Our Ref.: C/FRSCSent electronically through the IASB Website (www.ifrs.org)
20 January 2025Dr Andreas BarckowInternational Accounting Standards BoardColumbus Building7 Westferry CircusCanary WharfLondon E14 4HDUnited KingdomDear Andreas,IASB Exposure DraftEquity Method of AccountingIAS 28 Investments in Associates and Joint Ventures (revised 202x)
The Hong Kong Institute of Certified Public Accountants (HKICPA) is the only bodyauthorised by law to set and promulgate standards relating to financial reporting, auditing,ethics and sustainability disclosures for professional accountants in Hong Kong. We aregrateful for the opportunity to provide you with our comments on this Exposure Draft(ED).We appreciate the IASB’s endeavours in formulating proposals that aim to address long-standing application questions in IAS 28, thereby reducing diversity in practice andenhancing comparability and understandability of financial statements. Nevertheless,since the ED does not seek to resolve the fundamental issue of the nature of equitymethod – whether it is a one-line consolidation or a measurement model – certainapplication issues would arise. Furthermore, we have identified certain aspects of theED that necessitate clarification and guidance. We provide detailed comments in theAppendix and summarise our primary concerns and recommendations below.Accounting for initial and additional purchases and other changes in ownership interestsin an associate1 while retaining significant influenceIn respect of the accounting for the initial and subsequent purchases of additionalinterests of an associate while retaining significant influence, we agree with theproposals for adopting an approach similar to IFRS 3 Business Combinations. However,we have identified the following application issues.a. Treatment of transaction costsWe consider that the ED lacks clarity regarding how transaction costs incurred in thepurchase of an associate should be accounted for. Our respondents have expressedmixed views on this treatment. One view supports expensing transaction costs to profitor loss, considering that the ED is developed based on an approach similar to IFRS 3for measuring the cost of an associate. Conversely, the other view supports capitalising1 For simplicity, references in this letter to ‘investor’, ‘associate’ and ‘significant influence’ should be read asalso referring to ‘joint venturer’, ‘joint venture’ and ‘joint control’ in relation to investments in joint ventures.Page 2 of 10transaction costs as part of the cost of an associate. This approach is supported by theIFRS Interpretation Committee’s agenda decision made in July 2009 and paragraph 6.5of the Conceptual Framework for Financial Reporting (Conceptual Framework), whichtreats the purchase of an associate as a purchase of an asset, indicating that the costsincurred for acquiring an associate should be capitalised. Given the prevalence of thisissue in Hong Kong and the existence of divergent views, we recommend that the IASBexplicitly clarify the treatment of transaction costs in the final standard to avoid potentialdiversity in practice.b. Cost burden and practical challenges in performing PPAOur respondents, particularly preparers, have expressed significant concerns regardingthe cost burden and practical challenges of performing Purchase Price Allocation (PPA)
for each purchase of additional interest in an associate, as well as for other changes thatresult in an increase in ownership interests. There has long been a practical issue forinvestors to obtain information from associates due to a lack of control over these entities.Associates are often reluctant to share information beyond what is required for applyingthe equity method in the investor’s financial statements. These challenges are furthercompounded when measuring the fair value of contingent consideration related topurchases of unlisted associates as determining fair value requires additionalinformation for estimating the associates’ future performance. The costs and burdencould be more significant for preparers lacking valuation resources. Given theseconcerns, we recommend that the IASB provide guidance to clarify that PPA isnecessary only when its impact on the investor’s financial statements is material andexplain how such a materiality assessment should be performed.c.Recognition of a bargain purchase gainWe, along with most of our stakeholders, support recognising bargain purchase gains inprofit or loss when purchasing additional interests in an associate that includespreviously recognised goodwill. We consider that this treatment aligns with the‘accumulation of purchases’ approach adopted throughout the ED. Nevertheless,several respondents consider that such bargain purchase gains should instead be offsetagainst the previously recognised goodwill for practical reasons. These include thepotential impact on current practices adopted by investors that are dual-listed on thestock exchanges of Hong Kong and Mainland China and the risk of overstatement ofgoodwill included in the investment if impairment assessments are not conductedproperly. To address these concerns, we recommend the IASB:
(i)
provide guidance similar to IFRS 3.36 as a safeguard to address the possibility thata bargain purchase gain is recognised due to an inappropriate PPA;
(ii) state explicitly in the final standard that investments in associates should be testedfor impairment as a single unit of account whenever a bargain purchase gain arises;
and(iii) assess the impact of the proposal to jurisdictions where the majority of companiesare currently applying the alternative view, and determine if any refinements to theproposal are necessary.d. Deferred tax effects on purchase of an associateThe current proposals require an investor to perform PPA and recognise the relateddeferred tax effects when accounting for purchase of an associate, without distinguishingbetween whether an associate constitutes a business. As per IFRS 3.2(b) and paragraph15(b) of IAS 12 Income Taxes, deferred tax is not recognised upon initial recognition ofan asset or a group of assets which does not constitute a business. If the same conceptapplies to the purchase of an associate, it is unclear why deferred tax should bePage 3 of 10recognised for the purchase of an associate that does not constitute a business.Accordingly, we recommend that the IASB clarify whether PPA should be performed andconsequently, whether the recognition of deferred tax effects should be required forpurchases of all associates, including those that only hold assets and do not constitutebusinesses.If you have any questions regarding the matters raised in this letter, please contactCarrie Lau (carrie@hkicpa.org.hk) or Katherine Leung (katherineleung@hkicpa.org.hk),Associate Directors of the Standard Setting Department.Sincerely,Cecilia KweiDirector of Standard SettingPage 4 of 10Work undertaken by the HKICPA in forming its views:
The HKICPA:
(a)
issued an Invitation to Comment on the ED on 20 September 2024 to its membersand other stakeholders;
(b)
sought input from its Business Combinations and Reporting Entity Advisory Panel,Small and Medium Practices Committee and its Technical Issues Support Group,which mainly comprise technical and industry experts from large as well as smalland medium accounting firms (collectively, Practitioners);
(c)
held a public roundtable discussion for local stakeholders, including Practitioners,preparers of listed entities and academics on 19 November 2024;
(d)
conducted a targeted outreach to a preparer of a listed corporate;
(e)
reviewed the findings from regulators’ reports focusing on the review findingsrelated to application of the equity method; and(f)
developed its views through its Financial Reporting Standards Committee, havingreflected on its respondents’ views. The Committee comprises preparerrepresentatives from various industry sectors, regulators, as well as technical andindustry experts from small, medium and large accounting firms.Detailed comments on the IASB EDQuestion 1: Measurement of cost of an associate
1.We appreciate the expected benefits brought by the ED in providing clearer guidancein IAS 28 to address long-standing application issues. We consider it appropriate toapply an approach similar to IFRS 3 for accounting for the purchase of an associate.However, given that the ED does not seek to resolve the fundamental issue of thenature of equity method in terms of whether it represents a one-line consolidation ora measurement model, the following application issues would arise.(a) Transaction costs
2.The ED is unclear regarding how transaction costs incurred in the purchase ofassociates should be accounted for. Our respondents have expressed mixed viewson the accounting treatment.View 1 – Expense transaction costs to profit or lossGiven that the proposal for measuring the cost of an associate is developed basedon an approach similar to the requirements in IFRS 3, this view supports expensingtransaction costs to profit or loss to ensure consistency with the treatment oftransaction costs under IFRS 3. In addition, since the definition of ‘cost of theassociate or joint venture’ proposed in Appendix A to the ED does not includetransaction costs, it could be interpreted that an investor should exclude these costsfrom the cost of an associate.View 2 – Capitalise transaction costs as part of the cost of an associateThis view considers it more appropriate to capitalise transaction costs as part of thecost of an associate, aligning with an established practice following the IFRSInterpretation Committee (IFRC IC) July 2009 agenda decision (AD) and the principlein paragraph 6.5 of the Conceptual Framework. According to the AD, IFRS ICconcluded that the cost of an associate includes transaction costs, and theConceptual Framework specifies that historical cost comprises the considerationpaid to acquire the asset plus transaction costs. This view is based on the notion thatthe purchase of an associate is treated as a purchase of an asset.AppendixPage 5 of 10
3.This issue is widespread in Hong Kong, where transaction costs are incurred inalmost every purchase of an associate. Given the prevalence of this matter and thevarying views on the accounting treatment, diversity in practice is likely to persistwithout any clarification or guidance. Accordingly, we recommend that the IASB:
(i) clarify the treatment of transaction costs on initial and subsequent purchases ofan associate while retaining significant influence, and explain its rationale in thebasis for conclusions, regardless of the view adopted; and(ii) explicitly state in the final standard that the treatment of transaction costs appliesonly to the purchase of an associate in the context of IAS 28, thereby avoidingany unintended consequences in accounting for transaction costs related to thepurchase of other assets.(b) Contingent consideration and measurement period adjustments
4.BC 91 of the ED states that the IASB decided that the proposed requirements oncontingent consideration should be similar to those in IFRS 3 for the acquisition of asubsidiary. Based on this premise, we have the following comments andrecommendations for the IASB’s consideration.
5.Firstly, we believe that the proposed requirements for contingent consideration inIAS 28, both in terms of wording and requirements, should align as closely aspossible with the requirements in IFRS 3.58, where applicable. Specifically,paragraph 26 of the ED should include:
(i) references to IFRS 9 Financial Instruments; and(ii) the requirements on measurement period adjustments for both initial purchaseof an associate and subsequent additional purchases while retaining significantinfluence.
6.We consider that the requirements for measurement period adjustments under IFRS
3.45 to 49 and 58 are relevant to the purchase of associates. Similar to businesscombinations, an investor of an associate may encounter situations whereprovisional amounts need to be reported if the measurements of the associate areincomplete at the end of the reporting period. Measurement period requirementsprovide guidance on determining the measurement period and how the investoridentifies and accounts for measurement period adjustments. The impact ofmeasurement period adjustments could be significant depending on facts andcircumstances.
7.Secondly, it is not clear whether subsequent changes in contingent considerationassociated with the purchase of an associate should be presented in the investor’sstatement of profit or loss, viz. operating or investing category. Due to the lack ofspecific guidance in the ED and IFRS 18, it appears reasonable to follow IFRS
18.B49(f) and B55(c) on remeasurement of contingent consideration arising from abusiness combination given that the proposal for contingent consideration aligns withthe approach in IFRS 3. Consequently, the remeasurement of contingentconsideration from purchase of an associate would be categorised under the‘operating’ category. However, this would be inconsistent with presenting incomeand expenses from investments in associates under the ‘investing’ category perIFRS 18.53 and 55.
8.Given the above, we recommend that the IASB clarify whether the abovepresentation outcomes align with the intended objectives of IFRS 18. If not,appropriate amendments to IFRS 18 should be considered to ensure consistentcategorisation of such items in the investor’s statement of profit or loss.Page 6 of 10(c) Deferred tax effects on purchase of an associate
9.The ED requires investors to perform a PPA and recognise the related deferred taxeffects in accounting for the purchase of an associate, without distinguishingbetween whether the associate constitutes a business. However, IFRS 3 does notapply to the acquisition of an asset or a group of assets that does not constitute abusiness (IFRS 3.2(b)). In such cases, the investor should allocate the purchaseprice to the assets acquired and liabilities assumed based on their relative fair valuesand no deferred tax should be recognised (IAS 12.15(b)). If the same concept appliesto the purchase of an associate, it is unclear why (i) a PPA should be performed, and(ii) deferred tax should be recognised in the case of an associate that does notconstitute a business.
10.In light of the above, we recommend that the IASB clarify whether PPA should beperformed and consequently, whether the recognition of deferred tax effects shouldbe required for all purchases of associates, including those that do not constitute abusiness.Question 2: Changes in an investor’s ownership interest while retainingsignificant influence
(1)Purchase of additional interests in an associate(a) Cost burden and practical challenges in performing PPA for each purchase ofadditional interest
11.While acknowledging the IASB’s rationale for performing PPA for each purchase ofadditional interest in an associate, our respondents, particularly preparers, haveexpressed significant concerns regarding the costs and practical challenges ofimplementing the proposed requirements:
(i) Based on past experience and market practice, investors often encounterdifficulties in obtaining the necessary information from their associates toconduct PPA. To protect sensitive commercial information and maintain fairnessbetween all shareholders, listed associates are often reluctant to shareinformation beyond what is required for applying the equity method in theinvestor’s financial statements.(ii) Measuring the fair value of contingent consideration can be complex in the caseof purchases of unlisted associates. Determining the fair value in such instancesoften requires the use of discounted cash flow methods, which rely on estimatesof the associates’ future performance. This process demands significantjudgement and estimation assumptions.(iii) The above issues are further exacerbated when fair value measurements arerequired for each purchase of additional interest of an associate, increasingcosts and burdening preparers who lack sufficient valuation resources.
12.To alleviate these concerns, we recommend that the IASB provide guidance to:
(i) clarify that PPA is necessary only when its impact on the investor’s financialstatements is assessed to be material; and(ii) explain how such a materiality assessment should be performed, including thefactors for consideration and methodologies that can be used for conducting theassessment.Page 7 of 10(b) Recognition of a bargain purchase gain
13.We, along with most of our respondents, support the ED’s proposal for therecognition of bargain purchase gains in profit or loss arising from purchase ofadditional interests when the investment in the associate includes previouslyrecognised goodwill for the following reasons:
(i) We agree with the IASB’s rationale explained in BC26-27 of the ED. We considerit logical to recognise bargain purchase gains from the purchases of additionalinterests separately in profit or loss as the ED adopts an ‘accumulation ofpurchases’ approach to measure the cost of an associate. This approach alsoapplies to other proposals in the ED, such as the proposal for not catching up theunrecognised losses in subsequent purchases. Therefore, deviating from thisapproach could lead to potential unintended consequences for other proposals.(ii) We agree that a bargain purchase gain could be an indication of impairment,necessitating an impairment assessment based on IAS 36 Impairment of Assets.We believe that a proper impairment assessment can prevent the potential issueof overstating goodwill included in the carrying amount of the investment.Conversely, applying an offset approach, as indicated below, might inadvertentlycreate an impression that impairment is unnecessary as the goodwill embeddedin the carrying amount of the associate has been reduced after offsetting, therebyincreasing the risk of overstatement of investments in associates.
14.Nevertheless, several respondents do not support the proposal. They argue thatbargain purchase gains should be offset against previously recognised goodwillembedded in the carrying amount of the associate for the following practical reasons:
(i) In practice, investors, particularly those that are dual-listed on the stockexchanges of Hong Kong and Mainland China, currently offset bargain purchasegains against previously recognised goodwill because this treatment is specifiedin the China Accounting Standards for Business Enterprises. This treatment isbased on the premise that cumulative purchases of interests in an associate areregarded as a single asset for subsequent impairment tests and disposals. Theproposal would alter the accounting practice for these investors.(ii) A bargain purchase gain may indicate that an impairment exists. Recognisingsuch a gain in profit or loss might result in an overstatement of the investment inthe associate if the investor fails to conduct a proper impairment assessment ofthe investment which includes goodwill.(iii) Recognising bargain purchase gains in profit or loss for additional purchaseswhile retaining significant influence is inconsistent with the treatment ofpurchasing additional interests in a subsidiary after gaining control in IFRS 10Consolidated Financial Statements. Under IFRS 10, the impact does not affectprofit or loss but is reflected within equity as transactions with non-controllinginterests.
15.We acknowledge the concerns of the alternative view regarding the risk of potentialoverstatement of goodwill due to inappropriate impairment assessments and thepotential impact on the companies that are dual-listed on the stock exchanges ofHong Kong and Mainland China. To address these concerns, we recommend thatthe IASB:
(i) provide guidance requiring investors to perform procedures similar to those inIFRS 3.36 as a safeguard to ensure that the measurements appropriately reflectconsideration of all available information as of the purchase date beforerecognising a bargain purchase gain. This would help mitigate the possibility ofrecognising a bargain purchase gain due to an inappropriate PPA;
(ii) state explicitly in the final standard that investments in associates should betested for impairment as a single unit of account whenever a bargain purchasePage 8 of 10gain arises; and(iii) assess the impact of the proposal on existing practice, particularly in jurisdictionswhere entities are currently applying the alternative view, and determine if anyrefinements to the proposal are necessary.
(2)Other changes in ownership interests in an associate(a) Cost burden and practical challenges
16.We agree with the proposal requiring an investor that retains significant influence torecognise an increase in its ownership interest as if purchasing an additionalownership interest. However, we are also aware that all the issues related to costburden and practical challenges in performing PPA, as highlighted in paragraph 11regarding the accounting for purchase of an additional ownership interest, would alsoarise if this proposal is implemented. To address these concerns, we recommendthat the IASB provide guidance on materiality consideration as suggested inparagraph 12.(b) Application of paragraphs 34(a) and (b) of ED
17.We consider the calculation of the effect of other changes in ownership interestarising from deemed purchases and deemed disposals to be complex, and thewording in paragraphs 34(a) and (b) of the ED is difficult to understand. This couldlead to varied interpretations of the requirements resulting in diversity in practice. Wenote that IE3 of the ED, which illustrates the application of paragraph 34(b) of the EDto deemed disposals, is helpful for clarifying the requirement. Therefore, werecommend that the IASB incorporate an illustrative example for deemed purchasesresulting from a redemption of shares by the associate to assist preparers inunderstanding the proposed requirements.
18.We understand that the ED focuses solely on developing requirements for simplescenarios of deemed purchases and deemed disposals due to cost-benefitconsiderations (BC45-46 of the ED). However, our respondents have emphasisedthe need for clear guidance to address the following prevalent scenarios in HongKong, particularly in the case of listed associates:
(i) Due to different extents of participation by the investor and other shareholders inshare redemption and share issuance by an associate:
(a) the investor’s ownership interest decreases when the associate redeems itsshares;
(b) the investor’s ownership interest increases when the associate issues newshares; and(ii) Under an equity-settled share-based payment arrangement, the employees ofan associate exercise the share options issued by the associate, resulting in adeemed disposal of the investor’s ownership interest in the associate.
19.In light of the above, we believe it would be beneficial for many preparers if the IASBcould provide guidance and illustrative examples to address these commonscenarios. In respect of scenario (i)(b) in paragraph 18, we noted that the September2022 IASB staff paper discussed a similar example where the investor subscribesfor 100% of the new shares issued by the associate. We recommend the IASBinclude this example or adjust it as appropriate to assist preparers in applying theproposed requirements.Page 9 of 10Question 3: Recognition of the investor’s share of lossesRecognising and presenting separately the share of the associate’s profit or loss andother comprehensive income (OCI)
20.Regarding the proposal for recognising and presenting separately the share of theassociate’s profit or loss and OCI, we consider that paragraphs 45-52 and IE4 of theED are unclear and could lead to confusion and application issues. We recommendthat the IASB clarify the requirements and provide guidance should it proceed withthe proposals. These issues are summarised as follows.
21.Firstly, paragraphs 45 and 48 of the ED specify that, in determining when an investor(i) reduces its net investment in an associate to nil, or (ii) resumes recognising itsshare of profit, the investor should consider the associate’s total comprehensiveincome. However, paragraph 50 of the ED requires the investor to recogniseseparately its share of the associate’s profit or loss and its share of the associate’sOCI. It is unclear how these paragraphs interact with each other, particularly whetherthe investor’s share of unrecognised losses should be considered separately forprofit or loss and OCI respectively, or in aggregate at the level of total comprehensiveincome, without differentiating between the amounts arising from profit or loss andOCI.
22.Secondly, the examples in paragraph 52 and IE4 of the ED illustrate that when aninvestor has unrecognised losses in an associate, the investor is required torecognise the same absolute amount of its share of the associate’s OCI (if it is aprofit) and share of profit or loss (if it is a loss) simultaneously in accordance withparagraph 50 of the ED, while continuing to measure its investment in the associateat nil. We have the following concerns regarding these examples:
(i) Contrary to the accounting outcome in paragraph 50 of the ED, when applyingparagraph 48 of the ED to these examples, we consider that the investor shouldnot recognise any share of profit in OCI because the total comprehensive incomeis a loss. This indicates inconsistencies between paragraphs 48 and 50 of theED.(ii) The statement of profit or loss is the primary source of information about anentity’s financial performance and the main focus for financial statement users toassess the financial performance of the entity. The treatment of recognising aprofit in the statement of profit or loss while the carrying amount of the investmentin an associate is nil and there are cumulative share of associate’s unrecognisedlosses could be confusing and misleading to financial statement users. Somerespondents recommend that the IASB consider requiring the investor torecognise any share of associate’s profit or loss or OCI only when the respectiveunrecognised losses are eliminated.
23.Thirdly, paragraph 51 of the ED requires an investor to recognise its share of theassociate’s profit or loss first and then its share of OCI until the net investment in theassociate is reduced to nil, if both profit or loss and OCI are losses. However,questions arise regarding:
(i) the accounting treatment for other scenarios, such as a loss in the share of theassociate’s profit or loss and a profit of the share of OCI, or vice versa, in whichcases the share of the total comprehensive income is a loss that exceeds theinvestment in an associate; and(ii) whether the order for recognising profits in profit or loss and in OCI when aninvestor resumes recognising its share of the associate’s profits is the same asthe order in paragraph 51 of the ED.Page 10 of 10
24.Lastly, a question arises on the accounting treatment in situations where the carryingamount of the net investment in an associate is reduced to nil due to an impairmentloss and a share of the associate’s losses remains unrecognised. If there is asubsequent reversal of the impairment loss on the investment in that associate, it isunclear whether the investor should offset this reversal against the cumulative shareof the associate’s unrecognised losses. We note that this situation occurs in somelisted biotechnology companies, which incur losses due to heavy investments inresearch and development in their early phases and the need for and extent ofrecognising any impairment loss is influenced to a large extent by fluctuating marketcapitalisation.Question 4: Transactions with associates
25.We support the proposal for investors to recognise full gains or losses from alltransactions with their associates because according to both the ConceptualFramework and other IFRS Accounting Standards, associates are not part of thegroup and are not in the boundary of the reporting entity. In addition, the proposedmethod is simpler and less costly to apply.
26.However, paragraph 53 of the ED provides only two examples of transactions withassociates that would fall within the scope of the proposal, both of which involve asale of assets. We recommend that the IASB clarify whether the proposal alsoapplies to other types of transactions, such as rendering of services.Other questions in the ED
27.We support the proposals and do not have any specific comments on Question 2(b)
regarding the disposal of an ownership interest in an associate and Questions 5-11of the ED.~ End ~
IASB Exposure Draft Equity Method of Accounting IAS 28 Investments in Associates and Joint Ventures (revised 202x)
下载原件Our Ref.: C/FRSCSent electronically through the IASB Website (www.ifrs.org)
20 January 2025Dr Andreas BarckowInternational Accounting Standards BoardColumbus Building7 Westferry CircusCanary WharfLondon E14 4HDUnited KingdomDear Andreas,IASB Exposure DraftEquity Method of AccountingIAS 28 Investments in Associates and Joint Ventures (revised 202x)
The Hong Kong Institute of Certified Public Accountants (HKICPA) is the only bodyauthorised by law to set and promulgate standards relating to financial reporting, auditing,ethics and sustainability disclosures for professional accountants in Hong Kong. We aregrateful for the opportunity to provide you with our comments on this Exposure Draft(ED).We appreciate the IASB’s endeavours in formulating proposals that aim to address long-standing application questions in IAS 28, thereby reducing diversity in practice andenhancing comparability and understandability of financial statements. Nevertheless,since the ED does not seek to resolve the fundamental issue of the nature of equitymethod – whether it is a one-line consolidation or a measurement model – certainapplication issues would arise. Furthermore, we have identified certain aspects of theED that necessitate clarification and guidance. We provide detailed comments in theAppendix and summarise our primary concerns and recommendations below.Accounting for initial and additional purchases and other changes in ownership interestsin an associate1 while retaining significant influenceIn respect of the accounting for the initial and subsequent purchases of additionalinterests of an associate while retaining significant influence, we agree with theproposals for adopting an approach similar to IFRS 3 Business Combinations. However,we have identified the following application issues.a. Treatment of transaction costsWe consider that the ED lacks clarity regarding how transaction costs incurred in thepurchase of an associate should be accounted for. Our respondents have expressedmixed views on this treatment. One view supports expensing transaction costs to profitor loss, considering that the ED is developed based on an approach similar to IFRS 3for measuring the cost of an associate. Conversely, the other view supports capitalising1 For simplicity, references in this letter to ‘investor’, ‘associate’ and ‘significant influence’ should be read asalso referring to ‘joint venturer’, ‘joint venture’ and ‘joint control’ in relation to investments in joint ventures.Page 2 of 10transaction costs as part of the cost of an associate. This approach is supported by theIFRS Interpretation Committee’s agenda decision made in July 2009 and paragraph 6.5of the Conceptual Framework for Financial Reporting (Conceptual Framework), whichtreats the purchase of an associate as a purchase of an asset, indicating that the costsincurred for acquiring an associate should be capitalised. Given the prevalence of thisissue in Hong Kong and the existence of divergent views, we recommend that the IASBexplicitly clarify the treatment of transaction costs in the final standard to avoid potentialdiversity in practice.b. Cost burden and practical challenges in performing PPAOur respondents, particularly preparers, have expressed significant concerns regardingthe cost burden and practical challenges of performing Purchase Price Allocation (PPA)
for each purchase of additional interest in an associate, as well as for other changes thatresult in an increase in ownership interests. There has long been a practical issue forinvestors to obtain information from associates due to a lack of control over these entities.Associates are often reluctant to share information beyond what is required for applyingthe equity method in the investor’s financial statements. These challenges are furthercompounded when measuring the fair value of contingent consideration related topurchases of unlisted associates as determining fair value requires additionalinformation for estimating the associates’ future performance. The costs and burdencould be more significant for preparers lacking valuation resources. Given theseconcerns, we recommend that the IASB provide guidance to clarify that PPA isnecessary only when its impact on the investor’s financial statements is material andexplain how such a materiality assessment should be performed.c.Recognition of a bargain purchase gainWe, along with most of our stakeholders, support recognising bargain purchase gains inprofit or loss when purchasing additional interests in an associate that includespreviously recognised goodwill. We consider that this treatment aligns with the‘accumulation of purchases’ approach adopted throughout the ED. Nevertheless,several respondents consider that such bargain purchase gains should instead be offsetagainst the previously recognised goodwill for practical reasons. These include thepotential impact on current practices adopted by investors that are dual-listed on thestock exchanges of Hong Kong and Mainland China and the risk of overstatement ofgoodwill included in the investment if impairment assessments are not conductedproperly. To address these concerns, we recommend the IASB:
(i)
provide guidance similar to IFRS 3.36 as a safeguard to address the possibility thata bargain purchase gain is recognised due to an inappropriate PPA;
(ii) state explicitly in the final standard that investments in associates should be testedfor impairment as a single unit of account whenever a bargain purchase gain arises;
and(iii) assess the impact of the proposal to jurisdictions where the majority of companiesare currently applying the alternative view, and determine if any refinements to theproposal are necessary.d. Deferred tax effects on purchase of an associateThe current proposals require an investor to perform PPA and recognise the relateddeferred tax effects when accounting for purchase of an associate, without distinguishingbetween whether an associate constitutes a business. As per IFRS 3.2(b) and paragraph15(b) of IAS 12 Income Taxes, deferred tax is not recognised upon initial recognition ofan asset or a group of assets which does not constitute a business. If the same conceptapplies to the purchase of an associate, it is unclear why deferred tax should bePage 3 of 10recognised for the purchase of an associate that does not constitute a business.Accordingly, we recommend that the IASB clarify whether PPA should be performed andconsequently, whether the recognition of deferred tax effects should be required forpurchases of all associates, including those that only hold assets and do not constitutebusinesses.If you have any questions regarding the matters raised in this letter, please contactCarrie Lau (carrie@hkicpa.org.hk) or Katherine Leung (katherineleung@hkicpa.org.hk),Associate Directors of the Standard Setting Department.Sincerely,Cecilia KweiDirector of Standard SettingPage 4 of 10Work undertaken by the HKICPA in forming its views:
The HKICPA:
(a)
issued an Invitation to Comment on the ED on 20 September 2024 to its membersand other stakeholders;
(b)
sought input from its Business Combinations and Reporting Entity Advisory Panel,Small and Medium Practices Committee and its Technical Issues Support Group,which mainly comprise technical and industry experts from large as well as smalland medium accounting firms (collectively, Practitioners);
(c)
held a public roundtable discussion for local stakeholders, including Practitioners,preparers of listed entities and academics on 19 November 2024;
(d)
conducted a targeted outreach to a preparer of a listed corporate;
(e)
reviewed the findings from regulators’ reports focusing on the review findingsrelated to application of the equity method; and(f)
developed its views through its Financial Reporting Standards Committee, havingreflected on its respondents’ views. The Committee comprises preparerrepresentatives from various industry sectors, regulators, as well as technical andindustry experts from small, medium and large accounting firms.Detailed comments on the IASB EDQuestion 1: Measurement of cost of an associate
1.We appreciate the expected benefits brought by the ED in providing clearer guidancein IAS 28 to address long-standing application issues. We consider it appropriate toapply an approach similar to IFRS 3 for accounting for the purchase of an associate.However, given that the ED does not seek to resolve the fundamental issue of thenature of equity method in terms of whether it represents a one-line consolidation ora measurement model, the following application issues would arise.(a) Transaction costs
2.The ED is unclear regarding how transaction costs incurred in the purchase ofassociates should be accounted for. Our respondents have expressed mixed viewson the accounting treatment.View 1 – Expense transaction costs to profit or lossGiven that the proposal for measuring the cost of an associate is developed basedon an approach similar to the requirements in IFRS 3, this view supports expensingtransaction costs to profit or loss to ensure consistency with the treatment oftransaction costs under IFRS 3. In addition, since the definition of ‘cost of theassociate or joint venture’ proposed in Appendix A to the ED does not includetransaction costs, it could be interpreted that an investor should exclude these costsfrom the cost of an associate.View 2 – Capitalise transaction costs as part of the cost of an associateThis view considers it more appropriate to capitalise transaction costs as part of thecost of an associate, aligning with an established practice following the IFRSInterpretation Committee (IFRC IC) July 2009 agenda decision (AD) and the principlein paragraph 6.5 of the Conceptual Framework. According to the AD, IFRS ICconcluded that the cost of an associate includes transaction costs, and theConceptual Framework specifies that historical cost comprises the considerationpaid to acquire the asset plus transaction costs. This view is based on the notion thatthe purchase of an associate is treated as a purchase of an asset.AppendixPage 5 of 10
3.This issue is widespread in Hong Kong, where transaction costs are incurred inalmost every purchase of an associate. Given the prevalence of this matter and thevarying views on the accounting treatment, diversity in practice is likely to persistwithout any clarification or guidance. Accordingly, we recommend that the IASB:
(i) clarify the treatment of transaction costs on initial and subsequent purchases ofan associate while retaining significant influence, and explain its rationale in thebasis for conclusions, regardless of the view adopted; and(ii) explicitly state in the final standard that the treatment of transaction costs appliesonly to the purchase of an associate in the context of IAS 28, thereby avoidingany unintended consequences in accounting for transaction costs related to thepurchase of other assets.(b) Contingent consideration and measurement period adjustments
4.BC 91 of the ED states that the IASB decided that the proposed requirements oncontingent consideration should be similar to those in IFRS 3 for the acquisition of asubsidiary. Based on this premise, we have the following comments andrecommendations for the IASB’s consideration.
5.Firstly, we believe that the proposed requirements for contingent consideration inIAS 28, both in terms of wording and requirements, should align as closely aspossible with the requirements in IFRS 3.58, where applicable. Specifically,paragraph 26 of the ED should include:
(i) references to IFRS 9 Financial Instruments; and(ii) the requirements on measurement period adjustments for both initial purchaseof an associate and subsequent additional purchases while retaining significantinfluence.
6.We consider that the requirements for measurement period adjustments under IFRS
3.45 to 49 and 58 are relevant to the purchase of associates. Similar to businesscombinations, an investor of an associate may encounter situations whereprovisional amounts need to be reported if the measurements of the associate areincomplete at the end of the reporting period. Measurement period requirementsprovide guidance on determining the measurement period and how the investoridentifies and accounts for measurement period adjustments. The impact ofmeasurement period adjustments could be significant depending on facts andcircumstances.
7.Secondly, it is not clear whether subsequent changes in contingent considerationassociated with the purchase of an associate should be presented in the investor’sstatement of profit or loss, viz. operating or investing category. Due to the lack ofspecific guidance in the ED and IFRS 18, it appears reasonable to follow IFRS
18.B49(f) and B55(c) on remeasurement of contingent consideration arising from abusiness combination given that the proposal for contingent consideration aligns withthe approach in IFRS 3. Consequently, the remeasurement of contingentconsideration from purchase of an associate would be categorised under the‘operating’ category. However, this would be inconsistent with presenting incomeand expenses from investments in associates under the ‘investing’ category perIFRS 18.53 and 55.
8.Given the above, we recommend that the IASB clarify whether the abovepresentation outcomes align with the intended objectives of IFRS 18. If not,appropriate amendments to IFRS 18 should be considered to ensure consistentcategorisation of such items in the investor’s statement of profit or loss.Page 6 of 10(c) Deferred tax effects on purchase of an associate
9.The ED requires investors to perform a PPA and recognise the related deferred taxeffects in accounting for the purchase of an associate, without distinguishingbetween whether the associate constitutes a business. However, IFRS 3 does notapply to the acquisition of an asset or a group of assets that does not constitute abusiness (IFRS 3.2(b)). In such cases, the investor should allocate the purchaseprice to the assets acquired and liabilities assumed based on their relative fair valuesand no deferred tax should be recognised (IAS 12.15(b)). If the same concept appliesto the purchase of an associate, it is unclear why (i) a PPA should be performed, and(ii) deferred tax should be recognised in the case of an associate that does notconstitute a business.
10.In light of the above, we recommend that the IASB clarify whether PPA should beperformed and consequently, whether the recognition of deferred tax effects shouldbe required for all purchases of associates, including those that do not constitute abusiness.Question 2: Changes in an investor’s ownership interest while retainingsignificant influence
(1)Purchase of additional interests in an associate(a) Cost burden and practical challenges in performing PPA for each purchase ofadditional interest
11.While acknowledging the IASB’s rationale for performing PPA for each purchase ofadditional interest in an associate, our respondents, particularly preparers, haveexpressed significant concerns regarding the costs and practical challenges ofimplementing the proposed requirements:
(i) Based on past experience and market practice, investors often encounterdifficulties in obtaining the necessary information from their associates toconduct PPA. To protect sensitive commercial information and maintain fairnessbetween all shareholders, listed associates are often reluctant to shareinformation beyond what is required for applying the equity method in theinvestor’s financial statements.(ii) Measuring the fair value of contingent consideration can be complex in the caseof purchases of unlisted associates. Determining the fair value in such instancesoften requires the use of discounted cash flow methods, which rely on estimatesof the associates’ future performance. This process demands significantjudgement and estimation assumptions.(iii) The above issues are further exacerbated when fair value measurements arerequired for each purchase of additional interest of an associate, increasingcosts and burdening preparers who lack sufficient valuation resources.
12.To alleviate these concerns, we recommend that the IASB provide guidance to:
(i) clarify that PPA is necessary only when its impact on the investor’s financialstatements is assessed to be material; and(ii) explain how such a materiality assessment should be performed, including thefactors for consideration and methodologies that can be used for conducting theassessment.Page 7 of 10(b) Recognition of a bargain purchase gain
13.We, along with most of our respondents, support the ED’s proposal for therecognition of bargain purchase gains in profit or loss arising from purchase ofadditional interests when the investment in the associate includes previouslyrecognised goodwill for the following reasons:
(i) We agree with the IASB’s rationale explained in BC26-27 of the ED. We considerit logical to recognise bargain purchase gains from the purchases of additionalinterests separately in profit or loss as the ED adopts an ‘accumulation ofpurchases’ approach to measure the cost of an associate. This approach alsoapplies to other proposals in the ED, such as the proposal for not catching up theunrecognised losses in subsequent purchases. Therefore, deviating from thisapproach could lead to potential unintended consequences for other proposals.(ii) We agree that a bargain purchase gain could be an indication of impairment,necessitating an impairment assessment based on IAS 36 Impairment of Assets.We believe that a proper impairment assessment can prevent the potential issueof overstating goodwill included in the carrying amount of the investment.Conversely, applying an offset approach, as indicated below, might inadvertentlycreate an impression that impairment is unnecessary as the goodwill embeddedin the carrying amount of the associate has been reduced after offsetting, therebyincreasing the risk of overstatement of investments in associates.
14.Nevertheless, several respondents do not support the proposal. They argue thatbargain purchase gains should be offset against previously recognised goodwillembedded in the carrying amount of the associate for the following practical reasons:
(i) In practice, investors, particularly those that are dual-listed on the stockexchanges of Hong Kong and Mainland China, currently offset bargain purchasegains against previously recognised goodwill because this treatment is specifiedin the China Accounting Standards for Business Enterprises. This treatment isbased on the premise that cumulative purchases of interests in an associate areregarded as a single asset for subsequent impairment tests and disposals. Theproposal would alter the accounting practice for these investors.(ii) A bargain purchase gain may indicate that an impairment exists. Recognisingsuch a gain in profit or loss might result in an overstatement of the investment inthe associate if the investor fails to conduct a proper impairment assessment ofthe investment which includes goodwill.(iii) Recognising bargain purchase gains in profit or loss for additional purchaseswhile retaining significant influence is inconsistent with the treatment ofpurchasing additional interests in a subsidiary after gaining control in IFRS 10Consolidated Financial Statements. Under IFRS 10, the impact does not affectprofit or loss but is reflected within equity as transactions with non-controllinginterests.
15.We acknowledge the concerns of the alternative view regarding the risk of potentialoverstatement of goodwill due to inappropriate impairment assessments and thepotential impact on the companies that are dual-listed on the stock exchanges ofHong Kong and Mainland China. To address these concerns, we recommend thatthe IASB:
(i) provide guidance requiring investors to perform procedures similar to those inIFRS 3.36 as a safeguard to ensure that the measurements appropriately reflectconsideration of all available information as of the purchase date beforerecognising a bargain purchase gain. This would help mitigate the possibility ofrecognising a bargain purchase gain due to an inappropriate PPA;
(ii) state explicitly in the final standard that investments in associates should betested for impairment as a single unit of account whenever a bargain purchasePage 8 of 10gain arises; and(iii) assess the impact of the proposal on existing practice, particularly in jurisdictionswhere entities are currently applying the alternative view, and determine if anyrefinements to the proposal are necessary.
(2)Other changes in ownership interests in an associate(a) Cost burden and practical challenges
16.We agree with the proposal requiring an investor that retains significant influence torecognise an increase in its ownership interest as if purchasing an additionalownership interest. However, we are also aware that all the issues related to costburden and practical challenges in performing PPA, as highlighted in paragraph 11regarding the accounting for purchase of an additional ownership interest, would alsoarise if this proposal is implemented. To address these concerns, we recommendthat the IASB provide guidance on materiality consideration as suggested inparagraph 12.(b) Application of paragraphs 34(a) and (b) of ED
17.We consider the calculation of the effect of other changes in ownership interestarising from deemed purchases and deemed disposals to be complex, and thewording in paragraphs 34(a) and (b) of the ED is difficult to understand. This couldlead to varied interpretations of the requirements resulting in diversity in practice. Wenote that IE3 of the ED, which illustrates the application of paragraph 34(b) of the EDto deemed disposals, is helpful for clarifying the requirement. Therefore, werecommend that the IASB incorporate an illustrative example for deemed purchasesresulting from a redemption of shares by the associate to assist preparers inunderstanding the proposed requirements.
18.We understand that the ED focuses solely on developing requirements for simplescenarios of deemed purchases and deemed disposals due to cost-benefitconsiderations (BC45-46 of the ED). However, our respondents have emphasisedthe need for clear guidance to address the following prevalent scenarios in HongKong, particularly in the case of listed associates:
(i) Due to different extents of participation by the investor and other shareholders inshare redemption and share issuance by an associate:
(a) the investor’s ownership interest decreases when the associate redeems itsshares;
(b) the investor’s ownership interest increases when the associate issues newshares; and(ii) Under an equity-settled share-based payment arrangement, the employees ofan associate exercise the share options issued by the associate, resulting in adeemed disposal of the investor’s ownership interest in the associate.
19.In light of the above, we believe it would be beneficial for many preparers if the IASBcould provide guidance and illustrative examples to address these commonscenarios. In respect of scenario (i)(b) in paragraph 18, we noted that the September2022 IASB staff paper discussed a similar example where the investor subscribesfor 100% of the new shares issued by the associate. We recommend the IASBinclude this example or adjust it as appropriate to assist preparers in applying theproposed requirements.Page 9 of 10Question 3: Recognition of the investor’s share of lossesRecognising and presenting separately the share of the associate’s profit or loss andother comprehensive income (OCI)
20.Regarding the proposal for recognising and presenting separately the share of theassociate’s profit or loss and OCI, we consider that paragraphs 45-52 and IE4 of theED are unclear and could lead to confusion and application issues. We recommendthat the IASB clarify the requirements and provide guidance should it proceed withthe proposals. These issues are summarised as follows.
21.Firstly, paragraphs 45 and 48 of the ED specify that, in determining when an investor(i) reduces its net investment in an associate to nil, or (ii) resumes recognising itsshare of profit, the investor should consider the associate’s total comprehensiveincome. However, paragraph 50 of the ED requires the investor to recogniseseparately its share of the associate’s profit or loss and its share of the associate’sOCI. It is unclear how these paragraphs interact with each other, particularly whetherthe investor’s share of unrecognised losses should be considered separately forprofit or loss and OCI respectively, or in aggregate at the level of total comprehensiveincome, without differentiating between the amounts arising from profit or loss andOCI.
22.Secondly, the examples in paragraph 52 and IE4 of the ED illustrate that when aninvestor has unrecognised losses in an associate, the investor is required torecognise the same absolute amount of its share of the associate’s OCI (if it is aprofit) and share of profit or loss (if it is a loss) simultaneously in accordance withparagraph 50 of the ED, while continuing to measure its investment in the associateat nil. We have the following concerns regarding these examples:
(i) Contrary to the accounting outcome in paragraph 50 of the ED, when applyingparagraph 48 of the ED to these examples, we consider that the investor shouldnot recognise any share of profit in OCI because the total comprehensive incomeis a loss. This indicates inconsistencies between paragraphs 48 and 50 of theED.(ii) The statement of profit or loss is the primary source of information about anentity’s financial performance and the main focus for financial statement users toassess the financial performance of the entity. The treatment of recognising aprofit in the statement of profit or loss while the carrying amount of the investmentin an associate is nil and there are cumulative share of associate’s unrecognisedlosses could be confusing and misleading to financial statement users. Somerespondents recommend that the IASB consider requiring the investor torecognise any share of associate’s profit or loss or OCI only when the respectiveunrecognised losses are eliminated.
23.Thirdly, paragraph 51 of the ED requires an investor to recognise its share of theassociate’s profit or loss first and then its share of OCI until the net investment in theassociate is reduced to nil, if both profit or loss and OCI are losses. However,questions arise regarding:
(i) the accounting treatment for other scenarios, such as a loss in the share of theassociate’s profit or loss and a profit of the share of OCI, or vice versa, in whichcases the share of the total comprehensive income is a loss that exceeds theinvestment in an associate; and(ii) whether the order for recognising profits in profit or loss and in OCI when aninvestor resumes recognising its share of the associate’s profits is the same asthe order in paragraph 51 of the ED.Page 10 of 10
24.Lastly, a question arises on the accounting treatment in situations where the carryingamount of the net investment in an associate is reduced to nil due to an impairmentloss and a share of the associate’s losses remains unrecognised. If there is asubsequent reversal of the impairment loss on the investment in that associate, it isunclear whether the investor should offset this reversal against the cumulative shareof the associate’s unrecognised losses. We note that this situation occurs in somelisted biotechnology companies, which incur losses due to heavy investments inresearch and development in their early phases and the need for and extent ofrecognising any impairment loss is influenced to a large extent by fluctuating marketcapitalisation.Question 4: Transactions with associates
25.We support the proposal for investors to recognise full gains or losses from alltransactions with their associates because according to both the ConceptualFramework and other IFRS Accounting Standards, associates are not part of thegroup and are not in the boundary of the reporting entity. In addition, the proposedmethod is simpler and less costly to apply.
26.However, paragraph 53 of the ED provides only two examples of transactions withassociates that would fall within the scope of the proposal, both of which involve asale of assets. We recommend that the IASB clarify whether the proposal alsoapplies to other types of transactions, such as rendering of services.Other questions in the ED
27.We support the proposals and do not have any specific comments on Question 2(b)
regarding the disposal of an ownership interest in an associate and Questions 5-11of the ED.~ End ~