Update on HKFRS (or IFRS) 10 September 2008

Transcription

1 Update on HKFRS (or IFRS) 10 September 2008 Nelson Lam 林智遠 MBA MSc BBA ACA ACS CFA CPA(Aust.) CPA(US) FCCA FCPA(Practising) MSCA Nelson 1 Today s Agenda Update on IFRIC 12 and HK(IFRIC) 12 Brief update on latest IFRS and HKFRS Nelson 2 1

2 Service Concession Arrangements (HK(IFRIC) Interpretation 12) Nelson 3 Background An arrangement within the scope of this Interpretation, Service Concession Arrangements, typically involves a private sector entity (an operator) constructing the infrastructure used to provide the public service or upgrading it (for example, by increasing its capacity) and operating and maintaining that infrastructure for a specified period of time. The operator is paid for its services over the period of the arrangement. The arrangement is governed by a contract that sets out performance standards, mechanisms for adjusting prices, and arrangements for arbitrating disputes. Such an arrangement is often described as a build-operate-transfer (BOT), a rehabilitate-operate-transfer (ROT) or a public-to-private service concession arrangement Nelson 4 2

3 Scope of HK(IFRIC)-Int 12 HK(IFRIC) Interpretation 12 gives guidance on the accounting by operators for public-to-private private service concession arrangements The interpretation applies to public-to-private service concession arrangements if a) the grantor controls or regulates what service the operator must provide with the infrastructure, 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. No need to have complete control Sufficient for the price to be regulated, say by capping mechanism Nelson 5 Scope of HK(IFRIC)-Int 12 Infrastructure used in a public-to-private service concession arrangement for its entire useful life (whole of life assets) is within the scope of this interpretation if the conditions of (a) above are met in other words, the conditions of (b) above are in substance fulfilled Nelson 6 3

4 Scope of HK(IFRIC)-Int 12 This interpretation applies to both: a) infrastructure that the operator constructs or acquires from a third party for the purpose p of the service arrangement; 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 and recognised as property, plant and equipment 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 Nelson 7 Issues The interpretation sets out general principles on recognising and measuring the obligations (liabilities) and related rights (assets) in service concession arrangements. 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 Nelson 8 4

5 Summary of HK(IFRIC)-Int 12 a) Treatment of operator s rights over the infrastructure; b) Recognition & measurement of FV to be used 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. Shall not be recognised as PPE Construction ti or Upgrade HKAS 11 HKAS 23 Financial Asset HKAS 39 Intangible Asset HKAS 38 Operation HKAS 18 Unconditional contractual right to receive cash or other FA A right (a licence) to charge users Use only or as part of the consideration Nelson 9 Operator s Rights over the Infrastructure Infrastructure within the scope of this Interpretation shall not be recognised as property, plant and equipment of the operator because the contractual service arrangement does not convey the right to control the use of the public service infrastructure to the operator. The operator has access to operate the infrastructure to provide the public service on behalf of the grantor in accordance with the terms specified in the contract Nelson 10 5

6 Recognition and Measurement of Arrangement Consideration Under the terms of contractual arrangements within the scope of this Interpretation, the operator acts as a service provider. The operator constructs or upgrades infrastructure (construction or upgrade services) used to provide a public service and operates and maintains that infrastructure (operation services) for a specified period of time. The operator shall recognise and measure revenue in accordance with HKASs 11 and 18 for the services it performs. Operator = Service Provider Construction or Upgrade Operation Nelson 11 Recognition and Measurement of Arrangement Consideration If the operator performs more than one service (i.e. construction or upgrade services and operation services) under a single contract or arrangement, consideration received or receivable shall be Construction allocated by reference to the relative fair or Upgrade values of the services delivered, when the 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) Operator = Service Provider Operation Nelson 12 6

7 Recognition and Measurement of Arrangement Consideration The operator shall account for revenue and costs relating to construction or upgrade services in accordance with HKAS 11. The operator shall account for revenue and costs relating to operation services in accordance with HKAS 18. Operator = Service Provider Construction or Upgrade Operation HKAS 11 HKAS Nelson 13 Construction or Upgrade If the operator provides construction or upgrade services the consideration received or receivable by the operator shall be recognised at its fair value. The consideration may be rights to: a) a financial asset, or b) an intangible asset. Operator = Service Provider Construction or Upgrade An unconditional contractual right to receive cash or another financial asset A right (a licence) to charge users of the public service. Financial Asset Intangible Asset Nelson 14 7

8 The operator shall recognise a financial asset to the extent that it has an unconditional contractual right to receive cash or another financial asset from or at the direction of the grantor for the construction services; the grantor has little, if any, discretion to avoid payment, usually because the agreement is enforceable by law. The operator has an unconditional right to receive cash if the grantor contractually guarantees to pay the operator (a) specified or determinable amounts or (b) the shortfall, if any, between amounts received from users of the public service and specified or determinable amounts, even if payment is contingent on the operator ensuring that the infrastructure meets specified quality or efficiency requirements. Operator = Service Provider Construction or Upgrade Financial Asset Nelson 15 The operator shall recognise an intangible asset to the extent that it receives a right (a licence) to charge users of the public service. A right to charge users of the public service is not an unconditional right to receive cash because the amounts are contingent on the extent that the public uses the service. Operator = Service Provider Construction or Upgrade Intangible Asset Nelson 16 8

9 If the operator is paid for the construction services partly by a financial asset and partly by an intangible asset it is necessary to account separately for each component of the operator's consideration. The consideration received or receivable for both components shall be recognised initially at the fair value of the consideration received or receivable. The nature of the consideration given by the grantor to the operator shall be determined by reference to the contract terms and, when it exists, relevant contract law. Operator = Service Provider Construction or Upgrade Financial Asset Intangible Asset Nelson 17 Case China Communications Construction Company Ltd. Annual Report of 2006 IFRIC 12, Service Concession Arrangements, effective for annual periods beginning on or after 1 January 2008, was early adopted in The Group is engaged in certain service concession arrangements in which the Group carries out the construction work (e.g. toll highways and bridges) for the granting authority and receives in exchange a right to operate the asset concerned in accordance with pre-established conditions set by the granting authority. In accordance with the IFRIC Interpretation 12 Service Concession Arrangement (IFRIC 12), the assets under the concession arrangements may be classified as intangible assets or financial assets Nelson 18 9

10 Case China Communications Construction Company Ltd. Annual Report of 2006 The assets are classified as intangibles if the operator receives a right (a license) to charge users of the public service or as financial assets if paid by the granting authority. The Group classified the non-current assets linked to the long-term investment in these concession arrangements as concession assets within intangible assets classification on the balance sheet if the intangible ibl asset model is adopted. d Once the underlying infrastructure of the concession arrangements is completed, the concession assets will be amortised over the term of the concession on a straight-line basis under the intangible asset model Nelson 19 Contractual Obligations to Restore the Infrastructure to a Specificed Level of Serviceability The operator may have contractual t obligations it must fulfil as a condition of its licence a) to maintain the infrastructure to a specified level of serviceability or b) to restore the infrastructure to a specified condition before it is handed over to the grantor at the end of the service arrangement. These contractual obligations to maintain or restore infrastructure (except for any upgrade element), shall be recognised and measured in accordance with HKAS 37, i.e. at the best estimate of the expenditure that would be required to settle the present obligation at the balance sheet date Nelson 20 10

11 Borrowing costs incurred by the operator In accordance with HKAS 23, borrowing costs attributable to the arrangement shall be recognised as an expense in the period in which they are incurred unless the operator has a contractual right to receive an intangible asset (a right to charge users of the public service). In this case borrowing costs attributable to the arrangement shall be capitalised during the construction phase of the arrangement in accordance with HKAS Nelson 21 Financial Asset HKASs 32 and 39 and HKFRS 7 apply to the financial asset recognised under this Interpretation. The amount due from or at the direction of the grantor is accounted for in accordance with HKAS 39 as: a) a loan or receivable; b) an available-for-sale financial asset; or c) if so designated upon initial recognition, Operator = Service Provider Construction or Upgrade 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 Nelson 22 11

12 Intangible Asset HKAS 38 applies to the intangible asset recognised in accordance with this Interpretation. HKAS 38 provide guidance on measuring intangible assets acquired in exchange for a non-monetary asset or assets or a combination of monetary and non-monetary assets. Operator = Service Provider Construction or Upgrade 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 consideration received or receivable for the construction services delivered. Intangible Asset Nelson 23 Case MTR Corporation Limited (2007 Circular) As part of the Rail Merger, the Company will be required to pay the Upfront Payment. This Upfront Payment, net of the consideration for the Purchased Rail Assets, will be capitalised as a service concession asset under Hong Kong (IFRIC) 12 Service Concession Arrangements and amortised over the term of the Concession Period. (page 38) Nelson 24 12

13 Case MTR Corporation Limited (2007 Circular) Under the terms of the SCA, the tangible assets that form part of the railway network are subject to a service concession arrangement whereby MTRC will have the right to access, use and operate these assets. These tangible assets comprise of tangible assets that exist on the date of the proposed Rail Merger ( Initial Concession Property ) and those assets that are subsequently acquired after the date of the proposed Rail Merger ( Additional Concession Property ). Ownership of the Initial Concession Property will remain with KCRC. As the Initial Concession Property assets will not be acquired by MTRC under the terms of the Transaction Documents, they will continue to form part of KCRC s fixed assets. Under HK(IFRIC) 12 Service Concession Arrangements, MTRC would not recognise such railway assets on its balance sheet and would recognise a service concession asset in respect of payments to acquire the right to operate the railway assets of KCRC. Accordingly, the railway assets of KCRC would remain recognised in KCRC s financial statements as fixed assets. (Page VII-7) Nelson 25 Case MTR Corporation Limited (2007 Circular) Recognition of a service concession asset at carrying value of HK$15,335 million upon application of HK(IFRIC) 12 Service Concession Arrangements in respect of: the acquisition of initial concession assets of HK$14,847 million which comprise of upfront payment of HK$3,895 million (HK$4,250 million less consideration of HK$355 million for the acquisition of certain stores and spares); the net present value of the fixed annual payments of HK$750 million discounted at an interest rate of 6.75%, which is the estimated incremental cost of borrowing for the Company for the long-term, amounting to HK$10,687 million; the assumption of certain obligations of KCRC in the amounts of HK$265 million by the Company forming part of the cost of acquiring the service concession asset; the capitalisation of costs of HK$389 million previously incurred by the Company and classified as deferred expenditure which are directly attributable to the cost of acquiring the service concession asset; and the assumption of certain liabilities of a capital nature amounting to HK$99 million representing additional concession property acquired on the merger date. (Page VII- 10) Nelson 26 13

14 Items provided to the operator by the grantor Infrastructure items to which the operator is given access by the grantor for the purposes of the service arrangement are not recognised as property, plant and equipment of the operator. The grantor may also provide other items to the operator that the operator can keep or deal with as it wishes. If such assets form part of the consideration payable by the grantor for the services, they are not government grants as defined in HKAS 20. They are recognised as assets of the operator, measured at fair value on initial recognition. The operator shall recognise a liability in respect of unfulfilled obligations it has assumed in exchange for the assets Nelson 27 Effective Date and Transition An entity shall apply this Interpretation for annual periods beginning on or after 1 January Earlier application is permitted. If an entity applies this Interpretation for a period beginning before 1 January 2008, it shall disclose that fact Nelson 28 14

15 Effective Date and Transition Subject to the operator s impracticability to apply this interpretation, changes in accounting policies are accounted for in accordance with HKAS 8, i.e. retrospectively. If, for any particular service arrangement, it is impracticable for an operator to apply this Interpretation retrospectively at the start of the earliest period presented, it shall: a)recognise financial assets and intangible assets that existed at the start of the earliest period presented; b)use the previous carrying amounts of those financial and intangible assets (however previously classified) as their carrying amounts as at that date; and c) test financial and intangible assets recognised at that date for impairment, unless this is not practicable, in which case the amounts shall be tested for impairment as at the start of the current period Nelson 29 Today s Agenda Brief update on latest IFRS and HKFRS Nelson 30 15

16 Amendment Effective After Selected new interpretations and amendments to HKFRSs issued in 2007 to 2008 HK(IFRIC )12 Service Concession Arrangements (2007) HK(IFRIC) 13 Customer Loyalty Programmes (2007) HK(IFRIC) 14 HKAS 19 The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction (2007) HKFRS 8 Operating Segments (2007) HKFRS 23 Borrowing Costs (2007) HKAS 1 Presentation of Financial Statements (2007) HKAS 27 Consolidated and Separate Financial Statements (2008) HKFRS 3 Business Combination (2008) Effective for periods beginning on/after 1 Jan Jul Jan Jan Jan Jan Jan Jul Jul Nelson 31 HKFRS 8 Operating Segments 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 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 Nelson 32 16

17 Operating Segments An operating segment is a component of an entity: a) that engages in business activities from which it may earn revenues and incur expenses (including revenues and expenses relating to transactions with other components of the same entity), b) whose operating results are regularly reviewed by the entity s chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance, and c) for which discrete financial information is available. A business activity might have not yet earned any revenue For example: CEO, COO, or a group of executive directors Not necessary be geographical areas or products Operating Segments Not every part of an entity is necessarily an operating segment or part of an operating segment, say corporate headquarter Nelson 33 Disclosure To give effect to the core principle, an entity shall disclose the following for each period for which an income statement is presented: a) general information as described in HKFRS 8; b) information about General Information 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 of fthe totalst of segment revenues, reported segment profit or loss, segment assets, and other material segment items to corresponding entity amounts. Reconciliations Nelson 34 17

18 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 Nelson 35 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, 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 Nelson 36 18

19 Measurement Adjustments and eliminations made in preparing an entity s financial statements and allocations of revenues, expenses, and gains 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 Nelson 37 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 disclosures, including: 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 Geographical Areas Major Customers Nelson 38 19

20 Presentation of Financial Statements (HKAS 1 Revised in 2007) Nelson 39 Summary of Changes A complete set of financial statements comprises: a) a statement of financial position as at the end of the period; b) a statement of comprehensive income for the period; 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) 財務狀況表 Previously, we call it Balance Sheet Previously, we call it Income Statement 全面收益表 3 years balance sheets Nelson 40 20

21 Summary of Changes Complete Set of Financial Statements Statement of Financial Position as at the end of the period Previous title or changes Previous title: Balance Sheet To use a single statement to present all items of income and expense Statement of Comprehensive Income for the period To use two statements to present all items of income and expense Income Statement for the period Statement of Comprehensive Income for the period No title change New statement Statement of Changes in Equity for the period Statement of Cash Flows for the period Notes A statement of financial position as at the beginning of the earliest comparative period, if required No title change (but restructured) Previous title: Cash Flow Statement No title change New requirement Nelson Sourced from Intermediate Financial Reporting (2008) of Nelson Lam and Peter Lau 41 Statement of Comprehensive Inc. Statement of comprehensive income can be further divided into 2 statements An entity shall present all items of income and expense recognised in a period: a) in a single statement of comprehensive income, or b) in two statements: i. a statement displaying components of profit or loss (separate income statement) and ii. a second statement beginning with profit or loss and displaying components of other comprehensive income (statement of comprehensive income). (HKAS 1.81) One Statement Model Two Statements Model Comprehensive income concept used in US since 90s Nelson 42 21

22 Statement of Comprehensive Inc. Changes in equity in a period Two Statements Model One Statement Model Non-owner changes Components of profit or loss Components of other comprehensive income Presented in separate income statement Presented in statement of comprehensive income Presented in statement of comprehensive income Other comprehensive income ( 其他全面收益 ) Owner changes Components of owner changes in equity Presented in statement of changes in equity Presented in statement of changes in equity Nelson Sourced from Intermediate Financial Reporting (2008) of Nelson Lam and Peter Lau 43 Statement of Comprehensive Inc. Changes in equity in a period Two Statements Model One Statement Model Before amendment Non-owner changes Owner changes Components of profit or loss Components of other comprehensive income Components of owner changes in equity Income statement Statement of comprehensive income Statement of changes in equity Statement of Comprehensive income Statement of changes in equity Income Statement Statement of changes in equity Nelson Sourced from Intermediate Financial Reporting (2008) of Nelson Lam and Peter Lau 44 22

23 Statement of Comprehensive Inc. Example Statement of comprehensive statement (under Two-Statement Approach) Profit for the year $ 121, $ 65, 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 to components of other comprehensive 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, ,250 93, Nelson 45 Update on HKFRS (or IFRS) 10 September 2008 Full set of slides in PDF can be found in Q&A Session Nelson Lam 林智遠 nelson@nelsoncpa.com.hk Nelson 46 23