FTMS Hong Kong

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HKICPA Final Examination

Course Materials

Module A - Financial Reporting

June 2010

HONG KONG

HKICPA Final Examination

Hong Kong Financial Reporting Standards, Legal Environment of Business, Financial Accounting and External Reporting

Course Notes [June 2010 ]

HONG KONG

HKICPA Final Examination - Module A Course Notes - June 2010

II CON TEN T 5 II

Relevant
Section to CLP Page

1. Study guide 2
2. Special topics and analysis of past exams 3
3. Comments why candidates perform poorly 4
4. Preparing Consolidated Financial Statements (overview) 5
a. HKAS27 Consolidated and Separate Financial Statements Section 21 10
b. HKFRS3 Business Combinations Section 21 14
5. HKAS1 Presentation of Financial Statements Section 5 21
6. HKAS10 Events after the Reporting Period Section 17 31
7. HKAS17 Leases Section 16 32
8. HKAS18 Revenue Section 7 35
9. HKAS24 Related Party Disclosures Section 27 38
10. HKAS37 Provisions, Contingent Liabilities and Contingent Assets Section 18 42
11. HKAS38 Intangible Assets Section 13 45
12. HKAS32 Financial Instruments: Presentation Section 12 51
13. HKAS39 Financial Instruments: Recognition and Measurement Section 12 56
HKFRS9 Financial Instruments BILL YANG 2010 All rights reserved unless otherwise stated.

Bi/lyfcca@yahoo.com

1

HONG KONG

HKICPA Final Examination - Module A Course Notes - June 2010

1. STUDY GUIDE

For this De_cember 2009 FE exam, module A topics are likely to take up about 50 marks out of a total of 200 (Paper I and II combined). I would expect the following to be important topics which students must review before the exams:

I plan to review:

1.

(Section 21 of CLP)

3. Other issues

Presentation of financial statements H U\,· I

Events after the reporting period /11t.Jv) I \.) Leases !~\ L i.' , i1

Revenue I·H-P., I~

(Section 5 of CLP) (Section 17 of CLP) (Section 16 of CLP) (Section 7 of CLP) (Section 27 of CLP) (Section 18 of CLP) (Section 13 of CLP) (Section 4 of CLP)

Related party disclosures

Provisions, contingent liabilities and contingent assets 11~AS ~ i Intangible assets t-11CJ\'1 -)'d

Legal Requirements Associated with Company Structure, Share Offerings, Debt Obligations and Restructuring

You should, before the course starts, make sure that you review the information, including examples, in the CLP and Course Materials File.

BILL YANG 2010 All rights reserved unless otherwise stated.

Billyfcca@yahoo.com

2

HONG KONG

HKICPA Final Examination - Module A Course Notes - June 2010

2. SPECIAL TOPICS AND ANALYSIS OF PAST EXAn.-

Legal environment of business and the financial reporting framework

Rights, duties and obligations of directors and officers

o Topics newly designated as special topics for the relevant diet.

D Topics brought forward from previous diet.

B\J k . ~,,- ~I}. I to~'t

BILL YANG 2010 All rights reserved unless otherwise stated.

Billyfcca@yahoo.com

3

HONG KONG

HKICPA Final Examination - Module A Course Notes - June 2010

3. COMMENTS ON WHY CANDIDATES PERFORM POORLY

o Did not read question carefully - read with speed and care.

f} Failed to identify the key issue(s) of the case situation - improve on case analysis skills.

C) Failed to identify the relevant HKFRSs or relevant requirements in the HKFRS.

o Showed a lack of indepth knowledge of HKFRSs.

" Submitted answers that were irrelevant and non-specific to the case situation.

CD Copied irrelevant paragraphs in the HKHKFRS - straight copying from CLP would not gain marks, application instead of copying.

8 Poor presentation of answers - jumping here and there without signs of a logical thinking.

(3 Did not draft report with proper conclusion and recommendations - offer a logical conclusion and recommendations based on your analysis.

o Did not allocate time adequately to all questions or parts of the questions or failed to complete all questions - spend the amount of time as advised in the question.

BILL YANG 2010 All rights reserved unless otherwise stated.

Billyfcca@yahoo.com

4

HONG KONG

HKICPA Final Examination - Module A Course Notes - June 2010

4. HKAS27

CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS [CLP Section 21 }

Overview on Accounting for Investment in Subsidiaries, Jointly Controlled Entities and Associates

Unless the investment is classified as held-far-sale in accordance with HKFRS5 OR the investor is exempted in preparing CoFS, the investor should account for the investment as follows:

---------~

- = = : : - - - - ok

----

------- __ ... HKAS39!

HKFRS9ii\('" I

Cost

acquired Date of I End of I

~20% - 1----------- .... Il0l reporting

___ - shares of B a_(!;q_u_is_it_io_n... . period .

~

.,

.-

.-

,

----.,

, , ,

,

..... Jointly

controlled entity - - - .... (joint control)

Subsidiary ~ ~I GOflsQlidatidn (HKAS27) ~

(control) Acqulsttlon-method (HKFRS3)

Associate

(significant - - - - -~ influence)

Equity method (HKAS28)

------~

Proportionate consolidation ~

or Equity method (HKAS31)

i. BIll, .i r( ;\

.----~--~--~-----

-) iJ, ( qL11 " II lJi-]

" C>d I I

Illl·1 .' / '1"1' c: . ',1, ,I ! h,,' ,j

l(il'r./ir·(i IJIJ leM"i)

(.\!phri ))\/) ',,,il \

BILL YANG 2010 All rights reserved unless otherwise stated.

Billyfcca@yahoo.com

5

HONG KONG

HKICPA Final Examination - Module A Course Notes - June 2010

Consolidated Journal Entries for preparing CSFP and CSCI

CD Add together like items of assets, liabilities and equity of Parent and Subsidiary from the date when Parent gains control over Subsidiary.

@ Prepare consolidation journal entries (CJE):

#1 Eliminate the investment cost and pre-acquisition equity of subsidialY. perform fair value adiustment to subsidiary's assets and liabilities, and recognise goodwill and non-controlling interests (affect only CSFP)

Dr. SC and SP of Subsi Dr. RE of Subsi

Dr. Asset of Subsi

Cr. Liability of Subsi

Cr. COl in Subsi

Cr. NCI

Dr. Goodwill

A I Use or determine the amounts at B acquisition date

CI· DebiVcredit the relevant accounts that D. subject to FVA at acqn. date

E I Amount recorded in Parent's books This may be stated at FV or the

F proportionate share of Subsi's net identifiable assets (i.e. A+B+C-O)

G I Residual amount

#2 Eliminate intra-group balances (affect only CSFP)

Dr. Trade/loan payable Cr. Trade/loan receivable

I Remove all forms of liabilities extended to/from group members

#3 Eliminate intra-group transactions (affect only CSCI)

Dr. RE - P/L (sales) Cr. RE - P/L (COS)

Dr. RE - PfL (interesVrental income) Cr. RE - PfL (interesVrental expense)

Dr. RE - PfL (dividend from Subsi) Dr. NCI- SCE

Cr. RE - SCE (dividend paid by Subsi)

Remove all forms of income and expenses transacted during the reporting period between group members

Dr. RE - PfL (COS) Cr. Inventory

Dr. RE - PfL (gain on disposal) Cr. Property, plant and equipment

#4 Elhninate unreafised profit for assets transferred and retained withrn ·the group (affect both CSFP and CSCI)

I Remove unrealised profit ~rises from intra-group sales

I Remove unrealised profit arises from intra-group transfer of PPE

#5 Accounffor depreciation adjustment due 1(;1 unrea!isedprofit on PPE (affect both CSFP and CSCI)

Dr. Property, plant and equipment Cr. RE - PfL (depreciation)

I Remove overstatement of depn. due to unrealised profit .

#6 Account for additional depreciation due to FV adjustment atacguisition date (affect both CSF~ and CSCI)

Dr. RE - PfL (depreciation)

Cr. Property, plant and equipment

#7 Account for non-controlling interests' share post-acquisition adjusted profits of Subsi (affect both CSFP and CSCI)

Dr. RE Cr. NCI

I Consider only the post-acquisition profit of Subsi.

BILL YANG 2010 All rights reserved unless otherwise stated.

Billyfcca@yahoo.com

HONG KONG

HKICPA Final Examination - Module A Course Notes - June 2010

Changes in parent's interest in subsidiary

10% (",', to

65% (ctrl)

25% (SI) to

65% (Ctr)

65% (Ctrl) to

75% (Ctrl)

65% (ctrl) to

60% (ctrl)

65% (ctrl) to

49% (SI)

65% (ctrl) to

15%

Consolidated SCI

• start censelidating subsi 100% from 1/4/09 for ~/12

• NCI of 35% for 9/12

• GIL en remeasurement of 10% interest to. FV is reco nised in P/L

Consolidated SFP

• share of associate's results for 3/12 until 31/3/09

• start conselidating subsi 100% from 1/4/09 for 9/12

• NCI of 35% fer 9/12

• GIL on remeasurement of 25% interest to. FV is recegnised in P/L

• consolidate subsi 100%

• NClof35%

• recognise goodwill

• consolidate subsi 100% fer '''112

• NCI of 35% fer 3/12 and 25% fer 9/12

• consolidate subsi 100% for "'/12

• NCI of 35% fer 3/12 and 40% fer 9/12

• conselidate subsi 100%

• NClef35%

• recegnise geodwill

• consolidate subsi 100% for ~/12

• NCI of 35% fer 3/12

• GIL en loss of control over Subsi is recognised in P/L

• share of associate's results for 9/12 from 1/4/09

• consolidate subsi 100% fer ~/12

• NC) of 35% fer 3/12

• GIL en loss of control ever Subsi is recognised in P/L

• subsequent changes in FV is recognised in OCI or P/L

End of reperting period Change in parent's interest

• consolidate subsi 100%

• NCI ef25%

• goodwill is unaffected

• difference on changes in parent's interest is recegnised in RE directly.

• consolidate subsi 100%

• NCI ef40%

• goodwill is unaffected

• difference en changes in parent's interest is recegnised in RE directly.

• deconsoli 1/4/09

• deconsolidate NCI

• investment is accounted fer under HKAS39

::;; 31 December 2009 ::;; 1 April 2009

BILL YANG 2010 All rights reserved unless otherwise stated.

Billyfcca@yahoo.com

7

HONG KONG

HKICPA Final Examination - Module A Course Notes - June 2010

Consolidated Journal Entries in accounting for disposal

of shares

in subsidiary

Analysis of subsi's net assets from AQD to date r"'Sub'si's'--; Parent's NCI's
of dis~osal and their share by ~arent and NCI : net assets: share share
, ,
'r. :
,
Subsi's SC and SP at AQD , $A ,
, ,
,
Subsi's RE at AQD : $B ,
,
FV adjustment (FVA) $C i
,
FV of net identifiable assets at AQD [80%:20%] $0 , $E $F
,
Goodwill at AQD [($J - $E) and ($K - $F)] $G , $H $1
FV of consideration transferred $T $K
Post-acqn. P/L (incl. depn. on FVA) [80%:20%] $L $M $N
Post-acqn. OCI [80%:20%] , $0 $P $Q
Goodwill impairment [80%:20%] , ($R) ($S) ($T)
,
Balance at date of disposal : $U $V $W
,
,-,~ -~- --- ~ -_.-
Disposal of parent interest without loss of control (e.g,frO'm 80%10 70%)

Dr.lCr. RE of parent CD reverse G/L on disposal recorded in SFS
Dr. Investment in subsi. CD reinstate investment cost at group level
Cr. NCI CO%/eo%x$V*] ~ increase in NCI
Dr.lCr. RE of parent [CD-~] @ difference recognised directly in CSCE
[*/f NCI is measured initially at proportionate interest = 10%/80%X($E+$M+$P)]
P.arent dispQsal of its interest with loss of control (e.g. from 80% 10 15%)

Dr.lCr. RE of parent CD reverse G/L on disposal recorded in SFS
Dr. Investment in subsi. CD reinstate investment cost at group level
Dr. Investment (apply HKFRS9) ~ retained interest remeasured at fair value
Dr.lCr. Liabilities/Assets of subsi. ® derecognise assets/liabilities of subsi. [$D+$L +$0]
Cr. Goodwill ® derecognise amount of $G-$R
Dr. NCI ® derecognise NCI of $W
Dr.lCr. RE of parent [residual amt] CV G/L on disposal recognised in P/L BILL YANG 2010 All rights reserved unless otherwise stated.

Billyfcca@yahoo.com

8

HONG KONG

HKICPA Final Examination - Module A Course Notes - June 2010

Complex Group Structure

Indirect Structure

Mixed Structure

30% 40%
INCII 1N_C11 6%
40% 49%
INcrl .. INCII

Own Control Own Control
P in SA 70% 100% P in SA 60% 100%
Pin S8 42% 100% Pin S8 33% 100%
Goodwill P SA Goodwill P SA P
in in in in in
SA S8 Total SA S8 S8 Total
Cost of invmt. xx $A Cost of invmt. xx $A xx
Remeasurement GIL ® ®
P's share of S8 xx (xx)
NCI at FV or PS xx xx NCI at FV or PS xx xx
FVNA (xx) (CD) FVNA (xx) (xx)
$8 $8
SA's NCI adjmt. __ . (C?) SA's NCI adjmt. _(<V) __
xx xx xx xx xx xx xx
-- ~~--
Retained earnings P SA S8 Total Retained earnings P SA S8 Total

Given xx xx xx Given xx xx xx
Pre-acqn balance xx xx xx Pre-acqn balance xx xx xx
Adjustments(if any) +1- +1- +1- Adjustments(if any) +1- +1-' +1-
Remeasurement GIL ® ®
---- ----
Adjusted post balance xx xx Adjusted post balance xx xx
SA in S8 xx (xx) SA in S8 xx (xx)
-- --
xx xx
NCI _ (xx) (xx) NCI (xx) (xx)
------
xx xx 0 xx 'XX XX Xx xx
· ____ ,· ....................... iIIi .. .lI_!!_I.!IIII ~--'-
NCI SA S8 Total NCI SA S8 Total
Initially at FV or PS xx xx Initially at FV or PS xx xx
SA's NCI adjmt. <V SA's NCI adjmt. @
Share of post xx xx Share of post xx xx
_._-- ............... - .. ---.
xx xx xx xx xx xx
-,-- ............ ----~ CD Use the balances at the later date when P acquired its indirect interest in S8.

<V If the NCI is measured at proportionate share, this represents NCI of SA share of goodwill of S8 (i.e. SA's NCI x $8). If NCI is measured fair value, this adjustment is to reduce NCI share of SA's cost in S8 (i.e. SA's NCI x $A) as this is reflected in the effective interest of S8's NCI.

BILL YANG 2010 All rights reserved unless otherwise stated.

Billyfcca@yahoo.com

9

HONG KONG

HKICPA Final Examination - Module A Course Notes - June 2010

4a. HKAS27

CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS [CLP Section 21 ]

Separate Financial Statements (SFS)

Consolidated Financial Statement (CoFS)

, , '1

I, 1\ '-'r ...l ... '"

• t (/._,,1

When SFS are prepared, investments in subsidiaries, jointly controlled entities and associates that are not classified as held for sale (or included in a disposal group that is classified as held for sale) in accordance with HKFRS5 shall be accounted for either at cost, or in accordance with HKAS39 and HKFRS9.

SFS are those presented by a parent, an. investor in an associate or a venturer in a jointly controlled entity, in which the investments are accounted for on the basis of the direct equity interest rather than on the basis of the reported results and net assets of the investees.

The same accounting shall be applied for each category of investments.

Investments in subsidiaries, jointly controlled entities and associates that are classified as held for sale (or included in a disposal group that is classified as held for sale) in accordance with HKFRS5 shall be accounted for in accordance with that FRS.

CoFS are the F/S of a group presented as those of a single economic entity.

A parent should present CoFS in which it consolidates all its investments in subsidiaries. A parent may elect not to present CoFS only if

ill the parent is itself a wholly-owned subsidiary, or is a partially-owned subsidiary of another entity and its other owners, including those not otherwise entitled to vote, have been informed about, and do not object to, the parent not presenting CoFS;

~ the parent's debt or equity instruments are not traded in a public market;

® the parent did not file, nor is in the process of filing, its financial statements with a securities commission or other regulatory organisation for the purpose of issuing any class of instruments in a public market; and

® the ultimate or any intermediate parent of the parent produces CoFS available for public use that comply with HKHKFRS or IFRS.

A subsidiary is an entity, including an unincorporated entity such as a partnership, that is controned by another entity (known as the parent).

A subsidiary is not excluded from consolidation simply because the investor is a venture capital organisation, mutual fund, unit trust or similar entity or its business activities are dissimilar from those of the other entities within the orouo.

BILL YANG 2010 All rights reserved unless otherwise stated.

Billyfcca@yahoo.com

10

HONG KONG

HKICPA Final Examination - Module A Course Notes - June 2010

Special Purpose Entities

acquirer acquires:

over more than 50% of the voting rights of the other entity by virtue of an agreement with other investors; or

to govern the financial and operating policies of the other entity under a statute or an agreement; or

to appoint or remove the majority of the members of the board of directors or equivalent governing body of the other entity; or

to cast the majority of votes at meetings of the board of directors or equivalent governing body of the other entity.

,', (I,

• that are currently. exercisable or convertible should be considered when assessing whether an entity has the power to govern another entity's financial and operating policies.

• the proportions of profit or loss and changes in equity allocated to the parent and NCI are determined on the basis of present ownership, and do not reflect any

exercise or conversion of otential votin hts.

When assessing whether control exists over special purpose entities, consider the following factors as indicative of control:

• acquiree's activities are conducted on behalf of the entity according to its specific business needs so that the entity obtains benefits from the acquiree's operations;

• the entity has the decision-making powers to obtain the majority of benefits or has delegated those powers through an 'autopilot' mechanism;

• the entity has rights to obtain the majority of benefits and, therefore, may be exposed to risks from the acquiree's activities; or

• the entity retains the majority of residual or ownership risks related to the acquiree or its assets in order to obtain benefits from its activities.

BILL YANG 2010 All rights reserved unless otherwise stated.

Billyfcca@yahoo.com

11

HONG KONG

HKICPA Final Examination - Module A Course Notes - June 2010

Consolidation Procedures

Noncontrolling Interest (NCI)

<D Combines the F/S of the parent and its subsidiaries line by line by adding together like items of assets, liabilities, equity, income and expenses.

<?l Eliminate the carrying amount of the parent's investment in each subsidiary against the parent's portion of equity of each subsidiary (apply HKFRS3).

® Separately recognise non-controlling interests (see below).

® Adjust income and expenses of the subsidiary so that they are based on the values of the assets and liabilities recognised in the parent's CoFS.

® Intra-group balances and transactions should be eliminated in full. Profits and losses resulting from intra-group transactions that are recognised in assets, such as inventory and fixed assets, are eliminated in full, except for impairment losses.

@ F/S of the parent and its subsidiaries used in preparing the CoFS should all be prepared as of the same end of reporting period, unless it is impracticable to do so. If impracticable, adjustments must be made for the effects of significant transactions or . events that occur between the dates of the subsidiary's F/S and the parent's F/S. The difference shall not be more than 3 months.

(J) CQFS must be prepared using uniform accounting policies for like transactions and other events in similar circumstances.

NCI is the equity in a subsidiary not attributable, directly or indirectly, to a parent.

Recognise NCI separately:

• in the CSCI which represent the share of the P/L and TCI of consolidated subsidiaries for the reporting period.

• in the CSFP (within equity but separately from the equity of the owners of the parent) which represent the share of the net assets of consolidated subsidiaries, consisting of:

~ the amount of those NCI at the date of the original combination calculated in accordance with HKFRS3; and

~ the NCI' share of changes in equity since the date of the combination.

The following items of consolidated subsidiaries are to be attributed to the owners of the parent and to the NCI, even if this results in NCI having a deficit balance:

• P/L and each component of other comprehensive income; and

• total comprehensive income.

For each business combination, HKFRS3 allows acquirer to measure any N'CI either:

• at fair value; or

• at the NCI's proportionate share of the acquiree's identifiable net assets.

Subsequent changes in the fair value of the NCI are not recognised.

BILL YANG 2010 All rights reserved unless otherwise stated.

Billyfcca@yahoo.com

12

HONG KONG

HKICPA Final Examination - Module A Course Notes - June 2010

Changes in Parent's interest in Subsidiary

INCREASE resultina in gain of control (i.e. from 10% or 40% t6 above 5D%)

Such business combinations achieved in stages, HKFRS3 requires:

G) acquirer to remeasure its previously held equity interest in the acquiree at its AQD-FV and recognise the resulting GIL, if any, in PIL,

~ any prior-period changes in the value of its equity interest in the acquiree recognised in other comprehensive income shall be recognised on the same basis as would be required if the acquirer had disposed directly of the previously held equity interest, and

® acquirer to consolidate the subsidiary from this date l.e, starts applying HKAS27 and HKFRS3 ... )

, '

DECREASE. resulting in loss of control (i.e. from 700/0 to below 50%)

At the date when control is lost:

G) Recognise the FV of the consideration received from the transaction, event or circumstances that resulted in the loss of control;

. ~ Recognise any retained interest in the former subsidiary at its FV. This FV:

• is reflected in the calculation of the gain or loss on disposal attributable to the parent, and

• becomes the initial carrying amount (i.e, cost) for subsequent accounting for the retained interest under HKAS28, HKAS31 or HKAS39/HKFRS9 as appropriate.

® Derecognise the carrying amount of any NCI in the former subsidiary;

® Derecognise the assets (including any goodwill) and liabilities of the subsidiary at their carrying amounts;

® Recognise, if the transaction that resulted in the loss of control involves a distribution of shares of the subsidiary to owners in their capacity as owners, that distribution;

@ Reclassify to P/L any amounts (i.e. the entire amount, not a proportion) relating to the subsidiary's assets and liabilities previously recognised in OCI as if the assets and ! liabilities had been disposed of directly; and

. (l) Recognise any resulting difference as a GIL in P/L attributable to the parent.

Changes when NO impact on control (i.e. from 60% to 800/0 or from ,90% to ·W%)

G) Account for as equity transactions - adjust the carrying amounts of the parent and NCI to reflect the changes in their relative interests in the subsidiary.

~ Any difference between the amount by which the NCI are adjusted and the FV of the consideration paid or received should be recognised directly in equity and attributed to the owners of the parent.

® No consequential adjustment to the carrying amount of goodwill, and no GIL ls recognised in P/L.

BILL YANG 2010 All rights reserved unless otherwise stated.

Billyfcca@yahoo.com

13

HONG KONG

HKICPA Final Examination - Module A Course Notes - June 2010

4b. HKFRS3 BUSINESS COMBINATIONS [ CLP Section 21 ]

Definition of Business Combination

Accounting for Business Combination

Identification of Acquirer

Acquisition Date (AQD)

A transaction or other event in which an acquirer obtains control of one or more businesses.

Business represents an integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing a return in the form of dividends, lower costs or other economic benefits directly to investors or other owners, members or participants.

HKFRS3 applies to a transaction (event) that meets the definition of a business combination, except for:

• the formation of a joint venture. ~\I:-'f.\s, ~l

• the acquisition of an asset (a group of assets) that does not constitute a business r: ["/'1' I' j If(f ",:,./ Ill· /(',

• a combination of entities or businesses under common control. Aft t.

CD identifying the acquirer; - (;,,(1 i I· C

@ determining the acquisition date;

® measuring the consideration and determining what is part of the business combination;

@ recognising and measuring the identifiable assets acquired, the liabilities assumed and any NCI in the acquiree; and

and measurin _

ain from a bar ain urchase.

Acquirer is the entity that obtains control of the acquiree - the guidance in HKAS27 should' be used to identify the acquire!'.

Acquiree is the business or businesses that the acquirer obtains control of in a business combination.

the AQD is the date on which acquirer obtains control of the acquiree i.e. the date on which the acquirer legally transfers the consideration, acquires the assets and assumes the liabilities of theacquiree.

Billyfcca@yahoo.com

BILL YANG 2010 All rights reserved unless otherwise stated.

14

HONG KONG

HKICPA Final Examination - Module A Course Notes - June 2010

Consideration transferred

in a business combination

AQO-FV of assets transferred by the acquirer

AQO-FV of liabilities incurred by the acquirer to former owners of the acquiree AQO-FV of equity interests issued by acquirer

Consideration transferred ! r :. .!

CD Non-controlling equity investment in the acquiree immediately before obtaining control should be remeasured to FV as at the date of gaining control with any GIL on remeasurement recognised in P/L or OCI, as appropriate.

@ When consideration transferred includes assets or liabilities with CV that differ from their AQO-FV, the acquirer should remeasure the transferred assets or liabilities at their AQD-FVand recognise the resulting GIL in PIL.

However, if the transferred assets or liabilities remain in the combined entity after AQO, the GIL is eliminated in the CoFS and the respective transferred assets or liabilities are restored to their historical CV.

Ci). Any portion of the acquirer's SBP awards exchanged for awards held by the acquiree's employees that is included in consideration transferred should be measured in accordance with HKFRS2 rather than at FV.

@ For acquisitions that only involve exchange of equity interests, use the AQO-FV of the acquiree's equity interests instead of the AQO-FV of the equity interests transferred (i.e. acquirer) if the earlier is more reliably measurable.

@. Contingent consideration

• Contingent consideration is an obligation of the acquirer to transfer additional assets or equity interests to the former owners of an acquiree as part of the exchange for control of the acquiree if specified future events occur or conditions are met. Contingent consideration also may give the acquirer the right to the return of previously transferred consideration if specified conditions are met.

• As part of the consideration transferred in exchange for acquired business, contingent consideration is recognised as of the AQD at FV - base on an assessment of the circumstances and expectations that exist as of the AQO.

• Subsequent changes that are the result of the acquirer obtaining additional information about facts and circumstances that existed at the AQD, and that occur within the measurement period, are recognised as adjustments against the original accounting for the acquisition (and so may impact goodwill).

• Subsequent changes in the value of contingent consideration that relate to postcombination events do not result in the change of goodwill but instead are accounted for, as follows:

~ Contingent consideration classified as equity is not remeasured, and its settlement is accounted for within equity.

~ Contingent consideration that takes the form of financial instruments within the scope of HKAS39 or HKFRS9 is measured at FV, with resulting GIL recognised either in P/L or OCI in accordance with HKAS39 or HKFRS9.

~ Contingent consideration that is not within the scope of HKAS39 or HKFRS9 is accounted for in accordance with HKAS37 or other applicable FRSs.

® Acquisition-related costs should be recognised as expenses in PIL in the periods in which the costs are incurred and the services are received, with one exception. The costs to issue debt or equity securities should be recognised in accordance with HKAS32 and HKAS39.

o e @)

xx

BILL YANG 2010 All rights reserved unless otherwise stated.

Billyfcca@yahoo.com

15

HONG KONG

HKICPA Final Examination - Module A Course Notes - June 2010

Part of Business Combination Transaction

Recognition

of identifiable assets acquired, and liabilities assumed in the acquiree

Acquirer shall recognise, as part of applying the acquisition method, only the consideration transferred for the acquiree and the assets acquired and liabilities assumed in the exchange for the acquiree.

A transaction entered into by or on behalf of the acquirer or primarily for the benefit of the acquirer or the combined entity, rather than primarily for the benefit of the acquiree (or its former owners) before the combination, is likely to be a separate transaction.

An acquirer should consider the following factors, which are neither mutually exclusive nor individually conclusive, to determine whether a transaction is part of the exchange for the acquiree or whether the transaction is separate from the business combination:

• reasons for the transaction - a transaction that is arranged primarily for the benefit of the acquirer or the combined entity rather than primarily for the benefit of the acquiree or its former owners before the combination is less likely to be part of the exchange for the acquiree.

• initiation of the transaction - a transaction or arrangement initiated by the acquiree or its former owners is less likely to be for the benefit of the acquirer or the combined entity and more likely to be part of the business combination transaction.

• timing of the transaction - a transaction between the acquirer and the acquiree that takes place during the negotiations of the terms of a business combination may have been entered into in contemplation of the business combination to provide future economic benefit to the acquirer or the combined entity. If so, the acquiree or its former owners are likely to receive little or no benefit from the transaction except for the benefits they receive as part of the combined entity.

The following are examples of separate transactions that are not to be included in applying the acquisition method:

• in effect settles pre-existing relationships between the acquirer and acquiree;

• remunerates employees or former owners of the acquiree for future services; and

• reimburses the acquiree or its former owners for paying the acquirer's acquisitionrelated costs.

As of the AQD and subject to limited exceptions, an acquirer should recognise, separately from goodwill, the identifiable assets acquired and the liabilities assumed in the acquiree if and only if they meet the following conditions:

CD meet the definitions of assets and liabilities in the Framework; and

@ be part of what the acquirer and the acquiree (or its former owners) exchanged in the business combination transaction rather than the result of separate transactions.

Contrary to HKAS37, the acquirer should recognise a contingent liability assumed in a business combination as of the AQD if it is a present obligation that arises from past events and its FV can be measured reliably - even if it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation.

Costs that the acquirer expects but is not obliged to incur in the future to effect its plan to exit an activity of an acquiree or to terminate the employment of or relocate an acquiree's employees are not liabilities at the AQD.

BILL YANG 2010 All rights reserved unless otherwise stated.

Bi/lyfcca@yahoo.com

16

HONG KONG

HKICPA Final Examination - Module A Course Notes - June 2010

Classification or Designation of identifiable assets acquired and liabilities assumed in a business combination

Measurement

of identifiable assets acquired, liabilities assumed,

and any noncontrolling interest in the acquiree

Use of Provisional Values and Measurement Period

The acquirer should make those classifications or designations on the basis of the contractual terms, economic conditions, its operating or accounting policies and other pertinent conditions as they exist at the acquisition date. Examples:

• classification of particular FA and FL as measured at FV or AC, in accordance with HKAS39 and HKFRS9.

• designation of a derivative instrument as a hedging instrument in accordance with HKAS39; and

• assessment of whether an embedded derivative should be separated from a host contract outside the scope of HKFRS9 in accordance with HKAS39.

Lease and insurance contracts should be excluded from the above requirements as they continue to be classified on the basis of the contractua1 terms and other factors at the inception of the contract.

Subject to limited exceptions, an acquirer should measure:

CD identifiable assets acquired and liabilities assumed at their acquisition-date fair values

(AQD-~ .. ) c,/.ii \J "'r ..»,

@ for each business, any NCI in the acquiree either at:

• fair value or

• NCl's proportionate share of acquiree's identifiable net assets.

The fair value of an asset should generally reflect its highest and best use.

Separate valuation allowance is not allowed as of the AQD for assets acquired in a business combination because the effects of uncertainty about future cash flows are included in the fair value measure.

If the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, the financial statements should be prepared using provisional amounts for the items for which the accounting is incomplete.

Measurernent.perlod.ls the-period-after-ti;}e-AQD-duroing-which-the aoqulrer-rnay adjust .. the provisional arnounts-recoqnised for-a-business.sombination-c-

It should not exceed one year from AQD.

During the measurement period, the acquirer should:

'retroepeonvety adjust the provisional amounts recognised at the AQD to reflect new information obtained about facts and circumstances that existed as of the AQD and, if known, would have affected the measurement of the amounts recognised as of that AQD.

• recognise additional assets or liabilities if new information is obtained about facts and circumstances that existed as of the AQD and, if known, would have resulted in the recognition of those assets and liabilities as of that AQD.

• an increase (decrease) in the provisional amount recognised for an identifiable asset (liability) by means of a decrease (increase) in goodwill.

After the measurement period ends, the acquirer shall revise the accounting for a business combination only to correct an error in accordance with HKAS8.

BILL YANG 2010 All rights reserved unless otherwise stated.

Bil/yfcca@yahoo.com

17

HONG KONG

HKICPA Final Examination - Module A Course Notes - June 2010

Exceptions

to recognitionl measurement principle at acquisition date and related subsequent measurement

At acquisition date

x

~ Recognise and measure a deferred tax

~ asset/liability arising from the assets acquired

t:: and liabilities assumed in a business

~

(J) combination in accordance with HKAS12.

o

.l!l ~

c::

J:l Recognise and measure a liability (or asset, if

8l any) related to the acquiree's employee benefit

~ arrangements in accordance with HKAS19.

c..

E

w

.l!l (J) VI VI m

c::

.Q

iii

o <+=

·c

E

(J) "C c::

Recognise an indemnification asset at the same time that it recognises the indemnified item measured on the same basis as the indemnified item.

Subsequent measurement

The seller in a business combination may contractually indemnify the acquirer for the outcome of a contingency or uncertainty related to all or part of a specific asset or liability.

VI

:c .~

"C (J)

,_

·5 co m (J)

0::

• unfavourable - adjust consideration down (loss) as part of the agreed consideration effectively settles an unfavourable exposure from the acquirer's perspective.

Apply HKAS12

Measure the value of a reacquired right recognised as an intangible asset on the basis of the remaining contractual term of the related contract regardless of whether market participants would consider potential contractual renewals in determining its FV.

From the acquirer's perspective, relative to the terms of current market transactions, if terms of contract are:

• favourable - adjust consideration up (gain) as the agreed consideration is lower due to the effective settlement of a favourable arrangement.

Measure a liability or an equity instrument related to the replacement of an acquiree's SBP awards with SBP awards of the acquirer in accordance with the method in HKFRS2.

(/) LL I VI

Q3

VI VI

-c

Measure an acquired NCA (or disposal group) that is classified as HFS at the AQD in accordance with HKFRS5 at fair value less costs to sell in accordance with HKFRS5.

Apply HKAS19

BILL YANG 2010 All rights reserved unless otherwise stated.

Measure the indemnification asset on the same basis as the indemnified item, subject to any contractual limitations on its amount and, for an indemnification asset that is not subsequently measured at its FV, mgt.'s assessment of the collectibility of the indemnification asset.

Derecognise indemnification asset only when it collects the asset, sells it or otherwise loses the right to it.

Amortise the recognised

reacquired-right over the

remaining contractual period of the contract in which the right was granted.

Include the CV of the reacquired right while determining the GIL for subsequent sale a third party.

Apply HKFRS2

Apply HKFRS5

Billyfcca@yahoo.com

18

HONG KONG

HKICPA Final Examination - Module A Course Notes - June 2010

Recognition and Measurement

of Goodwill

or a Gain from a Bargain Purchase

Consideration transferred measured at AOO-FV Amount of any NCI in the acquiree

AQO-FV of the acquirer's previously held equity interest in the acquiree

Aggregated amount

Net of acquisition-date amounts of the identifiable assets acquired

and the liabilities assumed measured in accordance with HKFRS3.

Difference

L---.!_G;_·O'-O;_d_W_. i,,;,:I1 __ __,! where. lID> ill

.' an asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognised.

• recognise as an asset by the acquirer at acquisition date and measure,

~ initially

at cost, the excess of ® over ®.

~ thereafter

at cost less any accumulated impairment losses.

xx

• recognised goodwill must be tested for impairment annually or whenever indication(s) on impairment prevail, apply HKAS36.

goodwill does not generate cash flows independently of other assets or groups of assets, and often contributes to the cash flows of multiple cashgenerating units. Hence, the impairment test must be done by comparing the carrying amount of the CGU containing the goodwill with its recoverable amount.

~ for the purpose of impairment testing, goodwill acquired in a business combination should be allocated to each of the acquirer's CGU, or groups of CGUs, that are expected to benefit from the synergies of the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those CGUs or groups of CGUs. It is possible that some of the synergies resulting from a business combination will be allocated to a CGU in which the NCI does not have an interest.

If NCI is measured as its proportionate interest in the net identifiable assets of a subsidiary at the AOO, rather than at FV, the goodwill allocated to the CGU should be grossed up to include NCl's portion. This adjusted goodwill is then compared with the recoverable amount to determine whether the CGU is impaired.

L--=B:_::a:_:_rg""a=i:_:_n:_jpccu=.;rc.::c:_:_h:.=a:.=s-=e___J! where ® < ®

• recognise as a gain (portion attributable to acquirer) in profit or loss on the acquisition date after reassessing the recognition and measurement of ® and ®.

BILL YANG 2010 All rights reserved unless otherwise stated.

Bi/lyfcca@yahoo.com

19

HONG KONG

HKICPA Final Examination - Module A Course Notes - June 2010

Reverse Acquisition

Reverse acquisition accounting applies only in the CoFS. Steps in dealing with reverse acquisition:

CD Identification of. reverse acguisition transaction - a business combination effected primarily by ~r;lgI@~qUJW'AD'rnFeit~ the entity that issues securities (the legal parent) is identified as the accounting acquiree and the entity whose equity interests are acquired (the legal subsidiary) is identified as the accounting acquirer. The accounting acquirer is usually the combining entity whose:

• owners as a group retain or receive the largest portion of the voting rights in the combined entity.

• single owner or organised group of owners holds the largest minority voting interest in the combined entity.

• owners have the ability to elect or appoint or to remove a majority of the members of the governing body of the combined entity.

• (former) management dominates the management of the combined entity.

• relative size is significantly greater than that of the other combining entity or entities.

@ Remove the legal parent's actual consideration and replace with the notional consideration (Ox@) that would be transferred by accounting acquirer.

The AQD-FV of the consideration transferred by the legal subsidiary (accounting acquirer) for its interest in the legal parent (accounting acquiree) is based on the number of equity interests the legal subsidiary would have had to issue to give the owners of the legal parent the same percentage equity interest in the combined entity that results from the reverse acquisition.

® Account for any fair value adjustments to the assets and liabilities of the accounting acquiree.

® Account for any NCI- represents those owners of the accounting acquirer who do not exchange their equity instruments for equity instruments of the accounting acquiree i.e. those have an interest only in the results and net assets of the accounting acquirer, and not in the results and net assets of the combined entity. This should reflect the noncontrolling shareholders' proportionate interest in the PRE-combination (i.e. immediately before combination) carrying amounts of the accounting scquirers: net assets.

BILL YANG 2010 All rights reserved unless otherwise stated.

Bilfyfcca@yahoo.com

20

HONG KONG

HKICPA Final Examination - Module A Course Notes - June 2010

5. HKAS1 PRESENTATION OF FINANCIAL STATEMENTS [ CLP Section 5 J

Financial Statements

Use of these

Reports and statements presented outside F/S are outside the scope of FRSs.

F IS are a structured representation of the financial position and financial performance of an entity.

The objective of F/S is to provide information about the financial position, financial performance and cash flows of an entity that is useful to a wide range of users in making economic decisions. F/S also show the results of the management's stewardship of the resources entrusted to it.

A complete set of financial statements comprises:

" <D a statement of financial position (SFP) as at the end of the period;

terminologies @ a statement of comprehensive income (SCI) for the period;

is not mandatory ~

® a statement of changes in equity (SCE) for the period;

Fundamental Concepts upon which Financial Statements are based

® a statement of cash flows (SCF) for the period;

® notes, comprising a summary of significant accounting policies and other explanatory information; and

® a SFP as at the beginning of the earliest comparative period when an entity applies an accounting policy retrospectively or makes a retrospective restatement of items in its F/S, or when it reclassifies items in its F/S.

An entity may use titles for the statements other than those used in HKAS1.

An entity shall present with equal prominence all of the F/S in a complete set of F/S.

Going Concern

When preparing F/S, management shall make an assessment of an entity's ability to continue as a going concern.

F/S are prepared on a going concern basis unless management either intends to liquidate the entity or to cease trading, or has no realistic alternative but to do so.

When management is aware of material uncertainties related to events or conditions that may cast significant doubt upon the entity's ability to' continue as a going concern, the entity shall disclose those uncertainties.

When F/S are prepared not on a going concern basis, it shalldisclose that fact, together with the basis on which the F/S are prepared and the reason why the entity is not regarded as a going concern.

Freguency of reporting

A complete set of F/S (including comparative information) are presented at least annually.

Disclose when an entity changes the end of its reporting period and presents F/S for a period longer or shorter than one year.

Accrual basis of accounting

F/S, except for cash flow information, are

accrual basis of accountin

BILL YANG 2010 All rights reserved unless otherwise stated.

Billyfcca@yahoo.com

21

HONG KONG

HKICPA Final Examination - Module A Course Notes - June 2010

Fundamental Concepts upon which Financial Statements are based

Materiality and aggregation

Omissions or misstatements of items are material if they could, individually or collectively, influence the economic decisions that users make on the basis of the F/S. Materiality depends on the size and nature of the omission or misstatement judged in the surrounding circumstances. The size or nature of the item, or a combination of both, could be the determining factor.

Each material class of similar items is presented separately.

Items of dissimilar nature or function are presented separately unless they are immaterial.

If a line item is not individually material, it is aggregated with other items either in the F/S or in the notes.

An item that is not sufficiently material to warrant separate presentation in the F/S may warrant separate presentation in the notes.

Offsetting

Assets and liabilities, income and expenses shall not be offset unless required or permitted by a FRS.

Measuring assets net of valuation allowances is not offsetting.

Transactions that do not generate revenue but that are incidental to the main revenuegenerating activities, the results of such transactions shall be presented by netting any income with the related expenses arising on the same transaction, when such presentation reflects the substance of the transaction or other event.

Present gains and losses arising from a group of similar transactions on net basis unless the GIL are material, in which case they are reported separately.

Comparative information

Comparative information shall be disclosed in respect of the previous period for all amounts reported in the F/S, both on the face of F/S and in the notes, unless another HKHKFRS permits or requires otherwise.

If comparative amounts are changed or reclassified, disclosures are required.

HKAS8 sets out the adjustments to comparative information required when an entity changes an accounting policy or corrects an error.

Consistency of presentation

Presentation and classification of items in the F/S shall be retained from one period to the next unless:

• it is apparent, following a significant change in the nature of the entity's operations or a review of its F/S, that another presentation or classification would be more appropriate having regard to the criteria for the selection and application of accounting policies in HKAS8; or

• a HKHKFRS re

resentation.

"

I' " II

) I

! j /

I I

BILL YANG 2010 All rights reserved unless otherwise stated.

Billyfcca@yahoo.com

22

HONG KONG

HKICPA Final Examination - Module A Course Notes - June 2010

Fair presentation and compliance with FRSs

Identification of Financial Statements

F/S shall present fairly the financial position, financial performance and cash flows of the entity.

An entity achieves a fair presentation by compliance with applicable FRSs.

Fair presentation requires an entity to:

• faithfully represent the effects of transactions, other events and conditions, in accordance with the definitions and recognition criteria for assets, liabilities, income and expenses set out in the Framework.

• select and apply accounting policies in accordance with HKAS8, which sets out a hierarchy of authoritative guidance that management considers in the absence of a HKHKFRS that specifically applies to an item;

• present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information; and

• provide additional disclosures when compliance with the specific requirements in HKFRSs is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the entity's financial position and financial performance.

An entity whose F/S comply with HKFRSs shall make an explicit and unreserved statement of such compliance in the notes.

An entity shall not describe F/S as complying with HKFRSs unless they comply with all the requirements of FRSs.

Inappropriate accounting policies are not rectified either by disclosure of the accounting policies used or by notes or explanatory material.

In extremely rare circumstances, management may conclude that compliance with a HKHKFRS requirement would be so misleading that it would conflict with the objective of financial statements set out in the Framework. In such a case, the entity isrequired to depart from the HKHKFRS requirement, with detailed disclosure of the nature, reasons, and impact of the departure.

If the departure from the HKHKFRS requirement is prohibited by the relevant regulatory framework, the entity is required, to the maximum extent possible, to reduce the perceived misleading aspects of compliance with detailed disclosure of the title of the HKHKFRS in question, nature, reasons, any adjustments that would be necessary to achieve a fair

presentation.

Clearly identify:

• F/S and distinguish them from other information in the same published document;

• each component of F/S and the notes;

• the name of the reporting entity or other means of identification, and any change in that information from the end of the preceding reporting period;

• whether the F/S are of the individual entity or a group of entities;

• the date of the end of the reporting period or the period covered by the set of F/S or notes;

• the presentation currency; and

• the level of rounding used in presenting amounts in the F/S.

BILL YANG 2010 All rights reserved unless otherwise stated.

Billyfcca@yahoo.com

23

HONG KONG

HKICPA Final Examination - Module A Course Notes - June 2010

Statement of Financial Position (SFP)

Information to be disclosed in SFP or in Notes/SeE

HKAS1 does not prescribe the order or format in which an entity presents items. As a minimum, SFP shall include line items that present the following amounts:

a. property, plant and equipment;

b. investment property;

c. intangible assets;

d. financial assets [excluding amounts shown under (e), (h) and (i)];

e. investments accounted for using the equity method;

f. biological assets;

g. inventories;

h. trade and other receivables;

i. cash and cash equivalents;

j. total of assets and/or assets included in disposal groups classified as HFS [see HKFRS5];

k. trade and other payables;

I. provisions;

m. financial liabilities [excluding amounts shown under (k) and (I)];

n.

liabilities and assets for current tax [see HKAS12]

Include an 'additional' SFP as at the beginning of the earliest comparative period whenever an entity retrospectively applies an accounting policy or makes a retrospective restatement of items in its PIS.

Present additional line items, headings and sub-totals in the SFP when such presentation is relevant to an understanding of the entity's financial position.

" I

I

When an entity presents current : and non-current assets, and current: and non-current liabilities, as ,: separate classifications in its SFP, it I shall not classify deferred tax

assets (liabilities) as current assets (liabilities).

Present current and non-current assets, and current and non-current, liabilities, as separate

classifications in its SFP except when a presentation based on liquidity provides information that is reliable and is more relevant.

When a presentation based on liquidity provides information that is reliable and is more relevant than presentation on a current/noncurrent basis, an entity shall present all assets and liabilities in order of liquidity.

Disclose the amount of asset and liability expected to be recovered or settled after more than 12-months.

1 1

o.

deferred tax liabilities and deferred tax assets [see HKAS12];

p.

liabilities included in disposal groups classified as held for sale [see HKFRS5];

Further sub-classifications of the line items presented, classified in a manner appropriate to the entity's operations

1-------'1

: SFP or:

I Notes I

L I

Each class of share capital:

q.

non-controlling interest, presented within equity; and

r-------

I

I I

,

a. no. of shares authorised;

b. no. of shares issued and fully paid, and issued but not fully paid;

c. par value per share, or that the shares have no par value;

d. a reconciliation of the number of shares outstanding at the beginning and at the end of the period;

BILL YANG 2010 All rights reserved unless otherwise stated.

r. issued capital and reserves attributable to owners of the parent.

SFP or SeE or Notes

A description of the nature and purpose of each reserve within equity.

t

r .1

Biffyfcca@yahoo.com

24

HONG KONG

HKICPA Final Examination - Module A Course Notes - June 2010

Illustrative Statement of Financial Position

This illustrative statement of financial position shows one way in which an entity may present a statement of financial position distinguishing between current and non-current items. Other formats may be equally appropriate, provided the distinction is clear.

Sunshine Group

Statement of Financial Position as at 31 December 2009

31 Dec 31 Dec

2009 2008

$m $m

ASSETS

Non-current assets

Property, plant and equipment Goodwill

Other intangible assets Investments in associates Financial assets

~x xx
xx xx
xx, xx
xx xx
xx xx
xx xx
xx xx
xx xx
xx xx
xx xx
xx xx
xx xx Current assets Inventories

Trade receivables Other current assets

Cash and cash equivalents

Total assets

EQUITY AND LIABILITIES

Equity

Share capital Retained earnings

Other components of equity

xx xx
xx xx
xx: xx
xx xx
xx xx
xx xx
xx xx
Xx xx
xx xx
xx xx
xx xx
xx xx
xx xx
xx xx
xx xx
xx xx
xx xx
xx XX Attributable to owners of the parent Non-controlling interest

Total equity

Non-current liabilities Long-term borrowings Deferred tax Long-term provisions

Total non-current liabilities

Current liabilities

Trade and other payables Short-term borrowings

Current portion of long-term borrowings Current tax payable

Short-term provisions

Total current liabilities

Total liabilities

Total equity and liabilities

BILL YANG 2010 All rights reserved unless otherwise stated.

Billyfcca@yahoo.com

25

HONG KONG

HKICPA Final Examination - Module A Course Notes - June 2010

Current or Non-current Distinction

Current assets are assets satisfy any of the following criteria:

a. it expects to realise the asset, or intends to sell or consume it, in its normal operating cycle; or

b. it holds the asset primarily for the purpose of trading; or

c. it expects to realise the asset within 12-months after the end of the reporting period; or

d. the asset is cash or a cash equivalent (see HKAS7), unless the asset is restricted from being exchanged or used to settle a liability for at least 12-months after the reporting period.

Non-current assets are assets other than current assets.

Current liabilities are liabilities satisfy any of the following criteria:

a. it expects to settle the liability in its normal operating cycle; or

b. it holds the liability primarily for the purpose of trading; or

c. the liability is due to be settled within 12-months after the end of the reporting period; or

d. it does not have an unconditional right to defer settlement of the liability for at least 12- months after the reporting period. Terms of a liability that could, at the option of the counterparty, result in its settlement by the issue of equity instruments do not affect its classification.

Non-current liabilities are liabilities other than current liabilities.

Classify FL as current liabilities when they are due to be settled within 12-months after the reporting period, even if:

a. the original term was for a period longer than 12-months; and

b. an agreement to refinance, or to reschedule payments, on a long-term basis is completed after the reporting period and before the F/S are authorised for issue.

When an entity expects, and has the discretion, to refinance or roll over an obligation for at least 12-months after the reporting period under an existing loan facility, classify the FL as non-current liability even if it would otherwise be due within a shorter period.

For any breach of a provision of a long-term loan arrangement on or before the end of the reporting period with the effect that the liability becomes payable on demand, classify the FL as:

a. current, even if the lender agreed, after the reporting period and before the authorisation of the F/S for issue, not to demand payment as a consequence of the breach.

b. non-current if the lender agreed by the end of the reporting period to provide a period of grace ending at least twelve months after the reporting period, within which the entity can rectify the breach and during which the lender cannot demand' immediate re ·a rnent,

BILL YANG 2010 All rights reserved unless otherwise stated.

Billyfcca@yahoo.com

26

HONG KONG

HKICPA Final Examination - Module A Course Notes - June 2010

Statement of Com prehensive Income (SCI)

(Exclude transactions with equity owners]

Present ALL items of income and expense recognised in a period:

• in two statements:

• in a single SCI [i.e. covering (a) to (k) and below], or

~ a statement displaying components of P/L [separate income statement, (SIS)] [i.e. covering (a) to (f) and G)]; and

~ a second statement beginning with P/L and displaying components of OCI [i.e. covering (f) to (i) and (k)].

As a minimum, the SCI shall include line items that present the following amounts for the

period: 1---- -- - --- ---.- - -- -----------.- -- - ----,

.: Present additional line items, headings and :

, subtotals in the SCI and SIS (if presented), :

when such presentation is relevant to an !,

understanding of the entity's financial :

performance. '

a. revenue;

b. GIL from derecognition of FAs measured at AC;

c. finance costs;

d. share of the P/L of associates and joint ventures accounted for using the equity method;

PIL is the total of income less expenses, excluding the components of OCI. Recognise all items of income and expense in a period in P/L unless a HKFRS requires or permits otherwise.

., I ,

OCI comprises items of income and expense: (including reclassification adjustments) that ' , are not recognised in P/L as required or permitted by other FRSs.

Reclassification adjustments are amounts reclassified to P/L in the current period that were recognised in OCI in the current or previous periods.

TCI is the change in equity during a period resulting from transactions and other events, other than those changes resulting from transactions with owners in their capacity as owners.

Owners are holders of instruments classified as equity.

Disclose the amount of income tax relating to each component of OCI either in the SCI or in the notes.

Disclose the following in SCI or in notes:

• the nature and amount of items of income or expense separately if material.

• an analysis of expenses recognised in P/L using a classification based on either their nature or their function within the entity, whichever provides information

" that is reliable and more relevant. I

'r .... _ ... _ ........ ... __ ..... ..... _ .............. _ ........ -. ............ _ ... .....

e. GIL from reclassification of FA at ACTPL to FA at FVTPL;

f. tax expense;

g. a single amount comprising the total of:

• post-tax P/L of discontinued operations and

• post-tax GIL recognised on the measurement to FV less costs or on the disposal of the assets or disposal group(s) constituting the discontinued operation;

h. profit or loss (P/L);

g. each component of OCI classified by nature (excluding amounts in (i));

i. share of the OCI of associates and joint ventures accounted for using the equity method;

j. total comprehensive income (TCI);

k. allocation of P/L for the period attributable to NCI and owners of the parent; and

I. allocation of TCI for the period attributable to NCI and owners of the parent.

BILL YANG 2010 All rights reserved unless otherwise stated.

Billyfcca@yahoo.com

27

HONG KONG

HKICPA Final Examination - Module A Course Notes - June 2010

Illustrative Statement of Comprehensive Income

Consist of items recognised directl in equity and reclassification adjustments i.e. items recycled from equity to Ithe PIL.

This illustrative statement of comprehensive income use the term 'comprehensive income' to label the total of all components of comprehensive income, including P/L. The illustrations use the term oel to label income and expenses that are included in comprehensive income but excluded from P/L. HKAS1 does not require an entity to use those terms in its F/S.

Sunshine Group

Statement of Comprehens Ive I nco me for the year ended 31 December 2009

Classification bv function

Revenue Cost of sales

Gross profit

Other income Distribution costs Administrative expenses Other expenses

Finance costs

Share of profit of associates

Profit before tax Income tax expense

Profit for the year from CO Loss for the year from DO

Profit for the year

Other comprehensive income:

$m

888 (355)

533

88 (208) (148) (118)

(88) 98

157 (19)

138 (20)

118

48

166

98 20

118

138 28

166

Classification by nature

Revenue Other income

Changes in inventories of FGIWIP Raw material and consumables Employee benefits expense Depreciation and amortisation Impairment of PPE

Other expenses

Finance costs

Share of profits of associates

Profit before tax

, aJ'

E:

(Il, (/),

, ,

,

Other comprehensive income, net of tax:

Exchange differences 25

GIL from equity invmts at FVOCI 21

Gains on property revaluation 13

Actuarial gains on pension plan 6

Cash flow hedges (9)

Share of OCI of associates (8)

Total OCI,. net of tax

,aJ' E' 1'0'

(/):

, ,

,

r-------------------------------

• When expenses are classified by

function, disclose additional information in the notes on the nature of expenses, including depreciation and amortisation expense and employee benefits expense.

$m

Exchange differences 38

GIL from equity invmts at FVOCI 28

Gains on property revaluation 18

Actuarial gains on pension plan 8

Cash flow hedges (13)

Share of OCI of associates (12)

Tax relating to components of OCI (19)

• Comparatives are required but excluded from this illustration.

888 88 38 (288) (248) (228)

(58) (45) (88)

98

157

48

Total OCI, net of tax

Total comprehensive income

Profit attributable to:

Owners of the parent Non-controlling interest

TCI attributable to:

Owners of the parent Non-controlling interest

Earnings per share Basic

Diluted

15.8¢ 14.8¢

BILL YANG 2010 All rights reserved unless otherwise stated.

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28

HONG KONG

HKICPA Final Examination - Module A Course Notes - June 2010

III ustrative Disclosure of Components

of Other Comprehensive Income

Statement of Changes in Equity

Disclosure of other comprehensive income For the year ended 31 December 2009

Before tax amount $m

Tax (expense) benefit $m

After tax amount $m

6

Exchange differences on translating foreign operations

38

8

(13) (7) (5) (2)

13

GIL from investments in equity instruments at FVOCI

28

Gains on property revaluation

18

25

21

4

(9) (8)

Actuarial gains on defined benefit pension plans

Cash flow hedges:

Gains arising during the year

Less: reclassification adj. for gain included in P/L Less: adjustment for amounts transferred

to initial carrying amount of hedged items

(16) (2)

5 (13)

(12)

4

(19)

-

48

resented in notes.

When SCI is presented on 'aggregated' basis, present reclassification adjustments and current year GIL in the notes.

BILL YANG 2010 Aff rights reserved unless otherwise stated.

Share of other comprehensive income of associates

67

There was no disposal of a foreign operation. Therefore, there is no reclassification adjustment for the years presented.

Comparatives are required but excluded from this illustration.

An entity shall present a statement of changes in equity showing in the statement:

a. TCI for the period, showing separately the total amounts attributable to owners of the parent and to MI;

b. the amounts of transactions with owners in their capacity as owners, showing separately contributions by and distributions to owners; and

c. for each component of equity:

• the effects of retrospective application or retrospective restatement recognised in accordance with HKAS8;

• a reconciliation between the carrying amount at the beginning and the end of the period, separately disclosing each change.

d. the amount of dividends recognised as distributions to owners during the period, and the related amount per share.

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29

HONG KONG HKICPA Final Examination - Module A
Course Notes - June 2010
--- -------- --- --- - -- -------- ------
Illustrative Sunshine Group
Statement Statement of Changes in Eguit~ for the ~ear ended 31 December 2009
of Changes Translation Equity Cash
in Equity Share Retained of foreign invmt at flow Revaluation Total
capital earnings operation FVOCI hedges surplus Total NCI equity
----- --- _. ---_. _-
$m $m $m $m $m $m $m $m $m
Balance at 1/1/09 xx xx xx xx xx xx xx xx xx
Changes in alcg, policy xx xx xx xx
-------
Restated balance );l( xx XX XX xi< xx xx xx xx
Changes in equity for 2009
Issue of shares xx xx xx
Dividends (xx) (xx) (xx)
TCI for 2009 102 20 18 (7) 5 138 28 166
Transfer to ret. earnings xx (xx)
Reduction of xx (xx) XX xx xx
interest in subsidiary --- -=- - ... -. -.
Balance at 31112/09 xx xx xx' 'Xx xx XX XX xx xx
--- The amount included in retained earnings for 2009 of $1 02m represents profit attributable to owners of the parent of $98m plus actuarial gains on defined benefit pension plan of $4m ($6m, net of tax less NCI $2m).

The amount included in the translation, investments in equity instruments and cash flow hedge reserves represent OCI for each component, net of tax and NCI e.g. translation of foreign operations of $20m is $25m, net of tax less NCI $5m.

OCI of associates relates solely to loss on property revaluation. Hence, the amount included in the revaluation surplus of $5m represents the gains on property revaluation of $13 plus share of OCI of associates of -$8.

Comparatives are required for SCE but excluded from this illustration.

Statement of Cash Flows

HKAS7 sets out requirements for the presentation and disclosure of cash flow information.

Notes to F/S

I Refer to HKAS1 for detailed reguirements.

BILL YANG 2010 All rights reserved unless otherwise stated.

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30

HONG KONG

HKICPA Final Examination - Module A Course Notes - June 2010

6. HKAS10 EVENTS AFTER THE REPORTING PERIOD [ CLP Section 17 1

Event after the Reporting Period

Adjusting Event

Non-adjusting Event

Accounting Treatments

~' r

Going concern issues arising after the end of reporting period

Disclosure

An event, which could be favourable or unfavourable, that occurs between the end of

re ortin ericd and the date that the F/S are authorised for issue.

An event after the reporting period that is indicative of a condition that arose after the re ortin aeriod.

Adjust F/S for adjusting events.

Do not adjust for non-adjusting events.

If an entity declares dividends after reporting period, the entity shall not recognise those dividends as a liability at the end of reporting period. That is a non-adiusting event.

An entity shall not prepare its F/S on a going concern basis if management determines after the reporting period either that it intends to liquidate the entity or to cease trading, or that it has no realistic alternative but to do so.

'-

Non-adjusting events should be disclosed if they are of such importance that nondisclosure would affect the ability of users to make proper evaluations and decisions. The required disclosure is:

<Xl the nature of the event and

@ an estimate of its financial effect or a statement that a reasonable estimate of the effect cannot be made.

Update disclosures that relate to conditions that existed at the end of reporting period to reflect any new information that it receives after the reporting period about those conditions.

Disclose the date when the F/S were authorised for issue and who' gave that authorisation. Must disclose the fact that if the enterprise's owners or others have the power to amend the F/S after issuance.

'Ii

r-

It

• 11 1

'1 \) .

c,

BILL YANG 2010 All rights reserved unless otherwise stated.

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31

HONG KONG

HKICPA Final Examination - Module A Course Notes - June 2010

7. HKAS17 LEASES [ CLP Section 16 J

Lease An agreement whereby the lessor conveys to the lessee in return for a payment or series of payments the right to use an asset for an agreed period of time. It mayor may not contain a legal. title transfer clause.

Minimum

Lease Payments (MLP)

Present Value (PV)

Fair Value (FV)

Implicit Rate

Classification of Lease

I'

• For lessee .... rental payable plus residual value guaranteed by the lessee or by a

party related to the lessee.

• For lessor ...• rental receivable + residual value guarantee by anybody that is

financial capable of dischargina the obligations.

The cost of the asset at the outset of the lease, less any grants that the lessor (i.e. the legal owner is entitled to claim.

Discount rate that, at the inception of the lease, causes PVMLP + unguaranteed residual value e ual to FV of leased asset + lessor's initial direct costs

Two broad categories of leases, depending on the substance of the agreement and classification is made at the inception of the lease:

CD PVMLP represents substantial all of FV of the

leased asset? 1°, I. i' , ,

Yes" Finance Lease

A lease that transfers substantially all the risks and rewards incidental to ownership of an asset. Title mayor may not eventually be transferred.

(6) Ownership transferred to the lessee by the end of the lease term?

@ Bargain purchase option likely to be exercised by the lessee?

® Lease term represents major part of the leased asset's economic life?

No ., Operating Lease

A lease other than a finance lease.

® Leased asset is customised for lessee's use?

® If lease is cancelled by lessee, are lessor's losses borne by lessee?

<V Is lessee responsible for insurance, maintenance, etc?

.\ Land and buildings elements are considered separately. In determining whether the land lll<'- • : element is an eJPI1. @rr a F'~, an important consideration is that land normally has an

indefinite economic life. " : , ~' , i, I, , I, ( i

However, separate measurement of the land and buildings elements is not required if the lessee's interest in property is classified as an investment property in accordance with HKAS40 and the fair value model is ado ted.

BILL YANG 2010 All rights reserved unless otherwise stated.

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32

.iONG KONG

HKICPA Final Examination - Module A Course Notes - June 2010

Lessee

ACCOUNTING TREATMENT

Lessor

Q) 1/1 III

j

CI C :;::;

I!

Q) DO

P/L .. Debit the lease payments, as an expense, on a systematic basis representative of the time pattern of the users benefit.

SFP .. Recognise deferred income or rent receivable accordingly.

.. Asset held for rental income.

P/L .. Credit the lease rentals, as an income, on a systematic basis over the lease term.

.. Depreciation of the asset

(H KAS 16/38/40)

o 8 Q

SFP.. Recognise rent prepayment or rent accrual accordingly.

® ®

• At the commencement of the lease term, record a receivable at an amount equal to the net investment in the lease.

Manufacturer/dealer's lessor Dr. Net invmt. in finance lease Cr. Sales

Dr. Cost of sales Cr. Inventory

Lender's lessor

Dr. Net invmt. in finance lease 0

Cr. Cash

• Annually,

.. lease receipt represents payment for interest and lease receivable:

Dr. Cash 6

Cr. Interest income 0

Cr. Net invmt. in finance lease 0

.

• P/L I Selling profit/loss Interest income

Contingent rent (see below)

• SFP I Net invmt. in finance lease

8-Q e

0-0

• At commencement of the lease term, record asset and obligation:

Dr. Asset (lower PVMLP or FV) CD

Cr. Finance lease obligation @

• Annually,

.. asset is depreciated or amortised over the shorter of lease term or useful life

Dr. Depreciation Cr. Asset

\\: :"\. \

.. lease payment represents payment for interest and lease obligation:

Dr. F.inanceoexpense

Dr. Finance.lease obligati.Cil.n Cr. Cash

• P/L I Depreciation Finance costs

Contingent rent (see below)

· SFPI Asset (j) - e

Lease obligation @ - @

[split between current and non-current portion]

.,

Finance charge should be allocated to periods during the lease term so as to produce a constant periodic

rate of interest on the remaining balance of the liability for each period some form of approximation

may be used.

Contingent rent represents the portion of the lease payments that is not fixed in amount but is based on the future amount of a factor that changes other than with the passage of time.

BILL YANG 2010 All rights reserved unless otherwise stated.

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33

HONG KONG

HKICPA Final Examination - Module A Course Notes - June 2010

Initial direct costs incurred in connection with specific leasing activities

Incentives for new/renewed operating lease

Selling profit versus interest rate of a lease

Sale and Leaseback Transactions 1 ~\' kl v \"'y

I

Finance lease

Involving nonmanufacturer or dealer lessor

Involving manufacturer or dealer lessor

Operating lease

Add initial direct costs to the carrying amount of the leased asset and recognise as an expense over the lease term on the same basis as the lease income.

Include initial direct costs in the initial measurement of the finance lease receivable and reduce the amount of income recognised over the lease term.

Exclude initial direct costs from the net investment in the lease and recognise as an expense when the selling profit is

recognised.

Recognise initial direct costs as part of prepayment.

Add initial direct costs to the carrying amount of the leased asset.

The aggregate cost/benefits of incentives are recognised as a reduction of rental income/expense over the lease term, on a straight-line basis unless another systematic basis is more representative.

,/

Manufacturers' or dealer lessors should include selling P/L in the same period as if they would for an outright sale. If artificially low rates of interest are charged, selling profit should be restricted to that which would apply if a commercial rate of interest were eharqed.

...• the lessee has retained substantially all risks and rewards incidental to the ownership of the leased asset.

.... the transaction is a means whereby the lessor provides finance to the lessee, with the asset as security .

.... gain on disposal shall not be recognised as income by seller-lessee but instead be deferred over the lease term.

.... if sale price = FV

Recognise any GIL immediately .

. !:

Cl CII .... if sale price < FV

~ ~ Recognise any GIL immediately. If any loss is compensated for future lease

iil !: payments at below market price, the loss shall be deferred and amortised in

~ til proportion to the lease payments over the lease term.

§~

t3 ~ .... if sale price> FV

m Q. Defer the excess over FV and amortise this excess over lease term.

co

!!!

I- .... if the FV< CV

A loss equal to the amount of the difference between the carrying amount and FV shall be reco nised immediatel .

BILL YANG 2010 All rights reserved unless otherwise stated.

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34

HONG KONG

HKICPA Final Examination - Module A Course Notes - June 2010

8. HKAS18 REVENUE [ CLP Section 7 J

Definition of Revenue

Recognition of Revenue

Measurement of Revenue

Sales

of Goods

The gross inflow of economic benefits during the period arising in the course of the

ordinary activities when those inflows result in increases in equity, other than

increases relating to contributions from equity participants.

Revenue is recognised when it is probable that future economic benefits will flow to the ,

enter rise and these benefits can be measured reliabi . .

Revenue should be measured at the receiv~lJre.

Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm's length transaction.

An exchange for goods or services of a similar nature and value is not regarded as a transaction that generates revenue. However, exchanges for dissimilar items are regarded as generating revenue.

If the inflow of cash or cash equivalents is deferred, the fair value of the consideration receivable is less than the nominal amount of cash and cash equivalents to be received, and discounting is appropriate e.g. if the seller is providing interest-free credit to the buyer or is charging a below-market rate of interest. Interest must be imputed based on market rates.

It is necessary to apply the recognition and measurement criteria to the separately identifiable components of a single transaction in order to reflect the substance of the transaction.

Conversely, the recognition criteria are applied to two or more transactions together when they are linked in such a way that the commercial effect cannot be

understood without reference to the series of transactions as a whole.

Revenue from the sale of goods should be recognised when all the following conditions have been satisfied:

@ the seller retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold;

® the amount of revenue can be measured reliably;

® it is probable that the economic benefits associated with the transaction will flow to the enterprise; and

® the costs incurred or to be incurred in respect of the transaction can be measured reliabl .

BILL YANG 2010 All rights reserved unless otherwise stated.

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35

HONG KONG

HKICPA Final Examination - Module A Course Notes - June 2010

Rendering of Services

l ~ If"

Interest, Royalties and Dividends

Entity acting as a principal or as an agent

J I

When the outcome of the transaction involving the rendering of services cannot be estimated reliably, revenue should be recognised only to the extent of the expenses

recognised that are recoverable. ! \ r . , ,r L .

CD the amount of revenue can be measured reliably;

When the outcome of a transaction involving the rendering of services can be estimated' reliably, revenue ...... should be recognised by reference to the stage of completion ..... at the end of reporting period. The outcome of a transaction can be estimated reliably when all the following conditions are satisfied:

® it is probable that the economic benefits associated with the transaction will flow to the enterprise;

® the stage of completion of the transaction at the end of reporting period can be measured reliably; and

® the costs incurred for the transaction and the costs to complete the transaction can be measured reliably.

Revenue should be recognised:

CD it is probable that the economic benefits associated with the transaction will flow to the enterprise; and

® the amount of the revenue can be measured reliably.

Using the following bases:

• interest .-. effective interest rate method as set out in HKFRS9.

• royalties .... accrual basis in accordance with the substance of the relevant

agreement.

• dividends .... when the shareholder's right to receive payment is established.

In an agency relationship, the gross inflows of economic benefits include amounts collected on behalf of the principal and which do not result in increases in equity for the entity.

The amounts collected on behalf of the principal are not revenue. Instead, revenue is the amount of commission.

An entity is acting as a principal when it has exposure to the significant risks and rewards associated with the sale of goods or the rendering of services. Features that indicate that an entity is acting as a principal include:

• the entity has the primary responsibility for providing the goods or services to the customer or for fulfilling the order;

• the entity has inventory risk before or after the customer order, during shipping or on return;

• the entity has latitude in establishing prices, either directly or indirectly, for example by providing additional goods or services; and

One feature indicating that an entity is acting as an agent is that the amount the entity earns is predetermined, being either a fixed fee per transaction or a stated percentage of the amount billed to the customer.

BILL YANG 2010 All rights reserved unless otherwise stated.

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36

HONG KONG

HKICPA Final Examination - Module A Course Notes - June 2010

Accounting for Agreements for the Construction of Real Estate

Split the agreement into separately identifiable components by allocating the fair value of the consideration received or receivable to each Gam anent.

Component(s) for the delivery of other goods or services - a I HKAS18

,

Component for the construction of real estate and directly related services (in accordance with HKAS18.4

The agreement or component is a construction contract within the scope of HKAS11*

Does the agreement or component meet the definition of a construction contract? \ \\

Is the agreement or component only for the rendering of services?

, .

Revenue and costs are recognised by reference to the stage of completion

t

The agreement or component is for the sale of goods within the sco e of HKAS18**

The agreement or component is for the

rendering of services within ~ the scope of HKAS18

Are the criteria for recognising revenue from the sale of goods met on a continuous basis?

...... ~

Revenue is recognised when all the conditions HKAS18.14 have been satisfied.

.. The construction contract may need to be segmented in accordance with HKAS11.8.

"" Directly related services may need to be separated in accordance with HKAS 18.13

BILL YANG 2010 All rights reserved unless otherwise stated.

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37

HONG KONG

HKICPA Final Examination - Module A Course Notes - June 2010

9. HKAS24 RELATED PARTY DISCLOSURES [ CLP Section 27 J

Purpose of Related Party Disclosures

Definition of Related Party [HKAS24:9]

For the reasons mentioned below, knowledge of related party transactions, outstanding balances and relationships may affect assessments of an entity's operations by users of F/S, including assessments of the risks and opportunities facing the entity:

• a related party relationship could have an effect on the financial performance and position of an entity - related parties may enter into transactions that unrelated parties would not.

• transactions between related parties may not be made at the same amounts as between unrelated parties.

• the financial performance and position of an entity may be affected by a related party relationship even if related party transactions do not occur.

• one party may refrain from acting because of the significant influence of another.

A related party [RP] is a person or entity that is related to the entity that is preparing its financial statements (i.e. the 'reporting entity').

(a) A BeEson or a close member of that person's family is related to a reporting entity if that person:

(i) has control or joint control over the reporting entity;

(ii) has significant influence over the reporting entity; or

(iii) is a member of the key management personnel of the reporting entity or of a parent of the reporting entity.

(i) The entity and the reporting entity are members of the same group (which means that each parent, subsidiary and fellow subsidiary is related to the others).

(ii) One entity is an associate or joint venture of the other entity (or an associate or joint venture of a member of a group of which the other entity is a member).

(iii) Both entities are joint ventures of the same third party.

(iv) One entity is a joint venture of a third entity and the other entity is an associate of the third entity.

(v) The entity is a post-employment benefit plan for the benefit of employees of either the reporting entity or an entity related to the reporting entity. If the reporting entity is itself such a plan, the sponsoring employers are also related to the reporting entity.

(vi) The entity is controlled or jointly controlled by a person identified in (a).

(vii) A person identified in (a) (i) has significant influence over the entity or is a member of the key management personnel of the entity (or of a parent of the entity).

Close members of the family [CMF] of a person are those family members who may be expected to influence, or be influenced by, that person in their dealings with the entity and include:

• that person's children and spouse or domestic partner;

• children of that person's spouse or domestic partner; and

• dependants of that person or that person's spouse or domestic partner.

Key management personnel [KMP] are those persons having authority and responsibility for planning, directing and controlling the activities of the entity, directly or indirectly, lncludln an director (whether executive or otherwise of that entit .

BILL YANG 2010 All rights reserved unless otherwise stated.

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38

HONG KONG

HKICPA Final Examination _ Module A Course Notes _ June 2010

Diagrammatic Examples

of Related Party Relationships

--,

I

j ('

, >

KMP

eMF 9a(iii)

c

KMP 9a(iUl

I- .. ' ~~ ...

c

s ___.,..i Entity G \

tifilI".I'!tS!l--+-- J _j..___E_' n_ti_tY-,--T_, --"-'r:~I'---- J _j-·l~~~;t~~-]

--ISb(ii) _ L~~ _i

BILL YANG 2010 All rights reserved unless otherwise stated.

\ s : ,..-------l'

Entity W .,.._ 9b(vi)

i--E~-titY~X--j... s

• 1;--

, ,

t - .. __ :

s

, '

, '

:.."" ........... ~ .. ... 1

Factors for consideration when assessing RP relationships:

• RP relationships are symmetrical, i.e. if X is related to Y for the purpose of V's FIS, then Y is also related to X in X's F/S.

• All direct relationships involving control, joint control and significant influence are RP relationships.

• Relationships between a reporting entity and a corporate investor and between a reporting entity and individual investor are treated in the same manner.

• An individual and eMF of that individual are treated as one party in analysing RP relationships.

• Members of the same group (i.e. parent and all its subsidiaries) are treated as one party in analysing RP relationships.

• A post-employment benefit plan for employees of the RE or any entity that is a RP of the RE is considered to be a RP of the RE.

• Presence of control and joint control in one leg of an indirect relationship leads to a RP retationshlo.

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39

HONG KONG

HKICPA Final Examination - Module A Course Notes - June 2010

Relationship included and excluded

Parties DEEMED NOT to be related [HKAS24.11]

~~ HKAS24
C is not related to 8 in F/S of 8.
8 is related to C in the F/S of C.
C/J S
I Entit;B I I ~tyC I HKAS24R
Both 8 and C are related to each other in
the F/S of Band C.

~ HKAS24 :
E is related to D in the F/S of D.
o is not related to E in the F/S of E.
KMP C/J
I Entit~ I I ~tYE I HKAS24R
Both 0 and E are related to each other in
the F/S of 0 and E.

~ HKAS24
Both F and G are not related to each other
in the F/S of F and G.
C/J s
I Entit;i I I En:ty G I HKAS24R
Both F and G are related to each other in
the F/S of F and G.

~ HKAS24
Both J and K are related to each other in
the F/S of J and K.
S CMF+S
I Enlit:S'1 I ~tyK I HKAS24R
Both J and K are not related to each other
in the F/S of J and K.

~ HKAS24
N is related to M in the F/S of M:
M is not related to N in the F/S of N.
C/J CMF+J/S
I Enu:M I I ~tYN I HKAS24R
Both M and N are related to each other in
the F/S of M and N. • Two entities simply because they have a director or key manager in common.

• Two venturers who share joint control over a joint venture.

• providers of finance, trade unions, public utilities, and departments and agencies of a government that does not control, jointly control or significantly influence the RE, simply by virtue of their normal dealings with an entity (even though they may affect the freedom of action of an entity or participate in its decision-making process).

• A single customer, supplier, franchiser, distributor, or general agent with whom an entity transacts a significant volume of business merely by virtue of the resulting economic dependence.

BILL YANG 2010 All rights reserved unless otherwise stated.

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40

HONG KONG

HKICPA Final Examination - Module A Course Notes - June 2010

Related Party Transactions

Disclosures

A RE is exempt from the disclosure requirements in relation to RP transactions and outstanding balances, including commitments, with:

(a) a government that has control, joint control or significant influence over the RE; and

(b) another entity that is a RP because the same government has control, joint control or significant influence over both the RE and the other entity.

A . related party transaction is a transfer of resources, services or obligations between a reporting entity and a related party, regardless of whether a price is charged. Examples:

• purchases or sales of goods (finished or unfinished);

• purchases or sales of property and other assets;

• rendering or receiving of services;

• leases;

• transfers of research and development;

• transfers under licence agreements;

• transfers under finance arrangements (including loans and equity contributions in cash or in kind);

• provision of guarantees or collateral; and

• settlement of liabilities on behalf of the entity or by the entity on behalf of another party.

Regardless of whether there have been transactions between a parent and a subsidiary, an entity must disclose the name of its parent and, if different, the ultimate controlling party. If neither the entity's parent nor the ultimate controlling party produces financial statements available for public use, the name of the next most senior parent that does so must also be disclosed.

Disclose key management personnel compensation in total and for each of the following categories:

• short-term employee benefits;

• post-employment benefits;

• other long-term benefits;

• termination benefits; and

• share-based payments.

(c) Related party tr;ansaotions

Disclose the following the items:

• the amount of the transactions.

Disclose separately for each category of related parties

• the parent;

• entities with joint control or

significant influence over the entity;

• subsidiaries;

• associates;

• joint ventures in which the entity is a venturer;

• key management personnel of the entity or its parent; and

• other related parties.

• the amount of outstanding balances, including terms, conditions and guarantees.

'.11 ," "

• Iprovision~ for doubtful debts

related to the amount of outstanding balances.

• the expense recognised during the period in respect of bad or doubtful debts due from related parties.

A statement that related party transactions were made on terms equivalent to those that prevail in arm's length transactions should be made only if such terms can be substantiated,

/

. I I >

I / ('

.J~ , I,

... I

.,

BILL YANG 2010 All rights reserved unless otherwise stated.

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41

HONG KONG

HKICPA Final Examination - Module A Course Notes - June 2010

10. HKAS37 PROVISIONS,

CONTINGENT LIABILITIES AND CONTINGENT ASSETS [ CLP Section 18 J

Definition and Recognition of Provisions

Measurement of Provisions

Use of Provisions

A provision is a liability of uncertain timing or amount.

A provision shall be recognised if, and only if.

CD a lfi;iiiiiiii1QJi'/igJffi(jff (could be legal or constructive) has arisen as a result of a past event (the obligating event),

-------------------------------------------------------------------.

• legal obligation derives from a contract (through its explicit or implicit terms); :

legislation; or other operation of law. '

• constructive obligation derives from an enterprise's actions where:

• by an established pattern of past practice, published policies or a sufficiently specific current statement, the enterprise has indicated to other parties that it will accept certain responsibilities; and

• as a result, the enterprise has created a valid expectation on the part of those other parties that it will discharge those responsibilities.

I I

I. past event is deemed to give rise to a present obligation if it is more likely than

: not that a present obligation exists at the end of reporting period. For a past event

: to be an obligating event, it is necessary that the enterprise has no realistic

: alternative to settling the obligation created by the event.

I ~ __ ----------------------------------------------- _

(6) probable ('more likely than not') that an outflow of resources embodying economic benefits will be required to settle the obligation; and

® a reliable estimate can be made of the amount of the obligation.

Amount recognised as a provision should be the best estimate (rational amount) of the expenditure required to settle the present obligation at the end of reporting period.

Provision may be made base on most likely outcome or probability-weighted expected value. Consider:

risks and uncertainties - a risk adjustment may increase the amount of provision but uncertainty does not justify the creation of excessive provisions.

future events - may affect the amount required to settle an obligation should be reflected in the amount of a provision where there is sufficient objective evidence that they will occur.

discounting! (if ~aterial) at ~ p;e-t~~: di~count rat~·~· r~~e ~~~d should' r~f1ect the current market assessments of the time value of money and risks specific to the liability.

If reimbursement from third party is expected, recognise the reimbursement as a reduction of the required provision only if the receipt of the reimbursement is virtually certain.

Provisions should be reviewed at the end of each reporting period and adjusted to reflect the current best estimate. If it is no longer probable that an outflow of resources will be required to settle the obligation, the provision should be reversed.

only be used for the purpose for which they were originally

BILL YANG 2010 All rights reserved unless otherwise stated.

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HONG KONG

HKICPA Final Examination - Module A Course Notes - June 2010

Provision

for Future Operating Losses

Provision for Onerous Contracts

Provision

for Restructuring Costs

Provisions should not be recognised for future operating losses, even in a restructuring as it fails definition or recognition tests of a liability. Entity is not obligated to make the future losses - it has the option to change its procedures, wi~hdraw from the market, etc.

An expectation of future operating losses is an indication that certain assets of the .operation may be im~aired. These assets shall be tested for i~~_airme~t under HKAS36.

An onerous contract is one where 'the unavoidable costs of meeting the obligations under the contract exceeds the economic benefits expected to be received under it'.

A provision should be recognised for the present obligation under the contract based on the lower of fulfilling the contract, or paying the penalties/oompensation fst terrri'il"lating_ it.

A provision for restructuring costs is recognised only if the general recognition criteria for provisions are met. The following set out how the general recognition criteria apply to restructurings.

Restructuring that involve sale of an operation

i.e. there is a

Internal restructuring

Recognise a provision on a constructive obligation to restructure only if

ill there is a detailed formal plan identifying at least the following:

• business or part of a business concerned;

• principal locations affected;

• location, function, and approximate number of employees who will be compensated for terminating their services;

• the expenditures that will be undertaken;

• when the plan will be implemented; and

aJ has raised a valid expectation in those affected that it will carry out the restructuring by starting to implement that plan or announcing its main features to those affected by it.

A restructuring provision should include only the direct expenditures arising from the restructuring, which are those that are both:

• necessarily entailed by the restructuring; and

• not associated with the ongoing activities of the enterprise.

A restructuring provision should not include:

• costs for retraining or relocating continuing staff;

• costs for marketing;

• investment in new systems and distribution networks;

• identifiable future operating losses up to the date of a restructuring, unless they relate to an onerous contract (see above); or

• gains on the expected disposal of assets, even if the disposal is envisaged as part of the restructuring.

Assets of the operation involved in the restructuring should be reviewed for impairment in accordance with HKAS36.

BILL YANG 2010 All rights reserved unless otherwise stated.

Billyfcca@yahoo.com

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HKICPA Final Examination - Module A Course Notes - June 2010

Definition

Recognition

Disclosure

Contingent Liability

A possible obligation that arises from past events and whose existence will be conformed only on the occurrence or nonoccurrence of one or more uncertain future events not wholly within the control of the enterprise;

OR

A present obligation that arises from past events but is not recognised because:

• it is not probable that an outflow of

resources .will be required ; or

• amount. ... cannot be measured with sufficient reliability.

Contingent Asset

I This is not recognised in the F/S.

Unless the possibility of any outflow in settlement is remote, for each class of contingent liability, disclose:

• brief description of the nature of the contingent liability,

• estimate of its financial effect,

• indication of the uncertainties relating to the amount or timing of any outflow; and

• possibility of any reimbursement

A possible asset that arises from past events; and whose existence will be confirmed only by the occurrence of one or more uncertain future events not wholly within the control of the enterprise.

I This is not recognised in the F/S.

If an inflow of economic 'benefits is probable, disclose

• brief description of the nature of the contingent asset; and

• estimate of its financial effect.

If disclosure on any of the above required information is not practicable, that fact should be stated.

If disclosure on any of the above required information can be expected to prejudice seriously the position of the enterprise in a dispute with other parties, the above required information need not be disclosed, but instead disclose the general nature of the dispute, together with the fact that, and reason why, the information has not been disclosed.

BILL YANG 2010 All rights reserved unless otherwise stated.

Billyfcca@yahoo.com

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HONG KONG

HKICPA Final Examination - Module A Course Notes - June 2010

11. HKAS38 INTANGIBLE ASSETS [ CLP Section 13]

OVERVIEW

Recognition of IA

Probability Fair value

Measurement of IA

Initial Thereafter

Cost

Amorisation and Impairment

BILL YANG 2010 All rights reserved unless otherwise stated.

Cost model

OR

Revaluation model

Amortise IA with finite useful life.

No amortization for indefinite IA

Check finite IA for impairment only if indications suggest impairment.

Check indefinite IA for impairment annually or when indications suggest impairment, whichever is earlier ..

IA acquired separately

Presumed if FV can be measured reliably

Others

To be expensed off as they fail the definition test and/or the inflow of future

economic benefits is uncertain. .

I ~c.min I

IA arises from

business

combination

IA granted by government

ExchangedlA

I Ascertain II Asce~ain I

Development expenditure

Consider additional criteria - M.E.R.I.T.S.

Billyfcca@yahoo.com

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HKICPA Final Examination - Module A Course Notes - June 2010

Definition

of Intangible Assets

Recognition of Intangible Assets

An IA is identifiable when it:

• is separable (i.e. is capable of being separated or divided from the entity and sold, transferred, licensed, rented or exchanged, either individually or together with a related contract, identifiable asset or liability, regardless of whether the entity intends to do so; or

• arises from contractual or other legal rights, regardless of whether those rights are transferable or se arable from the entit or from other ri hts and obli ations.

An IA should be recognised if, and only if:

<D it is probable that the future economic benefits that re attributable to the asset will flow tetheehtity; and

} Item which fail recogntion test should written off as expense and should not be subsequently reinstated.

@ the cost of the asset can be measured reliab/y.

Additional criteria for internally generated lAs (l.e, development expenditures) shall be considered.

Probability recognition criterion of following lAs is always considered to be satisfied:

• IA acquired separately

The price paid to acquire separately an IA will reflect expectations about the probability that the expected future economic benefits embodied in the asset will flow to the entity i.e. an inflow of economic benefits is expected even if there is uncertainty about the timing or the amount of the inflow.

• IA acquired in business combinations

In accordance with HKFRS3, an IA is acquired in a business combination, the cost (its fair value at the acquisition date) of that IA will reflect expectations about the probability that the expected future economic benefits embodied in the asset will flow to the entity i.e. an inflow of economic benefits is expected even if there is uncertainty about the timing or the amount of the inflow.

If an IA acquired in a business combination is separable or arises from contractual or other legal rights, sufficient information exists to measure reliably the fair value of the asset. Thus, the reliable measurement criterion is always considered to be satisfied for IA acquired in business combinations.

HKFRS3/HKAS38 require an acquirer to recognise, at acquisition date, separately from goodwill, an IA of the acquiree (including in-process research and development project and irrespective of whether the IA had been recognised by the acquire before the business combination) if the expenditure meets:

• the definition of an intangible asset; and

• . its fair value can be measured reliably.

IA arising from development (or from the development phase of an internal project) should be recognised if, and only if, an entity can demonstrate !!l. of the following:

o how the IA will generate probable future economic benefits.

@ expenditure attributable to the IA during its development can be measured reliably.

G availability of adequate technical, financial and other resources to complete the

development and to use or sell the IA.

o the intention to complete the IA and to use or sell it.

o the technical feasibility of completing the IA so that it will be available for use or sale.

o the abilit to sell or use the IA.

Billyfcca@yahoo.com

BILL YANG 2010 All rights reserved unless otherwise stated.

46

HONG KONG

HKICPA Final Examination - Module A Course Notes - June 2010

Cost

of Intangible Assets

CD Cost of IA acquired separately includes:

• its purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates; and

• any directly attributable cost of preparing the asset for its intended use.

@ Cost of IA acquired by way of a government grant may be measured at:

• fair value; or

} In accordance with HKAS20

• nominal amount plus any directly attributable expenditure in preparing the IA for its intended use.

® Cost of Exchanged IA should be measured at:

• fair value unless the exchange transaction lacks commercial substance; or the fair value of neither the IA received nor the asset given up is reliably measurable.

Use fair value of the asset given up as cost unless the fair value of the IA received is more clearly evident.

• carrying amount of the asset given up if IA is not measured at fair value.

ffi Cost of IA acquired as part of a business combination should be measured at fair value at the date of acqusiition, which:

• reflects market expectations about the probability that the future economic benefits embodied in the IA will flow to the entity i.e. the effect of probability is reflected in the fair value measurement of the IA.

• can be estimated by making reference to the following sources of information in descending order:

o quoted active market price of the same IA.

e quoted active market price of the most recent similar transaction, only if there has not been a significant change in economic circumstances between the transaction date and the date at which the fair value is estimated.

9 outcome of recent transactions for similar lAs.

e techniques which reflect current transactions! practices in the industry to which the IA belongs.

® Cost of IA arises from development (or from the development phase of an internal project) comprises all directly attributable costs necessary to create, produce, and prepare the IA to be capable of operating in the manner intended by management:

• include materials used and!or services consumed, employee benefits (see HKAS19), fees to register a legal right, amortisation of patents and licences, directly attributable overheads, any interest (see HKAS23) etc.

• exclude selling, administrative and other general overheads, identified inefficiencies, initial operating losses incurred before the IA achieves planned performance, expenditure on training staff to operate the IA etc.

• the sum of directly attributable expenditure incurred from the date when the IA first meets the general and specific recognition criteria - reinstatement of expenditure revlousl reeo nised as an ex ense is rohibited.

BILL YANG 2010 All rights reserved unless otherwise stated.

Billyfcca@yahoo.com

47

HONG KONG

HKICPA Final Examination - Module A Course Notes - June 2010

Measurement of Intangible Assets

General Principles on Revaluation Model

IA that qualifies for recognition should be measured:

• initially at cost (amount of cash or cash equivalents paid, or fair value of other consideration given at the date of acquisition or construction or, where applicable, the amount attributed to that asset when initially recognised in accordance with the specific requirements of other FRSs).

• thereafter at . .. + cost model = cost } Less accumulated
amortisation
OR and any
accumulated
..... revaluation model = revalued amount Impairment losses (!) Revaluation, if done, should be regularly updated such that the carrying value is approximately equal to the fair value at the end of reporting period.

For the purpose of revaluations under HKAS38, FV should be determined by reference to an active market. Such active markets are expected to be uncommon, although this may happen, for IA. Examples where they might exist - production quotas, stock exchange seats and freely transferable taxi licences.

<ID If an item is revalued, the entire class of assets to which that asset belongs should be revalued.

(J) Revalued assets are amortised in the same way as under the cost model.

® Accumulated amortisation at revaluation date should be:

• restated proportionately with the change in the gross carrying amount of the lA, or

• eliminated against the gross carrying amount of the IA and the net amount restated to the revalued amount.

@ Upward I Dr. IA
revaluation Cr. P/L (to the extent that it reverses a previous charge as
a result of a revaluafien decrease of the same
asset)
Cr. OCI-RR (balancing figure)
® Downward ~ Dr. OCI-RR (to the extent of any credit balance existing
revaluation in the RR in respect of the same asset)
Dr. PIL-RE (balancing figure) .
Cr. IA
(j) RR may be When an upward-revalued IA is being:
transferred
directly to • depreciated (used) - the excess depreciation charged as a
retained result of the higher revalued amount may be transferred directly
earnings from RR to RE annual/y.
• disposed - the remaining credit balance in RR may be
transferred directly to R upon disposal. BILL YANG 2010 Aff rights reserved unless otherwise stated.

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HKICPA Final Examination - Module A Course Notes - June 2010

Intangible Assets with FINITE useful life

Intangible Assets

with INDEFINITE useful life

• The depreciable amount (cost or fair value less residual value) of an IA with

a finite useful life shall be allocated on a systematic basis over its useful life (not its contractual period).

• Amortisation represents a charge for the use of the asset and not a reflection of changes in price. Hence, it is not acceptable to omit charging amortisation on the grounds that the fair value is greater than the carrying value.

• The amortisation method selected should reflect the pattern of benefits to be consumed. If the pattern cannot be determined reliably, amortise by the straight line method. Once selected, it should be applied consistently from period to period unless there is a change in the expected pattern of consumption of those future economic benefits.

• The useful life of an IA that arises from contractual/legal rights shall be shorter of the period of the contractual/legal rights, or expected usage of the IA. Renewal period(s) should be included only if there is evidence to support renewal without significant cost. The useful life of a reacquired right recognised as an IA in a business combination is the remaining contractual period of the contract in which the right was granted and shall not include renewal periods.

• Amortisation begins when the IA is available for use and ceases at the earlier of the date that the IA is classified as held for sale (or included in a disposal group that is classified as held for sale) in accordance with HKFRS5 and the date that the IA is derecognised. Amortisation does not cease when the IA becomes idle or is retired from active use unless the IA is fully amortised.

• The amortisation charge is recognised in P/L unless another HKFRS requires that it be included in the cost of another asset.

• The residual value of an IA with a finite useful life shall be assumed to be zero unless:

• there is a commitment by a third party to purchase the IA at the end of its useful life; or

• residual value can be determined by reference to active market price; and it is probable that such a market will exist at the end of the lA's useful life.

• Amortisation method, resdiaul value and the amortisation period of an IA shall be reviewed at least at each financial year-end and, if expectations differ from previous estimates, the change(s) shall be accounted for prespectively (see HKAS8).

• An IA with indefinite useful life should not be amortised but, instead, subject to impairment test (apply HKAS36) annually, or whenever there is an indication that the IA may be impaired.

• The useful life of an IA with indefinite useful life shall be reviewed at the end of each reporting period to determine whether events and circumstances continue to support an indefinite useful life assessment for that asset.

• If change from indefinite to finite, the change

• should be accounted for as a change in an accounting estimate and hence it will be amortised prospectively over its remaining useful life.

• if indicator suggests that the IA is impaired - carry out an impairment test and recognise any impairment loss in accordance with HKAS36.

BILL YANG 2010 All rights reserved unless otherwise stated.

Billyfcca@yahoo.com

49

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HKICPA Final Examination - Module A Course Notes - June 2010

Recognition of Expenditure as an Expense

Expenditure on an IA item shall be recognised as an expense when it is incurred unless:

CD it forms part of the cost of an intangible asset that meets the recognition criteria; or

(f) the item is acquired in a business combination and cannot be recognised as an intangible asset. If this is the case, this expenditure (included in the cost of the business combination) shall form part of the amount attributed to goodwill at the acquisition date.

Following are examples of expenditure that is incurred to provide future economic benefits to an entity, but no IA or other asset is acquired or created that can be recognised:

• expenditure on start-up activities, unless this expenditure is included in the cost of an item of PPE (see HKAS16). Start-up costs may consist of establishment cost; preopening costs or pre-operating costs.

• expenditure on training activities.

• expenditure on advertising and promotional activities (including mail order catalogues).

• expenditure on relocating or reorganising part or all of an entity.

Expenditure on an IA item that was initially recognised as an expense shall not be recoqnlsed as part of the cost of an intangible asset at a later date.

BILL YANG 2010 All rights reserved unless otherwise stated.

Billyfcca@yahoo.com

50

HONG KONG

HKICPA Final Examination - Module A Course Notes - June 2010

12. HKAS32 FINANCIAL INSTRUMENTS: PRESENTATION [CLP Section 12 J

Financial Instruments [FI]

A contract that gives rise to a financial asset to one entity and a financial liability or equity instrument to another entit .

.... ..... .....

~1 F~·~~~a~:~:~~~al ~1 ~1 [_:_;b~~~~_~_~_! ~1 ~1 __ ~ln~.s~~~r~~.~~iW~e~n~ts~ .• __ ~

.... .... .....

FA is any asset that is:

• cash;

• an EI of another entity;

• a contractual right

~ to receive cash or another FA from another entity; or

~ to exchange FA or FL with another entity under conditions that are potentially favourable to the entity; or

• a ~l7tracti that will or may be settled in the entity's own EI and is:

~ a no~eriiatJxf!. for which the entity is or may be obliged to receive a variable number of the entity's own EI; or,

__ :J ~ '! \1\;\ \ .. n \' ~

~ a ~titre that will or may be settled other'. tha"l by the exchange of a fixed amount of cash or another FA for a fixed number of the entity's own EI.

For this purpose the entity's own EI do not include puttable FI classified as EI in accordance with HKAS32.16A and HKAS32.16B, FI that impose on the entity an obligation to deliver to another party a pro rata share of the net assets of the entity only on liquidation and are classified as EI in accordance with HKAS32.16C and HKAS32.16D, or FI that are contracts for the future receipt or delivery of the entity's own EI.

FL is any liability that is:

• a contractual obligation:

~ to deliver cash or another FA to another entity; or

~ to exchange FA or FL with another entity under conditions that are potentially unfavourable to the entity; or

~ a 'i:/J!Ijvative that will or may be settled other than by the exchange of a fixed amount of cash or another FA for a fixed number of the entity's own EI.

For this purpose the entity's own EI do not include puttable FI that are classified as EI in accordance with HKAS32.16A and HKAS32.16B, instruments that impose on the entity an obligation to deliver to another party a pro rata share of the net assets of the entity only on liquidation and are classified as EI in accordance with HKAS32.16C and HKAS32.16D, or FI that are contracts for the future receipt

or delive of the entit 's own EI. .

An EI is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities.

BILL YANG 2010 All rights reserved unless otherwise stated.

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HKICPA Final Examination - Module A Course Notes - June 2010

Classification of Fviriarwial

I nstrl:tfffentJ as Financial Liabilities

or ~quity Instsuments

Classification of FI issued

An issuer shall classify a FI (or its component parts), on initial recognition, as EI if only if 60th of the following conditions[jiJ'm~j-

ill The FI includes no contractual obligation:

• to deliver cash or another FA to another entity; or

• to exchange FA or FL with another entity under conditions that are potentially unfavourable to the issuer.

@ If the FI will or may be settled in the issuer's own EI, it is:

• a non-derivative that includes no contractual obligation for the issuer to deliver a variable number of its own EI; or

• a derivative that will be settled only by the issuer exchanging a fixed amount of cash or another FA for a fixed number of its own EI. For this purpose the issuer's own EI do not include FI that have all the features and meet the conditions described in paragraphs HKAS32.16A and HKAS32.168 or HKAS32.16C and HKAS32.6D, or FI that are contracts for the future receipt or delivery of the issuer's own EI.

As an exception, a FI that meets the definition of a FL is classified as an EI if it has all the features and meets the conditions in HKAS32.16A and HKAS32.168 or HKAS32.16C and HKAS32.6D.

Is the FI within the scope of puttable FI andobll

Is settlement of FI in cash and/or other FA?

....

Are the criteria in the puttable FI and obJ1galions arising 'on liquidation safi'sfied?

Is settlement of FI in cash and/or other FA either mandatory or at the option of the holder?

Can the derivative be settled other than by the exchange of a fixed amount of cash or another FA for a fixed number of its own EI?

Is, or may the issuer be, obliged 10 deliver a variable number of its Own EI?

Is the contingent event for settlement within the control of the issuer?

Does the issuer have discretion to avoid settlement in cash and/or other FA?

"

!

i

: ....

Is it remote that issuer will be required to settle in cash and/or other FA?

Equity instrument

Financialliabili ., J-

BILL YANG 2010 All rights reserved unless otherwise stated.

Billyfcca@yahoo.com

52

HONG KONG

HKICPA Final Examination - Module A Course Notes - June 2010

Puttable Financial Instrument [HKAS32.16A and HKAS32.16B]

Instruments that impose an obligation to deliver a pro-rata share of net assets only on liquidation [HKAS32.16C and HKAS32.16D]

Compound Financial Instrument

A puttable financial instrument is a FI that gives the holder the right to put the instrument back to the issuer for cash or another FA or is automatically put back to the issuer on the occurrence of an uncertain future event or the death or retirement of the instrument holder:

Puttable FI will be presented as equity only if all of the following criteria are met:

CD the holder is entitled to a pro-rata share of the entity's net assets on liquidation;

@ the FI is in the class of instruments that is the most subordinate and all instruments in that class have identical features;

® the FI has no other characteristics that would meet the definition of a FL;

@ the total expected cash flows attributable to the FI over its life are based substantially on the P/L, the change in the recognised net assets or the change in the fair value of the recognised and unrecognised net assets of the entity (excluding any effects of the instrument itself). P/L or change in recognised net assets for this purpose is as measured in accordance with relevant FRSs; and

® the entity must have no other instrument that has terms equivalent to @ above and that has the effect of substantially restricting or fixing the residual return to the holders of the p,Littable FI.

The criteria for equity classification for such instruments are the same as puttable instruments above except ® and @ do not apply.

Criterion ® does not apply because, if there is a component of the instrument that meets the definition of a liability (other than the right at liquidation itself), this will be recognised separately as a FL and the instrument will be presented as a compound instrument, i.e. with both liability and equity components.

Criterion @ does not apply because should any cash flows be paid to the holder of the instrument during the instrument's life, this will reduce the amount ultimately payable at liquidation,

The components of compound FI should be recognised and measured separately:

Proceeds from issuance of compound FI Liability component

Equity component

xx (CD{

~-

CD first, determine the carrying amount of the liability component by measuring the fair value of a similar liability (including any embedded non-equity derivative features) that does not have an associated equity component; and

® then, the carrying amount of the equity component represented by the option to convert the instrument into ordinary shares is determined by deducting the fair value of the liability component from the fair value of the compound FI as a whole.

The split is made at issuance of the FI and not revised for subsequent changes in market interest rates, share prices, or other event that changes the likelihood that the conversion option will be exercised.

BILL YANG 2010 All rights reserved unless otherwise stated.

Billyfcca@yahoo.com

53

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HKICPA Final Examination - Module A Course Notes - June 2010

Interests, Dividends, Gains and Losses on Fls

Offsetting of Financial Asset and Financial Liability

Treasury Shares

Items relating to FI that are classified as:

• FL ~ account for as finance costs in PIL

• EI ~ account for distributions of earnings in SeE

General rule

~ Do not off-set Fl's in SFP - present them separately.

Exception

~ A FA and FL should be offset and shown as a net amount in SFP only if both of the following are met:

• there is a legally enforceable right of set-off, and,

• there is an intention to settle on a net basis, or to realise the asset and settle the liability simultaneously.

If an entity reacquires its own EI, those instruments ('treasury shares') should be deducted from equity.

Equity: Ordinary share capital xx

Other reserves xx

Retained earnings xx

xx

Treasury shares [Dr. Treasury shares and Cr. Cash] ~

xx

The amount of treasury shares held is disclosed separately either in SFP or in- the notes, in accordance with HKAS1.

No GIL should be recognised in SCion the purchase, sale, issue or cancellation of an entity's own EI.

BILL YANG 2010 All rights reserved unless otherwise stated.

Billyfcca@yahoo.com

54

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HKICPA Final Examination - Module A Course Notes - June 2010

Examples of Classification of FI issued

Examples of Classification of puttable FI issued

Ordinary share Equity
Perpetual preferred share Equity
Preferred share mandatorily redeemable or puttable regardless of the way the Liability
amount is determined and form of settlement (cash or shares)
Instrument that "converts" mandatorily into a variable number of ordinary share Liability
with a fixed monetary amount (e.g. share-settled debt)
Written call option, warrant, share-settled stock appreciation right (SAR), and Equity1
employee stock option settled with shares
Net-cash-settled written call option and cash SAR Liability
Warrant to purchase an ordinary share for $1 when assuming the fair value of the Equity
ordinary share is substantially higher than $1
Physically, net-cash-settled or net-share-settled forward purchase contract at a Liability or
fixed price Asset
Prepaid forward purchase contract for a fixed number of shares (or a note Contra-
receivable for a fixed number of shares) equiti
Physically, net-cash-settled or net-share-settled written put option Liability
Convertible debt for fixed number of shares Equity and
liability
Callable ordinary share at fixed price Equity
Callable preferred share at fixed price Equity
Preferred share convertible into a fixed number of ordinary shares Equity~
Preferred share puttable, callable, and convertible Liability
Debt indexed to shares (e.g. convertible debt for which the entire conversion Liability
value is settled in cash) .
Variable share forward sales contract issued in conjunction (separately) with
ordinary share that is puttable at a fixed price (assumes the instruments meet Liabilities''
the linkage criteria and are combined and accounted for as one freestanding
instrument. 1. Classification of the instrument (or component of that instrument) as equity assumes that the instrument will be settled only by the issuer exchanging a fixed amount of cash for a fixed number of its own equity instruments.

2. Classification as equity assumes that the preferred share includes no other contractual obligations.

3. These instruments would be accounted for as two separate instruments in accordance with HKAS32. Classification of the puttable share as a liability assumes that it does not have all the features or meet the conditions to be classified as equity.

Share puttable throughout its life at fair value, that is also the most subordinate,
does not contain any other obligation, with discretionary dividends based on Equity
profits of the issuer. ;
Share puttable at fair value, that is not the most subordinate. Liability
Share puttable at fair value only on liquidation, that is also the most subordinate, Liability
but contains a fixed non-discretionary dividend. and equity
Share puttable at fair value only on liquidation, that is also the most subordinate,
but contains a fixed discretionary dividend and does not contain any other Equity
obligation.
Any of the instruments described above issued by a subsidiary held by non- Liability
controlling parties, in the CoFS. BILL YANG 2010 All rights reserved unless otherwise stated.

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55

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HKICPA Final Examination - Module A Course Notes - June 2010

13. HKAS39 FINANCIAL INSTRUMENTS: RECOGNITION AND MEASURMENT

HKFRS9 FINANCIAL INSTRUMENTS [ CLP Section 12 J

Main changes

to HKAS39 under HKFRS9

• HKFRS9 is part of the wider project to replace HKAS39.

• HKFRS9 applies only to financial assets, and not to financial liabilities, within the scope of HKAS39. The changes in classification and measurement of financial liabilities are planned for in the later project.

• A financial asset under HKFRS9 is measured at amortised cost if: (i) the asset is held within a business model whose objective is to hold assets in order to collect contractual cash flows; and (ii) the contractual terms of the financial asset give rise, on specified dates, to cash flows that are solely payments of principal and interest. All other financial assets are measured at fair value.

• HKFRS9 contains an option to classify financial assets that meet the amortised cost criteria as at fair value through profit or loss if doing so eliminates or significantly reduces an accounting mismatch. Similar designation for host contract that contains embedded derivative is no longer allowed under HKFRS9 (see below). The designation at fair value through profit or loss will continue to be irrevocable under HKFRS9.

• HKFRS9 removes the requirement to separate embedded derivatives from financial asset hosts. It requires a hybrid contract to be classified in its entirely at either amortised cost or fair value. Most embedded derivatives introduce variability to cash flows which usually be measured at fair value in their entirety. There is no change to the accounting for embedded derivatives with host contracts that are not financial assets within the scope of HKAS39, such as financial liabilities and non-financial host contracts.

• HKFRS9 classification principles indicate that all equity investments should be measured at fair value. However, management has an option to present in other comprehensive income fair value gains and losses on equity investments that are not held for trading. Such designation is available on initial recognition on an instrumentby-instrument basis and is irrevocable. There is no subsequent recycling of fair value gains and losses to profit or loss; however, dividends from such investments will continue to be recognised in profit or loss,

• HKFRS9 removes the cost exemption for investments in unquoted equities and derivatives on unquoted equities but provides on guidance on Ilrnlted circumstances where cost of such an instrument may be an appropriate estimate of fair value.

• Impairment issues need only to be addressed for financial assets that are measured at amortised cost as a result of the above changes.

• HKFRS9 prohibits reclassifications except in rare circumstances when the business model changes; in this case, the entity is required to reclassify affected financial assets prospectively. No other reclassifications are permitted.

• HKFRS9 contains specific guidance for contractually linked instruments that create concentrations of credit risk (which is often the case with investment tranches in a securitisation) and on classifying non-recourse financial assets.

• The effective date of the new classification and measurement is 1 January 2013; early application is permitted. HKFRS9 should be applied retrospectively; however, if adopted before 1 January 2012, comparative periods do not need to be restated. In addition, entities adopting before 1 January 2011 are allowed to designate any date between then and the date of issuance of HKFRS9, as the date of initial application that will be the date u on which the classification of financial assets will be determined.

BILL YANG 2010 All rights reserved unless otherwise stated.

Billyfcca@yahoo.com

56

HONG KONG

HKICPA Final Examination - Module A Course Notes - June 2010

Recognition of Financial Assets (HKAS39)

Overview of Classification and Measurement of Financial Assets (FA) (HKFRS9)

An entity shall recognise a FA in its SFP when, and only when, the entity becomes a party to the contractual provisions of the instrument.

FA within the scope of HKAS39

f'" .... ..: ...... , ........ _ .... _ ... _-

Is the asset held within a business model whose objective is to hold assets in order to collect contractual cash flows?

(6S"\ r '. \
At fair value At fair value. At fair value
plus directly Directly attributable plus directly
attributable
attributable transaction costs is transaction
transaction costs recognised in P/L costs

-'E At amortised cost
C II) At fair value At fair value
II) E with GIL recognised
::l II) with changes in with changes in fair
C" ... in PIL through .; l. \
II) ::l fair value (GIL) value (GIL)
III III amortisation
.Qra recognised in OC/. recognised in PIL.
::l II) process.
mE
-
C
GI Test for impairment
E
.; Not applicable Not applicable (see HKAS39) when
Q. objective prevails
.s I I -,

ls FA an "equity investment?

Are cash flows solely payments of principal and interest on specified dates?

~-,

I

~------------------I

I I

Is investment held for trading purpose?

I I I

_,

FAatACTPL

'FA at FVOCI

HKFRS9 requires investments in unquoted equity instruments to be measured at fair value. However, HKFRS9 also notes that, in limited circumstances, cost may be an appropriate estimate of fair value. HKFRS9 provides a list of indicators that cost might not be representative of fair value.

BILL YANG 2010 All rights reserved unless otherwise stated.

Billyfcca@yahoo.com

57

HONG KONG

HKICPA Final Examination - Module A Course Notes - June 2010

Financial Asset at Amortised Cost with amortised cost adjustment recognised in profit or loss (ACTPL) (HKFRS9)

Financial Asset at

Fair Value with changes in fair value recognised in profit or loss (FVTPL) (HKFRS9)

Financial Asset at

Fair Value

with changes in fair value recognised

in other comprehensive income (FVOCI) (HKFRS9)

• A FA is measured at amortised cost (AC) if both of the following conditions are met:

CD the asset is held within a business model whose objective is to hold assets in order to collect contractual cash flows (i.e. CCCF).

@ the contractual terms of the FA give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding (SPPI).

If a FA does not meet both of these conditions, then it is measured at fair value.

A FA qualified as amortised cost accounting may alternatively be designated and measured at FVfPL if such designation eliminates or significantly reduces a measurement or recognition inconsistency (an "accounting mismatch") that otherwise would arise from measuring assets or liabilities, or recognising gains or losses on them, on different bases. The election is available only on initial recognition of the asset and is irrevocable.

A GIL on a FA that is measured at amortised cost and is not part of a hedging relationship shall be recognised in PIL when the FA is derecognised, impaired or reclassified, and through the amortisation process.

Examples of instruments meeting the ACTPL requirements (it is assumed that the objective of the entity's business model is to hold the FAs to CCCF):

~ an instrument with a stated maturity date where the cash flows are entirely fixed, or where interest is at a variable rate or a rate which is a combination of both.

~ a bond with a stated maturity date where principal and interest are linked (on a non-leveraged basis) to an inflation index of the currency in which the FI is issued.

~ a variable rate instrument with a stated maturity date that permits the borrower to choose the market interest rate on an ongoing basis.

~ a bond with a stated maturity date which pays a variable market interest rate subject to a cap.

~ a full recourse loan secured by collateral.

• A FA is measured at fair value (FV) with changes in fair value recognised in PIL if either of the following applies:

CD the FA meets AC criterion but designated as FVfPL.

@ the FA does not meet AC criterion and:

• is not an investment in equity instrument; or

• is an investment in equity instrument that is held for trading; or

• is an investment in equity instrument that is not held for trading and FVOCI option is not elected.

• A GIL on a FA that is measured at FV and is not part of a hedging relationship shall be recognised in P/L unless the FA is an investment in an equity instrument and the entity has elected to present GIL on that investment in OCI.

• An entity, at initial recognition only, may elect to present changes in the FV of an investment in an equity instrument that is not held for trading in OCI.

• The election is irrevocable and may be made on an instrument-by-instrument basis.

• Dividend income on investment in equity instrument classified as FVOCI is recognised in PIL in accordance with HKAS18 unless the dividend clearly represents a repayment of part the cost of the investment. In this case, the dividend is recognised in OCI.

• Any amounts recognised in OCI are not recYGled to"iitOon disposal of the investment or in any other circumstances, although they may be reclassified within equity. Accordin I , there is no need for im sirment testin for these FAs.

Billyfcca@yahoo.com

BILL YANG 2010 All rights reserved unless otherwise stated.

58

HONG KONG

HKICPA Final Examination - Module A Course Notes - June 2010

Held for Trading (HFT) (HKAS39)

Derivatives (HKAS39)

Business Model for managing Financial Assets (HKFRS9)

A FAIFL is held for trading if:

CD it is acquired or incurred principally for the purpose of selling or repurchasing it in the near term;

@ on initial recognition it is part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of short-term profit-taking; or

Q) it is a derivative (except for a derivative that is a financial guarantee contract or a dsslqnated and effective hedging instrument).

A derivative is a FI or other contract within the scope of HKAS39 with all three of the following characteristics:

CD its value changes in response to the change in an underlying variable;

@ it requires no initial net investment or negligible initial net investment relative to other types of contracts that would be expected to have a similar response to changes in market factors; and

Q) it is settled at a future date.

All derivatives (except for a derivative that is a financial guarantee contract or a designated and effective hedging instrument) which should be measured at FVTPL.

• An entity's business model for managing FAs:

~ is determined by the entity's key management personnel.

~ does not depend on management's intentions for individual instruments (it is based on a higher level of aggregation).

• An entity may have separate business models for portfolios of investments that are managed in different ways (for example, an entity may hold one portfolio of investments which are managed in order to CCCF and hold. another portfolio of investments which are managed in order to trade to realise FV changes);

• An entity's business model could be to hold FAs to CCCF even when sales of those assets occur (l.e. an entity need not hold all instruments in a portf~lio to maturity). For example, an entity may sell an investment which no longer meets its investment policy or when the entity needs to fund some capital expenditure. Judgement is needed in these situations as, if more than infrequent sales are made, an entity will need to assess whether such sales are consistent with an objective of CCCF.

• FA acquired with incurred losses is not in itself inconsistent with a held to CCCF business model. For example, an entity may have a business model to acquire impaired loans and then CCCF by chasing the debtors for payment.

• Active management of a portfolio in order to realise FV changes is not consistent with a held to CCCF business model. Similarly, FAs meet the definition of HFT or whose performance is evaluated on a FV basis is not consistent with a held to CCCF business model.

• HKFRS9 acknowledges that changes to an entity's business model are expected to be very infrequent.

• FAs that meet the definition in HKAS39 of held for trading or whose performance is managed on a FV basis, are not held to CCCF.

BILL YANG 2010 All rights reserved unless otherwise stated.

Billyfcca@yahoo.com

59

HONG KONG

HKICPA Final Examination - Module A Course Notes - June 2010

Contractual Cash •

Flows that are

solely Payments

of Principal and •

Interest on the principal amount outstanding (SPPI) • (HKFRS9)

In contrast to the initial business model test, this second test is applied on an individual asset basis, and not on a portfolio basis.

Interest is defined as: " ... consideration for the time value of money and for the credit risk associated with the principal amount outstanding during a particular period of time".

Leverage is not consistent with the SPPI criterion. Leverage is described as increasing the variability of the contractual cash flows such that they do not have the economic characteristics of interest. HKFRS9 lists freestanding swaps, options and forwards as instruments that contain leverage.

• Contractual terms that permit the issuer to prepay before maturity, the holder to put the FA back to the issuer before maturity or either party to extend the term of a FA meet the SPPI criterion only if:

~ the feature is not contingent on future events or, if it is, it protects:

• the holder against a credit deterioration or change in control of the issuer; or

• the holder or the issuer against changes in relevant taxation or law; or

~ in the case of a prepayment or put feature, the prepayment amount substantially represents unpaid principal and interest, but may include reasonable additional

compensation for early termination: or .

~ in the case of an extension option, it results only in contractual cash flows during the extension period that are SPPI.

Any other contractual term that changes the timing or amount of cash flows does not meet the SPPI criterion unless it is a variable interest rate that represents consideration for the time value of money and credit risk. The credit spread element may be determined at inception and hence may be fixed.

Examples when the SPPI criterion is not met:

• a bond convertible into equity of the issuer. The SPPI criterion is not met as the return on the bond is not just consideration for the time value of money and credit risk but also reflects the value of the issuer's equity.

• an inverse floating interest rate loan. The SPPI criterion is not met as interest has an inverse relationship to market rates and so does not represent consideration for the time value of money and credit risk.

• a perpetual instrument that is callable at any time by the issuer at par plus accrued interest, but for which interest is only payable if the issuer remains solvent after payment and any deferred interest does not accrue additional interest. The SPPI criterion is not met as the issuer may defer payments and additional interest does not accrue on the amounts deferred. As a result the holder is not entitled to the consideration for the time value of money and credit risk.

• An instrument with interest payments indexed to the debtor's performance (e.g., the debtor's net income) or an equity index. The SPPI criterion is not met as a return linked to performance or an equity index is not consideration for the time value of money and credit risk.

• An investment in equity instrument does not give rise to cash flows that are SPPI (in addition, the dates of cash flows usually are not specified).

• A derivative asset does not have cash flows that SPPI.

BILL YANG 2010 All rights reserved unless otherwise stated.

Billyfcca@yahoo.com

60

HONG KONG

HKICPA Final Examination - Module A Course Notes - June 2010

Contractual Cash •

Flows that are

solely Payments

of Principal and Interest on the

principal amount •

outstanding (SPPI) (HKFRS9)

continued ...

Classification of a FA is not affected by a contractual term that is non-genuine. HKFRS9 clarifies that a cash flow is not genuine if it will affect contractual cash flows only on the occurrence of an event which is extremely rare, highly abnormal and very unlikely to occur.

For FA with contractual term that limits the lender's claim to specific assets or to the cash flow from specified assets of the borrower, the lender is required to 'look through' to the particular underlying assets (which can be FAs or non-FAs) or cash flows, to assess whether the SPPI criterion is met. If a FA contains terms which give rise to other cash flows or limit the cash flows in a manner which is inconsistent with the payment of principal and interest, the FA fails to meet the SPPI criterion.

• FAs that are subordinated relative to other FAs may still have contractual cash flows that are SPPI as long as the subordination does not affect the contractual rights to the holders of the subordinated assets to unpaid principal and other amounts due. For example, a borrower may have issued collateralised debt which, in the event of bankruptcy, would give the holder of collateralised debt priority over other lenders; but this arrangement would not affect the contractual rights of other lenders to the amounts due to them.

• FAs may include arrangements where payments to holders of FAs are prioritised through multiple subordinated interests (i.e. tranches) in a 'waterfall' structure where payments to senior debt holders are prioritised over those to other tranches i.e. the I holders of a tranche have the right to payments of principal and interest on the principal amount outstanding only if the issuer generates sufficient cash flows to satisfy the higher-ranking tranches. A tranche meets the SPPI criterion only if all the following conditions are met:

~ the contractual terms of the tranche itself have only SPPI characteristics;

~ the underlying pool of financial instruments:

• contains one or more instruments that meet the SPPI criterion

• may also include instruments that:

reduce the cash flow variability of other instruments (such as an interest rate cap or floor) as long as, when combined with the other instruments, the resulting cash flows are SPPI; or

align the cash flows of tranches with the cash flows of the pool of underlying instruments to address differences in (and only in) fixed or floating interest rates, the currency in which the cash flows are denominated or the timing of the cash flows.

~ the credit risk exposure of the underlying pool of financial instruments inherent in the tranche (and therefore the tranche itself) is equal to or lower that the credit risk exposure of the underlying pool of financial instruments.

A holder of a tranche is required to 'look through' a structure until the 'underlying pool' has been identified. This might require the tracing of transactions through a number of linked entities. For example, if an entity invests in contractually-linked notes issued by ABC whose only asset is an investment in contractually-linked notes issued by XYZ, the entity looks through to the assets of XYZ in performing the assessment.

If an entity is not able to make an assessment based on the above criteria, then it measures its investment in the tranche at FV.

BILL YANG 2010 All rights reserved unless otherwise stated.

Billyfcca@yahoo.com

61

HONG KONG

HKICPA Final Examination - Module A Course Notes - June 2010

Overview of accounting for Hybrid Contracts and Embedded Derivatives (HKAS39/HKFRS9)

brid contract contains a host that is a FA within the sco e of HKFRS9?

Apply HKFRS9 to the entire hybrid contract i.e. aration of embedded derivative from host.

An embedded derivative is a component of a hybrid (combined) contract that also includes a non-derivative host contract - with the effect that some of the cash flows of the combined contract vary in a way similar to a stand-alone derivative.

A derivative that is attached to a financial instrument but is contractually transferable independently of that instrument, or has a different counterparty, is not an embedded derivative, but a separate financial instrument.

For hybrid contract contains a host (i.e. financial asset) that is within the scope of . HKFRS9, the entire hybrid contract, including all embedded features, is assessed for classification under HKFRS9.

For hybrid contract contains a host that is not within the scope of HKFRS9:

~ The embedded derivative should be separated from the host contract and accounted for as a derivative under HKAS39 if, and only if

o the embedded derivative would meet the definition of a derivative if it was freestanding;

e the economic characteristics and risks of the embedded derivative are not closely related to the economic characteristics and risks of the host contract;

Q the hybrid contract is not measured at FVTPL; and

o the host is outside the scope of HKFRS9 (i.e, a non-FA).

~ Separated embedded derivative should initially be measured at FV (which usually will be zero for a forward derivative and something other than zero for option derivative) with changes in FV recognised in P/L.

~ Host should be accounted for under HKAS39 if it is a FL, and in accordance with other appropriate HKFRSs if it is not a FL.

~ Account the hybrid contract at FVTPL in its entirely if separable embedded derivative is not measurable separately either at acquisition or at the end of subsequent reporting period.

BILL YANG 2010 All rights reserved unless otherwise stated.

Billyfcca@yahoo.com

62

HONG KONG

HKICPA Final Examination - Module A Course Notes - June 2010

Issues

on Fair Value Measurement (HKAS39)

• Fair value (FV) is the amount for which an asset could be exchanged or a liability settled, between knowledgeable, willing parties in an arm's length transaction.

• The presumption that an entity is a going concern without any intention or need to liquidate, or to undertake a transaction on adverse terms underpins the definition of FV. FV is not therefore the amount that an entity would receive or pay in a forced transaction, involuntary liquidation or distress sale. However, FV does reflect the credit quality of the instrument.

• HKAS39 provides the following hierarchy for determining FV of instruments:

~ Active market - use quoted market price: The existence of published price quotations in an active market is the best evidence of FV and, when they are available, they must be used to measure FV.

The phrase "quoted in an active market" means that quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service or regulatory agency. Those prices represent actual and regularly occurring market transactions on an arm's length basis. The price can be taken from the most favourable market readily available to the entity even if that was not the market in which a transaction would occur.

The appropriate quoted market price for an asset held or a liability to be issued is the current bid price and for an asset to be acquired or liability held, is the asking price.

When an entity has assets and liabilities with offsetting risk positions, it may use mid-market prices and apply the bid or asking price to the net open position as appropriate.

When current bid prices are unavailable, the price of the most recent transaction provides evidence of the current FV.

~ No active market - use valuation techniques. The objective of a valuation technique is to establish what the transaction price would have been on the measurement date in an arm's length transaction motivated by normal business considerations.

Valuation techniques that are well established in financial markets include reference to a transaction that is substantially the same with adjustment for the differences, discounted cash flows and option pricing models. Normally the amount paid or received for a financial instrument is the best estimate of FV at inception. However, where all data inputs to a valuation technique are obtained from observable market transactions, the resulting calculation of FV can be used for initial reco9_nition..

BILL YANG 2010 All rights reserved unless otherwise stated.

Billyfcca@yahoo.com

63

HONG KONG

HKICPA Final Examination - Module A Course Notes - June 2010

Reclassification •

of Financial

Assets (HKAS39IHKFRS9)

Reclassification of FAs after initial recognition is prohibited, unless an entity fundamentally changes its business model for managing its FA in which case reclassification is required.

• The circumstances in which reclassification is required are extremely restrictive, with fundamental changes in the business model being expected to be very infrequent. They are determined by the senior management of the entity as a result of internal or external changes and are" demonstrable" to external parties.

• Examples of circumstances which are not changes in business model:

~ a change in intention related to particular FAs (even in circumstances of significant changes in market conditions);

~ a temporary disappearance of a particular market for FAs; and

~ a transfer of FAs between parts of an entity with different business models.

• Examples of circumstances representing a change in business model:

~ an entity holds a portfolio of commercial loans for sale. Subsequently it acquires a company whose business model is to hold similar loans in order to collect contractual cash flows and the commercial loans originally held for sale are transferred to the acquired company to be managed together with the company's other loans.

~ an entity decides to shut down part of its business.

• If an entity determines that its business model has changed, then all affected FAs are reclassified from the first day of the next reporting period (reclassification date). No prior periods are restated.

• For reclassification of FA with AC measurement to FVmeasurement, it is measured at FV at the reclassification date and any GIL arising from the difference between AC and the FV is recognised in PIL.

• For reclassification of FA with FV measurement to AC measurement, the FVat the reclassification date becomes the new carrying amount.

Bi/lyfcca@yahoo.com

BILL YANG 2010 All rights reserved unless otherwise stated.

64

HONG KONG

HKICPA Final Examination - Module A Course Notes - June 2010

Impairment and Uncollectibility of Financial Assets at Amortised

Cost (AC) (HKAS39)

• At the end of each reporting period, an entity shall assess whether there is any objective evidence that a FA or group of FAs measured at AC is impaired.

• Objective evidence includes observable data that comes to the attention of the holder of the asset about the following loss events:

~ significant financial difficulty of the issuer or obligor;

~ a breach of contract, such as a default or delinquency in interest or principal payments;

~ the lender, for economic or legal reasons relating to the borrower's financial difficulty, granting to the borrower a concession that the lender would not otherwise consider;

~ it becoming probable that the borrower will enter bankruptcy or other financial reorganisation.

~ etc.

• An entity first assesses whether objective evidence of impairment exists individually for FAs that are individually significant, and individually or collectively for FAs that are not individually significant. If an entity determines that no objective evidence of impairment exists for an individually assessed FA, whether significant or not, it includes the asset in a group of FAs with similar credit risk characteristics and collectively assesses them for impairment. FAs that are individually assessed for impairment and for which an impairment loss is or continues to be recognised are not included in a collective assessment of impairment.

• If there is objective evidence that an impairment loss on FA at AC has been incurred, the amount of the loss is measured as the difference between:

Q) the asset's carrying amount; and

@ the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the FA's original effective interest rate (Le. the effective interest rate computed at initial recognition).

The carrying amount of the FA at AC shall be reduced either directly or through use of an allowance account.

• The amount of any loss shall be recognised in PIL.

• If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised (such as an improvement in the debtor's credit rating), the previously recognised impairment loss shall be reversed. The reversal shall not result in a carrying amount of the FA that exceeds what the AC would have been had the impairment not been recognised at the date the impairment is reversed. The amount of the reversal shall be recognised in PIL.

BILL YANG 2010 All rights reserved unless otherwise stated.

Billyfcca@yahoo.com

65

HONG KONG

HKICPA Final Examination - Module A Course Notes - June 2010

I

Has the entity assumed an obligation to pay the cash flows from the FA that meets the conditions in HKAS39?

An obligation is assumed if the entity:

• has no obligation to pay amounts to the eventual recipient unless it collects equivalent amounts on the original FA,

• is prohibited from selling or pledging the original FA (other than as security to the eventual recipient), and

• has an obligation to remit those cash flows without material delay.

1-+{L_ __ _:_H:.::a:.::s...:t;,_:_he;:;_;:e_::n",tit:J,ty_;t:;_ra=.;n;,;,;s:::.;fi;,::e_::'I':...:e:..:d:....s::;u::;b::;s::;t:=a_::n:.::t/_:::·a:..:/IyoL..::a:..:.:/I_;r_::is::;k:::s...:a::,n:.::d_;r_:::e_::w:.::a::..rd:::.;s::_:?'----- _ __Jj

,

Derecognition

r i

No derecognition

• Derecognise FA.

• The difference between the FA's carrying amount (measured at date of derecognition) and the consideration received shall be recognised in P/L.

• Recognise either a servicing liability(asset) at FV for the servicing contract if the fee to be received is not expected to compensate the entity adequately (is expected to be more than adequate compensation) for performing the servicing.

• If an entity has neither transferred nor retained substantially all risks and rewards but has transferred control, it derecognises the FA and recognises separately as assets or liabilities any rights and obligations created or retained in the transfer.

• Treat as collaterallsed borrowing - recognise a FL for conslderatlon received for the transferred FA.

• 1.1 the transferee has the right to sell or repledge the FA, 'it is presented separately in the SFP.

• In subsequent-period. the entity recognises. income relating to the transferred FA and any expense incurred on the FL.

Recognise FA to the extent of its continuing involvement

• Recognise part of the FA which represents the maximum amount of the entity's exposure to that particular FA or its previous carrying amount, if lower.

• The FA and the associated FL are measured on a basis that reflects the rights and obligations that the entity has retained:

~ rights and obligations retained by the entity are measured at amortised cost if the FA is previously measured at amortised cost; or

~ rights and obligations retained by the entity are measured at FV if the FA is measured at FV.

BILL YANG 2010 All rights reserved unless otherwise stated.

Billyfcca@yahoo.com

66

HONG KONG

HKICPA Final Examination - Module A Course Notes - June 2010

Recognition of Financial Liabilities (HKAS39)

Financial Liability at Fair Value through P/L (FVTPL) (HKAS39)

Financial Guarantee Contract (FG) (HKAS39)

De-recognition of Financial Liabilities (HKAS39)

An entity shall recognise a FL in its SFP when, and only when, the entity becomes a party to the contractual provisions of the instrument.

A FL at FVTPL is a FL that meets either of the following conditions:

• it meets the definition of held for trading.

• upon initial recognition it is designated by as at FVTPL. Designation may be made only if.

~ it is a contract contains one or more embedded derivatives, unless:

• the embedded derivative(s) does not significantly modify the cash flows of the host contract; or

• it is clear with little or no analysis that HKAS39 would prohibit the separation of the embedded derivative(s) such as a prepayment option embedded in a loan that permits the holder to prepay the loan for approximately its amortised cost.

~ when designation will result in more relevant information, because either:

• it eliminates or significantly reduces an accounting mismatch arising from measuring assets or liabilities or recognising the gains and losses on them on different bases; or

• a group of FLs or FAs and FLs is managed and its performance is evaluated on a FV basis, in accordance with a documented risk management or investment strategy, and information about the group is provided internally on that basis to the entity's key mana_gement personnel (as defined in HKAS24).

FG is a contract that requires the issuer to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payment when due in accordance with the original or modified terms of a debt instrument.

A FL shall be derecognised from SFP when, and only when, it is extinguished l.e.:

CD when the obligation specified in the contract is discharged or cancelled or expired.

<V when an exchange between an existing borrower and lender of debt instruments with substantially different terms.

} The original FL is extinguished and a new FL should be recognised.

,

® when a substantial modification of the terms of an existing FL or a part of it

BILL YANG 2010 All rights reserved unless otherwise stated.

Billyfcca@yahoo.com

67

HONG KONG

HKICPA Final Examination - Module A Course Notes - June 2010

An Overview

of the Classificatio and Measurement of Financial Liabilities (HKAS39)

) II '-

I l ,

r-{~" ~I~s~F~L~a~d~e~rI~·va~t~w~~~?---------------------JJ

,

~ r Is FL issued with trading intent or part of portfolio with recent actual pattern of

~~ ~s~h~o~rt~t~e~rm~.~PJro~f,~it~-t~ak~i~n~Q?~,-- ~

,

~L_ ~ls~F~L~de~s~~~n~a~te~d~a~s~F~VT~P~L~?-------------- __ --J

,

Is FL a FG or commitment to provide loan at a below-market interest rate?

Is FL recognised due to a transfer of FA does not qualify for derecoenltion?

Is FL recognised when the contlnuinq Involvement applies?

FL at amortised cost

• initially, measure FL at FVBR less transaction cost.

• tbJlreafter, measure FL at A CTeL. ~ Up.

• initially, measure FL at FVBR (transaction cost is recognised in P/L).

Associated Fl of a transferred FA accounted for using the continuing involvement approach

• initially, measure FL at FVBR minus transaction cost.

• thereafter, measure FL at:

~ ACTPL of the rights and obligations retained, if the transferred FA is measured at ACTPL.

~ FV of the rights and bbligati0hs retained when measured on a stand-alone basis, if the transferred FA is measured at FV,

Associated FL of a transferred FA failed the derecognition test

• initially, measure FL at FVBR minus transaction cost.

• thereafter, measure FL at balance after recognizing any expense incurred on the FL.

FG or commitment to provide a loan at a below-market interest rate

• initially, measure FL at FVBR minus transaction cost.

• thereafter, measure FL at the higher of:

~ the amount initially recognised less, when appropriate, cumulative amortisation recognised in accordance with HKAS18; and

~ the amount determined in accordance with HKAS37.

FL at FVfPL

• thereafter, measure FL at FVTPL.

=

BILL YANG 2010 All rights reserved unless otherwise stated.

Billyfcca@yahoo.com

68

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