Module A (September 2008 Session)
Page 1 of 12
SECTION A – CASE QUESTIONS (Total: 50 marks)
To : Janice CHEUNG (Director)From : David LI, Accounting Managerc.c. : Michelle CHOW, Julian LIN, Fiona MERRILL (Directors)Date : dd/mm/yyyyI refer to your e-mail dated 18 May 2008 regarding your queries about the draftconsolidated financial statements for City as at 31 March 2008.
Pledged bank deposits
HKAS 1 requires the face of the statement of financial position to include a line item thatpresents the cash and cash equivalents.HKAS 7 states that cash comprises cash on hand and demand deposits while cashequivalents are short-term, highly liquid investments that are readily convertible to knownamounts of cash and which are subject to an insignificant risk of changes in value.Since pledged bank deposits are not readily convertible to known amounts of cash withoutan insignificant risk of changes in value, they are not included in the cash and cashequivalents.
HKAS 1 also specifies that additional line items, headings and subtotals shall be presentedon the face of the statement of financial position when such presentation is relevant to anunderstanding of the entity’s financial position.Paragraph 14 of HKFRS 7 requires an entity to disclose:
the carrying amount of financial assets it has pledged as collateral for liabilities orcontingent liabilities, including amounts that have been reclassified in accordancewith paragraph 37(a) of HKAS 39; and
the terms and conditions relating to its pledge.Paragraph 31 of HKFRS 7 requires an entity to disclose information that enables users ofits financial statements to evaluate the nature and extent of risks arising from financialinstruments to which the entity is exposed at the reporting date.Pledged bank deposits and their relevant financial liability create a potentially significantexposure to risks and hence their terms and conditions warrant disclosure.The amounts represent deposits pledged to banks to secure banking facilities granted tothe Group. This denotes that as at 31 March 2008, bank deposits of HK$8,904,000 (2007:HK$19,754,000) had been pledged to secure City’s banking facilities.