Mr Hans Hoogervorst Chairman of the International Accounting Standards Board 30 Cannon Street London EC4M 6XH United Kingdom Düsseldorf, 31 August 2012 540/602 Dear Mr Hoogervorst Re.: IASB Exposure Draft 2012/1 Annual Improvements to IFRSs 2010 2012 Cycle The IDW appreciates the opportunity to comment on the exposure draft " Annual Improvements to IFRSs 2010 2012 Cycle. In general, we agree with the proposed amendments. However, we would like to comment on certain matters, as set out below. IFRS 2 Share-based Payment In our view, the proposed guidance on vesting conditions contains an inconsistency: A vesting condition is either a service condition or a performance condition. The proposed definition of a performance condition states that a performance target is defined by reference to the entity s own operations (or activities) or the price (or value) of its equity instruments (Appendix A of the exposure draft). At the same time, the Board proposes that a share market index target is a non-vesting condition and, thus, not a performance condition
page 2/6 IDW Comment Letter to Mr Hans Hoogervorst on Exposure Draft 2012/1 Annual Improvements to IFRSs because it is not related to the performance of the entity, even if the entity s shares form part of that index. Such a target may be predominantly affected by many external variables or factors and is remote of the influence of the employee (paragraph BC5 of the exposure draft). According to the current IFRS 2, performance conditions consist of two subsets: market conditions and other performance conditions (IFRS 2, paragraphs 19 et seqq., Appendix A, IG24). The definition of a market condition remains unchanged in the exposure draft and still contains an example of achieving a target that is based on the market price of the entity s equity instruments relative to an index of market prices of equity instruments of other entities (Appendix A). Hence, this target is a performance condition. It might be argued that in both cases the target is predominantly affected by many external variables or factors. However, paragraph BC5 states that a share market index target is a non-vesting condition, whereas a similar target described in the definition of a market condition is a vesting condition. We recommend the Board clarify this issue to avoid misunderstanding. It might make more sense not to focus on whether the target is predominantly affected by many external variables or factors, which may be questionable. Such external variables or factors exist in many cases and are difficult to weight in relation to the influence the employee may have. Instead, an explicit statement could be included to clarify that a performance target is defined by reference to the entity s own operations (or activities) or the price (or value) of its equity instruments, irrespective of the question whether the target is also affected by external variables or factors. The proposed definition of a performance condition sets out that a performance target might relate either to the performance of the entity as a whole or to some part of the entity (Appendix A of the exposure draft). In our view, the Board should add guidance on certain share-based payment transactions involving different group entities. For example, if an award is granted by the parent of a subgroup, but vests upon attaining a specified share price target of the ultimate parent of the group, whether such a target is a performance target would appear questionable, i.e. whether the performance of the sub-group is sufficiently linked to the share price of the ultimate parent.
page 3/6 IDW Comment Letter to Mr Hans Hoogervorst on Exposure Draft 2012/1 Annual Improvements to IFRSs The Board proposes to clarify that in order to constitute a performance condition any performance target needs to have an explicit or implicit service requirement for at least the period during which the performance target is being measured (paragraph BC6 of the exposure draft). In our view, further guidance would be helpful in this context. Consider the following example: A grant of share options has a three-year service condition. In addition, the share options can only be exercised if a successful initial public offering (IPO) occurs within five years. Expectations about the occurance and timing of the IPO influence the classification of the IPO condition at the grant date, i.e. expectations about the occurance and timing of the IPO determine whether a performance condition exists. The IASB should clarify how to account for changes in expectations after the grant date that would result in a different classification. IFRS 3 Business Combinations If contingent consideration that meets the definition of a financial instrument should be subject to the requirements of IAS 39 or IFRS 9, it could be argued that IAS 39 or IFRS 9 should be applied without exemptions. This would mean that some contracts would be accounted for at amortised cost. However, we are aware of the Board s original intention for all liabilities for contingent payments to be accounted for similarly and for liabilities for contingent payments that are not derivatives also to be measured at fair value after the acquisition date (IFRS 3, paragraph BC355). Furthermore, given the uncertainties in remeasuring contingent consideration, in practice fair value and amortised cost measurements (applying paragraph AG8 of IAS 39) often do not differ substantially. Therefore, we support the IASB s approach in requiring that all contingent consideration classified as a liability be remeasured at fair value. In addition, we agree that the current accounting requirements for contingent consideration arising from business combinations lack clarity and should be amended. As mentioned above, the Board originally intended to account for all liabilities for contingent payments similarly. Nevertheless, the exposure draft proposals mean that changes in fair value would have to be recognised either in profit or loss or in other comprehensive income (e.g. changes in an entity s credit risk for certain types of financial liabilities, as set out in paragraph BC4 of the exposure draft).
page 4/6 IDW Comment Letter to Mr Hans Hoogervorst on Exposure Draft 2012/1 Annual Improvements to IFRSs In any case, the IASB should specify (especially in the context of IFRS 9.5.7.7 the Fair Value Option ) those instances in which changes in the fair value of financial liabilities for contingent consideration attributable to changes in an entity s own credit risk should be recognised in other comprehensive income. IAS 1 Presentation of Financial Statements We agree with the content of the proposal. Paragraph 73 of the exposure draft refers to similar terms while paragraphs BC1 et seq. use the language of paragraph 40 of IAS 39 to describe terms that are not similar, i.e. substantially different terms and substantial modification of the terms. In order to ensure consistent application, rather than defining similar terms in the Basis for Conclusions, the language of paragraph 40 of IAS 39 should be used in the final paragraph 73 of IAS 1. IAS 7 Statement of Cash Flows In the light of the current IASB and IFRS Interpretations Committee project on IAS 7, we believe it would be premature to amend IAS 7 (as part of this Annual Improvements Cycle) by clarifying that the classification of interest that is capitalised shall follow the classification of the underlying asset to which those payments were capitalised. In March 2012 the Committee noted that the following two principles of classification in IAS 7 had been used to support the Committee s decisions (either for issuing an agenda decision or for proposing an annual improvement): cash flows in IAS 7 should be classified in accordance with the nature of the activity to which they relate, following the definitions of operating, investing and financing activities, and cash flows in IAS 7 should be classified consistently with the classification of the related or underlying item in the statement of financial position.
page 5/6 IDW Comment Letter to Mr Hans Hoogervorst on Exposure Draft 2012/1 Annual Improvements to IFRSs The Committee observed that the primary principle behind the classification of cash flows in IAS 7 is that cash flows should be classified in accordance with the nature of the activity in a manner that is most appropriate to the business of the entity in accordance with the definitions of operating, investing and financing activities. The Committee noted that it will use this as a guiding principle when analysing future requests on the classification of cash flows. The Committee also recommended that the Board should clarify the primary principle behind the classification of cash flows in IAS 7. Consequently, we do not agree with the Board s proposal to amend IAS 7 as part of this Annual Improvements Cycle. IAS 24 Related Party Disclosures The exposure draft requires the separate disclosure of amounts recognised as an expense by the entity for the provision of key management personnel services that are provided by a separate management entity (paragraph 18A). In addition, the reporting entity would be required to disclose other transactions with the management entity, for example loans, under the existing disclosure requirements of IAS 24 with respect to related parties (paragraph BC2). In our view, applying these two requirements might be challenging in practice. According to the IFRS Interpretations Committee staff paper 11, September 2010, paragraph 5, servicing entities sometimes provide several related services to reporting entities, e.g. mutual funds: In some jurisdictions, the servicing entity would typically perform the role of the trustee and of the manager. Management duties would usually comprise: (a) administrative services, such as processing distributions to unit holders, servicing the unit holders register and preparing the financial statements; (b) investment management services, such as buying and selling investment assets; and (c) key management services relating to planning and directing the activities of the mutual fund.
page 6/6 IDW Comment Letter to Mr Hans Hoogervorst on Exposure Draft 2012/1 Annual Improvements to IFRSs As remuneration for the services performed, a service fee is paid by the reporting entity to the servicing entity. Both the servicing entity itself and employees of the servicing entity may provide services to several reporting entities. Pursuant to the exposure draft, the part of the service fee that is paid for the provision of key management personnel services should be disclosed separately under paragraph 18A, whereas the remaining remuneration, e.g. for administrative services, should be disclosed under the paragraphs 18 et seq. Consequently, the total service fee needs to be broken down in order to meet the disclosure requirements. It may be difficult to break the service fee down into the appropriate components, because the service fee is generally paid for all services as one package. We recommend the Board address this practical issue in the final document. We would be pleased to answer any questions that you may have or discuss any aspect of this letter. Yours sincerely Norbert Breker Technical Director Accounting and Auditing Uwe Fieseler Director International Accounting