HKFRS 9 Financial Instruments Hedge Accounting and Amendments to HKFRS 9, HKFRS 7 and HKAS 39

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1 HKFRS 9 Financial Instruments Hedge Accounting and Amendments to HKFRS 9, HKFRS 7 and HKAS 39 December Newsletter Issue No. 07/2013 MAIN FEATURES A substantial overhaul of hedging accounting Better reflect the risk management activities in the financial statements Change the accounting for liabilities that are elected to measure at fair value Changes in fair value caused by changes in its own credit quality are no longer recognised in profit or loss Remove the mandatory effective date of 1 January 2005 of HKFRS 9 A new date should be decided until the entire HKFRS 9 project is closer to completion Background In November 2013, the International Accounting Standards Board ( IASB ) announced the completion of a package of amendments to the accounting requirements for financial instruments. These amendments make three important changes to International Financial Reporting Standard ( IFRS ) 9, which are: To introduce a new hedge accounting model together with corresponding disclosures about risk management activity; To address the so-called own credit issue ; and To remove the mandatory effective date of 1 January 2005 of IFRS 9 The IASB intends that IFRS 9 will ultimately replace IAS 39 in its entirely by three main phases, namely: a) Phase 1: Classification and measurement of financial assets and liabilities b) Phase 2: Impairment methodology c) Phase 3: Hedge accounting 1 SHINEWING (HK) CPA Limited - Newsletter December 2013

2 Among the three phases, the impairment phase of the IFRS 9 has not yet been completed. This is also the reason why the IASB considered that a mandatory date of 1 January 2015 would not allow sufficient time for entities to prepare to apply the new standard. However, entities may still choose to apply IFRS 9 immediately and will have an accounting policy choice as to apply hedge accounting in IAS 39 or IFRS 9. Subsequently in December 2013, the Hong Kong Institute of Certified Public Accountants also issued the same amendments so as to maintain the convergence with IFRSs. Why change the hedge accounting requirements? In view of the increased use and complexity of hedging activities, investors want to be able to understand the risks that an entity faces, what management is doing to manage those risks and how effective those risk management strategies are. However, the existing HKAS 39 is not able to provide such information. In order to response to such concerns, a new hedging accounting model ( New Hedging Model ) together with corresponding disclosures about risk management activity is introduced. This will allow entities to use risk management information as a basis for hedge accounting. 2 SHINEWING (HK) CPA Limited - Newsletter December 2013

3 Overview of the major differences between HKAS 39 and the New Hedging Model Area HKAS 39 The New Hedging Model under HKFRS 9 a. Approach Principal-based Economic relationship-based b. Eligibility for hedging Whether an instrument is a Whether an instrument is accounting derivative or non-derivative measured at fair value through profit or loss Allow component of Allow component of financial items to be financial and non-financial hedged items to be hedged c. Accounting for the Recognise on a fair value Defer in other fair value changes of basis in profit or loss comprehensive income over options immediately the term of hedge Remove amounts from equity to profit or loss depends either the hedged item is: (i) a transaction related hedged item or (ii) a period related hedged item 3 SHINEWING (HK) CPA Limited - Newsletter December 2013

4 What is the accounting for liabilities under HKFRS 9? As part of the amendments, HKFRS 9 introduces new requirement for the accounting and presentation of changes in fair value of an entity s own debt that are measured at fair value. If the fair value is affected by the changes in the entity s own credit, such changes are recognised in other comprehensive income, rather than in profit or loss. Hence, an entity is now allowed to measure its financial instruments at fair value under HKAS 39 but to benefit from the improved accounting for own credit under HKFRS 9. More detailed information can be found at the following link: 4 SHINEWING (HK) CPA Limited - Newsletter December 2013

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