======= 14 november 2005 patrina buchanan project manager international accounting standards board 30 cannon street lo


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14 November 2005
Patrina Buchanan
Project Manager
International Accounting Standards Board
30 Cannon Street
London EC4M 6XH
United Kingdom
Re: Draft Technical Correction 1: Proposed Amendments to IAS 21 The
Effects of Changes in Foreign Exchange Rates—Net Investment in a
Foreign Operation
On behalf of the Technical Expert Group of the European Financial
Reporting Advisory Group (EFRAG) I am writing to comment on Draft
Technical Correction 1: Proposed Amendments to IAS 21 The Effects of
Changes in Foreign Exchange Rates—Net Investment in a Foreign
Operation (DTC1).
This letter is submitted in EFRAG’s capacity of contributing to IASB’s
due process and does not necessarily indicate the conclusions that
would be reached in its capacity of advising the European Commission
on endorsement of any final Technical Correction based on DTC1.
We would at the outset like to make clear that we are very pleased to
see the IASB moving so swiftly to address what it perceives to be an
error in an existing standard. We accept that in practice errors will
occur from time-to-time, and when that happens the best thing for all
concerned is to deal with the error as quickly as possible. That is
what the IASB is seeking to do.
Our more detailed comments are as follows:
1 We agree with the amendment that is being proposed to paragraph 33
of IAS 21.
2 There is a second, completely separate, draft technical correction
that is proposed in DTC1, involving the amendment of both IAS 21 (by
amending paragraph 15 and adding paragraphs 15A and 15B) and IAS 28.
It would appear that the objective of these amendments is to clarify
which items comprise a net investment in a foreign operation. This
draft technical correction appears to receive no mention in DTC1’s
background section or invitation to comment. Furthermore, the brief
reference to it in DTC1’s Basis for Conclusions seems incomplete
(because it does not, for example, explain what the perceived problem
is with the existing wording in IAS 28 that DTC1 is proposing to
amend).
(a) We agree with the amendments that are being proposed to IAS 21,
although we think it essential that any final Technical Correction
more fully explain the reason for making the specific changes being
made.
(b) Bearing in mind the absence of any explanation as to the precise
weakness the IAS 28 amendment is seeking to address and our own
uncertainty as to what is the perceived problem, we are not able to
support this aspect of the draft technical correction.
3 As you will be aware, we have responded to the IASB’s draft
Technical Corrections policy and, in that response, we have raised
some concerns about the proposed process. During our consideration of
DTC1, some additional process issues arose. We also have some concerns
about the IASB's decision to issue the first draft Technical
Correction before finalising the Technical Corrections Policy. These
issues and concerns are set out in the appendix to this letter.
Yours sincerely
Stig Enevoldsen
Chairman
EFRAG
Appendix: Further comments from EFRAG on the Technical Corrections
process
1 We note that the IASB has chosen to issue DTC1 before it has
finalised its Technical Corrections Policy. We hope that this is not
precedential, because such an approach gives the impression—and
creates the risk—that the IASB is not really interested in the views
of commentators on its draft Policy. It also makes it more difficult
to comment on DTC1—particularly if one has significant concerns about
some or all of the draft Policy, as we do—which in turn increases the
risk of the comments you receive being misunderstood.
2 One of the proposals in the draft Policy on Technical Corrections is
that both the draft and final amendment will be published in only two
forms—electronically and in IASB Update. We supported this proposal in
our comment letter on the IASB’s Technical Corrections process.
Similarly, we support the overall objective of the draft Policy on
Technical Corrections, which is to enable certain types of amendments
to IFRS to be made quickly. However, we understand that DTC1 would
have been published earlier (perhaps several weeks earlier) had it not
been necessary to publish it in IASB Update at the same time as it was
published electronically. Thus, it would appear that the proposal in
the draft Policy—that the draft and final Technical Corrections should
be published electronically and in IASB Update paper—and the way that
proposal is currently being interpreted—that publication
electronically should take place on the same date as publication in
IASB Update—will not always be consistent with the objective of making
the amendments as soon as possible.
We suggest therefore that the IASB consider either:
(a) publishing draft Technical Corrections in electronic form only; or
(b) ceasing the practice of publishing draft Technical Corrections in
electronic form and in IASB Update on the same day, and instead
publish the drafts electronically first and in IASB Update as soon as
possible thereafter. If the IASB adopts this approach it should also
make it clear that the 30-day comment period runs from the earliest
publication of the draft.
We think that the way in which the IASB dealt with the publication of
the IFRSs 1 and 6 amendments back in April might be a good way to
approach Technical Corrections. (The IASB agreed at its meeting on 19
April that it should propose making what was in effect a technical
correction to IFRS 1 and IFRS 6. Ten days later it issued IASB Update,
which explained the decision and the amendment being proposed and
informed readers that there would be a 30-day comment period; the
draft amendments themselves were published subsequently when as soon
as they were ready.) We suggest that the Technical Correction policy
should state that, if the Technical Correction is not ready to be
published at the time the IASB Update issued shortly after the meeting
is issued, a note should be included in the IASB Update issued shortly
after the Board meeting announcing that a Technical Correction is to
be proposed, explaining the actual correction being proposed in as
much detail as is at that time available, and reminding readers that
they will have only 30 days from the publication date in which to
respond. The draft Technical Correction can then be published as soon
as possible thereafter electronically.
3 The draft Policy on Technical Corrections proposed that the only
issues that should be addressed through the new procedure are:
(a) issues for which it is clear that the words in a standard do not
properly convey the Board’s intention, even when considered with the
basis for conclusions and any related guidance; or
(b) unexpected consequences of a standard that the Board would have
corrected, had it been aware of them when the standard was issued.
Unfortunately the Basis for Conclusions does not explain which of
these types of issues the IASB believes it is dealing with in DTC1,
nor why the IASB believes the issue in DTC1 falls within that
category. We think such explanations should always be included in the
Basis for Conclusions of future draft Technical Corrections.
4 Our understanding is that the Board believes the issue addressed in
DTC1 is an example of an unexpected consequence of a standard that the
Board would have corrected, had it been aware of them when the
standard was issued (in other words, an issue falling within (b) of
the paragraph above). We do not believe that is correct.
It appears that the error the Board believes has occurred is that it
included in the IFRS words that restricted the monetary items included
as part of the reporting entity’s net investment in a foreign
operation to those monetary items that are denominated in the
functional currency of either the reporting entity or the foreign
operation. However, the words included could have had no other
consequence than to impose that restriction. Therefore, the effect of
including the words could have been unintended only if the IASB
expected the words to have no effect in practice, and we doubt that
the IASB would include words in a standard that were expected to have
no practical effect.
It seems to us that the actual position is that, due to an oversight
(on the part both of the IASB and of those that responded in the
exposure draft, including EFRAG), words were included in the standard
that should not have been included in the standard because the IASB
did not want to achieve the effect that the words would have. Although
that is, in our view, a very good reason for changing the standard, it
does not mean that the draft Policy’s definition of a Technical Policy
has been met.
5 When we commented on the draft Policy on Technical Corrections, we
expressed some concern about the policy’s description of the issues
that would be addressed through Technical Corrections. In particular,
we did not believe that (a) and (b) in the paragraph 3 of this
appendix describe the sort of issues that should be addressed through
a fast-track mechanism of the type described in the draft policy. For
that reason our response to the point made in paragraph 4—that the
amendment proposed in DTC1 is not a technical correction as currently
defined—would be to change the definition in the draft Policy, rather
than to abandon the attempt to deal with this issue through a
Technical Correction.
In our response to the draft Policy we suggested that the definition
should be amended so that the new procedure applies only to where the
fact that there is an error, and the way in which the error should be
corrected, is obvious to everyone. We are not sure whether it is
obvious to everyone that the issue being addressed in DTC1 is an
error—IAS 21’s Basis for Conclusions does not discuss the paragraphs
being amended so it is difficult to be sure what the expected
consequences of the paragraphs were. However, we agree that, having
concluded that there is an error and what its nature is, the way in
which it should be corrected is obvious.
We proposed our ‘obvious to all’ test because we believe that a
fast-track process should be used only when there is no realistic
possibility of the proposed amendment being controversial. We believe
that is so in the case of DTC1.
6 As mentioned earlier, the underlying objective of the Technical
Corrections policy is to make it possible to make certain changes to
IFRS more quickly than at present. We support this basic objective.
However, the endorsement process that all standards, IFRIC
interpretations and (presumably) Technical Corrections have to go
through in Europe makes it difficult for any change to endorsed IFRS
to be made quickly in Europe. The draft Policy states that, generally
speaking, Technical Corrections will come into effect immediately on
issue. Thus, when the IASB issues a Technical Correction that amends
an IFRS that has already come into effect, IFRS as issued by the IASB
(IASB IFRS) will differ from EU-adopted IFRS until Europe has been
able to endorse the Technical Correction. Furthermore, until Europe
has been able to endorse the Technical Correction, it will be the
EU-adopted version of IFRS that European companies will be required to
comply with. If it is not possible to comply with both EU-adopted IFRS
and IASB IFRS, entities will have to depart from IASB IFRS. It would
be very unfortunate if an entity that has adopted IASB IFRS and wishes
to continue to adopt IASB IFRS is forced to stop adopting it because
of a Technical Correction that it cannot apply because it has not been
endorsed and is inconsistent with EU-adopted IFRS. Clearly this is an
issue that Europe needs to think about further to see what can be done
to address the problem; we think it is also an issue that the IASB
could usefully give further thought to, particularly in view of the
statement in the draft Memorandum of Understanding on the role of
Accounting Standard-Setters and their relationship with the IASB that
the IASB “should provide a reasonable lead time to allow other
standard-setters to process the IFRSs for application in their local
regulatory framework so that they have every opportunity to establish
and maintain a set of standards that enable their constituents to
continue to make an unreserved statement of compliance with IFRSs.”
7 We also note that the draft Policy states that, generally speaking,
Technical Corrections will apply retrospectively. This may be a
problem in jurisdictions where IFRS are part of law because there is,
in such circumstances, a limit to the extent to which the law permits
rules can to be applied retrospectively. We intend to discuss this
matter further with the European Commission to try to ensure that it
does not become a problem in practice in Europe. It may also be a
practical problem if the Technical Correction is issued quite late in
the reporting period when the entity has insufficient time to make the
necessary calculations and adjustments.

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