Our Ref.: C/FRSCSent electronically through the IASB Website (www.ifrs.org)
12 July 2024Dr Andreas BarckowInternational Accounting Standards BoardColumbus Building7 Westferry CircusCanary WharfLondon E14 4HDUnited KingdomDear Andreas,IASB Exposure DraftBusiness Combinations—Disclosures, Goodwill and Impairment(Proposed amendments to IFRS 3 and IAS 36)
The Hong Kong Institute of Certified Public Accountants (HKICPA) is the only bodyauthorised by law to set and promulgate standards relating to financial reporting, auditing,ethics and sustainability disclosures for professional accountants in Hong Kong. We aregrateful for the opportunity to provide our comments on this Exposure Draft (ED).The HKICPA appreciates the IASB’s efforts in addressing users’ needs for betterinformation about the performance of business combinations, while balancing preparers’concerns about cost and commercial sensitivity through the proposed changes to IFRS3 Business Combinations. The HKICPA also welcomes the IASB’s initiative to reducecost and complexity of the impairment test by proposing targeted improvements to IAS36 Impairment of Assets. However, we have significant concerns about certain aspectsof the proposals. We provide detailed comments in the Appendix and summarise ourprimary concerns and recommendations below.Proposed amendments to IFRS 3We agree with the overall direction of the proposed disclosures that they should only beapplied to a subset of material business combinations, subject to an exemption. However,we have significant concerns in the following areas:
Scope of strategic business combinationsWe see the merits of applying a threshold approach as it is easier to use, audit andenforce. Nevertheless, we are concerned that the proposed thresholds would noteffectively capture the intended population of strategic business combinations asdescribed in BC54 of the ED and may capture many more business combinations thanwhat we would consider to be strategic business combinations, for the following reasons:
- The proposed 10% threshold appears too low compared to the local listing rules toprovide additional information for significant acquisitions.- The proposed quantitative thresholds only focus on the size of business combinationsin terms of revenue, operating profit or loss and total assets, without consideringwhether the transactions are of any strategic value to the acquirer. Furthermore, whencalculating the thresholds, the acquirer and acquiree’s financial information may bedistorted e.g. due to significant non-recurring items, making it unrepresentative of theusual state of their financial performance and position.Page 2 of 13- The proposed qualitative threshold is not sufficiently clear on whether it is targetingmajor and strategically important acquisitions geographically.We acknowledge the challenges in defining a universal set of thresholds that wouldaccommodate the diverse types of acquisitions and business strategies across entities.Therefore, if the IASB’s intention were to capture only sizable business combinations,we recommend the IASB reset the proposed 10% threshold to a higher one to be morein line with capital market regulations for major acquisitions, provide guidance andclarifications to address the identified issues for qualitative and quantitative thresholds,and rename the term ‘strategic’ to another term, such as ‘major’ or ‘substantial’, to reflectthe specific criteria that characterise the relevant business combinations.However, if the IASB’s intention were to identify both strategically important and sizablebusiness combinations, we suggest the IASB consider using a principle-based approachwith BC54 as the principle and the proposed thresholds as indicators rather thandeterminative factors for a strategic business combination. Under this approach, entitiescould rebut the presumption by providing reasonable justifications and additionaldisclosures.Disclosure of key objectives, targets and expected synergiesWe have identified practical questions relating to the disclosure of key objectives, targetsand expected synergies, and recommend the IASB provide guidance or clarification onhow the proposals should be applied. These questions include:
-An entity’s objectives for an acquisition are often broad and subjective in nature, andthere could be difficulties in objectively identifying the key objectives of a strategicbusiness combination. In particular, our respondents considered that potential riskfactors adversely impacting the achievement of the key objectives could be animpediment to the success of a business combination and are useful information tousers. They questioned whether potential risk factors would warrant disclosure.-The key objectives of a strategic business combination could be financial-related ornon-financial related. In cases where the key objectives of a strategic businesscombination are to achieve branding, technological and innovation-related benefits,the ED is not clear as to whether, and if so, how entities should set the measurabletargets and quantify the expected synergies for non-financial objectives fordisclosures.-There is a lack of clarity on what ‘synergies’ mean in the ED. Specifically, ourpreparers and users questioned whether the proposed disclosures intend to capturethe revenue of the combining operations or incremental revenue. Without clearexplanations, entities would prepare the disclosures on different bases and usersmay interpret the quantitative information differently.Exemption from disclosuresThe application of the disclosure exemption requires a high level of judgement inidentifying circumstances that ‘can be expected to prejudice seriously the achievementof any of the acquirer’s acquisition-date key objectives for the business combination’.However, the proposed application guidance does not provide sufficient direction on thespecific circumstances where the exemption can be applied. It is also unclear whetherthe exemption would only apply in ‘extremely rare cases’, similar to the exemption in IAS37 Provisions, Contingent Liabilities and Contingent Assets. This lack of clarity leavessignificant room for interpretation and subjectivity in restricting the exemption only to theappropriate circumstances.Page 3 of 13Given the above, we recommend the IASB provide application guidance and examplesof legitimate circumstances that qualify for the disclosure exemption to mitigate a risk ofdiversity in practice. This recommendation, together with those on the scope of strategicbusiness combinations and disclosures of key objectives, targets and expectedsynergies explained above, could enhance the overall robustness of the proposals andenable entities to focus on the most important information for the most importantbusiness combinations in a cost-efficient manner, while mitigating potential debatebetween preparers and auditors.Expectation gap on the level of assurance providedOur practitioners expressed significant concerns that users and regulators might assumeauditors had performed work to provide reasonable assurance of the existence andachievability of key objectives, targets and expected synergies disclosed in auditedfinancial statements, exposing auditors to litigation risk when users rely on thatinformation for decision making and suffer losses. This creates an expectation gapbetween the assurance provided by auditors and the assurance perceived by users.To address this, we recommend the IASB clearly specify in the body of IFRS 3 that thekey objectives, targets and expected synergies are solely based on information preparedand reviewed by the entity’s management and represent management’s best estimateat the time of acquisition, and there is no guarantee that the actual results will align withthe disclosures. In addition, entities should disclose this management assertion in thefinancial statements. We believe that this approach would be consistent with paragraph122 of IFRS 18 Presentation and Disclosure in Financial Statements, which requires acompany to disclose a statement to set appropriate expectations around the nature andreliability of the information provided, helping users understand the inherent uncertaintyand mitigate the expectation gap.If you have any questions regarding the matters raised in this letter, please contactKennisLee(kennislee@hkicpa.org.hk),AssociateDirectororSamChan(samkcchan@hkicpa.org.hk), Manager of the Standard Setting Department.Sincerely,Cecilia KweiDirector of Standard SettingPage 4 of 13Work undertaken by the HKICPA in forming its views:
The HKICPA:
(a) issued an Invitation to Comment on the ED on 15 March 2024 to its members andother stakeholders;
(b) sought input from its Business Combinations and Reporting Entity Advisory Panel,Financial Reporting Valuation Advisory Panel and Small and Medium PracticesCommittee and its Technical Issues Support Group, which mainly comprise technicaland industry experts from large as well as small and medium accounting firms(collectively, Practitioners);
(c) held a public roundtable discussion for local stakeholders, including Practitioners,preparers, valuers and investors on 27 May 2024; and(d) developed its views through its Financial Reporting Standards Committee, havingreflected on its respondents’ views. The Committee comprises preparerrepresentatives from various industry sectors, regulators, as well as technical andindustry experts from small, medium and large accounting firms.Detailed comments on the IASB EDQuestion 1—Disclosures: Performance of a business combination(proposed paragraphs B67A–B67G of IFRS 3)
1.Our respondents expressed mixed views regarding the proposals of requiring entitiesto disclose information on the performance of a strategic business combination,subject to exemption. Some respondents, including users of financial statements,supported the proposals as they provide them with useful information about materialacquisitions and their subsequent performance. However, other respondents had thefollowing comments.A. Operational challenges
2.Some preparers raised concerns about the practicability of the proposals. Theynoted that business strategies and objectives can be intricate and challenging toexplain in a simple and easily understandable manner. This creates a burden forentities in determining the acquisition-date key objectives and the related targets thatare ‘critical to the success of the business combination’. They also questioned theboundaries of key objectives and targets, such as whether potential risk factorsadversely impacting the achievement of the key objectives should be disclosed andwhat the appropriate target would be for this type of non-financial objective. Theserisk factors could be an impediment to the success of a business combination andare useful information to users. These respondents were concerned that entitieswould need to devote significant effort and costs to identify and support the keyobjectives and targets to auditors’ satisfaction.
3.Similarly, some practitioners from large accounting firms expressed significantconcerns on how the proposals would work operationally. Without preciseexplanation and clear guidance, they foresaw difficulties for preparers and auditorsin objectively determining what the key objectives and targets are and what qualifiesfor the disclosure exemption (see details of our respondents’ comments in paragraph26). This could cause ongoing debate and inconsistent application across entities,and ultimately undermine the intended objective of the proposals.AppendixPage 5 of 13B. Usefulness of the information
4.Some respondents questioned the usefulness of the proposed disclosures, notingthat existing goodwill impairment requirements already provide certain informationregarding the performance of business combinations. The proposed additionaldisclosures might lead to information overload for users and potentially obscure themost important information of the business combinations. In particular, the proposedthresholds would likely capture many more business combinations than what wewould consider to be strategic business combinations (see details of our respondents’comments in paragraphs 15, 16 and 19).
5.There are also concerns about the potential for management bias to influence thedisclosures, as entities may have incentives to set objectives and goals that are lessambitious but easier to achieve. Since the reporting entity ultimately decides whatwould be disclosed in the financial statements, there are doubts about whether theproposed disclosures are unbiased and could capture the most important informationof a strategic business combination for the benefit of users.
6.In Hong Kong, small and medium-sized entities (SMEs) often prepare their financialstatements using HKFRS (equivalent to IFRS Accounting Standards). These SMEsare usually owner-managed businesses with a limited number of users, and thefinancial statement users rarely require the information about the performance ofbusiness combinations. Furthermore, the cost of preparing and disclosing theinformation could be significant and would impose a substantial burden on SMEswith limited resources, considering the extent of disclosures for a single transactionand the potential never-ending core time period for disclosing the subsequentperformance. Hence, the cost to SMEs preparers outweighs the benefit for users.C. Auditability of the proposed disclosures
7.Some practitioners expressed significant concerns about the auditability of theproposed disclosures relating to the key objectives, targets and expected synergiesfrom business combinations, given that these disclosures involve forward-lookinginformation which could not be reliably verified by auditors. Some of them also opinedthat the information should be included in management commentary rather thanfinancial statements for similar reasons stated in BC133 of the ED.
8.Other practitioners from a large accounting firm expressed the view that the auditorscould verify whether the disclosed information is consistent with the entity’s internalplanning documents such as management budgets or forecasts reviewed by the keymanagement personnel, which is similar to the IASB’s expectations as described inBC145 of the ED.
9.Nevertheless, these practitioners were concerned about the expectation gap theseproposed disclosures could create. Investors and regulators might assume auditorshad performed work to provide reasonable assurance of the existence andachievability of the disclosed information when it is included in audited financialstatements. There is a risk that users would rely on that information for makingdecisions and suffer a loss when an entity fails to meet its objectives and targets,exposing auditors to litigation risk.
10.To bridge the expectation gap, these respondents recommended the IASB clearlyspecify in the body of IFRS 3 that the key objectives, targets and expected synergiesare solely based on information prepared and reviewed by the entity’s managementafter due and careful consideration, and represent management’s best estimate atPage 6 of 13the time of acquisition, and there is no guarantee that the actual results will align withthe disclosures.
11.These respondents further recommended that the proposed disclosures should bemade in a clear and understandable manner in financial statements, faithfullyrepresenting their characteristics to avoid misleading users. To do so, entities aresuggested to disclose a statement saying that the key objectives, targets andexpected synergies merely provide management’s view of an aspect of theperformance of business combinations at the time of the acquisition, withoutasserting certainty or achievability. This approach would be consistent withparagraph 122 of IFRS 18 Presentation and Disclosure in Financial Statementswhen entities use management-defined performance measures to communicate toinvestors management’s view of an aspect of the financial performance of the entities.D. Our recommendations
12.We agree with the overall direction of the proposed disclosures that they should onlybe applied to a subset of material business combinations, subject to an exemption.We believe that the proposed disclosures would give users more direct and usefulinformation on the performance of business combinations than that provided by theexisting goodwill impairment test. We also support requiring entities to provide thesedisclosures in financial statements instead of management commentary for thereasons stated in BC132-137 of the ED.
13.However, we acknowledge the concerns raised by respondents about thepracticability and auditability of the proposals. To make the proposals operationaland clear for different stakeholders, we strongly recommend the IASB refine theproposals in the following key areas:
Key objectives, targets and expected synergies: Given an entity’s objectives foran acquisition are often broad and subjective in nature, more precise explanationand guidance from the IASB on the boundaries of key objectives and targets wouldbe helpful for preparers. This includes clarification and guidance on whether potentialrisk factors would warrant disclosure. In cases where the objective of a businesscombination is to achieve branding, or technological and innovation-related benefits,we consider more guidance is needed for setting measurable targets as well as aconsistent approach to quantify the expected synergies for this type of non-financialobjectives for disclosures (see our respondents’ comments on paragraph 32 below).Scope of strategic business combinations: As the proposed scope seems tocover many more business combinations than what our respondents would expect,the IASB should reconsider the use of a threshold approach and the proposedthresholds (see details of our recommendations in paragraphs 22-24 below). Settingan appropriate threshold would reduce the number of business combinations fordisclosures and hence reduce the cost to preparers and the potential informationoverload to users.Exemption from disclosure: The IASB should provide more guidance oncommercial sensitivity and the specific circumstances that qualify for the exemptionfrom the disclosure requirements (see details of our recommendations in paragraph27 below). This could help mitigate the debate between the preparers and auditors.Expectation gap on the assurance level: Framing the proposed disclosures frommanagement’s perspective, as recommended by our respondents in paragraphs 10and 11 above, would better align the information with its characteristics and enhancePage 7 of 13transparency. This would also set appropriate expectations around the nature andreliability of the information provided, helping users understand its inherentuncertainty and mitigate the expectation gap risk between the assurance providedby auditors and the assurance perceived by users.Question 2—Disclosures: Strategic business combinations(proposed paragraph B67C of IFRS 3)
14.A majority of our respondents supported the use of a threshold approach as it iseasier to use, audit and enforce. However, they expressed concerns about theappropriateness of the proposed thresholds and questioned whether the thresholdapproach would effectively capture the intended population of strategic businesscombinations. Their comments are as follows:
A. Proposed quantitative thresholds
15.Many respondents questioned the appropriateness of the proposed 10% threshold,noting that the local listing rules for additional disclosures apply to acquisitions thatmeet or exceed the 25% threshold1. Without further analysis to justify the 10%threshold (other than referencing the 10% threshold used in IFRS 8 OperatingSegments), these respondents were not convinced that 10% is the appropriatethreshold. They considered the proposed threshold too low and recommended theIASB reconsider the proposals.
16.Some respondents commented that the proposed thresholds may not align with thedescription of a ‘strategic business combination’ in BC54 of the ED. BC54 states thata strategic business combination is one ‘for which failure to meet any one of anentity’s acquisition-date key objectives would put the entity at serious risk of failingto achieve its overall business strategy’. Applying the quantitative thresholds could,in certain cases, capture business combinations that neither have significantstrategic value nor pose serious risk to the acquirer. For example:
(a) Entity A, a loss-making entity with substantial net assets, acquired a profitablebusiness with minimal net assets. As the acquiree's operating profit exceeds 10%of the absolute amount of Entity A's operating loss, the proposed threshold wouldclassify this as a strategic business combination, regardless of its strategic valueor risk to Entity A.(b) Entity B acquired a small business with a low net asset value comprising asignificant amount of total assets and total liabilities for a relatively smallpurchase consideration. Since the acquiree's total assets exceed 10% of EntityB's total assets, the proposed threshold would classify this as a strategicbusiness combination, regardless of its strategic value or risk to Entity B.(c) Entity C acquired one of its major suppliers, and a substantial portion of theacquiree’s revenue is derived from sales to Entity C. Since the acquiree’srevenue exceeds 10% of Entity C’s revenue, the proposed threshold wouldclassify this as a strategic business combination. However, the post-acquisitionsales transactions between Entity C and the acquiree will be eliminated onconsolidation. Passing the revenue threshold may not necessarily indicate the1 Please refer to Chapter 14.33, Main Board Listing Rules (MBLR) issued by the Stock Exchange of Hong KongLimited (Hong Kong Stock Exchange) for a summary of the reporting and disclosure obligations for transactionsmeeting or exceeding 25% threshold, i.e. major acquisitions or very substantial acquisitions as set out in Chapter
14.08.Page 8 of 13strategic nature of the acquisition.
17.Some respondents raised questions about the calculation of thresholds in situationswhere the financial information of the acquirer or acquiree, such as operating profit,is distorted due to significant non-recurring items, resulting in unrepresentativefinancial information. They noted that Hong Kong listed issuers may be allowed todisregard the calculation or apply an alternative size test with the prior consent of theHong Kong Stock Exchange in certain situations2. These respondents consideredthat the IASB should provide guidance on how to address this matter, such aswhether any adjustment to the financials or an alternative test would be applied insuch cases.
18.Our respondents also identified several practical challenges in applying the proposedquantitative test in the ED:
(a) The acquiree’s pre-acquisition financial statements may not be prepared usingIFRS Accounting Standards. It would be costly and complex for the acquirer tocompile financial information, particularly the operating profit, using IFRSAccounting Standards solely for determining the thresholds.(b) The acquiree that prepares IFRS financial statements could have applieddifferent accounting policies than the acquirer, or its reporting period may notcoincide with that of the acquirer. As a result, the financial information of theacquirer and acquiree may not be comparable and appropriate for calculatingthe proposed thresholds. This raises practicability and cost concerns if theaccounting policies and reporting period of those financial statements need tobe aligned with those of the acquirer.(c) The acquirer may face difficulties in obtaining pre-acquisition financialinformation, especially if it did not conduct formal due diligence due to the natureand size of the business combination.B. Proposed qualitative thresholds
19.Some respondents commented that the wording in B67C(c) of the ED could beinterpreted to capture a business combination that enables the acquirer entering anew geographical area of operation, regardless of the magnitude of that combinationand whether it is strategic. For instance, an entity acquired a business that primarilyoperates in geography A where the entity already has a presence, but the acquireealso has some incidental operations in geography B where the entity does notcurrently operate and has no plan to expand. Applying the proposed qualitativethresholds would capture this as a strategic business combination as the businesscombination enables the entity to operate in a new geographical area B. Theserespondents suggested the IASB clarify whether this is what it intends to achieveand provide more precise description of the qualitative thresholds.C. Use of a threshold approach
20.A few respondents questioned the appropriateness of using the term ‘strategic’ tocharacterise the relevant business combinations using a threshold approach. Theycommented that whether a business combination constitutes a ‘strategic’ transaction2 Pursuant to Chapter 14.20, MBLR, ‘Where any calculation of the percentage ratio produces an anomalous resultor is inappropriate to the sphere of activity of the listed issuer, the listed issuer may apply to the Exchange todisregard the calculation and/or apply other relevant indicators of size, including industry specific tests.’Page 9 of 13is always determined by management based on an entity’s own strategies and thiswould inevitably be different for different entities. There could be a mismatch indefining a business combination as ‘strategic’ based on the proposed thresholds,which primarily focus on the size of the business combinations. As the proposalintends to capture a subset of material business combinations, these respondentsrecommended that the IASB use the descriptions, such as ‘substantial’ or ‘major’, tobetter reflect the scope of additional disclosures in IFRS 3.
21.Given the potential issues associated with the threshold approach, a fewrespondents suggested adopting a principle-based approach, i.e. using BC54 of theED as the principle and the proposed thresholds as indicators rather thandeterminative factors for identifying a strategic business combination. If one of theproposed thresholds is met, an entity could still rebut the presumption by disclosingthe fact together with reasonable justifications, enabling the entity to exercisejudgement in determining strategic business combinations. However, otherrespondents expressed concerns that such an approach is subjective andchallenging to audit, particularly in determining whether there is a serious risk to theacquirer’s overall business strategy.D. Our recommendations
22.We acknowledge our respondents’ concerns that the proposed thresholds may notalign with an entity’s strategies nor the description for a strategic businesscombination in BC54 of the ED. We are also aware of the challenges in defining auniversal set of thresholds that could accommodate the diverse types of acquisitionsand business strategies across entities. In light of these and our respondents’concerns, if the IASB’s intention were to capture only major or substantial businesscombinations, we recommend the IASB improve the threshold approach andproposed thresholds in the following ways:
(a) Reset the proposed 10% threshold to a higher one to be more in line with capitalmarket regulations for major acquisitions and to capture only sizable businesscombinations, and provide clear justification for the threshold.(b) Provide guidance to address situations where the financials of the acquirer andacquiree are not representative of their usual state of financial performanceand/or position and consider whether entities would be allowed to make anynecessary adjustments to derive a more appropriate threshold.(c) Provide a more precise description of the qualitative threshold to capture onlybusiness combinations that represent a major geographic expansion or shift forthe entity.(d) Rename the proposed term ‘strategic’ to another term, such as ‘major’ or‘substantial’, to reflect the specific criteria that characterise the relevant businesscombinations for additional disclosures in IFRS 3.
23.However, if the IASB’s intention were to identify both strategically important andsizable business combinations, we suggest the IASB consider our respondents’recommendation to use a principle-based approach, using BC 54 of the ED as theprinciple, with the proposed thresholds (taking into account our recommendationsin paragraph 22(a) to (c) above) serving as indicators rather than determinativefactors for a strategic business combination that are rebuttable with reasonablejustifications and additional disclosures by entities.Page 10 of 13
24.While we recognise that the practical challenges mentioned in paragraph 18 aboveare inevitable, we believe that the above suggested improvements could help entitiesmore effectively identify the intended population of the most important businesscombinations, and consequently limiting those challenges to a smaller number ofbusiness combinations.Question 3—Disclosures: Exemption from disclosing information(proposed paragraphs B67D–B67G of IFRS 3)
25.We appreciate the IASB’s endeavours to address preparers’ concerns aboutcommercial sensitivity and litigation risk by proposing to exempt an entity fromdisclosing some of the information in specific circumstances. Our respondents aresupportive of the disclosure exemption in principle but had the following commentsand recommendations.A. Specific circumstances for using the exemption
26.Our respondents considered that the application for the exemption requires a highlevel of judgement in identifying the circumstances that can be expected to prejudiceseriously the achievement of any of the acquirer’s acquisition-date key objectives forthe business combination’, as described in B67D of the ED. Nevertheless, theproposed application guidance only prescribes a few circumstances where theexemption is not appropriate but does not provide sufficient guidance on the specificcircumstances where the exemption can be applied. This lack of clarity presentssignificant challenges for both auditors and preparers in objectively assessing andconsistently applying the exemption across different companies. In addition, somepractitioners are concerned that preparers will have wide latitude to argue that lotsof the required information could reasonably be considered prejudicial, potentiallyrendering the disclosures requirements ineffective. Therefore, our respondentsstressed the need for examples to illustrate circumstances where the exemption canbe applied.
27.We agree with the respondents’ feedback that the proposed application guidancecould leave significant room for interpretation and subjectivity in restricting theexemption only to the appropriate circumstances. In addition, it is not clear whetherthe exemption would be expected to apply only to ‘extremely rare cases’, given theIASB’s explanation in BC80 of the ED that the principle underpinning the exemptionis similar to the approach in IAS 37.92. In light of the above, we strongly recommendthe IASB provide more application guidance on commercial sensitivity and thelegitimate circumstances and examples where the exemption can be applied. Thiswould help improve the overall robustness of the proposals and mitigate potentialdebate between auditors and preparers on its appropriate use.B. Other concerns
28.Our respondents noted that the proposal in B67E of the ED allow entities to discloseinformation at a sufficiently aggregate level so that it would not prejudice seriouslythe acquisition objectives. However, they questioned whether such aggregatedinformation would still be meaningful and useful for users. They also considered thataggregation may not adequately address their concerns in cases where the entityonly engages in one or two business combinations during the reporting periods.Presenting the expected synergies in total for a limited number of businesscombinations may still be commercially sensitive.Page 11 of 13
29.We recognise the respondents’ comments and consider that the proposedaggregation is not entirely clear. The ED provides an example where an acquirer canaggregate the total amount of expected synergies for each individual businesscombination without prejudicing seriously any of the acquisition-date key objectivesfor the business combination (i.e. vertical aggregation). However, the ED is not clearas to whether the acquirer can also aggregate the expected synergies across all theirbusiness combinations at a total level (i.e. horizontal aggregation). We consider thatthe horizontal aggregation approach could not provide useful information to users.As such, we recommend the IASB clarify this in the final amendment.Question 4—Disclosures: Identifying information to be disclosed(proposed paragraphs B67A–B67B of IFRS 3)
30.We generally agree with the proposals to apply a management approach using theentity’s key management personnel for identifying disclosure information for strategicbusiness combinations. This approach allows for the provision of relevantinformation to users by leveraging information that management already usesinternally, thereby minimising the reporting burden on preparers.
31.We note that IFRS 3:B67B(b) includes specific disclosure requirements if the keymanagement personnel stop reviewing the performance of a business combinationbut continue to receive and monitor it as part of the entity’s annual budgeting processfor reasons described in BC123 of the ED. We suggest that the IASB reconsider theproposal. Key management personnel would generally be able to access and‘receive’ any information on-demand through an ERP or another similar system.Hence it may inadvertently capture situations where the key management personnelis able to access and ‘receive’ such information, but has not reviewed or monitoredit.Question 5—Disclosures: Other proposals
32.We broadly support the proposals but have some concerns about the practice issuesand challenges associated with disclosing the expected synergies from thecombining operations in B64(ea) of the ED and recommend that the IASB provideguidance or clarification. These issues include:
Challenges in quantifying synergies: Our practitioners questioned whether it ispossible to reliably quantify expected synergies in all cases. For example, if thesynergies arise from increased market share, branding, or technology and innovation,how should an entity measure and quantify the effects? Furthermore, does the entityneed to consider the level of reliability and probability of occurrence of the synergieswhen determining whether to disclose such information?Mandatory disclosure despite lack of available data: Our preparers queriedwhether the disclosure is intended to be mandatory even when the entity does nothave the necessary analyses and data on synergies readily available. For example,entities may not break down the synergies by category. This could impose asignificant burden on entities to gather information for disclosure.Ambiguity around the ‘synergies’ concept: There is a lack of clarity on what‘synergies’ mean in the ED. Specifically, our preparers and users questionedwhether the proposed disclosures intend to capture the revenue of the combiningoperations or incremental revenue. Without clear explanations, entities wouldprepare the disclosures on different bases and users may interpret the quantitativePage 12 of 13information differently.Potential compliance issues for Hong Kong listed entities: Our practitionerswere concerned that if entities listed in Hong Kong disclose the expected synergiesfor the combining operations, such synergy disclosures may constitute a ‘profitforecast’ under the local listing rules3. Depending on the level of detail provided inthe disclosure, if the information implicitly quantifies the anticipated level of futureprofits or losses, it could potentially be treated as a profit forecast and triggercompliance issues for Hong Kong listed entities.Auditability of synergies: Similar to the comments on question 1, our practitionersquestioned whether the information could be reliably auditable, given that it involvesfuture projections.Question 6—Changes to the impairment test(paragraphs 80–81, 83, 85 and 134(a) of IAS 36)
A. Proposal to reduce shielding
33.We generally agree with the proposal. We share the IASB's view that the issue ofshielding cannot be fully eliminated under the current impairment-only model forgoodwill, but that the proposal could still help mitigate shielding and enhancecomparability across entities in how they conduct the impairment assessment.B. Proposal to reduce management over-optimism
34.We broadly agree with the proposal as it provides users of financial statements withmore useful information, although the proposal does have certain limitations. Forexample, it cannot reduce management over-optimism in situations where entitiesdo not provide segment information under IFRS 8 or when a reportable segmentcontains more than one cash-generating unit with goodwill.Question 7—Changes to the impairment test: Value in use(paragraphs 33, 44–51, 55, 130(g), 134(d)(v) and A20 of IAS 36)
A. Removing the constraint on including uncommitted future restructuring or assetenhancement cash flows
35.Our respondents expressed mixed views on the proposal. Some respondents agreedwith the proposal for reasons similar to BC205 of the ED.
36.However, a few respondents disagreed with the proposal. They considered that theproposal could increase the risk of management over-optimism in calculating valuein use (VIU) because management would have more flexibility to include a widerange of assumptions in VIU calculation. This appears to conflict with one of theobjectives of the ED to reduce management over-optimism. These respondents alsoquestioned whether auditors could verify cash flows arising from future restructuringto which the entity is not yet committed.
37.Furthermore, some respondents noted the IASB’s view in BC213 and BC219 of theED and considered the VIU measurement would become similar to how fair value is3 Pursuant to MBLR Chapter 14.61, a ‘profit forecast’ means ‘any forecast of profits or losses, however worded,and includes any statement which explicitly or implicitly quantifies the anticipated level of future profits or losses,either expressly or by reference to previous profits or loses or any other benchmark or point of reference’.Page 13 of 13determined after applying the proposed changes to the impairment test. Therefore,these respondents questioned whether, and if so, how VIU would differ from fairvalue going forward.
38.We recognise that the cash flows from uncommitted future restructuring and assetenhancement introduce extra subjectivity and uncertainty into the VIU calculationand could significantly impact the impairment assessment in certain circumstances.Hence, we suggest the IASB add this type of cash flows as an example of keyassumptions for disclosure under IAS 36.134(d)(i) & (ii). This would help users betterassess the reasonableness of this key assumption and reduce management over-optimism. In addition, we believe that there will remain to be differences betweenVIU and fair value, as explained in IAS 36.53A, even if the constraint is removed. Ifthe IASB were to proceed with the proposal, we suggest the IASB explain their viewsin detail in the Basis for Conclusions of the final amendments so as to help entitiesconsider the reasonableness of VIU and fair value when ascertaining the recoverableamount.B. Removing the requirement to use pre-tax cash flows and pre-tax discount rates incalculating value in use
39.We support the proposal as the post-tax approach aligns with how entities preparecash flows projections and the valuation practice.Question 8—Proposed amendments to IFRS X Subsidiaries without PublicAccountability: Disclosures (Subsidiaries Standard)
40.Some respondents disagreed with adding the proposed quantitative disclosure onexpected synergies in the Subsidiaries Standard. Same as the comments onquestion 5, these respondents anticipated significant challenges in quantifying andauditing the expected synergies disclosures. In addition, subsidiaries without publicaccountability often have a limited number of financial statements users only, andthese users rarely require the proposed information.
41.Considering the cost-benefit of the proposed quantitative information about expectedsynergies, we suggest the IASB further explore the usefulness of this information forusers of private subsidiaries.Question 9—Transition(proposed paragraph 64R of IFRS 3, proposed paragraph 140O of IAS 36 andproposed paragraph B2 of the Subsidiaries Standard)
42.We support the prospective application of the proposals because retrospectiveapplication is not feasible given the nature of the amendments.~ End ~
IASB Exposure Draft Business Combinations—Disclosures, Goodwill and Impairment (Proposed amendments to IFRS 3 and IAS 36)
下载原件Our Ref.: C/FRSCSent electronically through the IASB Website (www.ifrs.org)
12 July 2024Dr Andreas BarckowInternational Accounting Standards BoardColumbus Building7 Westferry CircusCanary WharfLondon E14 4HDUnited KingdomDear Andreas,IASB Exposure DraftBusiness Combinations—Disclosures, Goodwill and Impairment(Proposed amendments to IFRS 3 and IAS 36)
The Hong Kong Institute of Certified Public Accountants (HKICPA) is the only bodyauthorised by law to set and promulgate standards relating to financial reporting, auditing,ethics and sustainability disclosures for professional accountants in Hong Kong. We aregrateful for the opportunity to provide our comments on this Exposure Draft (ED).The HKICPA appreciates the IASB’s efforts in addressing users’ needs for betterinformation about the performance of business combinations, while balancing preparers’concerns about cost and commercial sensitivity through the proposed changes to IFRS3 Business Combinations. The HKICPA also welcomes the IASB’s initiative to reducecost and complexity of the impairment test by proposing targeted improvements to IAS36 Impairment of Assets. However, we have significant concerns about certain aspectsof the proposals. We provide detailed comments in the Appendix and summarise ourprimary concerns and recommendations below.Proposed amendments to IFRS 3We agree with the overall direction of the proposed disclosures that they should only beapplied to a subset of material business combinations, subject to an exemption. However,we have significant concerns in the following areas:
Scope of strategic business combinationsWe see the merits of applying a threshold approach as it is easier to use, audit andenforce. Nevertheless, we are concerned that the proposed thresholds would noteffectively capture the intended population of strategic business combinations asdescribed in BC54 of the ED and may capture many more business combinations thanwhat we would consider to be strategic business combinations, for the following reasons:
- The proposed 10% threshold appears too low compared to the local listing rules toprovide additional information for significant acquisitions.- The proposed quantitative thresholds only focus on the size of business combinationsin terms of revenue, operating profit or loss and total assets, without consideringwhether the transactions are of any strategic value to the acquirer. Furthermore, whencalculating the thresholds, the acquirer and acquiree’s financial information may bedistorted e.g. due to significant non-recurring items, making it unrepresentative of theusual state of their financial performance and position.Page 2 of 13- The proposed qualitative threshold is not sufficiently clear on whether it is targetingmajor and strategically important acquisitions geographically.We acknowledge the challenges in defining a universal set of thresholds that wouldaccommodate the diverse types of acquisitions and business strategies across entities.Therefore, if the IASB’s intention were to capture only sizable business combinations,we recommend the IASB reset the proposed 10% threshold to a higher one to be morein line with capital market regulations for major acquisitions, provide guidance andclarifications to address the identified issues for qualitative and quantitative thresholds,and rename the term ‘strategic’ to another term, such as ‘major’ or ‘substantial’, to reflectthe specific criteria that characterise the relevant business combinations.However, if the IASB’s intention were to identify both strategically important and sizablebusiness combinations, we suggest the IASB consider using a principle-based approachwith BC54 as the principle and the proposed thresholds as indicators rather thandeterminative factors for a strategic business combination. Under this approach, entitiescould rebut the presumption by providing reasonable justifications and additionaldisclosures.Disclosure of key objectives, targets and expected synergiesWe have identified practical questions relating to the disclosure of key objectives, targetsand expected synergies, and recommend the IASB provide guidance or clarification onhow the proposals should be applied. These questions include:
-An entity’s objectives for an acquisition are often broad and subjective in nature, andthere could be difficulties in objectively identifying the key objectives of a strategicbusiness combination. In particular, our respondents considered that potential riskfactors adversely impacting the achievement of the key objectives could be animpediment to the success of a business combination and are useful information tousers. They questioned whether potential risk factors would warrant disclosure.-The key objectives of a strategic business combination could be financial-related ornon-financial related. In cases where the key objectives of a strategic businesscombination are to achieve branding, technological and innovation-related benefits,the ED is not clear as to whether, and if so, how entities should set the measurabletargets and quantify the expected synergies for non-financial objectives fordisclosures.-There is a lack of clarity on what ‘synergies’ mean in the ED. Specifically, ourpreparers and users questioned whether the proposed disclosures intend to capturethe revenue of the combining operations or incremental revenue. Without clearexplanations, entities would prepare the disclosures on different bases and usersmay interpret the quantitative information differently.Exemption from disclosuresThe application of the disclosure exemption requires a high level of judgement inidentifying circumstances that ‘can be expected to prejudice seriously the achievementof any of the acquirer’s acquisition-date key objectives for the business combination’.However, the proposed application guidance does not provide sufficient direction on thespecific circumstances where the exemption can be applied. It is also unclear whetherthe exemption would only apply in ‘extremely rare cases’, similar to the exemption in IAS37 Provisions, Contingent Liabilities and Contingent Assets. This lack of clarity leavessignificant room for interpretation and subjectivity in restricting the exemption only to theappropriate circumstances.Page 3 of 13Given the above, we recommend the IASB provide application guidance and examplesof legitimate circumstances that qualify for the disclosure exemption to mitigate a risk ofdiversity in practice. This recommendation, together with those on the scope of strategicbusiness combinations and disclosures of key objectives, targets and expectedsynergies explained above, could enhance the overall robustness of the proposals andenable entities to focus on the most important information for the most importantbusiness combinations in a cost-efficient manner, while mitigating potential debatebetween preparers and auditors.Expectation gap on the level of assurance providedOur practitioners expressed significant concerns that users and regulators might assumeauditors had performed work to provide reasonable assurance of the existence andachievability of key objectives, targets and expected synergies disclosed in auditedfinancial statements, exposing auditors to litigation risk when users rely on thatinformation for decision making and suffer losses. This creates an expectation gapbetween the assurance provided by auditors and the assurance perceived by users.To address this, we recommend the IASB clearly specify in the body of IFRS 3 that thekey objectives, targets and expected synergies are solely based on information preparedand reviewed by the entity’s management and represent management’s best estimateat the time of acquisition, and there is no guarantee that the actual results will align withthe disclosures. In addition, entities should disclose this management assertion in thefinancial statements. We believe that this approach would be consistent with paragraph122 of IFRS 18 Presentation and Disclosure in Financial Statements, which requires acompany to disclose a statement to set appropriate expectations around the nature andreliability of the information provided, helping users understand the inherent uncertaintyand mitigate the expectation gap.If you have any questions regarding the matters raised in this letter, please contactKennisLee(kennislee@hkicpa.org.hk),AssociateDirectororSamChan(samkcchan@hkicpa.org.hk), Manager of the Standard Setting Department.Sincerely,Cecilia KweiDirector of Standard SettingPage 4 of 13Work undertaken by the HKICPA in forming its views:
The HKICPA:
(a) issued an Invitation to Comment on the ED on 15 March 2024 to its members andother stakeholders;
(b) sought input from its Business Combinations and Reporting Entity Advisory Panel,Financial Reporting Valuation Advisory Panel and Small and Medium PracticesCommittee and its Technical Issues Support Group, which mainly comprise technicaland industry experts from large as well as small and medium accounting firms(collectively, Practitioners);
(c) held a public roundtable discussion for local stakeholders, including Practitioners,preparers, valuers and investors on 27 May 2024; and(d) developed its views through its Financial Reporting Standards Committee, havingreflected on its respondents’ views. The Committee comprises preparerrepresentatives from various industry sectors, regulators, as well as technical andindustry experts from small, medium and large accounting firms.Detailed comments on the IASB EDQuestion 1—Disclosures: Performance of a business combination(proposed paragraphs B67A–B67G of IFRS 3)
1.Our respondents expressed mixed views regarding the proposals of requiring entitiesto disclose information on the performance of a strategic business combination,subject to exemption. Some respondents, including users of financial statements,supported the proposals as they provide them with useful information about materialacquisitions and their subsequent performance. However, other respondents had thefollowing comments.A. Operational challenges
2.Some preparers raised concerns about the practicability of the proposals. Theynoted that business strategies and objectives can be intricate and challenging toexplain in a simple and easily understandable manner. This creates a burden forentities in determining the acquisition-date key objectives and the related targets thatare ‘critical to the success of the business combination’. They also questioned theboundaries of key objectives and targets, such as whether potential risk factorsadversely impacting the achievement of the key objectives should be disclosed andwhat the appropriate target would be for this type of non-financial objective. Theserisk factors could be an impediment to the success of a business combination andare useful information to users. These respondents were concerned that entitieswould need to devote significant effort and costs to identify and support the keyobjectives and targets to auditors’ satisfaction.
3.Similarly, some practitioners from large accounting firms expressed significantconcerns on how the proposals would work operationally. Without preciseexplanation and clear guidance, they foresaw difficulties for preparers and auditorsin objectively determining what the key objectives and targets are and what qualifiesfor the disclosure exemption (see details of our respondents’ comments in paragraph26). This could cause ongoing debate and inconsistent application across entities,and ultimately undermine the intended objective of the proposals.AppendixPage 5 of 13B. Usefulness of the information
4.Some respondents questioned the usefulness of the proposed disclosures, notingthat existing goodwill impairment requirements already provide certain informationregarding the performance of business combinations. The proposed additionaldisclosures might lead to information overload for users and potentially obscure themost important information of the business combinations. In particular, the proposedthresholds would likely capture many more business combinations than what wewould consider to be strategic business combinations (see details of our respondents’comments in paragraphs 15, 16 and 19).
5.There are also concerns about the potential for management bias to influence thedisclosures, as entities may have incentives to set objectives and goals that are lessambitious but easier to achieve. Since the reporting entity ultimately decides whatwould be disclosed in the financial statements, there are doubts about whether theproposed disclosures are unbiased and could capture the most important informationof a strategic business combination for the benefit of users.
6.In Hong Kong, small and medium-sized entities (SMEs) often prepare their financialstatements using HKFRS (equivalent to IFRS Accounting Standards). These SMEsare usually owner-managed businesses with a limited number of users, and thefinancial statement users rarely require the information about the performance ofbusiness combinations. Furthermore, the cost of preparing and disclosing theinformation could be significant and would impose a substantial burden on SMEswith limited resources, considering the extent of disclosures for a single transactionand the potential never-ending core time period for disclosing the subsequentperformance. Hence, the cost to SMEs preparers outweighs the benefit for users.C. Auditability of the proposed disclosures
7.Some practitioners expressed significant concerns about the auditability of theproposed disclosures relating to the key objectives, targets and expected synergiesfrom business combinations, given that these disclosures involve forward-lookinginformation which could not be reliably verified by auditors. Some of them also opinedthat the information should be included in management commentary rather thanfinancial statements for similar reasons stated in BC133 of the ED.
8.Other practitioners from a large accounting firm expressed the view that the auditorscould verify whether the disclosed information is consistent with the entity’s internalplanning documents such as management budgets or forecasts reviewed by the keymanagement personnel, which is similar to the IASB’s expectations as described inBC145 of the ED.
9.Nevertheless, these practitioners were concerned about the expectation gap theseproposed disclosures could create. Investors and regulators might assume auditorshad performed work to provide reasonable assurance of the existence andachievability of the disclosed information when it is included in audited financialstatements. There is a risk that users would rely on that information for makingdecisions and suffer a loss when an entity fails to meet its objectives and targets,exposing auditors to litigation risk.
10.To bridge the expectation gap, these respondents recommended the IASB clearlyspecify in the body of IFRS 3 that the key objectives, targets and expected synergiesare solely based on information prepared and reviewed by the entity’s managementafter due and careful consideration, and represent management’s best estimate atPage 6 of 13the time of acquisition, and there is no guarantee that the actual results will align withthe disclosures.
11.These respondents further recommended that the proposed disclosures should bemade in a clear and understandable manner in financial statements, faithfullyrepresenting their characteristics to avoid misleading users. To do so, entities aresuggested to disclose a statement saying that the key objectives, targets andexpected synergies merely provide management’s view of an aspect of theperformance of business combinations at the time of the acquisition, withoutasserting certainty or achievability. This approach would be consistent withparagraph 122 of IFRS 18 Presentation and Disclosure in Financial Statementswhen entities use management-defined performance measures to communicate toinvestors management’s view of an aspect of the financial performance of the entities.D. Our recommendations
12.We agree with the overall direction of the proposed disclosures that they should onlybe applied to a subset of material business combinations, subject to an exemption.We believe that the proposed disclosures would give users more direct and usefulinformation on the performance of business combinations than that provided by theexisting goodwill impairment test. We also support requiring entities to provide thesedisclosures in financial statements instead of management commentary for thereasons stated in BC132-137 of the ED.
13.However, we acknowledge the concerns raised by respondents about thepracticability and auditability of the proposals. To make the proposals operationaland clear for different stakeholders, we strongly recommend the IASB refine theproposals in the following key areas:
Key objectives, targets and expected synergies: Given an entity’s objectives foran acquisition are often broad and subjective in nature, more precise explanationand guidance from the IASB on the boundaries of key objectives and targets wouldbe helpful for preparers. This includes clarification and guidance on whether potentialrisk factors would warrant disclosure. In cases where the objective of a businesscombination is to achieve branding, or technological and innovation-related benefits,we consider more guidance is needed for setting measurable targets as well as aconsistent approach to quantify the expected synergies for this type of non-financialobjectives for disclosures (see our respondents’ comments on paragraph 32 below).Scope of strategic business combinations: As the proposed scope seems tocover many more business combinations than what our respondents would expect,the IASB should reconsider the use of a threshold approach and the proposedthresholds (see details of our recommendations in paragraphs 22-24 below). Settingan appropriate threshold would reduce the number of business combinations fordisclosures and hence reduce the cost to preparers and the potential informationoverload to users.Exemption from disclosure: The IASB should provide more guidance oncommercial sensitivity and the specific circumstances that qualify for the exemptionfrom the disclosure requirements (see details of our recommendations in paragraph27 below). This could help mitigate the debate between the preparers and auditors.Expectation gap on the assurance level: Framing the proposed disclosures frommanagement’s perspective, as recommended by our respondents in paragraphs 10and 11 above, would better align the information with its characteristics and enhancePage 7 of 13transparency. This would also set appropriate expectations around the nature andreliability of the information provided, helping users understand its inherentuncertainty and mitigate the expectation gap risk between the assurance providedby auditors and the assurance perceived by users.Question 2—Disclosures: Strategic business combinations(proposed paragraph B67C of IFRS 3)
14.A majority of our respondents supported the use of a threshold approach as it iseasier to use, audit and enforce. However, they expressed concerns about theappropriateness of the proposed thresholds and questioned whether the thresholdapproach would effectively capture the intended population of strategic businesscombinations. Their comments are as follows:
A. Proposed quantitative thresholds
15.Many respondents questioned the appropriateness of the proposed 10% threshold,noting that the local listing rules for additional disclosures apply to acquisitions thatmeet or exceed the 25% threshold1. Without further analysis to justify the 10%threshold (other than referencing the 10% threshold used in IFRS 8 OperatingSegments), these respondents were not convinced that 10% is the appropriatethreshold. They considered the proposed threshold too low and recommended theIASB reconsider the proposals.
16.Some respondents commented that the proposed thresholds may not align with thedescription of a ‘strategic business combination’ in BC54 of the ED. BC54 states thata strategic business combination is one ‘for which failure to meet any one of anentity’s acquisition-date key objectives would put the entity at serious risk of failingto achieve its overall business strategy’. Applying the quantitative thresholds could,in certain cases, capture business combinations that neither have significantstrategic value nor pose serious risk to the acquirer. For example:
(a) Entity A, a loss-making entity with substantial net assets, acquired a profitablebusiness with minimal net assets. As the acquiree's operating profit exceeds 10%of the absolute amount of Entity A's operating loss, the proposed threshold wouldclassify this as a strategic business combination, regardless of its strategic valueor risk to Entity A.(b) Entity B acquired a small business with a low net asset value comprising asignificant amount of total assets and total liabilities for a relatively smallpurchase consideration. Since the acquiree's total assets exceed 10% of EntityB's total assets, the proposed threshold would classify this as a strategicbusiness combination, regardless of its strategic value or risk to Entity B.(c) Entity C acquired one of its major suppliers, and a substantial portion of theacquiree’s revenue is derived from sales to Entity C. Since the acquiree’srevenue exceeds 10% of Entity C’s revenue, the proposed threshold wouldclassify this as a strategic business combination. However, the post-acquisitionsales transactions between Entity C and the acquiree will be eliminated onconsolidation. Passing the revenue threshold may not necessarily indicate the1 Please refer to Chapter 14.33, Main Board Listing Rules (MBLR) issued by the Stock Exchange of Hong KongLimited (Hong Kong Stock Exchange) for a summary of the reporting and disclosure obligations for transactionsmeeting or exceeding 25% threshold, i.e. major acquisitions or very substantial acquisitions as set out in Chapter
14.08.Page 8 of 13strategic nature of the acquisition.
17.Some respondents raised questions about the calculation of thresholds in situationswhere the financial information of the acquirer or acquiree, such as operating profit,is distorted due to significant non-recurring items, resulting in unrepresentativefinancial information. They noted that Hong Kong listed issuers may be allowed todisregard the calculation or apply an alternative size test with the prior consent of theHong Kong Stock Exchange in certain situations2. These respondents consideredthat the IASB should provide guidance on how to address this matter, such aswhether any adjustment to the financials or an alternative test would be applied insuch cases.
18.Our respondents also identified several practical challenges in applying the proposedquantitative test in the ED:
(a) The acquiree’s pre-acquisition financial statements may not be prepared usingIFRS Accounting Standards. It would be costly and complex for the acquirer tocompile financial information, particularly the operating profit, using IFRSAccounting Standards solely for determining the thresholds.(b) The acquiree that prepares IFRS financial statements could have applieddifferent accounting policies than the acquirer, or its reporting period may notcoincide with that of the acquirer. As a result, the financial information of theacquirer and acquiree may not be comparable and appropriate for calculatingthe proposed thresholds. This raises practicability and cost concerns if theaccounting policies and reporting period of those financial statements need tobe aligned with those of the acquirer.(c) The acquirer may face difficulties in obtaining pre-acquisition financialinformation, especially if it did not conduct formal due diligence due to the natureand size of the business combination.B. Proposed qualitative thresholds
19.Some respondents commented that the wording in B67C(c) of the ED could beinterpreted to capture a business combination that enables the acquirer entering anew geographical area of operation, regardless of the magnitude of that combinationand whether it is strategic. For instance, an entity acquired a business that primarilyoperates in geography A where the entity already has a presence, but the acquireealso has some incidental operations in geography B where the entity does notcurrently operate and has no plan to expand. Applying the proposed qualitativethresholds would capture this as a strategic business combination as the businesscombination enables the entity to operate in a new geographical area B. Theserespondents suggested the IASB clarify whether this is what it intends to achieveand provide more precise description of the qualitative thresholds.C. Use of a threshold approach
20.A few respondents questioned the appropriateness of using the term ‘strategic’ tocharacterise the relevant business combinations using a threshold approach. Theycommented that whether a business combination constitutes a ‘strategic’ transaction2 Pursuant to Chapter 14.20, MBLR, ‘Where any calculation of the percentage ratio produces an anomalous resultor is inappropriate to the sphere of activity of the listed issuer, the listed issuer may apply to the Exchange todisregard the calculation and/or apply other relevant indicators of size, including industry specific tests.’Page 9 of 13is always determined by management based on an entity’s own strategies and thiswould inevitably be different for different entities. There could be a mismatch indefining a business combination as ‘strategic’ based on the proposed thresholds,which primarily focus on the size of the business combinations. As the proposalintends to capture a subset of material business combinations, these respondentsrecommended that the IASB use the descriptions, such as ‘substantial’ or ‘major’, tobetter reflect the scope of additional disclosures in IFRS 3.
21.Given the potential issues associated with the threshold approach, a fewrespondents suggested adopting a principle-based approach, i.e. using BC54 of theED as the principle and the proposed thresholds as indicators rather thandeterminative factors for identifying a strategic business combination. If one of theproposed thresholds is met, an entity could still rebut the presumption by disclosingthe fact together with reasonable justifications, enabling the entity to exercisejudgement in determining strategic business combinations. However, otherrespondents expressed concerns that such an approach is subjective andchallenging to audit, particularly in determining whether there is a serious risk to theacquirer’s overall business strategy.D. Our recommendations
22.We acknowledge our respondents’ concerns that the proposed thresholds may notalign with an entity’s strategies nor the description for a strategic businesscombination in BC54 of the ED. We are also aware of the challenges in defining auniversal set of thresholds that could accommodate the diverse types of acquisitionsand business strategies across entities. In light of these and our respondents’concerns, if the IASB’s intention were to capture only major or substantial businesscombinations, we recommend the IASB improve the threshold approach andproposed thresholds in the following ways:
(a) Reset the proposed 10% threshold to a higher one to be more in line with capitalmarket regulations for major acquisitions and to capture only sizable businesscombinations, and provide clear justification for the threshold.(b) Provide guidance to address situations where the financials of the acquirer andacquiree are not representative of their usual state of financial performanceand/or position and consider whether entities would be allowed to make anynecessary adjustments to derive a more appropriate threshold.(c) Provide a more precise description of the qualitative threshold to capture onlybusiness combinations that represent a major geographic expansion or shift forthe entity.(d) Rename the proposed term ‘strategic’ to another term, such as ‘major’ or‘substantial’, to reflect the specific criteria that characterise the relevant businesscombinations for additional disclosures in IFRS 3.
23.However, if the IASB’s intention were to identify both strategically important andsizable business combinations, we suggest the IASB consider our respondents’recommendation to use a principle-based approach, using BC 54 of the ED as theprinciple, with the proposed thresholds (taking into account our recommendationsin paragraph 22(a) to (c) above) serving as indicators rather than determinativefactors for a strategic business combination that are rebuttable with reasonablejustifications and additional disclosures by entities.Page 10 of 13
24.While we recognise that the practical challenges mentioned in paragraph 18 aboveare inevitable, we believe that the above suggested improvements could help entitiesmore effectively identify the intended population of the most important businesscombinations, and consequently limiting those challenges to a smaller number ofbusiness combinations.Question 3—Disclosures: Exemption from disclosing information(proposed paragraphs B67D–B67G of IFRS 3)
25.We appreciate the IASB’s endeavours to address preparers’ concerns aboutcommercial sensitivity and litigation risk by proposing to exempt an entity fromdisclosing some of the information in specific circumstances. Our respondents aresupportive of the disclosure exemption in principle but had the following commentsand recommendations.A. Specific circumstances for using the exemption
26.Our respondents considered that the application for the exemption requires a highlevel of judgement in identifying the circumstances that can be expected to prejudiceseriously the achievement of any of the acquirer’s acquisition-date key objectives forthe business combination’, as described in B67D of the ED. Nevertheless, theproposed application guidance only prescribes a few circumstances where theexemption is not appropriate but does not provide sufficient guidance on the specificcircumstances where the exemption can be applied. This lack of clarity presentssignificant challenges for both auditors and preparers in objectively assessing andconsistently applying the exemption across different companies. In addition, somepractitioners are concerned that preparers will have wide latitude to argue that lotsof the required information could reasonably be considered prejudicial, potentiallyrendering the disclosures requirements ineffective. Therefore, our respondentsstressed the need for examples to illustrate circumstances where the exemption canbe applied.
27.We agree with the respondents’ feedback that the proposed application guidancecould leave significant room for interpretation and subjectivity in restricting theexemption only to the appropriate circumstances. In addition, it is not clear whetherthe exemption would be expected to apply only to ‘extremely rare cases’, given theIASB’s explanation in BC80 of the ED that the principle underpinning the exemptionis similar to the approach in IAS 37.92. In light of the above, we strongly recommendthe IASB provide more application guidance on commercial sensitivity and thelegitimate circumstances and examples where the exemption can be applied. Thiswould help improve the overall robustness of the proposals and mitigate potentialdebate between auditors and preparers on its appropriate use.B. Other concerns
28.Our respondents noted that the proposal in B67E of the ED allow entities to discloseinformation at a sufficiently aggregate level so that it would not prejudice seriouslythe acquisition objectives. However, they questioned whether such aggregatedinformation would still be meaningful and useful for users. They also considered thataggregation may not adequately address their concerns in cases where the entityonly engages in one or two business combinations during the reporting periods.Presenting the expected synergies in total for a limited number of businesscombinations may still be commercially sensitive.Page 11 of 13
29.We recognise the respondents’ comments and consider that the proposedaggregation is not entirely clear. The ED provides an example where an acquirer canaggregate the total amount of expected synergies for each individual businesscombination without prejudicing seriously any of the acquisition-date key objectivesfor the business combination (i.e. vertical aggregation). However, the ED is not clearas to whether the acquirer can also aggregate the expected synergies across all theirbusiness combinations at a total level (i.e. horizontal aggregation). We consider thatthe horizontal aggregation approach could not provide useful information to users.As such, we recommend the IASB clarify this in the final amendment.Question 4—Disclosures: Identifying information to be disclosed(proposed paragraphs B67A–B67B of IFRS 3)
30.We generally agree with the proposals to apply a management approach using theentity’s key management personnel for identifying disclosure information for strategicbusiness combinations. This approach allows for the provision of relevantinformation to users by leveraging information that management already usesinternally, thereby minimising the reporting burden on preparers.
31.We note that IFRS 3:B67B(b) includes specific disclosure requirements if the keymanagement personnel stop reviewing the performance of a business combinationbut continue to receive and monitor it as part of the entity’s annual budgeting processfor reasons described in BC123 of the ED. We suggest that the IASB reconsider theproposal. Key management personnel would generally be able to access and‘receive’ any information on-demand through an ERP or another similar system.Hence it may inadvertently capture situations where the key management personnelis able to access and ‘receive’ such information, but has not reviewed or monitoredit.Question 5—Disclosures: Other proposals
32.We broadly support the proposals but have some concerns about the practice issuesand challenges associated with disclosing the expected synergies from thecombining operations in B64(ea) of the ED and recommend that the IASB provideguidance or clarification. These issues include:
Challenges in quantifying synergies: Our practitioners questioned whether it ispossible to reliably quantify expected synergies in all cases. For example, if thesynergies arise from increased market share, branding, or technology and innovation,how should an entity measure and quantify the effects? Furthermore, does the entityneed to consider the level of reliability and probability of occurrence of the synergieswhen determining whether to disclose such information?Mandatory disclosure despite lack of available data: Our preparers queriedwhether the disclosure is intended to be mandatory even when the entity does nothave the necessary analyses and data on synergies readily available. For example,entities may not break down the synergies by category. This could impose asignificant burden on entities to gather information for disclosure.Ambiguity around the ‘synergies’ concept: There is a lack of clarity on what‘synergies’ mean in the ED. Specifically, our preparers and users questionedwhether the proposed disclosures intend to capture the revenue of the combiningoperations or incremental revenue. Without clear explanations, entities wouldprepare the disclosures on different bases and users may interpret the quantitativePage 12 of 13information differently.Potential compliance issues for Hong Kong listed entities: Our practitionerswere concerned that if entities listed in Hong Kong disclose the expected synergiesfor the combining operations, such synergy disclosures may constitute a ‘profitforecast’ under the local listing rules3. Depending on the level of detail provided inthe disclosure, if the information implicitly quantifies the anticipated level of futureprofits or losses, it could potentially be treated as a profit forecast and triggercompliance issues for Hong Kong listed entities.Auditability of synergies: Similar to the comments on question 1, our practitionersquestioned whether the information could be reliably auditable, given that it involvesfuture projections.Question 6—Changes to the impairment test(paragraphs 80–81, 83, 85 and 134(a) of IAS 36)
A. Proposal to reduce shielding
33.We generally agree with the proposal. We share the IASB's view that the issue ofshielding cannot be fully eliminated under the current impairment-only model forgoodwill, but that the proposal could still help mitigate shielding and enhancecomparability across entities in how they conduct the impairment assessment.B. Proposal to reduce management over-optimism
34.We broadly agree with the proposal as it provides users of financial statements withmore useful information, although the proposal does have certain limitations. Forexample, it cannot reduce management over-optimism in situations where entitiesdo not provide segment information under IFRS 8 or when a reportable segmentcontains more than one cash-generating unit with goodwill.Question 7—Changes to the impairment test: Value in use(paragraphs 33, 44–51, 55, 130(g), 134(d)(v) and A20 of IAS 36)
A. Removing the constraint on including uncommitted future restructuring or assetenhancement cash flows
35.Our respondents expressed mixed views on the proposal. Some respondents agreedwith the proposal for reasons similar to BC205 of the ED.
36.However, a few respondents disagreed with the proposal. They considered that theproposal could increase the risk of management over-optimism in calculating valuein use (VIU) because management would have more flexibility to include a widerange of assumptions in VIU calculation. This appears to conflict with one of theobjectives of the ED to reduce management over-optimism. These respondents alsoquestioned whether auditors could verify cash flows arising from future restructuringto which the entity is not yet committed.
37.Furthermore, some respondents noted the IASB’s view in BC213 and BC219 of theED and considered the VIU measurement would become similar to how fair value is3 Pursuant to MBLR Chapter 14.61, a ‘profit forecast’ means ‘any forecast of profits or losses, however worded,and includes any statement which explicitly or implicitly quantifies the anticipated level of future profits or losses,either expressly or by reference to previous profits or loses or any other benchmark or point of reference’.Page 13 of 13determined after applying the proposed changes to the impairment test. Therefore,these respondents questioned whether, and if so, how VIU would differ from fairvalue going forward.
38.We recognise that the cash flows from uncommitted future restructuring and assetenhancement introduce extra subjectivity and uncertainty into the VIU calculationand could significantly impact the impairment assessment in certain circumstances.Hence, we suggest the IASB add this type of cash flows as an example of keyassumptions for disclosure under IAS 36.134(d)(i) & (ii). This would help users betterassess the reasonableness of this key assumption and reduce management over-optimism. In addition, we believe that there will remain to be differences betweenVIU and fair value, as explained in IAS 36.53A, even if the constraint is removed. Ifthe IASB were to proceed with the proposal, we suggest the IASB explain their viewsin detail in the Basis for Conclusions of the final amendments so as to help entitiesconsider the reasonableness of VIU and fair value when ascertaining the recoverableamount.B. Removing the requirement to use pre-tax cash flows and pre-tax discount rates incalculating value in use
39.We support the proposal as the post-tax approach aligns with how entities preparecash flows projections and the valuation practice.Question 8—Proposed amendments to IFRS X Subsidiaries without PublicAccountability: Disclosures (Subsidiaries Standard)
40.Some respondents disagreed with adding the proposed quantitative disclosure onexpected synergies in the Subsidiaries Standard. Same as the comments onquestion 5, these respondents anticipated significant challenges in quantifying andauditing the expected synergies disclosures. In addition, subsidiaries without publicaccountability often have a limited number of financial statements users only, andthese users rarely require the proposed information.
41.Considering the cost-benefit of the proposed quantitative information about expectedsynergies, we suggest the IASB further explore the usefulness of this information forusers of private subsidiaries.Question 9—Transition(proposed paragraph 64R of IFRS 3, proposed paragraph 140O of IAS 36 andproposed paragraph B2 of the Subsidiaries Standard)
42.We support the prospective application of the proposals because retrospectiveapplication is not feasible given the nature of the amendments.~ End ~