Page 1 of 13Our Ref.: C/FRSCSent electronically through the IASB Website (www.ifrs.org)
11 November 2016Mr Hans HoogervorstInternational Accounting Standards Board30 Cannon StreetLondon EC4M 6XHUnited KingdomDear Hans,IASB Exposure Draft ED/2016/1Definition of a Business and Accounting for Previously Held Interests(Proposed amendments to IFRS 3 and IFRS 11)
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, and ethics for professional accountants, in Hong Kong. The HKICPAwelcomes the opportunity to provide you with our responses to the questions raised inED/2016/1.Definition of a BusinessThe HKICPA considers this project is a step in the right direction to better define abusiness for the purposes of improving IFRS 3 Business Combinations. We continueto appreciate the IASB's effort in this regard.The HKICPA accepts that it could be challenging to determine whether a group ofassets constitutes a business and that some level of judgement is inevitable. However,the fundamental issue underlying this is the different approaches to accountingbetween an asset acquisition and a business acquisition. The HKICPA acknowledgesthat the IASB had previously explored aligning the different approaches without muchsuccess and hence the issue of demarcation between a business versus an assetarises. However, given that this has been a longstanding challenge in a judgementalarea, the HKICPA strongly recommends that the IASB takes a step back and revisits,conceptually, the fundamental need for different accounting requirements for assetacquisitions and business acquisitions. Given the different approaches tomeasurement on initial recognition as they stand, the HKICPA recognises that, we are,out of necessity, stuck with having to create what can be at the margins an arbitraryand judgemental distinction between business acquisitions and asset acquisitions.In the meantime, the HKICPA is not opposed to the IASB providing clearer guidance inIFRS 3 as an interim measure—provided that the clarifications are clear,understandable, and can be applied consistently to similar facts and circumstances,and that the standard provides accounting that faithfully represents the economics ofthe transaction. Having assessed the proposed amendments against these principlesfor clarifications, the HKICPA thinks that the proposed amendments in ED/2016/1 arenot a marked improvement over existing IFRS 3 guidance and therefore, on balance,do not support the proposed amendments.Page 2 of 13The HKICPA considers the proposed amendments as they are currently drafted lackconceptual underpinning and are written in a rules-based manner, which may lead topotential unintended consequences. If the IASB were to proceed with the proposedamendments as an interim measure, the HKICPA strongly recommends the IASB to:
(a) develop a principle with strong conceptual justification for the difference between abusiness and an asset; (b) make the proposed quantitative screening test as part of aholistic assessment that includes qualitative tests, and not the first step of theassessment; (c) reconsider whether the guidance on evaluating whether an acquiredprocess is substantive translates logically to all circumstances; and (d) reconsiderwhether the examples are consistent with the guidance provided and results in alogical outcome.The HKICPA appreciates the IASB's efforts in maintaining a substantially convergedstandard with the equivalent US standard and we continue to support such efforts.However, because of its significant concerns on the proposed amendments, theHKICPA is prepared to move away from a converged standard. The HKICPA thinks itwould be unfortunate to do so, but it thinks that convergence between IFRS 3 and USGAAP, while desirable, does not override the need to have principles-based standards.If the IASB were to proceed with substantially the same proposed amendments, theHKICPA urges the IASB to state clearly, why the differences in text would not lead todifferent outcomes. The HKICPA thinks that if different text is necessary to explain thesame thing within the IASB and FASB proposals, then it suggests that there may bedifferent interpretations. Finally, if there are differences between IFRS 3 and theequivalent US GAAP which are intended to lead to different outcomes, this should alsobe stated.Accounting for Previously Held InterestsThe HKICPA does not object to the proposed amendments to IFRS 3 and IFRS 11Joint Arrangements in relation to the clarification on the accounting for previously heldinterests, but recommends that the IASB elaborates its rationale in the basis forconclusions.Our responses to the questions in ED/2016/1 are outlined in detail in the Appendix.If you have any questions regarding the matters raised in this letter, please contact me,or Kam Leung (kamleung@hkicpa.org.hk) and Katherine Leung(katherineleung@hkicpa.org.hk), Associate Directors of our Standard SettingDepartment.Yours sincerely,Christina NgDirector, Standard Setting DepartmentEncl.APPENDIXPage 3 of 13Work undertaken by HKICPA in forming its viewsThe Hong Kong Institute of Certified Public Accountants:
(i)
issued an Invitation to Comment on ED/2016/1 on 29 June 2016 to our membersand other stakeholders;
(ii) met with members of the academia, accounting representatives from Hong Kong'sfinancial reporting and listing regulatory bodies, preparers from conglomerates andbanks; and senior practitioners of six large as well as small-medium accountingfirms; and(iii) developed its views through its Financial Reporting Standards Committee, havingreflected on its stakeholder views. The Committee comprises academics,preparer representatives from various industry sectors, regulators, the Hong KongS.A.R. Treasury, as well as technical and industry experts from small, medium andlarge accounting firms.This submission outlines HKICPA's views as well as most of our stakeholdercomments on ED/2016/1.Detailed comments on ED/2016/1Question 1The Board is proposing to amend IFRS 3 to clarify the guidance on the definition of abusiness (see paragraphs B7–B12C and BC5–BC31). Do you agree with theseproposed amendments to IFRS 3?In particular, do you agree with the Board's conclusion that if substantially all the fairvalue of the gross assets acquired (ie the identifiable assets and non-identifiableassets) is concentrated in a single identifiable asset or group of similar identifiableassets, then the set of activities and assets is not a business (see paragraphsB11A–B11C)? Why or why not? If not, what alternative would you propose, if any,and why?Part 1 of 2: Stakeholder viewsOur stakeholders appreciate the IASB's efforts in clarifying the guidance on thedefinition of a business. However, they have concerns with the proposed amendmentsas they are currently drafted. Their concerns are outlined below.(a) They noted that the principles of the standard for defining a business had notchanged significantly but that the proposed additional guidance seems to draw anarbitrary line between an asset (or group of assets) and a business without anyconceptual underpinning. This led them to arrive at different conclusions from theIASB's outcome when applying the proposed guidance to the proposed illustrativeexamples.APPENDIXPage 4 of 13The revised definition of outputs in paragraphs B7(c) and BC15-BC17(b) Our stakeholders generally agreed that the revised definition of outputs is headingin the right direction, for the reasons as stated in paragraph BC15. However, onestakeholder noted that there seems to be an inconsistency in the definition ofoutputs between paragraphs B7(c) and BC17. Paragraph B7(c) discussesoutputs from the perspective of customers, whilst paragraph BC17 discussesoutputs from the perspective of an acquirer. It is unclear what the underlyingprinciples of an output are, and how to apply them in marginal situations. Forexample, if a company acquires a supply chain for vertical integration, the goodsand services produced would no longer be provided to customers—instead, theyare consumed by the acquirer. In this circumstance, the supply chain does notmeet the definition of an output under paragraph B7(c). However, paragraphBC17 states that it would still qualify as a business as it is 'capable of' generatingoutputs.(c) It was also noted that the revised output definition includes 'other revenue' withoutany explanation. A suggestion put forward is that the IASB clarifies what types ofother economic benefits could be considered 'other revenues' and why wouldsuch 'other revenue' meet the definition of output. For example, would investmentreturns, including dividends from an associate, or profits generated from flippingan asset such as real estate be considered 'other revenues'.The reference to 'market participant' in paragraphs B8, B11 and BC11-BC14(d) Our stakeholders support removing the reference to 'market participant' inparagraph B8 for reasons as stated in paragraph BC12, and retaining thereference to 'market participant' in paragraph B11 for reasons as stated inparagraph BC14.(e) However, they commented that determining a 'market participant' is currently oneof the areas of difficulty in applying IFRS 3 Business Combinations. As noted inparagraph BC11, some sets of activities and assets may be considered abusiness for market participants who could integrate the set of activities andassets in their processes. However, the same set of activities and assets may notbe considered a business from the perspective of other market participants. Forexample, if an acquirer has a substantive process in place, it may not need toacquire any substantive process from the acquiree and may request the seller toterminate/suspend the process before the completion of the acquisition. In thisscenario, assuming the criteria in proposed paragraph B8 is met, would thetransaction be an acquisition of a business or asset? Some stakeholders say itwould meet the definition of a business and others were not sure. Theyrecommend that the IASB clarifies this example.APPENDIXPage 5 of 13The proposed screening test in paragraphs B8A-B11C and BC18-BC21(f)
Our stakeholders note the IASB's intention to reduce the cost of applying thedefinition of a business without changing the IASB's intended outcome. Our smallmedium practitioners and entities welcome the proposed screening test forsimplification reasons.(g) However, our stakeholders, including those small and medium practitioners,expressed a strong concern that the proposed screening test, as a first step indetermining a business, is too rigid and prescriptive. Most, if not all, of ourstakeholders recommended that the screening test could be part of anassessment—but not the first step in a determinative assessment. They think thatthe proposed test, as a first step in determining a business, may inadvertentlyexclude acquisitions where the underlying substance is that of a business. This isbecause, depending on the valuation method, the fair values of a substantiveprocess and organised workforce may be incorporated into the valuation of anasset. For example, in the valuation of a retail shopping mall, does the IASBexpect the valuation of mall/building and the valuation of the propertymanagement/organised workforce to be valued separately? Some of ourstakeholders think that if the mall/building is valued using the income method, theproperty management/organised workforce will be incorporated into the value ofthe building. The fair value would then be concentrated in the valuation of themall/building and the retail shopping mall will not pass the screening test eventhough in substance, it is considered a business and currently is identified as abusiness under IFRS 3.(h) Our stakeholders commented that it is unclear how an organized workforcesupplied through a management contract is different from an in-house organizedworkforce, and how this distinction would lead to a difference in fair value. Forexample, it is unclear how to apply the screening test in instances wherecompanies have many outsourced management contracts that are 'at the money'.They commented that Illustrative Examples B, E, H and I are not sufficiently clearin illustrating how an organised workforce would be assessed under the proposedscreening test in these circumstances. Our stakeholders requested that moreconceptual reasoning needs to be added, and that IASB should clarify whyoutsourced management contracts which may provide critical substantiveprocesses, would fail the screening test purely because they are priced at currentmarket rates and results in an associated fair value of nil.(i)
In general, our stakeholders found paragraphs B11B and B11C to be tooprescriptive. In particular, they commented that it should be made clear thatparagraph B11C is only a non-exhaustive list of factors to assess, and not adefinitive list. Our stakeholders also raised the question of what should becombined into a single identifiable asset or considered a group of similaridentifiable assets? They requested that the IASB expands these paragraphs toinclude what should be combined or should be considered a single/group ofidentifiable assets. They think that this would help in the application of paragraphB11C as the two extremes of a spectrum would be represented.APPENDIXPage 6 of 13(j)
A few stakeholders also commented that paragraphs B11B and B11C would giverise to more questions in practice where an intangible asset is inextricably linkedto a tangible asset. One stakeholder noted that this may be due to internalinconsistencies between these two paragraphs. When applying paragraph B11Bone is required to consider the recognition and measurement of the assets in abusiness combination transaction and could conclude that tangible assets andintangible assets that are inextricably linked would be a “single identifiableasset” for the asset concentration test. This is further supported by referring toexisting B42 through the Illustrative Examples. However, B11C(a) refers to“separately identifiable tangible and intangible assets” in the general sense andhence explicitly says that these assets should not be combined. It also seemsstrange that the screening test to be used to determine whether the subject of thetransaction is a business or not, relies to some degree on the eventual accountingfor a business combination. This seems rather circular in nature and clearlyshows the lack of a principles-based test.The guidance for a substantive process in paragraphs B12-B12C and BC22-BC29(k) Our stakeholders appreciate the IASB's efforts in providing guidance on how toevaluate whether an acquired process is substantive. However, they have foundthe proposed guidance in paragraph B12A for a set of activities and assets whichdo not, at acquisition date, have outputs to be unclear and counter-intuitive insome circumstances. The IASB's Illustrative Example D outlines one end of thespectrum to demonstrate how the criteria in paragraph B12A is not met. However,our stakeholders raised many questions as to what would meet the criteria inparagraph B12A on the other end of the spectrum. They commented that theuncertainty on how to apply paragraph B12A may provide opportunities tostructure transactions depending on whether the entity wanted the acquisition tobe accounted for as an asset or a business. The following are their key concernson areas of uncertainty and they request that the IASB clarifies or provides moreguidance for them.(i)
The reference to an 'organized workforce'—our stakeholders found it unclear:
what an organized workforce actually means. Would it includeemployees that are easily replaceable, for example, those performingroutine manual work that are not specialised; andwhy an organized workforce would be a required input in allcircumstances. If the purpose of an acquisition were to buy out acompetitor, often the organized workforce would not be acquired withthe set of assets and activities.(ii) The reference to 'another acquired input'—it is also unclear what isconsidered 'critical to the ability to develop or convert another acquired inputor inputs into outputs'. For example, would both easily accessible inventoryraw materials and exclusive customer lists meet that characteristic?APPENDIXPage 7 of 13(l)
Our stakeholders welcomed the IASB's attempt to clarify how outsourced inputsand processes should be considered in the assessment of a business. However,one stakeholder commented that paragraph B12C is ambiguous as it states that"an acquired contract is not a substantive process", whilst also requiring entities to"assess whether an organised workforce accessed through such a contractualarrangement performs a substantive process that the entity controls, and thus hasacquired". How does an acquired contract perform a substantive process that theentity controls if an acquired contract is not a substantive process?The examples in paragraphs IE73-IE107(m) Most, if not all, of our stakeholders commented that the IASB has not providedsufficient context and details to the fact patterns, which led to some level ofdifficulty of arriving at the conclusions illustrated. They consider that it isimportant for the IASB to add more explicit reasoning in their examples, and toprovide the underlying principles so that qualitative considerations can also bemade when applying the proposed amendments. This would be more useful forreal life complex fact patterns.(n) Our stakeholders recommended that the IASB should develop contrastingexamples that illustrate the determination of opposite conclusions in borderlinescenarios (for example, one concludes to be a business and the other does notconclude to be a business) using a similar fact base pattern. These examplesshould explain how the difference in specific facts/circumstances would changethe conclusion so that it is clear what is the deciding factor in these borderlinecases.(o) Specific comments on the Illustrative Examples of ED/2016/1 include:
(i)
Example C is likely to be identified as a business under IFRS 3. However,under the proposed amendments, it is not considered a business becausethere is no output and an organized workforce is not acquired. It is unclearwhy in such scenario there is no output. Again, the example would be usefulif some explanation was added on why not acquiring an organised workforcewould fail the test.(ii) In Example D, regarding 'organised workforce', paragraphs IE83 "purchaseralso hires the employees that works in the facility" and IE85 "the set includesan organized workforce" are worded differently. There was some confusionon whether the sentences were attempting to refer to different things orrather to say the same thing in a different way.(p) Our stakeholders also suggested adding more complex examples pertaining tothe industries of extractive mining, financial services, and retail propertymanagement.APPENDIXPage 8 of 13Part 2 of 2: HKICPA's analysis and recommendationsThe HKICPA considers this project is a step in the right direction to better define'business' for the purposes of improving IFRS 3. We continue to support the IASB'seffort in this regard.While an asset purchase is seemingly different in nature from a business acquisition,the HKICPA accepts that in some situations/industries it could be challenging todetermine whether a group of assets constitutes a business and judgement would benecessary in certain circumstances. This is particularly the case when only some ofthe processes are being acquired or the processes are embedded in the inputs.The HKICPA acknowledges that the IASB had previously explored aligning thedifferent approaches without much success and hence the issue of demarcationbetween a business versus an asset arises. However, given that this has been alongstanding challenge in a judgemental area, the HKICPA strongly recommends thatthe IASB takes a step back and revisits, conceptually, the fundamental need fordifferent accounting requirements for asset acquisitions and business acquisitions.The HKICPA considers that it is not always clear why some of the accounting shouldbe different. This includes accounting for directly attributable acquisition-related costs,deferred taxes, consideration in the form of shares, contingent consideration and stepacquisitions. For example, directly attributable acquisition-related costs are capitalisedin the initial recognition of an asset, whilst it is expensed when incurred in a businesscombination.That said, we are not opposed to the IASB providing clearer guidance in IFRS 3 as aninterim measure—provided that the clarifications are clear, understandable, can beapplied consistently to similar facts and circumstances and the standard providesaccounting that faithfully represents the economics of the transaction. Havingassessed the proposed amendments against these principles for clarifications, theHKICPA thinks that the proposed amendments in ED/2016/1 are not a markedimprovement over existing IFRS 3 guidance.This is mainly because there still appears to be a lack of clear principles for what is abusiness versus an asset. The proposed amendments are more rules-based andseem to draw an arbitrary line, without any conceptual underpinning, between an asset(or group of assets) and a business. While applying a rules-based standard mightreduce the diversity in judgment being developed and be welcomed by small mediumpractitioners and entities, we think that the proposed amendments would lead toincreased ambiguity and unintended consequences rather than clearly clarifying thedefinition of a business. This was evidenced by our stakeholders arriving at differentconclusions when they applied the proposed guidance in ED/2016/1 to the IllustrativeExamples.APPENDIXPage 9 of 13The HKICPA generally agrees with our stakeholder views outlined in Part 1. However,the HKICPA thinks that the IASB should not just add more examples to illustrateopposite conclusions or examples on other industries, without providing explicitreasoning and underlying principles. This would not be helpful as there could be amultitude of complex situations across a diverse range of borderline scenarios orindustries—there may never be enough examples. The issue at hand is that it isdifficult to logically and consistently apply the proposed amendments to real-lifesituations or the IASB’s Illustrative Examples because the proposed amendments lackclear principles for what is a business versus an asset.Overall, to make the proposed amendments in ED/2016/1 clear, understandable, andconsistently implementable, the HKICPA strongly recommends that the IASB:
(a) develops, and adds to BC9-BC10, a strong conceptual justification for thedifference between a business and an asset. For example, it mentions inparagraph BC9 that the existence of a process distinguishes a business from anasset. Is it because a process and an input together create additional value that anasset would not ordinarily? Is the additional value created between a process andan input different from the value created when two or more assets are combined,for example, a group of individual but interrelated machines? If so, the IASBshould explain the differences.(b) makes the quantitative screening test as part of an overall holistic assessment thatincludes qualitative principle-based factors. The HKICPA is not convinced that theproposed quantitative screening test as a first step of the assessment wouldalways lead us to acquisitions that faithfully represent a business. For example,the HKICPA is not convinced that acquisitions of an entity that operates via manymanagement or outsourced contracts and thereby not have any in-houseorganized workforce, would not qualify as a business.(c) reconsiders the guidance on evaluating whether an acquired process is substantivetranslates logically to all circumstances, for example, when the scope of paragraphB12A extends its applicability to cases other than an early-stage entity that has notstarted generating revenues. It is uncertain what important characteristics of anorganised workforce supports the identification of a business with outputs andtherefore is considered 'critical to the ability to develop or convert another acquiredinput into outputs'. The uncertainty potentially opens the door to structuring issues,depending on whether the entity wants the acquisition to be accounted for as anasset acquisition or a business combination.(d) reconsider whether the examples are consistent with the guidance provided andresults in a logical outcome. The IASB should explain more robustly how theprinciples/guidance apply to the facts of the examples. The IASB should alsoconsider adding contrasting examples that illustrate opposite conclusions inborderline scenarios so that it is clear what the deciding factor is.APPENDIXPage 10 of 13In light of the above considerations, on balance, the HKICPA is supportive of theIASB's efforts to provide clearer and principles-based application guidance on thedefinition of a business. However, the HKICPA does not support the proposedamendments as they are currently drafted due to the lack of conceptual underpinningand the potential unintended consequences of applying what it considers to be rules-based guidance. The HKICPA strongly recommends that the IASB takes a step backand considers, conceptually, the need to have different accounting treatments foracquisitions of an asset versus acquisition of a business.If the IASB were to proceed with the proposed amendments as an interim measure,the HKICPA strongly recommends that the proposed screening test should not be thefirst step in the assessment of a business; the approach for determining a businessshould be more holistic, which includes both quantitative and qualitative tests; and theIASB clarifies the questions/concerns raised by the HKICPA and our stakeholders.Question 2The Board and the FASB reached substantially converged tentative conclusions onhow to clarify and amend the definition of a business. However, the wording of theBoard's proposals is not fully aligned with the FASB's proposals.Do you have any comments regarding the differences in the proposals, including anydifferences in practice that could emerge as a result of the different wording?Part 1 of 2: Stakeholder viewsAll stakeholders understand that the IASB intends to keep the principles of thestandard consistent, or substantially the same, with the equivalent US GAAP. As such,they commented that ideally, the IASB and FASB use identical text in their standards.This is because any differences in text between the IASB and FASB standards wouldinevitably result in potential confusion in terms of convergence.If it is not possible to use identical text, our stakeholders consider that to minimize therisk of material differences arising due to the interpretation of different wording, theIASB should:
(a)
update the IFRS 3 Appendix "Comparison of IFRS 3 (as revised in 2008) andSFAS 141(R)", which lists and explains the different requirements between IFRSand US GAAP; and(b)
include a clear statement in the basis for conclusions that any other differencesin proposed wording are not intended to result in any differences in principle.APPENDIXPage 11 of 13Our practitioners commented that it is difficult to anticipate the impact of the differencesin the proposals. They therefore found it difficult to recommend whether a particularwording is necessarily clearer or better. Notwithstanding this comment, ourstakeholders generally felt that the FASB's text, while elaborate and specific, waswritten in a rules-based way and therefore more difficult to follow.One stakeholder commented that property with an in-place lease is treated differently1under IFRS and US GAAP. Hence, application of IASB's paragraph B11C wouldpotentially lead to different outcomes from US GAAP. This stakeholder commentedthat deleting the wording in the FASB's ED paragraph 805-10-55-9C "(for example, realestate and in-place lease intangibles)" would not be sufficient in resolving the potentialapplication diversity. As such, it was suggested that the IASB explains such GAAPdifference explicitly under IASB's ED paragraph BC31.Most, if not all, of our stakeholders welcome additional basis for conclusions to explainthe intent behind the IASB's proposed amendments so long as the IASB does notunintentionally create new requirements/guidance in the basis for conclusions.Specifically, some stakeholders thought that the:
(a)
FASB ED paragraph BC31 on "Groups of Processes" may be helpful in applyingIASB paragraphs B12A and B12B; and(b)
FASB ED paragraph BC40 on "Single or Similar Asset Threshold" may be helpfulin applying IASB paragraph B11C.Part 2 of 2: HKICPA's analysis and recommendationsThe HKICPA notes that the IASB proposed amendments that are substantially thesame as FASB's proposed amendments to clarify the definition of a business, with theview that the text in the final amendments would also be the same to maintainconvergence.The HKICPA considers that maintaining a converged standard is desirable. If our aimis to maintain convergence, ideally, identical amendments should be made to thestandards.However, because of our significant concerns mentioned above, the HKICPA is notprepared to compromise on the quality of the amendments or IFRS 3 for the sake ofconverged IFRS and US GAAP standards. The HKICPA also thinks that the IASB'sopportunity to provide a high quality standard should not be sacrificed for the sake ofconvergence with the FASB. The HKICPA urges the IASB to reconsider the drafting ofamendments in a more principles-based manner.1 Under US GAAP the acquirer recognises a tangible asset and an intangible asset for in-place leases aswell as an asset or liability for the favourable or unfavourable aspect of the operating lease; whileparagraph B42 of IFRS 3 states that the acquirer does not recognise a separate asset or liability if theterms of the operating lease are either favourable or unfavourable when compared with market terms.APPENDIXPage 12 of 13The HKICPA agrees with our stakeholders that if the amendments to IFRS 3 weredifferent from the FASB's amendments, the IASB should continue to provide asummary table of text differences. The IASB should also explain why it thinks thedifferences would not lead to different outcomes. This is because if different text isnecessary to explain the same thing within the IASB and FASB proposals, then itsuggests that there may be different interpretations. Finally, if there are differencesbetween IFRS 3 and the equivalent US GAAP which are intended to lead to differentoutcomes, this should also be stated.Question 3To address diversity of practice regarding acquisitions of interests in businesses thatare joint operations, the Board is proposing to add paragraph 42A to IFRS 3 andamend paragraph B33C of IFRS 11 to clarify that:
(a) on obtaining control, an entity should remeasure previously held interests inthe assets and liabilities of the joint operation in the manner described inparagraph 42 of IFRS 3; and(b) on obtaining joint control, an entity should not remeasure previously heldinterests in the assets and liabilities of the joint operation.Do you agree with these proposed amendments to IFRS 3 and IFRS 11? If not, whatalternative would you propose, if any, and why?Part 1 of 2: Stakeholders viewsOur stakeholders do not object to the proposed amendments to IFRS 3 and IFRS 11 inrelation to the clarification on accounting for previously held interests.However, one practitioner pointed out that there are two schools of thought on theaccounting for previously held interests. One view is that a joint operation is not toodissimilar to a joint venture or an associate, and therefore the joint operator shouldremeasure its previously held interest. Another view is a joint operator has a directinterest in the joint operation's assets and liabilities, which is different from having asingle net investment as in a joint venture or an associate. Therefore remeasurementof assets and liabilities that the joint operator has direct interests in and recorded in itsbooks may not be appropriate.As such, this stakeholder thinks that the IASB might need to further address theseviews.APPENDIXPage 13 of 13Part 2 of 2: HKICPA's analysis and recommendationThe HKICPA does not object to the proposed amendments to IFRS 3 and IFRS 11 inrelation to the clarification on accounting for previously held interests. Given theconcerns noted by our stakeholders above, the HKICPA recommends that the IASBelaborates its rationale in the basis for conclusions.Question 4The Board is proposing the amendments to IFRS 3 and IFRS 11 to clarify theguidance on the definition of a business and the accounting for previously heldinterests be applied prospectively with early application permitted.Do you agree with these proposed transition requirements? Why or why not?Stakeholder views and HKICPA's analysis and recommendationsThe HKICPA and our stakeholders agree with the respective rationale and proposedtransition requirements in paragraph BC4 of IFRS 11 and paragraph BC32 of IFRS 3.
IASB Exposure Draft ED/2016/1 Definition of a Business and Accounting for Previously Held Interests (Proposed amendments to IFRS 3 and IFRS 11)
下载原件Page 1 of 13Our Ref.: C/FRSCSent electronically through the IASB Website (www.ifrs.org)
11 November 2016Mr Hans HoogervorstInternational Accounting Standards Board30 Cannon StreetLondon EC4M 6XHUnited KingdomDear Hans,IASB Exposure Draft ED/2016/1Definition of a Business and Accounting for Previously Held Interests(Proposed amendments to IFRS 3 and IFRS 11)
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, and ethics for professional accountants, in Hong Kong. The HKICPAwelcomes the opportunity to provide you with our responses to the questions raised inED/2016/1.Definition of a BusinessThe HKICPA considers this project is a step in the right direction to better define abusiness for the purposes of improving IFRS 3 Business Combinations. We continueto appreciate the IASB's effort in this regard.The HKICPA accepts that it could be challenging to determine whether a group ofassets constitutes a business and that some level of judgement is inevitable. However,the fundamental issue underlying this is the different approaches to accountingbetween an asset acquisition and a business acquisition. The HKICPA acknowledgesthat the IASB had previously explored aligning the different approaches without muchsuccess and hence the issue of demarcation between a business versus an assetarises. However, given that this has been a longstanding challenge in a judgementalarea, the HKICPA strongly recommends that the IASB takes a step back and revisits,conceptually, the fundamental need for different accounting requirements for assetacquisitions and business acquisitions. Given the different approaches tomeasurement on initial recognition as they stand, the HKICPA recognises that, we are,out of necessity, stuck with having to create what can be at the margins an arbitraryand judgemental distinction between business acquisitions and asset acquisitions.In the meantime, the HKICPA is not opposed to the IASB providing clearer guidance inIFRS 3 as an interim measure—provided that the clarifications are clear,understandable, and can be applied consistently to similar facts and circumstances,and that the standard provides accounting that faithfully represents the economics ofthe transaction. Having assessed the proposed amendments against these principlesfor clarifications, the HKICPA thinks that the proposed amendments in ED/2016/1 arenot a marked improvement over existing IFRS 3 guidance and therefore, on balance,do not support the proposed amendments.Page 2 of 13The HKICPA considers the proposed amendments as they are currently drafted lackconceptual underpinning and are written in a rules-based manner, which may lead topotential unintended consequences. If the IASB were to proceed with the proposedamendments as an interim measure, the HKICPA strongly recommends the IASB to:
(a) develop a principle with strong conceptual justification for the difference between abusiness and an asset; (b) make the proposed quantitative screening test as part of aholistic assessment that includes qualitative tests, and not the first step of theassessment; (c) reconsider whether the guidance on evaluating whether an acquiredprocess is substantive translates logically to all circumstances; and (d) reconsiderwhether the examples are consistent with the guidance provided and results in alogical outcome.The HKICPA appreciates the IASB's efforts in maintaining a substantially convergedstandard with the equivalent US standard and we continue to support such efforts.However, because of its significant concerns on the proposed amendments, theHKICPA is prepared to move away from a converged standard. The HKICPA thinks itwould be unfortunate to do so, but it thinks that convergence between IFRS 3 and USGAAP, while desirable, does not override the need to have principles-based standards.If the IASB were to proceed with substantially the same proposed amendments, theHKICPA urges the IASB to state clearly, why the differences in text would not lead todifferent outcomes. The HKICPA thinks that if different text is necessary to explain thesame thing within the IASB and FASB proposals, then it suggests that there may bedifferent interpretations. Finally, if there are differences between IFRS 3 and theequivalent US GAAP which are intended to lead to different outcomes, this should alsobe stated.Accounting for Previously Held InterestsThe HKICPA does not object to the proposed amendments to IFRS 3 and IFRS 11Joint Arrangements in relation to the clarification on the accounting for previously heldinterests, but recommends that the IASB elaborates its rationale in the basis forconclusions.Our responses to the questions in ED/2016/1 are outlined in detail in the Appendix.If you have any questions regarding the matters raised in this letter, please contact me,or Kam Leung (kamleung@hkicpa.org.hk) and Katherine Leung(katherineleung@hkicpa.org.hk), Associate Directors of our Standard SettingDepartment.Yours sincerely,Christina NgDirector, Standard Setting DepartmentEncl.APPENDIXPage 3 of 13Work undertaken by HKICPA in forming its viewsThe Hong Kong Institute of Certified Public Accountants:
(i)
issued an Invitation to Comment on ED/2016/1 on 29 June 2016 to our membersand other stakeholders;
(ii) met with members of the academia, accounting representatives from Hong Kong'sfinancial reporting and listing regulatory bodies, preparers from conglomerates andbanks; and senior practitioners of six large as well as small-medium accountingfirms; and(iii) developed its views through its Financial Reporting Standards Committee, havingreflected on its stakeholder views. The Committee comprises academics,preparer representatives from various industry sectors, regulators, the Hong KongS.A.R. Treasury, as well as technical and industry experts from small, medium andlarge accounting firms.This submission outlines HKICPA's views as well as most of our stakeholdercomments on ED/2016/1.Detailed comments on ED/2016/1Question 1The Board is proposing to amend IFRS 3 to clarify the guidance on the definition of abusiness (see paragraphs B7–B12C and BC5–BC31). Do you agree with theseproposed amendments to IFRS 3?In particular, do you agree with the Board's conclusion that if substantially all the fairvalue of the gross assets acquired (ie the identifiable assets and non-identifiableassets) is concentrated in a single identifiable asset or group of similar identifiableassets, then the set of activities and assets is not a business (see paragraphsB11A–B11C)? Why or why not? If not, what alternative would you propose, if any,and why?Part 1 of 2: Stakeholder viewsOur stakeholders appreciate the IASB's efforts in clarifying the guidance on thedefinition of a business. However, they have concerns with the proposed amendmentsas they are currently drafted. Their concerns are outlined below.(a) They noted that the principles of the standard for defining a business had notchanged significantly but that the proposed additional guidance seems to draw anarbitrary line between an asset (or group of assets) and a business without anyconceptual underpinning. This led them to arrive at different conclusions from theIASB's outcome when applying the proposed guidance to the proposed illustrativeexamples.APPENDIXPage 4 of 13The revised definition of outputs in paragraphs B7(c) and BC15-BC17(b) Our stakeholders generally agreed that the revised definition of outputs is headingin the right direction, for the reasons as stated in paragraph BC15. However, onestakeholder noted that there seems to be an inconsistency in the definition ofoutputs between paragraphs B7(c) and BC17. Paragraph B7(c) discussesoutputs from the perspective of customers, whilst paragraph BC17 discussesoutputs from the perspective of an acquirer. It is unclear what the underlyingprinciples of an output are, and how to apply them in marginal situations. Forexample, if a company acquires a supply chain for vertical integration, the goodsand services produced would no longer be provided to customers—instead, theyare consumed by the acquirer. In this circumstance, the supply chain does notmeet the definition of an output under paragraph B7(c). However, paragraphBC17 states that it would still qualify as a business as it is 'capable of' generatingoutputs.(c) It was also noted that the revised output definition includes 'other revenue' withoutany explanation. A suggestion put forward is that the IASB clarifies what types ofother economic benefits could be considered 'other revenues' and why wouldsuch 'other revenue' meet the definition of output. For example, would investmentreturns, including dividends from an associate, or profits generated from flippingan asset such as real estate be considered 'other revenues'.The reference to 'market participant' in paragraphs B8, B11 and BC11-BC14(d) Our stakeholders support removing the reference to 'market participant' inparagraph B8 for reasons as stated in paragraph BC12, and retaining thereference to 'market participant' in paragraph B11 for reasons as stated inparagraph BC14.(e) However, they commented that determining a 'market participant' is currently oneof the areas of difficulty in applying IFRS 3 Business Combinations. As noted inparagraph BC11, some sets of activities and assets may be considered abusiness for market participants who could integrate the set of activities andassets in their processes. However, the same set of activities and assets may notbe considered a business from the perspective of other market participants. Forexample, if an acquirer has a substantive process in place, it may not need toacquire any substantive process from the acquiree and may request the seller toterminate/suspend the process before the completion of the acquisition. In thisscenario, assuming the criteria in proposed paragraph B8 is met, would thetransaction be an acquisition of a business or asset? Some stakeholders say itwould meet the definition of a business and others were not sure. Theyrecommend that the IASB clarifies this example.APPENDIXPage 5 of 13The proposed screening test in paragraphs B8A-B11C and BC18-BC21(f)
Our stakeholders note the IASB's intention to reduce the cost of applying thedefinition of a business without changing the IASB's intended outcome. Our smallmedium practitioners and entities welcome the proposed screening test forsimplification reasons.(g) However, our stakeholders, including those small and medium practitioners,expressed a strong concern that the proposed screening test, as a first step indetermining a business, is too rigid and prescriptive. Most, if not all, of ourstakeholders recommended that the screening test could be part of anassessment—but not the first step in a determinative assessment. They think thatthe proposed test, as a first step in determining a business, may inadvertentlyexclude acquisitions where the underlying substance is that of a business. This isbecause, depending on the valuation method, the fair values of a substantiveprocess and organised workforce may be incorporated into the valuation of anasset. For example, in the valuation of a retail shopping mall, does the IASBexpect the valuation of mall/building and the valuation of the propertymanagement/organised workforce to be valued separately? Some of ourstakeholders think that if the mall/building is valued using the income method, theproperty management/organised workforce will be incorporated into the value ofthe building. The fair value would then be concentrated in the valuation of themall/building and the retail shopping mall will not pass the screening test eventhough in substance, it is considered a business and currently is identified as abusiness under IFRS 3.(h) Our stakeholders commented that it is unclear how an organized workforcesupplied through a management contract is different from an in-house organizedworkforce, and how this distinction would lead to a difference in fair value. Forexample, it is unclear how to apply the screening test in instances wherecompanies have many outsourced management contracts that are 'at the money'.They commented that Illustrative Examples B, E, H and I are not sufficiently clearin illustrating how an organised workforce would be assessed under the proposedscreening test in these circumstances. Our stakeholders requested that moreconceptual reasoning needs to be added, and that IASB should clarify whyoutsourced management contracts which may provide critical substantiveprocesses, would fail the screening test purely because they are priced at currentmarket rates and results in an associated fair value of nil.(i)
In general, our stakeholders found paragraphs B11B and B11C to be tooprescriptive. In particular, they commented that it should be made clear thatparagraph B11C is only a non-exhaustive list of factors to assess, and not adefinitive list. Our stakeholders also raised the question of what should becombined into a single identifiable asset or considered a group of similaridentifiable assets? They requested that the IASB expands these paragraphs toinclude what should be combined or should be considered a single/group ofidentifiable assets. They think that this would help in the application of paragraphB11C as the two extremes of a spectrum would be represented.APPENDIXPage 6 of 13(j)
A few stakeholders also commented that paragraphs B11B and B11C would giverise to more questions in practice where an intangible asset is inextricably linkedto a tangible asset. One stakeholder noted that this may be due to internalinconsistencies between these two paragraphs. When applying paragraph B11Bone is required to consider the recognition and measurement of the assets in abusiness combination transaction and could conclude that tangible assets andintangible assets that are inextricably linked would be a “single identifiableasset” for the asset concentration test. This is further supported by referring toexisting B42 through the Illustrative Examples. However, B11C(a) refers to“separately identifiable tangible and intangible assets” in the general sense andhence explicitly says that these assets should not be combined. It also seemsstrange that the screening test to be used to determine whether the subject of thetransaction is a business or not, relies to some degree on the eventual accountingfor a business combination. This seems rather circular in nature and clearlyshows the lack of a principles-based test.The guidance for a substantive process in paragraphs B12-B12C and BC22-BC29(k) Our stakeholders appreciate the IASB's efforts in providing guidance on how toevaluate whether an acquired process is substantive. However, they have foundthe proposed guidance in paragraph B12A for a set of activities and assets whichdo not, at acquisition date, have outputs to be unclear and counter-intuitive insome circumstances. The IASB's Illustrative Example D outlines one end of thespectrum to demonstrate how the criteria in paragraph B12A is not met. However,our stakeholders raised many questions as to what would meet the criteria inparagraph B12A on the other end of the spectrum. They commented that theuncertainty on how to apply paragraph B12A may provide opportunities tostructure transactions depending on whether the entity wanted the acquisition tobe accounted for as an asset or a business. The following are their key concernson areas of uncertainty and they request that the IASB clarifies or provides moreguidance for them.(i)
The reference to an 'organized workforce'—our stakeholders found it unclear:
what an organized workforce actually means. Would it includeemployees that are easily replaceable, for example, those performingroutine manual work that are not specialised; andwhy an organized workforce would be a required input in allcircumstances. If the purpose of an acquisition were to buy out acompetitor, often the organized workforce would not be acquired withthe set of assets and activities.(ii) The reference to 'another acquired input'—it is also unclear what isconsidered 'critical to the ability to develop or convert another acquired inputor inputs into outputs'. For example, would both easily accessible inventoryraw materials and exclusive customer lists meet that characteristic?APPENDIXPage 7 of 13(l)
Our stakeholders welcomed the IASB's attempt to clarify how outsourced inputsand processes should be considered in the assessment of a business. However,one stakeholder commented that paragraph B12C is ambiguous as it states that"an acquired contract is not a substantive process", whilst also requiring entities to"assess whether an organised workforce accessed through such a contractualarrangement performs a substantive process that the entity controls, and thus hasacquired". How does an acquired contract perform a substantive process that theentity controls if an acquired contract is not a substantive process?The examples in paragraphs IE73-IE107(m) Most, if not all, of our stakeholders commented that the IASB has not providedsufficient context and details to the fact patterns, which led to some level ofdifficulty of arriving at the conclusions illustrated. They consider that it isimportant for the IASB to add more explicit reasoning in their examples, and toprovide the underlying principles so that qualitative considerations can also bemade when applying the proposed amendments. This would be more useful forreal life complex fact patterns.(n) Our stakeholders recommended that the IASB should develop contrastingexamples that illustrate the determination of opposite conclusions in borderlinescenarios (for example, one concludes to be a business and the other does notconclude to be a business) using a similar fact base pattern. These examplesshould explain how the difference in specific facts/circumstances would changethe conclusion so that it is clear what is the deciding factor in these borderlinecases.(o) Specific comments on the Illustrative Examples of ED/2016/1 include:
(i)
Example C is likely to be identified as a business under IFRS 3. However,under the proposed amendments, it is not considered a business becausethere is no output and an organized workforce is not acquired. It is unclearwhy in such scenario there is no output. Again, the example would be usefulif some explanation was added on why not acquiring an organised workforcewould fail the test.(ii) In Example D, regarding 'organised workforce', paragraphs IE83 "purchaseralso hires the employees that works in the facility" and IE85 "the set includesan organized workforce" are worded differently. There was some confusionon whether the sentences were attempting to refer to different things orrather to say the same thing in a different way.(p) Our stakeholders also suggested adding more complex examples pertaining tothe industries of extractive mining, financial services, and retail propertymanagement.APPENDIXPage 8 of 13Part 2 of 2: HKICPA's analysis and recommendationsThe HKICPA considers this project is a step in the right direction to better define'business' for the purposes of improving IFRS 3. We continue to support the IASB'seffort in this regard.While an asset purchase is seemingly different in nature from a business acquisition,the HKICPA accepts that in some situations/industries it could be challenging todetermine whether a group of assets constitutes a business and judgement would benecessary in certain circumstances. This is particularly the case when only some ofthe processes are being acquired or the processes are embedded in the inputs.The HKICPA acknowledges that the IASB had previously explored aligning thedifferent approaches without much success and hence the issue of demarcationbetween a business versus an asset arises. However, given that this has been alongstanding challenge in a judgemental area, the HKICPA strongly recommends thatthe IASB takes a step back and revisits, conceptually, the fundamental need fordifferent accounting requirements for asset acquisitions and business acquisitions.The HKICPA considers that it is not always clear why some of the accounting shouldbe different. This includes accounting for directly attributable acquisition-related costs,deferred taxes, consideration in the form of shares, contingent consideration and stepacquisitions. For example, directly attributable acquisition-related costs are capitalisedin the initial recognition of an asset, whilst it is expensed when incurred in a businesscombination.That said, we are not opposed to the IASB providing clearer guidance in IFRS 3 as aninterim measure—provided that the clarifications are clear, understandable, can beapplied consistently to similar facts and circumstances and the standard providesaccounting that faithfully represents the economics of the transaction. Havingassessed the proposed amendments against these principles for clarifications, theHKICPA thinks that the proposed amendments in ED/2016/1 are not a markedimprovement over existing IFRS 3 guidance.This is mainly because there still appears to be a lack of clear principles for what is abusiness versus an asset. The proposed amendments are more rules-based andseem to draw an arbitrary line, without any conceptual underpinning, between an asset(or group of assets) and a business. While applying a rules-based standard mightreduce the diversity in judgment being developed and be welcomed by small mediumpractitioners and entities, we think that the proposed amendments would lead toincreased ambiguity and unintended consequences rather than clearly clarifying thedefinition of a business. This was evidenced by our stakeholders arriving at differentconclusions when they applied the proposed guidance in ED/2016/1 to the IllustrativeExamples.APPENDIXPage 9 of 13The HKICPA generally agrees with our stakeholder views outlined in Part 1. However,the HKICPA thinks that the IASB should not just add more examples to illustrateopposite conclusions or examples on other industries, without providing explicitreasoning and underlying principles. This would not be helpful as there could be amultitude of complex situations across a diverse range of borderline scenarios orindustries—there may never be enough examples. The issue at hand is that it isdifficult to logically and consistently apply the proposed amendments to real-lifesituations or the IASB’s Illustrative Examples because the proposed amendments lackclear principles for what is a business versus an asset.Overall, to make the proposed amendments in ED/2016/1 clear, understandable, andconsistently implementable, the HKICPA strongly recommends that the IASB:
(a) develops, and adds to BC9-BC10, a strong conceptual justification for thedifference between a business and an asset. For example, it mentions inparagraph BC9 that the existence of a process distinguishes a business from anasset. Is it because a process and an input together create additional value that anasset would not ordinarily? Is the additional value created between a process andan input different from the value created when two or more assets are combined,for example, a group of individual but interrelated machines? If so, the IASBshould explain the differences.(b) makes the quantitative screening test as part of an overall holistic assessment thatincludes qualitative principle-based factors. The HKICPA is not convinced that theproposed quantitative screening test as a first step of the assessment wouldalways lead us to acquisitions that faithfully represent a business. For example,the HKICPA is not convinced that acquisitions of an entity that operates via manymanagement or outsourced contracts and thereby not have any in-houseorganized workforce, would not qualify as a business.(c) reconsiders the guidance on evaluating whether an acquired process is substantivetranslates logically to all circumstances, for example, when the scope of paragraphB12A extends its applicability to cases other than an early-stage entity that has notstarted generating revenues. It is uncertain what important characteristics of anorganised workforce supports the identification of a business with outputs andtherefore is considered 'critical to the ability to develop or convert another acquiredinput into outputs'. The uncertainty potentially opens the door to structuring issues,depending on whether the entity wants the acquisition to be accounted for as anasset acquisition or a business combination.(d) reconsider whether the examples are consistent with the guidance provided andresults in a logical outcome. The IASB should explain more robustly how theprinciples/guidance apply to the facts of the examples. The IASB should alsoconsider adding contrasting examples that illustrate opposite conclusions inborderline scenarios so that it is clear what the deciding factor is.APPENDIXPage 10 of 13In light of the above considerations, on balance, the HKICPA is supportive of theIASB's efforts to provide clearer and principles-based application guidance on thedefinition of a business. However, the HKICPA does not support the proposedamendments as they are currently drafted due to the lack of conceptual underpinningand the potential unintended consequences of applying what it considers to be rules-based guidance. The HKICPA strongly recommends that the IASB takes a step backand considers, conceptually, the need to have different accounting treatments foracquisitions of an asset versus acquisition of a business.If the IASB were to proceed with the proposed amendments as an interim measure,the HKICPA strongly recommends that the proposed screening test should not be thefirst step in the assessment of a business; the approach for determining a businessshould be more holistic, which includes both quantitative and qualitative tests; and theIASB clarifies the questions/concerns raised by the HKICPA and our stakeholders.Question 2The Board and the FASB reached substantially converged tentative conclusions onhow to clarify and amend the definition of a business. However, the wording of theBoard's proposals is not fully aligned with the FASB's proposals.Do you have any comments regarding the differences in the proposals, including anydifferences in practice that could emerge as a result of the different wording?Part 1 of 2: Stakeholder viewsAll stakeholders understand that the IASB intends to keep the principles of thestandard consistent, or substantially the same, with the equivalent US GAAP. As such,they commented that ideally, the IASB and FASB use identical text in their standards.This is because any differences in text between the IASB and FASB standards wouldinevitably result in potential confusion in terms of convergence.If it is not possible to use identical text, our stakeholders consider that to minimize therisk of material differences arising due to the interpretation of different wording, theIASB should:
(a)
update the IFRS 3 Appendix "Comparison of IFRS 3 (as revised in 2008) andSFAS 141(R)", which lists and explains the different requirements between IFRSand US GAAP; and(b)
include a clear statement in the basis for conclusions that any other differencesin proposed wording are not intended to result in any differences in principle.APPENDIXPage 11 of 13Our practitioners commented that it is difficult to anticipate the impact of the differencesin the proposals. They therefore found it difficult to recommend whether a particularwording is necessarily clearer or better. Notwithstanding this comment, ourstakeholders generally felt that the FASB's text, while elaborate and specific, waswritten in a rules-based way and therefore more difficult to follow.One stakeholder commented that property with an in-place lease is treated differently1under IFRS and US GAAP. Hence, application of IASB's paragraph B11C wouldpotentially lead to different outcomes from US GAAP. This stakeholder commentedthat deleting the wording in the FASB's ED paragraph 805-10-55-9C "(for example, realestate and in-place lease intangibles)" would not be sufficient in resolving the potentialapplication diversity. As such, it was suggested that the IASB explains such GAAPdifference explicitly under IASB's ED paragraph BC31.Most, if not all, of our stakeholders welcome additional basis for conclusions to explainthe intent behind the IASB's proposed amendments so long as the IASB does notunintentionally create new requirements/guidance in the basis for conclusions.Specifically, some stakeholders thought that the:
(a)
FASB ED paragraph BC31 on "Groups of Processes" may be helpful in applyingIASB paragraphs B12A and B12B; and(b)
FASB ED paragraph BC40 on "Single or Similar Asset Threshold" may be helpfulin applying IASB paragraph B11C.Part 2 of 2: HKICPA's analysis and recommendationsThe HKICPA notes that the IASB proposed amendments that are substantially thesame as FASB's proposed amendments to clarify the definition of a business, with theview that the text in the final amendments would also be the same to maintainconvergence.The HKICPA considers that maintaining a converged standard is desirable. If our aimis to maintain convergence, ideally, identical amendments should be made to thestandards.However, because of our significant concerns mentioned above, the HKICPA is notprepared to compromise on the quality of the amendments or IFRS 3 for the sake ofconverged IFRS and US GAAP standards. The HKICPA also thinks that the IASB'sopportunity to provide a high quality standard should not be sacrificed for the sake ofconvergence with the FASB. The HKICPA urges the IASB to reconsider the drafting ofamendments in a more principles-based manner.1 Under US GAAP the acquirer recognises a tangible asset and an intangible asset for in-place leases aswell as an asset or liability for the favourable or unfavourable aspect of the operating lease; whileparagraph B42 of IFRS 3 states that the acquirer does not recognise a separate asset or liability if theterms of the operating lease are either favourable or unfavourable when compared with market terms.APPENDIXPage 12 of 13The HKICPA agrees with our stakeholders that if the amendments to IFRS 3 weredifferent from the FASB's amendments, the IASB should continue to provide asummary table of text differences. The IASB should also explain why it thinks thedifferences would not lead to different outcomes. This is because if different text isnecessary to explain the same thing within the IASB and FASB proposals, then itsuggests that there may be different interpretations. Finally, if there are differencesbetween IFRS 3 and the equivalent US GAAP which are intended to lead to differentoutcomes, this should also be stated.Question 3To address diversity of practice regarding acquisitions of interests in businesses thatare joint operations, the Board is proposing to add paragraph 42A to IFRS 3 andamend paragraph B33C of IFRS 11 to clarify that:
(a) on obtaining control, an entity should remeasure previously held interests inthe assets and liabilities of the joint operation in the manner described inparagraph 42 of IFRS 3; and(b) on obtaining joint control, an entity should not remeasure previously heldinterests in the assets and liabilities of the joint operation.Do you agree with these proposed amendments to IFRS 3 and IFRS 11? If not, whatalternative would you propose, if any, and why?Part 1 of 2: Stakeholders viewsOur stakeholders do not object to the proposed amendments to IFRS 3 and IFRS 11 inrelation to the clarification on accounting for previously held interests.However, one practitioner pointed out that there are two schools of thought on theaccounting for previously held interests. One view is that a joint operation is not toodissimilar to a joint venture or an associate, and therefore the joint operator shouldremeasure its previously held interest. Another view is a joint operator has a directinterest in the joint operation's assets and liabilities, which is different from having asingle net investment as in a joint venture or an associate. Therefore remeasurementof assets and liabilities that the joint operator has direct interests in and recorded in itsbooks may not be appropriate.As such, this stakeholder thinks that the IASB might need to further address theseviews.APPENDIXPage 13 of 13Part 2 of 2: HKICPA's analysis and recommendationThe HKICPA does not object to the proposed amendments to IFRS 3 and IFRS 11 inrelation to the clarification on accounting for previously held interests. Given theconcerns noted by our stakeholders above, the HKICPA recommends that the IASBelaborates its rationale in the basis for conclusions.Question 4The Board is proposing the amendments to IFRS 3 and IFRS 11 to clarify theguidance on the definition of a business and the accounting for previously heldinterests be applied prospectively with early application permitted.Do you agree with these proposed transition requirements? Why or why not?Stakeholder views and HKICPA's analysis and recommendationsThe HKICPA and our stakeholders agree with the respective rationale and proposedtransition requirements in paragraph BC4 of IFRS 11 and paragraph BC32 of IFRS 3.