International Financial Reporting Standard (IFRS) 17 Insurance Contracts introduces significant changes to accounting for the insurance industry. Despite the standard being years in the making, due to the significance of the changes, insurers in Hong Kong are concerned about being able to meet the implementation deadline, and the technical aspects of the new standard with which they had particular concerns.
Stakeholders in the sector relayed these worries to the Hong Kong Institute of CPAs’ Financial Reporting Standards Committee (FRSC), which in turn raised them with standard setter the International Accounting Standards Board (IASB).
Two of the issues that caused concern have since been addressed in the IASB’s proposed amendments, which also propose to defer the implementation date for the standard by 12 months. Providing further support to insurers, the Institute established a Hong Kong Insurance Implementation Support Group to call for and discuss stakeholder questions regarding implementation of the standard, and identify implementation issues which need to be brought to the IASB’s attention.
This is one of the many examples of the work the Institute does behind the scenes in its role as a standard-setter to monitor and influence international standards.
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Christina Ng, the Institute’s Director, Standard Setting, says the work that goes into standard-setting is not always well understood. “The most common misconception is that we are just copying the standard and there is really nothing we need to do. People just don’t know what we do behind the scenes,” she says.
Shelley So, Partner, Accounting Consulting Services at PwC, and a former chair of the FRSC, agrees: “The Institute’s involvement in the standard-setting process is often seen as just being a rubber stamp, but this is not the case.”
Ernest Lee, Technical Partner at Deloitte China and current Chair of the FRSC, explains that the committee gets involved in standards from the very beginning – even before the standard has been issued by the IASB – it also continues to monitor them through both immediate post-implementation reviews and reviews years after they become effective. He adds that throughout the process, it provides feedback to the IASB about how the standard will impact Hong Kong, and makes recommendations on how potential issues could be overcome.
“The work of FRSC is essential because it strives to develop and issue financial reporting standards, interpretations and guidance that are both accepted globally and suited locally for reporting entities in Hong Kong with different reporting requirements, needs and sizes,” says Gary Poon, the FRSC’s small- and medium-sized practitioner (SMP) and small- and medium-sized enterprise (SME) representative.
Active communication
For Ng, one of the most important aspects of standard-setting work is proactively communicating with stakeholders in Hong Kong, whether these are Institute members, companies who will be impacted by the standard or investors, or other parties involved in the financial reporting process such as regulators and auditors.
Another key part of proactive communication is the constant dialogue with the IASB board and staff. “Before joining the Institute, I worked for the IASB. At the IASB, I found many standard setters only got in touch with us during a public consultation period. However, I would frequently hear my colleagues on various projects saying ‘I have a call with the Hong Kong Standard Setter.’ The Institute staff would often contact us and speak with different project teams at various stages of projects, not only during a formal consultation,” remembers Michelle Fisher, Deputy Director, Standard Setting at the Institute. Ng says: “We seemed to be on the phone with them all the time, and we felt sure they were sick of us by now.”
The Institute has set up a number of channels to obtain feedback on the IASB’s proposed new and revised standards, ranging from sending out letters to corporations, investors, regulators and trade associations such as the Chamber of Hong Kong Listed Companies, to using social media, and hosting roundtable events. It also details its work on new standards on its website. The Institute’s consultation periods for new standards typically last about 90 days. After the consultation ends, the Institute will study these comments to shape its own views on the proposals before submitting its comments to the IASB.
The Institute also has a number of project advisory panels comprised of a range of stakeholders with expertise in a particular area of accounting which advise the FRSC on issues under their remit.
But despite all these efforts, and the fact that a standard usually takes two or more years to be finalized, Ng says the Institute typically receives very little feedback from stakeholders, and when it does, it often comes late in the process. “If we hear little during the public consultation, we assume the standard is fine and there aren’t any issues. We do several rounds of consultation, but often it is only when we have issued the standard that concerns get raised.”
Timeliness is key to finding workable solutions, she says. “People need to tell us about the issues early on and not wait until they have become a problem because by then it is very difficult to help in a meaningful way. Communication is really important,” Ng says.
“The FRSC also pays particularly close attention to the views of SMPs and enterprises during the consultation process and conducts roundtable meetings on relevant topics especially for them to voice their concerns and views,” Poon says, whose role on the committee is also to get feedback from both SMPs and SMEs and help identify any issues which may affect them.
Early involvement
The Institute ensures it is involved in the standard-setting process from the very beginning.
The IASB has monthly meetings in which it discusses its current standard-setting projects, and the FRSC, supported by Ng and her team, monitor these meetings closely to understand the direction in which a standard is developing. “We discuss these meetings internally and if we are concerned about the direction they are taking and how it will impact Hong Kong, we write to them and communicate our concerns,” Ng says.
An example of this is when the Institute raised concerns with the IASB over the definition of a business being used in IFRS 3 Business Combinations. This standard establishes principles for how an acquirer of a business recognizes the assets acquired and liabilities assumed at their acquisition-date fair values, and discloses information that enables users to evaluate the nature and financial effects of the acquisition. “We were concerned about a very rule-based position they were taking and the unintended consequences that would arise from overly simplifying the determination of what is a ‘business,’” Ng says. “We believe in having standards that are principles-based – in our experience, structuring transactions to avoid an unfavourable reporting outcome was common under rules-based standards,” Ng says.
Through back and forth dialogue between the IASB and the Institute, including the chance to comment on the drafting of the amendments, eventually the standard was tweaked to address its concerns. “The communication between us, the IASB and our stakeholders is quite powerful. The IASB gets the chance to see how we would apply their position, and they can tell us if it is not what they were intending,” Ng says.
The Institute also runs seminars and workshops to help educate and prepare members for new standards, as well as issuing articles on particular areas of the standard where there are difficulties in understanding. There is also a technical enquiry process, through which all stakeholders can submit questions about standards.
Its educational efforts also extend to non-practitioners, such as investors and regulators, to help them understand the impact new standards will have on companies’ financial statements. The IASB and the Institute collaborate heavily on investor and regulator education.
Proactive research
As well as closely following the development of standards, the Institute also proactively undertakes research into issues that it would like to see tackled, and provides recommendations to the IASB. A current project is investigating developing accounting requirements for business combinations under common control, referring to mergers and acquisitions between entities or businesses that are ultimately controlled by the same party. The Institute is leading a working group on the topic in the region and has worked with national standard-setters in Europe to analyse how such transactions are accounted for in their region – and whether there are cultural or legal differences that could lead to different ways of accounting for them.
Lee says: “We are leading by questioning why such transactions are any different from a merger or acquisition with independent parties. We’re challenging the conceptual merits of accounting for them differently and the team shares their developments with IASB staff as their thinking progresses. In Hong Kong, we have held outreach meetings with investors, preparers, practitioners and regulators to seek their views on such transactions.” The committee will report all of these findings to the IASB to help them develop a global standard.
Ng says: “We are pushing the IASB hard to make a standard for these types of transactions.” She adds that in the past couple of years, the Institute has presented at a few times at global meetings to raise conceptual arguments and issues it would like to be considered.
Ng and her team are also currently working with the staff at the Japanese standard setter, the Accounting Standards Board of Japan, to see if there is a better way to account for goodwill, as it is felt by many practitioners and investors that the current impairment-only approach is not working in practice. So says: “I think the amortization of goodwill is always a hot topic in Hong Kong and China.
“In the past, when the IASB chose to stop the amortization of goodwill, we were not very comfortable with the decision, partly because of the way in which the valuation process is done here. The significant value of intangible assets may be embedded in goodwill rather than recognized separately. As a result, you can suddenly have large impairments because the goodwill has not been amortized over time, and people do not like this. It is a big concern.”
Fisher adds that the IASB’s project is still in its research phase and it may be several years before a final standard is issued, “it is at this stage that people can influence the project the most, when the IASB’s proposals are still in the early stages of being developed.”
Post-implementation assistance
Once a standard is in place, the Institute conducts its own reviews on the implementation of the standard. While the IASB typically carries out a review of standards two to five years after they have first been implemented, the Institute will start the review process much earlier, and in turn advises the IASB of any significant implementation issues.
Lee says: “After the standard is issued, we continue to monitor its implementation to see if our stakeholders in Hong Kong have any practical difficulties, if there were unintended effects, and where necessary we will develop our own materials to aid understanding of the standards.”
Ng agrees: “Reviews are a very central part of standard-setting. It is not a ‘set and forget’ thing.”
One of the areas in which the FRSC is currently very active is monitoring the impact of IFRS 15 Revenue from Contracts with Customers, which became effective in January 2018, and is having a big impact on several industries where it has changed the point of revenue recognition.
Ng explains: “A lot more robust requirements and guidance have been added to help entities account for revenue in the way that was intended. We noted construction or services industries now may recognize revenue later or earlier under IFRS 15, depending on the jurisdiction’s legal environment and enforceability of a company’s rights to payment, among other things. We thought this is interesting and requires companies to really understand their rights and obligations across the jurisdictions they operate in. Because of this, we’re undertaking a study of how jurisdictions in the region are applying IFRS 15 to the real estate sector, and plan to share the findings as part of the education on the standard.”
“We do several rounds of consultation, but often it is only when we have issued the standard that concerns get raised.”
So points out that the Institute was one of the first territories globally to discuss the matter with the IASB, particularly determining the points of revenue recognition. Since then, other jurisdictions have done so.
Ng’s team is leading a revenue technical working group in the region as part of the Asian-Oceanian Standard-Setters Group (AOSSG) which facilitates education and discussions on practice developments and emerging issues in the region.
Fisher says the revenue standard is a good example of why education and communication with stakeholders early on is so important. “On the face of it, many companies did not expect significant accounting changes when the new revenue standard was issued. However, when they started to apply the detail in the standard near its effective date, issues started to arise,” she says. “We have been discussing these issues with the FRSC and our Revenue Advisory Panel and we have developed a number of articles and frequently asked questions to help industries better understand and implement the standard,” she says.
So agrees: “Many companies only started to look at the standard when they had to prepare their reports, so the issues only came to our attention when it was already in force.
“The Institute was able to give them more guidance, but it could not eliminate the impact altogether. People need to get in touch at an earlier stage and not leave it so late.”
“Reviews are a very central part of standard-setting. It is not a ‘set and forget’ thing.”
A trusted voice
The Institute is active in international accounting groups, such as the IASB’s Accounting Standards Advisory Forum and the AOSSG, which is made up of 26 national standard-setters from around the region. Fisher says it is particularly important to discuss new standards with other regional standard-setters, as local bodies may have encountered similar issues. “It is a good group to be part of because we can bounce ideas off each other. If the IASB is discussing a proposal or deliberating views, we can see what other standard-setters are concerned about.”
Ng points out that different cultures and legal frameworks can also impact how different jurisdictions apply the standards.
So thinks the work the Institute does in this area is very important to ensure the region’s voice is heard internationally. “Traditionally, there have been more western voices than Asian voices, but if you look at the complexity of the issues, we have a lot of unique situations in the region and the way we do business is quite different to the way business is done in the west. When a standard is set, it is important these issues are considered,” she says.
Lee stresses that it is important members get involved in the development of standards as early as possible – providing feedback especially during consultation stages. He adds that in order to do this they must keep abreast of developments so that they can identify any major issues.
Poon also encourages members to make the best use of the resources the Institute makes available to its members, as well as attending its seminars and workshops.
Lee says: “I believe standards will keep evolving and we will never have a so-called perfect standard for all situations because of the increasing complexity of transactions in Hong Kong and elsewhere in the world. What is important, is for everyone to nurture a culture of improvement and with that mindset we should be able to develop better standards for Hong Kong.”
