In September, the Institute’s Standard Setting Department responded to the International Accounting Standards Board’s (IASB) request for information (RFI) on its Third Agenda Consultation. The RFI sought views on the strategic direction and balance of the IASB’s activities, the financial reporting issues it should prioritize and the criteria for adding projects to its work plan for 2022 to 2026. This article highlights our response to the RFI. The full response is available on our website.
Strategic direction and balance of the IASB’s activities
We consider that the IASB should leave its current level of focus for each main activity unchanged, given its resources will remain substantially unchanged from 2022 to 2026. In addition, we do not consider that the IASB should undertake any other activities within the current scope of its work.
Criteria for assessing the priority of financial reporting issues
We recommend that the IASB clarify how they prioritize a project if it interacts with other projects on the work plan. For example, does more interaction with other projects mean a higher or lower priority will be set? We suggest that the IASB should be cautious of repeatedly deferring important issues in financial reporting on the basis that the issue interacts with other projects, as this has the potential of resulting in significant issues being unaddressed for many years.
Financial reporting issues that could be added to the IASB’s work plan
Our outreach has identified four problematic accounting topics in Hong Kong: (i) commodity transactions, (ii) cryptocurrencies and related transactions, (iii) intangible assets, and (iv) variable and contingent consideration. We recommend three high priority projects to address issues in these areas. We understand the scope of any project that would be added to the IASB’s work plan is yet to be determined. As some of the three projects prioritized by us are related to each other, e.g. cryptocurrencies and intangible assets, we suggest that the IASB should seek synergies and consider where projects can be conducted in parallel.
Develop a standard to set out accounting requirements for a range of non-financial tangible or intangible assets held solely for investment purposes
We note commodity transactions, in particular commodity loans, are quite common in Hong Kong. Application questions are arising and diversity in practice is observed as no specific reporting standard governs such transactions. Hence there is a need to develop requirements for common types of commodity transactions, for example, commodity loans. Furthermore, it is worth setting out the range of non-financial tangible or intangible assets to which the proposed commodity loan requirements would apply.
Given the increasing prevalence of cryptocurrency transactions, we believe there is a need for more robust accounting requirements that faithfully represent the underlying transactions. We believe that accounting for cryptocurrencies under International Accounting Standard (IAS)2 Inventories or IAS 38 Intangible Assets may not provide relevant information when these items are held for speculative or investment purposes. Alternatively, the IASB may consider amending the scope of International Financial Reporting Standard (IFRS) 9 Financial Instruments to include cryptocurrencies. However, as existing standards like IFRS 9 were not written to specifically address crypto-related issues, such an application may only be a short-term fix.
In light of the above, we consider that a standard that sets out accounting requirements for a range of non-financial tangible or intangible assets held solely for investment purposes is needed.
Undertake a comprehensive review of IAS 38, including the recognition and measurement requirements
IAS 38 was published almost two decades ago and does not adequately address common transactions encountered now in this knowledge-based era, where there are frequent and material transactions involving information technologies and intellectual properties.
As such, we believe a fundamental review of IAS 38 is warranted in terms of: (i) scope, e.g. how to cope with new types of intangibles both unrecognized (e.g. internally generated intangibles) and recognized (e.g. crypto and polluting permits), (ii) recognition and measurement, and (iii) disclosure requirements.
Specify the accounting for transactions that involve variable or contingent consideration
This has been a growing issue for quite some time (e.g. transactions involving performance-linked purchase prices for assets) which currently lacks clear requirements. Our respondents observed diversity in practice, for example, initial accounting – when and at what amount, subsequent accounting – capitalized or charged/credited to profit or loss. We believe that targeted changes to the relevant standards would be a quick fix.
This article was contributed by Anthony Wong CPA, Associate Director, the Institute’s Standard Setting Department.