Update on HKFRS 9 and 15 (Abridged version) 12 November 2014

Update on HKFRS 9 and 15 (Abridged version) 12 November 2014 LAM Chi Yuen Nelson 林智遠 MBA MSc BBA ACA ACS CFA CGMA CPA(US) CTA FCCA FCPA FCPA(Aust.) FHKIoD FTIHK MHKSI MSCA 2014 Nelson Consulting Limited 1 Today s Agenda HKFRS 9 Financial Instruments HKFRS 15 Revenue from Contracts with Customers 2014 Nelson Consulting Limited 2 1

HKFRS 9 Financial Instruments 2014 Nelson Consulting Limited 3 HKFRS 9 Issued in 2014 Effective Date An entity shall apply HKFRS 9 for annual periods beginning on or after 1 January 2018. Earlier application is permitted. If an entity elects to apply HKFRS 9 early, it must disclose that fact and apply all of the requirements in HKFRS 9at the same time (but see also paragraphs 7.1.2, 7.2.21 and 7.3.2). It shall also, at the same time, apply the amendments in Appendix C. (para. 7.1.1) 2014 Nelson Consulting Limited 4 2

HKFRS 9 Issued in 2014 1. Objective 2. Scope 3. Recognition and Derecognition 4. Classification 5. Measurement 6. Hedge Accounting 7. Effective Date and Transition Transferred from HKAS 39 Debt instruments can now be measured at fair value through other comprehensive income Initial measurement of trade receivable New impairment requirements Changes mainly on hedge conditions 2014 Nelson Consulting Limited 5 HKFRS 9 Issued in 2014 1. Objective 2. Scope 3. Recognition and Derecognition 4. Classification 5. Measurement 6. Hedge Accounting 7. Effective Date and Transition 2014 Nelson Consulting Limited 6 3

Chapter 4.1 Classification of FA Unless para. 4.1.5 of HKFRS 9 (so called fair value option ) applies, an entity shall classify financial assets as subsequently measured at either amortised cost, fair value through other comprehensive income, or fair value through profit or loss on the basis of both: a) the entity s business model for managing the financial assets; and b) the contractual cash flow characteristics of the financial asset. (para. 4.1.1) Amortised Cost Fair Value Through Other Comprehensive income Fair Value Through Profit or Loss 2014 Nelson Consulting Limited 7 Chapter 4.1 Classification of FA A financial asset shall be measured at fair value through other comprehensive income if both of the following conditions are met: a. the financial asset is held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets, and b. the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. Para. B4.1.1 B4.1.26 provide guidance on how to apply these conditions. (para. 4.1.2A) Fair Value Through Other Comprehensive income 2014 Nelson Consulting Limited 8 4

HKFRS 9 Issued in 2014 1. Objective 2. Scope 3. Recognition and Derecognition 4. Classification 5. Measurement 6. Hedge Accounting 7. Effective Date and Transition 2014 Nelson Consulting Limited 9 Chapter 5 Measurement Initial measurement Except for trade receivables within the scope of para. 5.1.3, at initial recognition, an entity shall measure a financial asset or financial liability at its fair value Initial Measurement Fair Value + Transaction Cost plus or minus, in the case of a financial asset or financial liability not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition or issue of the financial asset or financial liability. (para. 5.1.1) However, if the fair value of the financial asset or financial liability at initial recognition differs from the transaction price, an entity shall apply para. B5.1.2A. (para. 5.1.1A) 2014 Nelson Consulting Limited 10 5

Chapter 5 Measurement Subsequent Measurement of Financial Assets After initial recognition, an entity shall measure a financial asset in accordance with para. 4.1.1 4.1.5 at: a. amortised cost; b. fair value through other comprehensive income; or c. fair value through profit or loss. (para. 5.2.1) Amortised Cost Fair Value Through Other Comprehensive income Fair Value Through Profit or Loss 2014 Nelson Consulting Limited 11 Chapter 5 Measurement Subsequent Measurement of Financial Assets An entity shall apply the impairment requirements in Section 5.5 to financial assets that are measured at amortised cost in accordance with para. 4.1.2 and to financial assets that are measured at fair value through other comprehensive income in accordance with para. 4.1.2A. (para. 5.2.2) New Impairment Requirements Amortised Cost Fair Value Through Other Comprehensive income Fair Value Through Profit or Loss 2014 Nelson Consulting Limited 12 6

Chapter 5 Measurement Subsequent Measurement of Financial Assets An entity shall apply the hedge accounting requirements in para. 6.5.8 6.5.14 (and, if applicable, para. 89 94 of HKAS 39 for the fair value hedge accounting for a portfolio hedge of interest rate risk) to a financial asset that is designated as a hedged item. (para. 5.2.3) Amortised Cost Fair Value Through Other Comprehensive income Fair Value Through Profit or Loss 2014 Nelson Consulting Limited 13 Chapter 5 Measurement Amortised Cost Measurement on Financial Assets Interest revenue shall be calculated by using the effective interest method (see Appendix A and para. B5.4.1 B5.4.7). This shall be calculated by applying the effective interest rate to the gross carrying amount of a financial asset except for: a. purchased or originated credit impaired financial assets. For those financial assets, the entity shall apply the creditadjusted effective interest rate to the amortised cost of the financial asset from initial recognition. b. financial assets that are not purchased or originated credit impaired financial assets but subsequently have become credit impaired financial assets. For those financial assets, the entity shall apply the effective interest rate to the amortised cost of the financial asset in subsequent reporting periods. (para. 5.4.1) 2014 Nelson Consulting Limited 14 7

Chapter 5 Measurement Amortised Cost Measurement on Financial Assets Write off An entity shall directly reduce the gross carrying amount of a financial asset when the entity has no reasonable expectations of recovering a financial asset in its entirety or a portion thereof. A write off constitutes a derecognition event (see para. B3.2.16(r)).. (para. 5.4.4) 2014 Nelson Consulting Limited 15 Chapter 5.5 Impairment Topics Covered 1. Recognition of Expected Credit Losses General approach Determining significant increases in credit risk Modified financial assets Purchased or originated creditimpaired financial assets 2. Simplified Approach for Trade Receivables, Contract Assets and Lease Receivables 3. Measurement of Expected Credit Losses 2014 Nelson Consulting Limited 16 8

Chapter 5.5 Impairment Recognition of Expected Credit Losses General Approach An entity shall recognise a loss allowance for expected credit losses on a financial asset that is measured in accordance with para. 4.1.2 or 4.1.2A, a lease receivable, a contract asset or a loan commitment and a financial guarantee contract to which the impairment requirements apply in accordance with para. 2.1(g), 4.2.1(c) or 4.2.1(d). (para. 5.5.1) HKFRS 9defines expected credit losses as: The weighted average of credit losses with the respective risks of a default occurring as the weights. 2014 Nelson Consulting Limited 17 Chapter 5.5 Impairment Recognition of Expected Credit Losses General Approach HKFRS 9defines credit losses as: The difference between all contractual cash flows that are due to an entity in accordance with the contract and all the cash flows that the entity expects to receive (i.e. all cash shortfalls), discounted at the original effective interest rate (or credit adjusted effective interest rate for purchased or originated credit impaired financial assets). 2014 Nelson Consulting Limited 18 9

Chapter 5.5 Impairment Recognition of Expected Credit Losses General Approach HKFRS 9 defines credit losses as: An entity shall estimate cash flows by considering all contractual terms of the financial instrument (for example, prepayment, extension, call and similar options) through the expected life of that financial instrument. The cash flows that are considered shall include cash flows from the sale of collateral held or other credit enhancements that are integral to the contractual terms. There is a presumption that the expected life of a financial instrument can be estimated reliably. However, in those rare cases when it is not possible to reliably estimate the expected life of a financial instrument, the entity shall use the remaining contractual term of the financial instrument. 2014 Nelson Consulting Limited 19 Chapter 5.5 Impairment Recognition of Expected Credit Losses General Approach An entity shall apply the impairment requirements for the recognition and measurement of a loss allowance for financial assets that are measured at fair value through other comprehensive income in accordance with para. 4.1.2A. However, the loss allowance shall be recognised in other comprehensive income and shall not reduce the carrying amount of the financial asset in the statement of financial position. (para. 5.5.2) Fair Value Through Other Comprehensive income 2014 Nelson Consulting Limited 20 10

Chapter 5.5 Impairment Recognition of Expected Credit Losses General Approach HKFRS 9defines Lifetime expected credit losses as: The expected credit losses that result from all possible default events over the expected life of a financial instrument. 12 month expected credit losses as: The portion of lifetime expected credit losses that represent the expected credit losses that result from default events on a financial instrument that are possible within the 12 months after the reporting date. 2014 Nelson Consulting Limited 21 Chapter 5.5 Impairment Recognition of Expected Credit Losses General Approach Subject to para. 5.5.13 5.5.16, at each reporting date, an entity shall measure the loss allowance for a financial instrument at an amount equal to the lifetime expected credit losses if the credit risk on that financial instrument has increased significantly since initial recognition. (para. 5.5.3) The objective of the impairment requirements is to recognise lifetime expected credit losses for all financial instruments for which there have been significant increases in credit risk since initial recognition whether assessed on an individual or collective basis considering all reasonable and supportable information, including that which is forward looking. (para. 5.5.4) 2014 Nelson Consulting Limited 22 11

Chapter 5.5 Impairment Recognition of Expected Credit Losses General Approach Subject to para. 5.5.13 5.5.16, if, at the reporting date, the credit risk on a financial instrument has not increased significantly since initial recognition, an entity shall measure the loss allowance for that financial instrument at an amount equal to 12 month expected credit losses. (para. 5.5.5) For loan commitments and financial guarantee contracts, the date that the entity becomes a party to the irrevocable commitment shall be considered to be the date of initial recognition for the purposes of applying the impairment requirements. (para. 5.5.6) 2014 Nelson Consulting Limited 23 Chapter 5.5 Impairment Recognition of Expected Credit Losses General Approach If an entity has measured the loss allowance for a financial instrument at an amount equal to lifetime expected credit losses in the previous reporting period, but determines at the current reporting date that para. 5.5.3 is no longer met, the entity shall measure the loss allowance at an amount equal to 12 month expected credit losses at the current reporting date. (para.5.5.7) An entity shall recognise in profit or loss, as an impairment gain or loss, the amount of expected credit losses (or reversal) that is required to adjust the loss allowance at the reporting date to the amount that is required to be recognised in accordance with HKFRS 9. (para. 5.5.8) 2014 Nelson Consulting Limited 24 12

Chapter 5.5 Impairment Example Entity A originates a single 10 year amortising loan for $1 million. Taking into consideration the expectations for instruments with similar credit risk (using reasonable and supportable information that is available without undue cost or effort), the credit risk of the borrower, and the economic outlook for the next 12 months, Entity A estimates that the loan at initial recognition has a probability of default (PD) of 0.5 per cent over the next 12 months. Entity A also determines that changes in the 12 month PD are a reasonable approximation of the changes in the lifetime PD for determining whether there has been a significant increase in credit risk since initial recognition. 2014 Nelson Consulting Limited 25 Chapter 5.5 Impairment Example At the reporting date (which is before payment on the loan is due), there has been no change in the 12 month PD and Entity A determines that there was no significant increase in credit risk since initial recognition. Entity A determines that 25 per cent of the gross carrying amount will be lost if the loan defaults (i.e. the LGD is 25 per cent). Entity A measures the loss allowance at an amount equal to 12 month expected credit losses using the 12 month PD of 0.5 per cent. Implicit in that calculation is the 99.5 per cent probability that there is no default. At the reporting date the loss allowance for the 12 month expected credit losses is $1,250 (0.5% 25% $1,000,000). 2014 Nelson Consulting Limited 26 13

Chapter 5.5 Impairment Recognition of Expected Credit Losses Determining Significant Increases in Credit Risk At each reporting date, an entity shall assess whether the credit risk on a financial instrument has increased significantly since initial recognition. When making the assessment, an entity shall use the change in the risk of a default occurring over the expected life of the financial instrument instead of the change in the amount of expected credit losses. 2014 Nelson Consulting Limited 27 Chapter 5.5 Impairment Recognition of Expected Credit Losses Determining Significant Increases in Credit Risk To make that assessment, an entity shall comparethe risk of a default occurring on the financial instrument as at the reporting date with the risk of a default occurring on the financial instrument as at the date of initial recognition and consider reasonable and supportable information, that is available without undue cost or effort, that is indicative of significant increases in credit risk since initial recognition. (para.5.5.9) 2014 Nelson Consulting Limited 28 14

Chapter 5.5 Impairment Recognition of Expected Credit Losses Determining Significant Increases in Credit Risk An entity may assume that the credit risk on a financial instrument has not increased significantly since initial recognition if the financial instrument is determined to have low credit risk at the reporting date (see para. B5.5.22 B5.5.24). (para.5.5.10) 2014 Nelson Consulting Limited 29 Chapter 5.5 Impairment Recognition of Expected Credit Losses Modified Financial Assets If the contractual cash flows on a financial asset have been renegotiated or modified and the financial asset was not derecognised, an entity shall assess whether there has been a significant increase in the credit risk of the financial instrument in accordance with para. 5.5.3 by comparing: a. the risk of a default occurring at the reporting date (based on the modified contractual terms); and b. the risk of a default occurring at initial recognition (based on the original, unmodified contractual terms). (para.5.5.12) 2014 Nelson Consulting Limited 30 15

Chapter 5.5 Impairment Recognition of Expected Credit Losses Purchased or Originated Credit Impaired Financial Assets Despite para. 5.5.3 and 5.5.5, at the reporting date, an entity shall only recognise the cumulative changes in lifetime expected credit losses since initial recognition as a loss allowance for purchased or originated credit impaired financial assets. (para. 5.5.13) At each reporting date, an entity shall recognise in profit or loss the amount of the change in lifetime expected credit losses as an impairment gain or loss. An entity shall recognise favourable changes in lifetime expected credit losses as an impairment gain, even if the lifetime expected credit losses are less than the amount of expected credit losses that were included in the estimated cash flows on initial recognition. (para.5.5.14) 2014 Nelson Consulting Limited 31 Chapter 5.5 Impairment Simplified Approach for Trade Receivables, Contract Assets and Lease Receivables Despite para. 5.5.3 & 5.5.5, an entity shall always measure the loss allowance at an amount equal to lifetime expected credit losses for: a. trade receivables or contract assets that result from transactions that are within the scope of HKFRS 15, and that: i. do not contain a significant financing component (or when the entity applies the practical expedient for contracts that are one year or less) in accordance with HKFRS 15; or ii. contain a significant financing component in accordance with HKFRS 15, if the entity chooses as its accounting policy to measure the loss allowance at an amount equal to lifetime expected credit losses. That accounting policy shall be applied to all such trade receivables or contract assets but may be applied separately to trade receivables and contract assets. 2014 Nelson Consulting Limited 32 16

Chapter 5.5 Impairment Simplified Approach for Trade Receivables, Contract Assets and Lease Receivables Despite para. 5.5.3 & 5.5.5, an entity shall always measure the loss allowance at an amount equal to lifetime expected credit losses for: b. lease receivables that result from transactions that are within the scope of HKAS 17, if the entity chooses as its accounting policy to measure the loss allowance at an amount equal to lifetime expected credit losses. That accounting policy shall be applied to all lease receivables but may be applied separately to finance and operating lease receivables. (para. 5.5.15) An entity may select its accounting policy for trade receivables, lease receivables and contract assets independently of each other. (para. 5.5.16) 2014 Nelson Consulting Limited 33 Chapter 5.5 Impairment Measurement of Expected Credit Losses An entity shall measure expected credit losses of a financial instrument in a way that reflects: a. an unbiased and probability weighted amount that is determined by evaluating a range of possible outcomes; b. the time value of money; and c. reasonable and supportable information that is available without undue cost or effort at the reporting date about past events, current conditions and forecasts of future economic conditions. (para. 5.5.17) 2014 Nelson Consulting Limited 34 17

Chapter 5.5 Impairment Measurement of Expected Credit Losses When measuring expected credit losses, an entity need not necessarily identify every possible scenario. However, it shall consider the risk or probability that a credit loss occurs by reflecting the possibility that a credit loss occurs and the possibility that no credit loss occurs, even if the possibility of a credit loss occurring is very low. (para. 5.5.18) The maximum period to consider when measuring expected credit losses is the maximum contractual period (including extension options) over which the entity is exposed to credit risk and not a longer period, even if that longer period is consistent with business practice. (para. 5.5.19) 2014 Nelson Consulting Limited 35 Chapter 5.5 Impairment Measurement of Expected Credit Losses However, some financial instruments include both a loan and an undrawn commitment component and the entity s contractual ability to demand repayment and cancel the undrawn commitment does not limit the entity s exposure to credit losses to the contractual notice period. For such financial instruments, and only those financial instruments, the entity shall measure expected credit losses over the period that the entity is exposed to credit risk and expected credit losses would not be mitigated by credit risk management actions, even if that period extends beyond the maximum contractual period. (para. 5.5.20) 2014 Nelson Consulting Limited 36 18

Chapter 5.7 Gains and Losses A gain or loss on a financial asset or financial liability that is measured at fair value shall be recognised in profit or loss unless: a. it is part of a hedging relationship (see para. 6.5.8 6.5.14 and, if applicable, para. 89 94 of HKAS 39 for the fair value hedge accounting for a portfolio hedge of interest rate risk); b. it is an investment in an equity instrument and the entity has elected to present gains and losses on that investment in OCI in accordance with para. 5.7.5; c. it is a financial liability designated as at fair value through profit or loss and the entity is required to present the effects of changes in the liability s credit risk in other comprehensive income in accordance with para. 5.7.7; or d. it is a financial asset measured at fair value through OCI in accordance with para. 4.1.2A and the entity is required to recognise some changes in fair value in OCI in accordance with para. 5.7.10. (para. 5.7.1) Amortised Cost Fair Value Through Other Comprehensive income Fair Value Through Profit or Loss 2014 Nelson Consulting Limited 37 Chapter 5.7 Gains and Losses A gain or loss on a financial asset measured at fair value through other comprehensive income in accordance with para. 4.1.2A shall be recognised in other comprehensive income, except for impairment gains or losses (see Section 5.5) and foreign exchange gains and losses (see paragraphs B5.7.2 B5.7.2A), until the financial asset is derecognised or reclassified. When the financial asset is derecognised the cumulative gain or loss previously recognised in other comprehensive income is reclassified from equity to profit or loss as a reclassification adjustment (see HKAS 1). Fair Value Through Other Comprehensive income 2014 Nelson Consulting Limited 38 19

Chapter 6 Hedge Accounting More principles based to align hedge accounting more closely with risk management and economic relationship Conditions for hedge accounting rewritten Hedge effectiveness assessment is forward looking only and no arbitrary bright line effectiveness range, Credit risk is not expected to dominate the value change in the hedge relationship No changes on 3 types of hedging accounting, fair value, cash flow and net investment hedge 2014 Nelson Consulting Limited 39 Hedging Hedge Accounting Conditions Hedging Instrument Hedged Item HKFRS 9 has a choice for an entity to use the hegding model in HKFRS 9 or HKAS 39 Hedging Relationship Conditions for Hedge Accounting A Hedging Relationship qualifies for Hedge Accounting if and only if all the Conditions for Hedge Accounting are met 2014 Nelson Consulting Limited 40 20

Hedging Hedge Accounting Conditions All 5 Conditions for Hedge Accounting must be met: Formal documentation at inception Highly effective and consistent with originally documented risk Forecasted transaction to be highly probable (for cash flow hedge) Hedge effectiveness can be reliably measured Conditions for Hedge Accounting Ongoing assessed and actually highly effective 2014 Nelson Consulting Limited 41 Hedging Hedge Accounting Conditions HKFRS 9 revises the conditions Hedging relationship The hedging relationship consists only of eligible hedging instruments and eligible hedged items Formal documentation at inception Meets all hedge effectiveness requirements At the inception of the hedging relationship there is formal designation and documentation of the hedging relationship and the entity s risk management objective and strategy for undertaking the hedge That documentation shall include identification of the hedging instrument, the hedged item, the nature of the risk being hedged and how the entity will assess whether the hedging relationship meets the hedge effectiveness requirements (including its analysis of the sources of hedge ineffectiveness and how it determines the hedge ratio) 2014 Nelson Consulting Limited 42 21

Hedging Hedge Accounting Conditions HKFRS 9 revises the conditions Meets all hedge effectiveness requirements i) there is an economic relationship between the hedged item and the hedging instrument; ii) the effect of credit risk does not dominate the value changes that result from that economic relationship; and iii) the hedge ratio of the hedging relationship is the same as that resulting from the quantity of the hedged item that the entity actually hedges and the quantity of the hedging instrument that the entity actually uses to hedge that quantity of hedged item. However, that designation shall not reflect an imbalance between the weightings of the hedged item and the hedging instrument that would create hedge ineffectiveness (irrespective of whether recognised or not) that could result in an accounting outcome that would be inconsistent with the purpose of hedge accounting 2014 Nelson Consulting Limited 43 Hedging Rebalancing If a hedging relationship ceases to meet the hedge effectiveness requirement relating to the hedge ratio (see paragraph 6.4.1(c)(iii)) but the risk management objective for that designated hedging relationship remains the same, an entity shall adjust the hedge ratio of the hedging relationship so that it meets the qualifying criteria again (this is referred to in this Standard as rebalancing see para. B6.5.7 B6.5.21). (para. 6.5.5) 2014 Nelson Consulting Limited 44 22

Hedging Rebalancing Rebalancing refers to the adjustments made to the designated quantities of the hedged item or the hedging instrument of an already existing hedging relationship for the purpose of maintaining a hedge ratio that complies with the hedge effectiveness requirements. Changes to designated quantities of a hedged item or of a hedging instrument for a different purpose do not constitute rebalancing for the purpose of this Standard. (para. B6.5.7) Rebalancing is accounted for as a continuation of the hedging relationship in accordance with para. B6.5.9 B6.5.21. On rebalancing, the hedge ineffectiveness of the hedging relationship is determined and recognised immediately before adjusting the hedging relationship. (para. B6.5.8) 2014 Nelson Consulting Limited 45 HKFRS 15 Revenue (from Contracts with Customers) 2014 Nelson Consulting Limited 46 23

HKFRS 15 Issued in 2014 1. Identify the Contract with a Customer 2. Identify the Performance 3. Determine the Transaction Price 4. Allocate Transaction Price to Performance 5. Recognise Revenue When a Performance Obligation is Satisfied HKFRS 15 establishes a comprehensive framework for determining whento recognise revenue and how much revenue to recognise. The core principle in that framework is that an entity recognises revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services Under HKFRS 15, an entity applies a 5 step approach in recognising revenue 2014 Nelson Consulting Limited 47 HKFRS 15 Issued in 2014 1. Identify the Contract with a Customer 2. Identify the Performance 3. Determine the Transaction Price Effective Date An entity shall apply HKFRS 15 for annual reporting periods beginning on or after 1 January 2017. Earlier application is permitted. If an entity applies HKFRS 15, it shall disclose that fact. 4. Allocate Transaction Price to Performance 5. Recognise Revenue When a Performance Obligation is Satisfied 2014 Nelson Consulting Limited 48 24

HKFRS 15 Issued in 2014 1. Identify the Contract with a Customer 2. Identify the Performance 3. Determine the Transaction Price 4. Allocate Transaction Price to Performance 5. Recognise Revenue When a Performance Obligation is Satisfied HKFRS 15 supersedes the following Standards: a. HKAS 11 Construction Contracts b. HKAS 18 Revenue c. HK(IFRIC) Int 13 Customer Loyalty Programmes d. HK(IFRIC) Int 15 Agreements for the Construction of Real Estate e. HK(IFRIC) Int 18 Transfers of Assets from Customers f. HK(SIC) Int 31 Revenue Barter Transactions Involving Advertising Services 2014 Nelson Consulting Limited 49 Contents in HKFRS 15 Issued in 2014 1. Identify the Contract with a Customer 2. Identify the Performance 3. Determine the Transaction Price 4. Allocate Transaction Price to Performance 5. Recognise Revenue When a Performance Obligation is Satisfied A. Objective B. Scope C. Recognition Identifying the contract (Step 1) Identifying performance obligations (Step 2) Satisfaction of performance obligations (Step 5) D. Measurement Determining the transaction price (Step 4) Allocating the transaction price to performance obligations (Step 5) E. Contract costs F. Presentation G. Disclosure 2014 Nelson Consulting Limited 50 25

A. Objective HKFRS 15 specifies the accounting for an individual contract with a customer However, as a practical expedient, an entity may apply HKFRS 15 to a portfolio of contracts (or performance obligations) with similar characteristics if the entity reasonably expects that the effects on the financial statements of applying HKFRS 15 to the portfolio would not differ materially from applying HKFRS 15 to the individual contracts (or performance obligations) within that portfolio When accounting for a portfolio, an entity shall use estimates and assumptions that reflect the size and composition of the portfolio. (HKFRS 15.4) 2014 Nelson Consulting Limited 51 B. Scope An entity shall apply HKFRS 15 to all contracts with customers, except the following: lease contracts within the scope of HKAS 17 Leases; insurance contracts within the scope of HKFRS 4 Insurance Contracts; financial instruments and other contractual rights or obligations within the scope of HKFRS 9 (or HKAS 39), HKFRS 10, HKAS 27 and HKAS 28; and non monetary exchanges between entities in the same line of business to facilitate sales to customers or potential customers. (HKFRS15.5) An entity shall apply HKFRS 15 to a contract (other than a contract listed above) only if the counterparty to the contract is a customer. (HKFRS 15.6) 2014 Nelson Consulting Limited 52 26

C. Recognition and D. Measurement 1. Identify the Contract with a Customer 2. Identify the Performance 3. Determine the Transaction Price 4. Allocate Transaction Price to Performance 5. Recognise Revenue When a Performance Obligation is Satisfied 2014 Nelson Consulting Limited 53 C. Recognition 1. Identify the Contract with a Customer 2. Identify the Performance 5. Recognise Revenue When a Performance Obligation is Satisfied Step 1: Identifying the Contract(s) Combination of contracts Contract modifications Step 2: Identifying Performance Promises in contracts with customers Distinct goods or services Step 5: Satisfaction of performance obligations Performance obligations satisfied over time Performance obligations satisfied at a point in time Measuring progress towards complete satisfaction of a performance obligation 2014 Nelson Consulting Limited 54 27

Step 1: Identify the Contract(s) 1. Identify the Contract with a Customer Step 1: Identifying the Contract(s) A contract is an agreement between two or more parties that creates enforceable rights and obligations. The requirements of HKFRS 15 apply to each contract that has been agreed upon with a customer and meets specified criteria. In some cases, HKFRS 15 requires an entity to combine contracts and account for them as one contract. HKFRS 15 also provides requirements for the accounting for contract modifications. (HKFRS 15.IN7) 2014 Nelson Consulting Limited 55 Step 1: Identify the Contract(s) An entity shall account for a contract with a customer that is within the scope of HKFRS 15 only when all of the following criteria (i.e. contract criteria) are met: a. the parties to the contract have approved the contract (in writing, orally or in accordance with other customary business practices) and are committed to perform their respective obligations; b. the entity can identify each party s rights regarding the goods or services to be transferred; c. the entity can identify the payment terms for the goods or services to be transferred; d. the contract has commercial substance (i.e. the risk, timing or amount of the entity s future cash flows is expected to change as a result of the contract); and 2014 Nelson Consulting Limited 56 28

Step 1: Identify the Contract(s) An entity shall account for a contract with a customer that is within the scope of HKFRS 15 only when all of the following criteria (i.e. contract criteria) are met: e. it is probable that the entity will collect the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer. In evaluating whether collectability of an amount of consideration is probable, an entity shall consider only the customer s ability and intention to pay that amount of consideration when it is due. The amount of consideration to which the entity will be entitled may be less than the price stated in the contract if the consideration is variable because the entity may offer the customer a price concession (see HKFRS 15.52) (HKFRS 15.9) 2014 Nelson Consulting Limited 57 C. Recognition and D. Measurement 1. Identify the Contract with a Customer 2. Identify the Performance 3. Determine the Transaction Price 4. Allocate Transaction Price to Performance 5. Recognise Revenue When a Performance Obligation is Satisfied 2014 Nelson Consulting Limited 58 29

Step 2: Identify Performance 2. Identify the Performance Performance obligations Step 2: Identifying the Performance in the Contract A contract includes promises to transfer goods or services to a customer. If those goods or services are distinct, the promises are performance obligations and are accounted for separately A good or service is distinct if the customer can benefit from the good or service on its own or together with other resources that are readily available to the customer and the entity s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract. (HKFRS 15.IN7) 2014 Nelson Consulting Limited 59 Step 2: Identify Performance At contract inception, an entity shall assess the goods or services promised in a contract with a customer, and identify as a performance obligation each promise to transfer to the customer either: a. a good or service (or a bundle of goods or services) that is distinct; or b. a series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer (see HKFRS 15.23) (HKFRS 15.22) HKFRS 15 defines performance obligation as: Performance obligations A promise in a contract with a customer to transfer to the customer either: a. a good or service (or a bundle of goods or services) that is distinct; or b. a series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer. 2014 Nelson Consulting Limited 60 30

Step 2: Identify Performance A series of distinct goods or services has the same pattern of transfer to the customer if both of the following criteria are met: a. each distinct good or service in the series that the entity promises to transfer to the customer would meet the criteria in HKFRS 15.35 to be a performance obligation satisfied over time; and b. in accordance with HKFRS 15.39 40, the same method would be used to measure the entity s progress towards complete satisfaction of the performance obligation to transfer each distinct good or service in the series to the customer. (HKFRS 15.23) Performance obligations 2014 Nelson Consulting Limited 61 Step 2: Identify Performance A good or service that is promised to a customer is distinct if both of the following criteria are met: a. the customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer (i.e. the good or service is capable of being distinct); and b. the entity s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract (i.e. the good or service is distinct within the context of the contract). (HKFRS 15.27) Performance obligations 2014 Nelson Consulting Limited 62 31

Step 2: Identify Performance Example Factors that indicate that an entity s promise to transfer a good or service to a customer is separately identifiable include (but not limited to): a. the entity does not provide a significant service of integrating the good or service with other goods or services promised in the contract into a bundle of goods or services that represent the combined output for which the customer has contracted. In other words, the entity is not using the good or service as an input to produce or deliver the combined output specified by the customer. b. the good or service does not significantly modify or customise another good or service promised in the contract. c. Performance the good obligations or service is not highly dependent on, or highly interrelated with, other goods or services promised in the contract. For example, the fact that a customer could decide to not purchase the good or service without significantly affecting the other promised goods or services in the contract might indicate that the good or service is not highly dependent on, or highly interrelated with, those other promised goods or services. (HKFRS 15.29) 2014 Nelson Consulting Limited 63 Step 2: Identify Performance If a promised good or service is not distinct, an entity shall combine that good or service with other promised goods or services until it identifies a bundle of goods or services that is distinct. In some cases, that would result in the entity accounting for all the goods or services promised in a contract as a single performance obligation. (HKFRS 15.30) Performance obligations 2014 Nelson Consulting Limited 64 32

C. Recognition and D. Measurement 1. Identify the Contract with a Customer 2. Identify the Performance 3. Determine the Transaction Price 4. Allocate Transaction Price to Performance 5. Recognise Revenue When a Performance Obligation is Satisfied 2014 Nelson Consulting Limited 65 D. Measurement 3. Determine the Transaction Price 4. Allocate Transaction Price to Performance Step 3: Determining the Transaction Prices Variable consideration The existence of a significant financing component in the contract Non cash consideration Consideration payable to a customer Step 4: Allocating the Transaction Price to Performance Allocation based on stand alone selling prices Allocation of a discount Allocation of variable consideration Changes in the transaction price 2014 Nelson Consulting Limited 66 33

Step 3: Determine Transaction Price 3. Determine the Transaction Price Step 3: Determining the Transaction Prices The transaction price is the amount of consideration in a contract to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer can be a fixed amount of customer consideration, but it may sometimes include variable consideration or consideration in a form other than cash is also adjusted for the effects of the time value of money if the contract includes a significant financing component and for any consideration payable to the customer. (HKFRS 15.IN7) 2014 Nelson Consulting Limited 67 Step 3: Determine Transaction Price 3. Determine the Transaction Price Step 3: Determining the Transaction Prices If the consideration is variable, an entity estimates the amount of consideration to which it will be entitled in exchange for the promised goods or services. The estimated amount of variable consideration will be included in the transaction price only to the extent that it is highly probable that a significant reversal in the amount of cumulative revenue recognised will not occur when the uncertainty associated with the variable consideration is subsequently resolved. (HKFRS 15.IN7) 2014 Nelson Consulting Limited 68 34

Step 3: Determine Transaction Price HKFRS 15 defines transaction price as: The amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties (for example, some sales taxes). To determine the transaction price, an entity shall consider the terms of the contract and its customary business practices. The consideration promised in a contract with a customer may include fixed amounts, variable amounts, or both.(hkfrs 15.47) 2014 Nelson Consulting Limited 69 Step 3: Determine Transaction Price The nature, timing and amount of consideration promised by a customer affect the estimate of the transaction price. When determining the transaction price, an entity shall consider the effects of all of the following: a. variable consideration (see HKFRS 15.50 55 and 59); b. constraining estimates of variable consideration (see HKFRS 15.56 58); c. the existence of a significant financing component in the contract (see HKFRS 15.60 65); d. non cash consideration (see HKFRS 15.66 69); and e. consideration payable to a customer (see HKFRS 15.70 72). (HKFRS 15.48) Variable Consideration Constraining Estimates of Variable Con. Significant Financing Component Non cash Consideration Consideration Payable to Customer 2014 Nelson Consulting Limited 70 35

Step 3: Determine Transaction Price If the consideration promised in a contract includes a variable amount, an entity shall estimate the amount of consideration to which the entity will be entitled in exchange for transferring the promised goods or services to a customer. (HKFRS 15.50) Variable Consideration 2014 Nelson Consulting Limited 71 Step 3: Determine Transaction Price An entity shall estimate an amount of variable consideration by using either of the following methods, depending on which method the entity expects to better predict the amount of consideration to which it will be entitled: a. The expected value the expected value is the sum of probabilityweighted amounts in a range of possible consideration amounts. An expected value may be an appropriate estimate of the amount of variable consideration if an entity has a large no. of contracts with similar characteristics. Variable Consideration b. The most likely amount the most likely amount is the single most likely amount in a range of possible consideration amounts (i.e. the single most likely outcome of the contract). Expected Value Most Likely Amount The most likely amount may be an appropriate estimate of the amount of variable consideration if the contract has only two possible outcomes (e.g. an entity either achieves a performance bonus or does not). (HKFRS 15.53) 2014 Nelson Consulting Limited 72 36

Step 3: Determine Transaction Price An entity shall include in the transaction price some or all of an amount of variable consideration estimated in accordance with HKFRS 15.53 only to the extent that it is highly probable that a significant reversal in the amount of cumulative revenue recognised will not occur when the uncertainty associated with the variable consideration is subsequently resolved. (HKFRS 15.56) In assessing such highly probable circumstance, an entity shall consider both the likelihood and the magnitude of the revenue reversal. Constraining Estimates of Variable Con. 2014 Nelson Consulting Limited 73 Step 3: Determine Transaction Price In determining the transaction price, an entity shall adjust the promised amount of consideration for the effects of the time value of money if the timing of payments agreed to by the parties to the contract (either explicitly or implicitly) provides the customer or the entity with a significant benefit of financing the transfer of goods or services to the customer. In those circumstances, the contract contains a significant financing component. A significant financing component may exist regardless of whether the promise of financing is explicitly stated in the contract, or implied by the payment terms agreed to by the parties to the contract. (HKFRS 15.60) Significant Financing Component 2014 Nelson Consulting Limited 74 37

Step 3: Determine Transaction Price When adjusting the promised amount of consideration for a significant financing component, an entity shall use the discount rate that would be reflected in a separate financing transaction between the entity and its customer at contract inception. That rate would reflect the credit characteristics of the party receiving financing in the contract, as well as any collateral or security provided by the customer or the entity, including assets transferred in the contract. An entity may be able to determine that rate by identifying the rate that discounts the nominal amount of the promised consideration to the price that the customer would pay in cash for the goods or services when (or as) they transfer to the customer. Significant Financing Component After contract inception, an entity shall not update the discount rate for changes in interest rates or other circumstances (such as a change in the assessment of the customer s credit risk). (HKFRS 15.64) 2014 Nelson Consulting Limited 75 Step 3: Determine Transaction Price An entity shall present the effects of financing (interest revenue or interest expense) separately from revenue from contracts with customers in the statement of comprehensive income. Interest revenue or interest expense is recognised only to the extent that a contract asset (or receivable) or a contract liability is recognised in accounting for a contract with a customer. (HKFRS 15.65) Significant Financing Component 2014 Nelson Consulting Limited 76 38

Step 3: Determine Transaction Price To determine the transaction price for contracts in which a customer promises consideration in a form other than cash, an entity shall measure the non cash consideration (or promise of noncash consideration) at fair value. (HKFRS 15.66) If an entity cannot reasonably estimate the fair value of the non cash consideration, the entity shall measure the consideration indirectly by reference to the stand alone selling price of the goods or services promised to the customer (or class of customer) in exchange for the consideration. (HKFRS 15.67) Non cash Consideration Fair Value 2014 Nelson Consulting Limited 77 Step 3: Determine Transaction Price An entity shall account for consideration payable to a customer as a reduction of the transaction price and, therefore, of revenue unless the payment to the customer is in exchange for a distinct good or service (as described in HKFRS 15.26 30) that the customer transfers to the entity. If the consideration payable to a customer includes a variable amount, an entity shall estimate the transaction price (including assessing whether the estimate of variable consideration is constrained) in accordance with HKFRS 15.50 58. (HKFRS 15.70) Consideration Payable to Customer 2014 Nelson Consulting Limited 78 39

C. Recognition and D. Measurement 1. Identify the Contract with a Customer 2. Identify the Performance 3. Determine the Transaction Price 4. Allocate Transaction Price to Performance 5. Recognise Revenue When a Performance Obligation is Satisfied 2014 Nelson Consulting Limited 79 Step 4: Allocate Transaction Price to PO 4. Allocate Transaction Price to Performance Step 4: Allocating the Transaction Price to Performance An entity typically allocates the transaction price to each performance obligation on the basis of the relative stand alone selling prices of each distinct good or service promised in the contract. If a stand alone selling price is not observable, an entity estimates it. Sometimes, the transaction price includes a discount or a variable amount of consideration that relates entirely to a part of the contract. HKFRS 15 specify when an entity allocates the discount or variable consideration to one or more, but not all, performance obligations (or distinct goods or services) in the contract. (HKFRS 15.IN7) 2014 Nelson Consulting Limited 80 40

Step 4: Allocate Transaction Price to PO Based on Stand alone Selling Price (SASP) Allocation of a Discount Allocation of Variable Consideration The objective when allocating the transaction price is for an entity to allocate the transaction price to each performance obligation (or distinct good or service) in an amount that depicts the amount of consideration to which the entity expects to be entitled in exchange for transferring the promised goods or services to the customer. (HKFRS 15.73) 4. Allocate Transaction Price to Performance 2014 Nelson Consulting Limited 81 Step 4: Allocate Transaction Price to PO Based on Stand alone Selling Price (SASP) Allocation of a Discount Allocation of Variable Consideration 4. Allocate Transaction Price to Performance To meet the allocation objective, an entity shall allocate the transaction price to each performance obligation identified in the contract on a relative stand alone selling price basis in accordance with HKFRS 15.76 80, except as specified in HKFRS 15.81 83 (for allocating discounts) and HKFRS 15.84 86 (for allocating consideration that includes variable amounts). (HKFRS 15.74) 2014 Nelson Consulting Limited 82 41

Step 4: Allocate Transaction Price to PO Based on Stand alone Selling Price (SASP) Allocation of a Discount Allocation of Variable Consideration 4. Allocate Transaction Price to Performance HKFRS 15.76 86 do not apply if a contract has only one performance obligation. However, HKFRS 15.84 86 may apply if an entity promises to transfer a series of distinct goods or services identified as a single performance obligation in accordance with HKFRS 15.22(b) and the promised consideration includes variable amounts. (HKFRS 15.75) 2014 Nelson Consulting Limited 83 Step 4: Allocate Transaction Price to PO Based on Stand alone Selling Price (SASP) Suitable methods for estimating SASP of a good or service include (not limited to): a. Adjusted market assessment approach, b. Expected cost plus a margin approach, c. Residual approach, and/or d. Combination of the above 2014 Nelson Consulting Limited 84 42

C. Recognition and D. Measurement 1. Identify the Contract with a Customer 2. Identify the Performance 3. Determine the Transaction Price 4. Allocate Transaction Price to Performance 5. Recognise Revenue When a Performance Obligation is Satisfied 2014 Nelson Consulting Limited 85 Step 5: Satisfy Performance Step 5: Satisfaction of performance obligations A an entity recognises revenue when (or as) it satisfies a performance obligation by transferring a promised good or service to a customer which is when the customer obtains control of that good or service. The amount of revenue recognised is the amount allocated to the satisfied performance obligation. (HKFRS 15.IN7) 5. Recognise Revenue When a Performance Obligation is Satisfied 2014 Nelson Consulting Limited 86 43

Step 5: Satisfy Performance 5. Recognise Revenue When a Performance Obligation is Satisfied Step 5: Satisfaction of performance obligations A performance obligation may be satisfied at a point in time (typically for promises to transfer goods to a customer) or over time (typically for promises to transfer services to a customer). For performance obligations satisfied over time, an entity recognises revenue over time by selecting an appropriate method for measuring the entity s progress towards complete satisfaction of that performance obligation. (HKFRS 15.IN7) 2014 Nelson Consulting Limited 87 Step 5: Satisfy Performance An entity shall recognise revenue when (or as) the entity satisfies a performance obligation by transferring a promised good or service (i.e. an asset) to a customer. An asset is transferred when (or as) the customer obtains control of that asset (HKFRS 15.31) 2014 Nelson Consulting Limited 88 44

Step 5: Satisfy Performance For each performance obligation identified in accordance with HKFRS 15.22 30, an entity shall determine at contract inception whether it satisfies the performance obligation over time (in accordance with HKFRS 15.35 37) or satisfies the performance obligation at a point in time (in accordance with HKFRS 15.38). If an entity does not satisfy a performance obligation over time, the performance obligation is satisfied at a point in time. (HKFRS 15.32) Over Time At a Point in Time 2014 Nelson Consulting Limited 89 Step 5: Satisfy Performance Goods and services are assets, even if only momentarily, when they are received and used (as in the case of many services). Control of an asset refers to the ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset. includes the ability to prevent other entities from directing the use of, and obtaining the benefits from, an asset. When evaluating whether a customer obtains control of an asset, an entity shall consider any agreement to repurchase the asset (see HKFRS 15.B64 B76). (HKFRS 15.33) Over Time At a Point in Time 2014 Nelson Consulting Limited 90 45

Step 5: Satisfy Performance Example The benefits of an asset are the potential cash flows (inflows or savings in outflows) that can be obtained directly or indirectly in many ways, such as by: a. using the asset to produce goods or provide services (including public services); b. using the asset to enhance the value of other assets; c. using the asset to settle liabilities or reduce expenses; d. selling or exchanging the asset; e. pledging the asset to secure a loan; and f. holding the asset. (HKFRS 15.33) Over Time At a Point in Time 2014 Nelson Consulting Limited 91 Step 5: Satisfy Performance An entity transfers control of a good or service over time and, therefore, satisfies a performance obligation and recognises revenue over time, if one of the following criteria is met: Over Time a. the customer simultaneously receives and consumes the benefits provided by the entity s performance as the entity performs (see HKFRS 15.B3 B4); b. the entity s performance creates or enhances an asset (e.g. work in progress) that the customer controls as the asset is created or enhanced (see HKFRS 15.B5); or c. the entity s performance does not create an asset with an alternative use to the entity (see HKFRS 15.36) and the entity has an enforceable right to payment for performance completed to date (see HKFRS 15.37). (HKFRS 15.35) 2014 Nelson Consulting Limited 92 46

Step 5: Satisfy Performance If a performance obligation is not satisfied over time in accordance with HKFRS 15.35 37, an entity satisfies the performance obligation at a point in time. To determine the point in time at which a customer obtains control of a promised asset and the entity satisfies a performance obligation, the entity shall consider the requirements for control in HKFRS 15.31 34. (HKFRS 15.38) At a Point in Time 2014 Nelson Consulting Limited 93 Step 5: Satisfy Performance In addition, an entity shall consider indicators of the transfer of control, which include, but are not limited to, the following: a. The entity has a present right to payment for the asset b. The customer has legal title to the asset c. The entity has transferred physical possession of the asset d. The customer has the significant risks and rewards of ownership of the asset e. The customer has accepted the asset At a Point in Time 2014 Nelson Consulting Limited 94 47

C. Recognition and D. Measurement 1. Identify the Contract with a Customer 2. Identify the Performance 3. Determine the Transaction Price 4. Allocate Transaction Price to Performance When (or as) a performance obligation is satisfied, an entity shall recognise as revenue the amount of the transaction price (which excludes estimates of variable consideration that are constrained in accordance with HKFRS 15.56 58) that is allocated to that performance obligation. (HKFRS 15.46) 5. Recognise Revenue When a Performance Obligation is Satisfied 2014 Nelson Consulting Limited 95 Contract Costs, Presentation & Discl. 1. Identify the Contract with a Customer 2. Identify the Performance 3. Determine the Transaction Price 4. Allocate Transaction Price to Performance 5. Recognise Revenue When a Performance Obligation is Satisfied 2014 Nelson Consulting Limited 96 48