This Comment Letter was sent by BDO Global Coordination B.V. on behalf of BDO International, to the International Accounting Standards Board in March, 2009:
Dear Sir,
Exposure Draft – Relationships with the State (Proposed Amendments to IAS 24)
We are pleased to have the opportunity to comment on the above Exposure Draft issued by the International Accounting Standards Board (IASB), on behalf of BDO International1.
Our responses to your specific question are set out below.
Specific Questions asked in the Exposure Draft
Question 1—State-controlled entities
This exposure draft proposes an exemption from disclosures in IAS 24 for entities controlled, jointly controlled or significantly influenced by the state in specified circumstances.
Do you agree with the proposed exemption, and with the disclosures that entities must provide when the exemption applies? Why or why not? If not, what would you propose instead and why?
We agree with the proposed exemption in particular the removal of the proposed requirement in the 2007 ED that the state did not actually influence either entity with regard to transactions between them.
The current proposal, under revised paragraph 17B, would require the entity to disclose information necessary to draw attention to transactions with the state or other entities referred to in paragraph 17A. This requested information needs to include a qualitative or quantitative indication of the extent of the transactions. We agree that if entities give a qualitative disclosure they should not be required to quantify the transactions. Indeed, in some instances we believe that quantitative indication of the extent of such transactions would be impracticable to provide or the cost of doing so would outweigh the benefits.
We note the comment in BC 11 that there is no requirement “to quantify in detail transactions with such entities, because such a requirement would negate the exemption.” Given that paragraph 17B requires a qualitative or quantitative indication of the transactions we suggest BC 11 is extended to note that quantitative disclosure is not required at all if a qualitative disclosure is given.
Question 2—Definition of a related party
The exposure draft published in 2007 proposed a revised definition of a related party. The Board proposes to amend that definition further to ensure that two entities are treated as related to each other whenever a person or a third entity has joint control over one entity and that person (or a close member of that person’s family) or the third entity has joint control or significant influence over the other entity or has significant voting power in it.
Do you agree with this proposal? Why or why not? If not, what would you propose instead and why?
We agree with the proposed amendment on the definition of related party, which would help remove inconsistencies in the extant Standard.
We assume that 9(b)(vi), (vii) and (viii) also apply if the close member of a person’s family meets the conditions in 9(b)(vi), (vii) and (viii), where that person is identified in (a), (a)(i) and (a)(ii) respectively. It is not clear that the definition currently achieves this and we suggest it is amended to clarify the situation. For example 9(b)(vi) could be amended as follows “the entity is controlled or jointly controlled by a person identified in (a), or a close member of that person’s family.”; 9(b)(vii) could be amended as follows “a person identified in (a)(i), or a close member of that person’s family, ….” and 9(b)(viii) could be amended as follows “a person identified in (a)(ii), or a close member of that person’s family, ….”
Question 3
Do you have any other comments on the proposals?
Consequential amendments to IFRS 8
The additional paper on the IASB project page "An update on the other amendments proposed in the 2007 exposure draft (including consequential amendments to other IFRSs)" includes a proposed change to IFRS 8 that is not included in the ED. This gives some limited guidance on the application of paragraph 34 of IFRS 8 in determining whether a government and entities under the control of the government are to be considered a single entity for the purposes of the major customer disclosures in IFRS 8.
A requirement to quantify the extant of the transactions could, in many cases, require information to be identified at a detailed level and summarised which will inevitably bring back the difficulties in the extant Standard and defeat the whole purpose of the exemption in paragraph 17A of IAS 24.
Where it is impracticable to provide such a quantitative disclosure for the purposes of paragraph 34 of IFRS 8, or where the management believe the cost of doing so would outweigh the benefits, there should be an exemption from the disclosure provided that fact and the reason is given.
Significant voting power
The term “significant voting power” is used more widely in this ED than in the extant IAS 24 but still lacks a proper definition, which causes confusion. The current definition of significant influence in IAS 24 notes that it may be gained by share ownership. How does that differ from significant voting power?
The meaning of significant voting power is not evident from its use in the absence of a clear definition. For example:-
Under paragraph 9(a)(iii) – the term seems to mean something other than control, joint control and significant influence.
Under paragraph 9(b)(vii) – the term might be interpreted as control, joint control or significant influence.
Under paragraph 9(b)(viii) – it implies the term excludes the meaning of significant influence.
Under paragraph 9(b)(x) – the term might be interpreted as significant influence.
We hope that our comments and suggestions are helpful. Should you wish to discuss any of the points we have raised please contact either Tracy-Lee Massey at +32 (2) 778 0135 or Andrew Buchanan at +44 (0)20 7893 3300.
Yours faithfully,
BDO Global Coordination B.V.
1BDO International is a world wide network of public accounting firms, called BDO Member Firms, serving international clients. Each BDO Member Firm is an independent legal entity in its own country.
The network is coordinated by BDO Global Coordination B.V., incorporated in the Netherlands, with an office in Brussels, Belgium, where the International Executive Office is located.
Exposure Draft Relationships with the State - Proposed amendements to IAS 24, Comments due 13 March 2009:
ED Relationships with the State-Proposed amendments to IAS 24.pdf