HK SME Financial Reporting Framework and Standard 22 October 2005

Transcription

1 New New IFRS IFRS HK SME Financial Reporting Framework and Standard 22 October 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-FRS). 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) a) a) Conceptual Basis b) b) Qualifying Entities c) c) Transitional Provisions and Effective Date SME Financial Reporting Standard (SME-FRS) Main contents today Main Practices Introduced by by SME-FRS Further Developments on on Financial Reporting Standards with Impact on on SME and SMP Your focus? Choose or or Not Choose? Comparison to to HKFRS Contentious Issues 2005 Nelson 3 1. Brief Introduction 2005 Nelson 4 2

3 1. Brief Introduction Main Principles SME Financial Reporting Framework and SME Financial Reporting Standard The SME-FRF and SME-FRS 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 5 1. Brief Introduction Main Principles SME Financial Reporting Framework and SME Financial Reporting Standard In the event that the SME-FRS does not cover an event or a transaction undertaken by an entity management may consider the SME-FRF for guidance on developing an appropriate accounting policy, consistent with the historical cost convention, for that particular event or transaction. Self-contained Historical Cost Convention 2005 Nelson 6 3

4 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 SME-FRS 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 SME-FRS would only result in financial statements achieving achieving a proper presentation appropriate for SMEs", and/or exhibiting a true and correct view Nelson 7 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 8 4

5 2. SME Framework SME SME Financial Reporting Framework Sets out Conceptual Basis Qualifying Criteria (Qualifying Entity) Transitions and Effective Date 2005 Nelson 9 SME Framework Conceptual Basis Users Objective Underlying Assumptions Qualitative Characteristics Conceptual Basis for the preparation of financial statements in accordance with the SME Financial Reporting Standard Elements Recognition Measurement 2005 Nelson 10 5

6 SME Framework Conceptual Basis Simplified from Main HKFRS with some discrepancies (mainly in measurement): Users Objective Underlying Assumptions Qualitative Characteristics Elements Recognition Measurement Public is not the main concern and significant users (owners, government and creditors) can obtain additional information Similar to provide useful financial information to the users Same accrual basis of accounting and going concern assumption Same understandability, relevance, reliability and comparability Same 5 elements, including asset, liability, equity, income and expenses Similar meet the definition and 1) probable future economic benefit flowing in/out 2) cost or value measured with reliability Follow Historical Cost Convention but in more restrictive way Historical Cost Convention 2005 Nelson 11 SME Framework Conceptual Basis In Main HKFRS, historical cost is set out as follows: a) Assets are recorded at the amount of cash or cash equivalents paid or the fair value of the consideration given to acquire them at the time of their acquisition; and b) Liabilities are recorded at the amount of proceeds received in exchange for the obligation, or in some circumstances (for example, income taxes), at the amounts of cash or cash equivalents expected to be paid to satisfy the liability in the normal course of business. SME-FRF adopts the the above in in its its Historical Cost Cost Convention, but but further restricted that: that: assets should not not be be revalued nor nor should Ruled out out Revaluation future cash flows be be discounted in in the or the or Fair Value Model? measurement of of assets and and liabilities Value in in use? except when required or permitted by the Historical Cost SME-FRS. Convention 2005 Nelson 12 6

7 SME Framework Conceptual Basis HKFRS using fair value model or revaluation model include: Example 1 HKAS 16 HKAS 18 HKAS 38 HKAS 39 HKAS 40 HKAS 41 HKFRS 1 HKFRS 5 Property, plant and equipment Revenue Intangible assets Financial instruments: Recognition and measurement Investment property Agriculture Share-based payment Non-current assets held for sale and discontinued operations HKFRS using discounting include: HKAS 16 HKAS 36 HKAS 37 Property, plant and equipment (decommissioning cost) Impairment of assets (value in use) Provision, contingent liabilities and contingent assets (discounted expected value) 2005 Nelson 13 SME Framework Qualifying Entity HK Incorporated Entity Conceptual Basis Qualifying Criteria (Qualifying Entity) Non-HK Incorporated Entity 2005 Nelson 14 7

8 SME Framework Qualifying Entity HK Incorporated Entity Such entity if satisfies the criteria set out in section 141D of the HK Companies Ordinance the entity is qualified to adopt SME-FRS When such entity prepares its financial statements in accordance with section 141D compliance with the SME-FRS is necessary in order for financial statements to give a true and correct view Non-HK Incorporated Entity Such entity (subject to any specific requirements imposed by the law of the entity s place of incorporation and subject to its constitution) qualifies to adopt SME-FRS when the entity has no public accountability and: a) all of its owners agree to adopt the SME- FRS; and b) the entity is considered to be an SME in terms of the size test in SME-FRF 2005 Nelson 15 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 SME-FRS SME-FRS 2005 Nelson 16 8

9 Qualifying Entity Section 141D HK Incorporated Entity Satisfies S.141D Adopted S.141D Can choose Must use No Choice Section 141D of the HK Companies Ordinance grants power to the shareholders of private companies to waive compliance with requirements as to financial statements A private company has a meaning under section 29 of the HK Companies Ordinance as a company which by its articles a) restricts the right to transfer its shares; and b) limits the number of its members to 50, and c) prohibits any invitation to the public to subscribe for any shares or debentures of the company. SME-FRF SME-FRF and and SME-FRS SME-FRS 2005 Nelson 17 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 Each Year Group companies under the HK Co. Ordinance Companies in Specific Industries 2005 Nelson 18 9

10 Qualifying Entity Section 141D Satisfies S.141D Substance over form? HKICPA further clarified in its set of Questions and Answers that HK incorporated company with subsidiary cannot elect SME-FRF and SME-FRS local/overseas investments (but not subsidiaries under the HK Companies Ordinance) can elect SME-FRF and SME-FRS Group companies under the HK Co. Ordinance However, Section 1 of of SME-FRS clearly states that the SME-FRS does not apply to tothe preparation and presentation of of consolidated financial statements Nelson 19 Qualifying Entity Section 141D Can the following HK incorporated entities elect S.141D? Entity A it has a subsidiary incorporated in HK Entity B it has a subsidiary incorporated overseas Entity C it has an associate (not a subsidiary) incorporated in HK Entity D it is a subsidiary of a HK incorporated entity Entity E it is a subsidiary of a non-hk incorporated entity Entity F it is an associate of a HK incorporated entity Example 2 Subject to other conditions Subject to other conditions Subject to other conditions 2005 Nelson 20 10

11 Qualifying Entity Section 141D HK Incorporated Entity In other word, all HK incorporated company has adopted section 141D, they must use SME-FRF and SME-FRS. Must use Adopted S.141D No Choice SME-FRF (para. 16) also clearly states that Compliance with the SME-FRF and SME-FRS 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 SME-FRS SME-FRS True and Correct = Compliance with SME-FRF and SME-FRS 2005 Nelson 21 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 SME-FRS SME-FRS 2005 Nelson 22 11

12 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 SME-FRS for its own financial statements if it Consolidated? Consolidation? also satisfies the conditions for non-hk incorporated entity 2005 Nelson 23 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 SME-FRS for its consolidated financial statements SME-FRF SME-FRF and and SME-FRS SME-FRS Consolidation? 2005 Nelson 24 12

13 Qualifying Entity Overseas Entity In other word, an entity having a subsidiary cannot use SME-FRF unless it is a non-hk incorporated entity and it only chooses to elect SME-FRS for its own financial statements. Non-HK Incorporated Entity Such entity may elect SME- FRS for its own financial statements (subject to satisfying other conditions) SME-FRF SME-FRF and and SME-FRS SME-FRS Consolidation? 2005 Nelson 25 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 SME-FRS 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 26 13

14 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 SME-FRS 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 requirements no. of persons employed during the reporting period (incl. part-timer) imposed determined by the law on of a monthly the basis as follows: a) Determine the no. of employees entity s place as of at incorporation the end of each calendar month. b) Add together all the monthly and numbers 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 27 Qualifying Entity Overseas Entity Example 3 Is size test applicable for HK incorporated entity? Are part time workers included in the size test? Are employees under a subcontracting agreement included in the size test? No No Only Only applicable to to non-hk incorporated entity Yes Yes Size Size test test includes part-time workers No No An An entity has has to to take take into into account the the number of of employees employed by by itself itself (confirmed in in HKICPA s own own set set of of Q&A) Fulfilled Size Test 2005 Nelson 28 14

15 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 29 Qualifying Entity Overseas Entity Example 4 Before Entity A had not qualified as an SME in Year 0 but Qualifying becomes an SME starting from Year 1 When does it start to qualify for reporting Begin to qualify for reporting under the SME-FRF? from Year 3 Entity X had qualified as an SME in Year 0 but is no After Qualifying longer an SME starting from Year 1 When does it cease to be qualified for Required to transit to Main reporting under the SME-FRF? HKFRS from Year 3 Entity ABC had qualified to be an SME in Year 0. It was no longer an SME starting from Year 1 but has returned to be an SME starting from Year 3. Can it be qualified for reporting under the SME-FRF? No When does it start to qualify for reporting Begin to qualify for under the SME-FRF? reporting from Year Nelson 30 15

16 Qualifying Entity Substance over form? Entity HK Incorporated Entity Non-HK Incorporated Entity Differences between 2 kinds of entity? All owners agreement should be renewed each year No size test Group entities with subsidiary or HK incorporated parent cannot elect SME-FRS Public accountability inherent in s.141d (similar to non-hk incorporated entity) Renewal of all owners agreement each year is not required Size test imposed Group entities with subsidiary or parent can still elect SME-FRS for its own financial statements (but not the consolidation) Subject to the law of the entity s place of incorporation and its constitution 2005 Nelson 31 Transitional Provisions HKFRS (Main (Main HKFRS) SME-FRS The transition to the SME-FRF and SME-FRS is accounted for as follows: a) All items recognised previously under a different GAAP which do not meet the recognition criteria under the SME-FRF and SME-FRS are to be derecognised and dealt with as a change of accounting policy under the SME-FRS. b) All items not recognised previously under a different GAAP which do meet the recognition criteria under the SME-FRF and SME-FRS are to be recognised in accordance with the relevant section of the SME-FRS and dealt with as a change of accounting policy under the SME-FRS. c) All items recognised previously under a different GAAP, which do meet the recognition criteria under the SME-FRF and SME-FRS, but which were previously measured on a basis inconsistent with the SME-FRF and SME-FRS are to be re-measured in accordance with the relevant section of the SME- FRS and dealt with as a change of accounting policy under the SME-FRS Nelson 32 16

17 Transitional Provisions Suggest any items that: a) Not meeting the recognition criteria under the SME-FRF and SME-FRS to be derecognised b) Not recognised previously but meeting the recognition criteria under the SME- FRF and SME-FRS to be recognised c) Recognised previously but required to be re-measured in accordance with SME-FRS More discussion on on individual items later Example 5 Derivatives deferred tax component replacement of property, plant and equipment 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 33 Transitional Provisions HKFRS (Main (Main HKFRS) SME-FRS The transition from the SME-FRF and SME-FRS 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 SME-FRS However, HKICPA clarifies in its set of Questions and Answers that when an entity no longer qualifies for reporting under the SME-FRS, the entity has to apply HKFRS 1 First-time Adoption of HK Financial Reporting Standards for its first HKFRS financial statements 2005 Nelson 34 17

18 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 35 SME Framework SME SME Financial Reporting Framework SME Financial Reporting Standard Conceptual Basis Qualifying Criteria (Qualifying Entity) for the preparation of financial statements in accordance with the SME Financial Reporting Standard 2005 Nelson 36 18

19 3. SME Standard in HK SME SME Financial Reporting Framework SME Financial Reporting Standard 2005 Nelson SME Standard in HK SME SME Financial Reporting Framework SME Financial Reporting Standard Divided into Incorporated selectively in our later discussion With some new practices incorporated in both Main HKFRS and SME-FRS The SME Financial Reporting Standard (SME-FRS) is structured as a single document with the following 4 main areas: Definitions Specific Requirements (in 17 sections) Transitions and Effective Date Appendices 2005 Nelson 38 19

20 SME Standard Definitions SME-FRS has a lengthy list of definitions used in the SME- FRS They are used for the SME-FRS While most definitions are extracted from the Main HKFRS, or inherited from the historical set of HK SSAP, there are some new definitions developed by reference to the Main HKFRS or HK SSAP some definitions modified from the Main HKFRS or HK SSAP New definitions Modified definitions Definitions 2005 Nelson 39 SME Standard Definitions Some new definitions are introduced in SME-FRS, including: 1. Control (of an Asset) Not directly defined in Main HKFRS Discuss now 2. Historical Cost Convention Discussed To state clearly the definition of such convention and neither revaluation nor discounting is required New definitions 3. Investment (in a Security) Discuss later Not directly defined in Main HKFRS Defined as a financial asset held by an entity However, financial asset is not defined in SME- FRS 2005 Nelson 40 20

21 SME Standard Definitions In SME-FRS, Control (of an Asset) is defined as the power to obtain the future economic benefits that flow from the asset Main HKFRS has not formally defined such control but only explained it in different HKFRSs for example, HKAS 38 explains that an entity controls an asset if the entity has the power to obtain the future economic benefits flowing from the underlying resource and to restrict the access of others to those benefits New definitions Any implication if without this? 2005 Nelson 41 SME Standard Definitions Some definitions are modified from HKFRS or HK SSAP in order to align with the requirements in SME-FRS, including: 1. Cost and Depreciable Amount To align with the requirements that no revaluation is allowed 2. Foreign currency To fall back to a concept similar to HK SSAP 11 and the concept of functional currency is not adopted 3. Property, plant and equipment To extend to property held for investment potential 4. Recoverable amount To replace value in use with future net cash flow (as no discounting is required) 5. Tax expense (tax income) To exclude deferred tax expense (deferred tax income) More Discussion Later New definitions Modified definitions 2005 Nelson 42 21

22 SME Standard Definitions Some terms defined in HKFRS or HK SSAP have still been used in SME-FRS However, they have not been defined in SME-FRS, including: Financial asset Gain/loss and premium/discount (on forward contracts) Long-term investment Net selling price SME-FRS is self-contained and is not directly linked to HKFRS The definitions in Main HKFRS cannot be deemed as the definitions in SME-FRS However, reference may still be made to Main HKFRS 2005 Nelson 43 SME Standard Requirements SME-FRS HK SSAP Main HKFRS SME Financial Reporting Standard Divided into Definitions Specific Requirements (in 17 sections) 2005 Nelson 44 22

23 SME Standard Requirements Specific requirements in SME-FRS 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 Specific Requirements (in 17 sections) 2005 Nelson 45 SME Standard 17 Sections 17 sections in SME-FRS Equivalent HKAS Section 1 Section 2 Section 3 Section 4 Section 5 Section 6 Section 7 Section 8 Section 9 Section 10 Section 11 Section 12 Section 13 Section 14 Section 15 Section 16 Section 17 Presentation of Financial Statements Accounting Policies, Changes in Accounting Estimates and Errors Property, Plant and Equipment Intangible Assets Leases Investments Inventories Construction Contracts Impairment of Assets Provision, Contingent Liabilities and Contingent Assets Revenue Government Grants and Other Government Assistance Borrowing Costs Income Taxes The Effects of Changes in Foreign Exchange Rates Related Party Disclosures Events After the Balance Sheet Date HKAS 1 HKAS 8 HKAS 16 HKAS 38 HKAS 17 HKAS 39 HKAS 2 HKAS 11 HKAS 36 HKAS 37 HKAS 18 HKAS 20 HKAS 23 HKAS 12 HKAS 21 HKAS 24 HKAS Nelson 46 23

24 SME Standard 17 Sections Some sections are clearly originated 17 sections in SME-FRS partially from HK SSAP Equivalent SSAP Section 1 Section 2 Section 3 Section 4 Section 5 Section 6 Section 7 Section 8 Section 9 Section 10 Section 11 Section 12 Section 13 Section 14 Section 15 Section 16 Section 17 Presentation of Financial Statements Accounting Policies, Changes in Accounting Estimates and Errors Property, Plant and Equipment Intangible Assets Leases Investments Inventories Construction Contracts Impairment of Assets Provision, Contingent Liabilities and Contingent Assets Revenue Government Grants and Other Government Assistance Borrowing Costs Income Taxes The Effects of Changes in Foreign Exchange Rates Related Party Disclosures Events After the Balance Sheet Date SSAP 1 SSAP 17 SSAP 29 SSAP Nelson 47 SME Standard Not in 17 Sections 17 sections in SME-FRS have not included the following topics HKAS 7 Cash Flow Statements HKAS 14 Segment Reporting HKAS 19 Employee Benefits HKAS 26 Accounting and Reporting by Retirement Benefits Plans HKAS 27 Consolidated and Separate Financial Statements HKAS 28 Investments in Associates HKAS 29 Financial Reporting in Hyperinflationary Economics HKAS 30 Disclosures in the Financial Statements of Banks and Similar Financial Institutions (will be removed after HKFRS 7 becomes effective) HKAS 31 Investments in Joint Ventures HKAS 32 Financial Instruments: Disclosure and Presentation HKAS 33 Earnings Per Share Topics HKAS 34 Interim Financial Reporting Topics not not covered are are mainly: mainly: HKAS 39 Financial Instruments: Recognition consolidation and Measurement industry specific topics topics HKAS 40 Investment Property disclosures of of listed listed company HKAS 41 Agriculture some some complicated issues issues (like (like financial instruments) 2005 Nelson 48 24

25 SME Standard Not in 17 Sections 17 sections in SME-FRS have not included the following topics HKFRS 1 First-time Adoption of Hong Kong Financial Reporting Standards HKFRS 2 Share-based Payment HKFRS 3 Business Combinations HKFRS 4 Insurance Contracts HKFRS 5 Non-current Assets Held for Sale and Discontinued Operations HKFRS 6 Exploration for and Evaluation of Mineral Resources HKFRS 7 Financial Instruments: Disclosure All All HKFRS 1 to to 7 are are not not addressed in in the the sections Let s discuss the major items in the 17 sections 2005 Nelson 49 Section 1 Presentation Component of Financial Statements Overall Consideration Structure and Content Balance Sheet Income Statement Changes in Equity Accounting Policies and Notes SME-FRS Section 1 HK SSAP 1 HKAS Nelson 50 25

26 Section 1 Presentation Component of Financial Statements Under SME-FRF, a complete set of separate financial statements for the entity includes the following components: a) a balance sheet; b) an income statement; and c) accounting policies and explanatory notes. Difference from HKAS 1 Cash flow statement is not required Changes in equity can be presented either in the notes or as a separate statement. Implication Section 1 clearly states that the SME-FRS does NOT apply to the preparation and presentation of consolidated financial statements. If the entity is required or chooses to prepare group account, it cannot use SME-FRS to prepare the consolidated financial statements Nelson 51 Section 1 Presentation Overall Consideration Under SME-FRS, financial statements should properly present the financial In In HKAS HKAS 1, 1, financial statements position and financial performance of an shall shall give give a true true and and fair fair view viewof of the the financial entity. position, financial performance Explicitly, compliance with SME-FRF and and and cash cash flows flows of of an an entity. entity. SME-FRS would only result in financial statements that achieve a proper presentation appropriate for SMEs. An An entity whose financial statements comply with with the the SME-FRS should disclose that that fact. fact. Such financial statements should not not be be described as as complying with with Main HKFRS Nelson 52 26

27 Section 1 Presentation Overall Consideration In the event that the SME-FRS does not cover an event or a transaction undertaken by an entity, management may consider the SME-FRF for guidance on developing an appropriate accounting policy, consistent with the historical cost convention, for that particular event or transaction. In In HKAS HKAS 8, 8, reference will will be be made made to to relevance and and reliability requirements in in similar similar item item the the Framework and and the the pronouncements of of other other standard-setting bodies bodies adopted similar similar Framework Historical Cost Convention 2005 Nelson 53 Section 1 Presentation HK Incorporated Entity Notes to the financial statements Overall Consideration Example 6 Basis of preparation and accounting policies The company qualifies under the HK Companies Ordinance to prepare and present its financial statements in accordance with section 141D of that Ordinance. The company s shareholders have unanimously agreed in writing to apply section 141D with respect to the company s financial statements for the year ended 31 December These financial statements comply with the Small and Medium-sized Entity Financial Reporting Standard issued by the Hong Kong Institute of Certified Public Accountants and have been prepared under the accrual basis of accounting and on the basis that the company is a going concern. The measurement base adopted is the historical cost convention Nelson 54 27

28 Section 1 Presentation HK Incorporated Entity Overall Consideration Example 7 Unqualified auditors report (per ED on PN 900) Opinion In our opinion the financial statements have been properly prepared, in all material respects, in accordance with the SME-FRS. In addition, we report that we have obtained all the information and explanations which we have required and in our opinion the balance sheet together with the notes thereon is properly drawn up so as to exhibit a true and correct view of the state of the company s affairs as at 31 December 2005 according to the best of our information and explanations given to us, and as shown by the books of the company. Non-HK Incorporated Entity This is not required for non-hk incorporated co Nelson 55 Section 1 Presentation Overall Consideration Structure and Content Going concern basis, accrual basis, consistency of presentation and classification, offsetting guideline, and comparative requirements are largely the same as HKAS 1. Same as SSAP 1 and HKAS 1 Each component of the financial statements should be clearly identified Financial statements should be presented at least annually 2005 Nelson 56 28

29 Section 1 Presentation Balance Sheet Definitions of current assets and current liabilities follow the improved definitions in HKAS 1, some amendments different from HK SSAP 1 include: Current assets do not include Cash or cash equivalent restricted from being exchanged or used to settle a liability for at least 12 months after the balance sheet date Current liabilities must include Liabilities in which the entity has no unconditional right to defer settlement for at least 12 months after the balance sheet date Financial liabilities when they are due to be settled within 12 months after the balance sheet date, even if: a) the original term was for a period longer than 12 months; and b) an agreement to refinance, or to reschedule payments, on a longterm basis is completed after the balance sheet date and before the financial statements are authorised for issue Nelson 57 Section 1 Presentation Balance Sheet Example 8 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 2005 Nelson 58 29

30 Section 1 Presentation Income Statement The face of the income statement should include, where applicable, line items that present the following amounts: a) Revenue b) Finance costs c) Tax expense, and d) Profit or loss for the period Turnover required for HK incorporated company? No such requirement under S.141D and the Eleventh Schedule of the HK Companies Ordinance Nelson 59 Section 1 Presentation Changes in Equity Accounting Policies and Notes There is is a choice Should disclose An entity should present changes in equity either in the notes to the financial statements, or as a separate component of the financial statements. An entity should disclose the following, if the information is not disclosed elsewhere in information published with the financial statements: a) the domicile and legal form of the entity, its place of incorporation and the address of the registered office (or principal place of business, if different from the registered office); and b) a description of the nature of the entity s operations and its principal activities Nelson 60 30

31 Section 1 Presentation Changes in Equity Example 9 Accounting Policies and Notes Note to the financial statements SME Limited is a company incorporated in Hong Kong with limited liability. The company s registered office is located at 9/F, 28 Nowhere Street, Kowloon, Hong Kong. The principal activity of the company is trading of toys. The company has adopted a trade name Fun Times for its business Nelson 61 Section 2 Accounting Policies SME-FRS Section 2 HK SSAP HKAS 1 and 2 8??? 2005 Nelson 62 31

32 Section 2 Accounting Policies Select and Apply Accounting Policy Change in Accounting Policy Change in Accounting Estimate Correction of Errors Management should use its judgment in developing an accounting policy resulting in information that is relevant to the needs of users of the financial statements and is reliable in nature. Management should select and apply an entity s accounting policies so that the financial statements comply with all the requirements of the SME-FRS and are consistent with the historical cost convention. Further emphasis 2005 Nelson 63 Section 2 Accounting Policies Change in Accounting Policy SME-FRS requires that a change in accounting policy should be made only if 1. it is required by the SME-FRS or 2. if it results in a more relevant and reliable presentation in the financial statements of the effects of transactions or other events on the entity s financial position or financial performance. It is similar to HKAS 8 However, more relevant and reliable presentation is indeed the wordings of the Exposure Draft (ED) of IAS 8 (or HKAS 8) issued in HKAS 8 has finally replaced it by using reliable and more relevant information Any difference? 2005 Nelson 64 32

33 Section 2 Accounting Policies Change in Accounting Policy HKAS 8 adopts retrospective application (or applied retrospectively ) in accounting for a change in accounting policy unless there is a transitional provision if the change is resulted from a new HKFRS SME-FRS adopts a similar approach but the disclosure is simplified as compared with HKAS 8. As if the new policy had always been in used Adjust opening balance of reserves for the earlier period presented Adjust all comparatives The The simplified disclosure in in SME-FRS is is the the wordings of of the the ED ED of of IAS IAS 8 in in IAS IAS 8 (or (or HKAS HKAS 8) 8) has has finally finally adopted different wordings in in the the final final standard Nelson 65 Section 2 Accounting Policies Undue Undue cost cost or or effort effort not not defined defined in in SME-FRS Even Even not not in in Main Main HKFRS How to apply undue cost or effort? Change in Accounting Policy In addition, SME-FRS introduce a criterion of exemption undue cost or effort Restating comparative information is not required if it requires undue cost or effort Such Such undue undue cost cost or or effort effort exemption criterion had had been been proposed by by IASB IASB in in its its Exposure Draft Draft for for IAS IAS 8 but but was was finally finally abolished. IASB IASB decided that that an an exemption based based on on management s assessment of of undue undue cost cost or or effort effort is is too too subjective to to be be applied applied consistently by by different entities. In In consequence, IASB IASB abolished the the proposed undue undue cost cost or or effort effort criterion and and still still follow follow the the impracticability criterion in in IAS IAS But now SME-FRS still have it 2005 Nelson 66 33

34 Section 2 Accounting Policies How to apply undue cost or effort? Change in Accounting Policy The ED clarified that it is the cases in which the cost or effort of restating comparative information exceed the resulting benefits to be derived by users of financial statements. The ED set out an example that data may not have been collected in the prior periods in a way that allows restatement, and recreating the information would require undue cost or effort. When comparative information for a particular prior period is not restated the new accounting policy should be applied to the balances of assets and liabilities as at the beginning of the next period, and a corresponding adjustment should be made to the opening balance of reserves for the next period Nelson 67 Section 2 Accounting Policies Undue cost or effort exemption criterion introduced in SME-FRS has replaced the impracticability exemption criterion in HKAS 8 Change in Accounting Policy Change in Accounting Estimate Correction of Errors Except for the replaced exemption criterion, other areas are simplified from HKAS 8 the effect of a change in an accounting estimate is still recognised prospectively the amount of the correction of a material prior period error is till accounted for retrospectively no fundamental error any more and definition of error consistent with HKAS 8 the disclosure requirements are similar to HKAS Nelson 68 34

35 Section 2 Accounting Policies In short, Section 2 of SME-FRS emphasises the consistency to historical cost convention simplifies the disclosure (followed the wordings of ED of IAS 8) replaces impracticability by undue cost or effort exemption criterion has NO requirement to disclose the fact and estimated effect on new standard issued but not yet become effective Select and Apply Accounting Policy Change in Accounting Policy Change in Accounting Estimate Correction of Errors SME-FRS Section 2 HK SSAP HKAS 1 and 2 8 Most interesting is is. ED to to?? IAS Nelson 69 Section 3 Property, Plant & Equipment Mainly fallback to the requirements of HK SSAP 17 Extended to investment property and leasehold interest in land Follow some simple approaches SME-FRS Section 3 HK SSAP Nelson 70 35

36 Section 3 Property, Plant & Equipment Definition Property, plant and equipment are tangible assets that: a) are held by an entity for use in the production or supply of goods or services, for rental to others, Assets held for investment for investment potential, or potential (including investment for administrative purposes; and property) are included b) are expected to be used during more than one period. Leasehold interest in land from the HKSAR Government or elsewhere with similar features are also accounted for as property, plant and equipment In In HKAS 17 Leases, such interest is is accounted for as an operating lease 2005 Nelson 71 Section 3 Property, Plant & Equipment Recognition Recognition criteria on initial cost is the same as HKAS 16 and HK SSAP 17 However, separate recognition criteria are still imposed in recognising subsequent expenditure (as HK SSAP 17) In In HKAS 16, same criteria for both initial cost and subsequent expenditure 2005 Nelson 72 36

37 Section 3 Property, Plant & Equipment Recognition Recognition criteria for In SME-FRS In HKAS 16 Criteria not the same Same criteria Initial Cost Probable that future economic benefit of of the asset will flow to to the enterprise Cost measured reliably Subsequent Expenditure Probable that future economic benefits in in excess of of the originally assessed standard of of performance of of the existing asset will flow to to the entity Probable that future economic benefit of of the asset will flow to to the entity Cost measured reliably Same criteria applied to to both costs 2005 Nelson 73 Section 3 Property, Plant & Equipment Measurement at recognition Exchange of asset still follows dissimilar way (as in HK SSAP 17) Cost of such dissimilar asset acquired from exchange is measured at fair value of the asset received a permitted deviation from historical cost convention However, the description or requirement set on the exchange of similar assets in HK SSAP 17 has not been set out in SME-FRS In In HKAS PPE, all all assets acquired from exchange of of assets are measured at at fair value, unless no no commercial substance or or no no reliable measured fair fair value Cost of dismantling and removing the asset and restoring the site is not updated to HKAS Nelson 74 37

38 Section 3 Property, Plant & Equipment Measurement after recognition No revaluation model can be used i.e. PPE should be carried at cost less any accumulated depreciation and any accumulated impairment losses Definitions of useful life and residual value are updated to the same definitions as in HKAS 16 Implies depreciation begins from available for use depreciation is still required even the asset is retired from active use Annual review is required on useful life but there is no such annual review requirement on residual value Consistent with Historical Cost Convention No revaluation is is allowed Useful life is is defined as: a) a) the period of of time over which an an asset is is expected to to be be available for for use by by an an entity; or or b) b) the no. of of production or or similar units expected to to be be obtained from the asset by by an an entity Nelson 75 Section 3 Property, Plant & Equipment Illustrative financial statements in the Appendix to SME-FRS - Accounting Policies and Explanatory Notes to the Financial Statements Example 10 Property, plant and equipment Property, plant and equipment are stated at cost less accumulated depreciation and accumulated impairment losses. The depreciable amount of an item of property, plant and equipment is allocated on a systematic basis over its estimated useful life using the straight-line method. The principal annual rates used for depreciation are as follows: Leasehold land Over the lease terms Buildings 2% Furniture, fixtures and equipment 10%-20% 2005 Nelson 76 38

39 Section 3 Property, Plant & Equipment Disclosure A reconciliation of the carrying amount of the PPE at the beginning and end of the period is required However, comparative information is not required. HKAS has no no such exemption and comparative information is is still required The carrying amount of the PPE net book value of PPE In HK SSAP 17, the requirement is a reconciliation of the gross carrying amount and the accumulated depreciation at the beginning and end of the period 2005 Nelson 77 Section 3 Property, Plant & Equipment NBV only 2004 Annual Report Example 11 Leasehold improvements, furniture, equipment and But Leasehold Computer trading and clearing Other computer hardware buildings systems and software motor vehicles Total $ 000 $ 000 $ 000 $ 000 $ 000 Net book value at 1 Jan 2003 as previously reported (note ii) 117, , ,304 71, ,108 effect of adopting HKAS 17 (98,500) (98,500) as restated (note i) 18, , ,304 71, ,608 Additions 13,431 16,775 6,041 36,247 Disposals (3,474) (6,659) (1,604) (11,737) Depreciation (748) (109,510) (39,703) (31,778) (181,739) Revaluation (note 34) Net book value at 31 Dec , ,679 75,717 44, ,927 At 31 Dec 2003 At cost 1,345, , ,519 1,924,307 At valuation 18,300 18,300 Accumulated depreciation (1,000,724) (271,668) (187,288) (1,459,680) Net book value 18, ,679 75,717 44, , Nelson 78 39

40 Section 3 Property, Plant & Equipment Illustrative financial statements - Accounting Policies and Explanatory Notes to the Financial Statements Property, plant and equipment Cost: At 1 January 20X5 Additions Disposals At 31 December 20X5 Accumulated depreciation and impairment losses: At 1 January 20X5 Depreciation for the year Written back on disposal At 31 December 20x5 Net carrying amount: At 31 December 20X5 At 31 December 20x4 Leasehold land and buildings HK$ 5,040, ,040,000 2,160,000 80,000-2,240,000 2,800,000 2,880,000 Furniture, fixtures and equipment HK$ 2,428,180 2,381,530 (1,527,470) 3,282,240 1,204, ,770 (878,000) 811,940 2,470,300 1,224,010 Example 12 Are they carrying amount? HK$ 7,468,180 2,381,530 (1,527,470) 8,322,240 3,364, ,770 (878,000) 3,051,940 5,270,300 4,104, Nelson 79 Total Section 4 Intangible Assets Mainly fallback to the requirements of HK SSAP 29 and simplified the requirements relating to measurement SME-FRS Section 4 HK SSAP Nelson 80 40

41 Section 4 Intangible Assets Definition of intangible asset Updated to that of HKAS 38 an intangible asset is an identifiable non-monetary asset without physical substance. In In SSAP SSAP 29, 29, an an intangible asset asset is is defined defined as as an an identifiable non-monetary asset asset without without physical substance held held for for use use in in the the production or or supply supply of of goods goods or or services, for for rental rental to to others, others, or or for for administrative purposes. Now, the use of the intangible asset is irrelevant. Recognition and initial measurement are similar to HK SSAP 29 and HKAS Nelson 81 Section 4 Intangible Assets Measurement after recognition After initial recognition, an intangible asset should be carried at its cost less any accumulated amortisation and any accumulated impairment losses. No revaluation model can be used Amortisation with a rebuttable presumption that the useful life of an intangible asset will not exceed 20 years from the date when the asset is available for use. Definitions of useful life and residual value are updated to the same definitions as in HKAS 38. However, there is no annual review requirement on residual value. Consistent with Historical Cost Convention No revaluation is is allowed The approach of of finite and indefinite useful life in in HKAS has not been adopted 2005 Nelson 82 41

42 Section 4 Intangible Assets Disclosure Simplified as compared with HKAS 38 A reconciliation of the carrying amount of the PPE at the beginning and end of the period is still required. However, comparative information is not required. HKAS has no no such exemption and comparative information is is still required 2005 Nelson 83 Section 4 Intangible Assets Illustrative financial statements in the Appendix to SME-FRS - Accounting Policies and Explanatory Notes to the Financial Statements Example 13 Intangible assets Intangible assets are stated at cost less accumulated amortisation and accumulated impairment losses and are amortised on a systematic basis over their estimated useful lives using the straight-line method Nelson 84 42

43 Section 5 Leases Mainly simplified from HKAS 17 (or HK SSAP 14) except for leasehold land SME-FRS Section 5 HK SSAP 14 HKAS 17 Lease 2005 Nelson 85 Section 5 Leases In HKAS 17 Leases, leasehold land without title pass by the end of the lease term is an operating lease As set out in Section 3 of SME-FRS, leasehold interest in land from the HKSAR Government or elsewhere with similar features are accounted for as property, plant and equipment, not as operating leases as in HKAS 17 Lease 2005 Nelson 86 43

44 Section 5 Leases Other recognition and measurement practices are same as HKAS 17 and HK SSAP 14, including Lessees should still recognise finance leases as assets and liabilities at amounts equal to the inception of the lease to the fair value of the leased asset or, if lower, at the present value of the minimum lease payments Disclosures Simplified as compared with HKAS 17 and HK SSAP 14 Lease 2005 Nelson 87 Section 5 Leases Illustrative financial statements in the Appendix to SME-FRS - Accounting Policies and Explanatory Notes to the Financial Statements Example 14 Operating leases Leases where substantially all the risks and rewards of ownership of assets are not transferred to the lessee are accounted for as operating leases. Annual rents applicable to such operating leases are charged to the income statement on a straight-line basis over the lease term Nelson 88 44

45 Section 5 Leases Illustrative financial statements in the Appendix to SME-FRS - Accounting Policies and Explanatory Notes to the Financial Statements Finance leases Leases that transfer substantially all the rewards and risks of ownership of assets to the company, are accounted for as finance leases. At the inception of a finance lease, the cost of the leased asset is capitalised at the fair value of the leased asset or, if lower, at the present value of the minimum lease payments. Lease payments are apportioned between the finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged to the income statement. Capitalised leased assets are depreciated over the shorter of the estimated useful life of the asset or the lease term. Example Nelson 89 Section 6 Investments New practice Significantly difference from HK SSAP 24 and HKAS Nelson 90 45