Financial Reporting Update: Nelson Lam Nelson Lam 林智遠林智遠

Financial Reporting Update
18 April 2009
Nelson Lam 林智遠

MBA MSc BBA ACA ACS CFA CPA(Aust.)
CPA(US) FCCA FCPA(Practising) MSCA
© 2008-09 Nelson Consulting Limited 1
Effective for 2008 Dec. Year

Year--End
Selected new interpretations and amendments to Effective for periods
HKFRSs issued in 2007 to 2008 beginning on/after
• Amendments to HKAS 39 and HKFRS 7 Reclassification of ¾ Date back to
Financial Assets 1 Jul
Jul. 2008
• HK(IFRIC )11 HKFRS 2 – Group and Treasury Share ¾ 1 Mar.2007
Transactions
• HK(IFRIC )12 Service Concession Arrangements ¾ 1 Jan. 2008
• HK(IFRIC) 14 HKAS 19 —The Limit on a Defined Benefit Asset, ¾ 1 Jan. 2008
Minimum Funding Requirements and their Interaction
Updated from HKICPA, “HKFRS Update”, 8 Jan. 2009

1
Year--End
• Amendments to HKFRS 2 Vesting Conditions and Cancellations ¾ 1 Jan. 2009
• HKFRS 8 Operating Segments ¾ 1 Jan. 2009
• HKAS 1 (Revised) Presentation of Financial Statements ¾ 1 Jan. 2009
• HKAS 23 (Revised) Borrowing Costs ¾ 1 Jan. 2009
• Amendments to HKFRS 1 and HKAS 27 Cost of an Investment in ¾ 1 Jan. 2009
a Subsidiary, Jointly Controlled Entity or Associate
• Amendments to HKAS 32 and HKAS 1 Puttable Financial ¾ 1 Jan. 2009
Instruments and Obligations Arising on Liquidation
• HK(IFRIC) 13 Customer Loyalty Programmes ¾ 1 Jul. 2008
• HK(IFRIC) 15 Agreements for the Construction of Real Estate ¾ 1 Jan. 2009
• HK(IFRIC) 16 Hedges of a Net Investment in a Foreign Operation ¾ 1 Oct. 2008
• Annual improvements to HKFRSs ¾ 1 Jan. 2009
• HK(IFRIC) 18 Transfers of Assets from Customers ¾ 1 Jul. 2009 (trans. date)
• Amendments to HKFRS 7 Improving Disclosure about Financial ¾ 1 Jan. 2009
Instruments
Effective after 2009 Dec. Year

Year--End
• HKFRS 1 (Revised) First-time Adoption of HKFRS ¾ 1 Jul. 2009
• HKAS 27 (Revised) Consolidated and Separate Financial ¾ 1 Jul. 2009
Statements
• HKFRS 3 (Revised) Business Combination ¾ 1 Jul. 2009
• Amendments to HKAS 32 and HKAS 1 Puttable Financial ¾ 1 Jul. 2009
• HK(IFRIC) 17 Distributions of Non-cash Assets to Owners ¾ 1 Jul. 2009

2
Today’s Agenda
All New and Amended HKFRSs and

Interpretations for 2008 Dec. Year-End
Year End
Selected Amendments
for 2009 Dec. Year-End
Selected Amendments
Year-End
End
Global Trend and Fair Value Debate
Today’s Agenda
All New and Amended HKFRSs and

Interpretations for 2008 Dec. Year-End
Year End
3
Year--End
• Amendments to HKAS 39 and HKFRS 7 Reclassification of ¾ Date back to
Financial Assets 1 JJul.
l 2008
• HK(IFRIC )11 HKFRS 2 – Group and Treasury Share ¾ 1 Mar.2007
Transactions
• HK(IFRIC )12 Service Concession Arrangements ¾ 1 Jan. 2008
• HK(IFRIC) 14 HKAS 19 —The Limit on a Defined Benefit Asset, ¾ 1 Jan. 2008
Minimum Funding Requirements and their Interaction

Reclassification of Financial Assets

(Amendments to HKAS 39 and HKFRS 7)
4
•Measurement
Financial Assets – Reclassification
Reclassification
FA at FV
at Fair Value An entit
entity shall NOT reclassify
reclassif a financial
through P/L instrument into or out of the fair value through
profit or loss category while it is held or
AFS financial at Fair Value
assets
issued.
at Cost
Loans and
receivables at Amortised Cost •Not described in IAS 39 but, implicitly, it is
not feasible to reclassify a financial into or out
HTM of loans and receivables
investments at Amortised Cost
•Measurement
Reclassification
FA at FV
at Fair Value An entit
entity
From shall2008
1 July NOT(issued
reclassif
reclassify a financial
in Oct 2008) ……
through P/L instrument into or out of the fair value through
An entity: profit or loss category while it is held or
a)assets
shall not reclassify issued.
at Cost a derivative out of the fair value through profit or loss
category while it is held or issued.;
b) shall
Loans andnot reclassify any financial
at Amortised Cost instrument out of the fair value through profit
receivables
or loss category if upon initial recognition it was designated by the entity as at
fair value through profit or loss; and
HTM
c)) may,
investmentsy, if a financial asset is
at Amortised no longer
Cost g held for the p purpose
p of sellingg or
repurchasing it in the near term (notwithstanding that the financial asset may
have been acquired or incurred principally for the purpose of selling or
repurchasing it in the near term), reclassify that financial asset out of the fair
value through profit or loss category if the requirements in HKAS 39.50B or
50D are met.
An entity shall not reclassify any financial instrument into the fair value
through profit or loss category after initial recognition.
5
•Measurement
Reclassification
Implication
FA at FV
at Fair Value • An entity is permitted
through P/L
‒ to reclassify non-derivative financial
AFS financial at Fair Value assets (other than those designated at
assets at Cost fair value through profit or loss) out of
the fair value through profit or loss
category in particular circumstances
‒ to transfer from the available-for-sale
category to the loans and receivables
category a financial asset that would
have met the definition of loans and
receivables (if the financial asset had not
Non-Debt Securities been designated as available for sale), if
the entity has the intention and ability to
hold that financial asset for the
Debt Securities foreseeable future
•Measurement
Summary Reclassified to
FV through
AFS financial Loans and
P/L (not
assets receivables
designated)
• Non-derivative • Non-derivative
financial assets financial asset
FV through not meeting the meeting the
P/L (not N/A definition of loans definition of loans
designated) and receivables and receivables
(in rare (with intention and
Reclassified circumstances ability to hold the
from financial asset for
AFS • Not the foreseeable
financial allowed N/A future or until
assets specifically maturity)
• Not • Not allowed
Loans and
allowed implicitly N/A
receivables
specifically
6
•Measurement
AFS financial
assets
• Non-derivative
financial assets
FV through not meeting the
P/L (not definition of loans
designated) and receivables
(in rare
Reclassified circumstances
from

Reclassification
Measurement on the reclassification date
FA at FV • If an entity
i reclassifies
l ifi a financial
fi i l asset out
through P/L at Fair Value
of the fair value through profit or loss
category,
‒ the financial asset shall be reclassified at
its fair value on the date of
reclassification.
• Any gain or loss already recognised in profit
or loss shall not be reversed.
• The fair value of the financial asset on the
date of reclassification becomes its new
cost or amortised cost, as applicable.
Non-Debt Securities
7
•Measurement
Loans and
receivables
• Non-derivative
financial asset
FV through meeting the
P/L (not definition of loans
designated) and receivables
(with intention and
Reclassified ability to hold the
from financial asset for
AFS the foreseeable
financial future or until
assets maturity)

Case
It reclassified certain financial assets in 2008 and explained in its 2008

annual report that:
– The reclassifications resulted from
• significant reductions in market liquidity for these assets and
• a change in HSBC’s intention to hold them for the foreseeable future or to
maturity.
These circumstances arose in the wider context of market turmoil.
– As
A a result,
l the
h GGroup d decided
id d to reclassify
l if fi
financial
i l assets that
h would ld h
have
met the definition of loans and receivables at initial recognition, as permitted
by the IAS 39 amendments.
– In addition, as permitted by the IAS 39 amendments in rare circumstances,
the Group reclassified securities, that did not meet the definition of loans and
receivables on initial recognition, as the conditions of market turmoil prevailing
in the second half of 2008 were considered rare.
8
Reclassification
For financial assets met the definition of
FA at FV
at Fair Value loans and receivables
through P/L
• If an entity reclassifies a financial asset out
AFS financial at Fair Value of the fair value through profit or loss
assets at Cost category (HKAS 39.50D) or out of the
available-for-sale category (HKAS 39.50E),
‒ it shall reclassify the financial asset at its
fair value on the date of reclassification.
Debt Securities

Reclassification
• For a financial asset out of the fair value
FA at FV
at Fair Value through profit or loss category (HKAS
through P/L 39.50D),
AFS financial at Fair Value ‒ any gain or loss already recognised in
assets at Cost profit or loss shall not be reversed
‒ the fair value of the financial asset on the
date of reclassification becomes its new
cost or amortised cost, as applicable.
• For a financial asset reclassified out of the

available-for-sale category (HKAS 39.50E),
‒ any previous gain or loss on that asset
that has been recognised in other
comprehensive income (or equity) shall be
Debt Securities accounted for in accordance with HKAS
39.54 (to be discussed next slide).
9
Reclassification
• The fair value carrying amount of the asset on
FA at FV that date becomes its new cost or amortised
at Fair Value
through P/L cost, as applicable
• Any previous gain or loss on that asset that
has been recognised directly in equity shall
assets at Cost be accounted for as follows:
a) In the case of a financial asset with a
fixed maturity
¾ the gain or loss shall be amortised to
P/L over the remaining life of the
HTM investment
i t t using
i the
th effective
ff ti
interest method.
b) In the case of a financial asset that does
not have a fixed maturity
¾ the gain or loss shall remain in equity
until the financial asset is sold or
Debt Securities
otherwise disposed of, when it shall
be recognised in P/L.
•Measurement
Case
Reclassified to
AFS financial Loans and

assets receivables
FV through
P/L (not Oct. 08 US$ 0.4 Billion US$ 12.5 Billion
designated) Nov.-Dec. 08 US$ 2.2 Billion US$ 2.8 Billion
US$ 2.6 Billion US$ 15.3 Billion
Reclassified
from I Oct.
In O t 2008,
2008 HSBC reclassified
l ifi d
• US$12.5 billion & US$0.4 billion of held-for-trading financial assets
as loans and receivables and available for sale, respectively.
During Nov. and Dec. 2008, HSBC reclassified a further
• US$2.8 billion & US$2.2 billion of held-for-trading financial assets
as loans and receivables and available for sale, respectively.
10
Case
2008 annual report:

– The financial consequence of the reclassification is that the reclassified assets
are no longer marked-to-market through the income statement.
• Amounts reclassified as loans and receivables
– are accounted as such from the date of reclassification and tested
thereafter for impairment.
• Amounts reclassified as available for sale
– are held
h ld att ffair
i value
l with
ith changes
h iin th
the ffair
i value
l recognised
i d iin equity,
it
and tested for impairment.

Case
It explained in its 2008 annual report about the implication of the

reclassification as follows:
– If these reclassifications had not been made, the Group’s pre-tax profit would
have been reduced by
• US$3.5 billion
• from US$9.3 billion to US$5.8 billion.
– The reduction would have been
• US$0.9
US$0 9 billion
billi in
i the
h North
N h America
A i (NA’s
(NA’ lloss b
before
f tax: US$ 1 15.5 B) and
d
• US$2.6 billion in the Europe segments (EU’s profit before tax: US$ 10.9 B;
2007: US$ 8.6 B).
– There was no significant impairment identified on the loans transferred even
though the fair value continued to fall as a consequence of illiquidity and
market sentiment.
11
Effective Date and Transition
• If the election is made before 1 November 2008
¾ The reclassification can be made retrospective to 1
July 2008
• If the election is made on or after 1 November 2008

¾ reclassification shall take effect only from the date
of reclassification

Case
2008 annual report:

– In line with the transition rules, for reclassifications made during October 2008,
the reclassified financial assets were treated as having been so reclassified as
at 1 July 2008.
– The impact of back-dating these retrospective reclassifications was that fair
value movements between 1 July 2008 and October 2008 of US$835 million
were not recorded in the income statement.
12
HKFRS 2 – Group and Treasury Share
Transactions (HK(IFRIC) Interpretation 11)
Issues
SBP Arrangements involving an SBP Arrangements involving The
Entity’s Own Equity Instruments Parent’s Equity Instruments
A Parent Grants Rights to its

Equity Instruments to its
Subsidiary’s Employees
A Subsidiary Grants Rights to

It’s Parent’s Equity Instruments
to its Employees
13
Conclusions
SBP Arrangements involving an
Entity’s Own Equity Instruments
• SBP transactions in which an entity receives services as

consideration for its own equity instruments shall be accounted
for as equity-settled.
• This applies regardless of whether the entity chooses or is
required to buy those equity instruments from another party to
satisfy its obligations to its employees under the share-based
payment arrangement.
• It also applies regardless of whether:
a) the employee’s rights to the entity’s equity instruments were
granted by the entity itself or by its shareholder(s); or
b) the share-based payment arrangement was settled by the entity
itself or by its shareholder(s).
Conclusions
SBP Arrangements involving The
Parent’s Equity Instruments
• Provided that the share-based A Parent Grants Rights to its

arrangement is accounted for Equity Instruments to its
as equity-settled in the Subsidiary’s Employees
consolidated financial statements
of the parent,
– the subsidiary shall measure the services received from its
employees
• in accordance with the requirements applicable to equity-
settled SBP transactions,
• with a corresponding increase recognised in equity as a
contribution from the parent.
14
Conclusions
• A parent may grant rights to SBP Arrangements involving The
its equity instruments to the Parent’s Equity Instruments
employees
p y of its subsidiaries,,
conditional upon the completion A Parent Grants Rights to its
of continuing service with the
group for a specified period.
– An employee of one subsidiary may transfer employment to another
subsidiary during the specified vesting period without the employee’s
rights to equity instruments of the parent under the original share-based
payment arrangement being affected.
– Each subsidiary shall measure the services received from the employee
by reference to
• the fair value of the equity instruments at the date those rights to
equity instruments were originally granted by the parent as defined in
HKFRS 2 Appendix A, and
• the proportion of the vesting period served by the employee with each
subsidiary.
Conclusions
A Parent Grants Rights to its

• Such an employee may fail to satisfy a vesting condition other than

a market condition ultimately
– Then, each subsidiary shall adjust the amount previously recognised in
respect of the services received from the employee in accordance with
the principles in HKFRS 2.19.
– Hence, if the rights to the equity instruments granted by the parent do
not vest because of an employee’s failure to meet a vesting condition
other than a market condition,
¾ no amount is recognised on a cumulative basis for the services
received from that employee in the financial statements of any
subsidiary.
15
Conclusions
A Subsidiary Grants Rights to

It’s Parent’s Equity Instruments
to its Employees
• The subsidiary shall account for the transaction with its employees as
cash-settled.
– This requirement applies irrespective of how the subsidiary obtains the
equity instruments to satisfy its obligations to its employees.
Service Concession Arrangements

(HK(IFRIC) Interpretation 12)
16
Scope of HK(IFRIC)-Int 12
• HK(IFRIC) Interpretation 12
– gives guidance on the accounting by operators for
public-to-private
public to private service concession arrangements
• The interpretation applies to public-to-private
service concession arrangements if • No need to have complete
control
a) the grantor controls or regulates
• Sufficient for the price to be
• what service the operator must provide regulated, say by capping
with the infrastructure, mechanism
• to whom it must provide them, and
• at what price; and
b) the grantor controls – through ownership,
beneficial entitlement or otherwise – any
significant residual interest in the
infrastructure at the end of the term of
arrangement.
Scope of HK(IFRIC)-Int 12
• This interpretation applies to both:
a) infrastructure that the operator constructs or acquires from
a third p
party
y for the p
purpose
p of the service arrangement;
g ;
and
b) existing infrastructure to which the grantor gives the
operator access for the purpose of the service
arrangement.
• However, this interpretation does not specify the
derecognition requirements,
– i.e. does not specify the accounting for infrastructure that
was held
h ld and
d recognised
i d as property,
t plant
l t and d equipment
i t
by the operator before entering the service arrangement.
– The derecognition requirements of HKFRS (set out in
HKAS 16) apply to such infrastructure.
• This interpretation does not specify the accounting by
grantors, for example, the government.
17
Issues
• The interpretation sets out general principles on recognising and
measuring the obligations (liabilities) and related rights (assets) in
service concession arrangements.
g
• Requirements for disclosing information about service concession
arrangements are in HK(SIC)-Int. 29 Service Concession
Arrangements: Disclosures.
• The issues addressed in the interpretation are:
a) Treatment of operator’s rights over the infrastructure;
b) Recognition and measurement of arrangement consideration;
c) Construction or upgrade services;
d) Operation services;
e) Borrowing costs;
f) Subsequent accounting treatment of a financial asset and an intangible
asset; and
g) Items provided to the operator by the grantor.
Summary of HK(IFRIC)-Int 12
a) Treatment of operator’s Shall not be recognised as PPE
rights over the
infrastructure;
b) Recognition & FV to be C
Construction
t ti or Operation
O ti
used Upgrade Services Services
measurement of
arrangement consideration;
c) Construction or upgrade HKAS 11
services;
d) Operation services; HKAS 18
e) Borrowing costs; HKAS 23
Unconditional
f) Subsequent accounting Financial Asset contractual right to
treatment of HKAS 39 receive cash or other FA
a financial asset and A right (a licence) to
an intangible asset; and Intangible Asset charge users
HKAS 38
g) Items provided to the
operator by the grantor. Use only or as part of the consideration
18
Consensus
Recognition and Measurement of Arrangement Consideration
• Under the terms of contractual arrangements
within the scope of this Interpretation
Interpretation, the
operator acts as a service provider. Operator = Service Provider
• The operator
– constructs or upgrades infrastructure Construction
(construction or upgrade services) used to Operation
or Upgrade
provide a public service and Services
Services
– operates and maintains that infrastructure
(operation services) for a specified period of
time.
• The operator shall recognise and measure
revenue in accordance with HKAS 11 and 18
for the services it performs.
Consensus
• If the operator performs more than one
service (i.e.
(i e construction or upgrade
services and operation services) under a Operator = Service Provider
single contract or arrangement,
– consideration received or receivable shall be
Construction
allocated by reference to the relative fair Operation
or Upgrade
values of the services delivered, when the Services
Services
amounts are separately identifiable.
• The nature of the consideration determines
its subsequent accounting treatment.
– The subsequent accounting for consideration
received as a financial asset and as an
intangible asset is detailed the interpretation
(to be discussed)
19
Consensus
Operator = Service Provider

• The operator shall account for revenue and
costs relating to construction or upgrade
Construction
services in accordance with HKAS 11. or Upgrade
Operation
Services
Services
• The operator shall account for revenue and
costs relating to operation services in HKAS 11 HKAS 18
accordance
d with
ith HKAS 18.
18
Consensus
Construction or Upgrade Services
• If the operator provides construction or
upgrade services the consideration received
or receivable by the operator shall be Operator = Service Provider
recognised at its fair value.
• The consideration may be rights to: Construction
a) a financial asset, or or Upgrade
Services
b) an intangible asset.
An unconditional contractual right to

Financial Asset
receive cash or another financial asset
A right (a licence) to charge users of the Intangible Asset

public service.
20
Consensus
• If the operator is paid for the construction
services partly by a financial asset and
partly
p y by
y an intangible
g asset
– it is necessary to account separately for Operator = Service Provider
each component of the operator's
consideration.
– The consideration received or receivable for Construction
both components shall be recognised initially or Upgrade
at the fair value of the consideration Services
received or receivable.
• The nature of the consideration given by the
grantor to the operator shall be determined Financial Asset
by reference to the contract terms and,
when it exists, relevant contract law.
Intangible Asset
Consensus
Financial Asset
• HKASs 32 and 39 and HKFRS 7 apply to the financial
asset recognised under this Interpretation
Interpretation.
Operator = Service Provider
• The amount due from or at the direction of
the grantor is accounted for in accordance
with HKAS 39 as: Construction
a) a loan or receivable; or Upgrade
b) an available-for-sale financial asset; or Services
c) if so designated upon initial recognition,
a financial asset at fair value through profit or
loss, if the conditions for that classification
Financial Asset
are met.
• If the amount due from the grantor is accounted for
either as (a) or (b) as above, HKAS 39 requires
interest calculated using the effective interest method
to be recognised in profit or loss.
21
Consensus
Intangible Asset
• HKAS 38 applies to the intangible asset
recognised in accordance with this
Interpretation. Operator = Service Provider
• HKAS 38 provide guidance on measuring
intangible assets acquired in exchange for Construction
a non-monetary asset or assets or a or Upgrade
combination of monetary and non-monetary Services
assets.
In accordance with HKAS 38 Intangible Assets, the

operator recognises the intangible asset at cost
i.e. the fair value of consideration transferred to
acquire the asset, which is the fair value of the Intangible Asset
consideration received or receivable for the
construction services delivered.
HKAS 19 – Issues on Defined Benefit Asset

22
Background and Issues
• HKAS 19.58 limits the
measurement of a defined benefit
asset to When are such refunds or reductions
– the present value of economic regarded as available?
benefits available in the form of How may a minimum funding
refunds from the plan or requirement affect the availability of
reductions in future such reductions?
contributions to the plan When may a minimum funding
requirement give rise to a liability?
– plus unrecognised gains and
losses
• Minimum funding requirements exist in many countries to improve
the security of the post-employment benefit promise made to
members of an employee benefit plan.
• Such requirements normally stipulate a minimum amount or level
of contributions that must be made to a plan over a given period.
Conclusion
When are such refunds or reductions regarded as available?
• A
An economic i b
benefit
fit may b
be available
il bl even if it is
i nott
realisable immediately at the balance sheet date
• A refund is available to an entity if the entity has an
unconditional right to a refund:
a) during the life of the plan, without assuming that the plan
liabilities must be settled in order to obtain the refund, or
b) assuming the gradual settlement of the plan liabilities over
time until all members have left the plan; or
c) assuming the full settlement of the plan liabilities in a single
event (ie as a plan wind-up).
23
Conclusion
When are such refunds or reductions regarded as available?
• A
An entity
tit shall
h ll measure th
the economic
i bbenefit
fit available
il bl
as a refund as
– the amount of the surplus being the fair value of the plan assets less the
at the balance sheet date present value of the defined benefit obligation
– less any associated costs.
• If there is no minimum funding requirement, an entity shall determine

th economic
the i benefit
b fit available
il bl as a reduction
d ti in i ffuture
t contributions
t ib ti as
the lower of
a) the surplus in the plan and
b) the present value of the future service cost to the entity (excluding any
part that will be borne by employees) for each year over the shorter of the
expected life of the plan and the expected life of the entity.
Conclusion
How may a minimum funding requirement affect the availability of such
reductions?
• A
An entity
tit shall
h ll analyse
l any minimum
i i
funding requirement at a given date into
contributions that are required to cover • Do not affect future
a) any existing shortfall for past service on contribution for future service
the minimum funding basis and • Give rise to a liability (to be
b) the future accrual of benefits. discussed)
• F
For (b) above,
b an entity
tit shall
h ll d
determine
t i ththe economici b
benefit
fit available
il bl
as a reduction in future contributions as the present value of:
‒ The estimated future service cost in each year
‒ Less: the estimated minimum funding contributions required in respect of
the future accrual of benefits in that year.
24
Conclusion
When may a minimum funding requirement give rise to a liability?
• If an entity
tit has
h an obligation
bli ti underd a minimum
i i ffunding
di requirement
i t tto
pay contributions to cover an existing shortfall on the minimum funding
basis in respect of services already received,
– the entity shall determine whether the contributions payable will be
available as a refund or reduction in future contributions after they are paid
into the plan.
• To the extent that the contributions payable will not be available after
they are paid into the plan (i.e. not refundable)
– the entity shall recognise a liability when the obligation arises
Today’s Agenda
Selected Amendments
for 2009 Dec. Year-End
25
Year--End
• Amendments to HKFRS 2 Vesting Conditions and Cancellations ¾ 1 Jan. 2009
• HKFRS 8 Operating Segments ¾ 1 Jan. 2009
• HKAS 1 (Revised) Presentation of Financial Statements ¾ 1 Jan. 2009
• HKAS 23 (Revised) Borrowing Costs ¾ 1 Jan. 2009
• Amendments to HKFRS 1 and HKAS 27 Cost of an Investment in ¾ 1 Jan. 2009
a Subsidiary, Jointly Controlled Entity or Associate
• Amendments to HKAS 32 and HKAS 1 Puttable Financial ¾ 1 Jan. 2009
• HK(IFRIC) 13 Customer Loyalty Programmes ¾ 1 Jul. 2008
• HK(IFRIC) 15 Agreements for the Construction of Real Estate ¾ 1 Jan. 2009
• HK(IFRIC) 16 Hedges of a Net Investment in a Foreign Operation ¾ 1 Oct. 2008
• Annual improvements to HKFRSs ¾ 1 Jan. 2009
• HK(IFRIC) 18 Transfers of Assets from Customers ¾ 1 Jul. 2009 (trans. date)
• Amendments to HKFRS 7 Improving Disclosure about Financial ¾ 1 Jan. 2009
Instruments
Presentation of Financial Statements

(HKAS 1 Revised in 2007)
26
Summary of Changes
• A complete set of financial statements comprises:
Previously, we call it
a) a statement of financial position as at the end of the
“Balance Sheet”
period;
b) a statement of comprehensive income for the period; Previously, we call it
“Income Statement”
c) a statement of changes in equity for the period;
d) a statement of cash flows for the period;
e) notes, comprising a summary of significant accounting
policies and other explanatory information; and
f) a statement of financial position as at the beginning of 3 years’ “balance
the earliest comparative period sheets”
• when an entity applies an accounting policy
retrospectively or makes a retrospective restatement
of items in its financial statements, or
• when it reclassifies items in its financial statements.
• An entity may use titles for the statements other than
those used in HKAS 1. (HKAS 1.10)
Summary of Changes
• A complete set of financial statements comprises:
a) a statement of financial position as at the end of the 財務狀況表
period;
b) a statement of comprehensive income for the period; 全面收益表
c) a statement of changes in equity for the period;
d) a statement of cash flows for the period;
e) notes, comprising a summary of significant accounting
policies and other explanatory information; and
f) a statement of financial position 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 financial statements, or
• when it reclassifies items in its financial statements.
• An entity may use titles for the statements other than
those used in HKAS 1. (HKAS 1.10)
27
Summary of Changes
Complete Set of Financial Statements Previous title
or changes
Statement of Financial Position Previous title:
as at the end of the period “Balance Sheet”
To use a single statement to present To use two statements to present all

all items of income and expense items of income and expense
Income Statement for the period No title change

Statement of Comprehensive
Income for the period
Statement of Comprehensive
New statement
Income for the period
No title change
Statement of Changes in Equity for the period
(but restructured)
Previous title:“Cash
Statement of Cash Flows for the period
Flow Statement”
Notes No title change
A statement of financial position as at the beginning of

New requirement
the earliest comparative period, if required
© 2008-09 Nelson Consulting Limited Sourced from Intermediate Financial Reporting (2008) by Nelson Lam and Peter Lau 55
Statement of Comprehensive Inc.

Changes in equity • HKAS 1 requires that
in a period – The non-owner changes in equity during a
period are further separated
p p into two categories:
g
Components of 1. Components of “profit or loss”; and
profit or loss
2. Components of “other comprehensive
Non-owner income”.
changes Components of – All owner changes in equity must be
other
comprehensive
• presented separately from non-owner
income changes in equity and
• presented in the statement of changes in
Components of equity.
Owner
owner changes
changes
in equity
Comprehensive income
concept used in US
since 90s
28
Changes in equity Two-Statement
Two- Single Statement
in a period Approach Approach
• HKAS 1 revised in 2007 requires an entity to present

Components of such non-owner changes in equity in a period in the
profit or loss statement of comprehensive income by using either:
Non-owner 1. Single statement approach – present all items of
changes Components of income and expense recognised in a period in a
other single statement of comprehensive income, or
comprehensive
2. Two-statement approach – present all items of
income
income and expense recognised in a period in 2
statements:
a. a statement displaying components of profit
or loss (i.e. a separate income statement) &
b. a second statement beginning with profit or
loss and displaying components of other
comprehensive income (i.e. a statement of
comprehensive income). (HKAS 1.81)

• Profit or loss
– is the total of income less expenses, excluding
the components
p of other comprehensive
p income.
Components of – All items of income and expense are recognised
profit or loss in a period in profit or loss unless an HKFRS
requires or permits otherwise.
• Minimum line items to be disclosed in the
statement of comprehensive income in respect
of the component of profit or loss include:
1. revenue
2. finance costs
3. share of the profit or loss of associates and joint
ventures accounted for using the equity method
4 tax expenses
5. profit or loss ……
29
• Other comprehensive income
– Comprises items of income and expense
((includingg reclassification adjustments)
j ) that are
not recognised in profit or loss as required or
permitted by other HKFRSs.
– their components classified by nature to be
Components of reported in the statement of comprehensive
other income and to be presented either:
comprehensive 1. net of related tax effects, or
income
2. before related tax effects with one amount
shown for the aggregate amount of income
tax relating to those components.
– the amount of income tax relating to each
component, including reclassification
adjustments, either
1. in the statement of comprehensive income or
2. in the notes.

Example
• The components of other comprehensive income include:
1. changes in revaluation surplus recognised in accordance with HKAS 16
Property, Plant and Equipment;
2. changes in revaluation surplus recognised in accordance with HKAS 38
Intangible Assets;
3. actuarial gains and losses on defined benefit plans recognised in
accordance with HKAS 19 Employee Benefits;
Components of
4. gains and other
losses arising from translating the financial statements of a foreign
operation in accordance with HKAS 21 The Effects of Changes in Foreign
comprehensive
Exchangeincome
Rates;
5. gains and losses on remeasuring available
available-for-sale
for sale financial assets in
accordance with HKAS 39 Financial Instruments: Recognition and
Measurement; and
6. the effective portion of gains and losses on hedging instruments in a cash
flow hedge recognised in accordance with HKAS 39.
30
• Other comprehensive income also comprises
“reclassification adjustments”.
– Reclassification adjustments (重新分類調整)
are defined as:
• amounts reclassified to profit or loss in the
current period that were recognised in other
Components of comprehensive income in the current or
other previous periods.
comprehensive
income • An entity is required to disclose reclassification
adjustments relating to components of other
comprehensive income either:
– in the statement of comprehensive income,
or
– in the notes (then presents the components of
other comprehensive income after any related
reclassification adjustments in the statement of
comprehensive income)

Changes in equity Two Statements One Statement Before
in a period Model Model amendment
Components of Presented in separate Income

profit or loss income statement Presented in Statement
Non-owner statement of
changes comprehensive
Components of income
other Presented in statement
comprehensive of comprehensive income
income Statement of
Other comprehensive income (其他全面收益)
changes
Components of Presented in
in equity
Owner Presented in statement
owner changes of changes in equity
statement of changes
changes in equity
in equity
31
Changes in equity Two Statements One Statement Before
in a period Model Model amendment
Components of Income Income

profit or loss statement Statement
Statement of
Non-owner
Comprehensive
changes Components of
Statement of income
other
comprehensive
comprehensive
income Statement of
income
changes
Components of Statement of Statement of in equity
Owner
owner changes changes changes
changes
in equity in equity in equity

• In the statement of comprehensive income One Statement
(i.e. single statement approach), an entity is Model
required
q to at least include some line items
that present the amounts for the period
• For example, the following amounts should Statement of
be presented: Comprehensive
income
1. revenue
2. finance costs
3. profit or loss
4. each component of
other comprehensive
income classified by nature
5. total comprehensive income
32
Two Statements
Under the Two-Statement Model
Approach, these items are
presented in the separate
income statement. Income
statement
1. revenue Statement of
comprehensive
2. finance costs income
3. profit or loss
4. each component of
other comprehensive Under the Two-Statement
income classified by nature Approach, these items are
presented in the statement of
5. total comprehensive income
comprehensive income.

• HKAS 1 requires an entity to disclose in the
statement of comprehensive income:
– each component of other comprehensive
income classified by nature
– share of the other comprehensive Statement of
income of associates and joint ventures Comprehensive
income
accounted for using the equity method
– total comprehensive income
(全面收益總額).
33
Example
Statement of comprehensive statement (under Two-Statement Approach)
2007 2006
Profit for the year $ 121,250
121 250 $ 65,500
65 500
Other comprehensive income:
Exchange differences on translating foreign operations 5,334 10,667
Available-for-sale financial assets (24,000) 26,667
Cash flow hedges (667) (4,000)
Gains on property revaluation 933 3,367
Actuarial gains (losses) on defined benefit pension plans (667) 1,333
Share of other comprehensive income of associates 400 (700)
Income tax relating g to components
p of other comprehensive
p
income 4,667 (9,334)
Other comprehensive income for the year, net of tax (14,000) 28,000
Total comprehensive income for the year 107,250 93,500
Total comprehensive income attributable to:
Owners of the parent 85,800 74,800
Minority interest 21,450 18,700
107,250 93,500

• Either in the statement of comprehensive income or in the notes,
– To disclose income tax relating to each component of other
comprehensive income
income.
• The previous version of HKAS 1 did not include such a requirement.
• The purpose is to provide users with tax information relating to these
components because the components often have tax rates different from
those applied to profit or loss
– To disclose reclassification adjustments relating to components of
other comprehensive income.
34
HKFRS 8 Operating Segments
Background
• HKFRS 8 arises from the IASB’s consideration of
– FASB Statement No. 131 Disclosures about Segments of
an Enterprise
p and Related Information ((SFAS 131 of United
States) issued in 1997, compared with IAS 14 Segment
Reporting, which is similar to HKAS 14.
• HKFRS 8 achieves convergence with the requirements
of SFAS 131.
– The wording of HKFRS 8 is the same as that of SFAS 131
except for changes necessary to make the terminology
consistent with that in other HKFRSs.
35
Core Principle and Scope
Core Principle
• An entity shall disclose information to enable users
of its financial statements to evaluate
– the nature and financial effects of the business
activities in which it engages and
– the economic environments in which it operates.
Scope
• HKFRS 8 applies to:
– the separate or individual financial statements of an entity with listed debt and
equity
q y
– the consolidated financial statements of a group with a parent with listed debt
and equity
– The segment information of an entity which chooses to follow HKFRS 8
• If a financial report contains both the parent’s consolidated financial
statements and separate financial statements,
– segment information is required only in the consolidated financial statements.
Operating Segments
• An operating segment is a component of an entity:
a) that engages in business activities from which it may A business activity
earn revenues and incur expenses (including might
i ht h
have nott yett
revenues and expenses relating to transactions with earned any revenue
other components of the same entity),
For example: CEO,
b) whose operating results are regularly reviewed by
COO, or a group of
the entity’s chief operating decision maker to
executive directors
• make decisions about resources to be allocated
Not necessary be
to the segment and
geographical areas
• assess its performance, and or products
c) for which discrete financial information is available.
Operating
Segments
• Not every part of an entity is necessarily an

operating segment or part of an operating
segment, say corporate headquarter
36
Reporting Segments
Reportable
Segment
• An entity shall report separately information about

Operating
each operating segment that
Segments
a) has been identified as operating segment or
Aggregation results from aggregating two or more of those
Criteria segments under the aggregation criteria, and
b) exceeds the quantitative thresholds
Quantitative ((“10% or more test”).
)
Thresholds • There are also other situations in which separate
information about an operating segment shall be
Other Situations reported.
Reporting Segments
• Operating segments often exhibit similar long-term
financial performance if they have similar economic
characteristics.
– For example, similar long-term average gross
margins for two operating segments would be
expected if their economic characteristics were
similar.
Aggregation
Criteria
37
Reporting Segments
• Two or more operating segments may be
aggregated into a single operating segment if
‒ aggregation is consistent with the core principle of
HKFRS 8,
‒ the segments have similar economic characteristics,
and
‒ the segments are similar in each of the following
Aggregation
respects:
Criteria
a) the nature of the products and services;
b) the nature of the production processes;
c) the type or class of customer for their products
Aggregate
and services;
segments if desired
d) the methods used to distribute their products or
provide their services; and
e) if applicable, the nature of the regulatory
environment, e.g., banking or public utilities.
Disclosure
• To give effect to the core principle, an entity shall
disclose the following for each period for which
an income statement is presented:
p
a) general information as described in HKFRS 8; General
Information
b) information about
• reported segment profit or loss, including specified revenues
and expenses included in reported segment profit or loss,
• segment assets, and
Other Information
• the basis of measurement; and
c)) reconciliations
ili ti off the
th totals
t t l off
• segment revenues,
• reported segment profit or loss, Reconciliations
• segment assets, and
• other material segment items
to corresponding entity amounts.
38
Disclosure – Reconciliations
• Reconciliations of balance sheet amounts for
reportable segments
– to the entity’s
entity s balance sheet amounts are
required for each date at which a balance
sheet is presented.
• Previously reported information for prior periods
shall be restated.
Reconciliations
Disclosure – Other Information

• An entity shall report a measure of profit or loss and
total assets for each reportable segment.
• An entity shall report a measure of liabilities for
each reportable segment if such an amount is
regularly provided to the chief operating decision
maker.
Other Information
39
Measurement
• The amount of each segment item reported shall be the measure
reported to the chief operating decision maker
– for the purposes of making decisions about allocating resources to the
segment and assessing its performance.
• Compared with HKAS 14,

– HKAS 14 required segment information to be
prepared in conformity with the accounting policies
adopted for preparing and presenting the financial
statements of the consolidated group or entity.
– HKAS 14 defines segment revenue
revenue, segment
expense, segment result, segment assets and
segment liabilities
– HKFRS 8 does not define these terms but requires an
explanation of how segment profit or loss, segment
assets and segment liabilities are measured for each
reportable segment.
Measurement
• Adjustments and eliminations made in preparing an
entity’s financial statements and allocations of
revenues,, expenses,
p , and gains
g or losses shall be
included in determining reported segment profit or
loss only if
– they are included in the measure of the segment’s
profit or loss that is used by the chief operating
decision maker.
• Similarly, only those assets and liabilities that are
included in the measures of the segment’s assets
and segment’s liabilities that are used by the chief
operating decision maker shall be reported for that
segment.
• If amounts are allocated to reported segment profit
or loss, assets or liabilities, those amounts shall be
allocated on a reasonable basis.
40
Entity-Wide Disclosures
• All entities subject to HKFRS 8, including those that
have a single reportable segment, are also required
to have certain entity-wide
y disclosures,, including:
g
– the revenues from external customers for each
product and service, or each group of similar products
and services
– certain geographical information
– information about the extent of its reliance on its major
customers.
Products and
Services
Geographical
Areas
Major Customers
Customer Loyalty Programmes

41
Scope
• HK(IFRIC) Interpretation 13 applies to customer
loyalty award credits that:
a) an entity grants to its customers as part of a sales
transaction, i.e. a sale of goods, rendering of services or
use by a customer of entity assets; and
b) subject to meeting any further qualifying conditions, the
customers can redeem in the future for free or
discounted goods or services.
• The Interpretation addresses accounting by the entity
that grants award credits to its customers.
Issues
• Whether the entity’s obligation to provide free or
discounted goods or services ("awards") in the
future should be recognised
g and measured by: y
i) allocating some of the consideration received or
receivable from the sales transaction to the award
credits and deferring the recognition of revenue
(applying HKAS 18.13); or
ii) providing for the estimated future costs of supplying
the awards (applying HKAS 18.19); and
• If consideration is allocated to the award credits:
i) h how much h should
h ld bbe allocated
ll t d tto th
them;
ii) when revenue should be recognised; and
iii) if a third party supplies the awards, how revenue
should be measured.
42
Conclusions – Separation
• An entity shall
Separately
– apply HKAS 18.13 and Identifiable
– account for award credits as a separately Component
identifiable component of the sales
transaction(s) in which they are granted (the
"initial sale").
• The fair value of the consideration received or Fair Value
receivable in respect of the initial sale shall be
allocated between Award Credit
– the award credits and
Other
– the other components of the sale. Components
Supplied by Supplied by
the Entity Itself the Third Party
Conclusions – Fair Value

• The consideration allocated to the award credits shall
be measured by reference to their fair value,
– i.e.
i e the amount for which the award credits could
be sold separately.
• If the fair value is not directly observable, it must be
estimated.
• An entity may estimate the fair value of award credits Fair Value
by reference to
– the fair value of the awards for which they could Award Credit
be redeemed
redeemed.
43
Conclusions – Fair Value
• The fair value of the awards (for which they could be
redeemed) would be reduced to take into account:
a) the fair value of awards that would be offered to
customers who have not earned award credits
from an initial sale; and
b) the proportion of award credits that are not
expected to be redeemed by customers.
Fair Value
• If customers can choose from a range of different
awards, the fair value of the award credits will reflect Award Credit
– the fair values of the range of available awards,
awards
weighted in proportion to the frequency with which
each award is expected to be selected.
Conclusions – Recognition
• If the entity supplies the awards itself, it
shall recognise the consideration allocated
to award credits as revenue when
– award credits are redeemed and
– it fulfils its obligations to supply awards.
• The amount of revenue recognised shall be
based on
– the number of award credits that have No. of Award Credits
been redeemed in exchange for awards, Redeemed in Exchange
÷
– relative to the total number expected to Total No. of Award Credits
be redeemed. Expected to be Redeemed
Supplied by
the Entity Itself
44
Conclusions – Recognition
• If a third party supplies the awards, the entity
shall assess whether it is collecting the
consideration allocated to the award credits
– on its own account On its Own
Account
(i.e. as the principal in the transaction) or
– on behalf of the third party
On Behalf of the
(i.e. as an agent for the third party). Third Party
Supplied by
the Third Party
Construction of Real Estate

45
Before 2005 ……
• Before 2005, property developers in HK adopted various policies for

recognising revenue arising from pre-completion contracts for the sale
off development
d l t properties.
ti
• The stage of completion method was a commonly used policy.
• Full completion method was another one used by some companies.
Stage of Completion Full Completion
HK Interpretation 3
• HK Interpretation 3 (effective in 2005) concluded that pre-completion
contracts for the sale of development properties
− do not meet the definition of construction contracts,
contracts
− if the contracts in question are not specifically negotiated for the
construction of the properties.
• Accordingly, these contracts

− fall outside the scope of HKAS 11 and,
− as a result, the stage of completion method as
required under HKAS 11 shall not be used to
recognise
i revenue arising
i i ffrom suchh contracts.
t t
HK(IFRIC) 15 sets out

the same conclusion but gives
guidance on other types of pre-
sale transactions.
46
Definition of Construction Contract
• A construction contract is
– a contract specifically negotiated for the construction of an asset or a
combination of assets
– that are closely interrelated or interdependent in terms of their design,
technology and function or their ultimate purpose or use
Scope and Issue of HK(IFRIC) 15

• Scope
– HK(IFRIC) 15 applies to the accounting for revenue and associated
expenses by entities that undertake the construction of real estate directly
or through subcontractors.
• Agreements in the scope of this Interpretation are:
– agreements for the construction of real estate
– such agreements may include the delivery of other goods or
services.
• Issues
– HK(IFRIC) 15 addresses two issues:
1. Is the agreement within the scope of HKAS 11 or HKAS 18?
2. When should revenue from the construction of real estate be
recognised?
47
1. Within Scope of HKAS 11 or 18
• Determination depends on the terms of each agreement and all the
surrounding facts and circumstances
HKAS 11
• HKAS 11 Construction Contracts applies
– when the agreement meets the definition of a construction contract set
out in HKAS 11.3 (i.e. contract specifically negotiated) HKAS 18
– Meets the definition when the buyer is able to specify the major
structural elements of the design of the real estate before
construction begins and/or specify major structural changes once
construction is in progress (whether or not it exercises that ability).
– When HKAS 11 applies, the construction contract also includes any
contracts or components for the rendering of services in accordance
with HKAS 11.5(a) and HKAS 18.4
1. Within Scope of HKAS 11 or 18

• Determination depends on the terms of each agreement and all the
surrounding facts and circumstances
HKAS 11
HKAS 18
• HKAS 18 Revenue applies (i.e. an agreement
for the sale of goods),
– When an agreement for the construction of real estate in which buyers
have only limited ability to influence the design of the real estate, e.g.
– to
t select
l t a design
d i ffrom a range off options
ti specified
ifi d b
by th
the entity,
tit or
– to specify only minor variations to the basic design
48
2. When is Revenue Recognised?
Construction • When the agreement is within the scope of
Contract HKAS 11 and its outcome can be estimated
reliably,
y,
– the entity shall recognise revenue by reference to
the stage of completion of the contract activity in
accordance with HKAS 11.
• The agreement may not meet the definition of a
construction contract and therefore be within
the scope of HKAS 18.
– In this case, the entity shall determine whether
Rendering
R d i off the agreement is
Services • for the rendering of services or
• for the sale of goods.
Sale of Goods

• If the entity is not required to acquire and
supply construction materials,
– the agreement may be only an agreement for the
rendering of services in accordance with HKAS
18.
• In this case, if the criteria in HKAS 18.20 are
met,
– HKAS 18 requires revenue to be recognised by
reference to the stage of completion of the
transaction using the percentage of completion
Rendering
R d i off method.
h d
Services • The requirements of HKAS 11 are generally
applicable to the recognition of revenue and the
associated expenses for such a transaction
(HKAS 18.21).
49
• If the entity is required to provide services
together with construction materials in order to
perform its contractual obligation
p g to deliver the
real estate to the buyer,
– the agreement is an agreement for the sale of
goods and the criteria for recognition of revenue
set out in HKAS 18.14 apply.
• The entity may transfer to the buyer control and
the significant risks and rewards of ownership
– of the WIP in its current state as construction
progresses, or
– of the real estate in its entirely at a single time.
Sale of Goods Transfer WIP as Transfer entirely

construction progress at a single time

• Transfers in its current state as construction
progresses (and if all the criteria in HKAS 18.14
are met continuouslyy as construction
progresses)
– the entity shall recognise revenue by reference to
the stage of completion using the percentage of
completion method.
• The requirements of HKAS 11 are generally
applicable to the recognition of revenue and the
associated expenses for such a transaction.
Sale of Goods Transfer WIP as

construction progress
50
• Transfers the real estate in its entirety at a
single time (e.g. at completion, upon or after
delivery)
y)
– the entity shall recognise revenue only when all
the criteria in HKAS 18.14 are satisfied.
Sale of Goods Transfer entirely

at a single time
Hedges of Foreign Operation

51
Scope of HK(IFRIC) 16
• Scope
– HK(IFRIC) 16 applies to an entity that
• hedges the foreign currency risk arising from its net investments in
foreign operations and
• wishes to qualify for hedge accounting in accordance with HKAS 39.
– HK(IFRIC) 16 applies only to hedges of net investments in foreign
operations;
• it should not be applied by analogy to other types of hedge accounting.
Conclusions: Hedged Risk

• Hedge accounting may be applied only to the
foreign exchange differences arising between Not applied to
– the functional currency of the foreign operation and presentation
– the parent entity’s functional currency currency
• The hedged risk may be designated as the foreign

currency exposure arising between Net investment is
held through an
– the functional currency of the foreign operation and intermediate parent
– the functional currency of any parent entity (the does not affect it
immediate, intermediate or ultimate parent entity) of
that foreign operation
operation.
52
Conclusions: Hedged Risk
• An exposure to foreign currency risk The hedge accounting applied
arising from a net investment in a foreign by the lower level parent must
operation
p mayy qualify
q y for hedge
g g
be reversed before the higher
accounting only once in the consolidated level parent’s hedge
financial statements. accounting is recognised.
Conclusions: Where H.I. Held?
• The hedging instrument(s) (H.I.) may be held by

any entity or entities within the group (except the
foreign operation that itself is being hedged),
– as long as the designation, documentation and
effectiveness requirements are satisfied.
• The assessment of effectiveness is not affected
– b
by whether
h th ththe hhedging
d i iinstrument
t t iis a d
derivative
i ti or
a non-derivative instrument or
– by the method of consolidation.
53
Conclusions: Disposal
• When a foreign operation that was hedged is
disposed of, the amount reclassified to profit or
loss as a reclassification adjustment
j from the
foreign currency translation reserve in the
consolidated financial statements of the parent in
respect of the hedging instrument is:
– the cumulative gain or loss on the hedging
instrument that was determined to be an effective
hedge.
• The amount reclassified to profit or loss from the
foreign currency translation reserve is not affected
by the consolidation method.
Improving Disclosures about Financial

Instruments (Amendments to HKFRS 7 issued in March 2009)
54
Amendments to IFRS 7 in Mar. 2009
• The aim of the amendments was to enhance disclosures about
– fair value and
– liquidity risk
• SFAS 157 of US FASB requires disclosures that are based on a
three-level fair value hierarchy for the inputs used in valuation
techniques to measure fair value.
• The Board concluded that such a hierarchy would improve
comparability between entities about the effects of fair value
measurements as well as increase the convergence of IFRSs and
US generally accepted accounting principles (GAAP).
• Therefore, the Board decided to require disclosures for financial
instruments on the basis of a fair value hierarchy.
1. Fair Value Disclosure

• If there has been a change in valuation technique,
– the entity shall disclose that change and the
reasons for
f making
ki itit.
• A fair value hierarchy for disclosure is also required:
– classify fair value measurements using a fair
value hierarchy that reflects the significance of
the inputs used in making the measurements.
55
• The fair value hierarchy shall have the following
levels:
a. quoted
t d prices
i ((unadjusted)
dj t d) in i active
ti markets
k t for
f
identical assets or liabilities (Level 1);
b. inputs other than quoted prices included within
Level 1 that are observable for the asset or
liability, either directly (i.e. as prices) or indirectly
(i.e. derived from prices) (Level 2); and
c. inputs for the asset or liability that are not based
on observable
b bl market
k tddatat (unobservable
( b bl
inputs) (Level 3).

• The level in the fair value hierarchy within which the fair
value measurement is categorised in its entirety shall be
determined on the basis of the lowest level input that is
significant to the fair value measurement in its entirety.
• For this purpose, the significance of an input is assessed
against the fair value measurement in its entirety.
• If a fair value measurement uses observable inputs that
require significant adjustment based on unobservable
inputs, that measurement is a Level 3 measurement.
• Assessing
A i th
the significance
i ifi off a particular
ti l iinputt
to the fair value measurement in its entirety
requires judgement, considering factors specific
to the asset or liability.
56
• For fair value measurements recognised in the
statement of financial position an entity shall
disclose for each class of financial instruments:
1. the level in the fair value hierarchy
2. any significant transfers between Level 1 and
Level 2 of the fair value hierarchy (with other
details)
3. Further details for Level 3.
• An entity shall present the quantitative disclosures
as required above in tabular format unless another
format is more appropriate.

Case
Valuation Techniques
Quoted Using With significant
At 31 December 2008 market observable unobservable
(US$m) price inputs inputs Total
Assets
Trading assets 234,399 185,369 7,561 427,329
Financial assets designated at FV 14,590 13,483 460 28,533
Derivatives 8,495 476,498 9,883 494,876
Financial instruments: AFS 103,949 173,157 9,116 286,222
Liabilities
Trading liabilities 105,584 135,559 6,509 247,652
Financial liabilities designated at FV 23,311 51,276 - 74,587
Derivatives 9,896 473,359 3,805 487,060
57
2. Liquidity Risk Disclosure
• An entity shall disclose:
a. a maturity analysis for non-derivative financial liabilities
(i l di iissued
(including d fifinancial
i l guarantee
t contracts)
t t ) th
thatt shows
h th
the
remaining contractual maturities;
b. a maturity analysis for derivative financial liabilities. The maturity
analysis shall include the remaining contractual maturities for
those derivative financial liabilities for which contractual
maturities are essential for an understanding of the timing of the
cash flows. For example, this would be the case for:
i.i an interest
i t t rate
t swap with ith a remaining
i i maturity
t it off five
fi years
in a cash flow hedge of a variable rate financial asset or
liability.
ii. all loan commitments.
c. a description of how it manages the liquidity risk inherent in (a)
and (b).
Today’s Agenda
Selected Amendments
Year-End
End
58
Year--End
• HKFRS 1 (Revised) First-time Adoption of HKFRS ¾ 1 Jul. 2009
• HKAS 27 (Revised) Consolidated and Separate Financial ¾ 1 Jul. 2009
Statements
• HKFRS 3 (Revised) Business Combination ¾ 1 Jul. 2009
• Amendments to HKAS 32 and HKAS 1 Puttable Financial ¾ 1 Jul. 2009
• HK(IFRIC) 17 Distributions of Non-cash Assets to Owners ¾ 1 Jul. 2009

Consolidated Financial Statements

(HKAS 27 Revised in 2008)
59
HKAS 27 (Revised in 2008)
• Scope and definitions
• Presentation of consolidated financial statements
• Scope of consolidated financial statements
• Consolidation procedures Significant changes
• Loss of control New section
• Accounting in separate financial statements
Consolidation Procedures
• Consolidation procedures are similar to previous standard,
but ……
• Minority interests renamed as “non-controlling
non-controlling interests”
interests ,
which
– is the equity in a subsidiary not attributable, directly or
indirectly, to a parent.
60
Non-controlling Interests
• Profit or loss and each component of other
comprehensive
h i iincome are attributed
tt ib t d
– to the owners of the parent and
– to the non-controlling interests.
• Total comprehensive income is attributed
– to the owners of the parent and
– to the non-controlling interests
• even if this results in the non-controlling
g interests
A
Amended
d d having a deficit balance.
• Most critical ……
– Changes in a parent’s ownership interest in a
subsidiary that do not result in a loss of control
• are accounted for as equity transactions (i.e.
transactions with owners in their capacity as
owners)
• i.e. no gain or loss on disposal of interests in
subsidiary can be recognised in profit or loss if the
subsidiary is still a subsidiary.
61
• In such circumstances the carrying amounts of the

controlling and non-controlling interests shall be adjusted
to reflect the changes in their relative interests in the
subsidiary.
• Any difference between
– the amount by which the non-controlling interests are
adjusted
dj t d and d
– the fair value of the consideration paid or received
shall be recognised directly in equity and attributed to the
owners of the parent.
Example
Entity A holds 80% of Entity X since its incorporation Disposed of 20%
and their financial statements are set out below: interest at $50
Consol
A X pre-change
Property, plant & equipment 3,500 2,000 5,500

Interest in subsidiary 80 - -
Net current liabilities (1,000) (2,600) (3,600)
Net assets 2,580 (600) 1,900
Share capital 200 100 200

Reserves 2,380 (700) 1,820
2,580 (600) 2,020
Non-controlling interests (120)

(Assume fair value = carrying amount) 1,900
62
Example
Consol
A X pre-change
• In such circumstances the carrying amounts of the
Property, plant & equipment 3,500 2,000 5,500
controlling and non-controlling interests shall be adjusted
Interest in subsidiary 80 - -
to reflect the changes in their relative interests in the
Net current liabilities (1,000) (2,600) (3,600)
subsidiary.
• Any
Net difference between
assets 2,580 (600) 1,900
− the amount by which the non-controlling interests are NCI to be
adjusted
dj t d and d adjusted
dj t d (120)
Share capital
− the 200
fair value of the consideration 100
paid or received200 Consideration 50
Reserves 2,380 (700) 1,820
shall be recognised directly in equity and attributed to the Difference
2,580 (600) 2,020
owners of the parent. to equity 170
Non-controlling interests (120)
(Assume fair value = carrying amount) 1,900
Example
Consol Consol.
A X pre-change Dr/(Cr) after change
Property, plant & equipment 3,500 2,000 5,500 5,500

Interest in subsidiary 80 - - -
Net current liabilities (1,000) (2,600) (3,600) 50 (3,550)
Net assets 2,580 (600) 1,900 1,950
Share capital 200 100 200 200

Reserves 2,380 (700) 1,820 170 1,990
2,580 (600) 2,020 2,190
Non-controlling interests (120) (120) (240)

(Assume fair value = carrying amount) 1,900 1,950
63
Loss of Control
• Specific requirements introduced when a parent loses control of a
subsidiary:
– If a parentt loses
l control
t l off a subsidiary,
b idi it
it:
a) derecognises the assets (including any goodwill) and liabilities of the
subsidiary at their carrying amounts at the date when control is lost;
b) derecognises the carrying amount of any non-controlling interests in
the former subsidiary at the date when control is lost (including any
components of other comprehensive income attributable to them);
c) recognises:
i) the fair value of the consideration received
received, if any,
any from the
transaction, event or circumstances that resulted in the loss of
control; and
ii) 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;
Loss of Control
• Specific requirements introduced when a parent loses control of a
subsidiary:
– If a parentt loses
l control
t l off a subsidiary,
b idi it
it:
d) recognises any investment retained in the former subsidiary at its
fair value at the date when control is lost;
e) reclassifies to profit or loss, or transfers directly to retained earnings
if required in accordance with other HKFRSs, the amounts identified
in HKAS 27.35 (discussed in next slide); and
f) recognises any resulting difference as a gain or loss in profit or loss
attributable to the parent.
64
Loss of Control
• If a parent loses control of a subsidiary,
– the parent shall account for all amounts recognised in
other comprehensive income in relation to that
subsidiary
• on the same basis as would be required if the parent
had directly disposed of the related assets or
liabilities.
• Therefore, if a gain or loss previously recognised in
other comprehensive income would be reclassified to
profit or loss on the disposal of the related assets or
liabilities,
– the parent reclassifies the gain or loss from equity to
profit or loss (as a reclassification adjustment) when it
loses control of the subsidiary.
Loss of Control
Example
Think about 2 different cases with similar figures:

HK$ Sub. A Sub. B
Sale proceeds 100 100
Carrying amount of the subsidiary’s net

assets in consolidated financial statements 100 100
Anything recognised
in profit or loss?
What is the further
information you have
to ask?
65
Loss of Control
Example
What if ……
HK$ Sub. A Sub. B

Representing:
- Revalued amount of available-for-sale 100
- Revalued amount of PPE 100
Revaluation reserves 20 20
Anything recognised
in profit or loss?
Loss of Control
Example
A parent loses control of a

subsidiary and the subsidiary has
the following
g assets: The parent shall reclassify to
– The subsidiary has available-for- profit or loss the gain or loss
sale financial assets previously recognised in other
comprehensive income in relation
to those assets.
– The subsidiary has property, The parent transfers the

plant and equipment with revaluation surplus directly to
revaluation
l ti surplusl previously
i l retained earnings when it loses
recognised in other control of the subsidiary
comprehensive income • since the revaluation surplus
would be transferred directly to
retained earnings on the disposal
of the asset
66
Loss of Control
Example
What if ……
HK$ Sub. A Sub. B

Representing:
- Revalued amount of available-for-sale 100
- Revalued amount of PPE 100
Revaluation reserves 20 20
Revaluation reserves relating to available-

for-sale reclassified to profit or loss
Revaluation reserves relating to PPE
transferred directly to retained earnings
Business Combinations
(HKFRS 3 Revised in 2008)
67
Introduction
• The objective of HKFRS 3 (revised 2008) is
Scope
– to improve the relevance, reliability and comparability of
the information that a reporting entity provides in its
financial statements about a business combination and
Method of its effects.
accounting
• To accomplish that, HKFRS 3 establishes principles
and requirements for how the acquirer:
Application of
a) recognises and measures in its financial statements the
the method
identifiable assets acquired, the liabilities assumed and
any non-controlling interest in the acquiree;
b) recognises and measures
• the goodwill acquired in the business combination or
• a gain from a bargain purchase; and What is it?
c) determines what information to disclose to enable users
of the financial statements to evaluate the nature and
financial effects of the business combination.
The Acquisition Method
Scope
Method of • An entity shall account for each business combination

accounting by applying the acquisition method. (HKFRS 3.4)
• Applying the acquisition method requires:

Application of
a) identifying the acquirer; Guidance in HKAS 27
the method
b) determining the acquisition date; Date of control obtained
c)) recognising
g g and measuring g
• the identifiable assets acquired,
• the liabilities assumed and
• any non-controlling interest in the acquiree; and
d) recognising and measuring
• goodwill or
• a gain from a bargain purchase. (HKFRS 3.5)
68
• Recognising and measuring the identifiable assets acquired, the
liabilities assumed and any non-controlling interest in the acquiree
• As of the acquisition date, the acquirer shall

recognise, separately from goodwill,
– the identifiable assets acquired,
– the liabilities assumed and
Application of
the method – any non-controlling interest in the acquiree.
• Recognition of identifiable assets acquired and
liabilities assumed is subject to the conditions
specified in HKFRS 3.11 and 3.12. (HKFRS 3.10)

• Recognising and measuring the identifiable assets acquired, the
liabilities assumed and any non-controlling interest in the acquiree
• The acquirer shall measure the identifiable assets acquired

and the liabilities assumed
– at their acquisition-date fair values. Affect acquisition in stages
(HKFRS 3.18)
• For each business combination, the acquirer shall measure
any non-controlling interest in the acquiree either
– at fair value or New alternative ((“full g
goodwill method”))
– at the non-controlling interest’s proportionate share of the
acquiree’s identifiable net assets. (HKFRS 3.19) Existing practice
69
Example
New alternative
Existing practice
(“Full goodwill method”)
HK$ HK$
Fair value of identifiable net assets of
Entity A 100
Purchase 75% interest in Entity A Fair value of Entity A as a
(consideration is $120) 120
HK$ whole ($120 ÷ 75%) 160
HK$
Parent’s interest – 75% of fair value
off identifiable
id tifi bl nett assets
t ($100
$ × 75%) 75
Non-controlling interest ($100 × 25%) 25 NCI ($160 × 25%) 40
(at its proportionate share of Entity A’s (at fair value)
identifiable net assets)
Goodwill ($120 - $75) 45 Goodwill ($160 – $100) 60
The Acquisition Method Critical

Amendment
• Recognising and measuring goodwill or a gain from a bargain purchase
• The acquirer shall recognise goodwill as of the

acquisition date measured as the excess of (a) over (b)
below:
a) the aggregate of:
Application of i) the consideration transferred measured in accordance with
the method HKFRS 3, which generally requires acquisition-date fair value;
ii) the amount of any non-controlling interest in the acquiree
If fair value is adopted,
adopted it will measured in accordance with HKFRS 3; and
affect the amount of goodwill iii) in a business combination achieved in stages, the acquisition-
date fair value of the acquirer’s previously held equity interest
Practices changed in the acquiree.
b) the net of the acquisition-date amounts of the identifiable
assets acquired and the liabilities assumed measured in
accordance with HKFRS 3. (HKFRS 3. 32)
70
Example
Existing practice
HK$ HK$
Fair value ofFair
identifiable
value ofnet
identifiable
assets ofnet a
Entity A 100 100 b
Purchase 75%Purchase
interest75%
in Entity
interest
A in Entit
(consideration
(consideration
is $120) is $120) 120
HK$ 120
HK$ a(i)
Parent’s interest
Parent’s
– 75%
interest
of fair–value
75% of fairf
of identifiable
o de t ab e de
net
ett assets
ab e net
identifiable et($assets
($100
00 × 75%)
5%) 75
5
Non-controlling
Non-controlling
interest ($100
interest
× 25%) 25 a(ii)
(at its proportionate share of Entity A’s 145
Goodwill Goodwill ($120 - $75) 45 45

$(120 + 25) – $100
=$$45

Example
New alternative
Existing practice
(“Full goodwill method”)
HK$ HK$
Fair value of identifiable net assets of
Entity A 100 b
Purchase 75% interest in Entity A Fair value of Entity A
(consideration is $120) 120
HK$ a(i) ÷ 75%)
($120 160
HK$
Parent’s interest – 75% of fair value
of identifiable
o de t ab e net
et assets ($
($100
00 × 75%)
5%) 75
5
Non-controlling interest ($100 × 25%) 25 NCI
a(ii)($160 × 25%) 40 a(ii)
(at its proportionate share of Entity A’s (at fair value)
Goodwill ($120 - $75) 45 Goodwill ($160–$100) 60

$(120 + 25) – $100 $(120 + 40) – $100
=$$45 =$$60
71
• Additional guidance
– Amended practices on business combination achieved in stages
• In a business combination achieved in stages, the

acquirer shall
– remeasure its previously held equity interest in the
acquiree at its acquisition-date fair value and
– recognise the resulting gain or loss, if any, in profit or
loss. (HKFRS 3.42)

• Additional guidance
– Amended practices on business combination achieved in stages
• In prior reporting periods, the acquirer may have recognised changes in

the value of its equity interest in the acquiree in other comprehensive
income (for example, because the investment was classified as
available for sale).
– If so, the amount that was 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. (HKFRS 3.42)
– In other words
words, “the
the amount recognised directly in other comprehensive
income is reclassified and included in the calculation of the gain or loss
recognised in profit or loss”. (KPMG-UK, 2008.01)
72
• Acquisition-related costs
• Acquisition-related costs are costs the acquirer incurs to effect a

business combination.
– Those costs include finder’s fees; advisory, legal, accounting, valuation and other
professional or consulting fees; general administrative costs, including the costs of
maintaining an internal acquisitions department; and costs of registering and issuing
debt and equity securities.
• The acquirer shall account for acquisition-related costs as expenses in
the p
periods in which the costs are incurred and the services are
received, with one exception.
• The costs to issue debt or equity securities shall be recognised in
accordance with HKAS 32 and HKAS 39.
Today’s Agenda
Global Trend and Fair Value Debate
73
Global Trend in Financial Reporting
Latest observations
• IFRS uses more US approach
and/or terms • Converging to US
• The G20 communique said:
• Additional (or different role) is
‒ With a view towards promoting
financial stability, the governance suggested to the IASB
of the international accounting • IFRS would be subject to
standard-setting body should be further changes
further enhanced ……
• Fair value accounting advocated • What’s ne
next?
t?
by the IFRS is blamed for
• Fall back to historical cost
causing and/or exacerbating the
only?
current financial tsunami or credit
crisis • Changes again?
• US Roadmap to IFRS – 2014?
Fair Value Debate
Fair Value Debate
Housing price declines
Value of MBS (mortgage

back securities) declines
Mark-to-market losses
recognised
To raise capital
(say by selling MBS)
Credit ratings downgraded Eventually, entity

collapse …..
74
Fair Value Debate
• William Isaac, Past Chairman of the US Federal
Insurance Deposit Corp. complained that fair value
accounting or mark
mark-to-market
to market rule is the chief culprit in
the global financial crisis and “should be withdrawn
immediately”, noting “hundreds of billions of dollars have
been lost because of these rules.” (A Plus Dec. 2008)
• FASB Chairman Bob Herz said:

“The concept of fair value, which
was intended to help p bring
g
transparency, was scorned by some
as a villain, exacerbating the
(economic) turmoil, and heralded by
others as a savior in revealing the
problems on a timely basis”
(Journal of Accountancy Dec. 2008)
Fair Value Debate

• Sir David Tweedie even nearly quit from the Chairman of
the International Accounting Standard Board due to
political pressure from the European Commission that
forced to changes in fair value accounting rules
(Financial Times Nov. 2008)
• France supported by some countries

within European Commission was
lobbying very hard for changes in
IFRS, in particular IAS 39, i.e.
including fair value accounting rule
rule.
(A Plus Dec. 2008)
• The American Bankers Association

is currently the leading critic, saying
that fair value has exaggerated
losses at financial institutions.
(Financial Week Oct. 2008)
75
Fair Value Debate: Defend
• “Admittedly, fair value measurement is not a perfect system …..
But calls to scrap or suspend the implementation of fair value
rules are unwarranted.”
unwarranted. (CFA Magazine, Jul
Jul-Aug
Aug 2008)
• “However, those criticising fair value

accounting do not seem to provide any
credible alternatives.”
• “Do we go back to historical cost accounting,
wherein the financial assets are stated at
outdated values and hence are not relevant
or reliable?” (The Economic Times, 21 Nov. 08)
• US SEC Chairman, Christopher Cox, said “the

current concept of mark-to-market accounting
increases the transparency of financial
information.” (InvestorNews Dec. 2008)
Fair Value Debate: Steps Taken
• The US SEC (and FASB) have taken the following:

– SEC issued a clarification on fair value accounting in Sep. 2008
– FASB Staff Position released in Oct. 2008
• On 30 Dec. 2008, the SEC delivered a report to Congress (as
mandated by the Emergency Economic Stabilization Act of 2008)
– recommended against the suspension of fair value accounting
– rather, suggested having improvements to existing practice, incl.:
• reconsidering the accounting for impairments
• developing additional guidance for determining fair value of investments
in inactive markets (http://www.sec.gov/news/press/2008/2008-307.htm and
http://www.sec.gov/news/studies/2008/marktomarket123008.pdf)
76
Fair Value Debate: Steps Taken
• On 2 April 2009 (as you might have know), after the
continuous pressure from US Congress and the banks …….
“The
The US standard
standard-setter
setter has relaxed fair value accounting rules for
bank assets in a move that allows them to ignore market prices
where the market for those assets is judged to be illiquid or
distressed.”
“In a bid to reduce pressure on banks carrying toxic assets on their
balance sheets, the Financial Accounting Standards Board also
voted to allow banks to book smaller losses on impaired assets that
are listed for sale.”
“US
US markets reacted strongly
strongly, welcoming FASB's decision
decision.
• “The Dow Jones Index topped 8,000 for the first time since 9
February.”
• “The cheer spread to the UK, where the FTSE 100 rose 4.3
per cent to 4,125 in the first time it has closed above 4,000 for
more than a month.”
(Accountancy Age, 3 April 2009)
One World, One Standard ……
Canada
(2011) Russia
Europe Korea (2011)

2014? U.S.
China Japan (2011?)
Hong Kong
India
(2011)
天下大勢合久必分分久必合

《三國演義》
77
同一個世界，同一套準則 ……

18 April 2009
Full set of slides in PDF can be found in

www NelsonCPA com hk
www.NelsonCPA.com.hk

nelson@nelsoncpa.com.hk
www.nelsoncpa.com.hk
78
18 April 2009
Full set of slides in PDF can be found in

www NelsonCPA com hk
www.NelsonCPA.com.hk
Q&A Session

nelson@nelsoncpa.com.hk
www.nelsoncpa.com.hk
79

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Financial Reporting Update

Nelson Lam 林智遠

Effective for 2008 Dec. Year

Updated from HKICPA, “HKFRS Update”, 8 Jan. 2009

Effective after 2009 Dec. Year

Updated from HKICPA, “HKFRS Update”, 8 Jan. 2009

All New and Amended HKFRSs and

Global Trend and Fair Value Debate

© 2008-09 Nelson Consulting Limited 5

All New and Amended HKFRSs and

© 2008-09 Nelson Consulting Limited 6

Updated from HKICPA, “HKFRS Update”, 8 Jan. 2009

Reclassification of Financial Assets

© 2008-09 Nelson Consulting Limited 8

© 2008-09 Nelson Consulting Limited 9

© 2008-09 Nelson Consulting Limited 10

© 2008-09 Nelson Consulting Limited 11

© 2008-09 Nelson Consulting Limited 13

Financial Assets – Reclassification

© 2008-09 Nelson Consulting Limited 14

© 2008-09 Nelson Consulting Limited 15

Financial Assets – Reclassification

It reclassified certain financial assets in 2008 and explained in its 2008

© 2008-09 Nelson Consulting Limited 17

Financial Assets – Reclassification

• For a financial asset reclassified out of the

AFS financial Loans and

© 2008-09 Nelson Consulting Limited 20

2008 annual report:

© 2008-09 Nelson Consulting Limited 21

Financial Assets – Reclassification

It explained in its 2008 annual report about the implication of the

© 2008-09 Nelson Consulting Limited 22

• If the election is made on or after 1 November 2008

© 2008-09 Nelson Consulting Limited 23

Financial Assets – Reclassification

2008 annual report:

© 2008-09 Nelson Consulting Limited 24

© 2008-09 Nelson Consulting Limited 25

A Parent Grants Rights to its

A Subsidiary Grants Rights to

© 2008-09 Nelson Consulting Limited 26

• SBP transactions in which an entity receives services as

© 2008-09 Nelson Consulting Limited 27

• Provided that the share-based A Parent Grants Rights to its

© 2008-09 Nelson Consulting Limited 28

A Parent Grants Rights to its

• Such an employee may fail to satisfy a vesting condition other than

A Subsidiary Grants Rights to

© 2008-09 Nelson Consulting Limited 31

Service Concession Arrangements

© 2008-09 Nelson Consulting Limited 32

© 2008-09 Nelson Consulting Limited 33

© 2008-09 Nelson Consulting Limited 34

© 2008-09 Nelson Consulting Limited 35

© 2008-09 Nelson Consulting Limited 37

© 2008-09 Nelson Consulting Limited 38

Operator = Service Provider

© 2008-09 Nelson Consulting Limited 39

An unconditional contractual right to

A right (a licence) to charge users of the Intangible Asset

© 2008-09 Nelson Consulting Limited 40

© 2008-09 Nelson Consulting Limited 41

Financial Reporting Update: Nelson Lam Nelson Lam 林智遠林智遠

Financial Reporting Update: Nelson Lam Nelson Lam 林智遠林智遠