IASB Exposure Draft ED/2015/6 Clarifications to IFRS 15

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

9 November 2015Mr Hans HoogervorstInternational Accounting Standards Board30 Cannon StreetLondon EC4M 6XHUnited KingdomDear Hans,IASB Exposure Draft ED/2015/6 Clarifications to IFRS 15The 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. We are grateful for the opportunityto provide you with our comments on this Exposure Draft (ED).We support the efforts of IASB and FASB (the boards) to respond to implementationconcerns raised about the revenue standard. We encourage the boards to continue towork towards converged solutions to implementation issues related to the revenuestandard whenever possible. Having said that, the HKICPA supports, first and foremost,standards that are high-quality, understandable and principle-based, over and abovesimply having a standard that is identical for the sake of convergence.In general, we agree with most of the proposals as set out in the IASB ED and agree withthe IASB's decision not to clarify certain other issues where the FASB has decided toprovide further guidance in the Standard. However, we understand that people are havingdifficulty in applying the concept of 'distinct' in the Standard and we would supportadditional clarifications being made in the Standard itself, and not limited to the IllustrativeExamples. In this regard, we believe the changes proposed by the FASB relating toidentifying performance obligations (or the concept of 'distinct') are helpful and wouldencourage the IASB to consider the approach proposed by the FASB.The boards have claimed that the financial reporting outcomes might not be significantlydifferent, even when the boards pursued different approaches. However, we believe thatthe outcomes will not be the same in all cases. We are concerned that using differentwords to clarify or amend the standard will introduce additional complexity, diversity inpractice and will no longer be a converged standard.Therefore, we believe it is important that the IASB includes a discussion in the Basis forConclusions for each area where the wording of IFRS 15 and ASC Topic 606 Revenuefrom Contracts with Customers are diverged. It should state explicitly whether thedifference is simply semantic or that it could result in divergent practice and explain thecircumstances in which this may occur. It would also be helpful if a comparison tablebetween IFRS 15 and Topic 606 is included similar to the one provided in IFRS 3Business Combinations (as revised in 2008) which identifies and compares thoseparagraphs in which the IASB and the FASB have different requirements.In addition, we recommend that the illustrative examples as provided in the ED shouldinclude a more complex fact pattern and the discussion should be linked to the Standardto rationalize how the Standard should be applied. As described in Appendix B to thisletter, we consider that some of the examples included in the ED are too lengthy andinclude facts and circumstances that are not germane to the point intended to beillustrated or their consequences for the analysis is not clearly described.Our responses to the questions posed in the ED are set out in more detail in Appendix A.In Appendix B, we provide detailed comments on the proposed amendments to illustrativeexamples in both the IASB and FASB's exposure drafts1.If you have any questions regarding the matters raised in this letter, please contact me orWinnie Chan, Associate Director of the Standard Setting Department(winniechan@hkicpa.org.hk).Yours sincerely,Christina NgHead of Financial ReportingCN/WCEncl1 FASB ED 2015-250 (issued in May 2015) and FASB ED 2015-290 (issued in August 2015)

APPENDIX ADetailed comments on IASB ED/2015/6 Clarifications to IFRS 15Identifying a distinct good or serviceWe do not agree with the IASB's proposed approach that is limited to only adding newexamples, and to amending some of the existing examples that accompany IFRS 15 toclarify how an entity should apply the requirements on identifying performanceobligations.We are informed that people are having difficulty understanding how to apply the'distinct' principle in paragraph 27. In particular, when is a good or service that isdistinct within paragraph 27(a) not distinct within paragraph 27(b) and therefore notmeet the 'distinct' principle.This confusion arises in part because the supporting factors in paragraph 29 focus onwhen distinct promised goods or services (i.e. ones which have passed the test inparagrah 27(a)) are also regarded as distinct within the contract. The criteria inparagraph 29 therefore do not help with deciding the harder question of when thedistinct promised goods or services (i.e. ones which have passed the test in paragrah27(a)) are not in fact distinct within the meaning of a contract and should be bundledtogether. This confusion could lead to very different answers and major differences inaccounting for very similar fact patterns. Accordingly, we consider that more guidanceshould be provided in the standard on this harder question of when to bundle goodsand services within the context of a contract when these goods and services areotherwise capable of being distinct.We believe that it is important to include the concept discussed in the Basis forConclusions in the body of the standard itself. In particular, it would be easier forQuestion 1 — Identifying performance obligationsIFRS 15 requires an entity to assess the goods or services promised in acontract to identify the performance obligations in that contract. An entity isrequired to identify performance obligations on the basis of promised goodsor services that are distinct.To clarify the application of the concept of ‘distinct’, the IASB is proposing toamend the Illustrative Examples accompanying IFRS 15. In order to achievethe same objective of clarifying when promised goods or services aredistinct, the FASB has proposed to clarify the requirements of the newrevenue Standard and add illustrations regarding the identification ofperformance obligations. The FASB’s proposals include amendments relatingto promised goods or services that are immaterial in the context of a contract,and an accounting policy election relating to shipping and handling activitiesthat the IASB is not proposing to address. The reasons for the IASB’sdecisions are explained in paragraphs BC7–BC25.Do you agree with the proposed amendments to the Illustrative Examplesaccompanying IFRS 15 relating to identifying performance obligations? Whyor why not? If not, what alternative clarification, if any, would you proposeand why?entities to understand the separately identifiable principle if paragraph 29 includes theprinciple as set out in BC10 that an entity should evaluate whether the contract is totransfer (a) multiple distinct goods or services or (b) a combined item or items thatcomprise a distinct bundle of goods or services promised in the contract and BC11 thatthe evaluation should consider the relationship between the various goods or serviceswithin the contract in the context of the process of fulfilling the contract.We therefore prefer the language as proposed by the FASB in its exposure draft thatexpanding the articulation of the separately identifiable principle and to structure thefactors in paragraph 606-10-25-21 of Topic 606 (paragraph 29 of IFRS 15) to identifywhen the promises in a bundle of promised goods or services are not separatelyidentifiable and, therefore, constitute a single performance obligation. We found thatthe current wordings in paragraph 29 of IFRS 15 are less clear and indirect.Identifying immaterial goods or servicesWe agree with the IASB's decision not to propose an amendment to clarify that anentity is not required to identify goods or services promised in the contract that areimmaterial within the context of the contract, as proposed by the FASB. We believethat the concept of materiality is pervasive in financial reporting and should not bespecifically defined in IFRS 15.Shipping and handling activitiesWe agree with the IASB's decision not to propose a practical expedient permittingentities to make an accounting policy election in relation to the accounting for shippingand handling activities, as proposed by the FASB. As noted in paragraph BC24 of theED, such an accounting policy election would be an exception from the principles ofthe revenue recognition model and would reduce comparability between entities.We generally agree with the amendments proposed by the IASB to clarify therelationship between the control principal and the indicators. However, we recommendthe IASB to provide illustrative examples with more complex facts which can addresssituations that preparers are struggling with. For example, how should the principal-agent principle be applied when the inventory risk of the principal could be mitigated(such as with the right of return to seller) and the case in which a wholesaler who isacting as both a principal and an agent and has the flexibility in setting prices.We note that much of the difficulty in current practice is that current standard andillustrative examples for assessing the principal-agent relationship contain numerousindicators without a framework or guidance for making judgments when severalindicators point towards contrary directions. For example, paragraph B37(C) includes astatement that an agent could have pricing discretion in some cases. We areconcerned that this statement, which follows immediately after the description of whypricing discretion is an indicator that an entity is the principal, would confuse users. Wesuggest that the IASB includes a discussion of its application in the Basis forConclusions along with an example to provide the appropriate context.Question 2 — Principal versus agent considerationsWhen another party is involved in providing goods or services to a customer,IFRS 15 requires an entity to determine whether it is the principal in thetransaction or the agent. To do so, an entity assesses whether it controls thespecified goods or services before they are transferred to the customer.To clarify the application of the control principle, the IASB is proposing toamendparagraphsB34–B38ofIFRS15,amendExamples45–48accompanying IFRS 15 and add Examples 46A and 48A.The FASB has reached the same decisions as the IASB regarding theapplication of the control principle when assessing whether an entity is aprincipal or an agent, and is expected to propose amendments to Topic 606that are the same as (or similar to) those included in this Exposure Draft inthis respect.The reasons for the Boards’ decisions are explained in paragraphs BC26–BC56.Do you agree with the proposed amendments to IFRS 15 regarding principalversus agent considerations? In particular, do you agree that the proposedamendments to each of the indicators in paragraph B37 are helpful and do notraise new implementation questions? Why or why not? If not, what alternativeclarification, if any, would you propose and why?We note that the IASB and FASB proposals are articulated in different ways. This maylead to differences in accounting in certain circumstances. We encourage the Boardsto work together, wherever possible, to agree common wording or state explicitlywhether the difference could result in divergent practice.The nature of an entity's promise in granting a licence of intellectual propertyWe support the IASB's decision to propose clarifications to paragraph B58 in the newparagraph B59A. We believe the clarification can help to ensure more consistentconclusions in determining when the nature of an entity's promise is to provide a rightto access or a right to use the entity's intellectual property (IP).The FASB has proposed an alternative approach by classifying licences of IP as eitherfunctional or symbolic based on whether the underlying IP has significant standalonefunctionality. In paragraph BC70 of the Basis for Conclusions, the FASB observes thatthe outcomes under this alternative approach would differ from those under theapproach within IFRS 15 in relatively few cases. However, we do not prefer the FASB'sproposal as the model is rules-based and varies from the principles in the standard,and would increase the risk of structuring, for example.Question 3 — LicensingWhen an entity grants a licence to a customer that is distinct from otherpromised goods or services, IFRS 15 requires the entity to determine whetherthe licence transfers to a customer either at a point in time (providing theright to use the entity’s intellectual property) or over time (providing the rightto access the entity’s intellectual property). That determination largelydepends on whether the contract requires, or the customer reasonablyexpects, the entity to undertake activities that significantly affect theintellectual property to which the customer has rights. IFRS 15 also includesrequirements relating to sales-based or usage-based royalties promised inexchange for a licence (the royalties constraint).To clarify when an entity’s activities significantly affect the intellectualproperty to which the customer has rights, the IASB is proposing to addparagraph B59A and delete paragraph B57 of IFRS 15, and amend Examples54 and 56–61 accompanying IFRS 15. The IASB is also proposing to addparagraphs B63A and B63B to clarify the application of the royaltiesconstraint. The reasons for the IASB’s decisions are explained in paragraphsBC57–BC86.The FASB has proposed more extensive amendments to the licensingguidance and the accompanying Illustrations, including proposing analternative approach for determining the nature of an entity’s promise ingranting a licence.Do you agree with the proposed amendments to IFRS 15 regarding licensing?Why or why not? If not, what alternative clarification, if any, would youpropose and why?The scope and applicability of the sales-based and usage based royalties exceptionWe support the IASB's proposed clarifications to the requirements of paragraph B63through the proposed new paragraphs B63A and B63B.Contractual restrictions in a licence on identifying the performance obligations in thecontractWe agree with the IASB's decision not to make amendments to the Standard itself inrelation to contractual restrictions. We believe that a clarification in the Basis forConclusions, as proposed by the IASB, is sufficient.Determining when an entity should assess the nature of a licenceWe consider that paragraphs B55 and BC407 are sufficiently clear that an entity shouldconsider the nature of its promise in granting a licence when applying the generalrevenue recognition model to a combined performance obligation where the licence isthe dominant component. We therefore agree with the IASB's decision not to proposeany amendments in respect of this matter.We support the IASB's proposal of including two additional practical expedients ontransition to IFRS 15 in respect of contract modifications and completed contracts. Webelieve these practical expedients would assist entities with implementation and wouldnot significantly impact on the usefulness of the information disclosed.Question 4 — Practical expedients on transitionThe IASB is proposing the following two additional practical expedients ontransition to IFRS 15:

(a)

to permit an entity to use hindsight in (i) identifying the satisfied andunsatisfied performance obligations in a contract that has been modifiedbefore the beginning of the earliest period presented; and (ii)

determining the transaction price.(b) to permit an entity electing to use the full retrospective method not toapply IFRS 15 retrospectively to completed contracts (as defined inparagraph C2) at the beginning of the earliest period presented.The reasons for the IASB’s decisions are explained in paragraphs BC109–BC115. The FASB is also expected to propose a practical expedient ontransition for modified contracts.Do you agree with the proposed amendments to the transition requirementsof IFRS 15? Why or why not? If not, what alternative, if any, would youpropose and why?

(1)Collectability and contract terminationWe support the IASB's decision not to clarify this issue. We believe that paragraph9(e) is clear that an entity only assesses the consideration to which it will beentitled in exchange for the goods and services that will be transferred to thecustomer. Furthermore, this matter is also addressed in paragraph BC46 ofIFRS 15.We also agree with the IASB's decision not to clarify the meaning of 'contracttermination' under IFRS 15. We agree with the analysis in paragraph BC96 of theED that an entity applying IFRS 15 would normally conclude that a contracttermination means that an entity has stopped transferring goods or services, ratherthan stopped pursuing collection from the customer.

(2)Presentation of sales taxesWe agree with the IASB's decision not to provide a practical expedient in respect ofsales taxes. We believe that this is a US specific issue and we agree with theanalysis in paragraph BC108 of the ED.

(3)Non-cash consideration (measurement date / variability)

We support the IASB's decision not to make amendments to IFRS 15 in respect ofthe measurement date for non-cash consideration or in relation to how to apply theconstraint on variable consideration in situations where the fair value of the non-cash consideration might vary due to both the form of the consideration and forreasons other than only the form of the consideration. We acknowledge that theseissues interact with the requirements of other Standards such as IFRS 2 Share-based Payment and IAS 21 The Effects of Changes in Foreign Exchange Rates,and we understand that stakeholders have told the IASB that any practical effect ofdifferent measurement dates would only arise in limited circumstances (as stated inparagraph BC100 of the ED). Accordingly, we agree with the IASB's decision toconsider, if needed, the measurement date of the non-cash consideration morecomprehensively in a separate project.Question 5 — Other topicsThe FASB is expected to propose amendments to the new revenue Standardwith respect to collectability, measuring non-cash consideration and thepresentation of sales taxes. The IASB decided not to propose amendments toIFRS 15 with respect to those topics. The reasons for the IASB’s decisions areexplained in paragraphs BC87–BC108.Do you agree that amendments to IFRS 15 are not required on those topics?Why or why not? If not, what amendment would you propose and why? If youwould propose to amend IFRS 15, please provide information to explain whythe requirements of IFRS 15 are not clear.Other commentsWe note that the IASB and FASB proposals are articulated in different ways. We thinkthat this may lead to differences in accounting in certain circumstances. We also thinkthat it is important that the IASB includes a discussion in the Basis for Conclusions foreach area where the wording of IASB's IFRS 15 and FASB's ASC Topic 606 arediverged. It should state explicitly whether the difference is simply semantic or that itcould result in divergent practice and explain the circumstances in which this mayoccur. It would also be helpful if a comparison table between IFRS 15 and Topic 606 isincluded similar to the one provided in IFRS 3 Business Combinations (as revised in2008) which identifies and compares those paragraphs in which the IASB and theFASB have different requirements.~ End of Appendix A ~Appendix BAppendix B - Other comments about the proposed amendments on illustrative examplesin IFRS 15 and ASC Topic 606 in IASB ED 2015/6 and FASB ED 2015/2501 and FASB ED2015/2902Example 10, Case A — Significant integration service (single item)

IASB ED/2015/6: Paragraphs IE45 to IE48FASB ED 2015/250: Paragraphs 606-10-55-137 to 140HKICPA commentsWe consider the difference is simply semantic and is not expected to result in divergent practice.Example 10, Case B — Significant integration service (multiple items)

IASB ED/2015/6: Paragraphs IE48A to IE48DFASB ED 2015/250: Paragraphs 606-10-55-140A to 140CHKICPA comments:

As stated in Appendix A to this letter in our response to question 1, we consider that the focus inparagraph 29 on “when not to bundle” is unhelpful in understanding the concept of “distinct in thecontext of a contract”. We understand that this new example has been proposed as some constituentsexpressed concerns at the TRG meeting that the term "combined output' in para 29(a) might precludethe identification of a single performance obligation when an output comprises more than one phase,element or unit. Our strong preference for resolving this confusion is for paragraph 29 to be re-written toprovide much clearer guidance on the principle of “distinct within the context of the contract” to help withthe harder question of when to bundle goods and services which satisfy paragraph 27(a). We do notconsider that this example, in and of itself, resolves the confusion. It may even add confusion ifparagraph 29 itself is not re-drafted.In particular, both the examples of IASB and FASB stressed the facts that the devices produced by theentity are highly complex and specialized to customers. We are concerned that it may have unintendedconsequences and cause some entities to interpret that every manufacturer of a series of customizedgoods should conclude that it is providing a significant integration service or conversely that theintegrating non-complex items (such as combining bricks to form a wall) should not be a singleperformance obligation. We believe the IASB example could be worded more clearly. We prefer thelanguage as proposed by the FASB that can better explain why the production of multiple units isconsidered to be a single performance obligation.Also, the IASB example seems to indicate that an entity should conclude that the goods and servicesare not distinct if the entity is responsible for the overall management of the contract (para IE48C).However, this fact is not reflected in the FASB example. It is unclear whether the responsibility of overallmanagement is a critical feature in determining whether an integration service is a separateperformance obligation.Example 10, Case C — Highly interrelatedIASB ED/2015/6: No relevant example in IFRS 15FASB ED 2015/250: Paragraphs 606-10-55-140D to 140FHKICPA commentsWe agree with the IASB that an additional example is unnecessary as Example 55 already illustratesapplication of the requirements on identifying performance obligations to a similar fact pattern.1 FASB ED 2015-250: Identifying Performance Obligations and Licensing issued by the FASB in May 2015.2 FASB ED 2015-290: Principal versus Agent Considerations (Reporting Revenue Gross versus Net) issued by the FASB in August

2015.Example 11, Case A — Distinct goods or servicesIASB ED/2015/6: Paragraphs IE49 to IE53FASB ED 2015/250: Paragraphs 606-10-55-141 to 145HKICPA comments:

We prefer the language used by the FASB. The FASB's example provides a clearer explanation that theperformance of integration services in respect of certain goods or services promised in a contract maynot always leads to a conclusion that all of the goods and services promised in a contract constitute asingle performance obligation - the installation is not complex and that the entity can obtain the servicesfrom "alternative providers" (para 606-10-55-143).Example 11, Case B — Significant customizationIASB ED/2015/6: Paragraphs IE54 to IE58FASB ED 2015/250: Paragraphs 606-10-55-146 to 150HKICPA comments:

We agree with the IASB that no amendment is required for this example.Example 11, Case C — Promises are separately identifiable (installation)

IASB ED/2015/6: Paragraphs IE58A to IE58EFASB ED 2015/250: Paragraphs 606-10-55-150A to 150CHKICPA commentsWe suggest the IASB extends the example by including more complex facts that corresponds to livesituations. An example to consider is the integration of mobile network system which comprises ofinstallation of various equipment and the involvement of different suppliers. The installation ofequipment (e.g. receiver) may not necessarily change the utility/function of an individual receiver (i.e.the good or service is capable of being distinct) but the combination of several receivers together isessential to the set up of a mobile network as a whole. It is not clear in this example whether thecombination of various equipment and the installation services has transformed them into a "different"output and thus should be accounted for as a single performance obligation.Example 11, Case D — Promises are separately identifiable (contractual restrictions)

IASB ED/2015/6: Paragraphs IE58F to IE58GFASB ED 2015/250: Paragraphs 606-10-55-150D to 150FHKICPA commentsIt appears that this example is trying to establish the principle that it is irrelevant what the contract saysabout installation or why it says it. We do not agree with this principle and consider that the fact patternneeds to be expanded to state what the contract says about installation.For example, it is not clear from the instruction “Assume the same facts as Case C, except that thecustomer is contractually required to use the entity’s installation services” whether the fact in Case C of“the installation required is capable of being performed by other service providers” is also applicable inCase D or is varied in case D.Therefore, it is not clear if the conclusion would be different in case D if the installation service iscontractually required due to the reason that the services can only be performed by the entity due tospecific expertise requirement. Also, as no details of the contract terms are given, it is not clear if theconclusion would be different in Case D if using the original supplier for installation was one of theconditions for valid warranty.Example 11, Case E — Promises are separately identifiable (consumables)

IASB ED/2015/6: Paragraphs IE58H to IE58LFASB ED 2015/250: Paragraphs 606-10-55-150G to 150IHKICPA comments:

We do not have further comments on this example.Example 12, Case A — Explicit promises of serviceIASB ED/2015/6: Paragraphs IE60 to IE61FASB ED 2015/250: Paragraphs 606-10-55-152 to 153HKICPA comments:

We are fine with the amendments as proposed by the IASB which are for clarification purpose.Example 12, Case B — Implicit promises of serviceIASB ED/2015/6: No amendments proposed by the IASB.FASB ED 2015/250: Paragraphs 606-10-55-154 to 155HKICPA comments:

We agree with the IASB that no amendment is required for this example.Example 12, Case C — Services are not a performance obligationIASB ED/2015/6: No amendments proposed by the IASB.FASB ED 2015/250: Paragraphs 606-10-55-154 to 155HKICPA comments:

We agree with the IASB that no amendment is required for this example.Example 44—WarrantiesIASB ED/2015/6: No amendments proposed by the IASB.FASB ED 2015/250: Paragraphs 606-10-55-309 to 315HKICPA commentsWe agree with the IASB that no amendment is required for this example.Example 45—Arranging for the provision of goods or services (entity is an agent)

IASB ED/2015/6: Paragraphs IE231 to IE233FASB ED 2015/290: Paragraphs 606-10-55-317 to 319HKICPA commentsWe note that this example is straight-forward – an entity is an agent as it does not control the suppliers'inventory of goods used to fulfill the orders placed by customers using the website.We suggest the IASB extends the example with more complex facts to help users better understandhow to evaluate the inventory risk indicator, for example, whether the conclusion of the example wouldbe changed if an entity keeps the inventory but an entity's risk may be reduced significantly if it has theright to return unsold products to the supplier or receives inventory price protection from the supplier.Example 46—Promise to provide goods or services (entity is a principal)

IASB ED/2015/6: Paragraphs IE234 to IE238FASB ED 2015/290: Paragraphs 606-10-55-320 to 324HKICPA commentsWe suggest the IASB makes clear in paragraphs IE234 and IE238 that an entity is entering into twoseparate contracts with the supplier and the customer, and an entity is a principal in both of thecontracts.Example 46A—Promise to provide goods or services (entity is a principal)

IASB ED/2015/6: Paragraphs IE238A to IE238GFASB ED 2015/290: Paragraphs 606-10-55-324A to 324GHKICPA commentsWe do not have further comments on this example.Example 47—Promise to provide goods or services (entity is a principal)

IASB ED/2015/6: Paragraphs IE239 to IE243FASB ED 2015/290: Paragraphs 606-10-55-325 to 329HKICPA commentsIt would be helpful if the example further clarified the application of paragraph B34A(a) when an entityshould identify the specified good or service as a right to a good or service or the underlying good orservice that will be transferred to the customer.Example 48—Arranging for the provision of goods or services (entity is an agent)

IASB ED/2015/6: Paragraphs IE244 to IE248FASB ED 2015/290: Paragraphs 606-10-55-330 to 334HKICPA commentsWe believe that transactions in which a retailer obtains title of products of a supplier at the point of saleare common and users might have issues on how the control principle should be assessed for suchtransactions. We note that the staff paper from the 22 June 2015 joint Board meeting on principalversus agent considerations included an example of a retailer that had only momentarily obtained titleof a manufacturer's products at the point of sale. We recommend adding this example to illustrate thefactors that need to be considered when determining whether an entity obtains control of a good orservice prior to transferring it to the customer..Example 48A—Entity is a principal and an agent in the same contractIASB ED/2015/6: Paragraphs IE248A to IE248FFASB ED 2015/290: Paragraphs 606-10-55-334A to 334FHKICPA commentsWe do not have further comments on this example.Example 54—Right to use intellectual propertyIASB ED/2015/6: Paragraphs IE276 to IE277FASB ED 2015/250: Paragraphs 606-10-55-362 to 363BHKICPA commentsWe do not have further comments on this example.Example 55—Licence of intellectual propertyIASB ED/2015/6: Paragraphs IE278 to IE280FASB ED 2015/250: Paragraphs 606-10-55-364 to 366HKICPA commentsWe do not have further comments on this example.Example 56, Case A — Licence is not distinctIASB ED/2015/6: Paragraphs IE282 to IE284FASB ED 2015/250: Paragraphs 606-10-55-368 to 370HKICPA commentsWe have doubts on whether there is any patent right in Case A as in this case, apart from thepharmaceutical company, there is no other entity that can manufacture this drug due to the highlyspecialized nature of the manufacturing. We consider this arrangement is more of a nature ofmanufacturing service arrangement or a distribution arrangement.Example 56, Case B — Licence is distinctIASB ED/2015/6: Paragraphs IE285 to IE288FASB ED 2015/250: Paragraphs 606-10-55-371 to 374HKICPA commentsWe are concerned that the language used in para IE287 may cause some entities to interpret a drug'sstate of development is a determinative factor in the conclusion of the nature of the entity's promise intransferring the licence (i.e. that only a mature and/or approved drug formula can have significantstandalone functionality). We suggest the IASB deletes those wordings that described the drugs asmature product in para IE287 and focus more on the aspect that the drug formula has significantstandalone functionality.Example 57 – Franchise rightsIASB ED/2015/6: Paragraphs IE289 to IE296FASB ED 2015/250: Paragraphs 606-10-55-375 to 382HKICPA commentsWe prefer the example as amended by the FASB which included a license fee comprised of both a fixedfee of $1 million and a sales-based royalty of 5% of the customer's (opposed to only variableconsideration of 5% of the customer's sales from the franchise store in IASB's example) – we found thatit is useful to demonstrate the pattern of revenue recognition of the fixed franchise fee in the FASBexample.Example 58 – Access to intellectual propertyIASB ED/2015/6: Paragraphs IE297 to IE302FASB ED 2015/250: Paragraphs 606-10-55-383 to 388HKICPA commentsWe do not have further comments on this example.Example 59 – Right to use intellectual propertyIASB ED/2015/6: Paragraphs IE303 to IE306FASB ED 2015/250: Paragraphs 606-10-55-389 to 392HKICPA commentsWe do not have further comments on this example.Example 60—Sales-based royalty for a licence of intellectual propertyIASB ED/2015/6: Paragraphs IE307 to IE308FASB ED 2015/250: Paragraphs 606-10-55-393 to 394HKICPA commentsWe do not have further comments on this example.Example 61—Access to intellectual propertyIASB ED/2015/6: Paragraphs IE309 to IE313FASB ED 2015/250: Paragraphs 606-10-55-393 to 394HKICPA commentsWe do not have further comments on this example.Example 61A—Right to use intellectual propertyExample 61B—Contractual provisions that are (and are not) restrictionsIASB ED/2015/6: No relevant examplesFASB ED 2015/250: Paragraphs 606-10-55-399A to 399OHKICPA commentsWe agree with the IABS's decision and do not consider that the Examples 61A & 61B are necessary.~ End of Appendix B ~