statements. Also, were regulators to requirerestated pre-combination information to be presented as pro forma information inIPO prospectuses, they would also likely require such information to be audited,which would not be optimal from a cost and efficiency perspective.• A concept similar to pro-forma financial information has already existed in theaccounting for reverse acquisitions in IFRS 3, where the consolidated financialstatements of the legal acquirer, including comparative information, represent thecontinuation of the financial statements of the legal subsidiary except for its capitalstructure. We do not consider that presenting the pre-combination information ofthe combined company on an ‘as if’ basis would introduce a new concept to IFRS.• The issue of pre-combination information is only a presentation matter. It does notaffect the recognition and measurement of the combined entity at the combinationdate or subsequently. Therefore, the IASB should not prohibit companies fromrestating pre-combination information when companies are willing to do so tomeet their users’ information needs.
12.We acknowledge that in certain situations, for example for private companies thatare not preparing for IPO, the costs of restating pre-combination information wouldnot justify the benefits, or that users of financial statements may not need such pre-combination information. In those cases, we agree that companies should not berequired to restate the pre-combination information, but this does not necessitatethat there be a general prohibition on restatement.
13.In light of the above, we strongly recommend that the IASB provide an accountingpolicy choice to allow companies to choose whether to restate pre-combinationinformation to cater for the information needs and practice of different users andjurisdictions.Measuring assets and liabilities received
14.The HKICPA acknowledges that the IASB’s preliminary views on requiring thereceiving company to use the transferred company’s book values to measure assetsand liabilities received are in line with the overall thinking of the DP that focuses onthe receiving company’s perspective.3 https://www.sfc.hk/-/media/EN/files/SOM/MarketStatistics/a01.pdfPage 8 of 9
15.However, some respondents expressed concerns about the IASB’s preliminaryviews and considered that:
• Applying the IASB’s preliminary views, a book-value method would be applied toBCUCC that do not affect the NCS of the receiving company, or where the NCSdo not object the use of a book-value method. Under such circumstances, thecontrolling parties would be the primary users and it is more logical to measureassets and liabilities received from the controlling parties’ perspective.• Using the transferred company’s book values may create structuring opportunitiesfor the receiving company to hide any goodwill and intangible assets, andpotentially any associated impairment losses, related to the transferred company.Consider a scenario where the controlling party acquired several transferredcompanies from external parties and in doing so recognised goodwill andintangible assets in its consolidated financial statements. Subsequently, thecontrolling party set up a new investment holding company (Interco) and directedInterco to acquire the transferred companies. Applying the IASB’s preliminaryviews, Interco would be able to ‘reset’ the book values of the transferredcompanies without having to recognise the goodwill and intangible assets.Respondents considered that in this case, the consolidated financial statementsof Interco (i.e. the receiving company) represent a continuation of the financialstatements of the controlling party, and so, the controlling party’s book valuesshould be used.• For cases where a listed company spins off part of its businesses to another groupcompany (often a newly set-up company, ‘NewCo’), the financial information ofthe spun-off group presented in the listed company’s financial statements (as adiscontinued operation) would be different from that included in the NewCo’s firstset of financial statements, and this may confuse users.• Practical challenges would arise if the transferred company does not prepareIFRS financial statements.• The IASB could set up a rebuttable presumption that a receiving company canuse the ultimate controlling party’s book value. Book values at other levels (e.g.immediate or intermediate parent) could also be used based on the specific factsand circumstances to meet users’ needs. The receiving company should berequired to disclose who the controlling party is and which book values are used.
16.We note that the IASB’s preliminary views are inconsistent with the principles ofmerger accounting in the HKICPA’s Accounting Guideline 5 (AG 5) MergerAccounting for Common Control Combinations4, which requires companies to usethe book values from the controlling parties’ perspective.4 Accounting Guidelines have effect as guidance statements and indicators of best practice. They are notmandatory but persuasive in intent.https://www.hkicpa.org.hk/-/media/HKICPA-Website/Members-Handbook/volumeII/ag5_re20.pdfPage 9 of 9
17.Findings from our post-implementation review of AG 55 informed us that there arepractical challenges when using the controlling parties’ book values, e.g. who thecontrolling party in a multi-layered group is and what carrying values should be usedif the controlling parties are individuals or do not prepare IFRS financial statements.Nevertheless, we anticipate that there could be similar challenges when using thetransferred company’s book values.
18.Overall, while we acknowledge the IASB’s rationale of using the transferredcompany’s book values, we consider that there are situations where using thecontrolling party’s book values would better reflect the economic substance of thetransaction and mitigate structuring opportunities as stated in paragraph 15 above.Accordingly, we recommend that the IASB provide an accounting policy option forcompanies to use the controlling party’s book values when such an approach wouldprovide more relevant and useful information, and require companies to disclosewhich book values they have used.~ End ~5 https://www.hkicpa.org.hk/-/media/HKICPA-Website/HKICPA/section6_standards/standards/FinancialReporting/comment-letters/2016/msag5/AG5Feedback.pdf
IASB Discussion Paper DP/2020/2 Business Combinations under Common Control
下载原件Page 1 of 9Our Ref.: C/FRSCSent electronically through the IASB Website (www.ifrs.org)
11 August 2021Dr Andreas BarckowInternational Accounting Standards BoardColumbus Building7 Westferry CircusCanary WharfLondon E14 4HDUnited KingdomDear Andreas,IASB Discussion Paper DP/2020/2Business Combinations under Common ControlThe Hong Kong Institute of Certified Public Accountants (HKICPA) is the only bodyauthorised by law to set and promulgate standards relating to financial reporting, auditingand ethics for professional accountants in Hong Kong. We are grateful for the opportunityto provide our comments and the comments of our stakeholders on this DiscussionPaper (DP).The HKICPA appreciates the IASB’s initiatives in exploring possible reportingrequirements for business combinations under common control (BCUCC). We agreethat neither the acquisition method nor a book-value method should be applied to allBCUCC, and so we welcome the IASB in drawing a clear line for when eachmeasurement method should be applied. We also welcome the IASB in specifying howa book-value method should be applied to reduce diversity in practice.That said, the HKICPA has significant concerns about the IASB’s preliminary view ofprohibiting a receiving company from restating pre-combination information whenapplying a book-value method, for the following reasons, among others:
•Applying the IASB’s preliminary view, the presentation of pre-combinationinformation would solely depend on how the BCUCC is legally structured. This wouldresult in different pre-combination information being presented for economicallysimilar transactions, which would impair the comparability of financial statements.Also, we question how to apply the IASB’s preliminary views to cases where it iseconomically unclear who the receiving company is, e.g. a merger of two equals.•The IASB’s preliminary view ignores the information needs of potential investors forBCUCC undertaken in preparation for an initial public offering (IPO). Potentialinvestors need information that helps them assess the prospects for future cashflows of the listing group and management’s stewardship of the listing group’seconomic resources. The HKICPA and its respondents consider that restating pre-combination information provides evidence of management’s track record of thelisting group as a whole, which meets the information needs of potential investors.•For many years, Hong Kong listing applicants have been applying a book-valuemethod to IPO cases and restating the pre-combination information in theirIFRS/HKFRS financial statements to meet both the information needs of potentialinvestors and the regulatory requirements in the Hong Kong Listing Rules. Suchpresentation is considered to be useful, effective and essential by investors formaking investment decisions and by regulators for assessing the eligibility of thePage 2 of 9applicants for listing. Given that Hong Kong was the number one IPO venue globallyin seven out of the past twelve years and was the second largest IPO market in theworld in 20201, the IASB’s preliminary view, if implemented, would inevitably createa significant negative impact to the investor community and the Hong Kong capitalmarket.Given the above, the HKICPA strongly recommends that the IASB provide an accountingpolicy choice for companies to choose whether to restate pre-combination informationto cater for the information needs of potential investors and regulators.In addition, the HKICPA has comments and recommendations on the following areas ofthe DP:
•Similar to non-controlling shareholders (NCS), not all related parties can alwaysaccess the internal information of the receiving company. For example, investorswith significant influence in associates often struggle to obtain internal financialinformation of the associates. In such cases, the information needs of related partiescould be the same as the NCS of the receiving company. Accordingly, werecommend that the IASB remove the related party exception so the optionalexemption would also apply to related parties.•The IASB should further explore whether, and if so, how the information needs ofholders of equity-like financial instruments that are not classified as equity under IAS32 Financial Instruments: Presentation should be captured in this project given theprevalence of these instruments in private or pre-IPO companies. This may interactwith the IASB’s project Financial Instruments with Characteristics of Equity (FICE),and so we recommend that the IASB consider this in the context of the FICE project.•While we acknowledge the IASB’s rationale of using the transferred company’s bookvalues to measure the assets and liabilities received when applying a book-valuemethod, we consider that there are situations where using the controlling party’sbook values would better reflect the economic substance of the transaction andmitigate structuring opportunities. For example, this could be the case when theBCUCC is undertaken solely to hide goodwill and intangible assets related to thetransferred company, and any associated impairment losses, arising from a pastbusiness combination. Accordingly, we recommend that the IASB provide anaccounting policy option for companies to use the controlling party’s book valueswhen such an approach would provide useful information, and require companies todisclose which book values they have used.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), Carmen Ho (carmenho@hkicpa.org.hk) or Eky Liu(eky@hkicpa.org.hk), Associate Directors of the Standard Setting Department.Sincerely,Cecilia KweiDirector, Standard Setting Department1 https://www.hkex.com.hk/Join-Our-Market/IPO/Listing-with-HKEX?sc_lang=enPage 3 of 9Work undertaken by HKICPA in forming its viewsThe HKICPA:
(i)
issued an Invitation to Comment on DP/2020/2 on 8 December 2020 to its membersand other stakeholders;
(ii) met with representatives from Hong Kong Exchanges and Clearing (HKEX), HongKong's listing regulatory body;
(iii) sought input from its Business Combinations and Reporting Entity Advisory Paneland Investment Circular Reporting Sub-Committee, which are mainly comprised oftechnical and industry experts from large as well as small and medium accountingfirms (collectively, Practitioners);
(iv) held a public roundtable discussion on 11 May 2021, comprising investors, analysts,preparers, practitioners and regulators, with IASB Board member and staffparticipation; and(v) developed its views through its Financial Reporting Standards Committee, havingreflected on its stakeholder views. The Committee comprises academics, preparerrepresentatives from various industry sectors, regulators, as well as technical andindustry experts from small, medium and large accounting firms.Detailed comments on IASB DP/2020/2Selecting the measurement method (refer to DP Questions 2 and 3)
Overall
1.BCUCC are common in Hong Kong and occur for different reasons, such as grouprestructuring, tax planning, or preparing for an IPO. The HKICPA and itsrespondents consider that not all BUCCC have the same nature or economicsubstance; some are similar to business combinations covered by IFRS 3 BusinessCombinations while others are not. Therefore, we agree that neither the acquisitionmethod nor a book-value method should be applied to all BCUCC, and welcomethe IASB in drawing a clear line for when each measurement method should beapplied.
2.However, our respondents expressed mixed views on the IASB’s preliminary viewson determining when to use which measurement approach based on whether thenon-controlling shareholders (NCS) of the receiving company are affected byBCUCC:
•Respondents who agreed with the IASB’s preliminary views generally supportedthe idea that transactions that affect NCS of companies whose shares arepublicly traded should be accounted for using the acquisition method becausethose BCUCC are normally conducted at an arm’s length basis, and minorityshareholders are often protected by local securities regulations. Also, listedcompanies usually have substantial NCS who are in a position to make votingdecisions independently of the controlling shareholders. Therefore, theseBCUCC are arguably similar to business combinations with a third party underIFRS 3.•Respondents who disagreed generally considered that:
o The measurement method should not be based solely on the informationneeds of NCS. Information needs of other users, such as lenders, creditors,and potential investors should also be considered.AppendixPage 4 of 9o The measurement method should not be restricted by what is useful to thegroup of users from only the receiving company’s perspective. Unlikebusiness combinations under IFRS 3, BCUCC are often directed orinfluenced by the controlling party, hence the controlling party’s informationneeds should also be considered.o The measurement method should not be driven by whether companies’shares are publicly listed or privately held because the substance of thetransaction may not always be determinable or distinguishable based solelyon listing status. Also, there are no existing IFRSs that determine theaccounting of a transaction based on a company’s listing status. Userswould find it difficult to understand the change in measurement method forBCUCC once a company’s status or shareholder composition changes.Moreover, under the IASB’s preliminary views on the term ‘receivingcompany’ in paragraph 1.18 of the DP, the same transaction could beaccounted for differently by the immediate receiving company and itsparents in a multi-layered group if their listing statuses are different.•Some respondents suggested that companies should be given a broad principleon which to apply their judgement to assess the nature and substance of aBCUCC, and apply accounting policies for similar transactions in a consistentmanner as required by IAS 8 Accounting Policies, Changes in AccountingEstimates and Errors.
3.The HKICPA acknowledges the respondents’ concerns above. However, we thinkit would be highly subjective to determine the measurement method of a BCUCCbased on solely the nature or substance as suggested by respondents. In particular,the terms ‘nature’ and ‘substance’ can be interpreted broadly, and different factorsthat influence the nature or substance of the transaction carry different weights indifferent circumstances. In addition, even if there is common understanding of thesetwo terms, companies still need to apply significant judgement to determine themeasurement method based on the specific facts and circumstances of eachtransaction. As a result, diversity in practice could still arise even under comparablefact patterns, and this would not provide useful information.
4.In addition, the HKICPA notes that although the respondents analyse BCUCC indifferent ways, they generally agreed with the overall conclusions that:
• The acquisition method should be applied for BCUCC that affect NCS of thereceiving company whose shares are publicly traded, because these BCUCC aremore akin to business combinations under IFRS 3.• A book-value method could be applied to:
o BCUCC for companies whose shares are privately held, as this takes intoaccount cost-benefit considerations and addresses information needs of otherfinancial statement users in addition to NCS; ando Internal group restructurings in IPO cases because these transactions do nothave real commercial substance. This would allow companies to continueapplying a book value method as per existing practice in Hong Kong.
5.The HKICPA agrees with the overall accounting outcomes resulting from the IASB’spreliminary views. In the absence of other viable and objective suggestions of how adistinction could be made to determine the measurement method for BCUCC andPage 5 of 9acknowledging that there is no perfect solution, we consider that the IASB’spreliminary views is an objective, balanced and practical approach.Related party exception
6.We and our respondents consider that similar to NCS, not all related parties canalways access the internal financial information of the receiving company. We haveheard from our stakeholders that sometimes investors with significant influence inassociates often struggle to obtain internal financial information of the associates. Insuch cases, the information needs of related parties could be the same as the NCSof the receiving company. This situation is particularly common in Hong Kong andChina given the persuasiveness of related party relationships among state-ownedenterprises. Therefore, we recommend that the IASB remove the related partyexception so the optional exemption would also apply to related parties.Optional exemption
7.Our respondents expressed mixed views on the optional exemption from theacquisition method.• Some respondents considered that the optional exemption would work well inpractice and did not raise any significant concerns.• Others considered that NCS may not always have the knowledge andcompetency to understand different types of measurement methods. Hence,these NCS may not understand the consequences of their decisions and whetheror not they should object to the use of a book-value method.• Some also noted that because this optional exemption is applied on a transaction-by-transaction basis and driven by the decision of the NCS, differentmeasurement methods could be applied in similar transactions. This would impairthe comparability of financial statements.• A few respondents considered that the NCS opt-out mechanism should not beanalogized to the consolidation exemption in paragraph 4(a)(i) of IFRS 10Consolidated Financial Statements as they are used in different contexts. Theconsolidation exemption in IFRS 10 affects the presentation of financialstatements, whereas the optional exemption affects the measurement method fora BCUCC.
8.We note that the objective of the optional exemption in the DP is so that the NCScan object to the company applying a book-value method and require the companyto provide fair value information if they consider that is more useful to them. Hence,we think the optional exemption takes into consideration the information needs ofNCS. It also takes into account the cost-benefit considerations of applying theacquisition method to privately held companies as discussed in paragraph 2.41 ofthe DP. In light of our respondents’ concerns above, we recommend that the IASBfurther explore and understand whether there are practical challenges withimplementing this proposal.
9.We and our respondents noted that in Hong Kong, private or pre-IPO companies areoften funded by a variety of complex financial instruments, such as preferenceshares or convertible bonds. Depending on the terms of these instruments, they maynot be classified as equity instruments under IAS 32 but may nevertheless haveequity-like features. However, it seems that the DP does not address the informationPage 6 of 9needs of holders of these financial instruments. Therefore, we suggest that the IASBfurther explore whether, and if so, how these information needs should be captured;
for example, whether they should be considered as NCS and what types of financialinstruments should be considered. We think that this part of the project would interactwith the IASB’s project Financial Instruments with Characteristics of Equity (FICE),and so recommend that the IASB consider this in the context of the FICE project.Applying a book-value method (refer to DP Questions 6 and 10)
Pre-combination information
10.We acknowledge that the IASB’s preliminary view to require the receiving companyto present only the pre-combination information of the receiving company (i.e.without restating pre-combination information) is consistent with the overall thoughtprocess of the DP that focuses on the perspective of the receiving company.
11.That said, we have significant concerns about the IASB’s preliminary views for thefollowing reasons:
• Applying the IASB’s preliminary views, the presentation of pre-combinationinformation would solely depend on the legal structure of the transaction, i.e.which entity is the receiving company. This would result in different pre-combination information for economically similar transactions, which wouldreduce comparability. For example, Diagram 2.4 of the DP presents possibleBCUCC in preparation for an initial public offering (IPO). Scenarios 2B, 2C and2D of Diagram 2.4 would provide different pre-combination information followingthe IASB’s preliminary views although the purpose of the BCUCC is the same –to list both company A and company B. Also, we question how to apply the IASB’spreliminary views to cases where it is economically unclear which entity is thereceiving company, for example, in a merger of two equals.• Unlike business combinations within the scope of IFRS 3, BCUCC undertaken forthe purpose of IPO are often internal group restructurings. Restating pre-combination information in such cases would meet the information needs ofpotential investors because it provides evidence of management’s track recordsof the listing group as a whole, which helps potential investors assess theprospects for future cash flows to the listing group and management’s stewardshipof the listing group’s economic resources2.• The HKEX Listing Rules require listing applicants to include an accountants’report in their prospectus. The accountants’ report is prepared based onunderlying IFRS/HKFRS financial statements and must provide historical financialinformation covering the preceding three financial years before listing.In Hong Kong, a group restructuring often takes place shortly before a listing, forexample, setting a new parent company as the listing vehicle. Listing applicantsnormally apply a book-value method to account for such transactions and restatethe pre-combination information in the primary financial statements to provide thethree-year historical financial information. Such presentation has existed for manyyears, and is considered to be useful, effective and essential by investors formaking investment decisions, and by regulators for assessing the eligibility ofapplicants for listing.2 Paragraph 1.3 of Conceptual Framework for Financial ReportingPage 7 of 9Given that the HKEX was the fifth largest stock exchange in the world by marketcapitalization of listed companies as of June 20213, and Hong Kong has been thenumber one IPO venue globally in seven out of the past twelve years and was thesecond largest IPO market in the world in 20201, the IASB’s preliminary view, ifimplemented, would inevitably create a significant negative impact to the investorcommunity and the Hong Kong capital market.If the IASB were to prohibit the presentation of restated pre-combinationinformation in the financial statements, this would necessarily result in otherparties such as capital market regulators setting relevant requirements, e.g. tohave such information presented as pro forma information in IPO prospectuses.We believe this would impair the quality and completeness of informationpresented under IFRS because under such an approach, useful information forinvestors and other users to make informed economic decisions would only bepresented outside IFRS financial statements. Also, were regulators to requirerestated pre-combination information to be presented as pro forma information inIPO prospectuses, they would also likely require such information to be audited,which would not be optimal from a cost and efficiency perspective.• A concept similar to pro-forma financial information has already existed in theaccounting for reverse acquisitions in IFRS 3, where the consolidated financialstatements of the legal acquirer, including comparative information, represent thecontinuation of the financial statements of the legal subsidiary except for its capitalstructure. We do not consider that presenting the pre-combination information ofthe combined company on an ‘as if’ basis would introduce a new concept to IFRS.• The issue of pre-combination information is only a presentation matter. It does notaffect the recognition and measurement of the combined entity at the combinationdate or subsequently. Therefore, the IASB should not prohibit companies fromrestating pre-combination information when companies are willing to do so tomeet their users’ information needs.
12.We acknowledge that in certain situations, for example for private companies thatare not preparing for IPO, the costs of restating pre-combination information wouldnot justify the benefits, or that users of financial statements may not need such pre-combination information. In those cases, we agree that companies should not berequired to restate the pre-combination information, but this does not necessitatethat there be a general prohibition on restatement.
13.In light of the above, we strongly recommend that the IASB provide an accountingpolicy choice to allow companies to choose whether to restate pre-combinationinformation to cater for the information needs and practice of different users andjurisdictions.Measuring assets and liabilities received
14.The HKICPA acknowledges that the IASB’s preliminary views on requiring thereceiving company to use the transferred company’s book values to measure assetsand liabilities received are in line with the overall thinking of the DP that focuses onthe receiving company’s perspective.3 https://www.sfc.hk/-/media/EN/files/SOM/MarketStatistics/a01.pdfPage 8 of 9
15.However, some respondents expressed concerns about the IASB’s preliminaryviews and considered that:
• Applying the IASB’s preliminary views, a book-value method would be applied toBCUCC that do not affect the NCS of the receiving company, or where the NCSdo not object the use of a book-value method. Under such circumstances, thecontrolling parties would be the primary users and it is more logical to measureassets and liabilities received from the controlling parties’ perspective.• Using the transferred company’s book values may create structuring opportunitiesfor the receiving company to hide any goodwill and intangible assets, andpotentially any associated impairment losses, related to the transferred company.Consider a scenario where the controlling party acquired several transferredcompanies from external parties and in doing so recognised goodwill andintangible assets in its consolidated financial statements. Subsequently, thecontrolling party set up a new investment holding company (Interco) and directedInterco to acquire the transferred companies. Applying the IASB’s preliminaryviews, Interco would be able to ‘reset’ the book values of the transferredcompanies without having to recognise the goodwill and intangible assets.Respondents considered that in this case, the consolidated financial statementsof Interco (i.e. the receiving company) represent a continuation of the financialstatements of the controlling party, and so, the controlling party’s book valuesshould be used.• For cases where a listed company spins off part of its businesses to another groupcompany (often a newly set-up company, ‘NewCo’), the financial information ofthe spun-off group presented in the listed company’s financial statements (as adiscontinued operation) would be different from that included in the NewCo’s firstset of financial statements, and this may confuse users.• Practical challenges would arise if the transferred company does not prepareIFRS financial statements.• The IASB could set up a rebuttable presumption that a receiving company canuse the ultimate controlling party’s book value. Book values at other levels (e.g.immediate or intermediate parent) could also be used based on the specific factsand circumstances to meet users’ needs. The receiving company should berequired to disclose who the controlling party is and which book values are used.
16.We note that the IASB’s preliminary views are inconsistent with the principles ofmerger accounting in the HKICPA’s Accounting Guideline 5 (AG 5) MergerAccounting for Common Control Combinations4, which requires companies to usethe book values from the controlling parties’ perspective.4 Accounting Guidelines have effect as guidance statements and indicators of best practice. They are notmandatory but persuasive in intent.https://www.hkicpa.org.hk/-/media/HKICPA-Website/Members-Handbook/volumeII/ag5_re20.pdfPage 9 of 9
17.Findings from our post-implementation review of AG 55 informed us that there arepractical challenges when using the controlling parties’ book values, e.g. who thecontrolling party in a multi-layered group is and what carrying values should be usedif the controlling parties are individuals or do not prepare IFRS financial statements.Nevertheless, we anticipate that there could be similar challenges when using thetransferred company’s book values.
18.Overall, while we acknowledge the IASB’s rationale of using the transferredcompany’s book values, we consider that there are situations where using thecontrolling party’s book values would better reflect the economic substance of thetransaction and mitigate structuring opportunities as stated in paragraph 15 above.Accordingly, we recommend that the IASB provide an accounting policy option forcompanies to use the controlling party’s book values when such an approach wouldprovide more relevant and useful information, and require companies to disclosewhich book values they have used.~ End ~5 https://www.hkicpa.org.hk/-/media/HKICPA-Website/HKICPA/section6_standards/standards/FinancialReporting/comment-letters/2016/msag5/AG5Feedback.pdf