Framework and IAS 1 March 2007

Transcription

1 Framework and IAS 1 March 2007 Nelson Lam 林智遠 MBA MSc BBA ACA CFA CPA(Aust) CPA(US) FCCA FCPA(Practising) Nelson 1 Today s Agenda Introduction Framework Simple but Comprehensive Contentious and key issues Real Life Cases and Examples Presentation of of Financial Statements (IAS 1) 1) Capital Disclosures (Amendments to to IAS 1) 1) Nelson 2 1

2 Today s Agenda Introduction Nelson 3 Introduction International Financial Reporting Standards are: Standards and Interpretations issued and endorsed by the International Accounting Standard Board and comprise: International Financial Reporting Standards (IFRSs); 7 Sets in issue (from IFRS 1 to IFRS 7) International Accounting Standards (IASs); and 31 Sets in issue (from IAS 1 to IAS 41) Interpretations. What is the difference between IFRS and IAS? IASB has designated its standards as IFRS The accounting standards issued by its predecessor, the International Accounting Standards Committee (IASC), continue to be designated as IAS. IASB endorsed all IASs and designated the IFRSs to include IASs Nelson 4 2

3 Introduction After the training, you may realise that some traditional thinking Assets = Liabilities + Capital Extraordinary items should be reported in the income statement Cash at bank and deposits in bank should be current assets All should be adjusted now! Nelson 5 Today s Agenda Framework Nelson 6 3

4 What is Framework? Framework Sets out the concepts that underlie the preparation and presentation of financial statements for external users Assists preparers of financial statements in applying accounting standards Assists users of financial statements in interpreting the information contained in financial statements prepared in conformity with accounting standards But is not a standard or guideline, so does not override any specific accounting standard Nelson 7 What is Framework? Framework Deals with a) The objective of financial statements; b) The qualitative characteristics of financial information; c) The definition, recognition and measurement of the elements in the financial statements; and d) Concepts of capital and capital maintenance. Concerned with general purpose financial statements The users of financial statements include: present and potential investors, employees, lenders, suppliers and other trade creditors, customers, governments and their agencies and the public Qualitative Objective Concepts Elements of of Characteristics Capital Nelson 8 4

5 Objective of Financial Statements Process of communication Company s activities Accounting User perception Objective Nelson 9 Objective of Financial Statements Process of communication Company s activities Financial Reporting User perception IAS 1 states that: The objective of general purpose financial statements 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. Similar to the objective stated in the Framework Objective Nelson 10 5

6 Objective Assumptions Underlying Assumptions include: Accrual Basis In order to meet their objectives, financial statements are prepared on the accrual basis of accounting. Under this basis, the effects of transactions and other events are recognised when they occur (and not as cash or its equivalent is received or paid) and they are recorded in the accounting records and reported in the financial statements of the periods to which they relate. Going Concern The financial statements are normally prepared on the assumption that an entity is a going concern and will continue in operation for the foreseeable future. Hence, it is assumed that the entity has neither the intention nor the need to liquidate or curtail materially the scale of its operations; if such an intention or need exists, the financial statements may have to be prepared on a different basis and, if so, the basis used is disclosed Nelson 11 Qualitative Characteristics Primary qualitative characteristics of financial statements Relating to content - Relevance (Predictive value, Confirmatory value, Interrelated) - Reliability (Faithful representation, Substance over form, Neutrality, Prudence and Completeness) Relating to presentation - Comparability (Consistency and Disclosure) - Understandability (Users ability, Aggregation and Classification) Qualitative Objective Characteristics Nelson 12 6

7 Qualitative Characteristics Primary qualitative characteristics of financial statements Relating to content - Relevance - Reliability Relating to presentation - Comparability - Understandability Management Decision Financial reporting Qualitative Objective Characteristics Nelson 13 Qualitative Characteristics Emerging International Practices Financial reporting framework clearly defined Definition of assets and liabilities clearly established Beginning to adopt fair value model (instead of only historical cost) Discussing convergence in certain practices From IASC to IASB (International Accounting Standard Board) From IAS to IFRS (International Financial Reporting Standards) Nelson 14 7

8 Qualitative Characteristics All aims at Relevance Reliability Comparability Understandability Management Decision Financial reporting Nelson 15 Elements of Financial Statements Financial Position (in balance sheet) Asset Liability Equity Financial Performance (in income statement) Income Expenses Objective Balance Sheet Approach a resource controlled by the enterprise as a result of past events and from which future economic benefits are expected to flow to the enterprise a present obligation of the enterprise arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits the residual interest in the assets of the enterprise after deducting all its liabilities increases in economic benefits during a period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity other than those relating to contributions from equity participants decreases in economic benefits during a period in the form of outflows or depletions of assets or incurrences of liabilities that result in decreases in equity, other than those relating to distributions to equity participants Qualitative Elements Characteristics Nelson 16 8

9 Elements of Financial Statements Financial Position (in balance sheet) Asset Definition Liability Equity Financial Performance (in income statement) Income Expenses Objective Balance Sheet Approach a resource controlled by the enterprise as a result of past events and from which future economic benefits are expected to flow to the enterprise a present obligation of the enterprise arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits the residual interest in the assets of the enterprise after deducting all its liabilities increases in economic benefits during a period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity other than those relating to contributions from equity participants decreases in economic benefits during a period in the form of outflows or depletions of assets or incurrences of liabilities that result in decreases in equity, other than those relating to distributions to equity participants Qualitative Elements Characteristics Nelson 17 Elements of Financial Statements Definition IFRS Approach Recognition Measurement Presentation and disclosure Objective Qualitative Characteristics Elements Nelson 18 9

10 Elements of Financial Statements Definition IFRS Approach Recognition Framework gives a general overview Measurement Presentation and disclosure Objective Qualitative Characteristics Elements Nelson 19 Elements of Financial Statements Definition Recognition is is the the process of of incorporating in in the the balance sheet or or income statement an an item item that that meets the the Definition of of an an element and and satisfies the the Criteria for for Recognition Recognition Objective Criteria for for recognition an an item item that that meets the the definition of of an an element should be be recognized if: if: it it is is probable that that any any future economic benefit associated with with the the item item will will flow flow to to or or from fromthe enterprise; and and the the item item has has a cost cost or or value that that can can be be measured with with reliability. Qualitative Characteristics Elements Nelson 20 10

11 Elements of Financial Statements Historical cost Definition Recognition Measurement Current cost Realisable (settlement) value Fair value less cost to sell Present value Value in use Objective Qualitative Characteristics Elements Nelson 21 Capital and Capital Maintenance Concept of Capital Financial concept of capital is adopted by most enterprises in preparing their financial statements Under it, such as invested money or invested purchasing power, capital is synonymous with the net assets or equity of the enterprise. Physical concept of capital Under it, such as operating capability, capital is regarded as the productive capacity of the enterprise based on For example, units of output per day Concept of Capital Maintenance Financial concept maintenance Under this concept, a profit is earned only if the financial (or money) amount of the net assets at the end of the period exceeds the financial (or money) amount of net assets at the beginning of the period after excluding any distributions to, and contributions from, owners during the period. Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power Qualitative Concepts Objective Elements of of Characteristics Capital Nelson 22 11

12 Capital and Capital Maintenance Concept of Capital Financial concept of capital is adopted by most enterprises in preparing their financial statements Under it, such as invested money or invested purchasing power, capital is synonymous with the net assets or equity of the enterprise. Physical concept of capital Under it, such as operating capability, capital is regarded as the productive capacity of the enterprise based on For example, units of output per day Concept of Capital Maintenance Physical concept maintenance Under this concept, a profit is earned only if the physical productive capacity (or operating capability) of the enterprise (or the resources or funds needed to achieve that capacity) at the end of the period exceeds the physical productive capacity at the beginning of the period after excluding any distributions to, and contributions from, owners during the period. Qualitative Concepts Objective Elements of of Characteristics Capital Nelson 23 Summary of IFRSs International Financial Reporting Standards are: Standards and Interpretations issued and endorsed by the International Accounting Standard Board and comprise: International Financial Reporting Standards (IFRSs); International Accounting Standards (IASs); and Interpretations. IASs (International Accounting Standards) Totally 31 sets IFRSs (International Financial Reporting Standards) Totally 8 sets (up to 4 February 2007) More are coming Nelson 24 12

13 Key Points IFRSs set out Recognition, Measurement, Presentation and disclosure requirements e.g. market value, value by appraisal Main changes: Changes in recognition and measurement Changes in presentation and disclosure Less Choices Towards Fair Value Model More and clearer presentation and disclosure Aim at enhancing the information for users decision making Inter alia, one more change Nelson 25 Today s Agenda Presentation of of Financial Statements (IAS 1) 1) Nelson 26 13

14 Presentation of Financial Statements (IAS 1) Nelson 27 Presentation of Financial Statements (IAS 1) 1. Purpose of financial statements 2. Components of financial statements 3. Overall considerations 4. Structure and content Nelson 28 14

15 1. Purpose of Financial Statements To provide information about financial position, financial performance, and cash flows of an entity, That is useful to a wide range of users in making economic decisions To also show the results of management s stewardship of the resources entrusted to it To meet this objective, financial statements provide information about the entity s: Assets Liabilities Equity Income and expenses, including gains and losses Other changes in equity Cash flows Thus, we have Nelson Components of Financial Statements A complete set of financial statements comprises: a) a balance sheet; b) an income statement; c) a statement of changes in equity showing either: another name? i) all changes in equity, or ii) changes in equity other than those arising from transactions with equity holders acting in their capacity as equity holders; d) a cash flow statement; and e) notes, comprising a summary of significant accounting policies and other explanatory notes Nelson 30 15

16 3. Overall Consideration a) Fair presentation and compliance with IFRSs b) Going concern c) Accrual basis of accounting d) Consistency of presentation e) Materiality and aggregation f) Offsetting g) Comparative information Nelson Overall Consideration a) Fair presentation and compliance with IFRSs Financial statements shall present fairly of the financial position, financial performance and cash flows of an entity. Fair presentation requires the faithful representation of 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. The application of IFRSs, with additional disclosure when necessary, is presumed to result in financial statements that give a true and fair view. No such precisely statement before! Nelson 32 16

17 3. Overall Consideration a) Fair presentation and compliance with IFRSs Statement of compliance An entity whose financial statements comply with IFRSs shall make an explicit and unreserved statement of such compliance in the notes. Financial statements shall not be described as complying with IFRSs unless they comply with all the requirements of IFRSs. In virtually all circumstances, a fair presentation is achieved by compliance with applicable IFRSs Nelson Overall Consideration Case Melco Development Limited ( 新濠國際發展有限公司 ) Notes to the financial statements for year ended The consolidated financial statements have been prepared in accordance with HKFRSs. In addition, the consolidated financial statements include applicable disclosures required by the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited and by the Companies Ordinance Nelson 34 17

18 3. Overall Consideration a) Fair presentation and compliance with IFRSs A fair presentation also requires an entity: a) to select and apply accounting policies in accordance with IAS 8 b) to present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information. c) to provide additional disclosures when compliance with the specific requirements in IFRSs 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. Inappropriate accounting policies are not rectified either by disclosure of the accounting policies used, or by notes or explanatory material Nelson Overall Consideration a) Fair presentation and compliance with IFRSs Departure from Standard or Interpretation (Simplified) In the extremely rare circumstances in which management concludes that compliance with a requirement in a standard or an interpretation would be so misleading that it would conflict with the objective of financial statements set out in the Framework the entity shall depart from that requirement if the relevant regulatory framework requires, or otherwise does not prohibit, such a departure Nelson 36 18

19 3. Overall Consideration a) Fair presentation and compliance with IFRSs Departure from Standard or Interpretation (Simplified) Then, the following disclosure is required: a) management has concluded that the financial statements give a true and fair view; b) that it has complied with applicable standards and interpretations, except that it has departed from a particular requirement; c) the title of the standard or interpretation from which the entity has departed, the nature of the departure, the reason why that treatment would be so misleading, and the treatment adopted; and d) for each period presented, the financial impact of the departure on each item in the financial statements that would have been reported in complying with the requirement Nelson Overall Consideration Case Interim Report 2005 clearly stated that: The directors consider it inappropriate for the company to adopt two particular aspects of the new/revised HKFRSs as these would result in the financial statements, in the view of the directors, either: not reflecting the commercial substance of the business or being subject to significant potential short-term volatility, as explained below Nelson 38 19

20 3. Overall Consideration Case Interim Report 2005 clearly stated that: HKAS 40 Investment property requires an assessment of the fair value of investment properties. The group intends to follow the same accounting treatment as adopted in 2004, which is to value such investment properties on an annual basis. Accordingly, the investment properties were not revalued at 30 June 2005, since the directors consider that such change of practice could introduce a significant element of short-term volatility into the income statement in respect of assets which are being held on a long-term basis by the group It is not practicable to estimate the financial effect of this noncompliance as no interim valuation of the properties has been conducted. At At year-end, revaluation would still still be be conducted Nelson Overall Consideration Case Interim Report 2005 clearly stated that: HKAS 12 Income Taxes, together with HKAS-INT 21 Income Taxes Recovery of Revalued Non-Depreciable Assets, requires deferred taxation to be recognised on any revaluation movements on investment properties. It is further provided that any such deferred tax liability should be calculated at the profits tax rate in the case of assets which the management has no definite intention to sell. The company has not made such provision in respect of its HK investment properties since the directors consider that such provision would result in the financial statements not reflecting the commercial substance of the business since, should any such sale eventuate, any gain would be regarded as capital in nature and would not be subject to any tax in HK. Should this aspect of HKAS 12 have been adopted, deferred tax liabilities amounting to HK$2,008 million on the revaluation surpluses arising from revaluation of HK investment properties would have been provided. (estimate - over 12% of the net assets at 30 June 2005) Nelson 40 20

21 3. Overall Consideration a) Fair presentation and compliance with IFRSs Departure but such departure is prohibited In the extremely rare circumstances in which management concludes that compliance with a requirement in a standard or an interpretation would be so misleading that it would conflict with the objective of financial statements set out in the Framework but the relevant regulatory framework prohibits departure from the requirement, the entity shall, to the maximum extent possible, reduce the perceived misleading aspects of compliance by disclosing Nelson Overall Consideration a) Fair presentation and compliance with IFRSs Departure but such departure is prohibited by disclosing: a) the title of the standard or interpretation in question, the nature of the requirement, and the reason why management has concluded that complying with that requirement is so misleading in the circumstances that it conflicts with the objective of financial statements set out in the Framework; and b) for each period presented, the adjustments to each item in the financial statements that management has concluded would be necessary to give a fair presentation Nelson 42 21

22 3. Overall Consideration a) Fair presentation and compliance with IFRSs When assessing whether complying with a specific requirement in a standard or an interpretation would be so misleading that it would conflict with the objective of financial statements set out in the Framework management considers: a) why the objective of financial statements is not achieved in the particular circumstances; and b) how the entity s circumstances differ from those of other entities that comply with the requirement. If other entities in similar circumstances comply with the requirement,» there is a rebuttable presumption that the entity s compliance with the requirement would not be so misleading that it would conflict with the objective of financial statements set out in the Framework Nelson Overall Consideration Case How s about this However, 2005 Final Results Announcement disclosed that that provision for for deferred tax tax was was finally made with with regard to to revaluation of of the the HK HK investment properties (total HK$2.2 billion) at at 2005 year-end. end Nelson 44 22

23 3. Overall Consideration b) Going Concern When preparing financial statements, management shall make an assessment of an entity s ability to continue as a going concern. Financial statements shall be 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, in making its assessment, of material uncertainties related to events or conditions that may cast significant doubt upon the entity s ability to continue as a going concern, those uncertainties shall be disclosed. When financial statements are not prepared on a going concern basis, that fact shall be disclosed, together with the basis on which the financial statements are prepared and the reason why the entity is not regarded as a going concern Nelson Overall Consideration c) Accrual Basis of Accounting An entity shall prepare its financial statements, except for cash flow information, using the accrual basis of accounting. When the accrual basis of accounting is used, items are recognised as assets, liabilities, equity, income and expenses when they satisfy the definitions and recognition criteria for those elements in the Framework Nelson 46 23

24 3. Overall Consideration d) Consistency of presentation The presentation and classification of items in the financial statements shall be retained from one period to the next unless: a) it is apparent, following a significant change in the nature of the entity s operations (e.g. significant acquisition or disposal) or a review of its financial statements, that another presentation or classification would be more appropriate having regard to the criteria for the selection and application of accounting policies in IAS 8; or b) a IFRS requires a change in presentation. An An entity changes the the presentation of of its its financial statements only if if the the changed presentation provides information that is is reliable and and is is more relevant to to users of of the the financial statements, and and the the revised structure is is likely to to continue, so so that comparability is is not not impaired Nelson Overall Consideration e) Materiality and Aggregation Each material class of similar items shall be presented separately in the financial statements. Items of a dissimilar nature or function shall be presented separately unless they are immaterial. Applying the concept of materiality means that a specific disclosure requirement in a IFRS need not be satisfied if the information is not material. What is the situation of recognition and measurement? Nelson 48 24

25 3. Overall Consideration e) Materiality and Aggregation What is material? Omissions or misstatements of items are material if they could, individually or collectively, influence the economic decisions of users taken on the basis of the financial statements. 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 Nelson Overall Consideration f) Offsetting Assets and liabilities, and income and expenses, shall not be offset unless required or permitted by a IFRS. It is important that assets and liabilities, and income and expenses, are reported separately. Measuring assets net of valuation allowances for example, obsolescence allowances on inventories and doubtful debts allowances on receivables is not offsetting Nelson 50 25

26 3. Overall Consideration f) Offsetting During ordinary activities, some transactions that do not generate revenue but are incidental to the main revenue-generating activities. The results of such transactions are presented, when this presentation reflects the substance of the transaction or other event, by netting any income with related expenses arising on the same transaction Nelson Overall Consideration Example f) Offsetting For example: a) gains and losses on the disposal of non-current assets, including investments and operating assets, - are reported by deducting from the proceeds on disposal the carrying amount of the asset and related selling expenses; and b) expenditure related to a provision that is - recognised in accordance with IAS 37 and - reimbursed under a contractual arrangement with a third party (for example, a supplier s warranty agreement) may be netted against the related reimbursement Nelson 52 26

27 3. Overall Consideration Can foreign exchange gains and losses be offset? Example Gains and and losses arising from from a group of of similar transactions are are reported on on a net net basis For For example, foreign foreign exchange gains gains and and losses losses or or gains gains and and losses losses arising arising on on financial instruments held held for for trading. trading. Such gains and and losses are, are, however, reported separately if if they they are are material Nelson Overall Consideration g) Comparative information Except when a IFRS permits or requires otherwise, comparative information shall be disclosed in respect of the previous period for all amounts reported in the financial statements. When the presentation or classification of items in the financial statements is amended, comparative amounts shall be reclassified unless the reclassification is impracticable Nelson 54 27

28 3. Overall Consideration g) Comparative information When comparative amounts are reclassified, an entity shall disclose: a) the nature of the reclassification; b) the amount of each item or class of items that is reclassified; and c) the reason for the reclassification. Amended requirements In the past only the reason for and a description of the nature of material reclassifications should be disclosed. Exemption for disclosure of comparative information for the reconciliation of movements in fixed assets is also removed Nelson Overall Consideration Case Melco Development Limited ( 新濠國際發展有限公司 ) Notes to the financial statements for year ended Because HKAS 32 requires retrospective application, comparative figures for 2004 have been restated (see Note 2A for the financial impact) Nelson 56 28

29 3. Overall Consideration Case Galaxy Entertainment Group Limited Notes to the financial statements (y.e ) All changes in the accounting policies require retrospective application, except HKAS 39 and HKFRS 2 for which transitional provisions are applied. As a result, the 2004 comparative figures have also been restated or amended in accordance with the relevant requirements. The effects of all the changes in accounting policies are summarised in notes (b) and (c) below Nelson Structure and Content Identification of the financial statements Reporting period Balance sheet 1. Current/Non-current distinction 2. Current assets 3. Current liabilities 4. Information to be presented on the face of the balance sheet 5. Information to be presented either on the face of the balance sheet or in the notes Income statement 1. Profit or loss for the period 2. Information to be presented on the face of the income statement 3. Information to be presented either on the face of the income statement or in the notes Statement of changes in equity Cash flow statement Notes Nelson 58 29

30 Identification of Financial Statements The financial statements shall be identified clearly and distinguished from other information in the same published document. The following information shall be displayed prominently, and repeated when it is necessary for a proper understanding of the information presented: a) the name of the reporting entity or other means of identification, and any change in that information from the preceding balance sheet date; b) whether the financial statements cover the individual entity or a group of entities; c) the balance sheet date or the period covered by the financial statements, whichever is appropriate to that component of the financial statements; d) the presentation currency, as defined in HKAS 21 The Effects of Changes in Foreign Exchange Rates; and e) the level of rounding used in presenting amounts in the financial statements Nelson 59 Identification of Financial Statements Can the units of the presentation currency be rounded to thousands or millions? Example Financial statements are are often made more understandable by by presenting information in in thousands or or millions of of units of of the the presentation currency. This This is is acceptable as as long long as as the the level level of of rounding in in presentation is is disclosed and and material information is is not not omitted Nelson 60 30

31 Reporting Period Financial statements shall be presented at least annually. When an entity s balance sheet date changes and the annual financial statements are presented for a period longer or shorter than one year, an entity shall disclose, in addition to the period covered by the financial statements: a) the reason for using a longer or shorter period; and b) the fact that comparative amounts for the income statement, statement of changes in equity, cash flow statement and related notes are not entirely comparable Nelson 61 Reporting Period Can a set of financial statements cover 52- week, instead of a year? Example Normally, financial statements are are consistently prepared covering a one-year period. However, for for practical reasons, some entities prefer to to report, for for example, for for a 52-week period. IAS IAS 1 does not not preclude this this practice, because the the resulting financial statements are are unlikely to to be be materially different from from those that that would be be presented for for one one year Nelson 62 31

32 Current/Non-current Distinction An entity shall present current and non-current assets, and current and non-current liabilities, as separate classifications on the face of its balance sheet Except when a presentation based on liquidity provides information If that information is reliable and is more relevant When that exception applies, all assets and liabilities shall be presented broadly in order of liquidity Nelson 63 Current/Non-current Distinction Whichever method of presentation is adopted, for each asset and liability line item that combines amounts expected to be recovered or settled a) no more than 12 months after the balance sheet date and b) more than 12 months after the balance sheet date, (i.e. combines both current and non-current) an entity shall disclose the amount expected to be recovered or settled after more than 12 months Nelson 64 32

33 Current Assets An asset shall be classified as current when it satisfies any of the following criteria: a) it is expected to be realised in, or is intended for sale or consumption in, the entity s normal operating cycle; What is it? b) it is held primarily for the purpose of being traded; c) it is expected to be realised within 12 months after the balance sheet date; or d) it is cash or a cash equivalent unless it is restricted from being exchanged or used to settle a liability for at least 12 months after the balance sheet date. New requirements All other assets shall be classified as non-current. Examples: Deposits pledged to bank (how long?) Fixed deposits over 1 year maturity Nelson 65 Current Assets What is operating cycle? Example The The operating cycle of of an an entity is is the the time time between the the acquisition of of assets assets for for processing and and their their realisation in in cash cash or or cash cash equivalents. When the the entity s normal operating cycle is is not not clearly identifiable, its its duration is is assumed to to be be months Nelson 66 33

34 Current Assets Case Nelson 67 Current Assets Can a non-current asset reclassified if it fulfil the definition of current asset later? Assets classified as as non-current in in accordance with with IAS IAS 1 shall shall not notbe be reclassified as as current assets until untilthey they meet meet the the criteria criteria to to be be classified as as held held for for sale sale in in accordance with with IFRS IFRS 5 Assets of of a class that that an an entity would normally regard as as noncurrent that that are are acquired exclusively with with a view view to to resale shall shall not not non- be be classified as as current unless unlessthey meet meet the the criteria criteria to to be be classified as as held held for for sale sale in in accordance with with IFRS IFRS 5 No non-current assets can be classified as current unless the criteria in IFRS 5 are fulfilled, mainly Available for immediate sale Highly probable to make the sale Nelson 68 34

35 Current Assets Case In its 2005 Interim Report, full set of HKFRS was adopted and the report set out that: Available-for-sale financial assets are nonderivatives that are either designated in this category or not classified in any of the other categories (i.e. loans and receivables, financial assets at fair value through profit or loss and held-to-maturity investments). They are included in non-current assets unless management intends to dispose of the investment within 12 months of the balance sheet date. Similar in in 2005 Annual Report Is Is it it current? Nelson 69 Current Liabilities A liability shall be classified as current when it satisfies any of the following criteria: a) it is expected to be settled in the entity s normal operating cycle; b) it is held primarily for the purpose of being traded; c) it is due to be settled within 12 months after the balance sheet date; or d) the entity does not have an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date. New requirements All other liabilities shall be classified as non-current. Implication Nelson 70 35

36 Current Liabilities Revised rules on classifying a liability as current or non-current A liability held for being traded current A financial liability due within 12 months after the B/S date current even if an agreement to refinance on a long-term basis is completed after the B/S date (only disclosed as non-adjusting event) If an entity has discretion to refinance If an entity without discretion to refinance non-current current A non-current financial liability is payable on demand with a breach on a condition of its loan agreement on or before the B/S date If the lender agreed not to demand payment after the B/S date current (only disclosed as non-adjusting event) by the B/S date non-current Implication Nelson 71 Current Liabilities Case Note 12 to Interim Report 2006 Breach of loan covenants As at 30 June 2006, in respect of certain bank loans with an aggregate carrying amount of HK$1,529,806,000, the Group breached certain financial covenants of the banks loans. Since the lenders have not agreed to waive its right to demand immediate payment as at the balance sheet date, the loans have been classified as current liabilities in these financial statements at 30 June Nelson 72 36

37 Current Assets and Liabilities Example Can the following be classified as current assets? 3-month fixed deposits pledged to a bank to secure a mortgage loan of 5 years 2-year fixed deposits with a bank Can the following be classified as non-current liabilities? 5-year term loan matured after year end but renewed for another 5 years after year end (before the issuance of the financial statements) 2-year term loan to be matured with 12 months and the entity has a right to renew for another 2 years Nelson 73 Balance Sheet As a minimum, the face of the balance sheet shall include line items that present the following amounts: a) property, plant and equipment; b) investment property; c) intangible assets; d) financial assets (excl. 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) trade and other payables; k) provisions; l) financial liabilities (excl. amounts shown under (j) and (k)); m) liabilities and assets for current tax, as defined in HKAS 12 Income Taxes; n) deferred tax liabilities and deferred tax assets, as defined in HKAS 12; o) minority interest, presented within equity; and p) issued capital and reserves attributable to equity holders of the parent Nelson 74 37

38 Balance Sheet The face of the balance sheet shall also include line items that present the following amounts: a) The total of assets classified as held for sale and assets included in disposal groups classified as held for sale in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations; and b) Liabilities included in disposal groups classified as held for sale in accordance with IFRS Nelson 75 Balance Sheet Additional line items, headings and subtotals shall be presented on the face of the balance sheet when such presentation is relevant to an understanding of the entity s financial position. When an entity presents current and non-current assets, and current and non-current liabilities, as separate classifications on the face of its balance sheet, it shall not classify deferred tax assets (liabilities) as current assets (liabilities) Nelson 76 38

39 Balance Sheet The use of different measurement bases for different classes of assets suggests that their nature or function differs and, therefore, that they should be presented as separate line items. For example, different classes of property, plant and equipment can be carried at Cost, or Revalued amounts in accordance with IAS 16 PPE. In In the past, it it use may need Nelson 77 Balance Sheet Case Galaxy Entertainment Group Limited Consolidated balance sheet as at Nelson 78 39

40 Balance Sheet Case Melco Development Limited ( 新濠國際發展有限公司 ) Consolidated balance sheet as at Nelson 79 Income Statement Minimum requirements on the face of the income statement As a minimum, the face of the income statement shall include line items that present the following amounts for the period: a) revenue; b) finance costs; c) share of the profit or loss of associates and joint ventures accounted for using the equity method; d) pre-tax gain or loss recognised on the disposal of assets or settlement of liabilities attributable to discontinuing operations; e) tax expense; and f) profit or loss Nelson 80 40

41 Income Statement The following items shall be disclosed on the face of the income statement as allocations of profit or loss for the period: a) Profit or loss attributable to minority interest, and b) Profit or loss attributable to equity holders of the parent A similar requirement has been added for the statement of changes in equity and such allocated amounts are not to be presented as items of income or expense Nelson 81 Income Statement Case Melco Dev. Ltd. Consolidated income statement as at Nelson 82 41

42 Income Statement Not require to disclose the results of operating activities as a line item on the face of the income statement An entity shall not present any items of income and expense as extraordinary items, either on the face of the income statements or in the notes Entities can still show it it Entities can t use it it Nelson 83 Income Statement Either on the face of the income statement or in the notes: An entity shall present an analysis of expenses using a classification based on either the nature of expenses or their function within the entity, whichever provides information that is reliable and more relevant Entities classifying expenses by function shall disclose additional information on the nature of expenses, including depreciation and amortisation expense and employee benefits expense Nelson 84 42

43 Income Statement Case Nature or or Function? Nelson 85 Statement of Changes in Equity An entity shall present a statement of changes in equity showing on the face of the statement: a) profit or loss for the period; b) each item of income and expense for the period that, as required by IFRSs, is recognised directly in equity, and the total of these items; c) total income and expense for the period (calculated as the sum of (a) and (b)), showing separately the total amounts attributable to equity holders of the parent and to minority interest; and d) for each component of equity, the effects of changes in accounting policies and corrections of errors recognised in accordance with IAS 8. Any Change? A revised requirement: A statement of changes in equity that comprises only these items shall be titled a statement of recognised income and expenses Nelson 86 43

44 Statement of Changes in Equity An entity shall also present, either on the face of the statement of changes in equity or in the notes: a) the amounts of transactions with equity holders acting in their capacity as equity holders, showing separately distributions to equity holders; b) the balance of retained earnings (ie accumulated profit or loss) at the beginning of the period and at the balance sheet date, and the changes during the period; and c) a reconciliation between the carrying amount of each class of contributed equity and each reserve at the beginning and the end of the period, separately disclosing each change Nelson 87 Statement of Changes in Equity Case Consolidated SCE as at Nelson 88 44

45 Notes Structure (an entity is required to disclose the following) The notes shall: a) present information about the basis of preparation of the financial statements and the specific accounting policies used; b) disclose the information required by HKFRSs that is not presented on the face of the balance sheet, income statement, statement of changes in equity or cash flow statement; and c) provide additional information that is not presented on the face of the balance sheet, income statement, statement of changes in equity or cash flow statement, but is relevant to an understanding of any of them. Notes shall, as far as practicable, be presented in a systematic manner. Each item on the face of the balance sheet, income statement, statement of changes in equity and cash flow statement shall be cross-referenced to any related information in the notes Nelson 89 Notes Disclosures (an entity is required to disclose the following) Disclosure of accounting policies: An entity shall disclose in the summary of significant accounting policies: a) the measurement basis (or bases) used in preparing the financial statements; and b) the other accounting policies used that are relevant to an understanding of the financial statements Nelson 90 45

46 Notes Case Galaxy Entertainment Group Limited Notes to the financial statement (y.e ) The financial statements have been prepared in accordance with Hong Kong Financial Reporting Standards ( HKFRS ) issued by the Hong Kong Institute of Certified Public Accountants under the historical cost convention as modified by the revaluation of investment properties, available-for-sale financial assets, derivative financial instruments and other investments, which are carried at fair values The principal accounting policies applied in the preparation of these financial statements are set out below. These policies have been consistently applied to all the years presented, except for those stated in note 2(a) above Nelson 91 Notes Disclosures (an entity is required to disclose the following) Disclosure of accounting policies The judgements, apart from those involving estimations, management has made in the process of applying the entity s accounting policies that have the most significant effect on the amounts recognised in the financial statements (in the summary of significant accounting policies or other notes) Examples Management makes judgements in in determining: a) a) whether financial assets are held-to-maturity investments; b) b) when substantially all the significant risks and rewards of of ownership of of financial assets and lease assets are transferred to to other entities; c) c) whether, in in substance, particular sales of of goods are financing arrangements and therefore do not give rise to to revenue; and d) d) whether the substance of of the relationship between the entity and a special purpose entity indicates that the special purpose entity is is controlled by the entity Nelson 92 46

47 Notes Disclosures (an entity is required to disclose the following) Key sources of estimation uncertainty Information about the key assumptions concerning the future, and other key sources of estimation uncertainty at the balance sheet date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year In respect of those assets and liabilities, the notes shall include details of: a) their nature; and b) their carrying amount as at the balance sheet date Examples in in the absence of of recently observed market prices used to to measure the following assets and liabilities, future-oriented estimates are necessary to to measure: the recoverable amount of of classes of of PPE the effect of of technological obsolescence on inventories Estimates involve assumptions about such items as the risk adjustment to to cash flows or or discount rates used future changes in in salaries and in in prices affecting other costs Nelson 93 Notes Case Esprit Holdings Limited Critical Accounting Estimates and Judgements Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Critical accounting estimates and assumptions The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below (including (1) useful life and impairment of trademarks and (2) income taxes) Nelson 94 47

48 Notes Case Melco Development Limited ( 新濠國際發展有限公司 ) Notes to the financial statements for the year ended The key assumptions concerning the future, and other key sources of estimation uncertainty at the balance sheet date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year, are discussed below (The issues discussed include: Allowances for inventories Estimated impairment of goodwill Income taxes) Nelson 95 Notes Case Galaxy Entertainment Group Limited Notes to the financial statement (y.e ) Estimates and judgements used in preparing the financial statements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant effect on the carrying amounts of assets and liabilities are discussed below.. (including impairment of goodwill, impairment of gaming licence, Useful lives of property, plant and equipment, fair value of investment properties..) Nelson 96 48

49 Notes Disclosures (an entity is required to disclose the following) Other disclosures An entity shall disclose in the notes: a) the amount of dividends proposed or declared before the financial statements were authorised for issue but not recognised as a distribution to equity holders during the period, and the related amount per share (HK incorporated companies are required to show the aggregate amount which is recommended for distribution by way of dividend under a separate heading(s) in their balance sheet (HK Co. Ord. 10th Sch., para 9(1)(e)); and b) the amount of any cumulative preference dividends not recognised Nelson 97 Notes Disclosures (an entity is required to disclose the following) Other disclosures An entity shall disclose the following, if not disclosed elsewhere in information published with the financial Any special? statements: a) the domicile and legal form of the entity, shall disclose now, its country of incorporation and instead the address of its registered office of of encouraged to (or principal place of business, if different from the to disclose registered office); b) a description of the nature of the entity s operations and its principal activities; and c) the name of the parent and the ultimate parent of the group Nelson 98 49