HK SME Financial Reporting Framework and Standard 30 November 2005

Transcription

1 New New IFRS IFRS HK SME Financial Reporting Framework and Standard 30 November 2005 We are small! HELP! Nelson Lam CFA FCCA FCPA(Practising) MBA MSc BBA CPA(US) 2005 Nelson 1 HK SME Financial Reporting Framework and Standard In August 2005, HKICPA issued its locally developed Small and Medium-sized Entity (SME) Financial Reporting Framework (SME- FRF) and Financial Reporting Standard (). SME Financial Reporting Framework and SME Financial Reporting Standard 2005 Nelson 2 1

2 Today s Agenda Brief Introduction SME Financial Reporting Framework (SME-FRF) SME Financial Reporting Standard (SME- FRS) Choose or Not Choose? 2005 Nelson 3 1. Brief Introduction Main Principles SME Financial Reporting Framework and SME Financial Reporting Standard The SME-FRF and have the following characteristics: Independence, Not Not directly linked to to Main HKFRS self-contained and Selective fallback is is not not comprehensive allowed A simplified version Mainly derived from Main of HKAS/SSAP HKFRS (or (or HK HK SSAP) Follow historical Definitions largely the the same cost convention Recognition on on some Reduce disclosure items not not required requirements significantly To balance cost and benefit Only qualifying entities can choose to adopt 2005 Nelson 4 2

3 1. Brief Introduction Be Be careful fit fit your your reporting need? SME Financial Reporting Framework and SME Financial Reporting Standard Main Principles Explicitly, compliance with SME-FRF and cannot enable an entity to claim compliance with Main HKFRS, or financial statement giving a true and fair view Explicitly, compliance with SME-FRF and would only result in financial statements achieving achieving a proper presentation appropriate for SMEs", and/or exhibiting a true and correct view Nelson 5 1. Brief Introduction SME SME Financial Reporting Framework Sets out Conceptual Basis Qualifying Criteria (Qualifying Entity) Transitions and Effective Date SME Financial Reporting Standard Divided into Definitions Specific Requirements (in 17 sections) Transitions and Effective Date Appendices 2005 Nelson 6 3

4 2. SME Framework SME SME Financial Reporting Framework Sets out Conceptual Basis Qualifying Criteria (Qualifying Entity) Transitions and Effective Date 2005 Nelson 7 SME Framework Conceptual Basis Users Objective Underlying Assumptions Qualitative Characteristics Elements Recognition Measurement Even SME-FRF is similar to the Framework of Main HKFRS 2 frameworks should be considered as independent framework. Conceptual Basis for the preparation of financial statements in accordance with the SME Financial Reporting Standard One of the major differences is: SME-FRF adopts Historical Cost Convention, but but further restricted that that assets: should should not not be be revalued nor nor should should future future cash cash flows flows be be discounted in in the the measurement of of assets assets and and liabilities Ruled out out Revaluation or or Fair Value Model? Value in in use? 2005 Nelson 8 4

5 SME Framework Qualifying Entity HK Incorporated Entity Satisfies S.141D Adopted S.141D Can choose Must use No Choice Entity Non-HK Incorporated Entity Satisfies the requirements imposed by the law of the entity s place of incorporation and its constitution No Public Accountability All Owners Agreed Fulfilled Size Test Can choose SME-FRF SME-FRF and and 2005 Nelson 9 Qualifying Entity Section 141D Satisfies S.141D In order to apply section 141D All the shareholders of a private company agree in writing that section 141D shall apply with respect to a financial year The shareholders shall not in any financial year enter into an agreement for the above purposes for more than one such financial year. But the following private companies are not allowed to apply section 141D a) a company has any subsidiary or is a subsidiary of another company formed and registered under the HK Companies Ordinance or an existing company; or b) a bank, a securities dealer, an insurance company, money lender, or a company owning and operating ships/aircraft engaged in the carriage of cargo into or out of HK All Owners Agreed in Writing Each Year Group companies under the HK Co. Ordinance Companies in Specific Industries 2005 Nelson 10 5

6 Qualifying Entity Section 141D HK Incorporated Entity In other word, all HK incorporated company has adopted section 141D, they must use SME-FRF and. Must use Adopted S.141D No Choice SME-FRF (para. 16) also clearly states that Compliance with the SME-FRF and is necessary in order for financial statements to give a true and correct view When a HK incorporated company prepares its financial statements in accordance with section 141D SME-FRF SME-FRF and and True and Correct = Compliance with SME-FRF and 2005 Nelson 11 Qualifying Entity Overseas Entity HK Incorporated Entity Non-HK Incorporated Entity Check for the relevant law and its its constitution first Satisfies the requirements imposed by the law of the entity s place of incorporation and its constitution No Public Accountability All Owners Agreed Fulfilled Size Test Can choose SME-FRF SME-FRF and and 2005 Nelson 12 6

7 Qualifying Entity Overseas Entity An entity has Public Accountability for the purposes of the SME-FRF if: a) at any time during the current or preceding reporting period, the entity (whether in the public or private sector) is an issuer of securities, that is, its equity or debt securities are publicly traded or it is in the process of issuing publicly traded equity or debt securities; b) the entity is an institution authorised under the Banking Ordinance; c) the entity is an insurer authorised under the Insurance Companies Ordinance; or d) the entity is a corporation which is granted a licence under the Securities and Futures Ordinance to carry on business in a regulated activity in HK. Satisfies the requirements imposed by the law of the entity s place of incorporation and its constitution But different from No Public Accountability Similar to S.141D s.141d that an entity (it is a subsidiary or a holding company of another entity) can elect for its own financial statements if it Consolidated? Consolidation? also satisfies the conditions for non-hk incorporated entity 2005 Nelson 13 Qualifying Entity Overseas Entity HK Incorporated Entity Cannot choose Such entity having a subsidiary cannot elect S.141D No Choice Entity Non-HK Incorporated Entity Such entity may elect SME- FRS for its own financial statements (subject to satisfying other conditions) If If it it chooses to prepare consolidation, it it cannot elect for its consolidated financial statements In other words, an entity having a subsidiary cannot use SME-FRF unless it is a non-hk incorporated entity and it only chooses to elect for its own financial statements. SME-FRF SME-FRF and and Consolidation? 2005 Nelson 14 7

8 Qualifying Entity Overseas Entity Unless the law requires otherwise, it is presumed that, once an agreement is made by all owners to prepare the financial statements in accordance with the the agreement will remain valid Different from S.141D until there is a change in the ownership or the agreement is revoked by an owner or an entity no longer qualifies for reporting under the SME-FRF Satisfies the requirements imposed by the law of the entity s place of incorporation and its constitution No Public Accountability In writing? Not mention! All Owners Agreed 2005 Nelson 15 Qualifying Entity Overseas Entity An entity is considered to be an SME if it does not exceed any 2 of the following: a) Total annual revenue of HK$50 million b) Total assets of HK$50 million at the balance sheet date c) 50 employees The total revenue and total assets are determined after the application of the In the case where the reporting period is shorter or longer than a year, the total revenue shall be annualised No. of employees is the entity s Satisfies average the no. requirements of persons employed during the reporting period (incl. part-timer) imposed determined by the on law a monthly of the basis as follows: a) Determine the no. of employees entity s place as at of the incorporation end of each calendar month. b) Add together all the monthly numbers and its constitution in (a). c) Divide the no. in (b) by the no. of months in the reporting period. No Public Accountability All Owners Agreed Fulfilled Size Test 2005 Nelson 16 8

9 Qualifying Entity Overseas Entity When an entity has not been considered to be an SME in terms of its size and subsequently becomes an SME the entity will not qualify for reporting under SME-FRF in term of the size test until the entity has been determined to be an SME for two consecutive reporting periods Where an entity has previously qualified for reporting under SME-FRF the entity will no longer qualify for reporting under SME-FRF in terms of the size test until the entity is no longer an SME for two consecutive reporting periods Before Qualifying After Qualifying Non-HK Incorporated Entity Satisfies the requirements imposed by the law of the entity s place of incorporation and its constitution No Public Accountability All Owners Agreed Fulfilled Size Test 2005 Nelson 17 Transitional Provisions HKFRS (Main (Main HKFRS) Transition to SME-FRF and is accounted for as follows: a) All times recognised previously not meeting the recognition criteria under the SME-FRF and to be derecognised b) All items not recognised previously but meeting the recognition criteria under the SME-FRF and to be recognised c) All items recognised previously but required to be re-measured in accordance with dealt with as a change of accounting policy under the Retrospective application As if always been in used Adjust opening balance of reserves for the earlier period presented Adjust all comparatives Except for for undue cost or or effort 2005 Nelson 18 9

10 Transitional Provisions Suggest any items that: a) Not meeting the recognition criteria under the SME-FRF and to be derecognised Example Derivatives Deferred tax Component replacement of property, plant and equipment b) Not recognised previously but meeting the recognition criteria under the SME- FRF and to be recognised c) Recognised previously but required to be re-measured in accordance with Long leasehold interest in land without title pass Intangible asset not meeting the previous definition Decommissioning cost Property, plant and equipment remeasured to cost Intangible asset re-measured to cost Investments re-measured to cost Value in use fallback to expected future cash flow 2005 Nelson 19 Transitional Provisions HKFRS (Main (Main HKFRS) The transition from the SME-FRF and is not explicitly stated in the SME-FRF and SME- FRS. HKFRS 1 imposes some additional requirements during transition But it it also provides some exemptions not available in However, HKICPA clarifies in its set of Questions and Answers that when an entity no longer qualifies for reporting under the, the entity has to apply HKFRS 1 First-time Adoption of HK Financial Reporting Standards for its first HKFRS financial statements 2005 Nelson 20 10

11 Effective Date The SME-FRF becomes effective for a Qualifying Entity s financial statements that cover a period beginning on or after 1 January Earlier application is permitted Nelson SME Standard in HK SME SME Financial Reporting Framework SME Financial Reporting Standard 2005 Nelson 22 11

12 3. SME Standard in HK SME SME Financial Reporting Framework The SME Financial Reporting Standard () is structured as a single document with the following 4 main areas: SME Financial Reporting Standard Divided into Definitions Specific Requirements (in 17 sections) Transitions and Effective Date Appendices 2005 Nelson 23 SME Standard Requirements Specific requirements in are divided into 17 sections Each section discusses one topic, which is a topic covered in separate HKFRS or HK SSAP Obviously, such requirements are originated from the HKFRS or HK SSAP But cover less topics, are more simplified, and have less disclosure requirements HK SSAP Main HKFRS Specific Requirements (in 17 sections) 2005 Nelson 24 12

13 SME Framework and Standard Summary Self-contained Historical Cost Convention Properly Present Only Not Applicable to Consol. No fallback to Main HKFRS (if there is no guidance in for an item) No true and fair Only properly presented and/or true and correct Except for those Either not choose permitted or required, or under, incl. Apply to only PPE exchanged-in separate financial Finance lease statements Investment acquired by share or by asset exchange Revenue Foreign currency monetary items 2005 Nelson Choose or Not Choose Choose Not Choose 2005 Nelson 26 13

14 4. Choose or Not Choose Self-contained Historical Cost Convention Properly Present Only Not Applicable to Consol. Some points to be considered in transiting to SME-FRF and : Users Perception Shareholders agreements Entity s future development plan All qualifying criteria Pros and Cons Switching cost and effort Would users, say creditors and bankers satisfy only properly presented? Consents from all shareholders continuously? Any expansion, say purchase of subsidiary, increase in revenue, assets and employee? Can all the criteria be met continuously? More discussion 2005 Nelson 27 Pros and Cons (If Chosen) Saving the cost of compliance Tax Implication! Following historical cost convention simple No deferred tax is required No cash flow statement is required No separate statement of changes in equity is required Fair value accounting on financial instruments can be avoided Separation of lease of land and building is not required Leasehold land in HK can still be classified as PPE Fair value accounting on investment property can be avoided Less disclosure requirements Discounting is not required (but permitted in some cases) In 2005, directly switch from HK SSAP to More 2005 Nelson 28 14

15 Pros and Cons (If Chosen) Additional switching cost No more revaluation is allowed say, market value of property cannot be reflected in the balance sheet No true and fair view on the financial statements Resulting image to the external users, say bankers and creditors All shareholders continuous agreement required Less guidance on some items say, future cash flow, employee benefits, trade and other receivable Has to fulfil the size test (for non-hk incorporated entity) Subject to uncertainty possible changes imposed by IASB in 2007 Applicable to single entity only Additional cost may be incurred in switching to and from Main HKFRS 2005 Nelson 29 Switching Cost and Effort HKFRS (Main (Main HKFRS) Transitional Provisions (as discussed) From Main HKFRS to Retrospectively application From to Main HKFRS Following HKFRS 1 Additional switching cost Undue cost or or effort exemption As a change in accounting policy As if always been in used Adjust opening balance of reserves for the earlier period presented Adjust all comparatives Impose detailed guidance with some exemptions, say at the transition date, fair value as deemed cost, foreign exchange reserves deemed as zero some additional requirements, say reconciliation of equity and profit from to Main HKFRS 2005 Nelson 30 15

16 Switching Cost and Effort HKFRS (Main (Main HKFRS) Undue cost or or effort exemption Restatement of opening balances and comparative amounts is timeconsuming and costly Information must be available for both 2 sets of GAAP Keeping up to date with the developments of 2 sets of GAAP is also required Cost may be significant especially if frequent switching is resulted by circumstances (something out of company s control) Additional switching cost 2005 Nelson 31 Switching Cost and Effort Main HK SSAP HKFRS before HKFRS (Main (Main HKFRS) 2005 Should be HK SSAP before 2005 If you are in 2005/ Nelson 32 16

17 Switching Cost and Effort HKFRS (Main (Main HKFRS) Should be HK SSAP before 2005 If you are in 2005/ Nelson 33 Switching Cost and Effort 9 Sections out of 17 sections in with similar contents as HK SSAP 1 Presentation of Financial Statements 2 Accounting Policies, Changes in Accounting Estimates and Errors 3 Property, Plant and Equipment 4 Intangible Assets 5 Leases 6 Investments 7 Inventories 8 Construction Contracts 9 Impairment of Assets 10 Provision, Contingent Liabilities and Contingent Assets 11 Revenue 12 Government Grants and Other Government Assistance 13 Borrowing Costs 14 Income Taxes 15 The Effects of Changes in Foreign Exchange Rates 16 Related Party Disclosures 17 Events After the Balance Sheet Date No material differences from HK SSAP are noted on these sections. How are the remaining sections? 2005 Nelson 34 17

18 Switching Cost and Effort Remaining 8 sections with differences from HK SSAP 1 Presentation of Financial Statements 2 Accounting Policies, Changes in Accounting Estimates and Errors 3 Property, Plant and Equipment 4 Intangible Assets 6 Investments 9 Impairment of Assets 14 Income Taxes 16 Related Party Disclosures Adjustments mainly on deferred tax, investments, revaluation They are still needed even SME- FRS will not be adopted Differences from HK SSAP - Summary for Reference Only true and correct and/or properly present Cash flow exempted in Current assets and liabilities updated as HKAS 1 New disclosure required in Updated to HKAS 8 (no fundamental errors & etc.) Emphasise historical cost convention Having undue cost and effort exemption Follow SSAP 17 (leasehold land still PPE) Not updated to HKAS 16 Extended to investment property Revaluation model not allowed under Follow SSAP 29 Update the definitions as HKAS 38 Revaluation model not allowed under Significant difference from HK SSAP 24 No CGU concept and no discounting required No deferred tax required Updated to HKAS 24 with new disclosures 2005 Nelson 35 Switching Cost and Effort HKFRS (Main (Main HKFRS) HK SSAP before 2005 If adopted in 2005/06, or if continued HKFRS in 2005/06, Then, after 2005/ Nelson 36 18

19 Switching Cost and Effort 7 Sections out of 17 sections in with similar contents as HKAS 1 Presentation of Financial Statements 2 Accounting Policies, Changes in Accounting Estimates and Errors 3 Property, Plant and Equipment 4 Intangible Assets 5 Leases 6 Investments 7 Inventories 8 Construction Contracts 9 Impairment of Assets 10 Provision, Contingent Liabilities and Contingent Assets 11 Revenue 12 Government Grants and Other Government Assistance 13 Borrowing Costs 14 Income Taxes 15 The Effects of Changes in Foreign Exchange Rates 16 Related Party Disclosures 17 Events After the Balance Sheet Date No material differences from HKAS are noted on these sections. How are the remaining sections? 2005 Nelson 37 More and different kinds of Switching Cost and Effort adjustments are required when switching back to HKAS More cost and effort? Remaining 10 sections with differences from HKAS Differences from HKAS - Summary for Reference 1 Presentation of Financial Statements Only true and correct and/or properly present Cash flow exempted in More disclosure requirements in HKAS 1 2 Accounting Policies, Changes in Accounting Estimates and Errors Emphasise historical cost convention Undue cost and effort exemption in 3 Property, Plant and Equipment Follow SSAP 17 (leasehold land still PPE) No clear component accounting adopted in Investment property is in HKAS 40 Revaluation model not allowed in 4 Intangible Assets Follow SSAP 29, except definitions Indefinite useful life allowed in HKAS 38 Revaluation model not allowed in 5 Leases Leasehold land without title pass not PPE in HKAS 17 6 Investments Significant difference from HKAS 39 9 Impairment of Assets No CGU concept and no discounting required 13 Borrowing cost Benchmark (expense) treatment in HKAS Income Taxes No deferred tax required in 15 Foreign Exchange Rates Functional currency incorporated in HKAS Nelson 38 19

20 New New IFRS IFRS Choose or Not Choose HKFRS (Main (Main HKFRS) Evaluate the pros and cons Aware of the potential cost HK SSAP before 2005 Make a choice appropriate for you! 2005 Nelson 39 HK SME Financial Reporting Framework and Standard 30 November 2005 Updated version of the slides and a more detailed version can be found in We are small! HELP! Nelson Lam nelson@nelsoncpa.com.hk Nelson 40 20