IASB Exposure Draft ED/2021/07 Subsidiaries without Public Accountability: Disclosures

Page 1 of 11Our Ref.: C/FRSCSent electronically through the IASB Website (www.ifrs.org)

4 January 2022Dr Andreas BarckowInternational Accounting Standards BoardColumbus Building7 Westferry CircusCanary WharfLondon E14 4HDUnited KingdomDear Andreas,IASB Exposure Draft ED/2021/07Subsidiaries without Public Accountability: DisclosuresThe Hong Kong Institute of Certified Public Accountants (HKICPA) is the only body authorisedby law to set and promulgate standards relating to financial reporting, auditing, and ethics forprofessional accountants, in Hong Kong. We are grateful for the opportunity to provide you withour comments on this Exposure Draft (ED).We welcome the proposed new IFRS Standard and consider that it would reduce costs for eligiblesubsidiaries to prepare their financial statements while maintaining the usefulness of financialstatements for users.Nevertheless, we have several comments and recommendations on the ED. Firstly, regardingthe scope of the draft Standard, we understand that the draft Standard is intended to address thecost-benefit considerations for a subset of small and medium-sized entities (SMEs) – subsidiarieswithout public accountability. However, we consider that extending the scope of the draftStandard to all SMEs without public accountability would enable more SMEs to benefit from thereduced disclosure requirements and would set a better direction for the evolution of the IFRSfor SMEs Standard. In addition, we do not see any reason for restricting the scope of the draftStandard to subsidiaries when the draft Standard is developed based on the disclosurerequirements in the IFRS for SMEs Standard, which was designed for SMEs regardless ofwhether they are a subsidiary. Accordingly, we recommend that the scope of the draft Standardbe extended to cover all SMEs without public accountability, i.e. to remove the criteria inparagraph 6(a) and (c) of the draft Standard.Secondly, our respondents noted that the IASB is currently undertaking two other projects,namely the Second Comprehensive Review of the IFRS for SMEs Standard and the DisclosureRequirements in IFRS Standards—A Pilot Approach. These two projects either has similar scope(entities without public accountability) or objective (address disclosure problems) as the draftStandard. They questioned how these two projects interact with the draft Standard, in particular,in respect of the approach to developing the draft Standard going forward. Hence, we suggestthat the IASB clarify this matter.Lastly, to help stakeholders better understand the effects of the draft Standard and distinguishbetween different sets of accounting standards, we recommend that the IASB provideeducational materials, such as a comparison of the disclosure requirements between IFRSStandards, IFRS for SMEs Standard and the draft Standard, and illustrative financial statements,once the draft Standard is finalised.Page 2 of 11Our detailed comments are provided in the Appendices.If you have any questions regarding the matters raised in this letter, please contact me(ceciliakwei@hkicpa.org.hk) or Anthony Wong (anthonylwwong@hkicpa.org.hk), AssociateDirector of the Standard Setting Department.Sincerely,Cecilia KweiDirector, Standard Setting DepartmentPage 3 of 11Work undertaken by HKICPA in forming its viewsThe HKICPA:

(i)

issued an Invitation to Comment on ED/2021/07 on 27 July 2021 to its members and otherstakeholders;

(ii) sought input from its Disclosure Initiative Advisory Panel and Small and Medium PracticesCommittee and its Working Group on Technical Issues, which are mainly comprised oftechnical and industry experts from large as well as small and medium accounting firms(collectively, Practitioners);

(iii) held a roundtable discussion for local stakeholders, including preparers, practitioners andinvestors on 4 November 2021; and(iv) developed its views through its Financial Reporting Standards Committee, having reflectedon its stakeholder views. The Committee comprises academics, preparer representativesfrom various industry sectors, regulators, as well as technical and industry experts from small,medium and large accounting firms.Detailed comments on ED/2021/07Objective (refer to ED Question 1)

1.The HKICPA and its respondents agree with the objective of the draft Standard. Overall, weagree that the draft Standard would reduce costs for eligible subsidiaries to prepare theirfinancial statements in the following ways:

(a) Although eligible subsidiaries currently applying IFRS Standards would still be requiredto prepare IFRS disclosures for reporting to their parents and first-time implementationcost would be incurred, the draft Standard requires fewer disclosures than IFRSStandards, which can save costs in preparing and auditing the disclosures in thesubsidiaries’ financial statements on an ongoing basis; and(b) The draft Standard helps remove the need for eligible subsidiaries who are currentlyapplying a local GAAP to maintain two sets of accounting records – one for reporting tothe parent and one for the subsidiary’s own financial statements. It is also useful forentities that intend to transition to IFRS Standards, e.g. those that are recently acquiredby a listed entity or are planning to list in the near future.

2.However, some respondents expressed the concerns that with the introduction of the draftStandard, stakeholders may not be able to distinguish between IFRS Standards, IFRS forSMEs Standard and the draft Standard. They noted that both the draft Standard and the IFRSfor SMEs Standard target entities without public accountability, and that the IASB isdeliberating the feedback on the Second Comprehensive Review of the IFRS for SMEsStandard. In particular, the IASB is considering whether, and to what extent, the IFRS forSMEs Standard should align with the requirements in IFRS 9 Financial Instruments, IFRS 15Revenue from Contracts with Customers and IFRS 16 Leases. The draft standard and IFRSfor SMEs Standard would become quite similar if the requirements in IFRS for SMEsStandard would align with those in the IFRS Standards.In light of our respondents’ concerns above, we recommend that the IASB:

(a) clarify how this project interacts with the Second Comprehensive Review of the IFRS forSMEs Standard; and(b) provide educational materials to help stakeholders understand the effects of the draftStandard and the differences between different sets of accounting standards once thedraft Standard is finalised, given that most SMEs have limited resources. It would behelpful if these educational materials include a comparison of the disclosure requirementsbetween IFRS Standards, IFRS for SMEs Standard and the draft Standard, as well asillustrative financial statements (similar to the ones for IFRS for SMEs Standard).Appendix 1Page 4 of 11Scope (refer to ED Question 2)

Public accountability

3.The HKICPA agrees that only entities that do not have public accountability should be allowedto apply the draft Standard.

4.However, we note that certain non-insurance companies may issue insurance contractswithin the scope of IFRS 17 Insurance Contracts, e.g. certain product warranties issued bycorporates may be under the scope of IFRS 17. We question whether these entities wouldbe seen as holding assets in a fiduciary capacity for a broad group of outsiders as one of itsprimary businesses in accordance with paragraph 7(b) of the draft Standard and thereforeare not eligible for the draft Standard. Accordingly, we suggest that the IASB clarify this andconsider providing guidance on the meaning of ‘a broad group of outsiders’ under paragraph7(b) of the draft Standard.Extend the scope

5.While the HKICPA notes that the project is intended to address the cost-benefitconsiderations for a subset of small and medium-sized entities (SMEs) – subsidiaries withoutpublic accountability, we consider that the scope of the draft Standard could be extended tocover all SMEs without public accountability, i.e. to remove the criteria in paragraph 6(a) and(c) of the draft Standard for the following reasons:

(a) In developing the draft Standard, the IASB has either retained the disclosurerequirements in the IFRS for SMEs Standard or used the principles it used whendeveloping them. IFRS for SMEs Standard was designed for SMEs regardless of whetherthey are a subsidiary. We noted that IFRS for SMEs Standard has been applied for morethan 10 years and no significant concerns have been observed regarding its disclosurerequirements. Therefore, we do not think that the scope of the draft Standard should berestricted to subsidiaries.(b) The ED states that the reason for limiting eligibility to subsidiaries with parents issuingpublicly available financial information is that information exempted from being disclosedat the subsidiary level can be identified in the consolidated financial statements of itsintermediate parent or ultimate parent (paragraph 6(c) of the draft standard).However, information concerning a particular subsidiary will be disclosed in the parent’sconsolidated financial statements only if that information is material at the group level.Furthermore, that information is often disclosed on an aggregate basis without its beingattributed to any specific subsidiary. Hence, the requirement in paragraph 6(c) may notguarantee that information about the subsidiary could be identified in the parent’sconsolidated financial statements.Since the proposed eligibility criteria does not guarantee disclosure of the eligiblesubsidiary’s information to the public, we doubt the value of retaining such a restriction.(c) In Hong Kong, it is common that the financial statements users are the sole shareholderor are family members. For example,(i) Some private and sizable groups that are owned by families (e.g. family office) do notprefer making their financial statements publicly available due to confidential reasons.However, users of these financial statements are mainly family members.(ii) Private groups often have an ultimate holding or intermediate parent that isincorporated in the British Virgin Islands, Cayman Islands, Bermuda or otherjurisdictions where there is no statutory requirement to prepare financial statements.Page 5 of 11(iii) Many private companies do not have any external borrowings and are wholly-ownedby an individual. The only user of its financial statements would be its sole shareholder.We consider that using the draft Standard in these cases would still provide disclosuresthat meet users’ information needs. In addition, extending the scope to cover these caseswould enhance the usefulness of the draft standard.(d) We share the same view expressed by Ms Françoise Flores, former IASB member, inparagraphs AV4 and AV5 of the ED that widening the scope of the draft Standard toinclude all SMEs would help to set a better direction for the evolution of the IFRS for SMEsStandard. In particular, the IASB could affirm the objective of keeping the IFRS for SMEsStandard simple, easy to apply and a stable platform for SMEs. This would also facilitatestakeholders’ understanding of the differences of the scope and requirements betweendifferent sets of standards. If the IASB were to extend the scope of the draft Standard toall SMEs, the differences between the standards would be as follows:

IFRS StandardsThe DraftStandardIFRS for SMEsStandardScopeAll companiesCompanies without public accountabilityRecognitionandmeasurementrequirementsSameSimplified, easy toapplyDisclosuresComprehensiveSimplified, less disclosuresAvailable for public use

6.The draft Standard uses the concept of ‘available for public use’ (as in IFRS 10 ConsolidatedFinancial Statements) when defining its scope. However, IFRS 10 and the draft Standard donot provide any guidance on what the term means, for example, whether simply making theconsolidated financial statements of the parent available upon request will meet therequirement or whether the parent must be a listed entity. While we understand that the termhas been used for a long time and practice has evolved, we consider that the proposals inthe ED are likely to put pressure on the definition of ‘available for public use’. If the IASB werenot to extend the scope of the draft Standard to all SMEs and retain the criteria in paragraph6(c), we suggest that the IASB consider providing clear guidance on this matter because themeaning of the term will affect the scope of the draft Standard.Approach to developing the proposed disclosure requirements (refer to ED Questions 3and 4)

7.Overall, the HKICPA does not disagree with the ‘bottom-up’ approach to developing the draftStandard as proposed in the ED. However, we observe that most eligible subsidiaries mayalready be using full IFRS for reporting to their parents. Therefore, a ‘top-down’ approach, i.e.using IFRS Standards as the starting point and providing disclosure exemptions under eachIFRS Standard, would be more preferable as it helps eligible subsidiaries understand andapply the draft Standard more effectively and efficiently.

8.We note that the objective of this project is similar to that of another project DisclosureRequirements in IFRS Standards—A Pilot Approach (the Pilot Approach project) that theIASB is currently undertaking. Both projects aim to address disclosure problems. Accordingly,we suggest that the IASB clarify the interaction between the two projects in respect of theapproach to developing the proposed disclosure requirements, in particular, whether theapproach of setting overall and specific disclosure objectives would be adopted in the draftStandard, and whether ‘non-mandatory’ disclosure requirements as proposed in the PilotApproach project would be excluded from this draft Standard going forward.Page 6 of 11

9.In response to Question 4(b)(i) of the ED, we appreciate the IASB’s effort in simplifyingparagraphs 44A-44E of IAS 7 Statement of Cash Flows when drafting paragraph 130 of thedraft Standard. We note that IAS 7.44C also applies to changes in financial assets if changesfrom those assets were, or will be, included in cash flows from financing activities. However,such disclosures are not required under the draft Standard. We consider that such informationwould still be separately prepared for the parent’s consolidated financial statements. Inresponse to Question 4(b)(ii) of the ED, some respondents observed that entities applyingIFRS Standards usually include a reconciliation between the opening and closing balancesfor liabilities arising from financing activities to satisfy paragraphs 44A-44E of IAS 7. Hence,we suggest that the IASB consider including the requirement in IAS 7.44C on changes infinancial assets in paragraph 130 of the draft Standard to facilitate the preparation of theparent’s consolidated financial statements.Disclosure requirements (refer to ED Questions 5 to 8)

10.The HKICPA has included several suggestions to improve the disclosure requirements in thedraft Standard in Appendix 2. In general, we consider that disclosures about liquidity andmeasurement uncertainty should be required in the draft Standard in accordance with itsdrafting principles (paragraph BC34 of the ED), and these disclosures would be useful tousers. We note that paragraph 16 of the ED do not require entities to provide a disclosurerequired by the draft Standard if the information resulting from that disclosure is not material.Hence, we expect that the extent of disclosures would depend on facts and circumstances ofeach entity, for example, the financial risk management disclosure requirements in IFRS 7Financial Instruments: Disclosures may not be important for a dormant company or companywith minimal operation. On the other hand, if a subsidiary has financial instruments withsignificant carrying amounts, such disclosure requirements may provide useful information tousers.

11.We do not have any comments on the proposed disclosure requirements about transition toother IFRS Standards and the interaction with IFRS 1 First-time Adoption of InternationalFinancial Reporting Standards.

12.We agree with the proposal and the rationale as stated in paragraph BC64 of the ED that thedraft Standard should not include reduced disclosure requirements for insurance contractswithin the scope of IFRS 17. However, we consider that the IASB should continue to assessthe effectiveness of the disclosure requirements in IFRS 17 and propose reduced disclosurerequirements in the draft Standard after entities have applied IFRS 17 for some time, onceusers are familiar with the new accounting model for insurance contracts and its effect on anentity’s financial statements.Structure of the draft Standard (refer to ED Question 9)

13.The HKICPA notes that the draft Standard is not an exhaustive list of disclosure requirements.It includes footnotes which require entities to refer to other IFRS Standards for disclosuresthat remain applicable when entities adopt the draft Standard. Under this structure, entitiesmay easily miss the disclosure requirements in the footnotes. Accordingly, we recommendthat the IASB incorporate the disclosures as currently required in the footnotes into the bodyof the draft Standard so that entities would not need to cross-refer to the disclosurerequirements in IFRS Standards. Depending on the outcome of the Pilot Approach project,the IASB could also consider providing indication within the IFRS Standards of whichdisclosure requirements are exempted for entities adopting the draft Standard.Page 7 of 11Suggested improvements to the disclosure requirements in the draft StandardRequirements to addStandardDescriptionRationaleIFRS 3BusinessCombinationsThe disclosure of reasons why thetransaction resulted in a bargainpurchase gain (IFRS 3.B64(n)(ii)).The appearance of a bargainpurchase without disclosure of theunderlying reasons would raiseconcerns in practice about theexistence of measurement errors(i.e. measurement uncertainties asmentioned in BC34(c) of the ED).IFRS 3The disclosure requirement in IFRS

3.B64(j) in relation to a contingentliability that is not recognised underIFRS 3.This disclosure can provide theusers with information to assessthe potential liabilities (BC34(a) ofthe ED) of the acquiree.IFRS 7FinancialInstruments:

DisclosuresThe liquidity risk disclosure asrequired in IFRS 7.39 and B11.The financial statements users areparticularly interested in informationabout liquidity and solvency, andthis is also in line with the principlesused in developing the draftStandard (BC34(b) of the ED).IFRS 15Revenue fromContracts withCustomers &IAS 37Provisions,ContingentLiabilities andContingentAssetsInformation about significantjudgement and estimates.•Disclosures about assumptionsrelated to future events (IAS

37.85(b))

•Significant judgements made inapplying IFRS 15 (IFRS 15.110(b)

and 123)

•Separate disclosure of revenue inthe scope of IFRS 15 (IFRS

15.113(a))

•Timing of revenue recognition andnature of goods or services (IFRS

15.119(a) & (c))

The disclosure of significantjudgement and estimates canprovide information about themeasurement uncertainties(BC34(c) of the ED).IAS 1PresentationofFinancialStatementsIAS 1.61 requires an entity to disclosethe amount expected to be recoveredor settled after more than twelvemonths for each asset and liabilityline item that combines amountsexpected to be recovered or settled:

(a) no more than twelve months afterthe reporting period, and (b) morethan twelve months after the reportingperiod.This disclosure provides usefulinformation to financial statementsusers in assessing the liquidity andsolvency (BC34(b) of the ED) of theentity.Appendix 2Page 8 of 11Requirements to addStandardDescriptionRationaleIAS 12 IncomeTaxesIAS 12.81(f) requires the disclosure ofthe aggregate amount of temporarydifferences associated withinvestments in subsidiaries, branchesand associates and interests in jointarrangements, for which deferred taxliabilities have not been recognised.Such information is useful to somefinancial statements users forassessing the potential cashoutflows (BC34(a) of the ED) if thesubsidiaries, branches, associatesand interests in joint arrangementsdeclare dividends in the future.IAS 36Impairment ofAssetsThe sensitivity disclosurerequirements in IAS 36.134(f).They provide financial statementsusers with information forevaluating the measurementuncertainties (BC34(c) of the ED)

of impairment tests.Page 9 of 11Requirements to removeStandardDescriptionRationaleIFRS 7Paragraph 48 of the ED requires anentity to disclose for assetsreclassified out of the ‘fair valuethrough profit or loss’ category so thatthey are measured at amortised costor fair value through othercomprehensive income in accordancewith paragraph 4.4.1 of IFRS 9: (a)

the effective interest rate determinedon the date of reclassification; and (b)

the interest revenue recognised.In order to provide this disclosure,the related information needs to betracked separately for a group offinancial instruments beingreclassified (as in most cases,reclassification is applied to agroup of financial instruments asopposed to a single financialinstrument). This requiressignificant effort yet the informationdisclosed is not of much interest tothe financial statements users ofentities without publicaccountability.IFRS 16LeasesParagraph 103 of the ED requires alessee to disclose for short-termleases and, separately, for otherleases for which the underlying assetis of low value, the lease paymentsrecognised as an expense for thereporting period when the entity hasapplied paragraph 6 of IFRS 16. Theexpense disclosed for short-termleases need not include that forleases with a lease term of onemonth or less.The amounts of short-term leasesand leases of low value assets aregenerally not significant and hencesuch disaggregation of amountsmay not be useful for financialstatements users.IAS 1Paragraph 117 of the ED requires anentity to present in the statement offinancial position or disclose in thenotes (a) property, plant andequipment in classificationsappropriate to the entity inaccordance with IAS 16; (b) trade andother receivables, showing separatelyamounts receivable from relatedparties, amounts receivable fromother parties and receivables arisingfrom contract assets; (c) inventories,showing classifications appropriate tothe entity, in accordance with IAS 2Inventories; (d) trade and otherpayables, showing separatelyamounts payable to trade suppliers,payable to related parties, deferredincome and accruals; (e) provisionsfor employee benefits and otherprovisions; and (f) classes of equity,such as paid-in capital, sharepremium, retained earnings and itemsof income and expense that arerecognised in other comprehensiveincome and presented separately inequity.Items (a), (b), (c), (e) and (f) ofparagraph 117 of the ED are theexamples stated in IAS 1.78 forsubclassification of line items butthey are specified as the minimumdisclosure requirements in the ED.We suggest that the ED follow theapproach in IAS 1.78 so that anentity can apply judgement todetermine the subclassification ofline items.Page 10 of 11Requirements to clarifyStandardDescriptionRationaleIFRS 1 First-time Adoptionof InternationalFinancialReportingStandardsFootnote 3 of the ED stated that thedisclosure requirement in IFRS 1.D2applies to this ED. IFRS 1.D2requires a first-time adopter todisclose the information required byIFRS 2.44 and 45.However, the disclosurerequirements for share-basedpayment arrangement in IFRS

2.45(c) & (d) were removed fromthe ED but footnote 3 of the ED didnot mention that IFRS 2.45(c) & (d)

do not apply to a first-time adopter.This may imply that a first-timeadopter applying the draft Standardis required to disclose moreinformation about share-basedpayment arrangement than a non-first-time adopter.IFRS 7IFRS 7.20A requires an entity todisclose an analysis of the gain orloss recognised in the statement ofcomprehensive income arising fromthe derecognition of financial assetsmeasured at amortised cost, showingseparately gains and losses arisingfrom derecognition of those financialassets.This requirement has beenremoved from the ED. However,this seems to be inconsistent withparagraph 54(a)(b) of the ED whichrequires similar disclosurerequirements for financial assetsmeasured at fair value throughother comprehensive income.IFRS 8OperatingSegments &IAS 33Earnings perShareParagraph 4 of the ED states that thedisclosure requirements in IFRS 8Operating Segments, IFRS 17Insurance Contracts and IAS 33Earnings per Share remain applicableand are, therefore, not included inAppendix A. The application of thedisclosure requirements in IFRS 8,IFRS 17 or IAS 33 is unchanged foran entity applying this draft Standard.To avoid confusion, we suggestthat the IASB specify that IFRS 8and IAS 33 would only beapplicable for entities applying thisdraft Standard if they voluntarilychoose to disclose information inIFRS 8 and IAS 33.IFRS 16Paragraph 100(d) of the ED requiresthe disclosure for leases that havecommenced by the end of thereporting period, the total of futurelease payments at the end of thereporting period payable: (i) no laterthan one year from the reporting date;

(ii) later than one year and up to fiveyears from the reporting date; and (iii)

later than five years from thereporting date.It is unclear whether entities shoulddisclose the undiscountedcontractual amount or thediscounted amount. Besides,according to IFRS 16.58, a lesseeshall disclose a maturity analysis oflease liabilities applying IFRS 7.39and B11 while IFRS 7.B11mentioned that entity uses itsjudgement to determine anappropriate number of time bands.We suggest that entities applyingthis ED should also applyjudgement to determine anappropriate number of time bands.Page 11 of 11~ End ~Requirements to clarifyStandardDescriptionRationaleIAS 24Related PartyDisclosuresParagraph 169 of the ED requiresentities to disclose the nature of therelated party relationship as well asinformation about the transactions,outstanding balances andcommitments necessary for anunderstanding of the potential effectof the relationship on the financialstatements. It also lists out theminimum disclosure requirements.However, the disclosure oncommitments is not included in thelist of minimum disclosurerequirements in paragraph 169 (a)

to (d) of the ED. It is not clearwhether an entity is required todisclose any commitments arisingfrom related party transactions.IAS 34 InterimFinancialReportingParagraph 185 of the ED includes anon-exhaustive list of events andtransactions for which disclosureswould be required if they weresignificant. One of the disclosures istransfers between levels of the fairvalue hierarchy used in measuringthe fair value of financial instruments(paragraph 185(k)).However, the disclosure oftransfers between levels of the fairvalue hierarchy used in measuringthe fair value of financialinstruments as required underIFRS 13.93 has been removedfrom the ED for annual financialstatements. It seems that the draftStandard requires more fair valuedisclosures in the interim financialstatements than in the annualfinancial statements.