HKFRS 7 and Amendments to HKAS 1 & October 2006

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HKFRS 7 and Amendments to HKAS 1 & 39 16 October 2006 Nelson Lam 林智遠 CFA FCCA FCPA(Practising) MBA MSc BBA CPA(US) ACA 2005-06 Nelson 1 Today s Agenda Financial Instruments: Disclosure (HKFRS 7) 7) Amendment to to HKAS 39 39 Fair Value Option Amendment to to HKAS 39 39 and and HKFRS 4 Financial Guarantee Contracts Amendment to to HKAS 1 and and 39 39 Capital Disclosures Simple but Comprehensive Recap and key issues Real Life Cases and Examples 2005-06 Nelson 2 1

HKFRS 7 Financial Instruments: Disclosure 2005-06 Nelson 3 Disclosure Amended by HKFRS 7 The objective of HKFRS 7 is to require entities to provide disclosures in their financial statements that enable users to evaluate: 1) the significance of financial instruments for the entity s financial position and financial performance; and 2) the nature and extent of risks arising from financial instruments to which the entity is exposed during the period and at the reporting date, and how the entity manages those risks. Significance Balance sheet Income statement Other disclosures Nature and Extent Qualitative disclosures Quantitative disclosures 2005-06 Nelson 4 2

Disclosure Amended by HKFRS 7 HKFRS 7 supersedes (from 1 Jan. 2007) Full HKAS 30 Para. 51 to 95 of HKAS 32 As compared with HKAS 30 and 32, HKFRS 7 has the following attributes: 1. Apply to all entities while HKAS 30 applies to financial institution only 2. Is more correlation with the categories of financial instruments as defined in HKAS 39 3. Aim at simplifying the disclosure requirements of HKAS 32 on risks but introduced some new disclosures 4. HKAS 32 has exemption for comparative on first year of adoption but HKFRS 7 only provides exemption on the nature and extent of risks. Significance Nature and Extent 2005-06 Nelson 5 Recap of HKAS 30 First HKAS 30 Disclosures in the Financial Statements of Banks and Similar Financial Institutions set out some specific disclosure requirements on banks and similar entities, including: Accounting policies on specific items and transactions Specific items on income statement and balance sheet Fair values of each class of financial assets and liabilities Contingent liabilities and commitments (requiring specific items) Analysis of assets and liabilities into relevant maturity groupings Significant concentrations of its assets, liabilities and off balance sheet items (by geographical areas, customer, industry group or other groupings) Significant net foreign currency exposures Accounting policy, movements and amount on allowance for Not yet impairment loss closely Amounts set aside for general banking risks, including future losses and other unforeseeable risks or contingencies aligned with HKAS 39 Liabilities secured and assets pledged as security 2005-06 Nelson 6 3

1. Significance of Financial Instruments Significance An entity shall disclose information that enables users of its financial statements to evaluate the significance of financial instruments for its financial position and performance. 2005-06 Nelson 7 1. Significance of Financial Instruments Significance Balance Sheet The carrying amounts of each of the following categories, as defined in HKAS 39, shall be disclosed either on the face of the balance sheet or in the notes: a) financial assets at fair value through P/L, showing separately i) those designated as such upon initial recognition and ii) those classified as held for trading in accordance with HKAS 39; b) held-to-maturity investments; New c) loans and receivables; in in HKFRS 7 d) available-for-sale financial assets; e) financial liabilities at fair value through P/L, showing separately i) those designated as such upon initial recognition and ii) those classified as held for trading in accordance with HKAS 32 only HKAS 39; and requires such New f) financial liabilities measured at amortized cost. in in disclosures HKFRS 7 2005-06 Nelson 8 4

1. Significance of Financial Instruments Significance Balance Sheet Additional information is required to disclose on: Loan and receivable designated as at fair value through profit or loss (HKFRS 7.9) Financial liability designated as at fair value through profit and loss (HKFRS 7.10) Allowance account for credit losses (say bad debt) When financial assets are impaired by credit losses and the entity records the impairment in a separate account (e.g. an allowance account used) rather than directly reducing the carrying amount of the asset, it shall disclose a reconciliation of changes in that account during the period for each class of financial assets. No reconciliation required in in HKAS 32.94(i).. 2005-06 Nelson 9 1. Significance of Financial Instruments Significance Income Statement An entity shall disclose the following items either on the face of the financial statements or in the notes: a) net gains or net losses on: i) financial assets or financial liabilities at fair value through P/L, showing separately those on financial assets or financial liabilities designated as such upon initial recognition, and those on financial assets or financial liabilities that are classified as held for trading in accordance with HKAS 39; ii) available-for-sale financial assets, showing separately the amount of gain or loss recognised directly in equity during the period and the amount removed from equity and recognised in profit or loss for the period; iii) held-to-maturity investments; iv) loans and receivables; and v) financial liabilities measured at amortized cost New in in HKFRS 7 HKAS 32 requires this only New in in HKFRS 7 2005-06 Nelson 10 5

1. Significance of Financial Instruments Significance Income Statement An entity shall disclose the following items either on the face of the financial statements or in the notes: b) total interest income and total interest expense for financial assets or financial liabilities that are not at fair value through P/L; c) fee income and expense (other than amounts included in determining the effective interest rate) arising from: i) financial assets or financial liabilities that are not at fair value through profit or loss; and ii) trust and other fiduciary activities that result in the holding or investing of assets on behalf of individuals, trusts, retirement benefit plans, and other institutions; d) interest income on impaired financial assets accrued in accordance with paragraph AG93 of HKAS 39, and e) the amount of any impairment loss for each class of financial asset. New in in HKFRS 7 2005-06 Nelson 11 1. Significance of Financial Instruments Significance Other Disclosures Disclosure requirements on accounting policies, hedge accounting and fair value are similar to HKAS 32. HKFRS 7 additionally requires: a) in fair value hedges, gains or losses: i) on the hedging instrument; and ii) on the hedged item attributable to the hedged risk. b) the ineffectiveness recognised in profit or loss that arises from cash flow hedges; and c) the ineffectiveness recognised in profit or loss that arises from hedges of net investments in foreign operations. New in in HKFRS 7 2005-06 Nelson 12 6

2. Nature and Extent of Risks Nature and Extent An entity shall disclose information that enables users of its financial statements to evaluate the nature and extent of risks arising from financial instruments to which the entity is exposed at the reporting date. The disclosures required focus on the risks that arise from financial instruments and how they have been managed. These risks typically include, but are not limited to credit risk, liquidity risk and market risk. 2005-06 Nelson 13 2. Nature and Extent of Risks Nature and Extent In HKAS 32 Market Risk In HKFRS 7 Market Risk Currency Risk Risk FV FV Interest Rate Risk Risk Price Risk Risk Credit Risk Currency Risk Risk Interest Rate Risk Risk Other Price Risk Risk Credit Risk Liquidity Risk Liquidity Risk Cash Flow Interest Rate Risk Risk 2005-06 Nelson 14 7

2. Nature and Extent of Risks Nature and Extent Qualitative Disclosures For each type of risk arising from financial instruments, an entity shall disclose: a) The exposures to risk and how they arise; b) Its objectives, policies and processes for managing the risk and the methods used to measure the risk c) Any changes in (a) or (b) from the previous period. 2005-06 Nelson 15 2. Nature and Extent of Risks Nature and Extent Quantitative Disclosures For each type of risk arising from financial instruments, an entity shall disclose: Summary quantitative data about its exposure to that risk at the reporting date. The level of detail of such disclosure is based on: The information provided internally to key management personnel of the entity (as defined in HKAS 24 Related Party Disclosures), for example the entity s board of directors or chief executive officer. If the quantitative data disclosed as at the reporting date are unrepresentative of an entity s exposure to risk during the period, an entity shall provide further information that is representative. 2005-06 Nelson 16 8

2. Nature and Extent of Risks Nature and Extent Quantitative Disclosures Credit risk An entity shall disclose by class of financial instrument: a) the amount that best represents its maximum exposure to credit risk at the reporting date without taking account of any collateral held or other credit enhancements (e.g. netting agreements that do not qualify for offset in accordance with HKAS 32); b) in respect of the amount disclosed in (a), a description of collateral held as security and other credit enhancements; c) information about the credit quality of financial assets that are neither past due nor impaired; and d) the carrying amount of financial assets that would otherwise be past due or impaired whose terms have been renegotiated. 2005-06 Nelson 17 2. Nature and Extent of Risks Nature and Extent Quantitative Disclosures Credit risk For financial assets that are either past due or impaired, an entity shall disclose by class of financial asset: a) an analysis of the age of financial assets that are past due as at the reporting date but not impaired; b) an analysis of financial assets that are individually determined to be impaired as at the reporting date, including the factors the entity considered in determining that they are impaired; and c) for the amounts disclosed in (a) and (b), a description of collateral held by the entity as security and other credit enhancements and, unless impracticable, an estimate of their fair value. 2005-06 Nelson 18 9

2. Nature and Extent of Risks Case Early adopted HKFRS 7 in 2005 and its annual report states that (extract only): Exposure to credit risk - as at 31 Dec. 2005, the financial assets and financial liabilities of the Group and HKEx that were exposed to credit risk and their maximum exposure were as follows: 2005-06 Nelson 19 2. Nature and Extent of Risks Nature and Extent Quantitative Disclosures Liquidity risk An entity shall disclose: a) a maturity analysis for financial liabilities that shows the remaining contractual maturities; and b) a description of how it manages the liquidity risk inherent in (a). 2005-06 Nelson 20 10

2. Nature and Extent of Risks Case Early adopted HKFRS 7 in 2005 and its annual report states that (extract only): The financial liabilities of the Group and HKEx as at 31 December 2005 are analysed into relevant maturity buckets based on their contractual maturity dates in the table below: 2005-06 Nelson 21 2. Nature and Extent of Risks Nature and Extent Quantitative Disclosures Market risk HKFRS 7 requires the disclosures of sensitivity analysis. The disclosures of sensitivity analysis can be achieved by 2 approaches: 1. Sensitivity analysis for each type of market risk 2. Sensitivity analysis that reflects interdependencies between risks variables Sensitivity analysis 2005-06 Nelson 22 11

2. Nature and Extent of Risks Nature and Extent Quantitative Disclosures Market risk Sensitivity Analysis for Each Type of Market Risk An entity shall disclose: a) a sensitivity analysis for each type of market risk to which the entity is exposed at the reporting date, showing: how profit or loss and equity would have been affected by changes in the relevant risk variable that were reasonably possible at that date; b) the methods and assumptions used in preparing the sensitivity analysis; and c) changes from the previous period in the methods and assumptions used, and the reasons for such changes. 2005-06 Nelson 23 2. Nature and Extent of Risks Nature and Extent Quantitative Disclosures Market risk Sensitivity Analysis That Reflects Interdependencies Between Risks Variables Alternatively, an entity prepares and discloses a sensitivity analysis, such as Value-at-Risk (VaR), that reflects interdependencies between risk variables (e.g. interest rates and exchange rates) and uses it to manage financial risks. The entity shall also disclose: a) an explanation of the method used in preparing such a sensitivity analysis, and of the main parameters and assumptions underlying the data provided; and b) an explanation of the objective of the method used and of limitations that may result in the information not fully reflecting the fair value of the assets and liabilities involved. 2005-06 Nelson 24 12

2. Nature and Extent of Risks Case Early adopted HKFRS 7 in 2005 and its annual report states that (extract only): Risk management techniques, such as Value-at-Risk ( VaR ) based on historical simulation and portfolio stress testing, are used to identify, measure and control foreign exchange risk, equity price risk and interest rate risks of the Group s investments. VaR measures the expected maximum loss over a given time interval (a holding period of 10 trading days is used by the Group) at a given confidence level (95 per cent confidence interval is adopted by the Group) based on historical data (one year is used by the Group). The Board sets a limit on total VaR of the Group and VaR is monitored on a weekly basis How would you determine them? 2005-06 Nelson 25 2. Nature and Extent of Risks Case Early adopted HKFRS 7 in 2005 and its annual report states that (extract only): The VaR for each risk factor and the total VaR of the investments of the Group and HKEx during the year were as follows: Group HKEx 2005 2005 Average Highest Lowest Average Highest Lowest $million $million $million $million $million $million Foreign exchange risk 5 6.1 3.6 0.2 0.7 - Equity price risk 8.5 11.2 6.6 - - - Interest rate risk 20.5 24 14.4 - - - Total VaR 23.5 26.9 20.4 0.2 0.7-2005-06 Nelson 26 13

2. Nature and Extent of Risks Nature and Extent Quantitative Disclosures Other market risk disclosures When the sensitivity analyses disclosed (by the 2 approaches) are unrepresentative of a risk inherent in a financial instrument (for example because the year-end exposure does not reflect the exposure during the year), the entity shall disclose that fact and the reason it believes the sensitivity analyses are unrepresentative. 2005-06 Nelson 27 3. Effective Date and Transition An entity shall apply HKFRS 7 for annual periods beginning on or after 1 January 2007. Earlier application is encouraged. If an entity applies HKFRS 7 for an earlier period, it shall disclose that fact. If an entity applies HKFRS 7 for annual periods beginning before 1 January 2006, it need not present comparative information for the disclosures about the nature and extent of risks arising from financial instruments. HKAS 32.97 requires that that if if comparative information for for prior prior periods is is not not available when HKAS 32 32 is is first first applied, such such information need need not not be be presented, but but an an entity entity shall shall disclose that that fact. fact. 2005-06 Nelson 28 14

How Do You Determine Them Case Reference to the time horizon and confidence level of some entities used in VaR analysis Entity name HSBC BoC-HK Standard Chartered HKMA HKEx Time horizon 1 day 1 day 1 day 1 month 10 days Confidence level 99% 99% 97.5% 95% 95% 2005-06 Nelson 29 A Simple Quantitative Example Assume you have a financial asset with the following details: $ 10 million in HSBC shares Volatility is 2% per day and 32% per year Find 10-day VaR at 99% confidence level Example The The standard deviation of of daily daily changes in in the the value of of the the asset is: is: 2% 2% of of $ 10 10 million = $ 200,000 Assuming the the changes on on successive days are are independent, the the standard deviation over over 10-day period to to be be $ 200,000 x 10 = $ 632,456 99% confidence level implies N(-2.33) = 0.01 Thus, 10-day 99% VaR for that $10 million portfolio is: $632,456 x 2.33 = $ 1,473,621 Modified from Options, Futures, & Other Derivatives, by John C. Hull, 4th Edition, Prentice Hall, 2000 2005-06 Nelson 30 15

Fair Value Option For 2006 2005-06 Nelson 31 Fair Value Option Remember FA at FV through P/L AFS financial assets HTM investments Loans and receivables Financial instrument Financial asset Financial liability 4-category classification will affect the subsequent measurement of of financial assets (but not the initial measurement). 2005-06 Nelson 32 16

Fair Value Option Remember FA at FV through P/L Definition for Financial Assets at Fair Value through P/L A financial asset that meets either of the following 2 conditions. a) It is classified as held for trading, if: An entity has NO choice i) it is acquired/incurred principally for the purpose of selling or repurchasing it in the near term; ii) there is evidence of a recent actual pattern of shortterm profit-taking on it; or iii) a derivative (except for a designated and effective hedging instrument) b) Upon initial recognition it is designated by the entity as at fair value through profit or loss, except for investments in equity instruments that do not have a quoted market price in an active market, and whose fair value cannot be reliably measured. An entity has a choice But new requirements for 2006 2005-06 Nelson 33 Fair Value Option A Financial Held for trading (or Asset derivative)? No Upon initial recognition, designated at FA at FV through through P/L (if P/L? allowed)? No Designated as AFS financial assets? Yes Yes Yes Derivative? No Yes Designated and effective hedging instrument? No Yes Hedge Accounting To be discussed later The Fair Value Option (Jul. 2005) Restrict a company s option in designating a financial asset (or financial liability) at FV through P/L Only allow to designate if conditions are met 3 Conditions to Designate AFS financial FA at FV 2005-06 Nelson assets through P/L 34 17

Fair Value Option Upon initial recognition, an entity may designate a financial asset or financial liability as at fair value through profit or loss only: when permitted by paragraph 11A of HKAS 39, or when doing so results in more relevant information, because either i) it eliminates or significantly reduces a measurement or recognition inconsistency ii) financial assets, financial liabilities or both is managed and its performance is evaluated on a fair value basis 1. Embedded Derivative Condition 2. Eliminates Inconsistency 3. Managed on Fair Value Basis 3 Conditions to Designate 2005-06 Nelson 35 Fair Value Option Economic characteristics and risks NOT closely related Embedded derivative meets the definition of derivative Hybrid instruments NOT measured at FV through P/L 1. Embedded Derivative Condition Hybrid (Combined) Contract Host Contract Embedded Derivative Separate the the Embedded Derivative and accounted for for under HKAS 39 39 Not to the Embedded Require to Separate the Derivative Management can choose it to avoid separation 2005-06 Nelson 36 18

Fair Value Option Paragraph 11A of HKAS 39 if a contract contains one or more embedded derivatives, 1. an entity may designate the entire hybrid Embedded Derivative Condition (combined) contract as a financial asset or financial liability at fair value through profit or loss unless: a) the embedded derivative(s) does not significantly modify the cash flows that otherwise would be required by the contract; or b) it is clear with little or no analysis when a similar hybrid (combined) instrument is first considered that separation of the embedded derivative(s) is prohibited, such as a prepayment option embedded in a loan that permits the holder to prepay the loan for approximately its amortised cost. 3 Conditions to Designate 2005-06 Nelson 37 Fair Value Option It eliminates or significantly reduces a measurement or recognition inconsistency (sometimes referred to as an accounting mismatch ) that would otherwise arise from measuring assets or liabilities or recognising the gains and losses on them on different bases 2. Eliminates Inconsistency 3 Conditions to Designate 2005-06 Nelson 38 19

Fair Value Option Entity A has a financial asset, say a portfolio of fixed income securities, would be classified as AFS financial asset changes in fair value recognised in equity The portfolio is related to a financial liability, say a fixed rate bond, which is measured at amortised cost Example 2. Eliminates Inconsistency 3 Conditions to Designate In In such circumstances, an entity may conclude that its financial statements would provide more relevant information if if both the asset and the liability were classified as at at fair value through profit or or loss 2005-06 Nelson 39 Fair Value Option a group of financial assets, financial liabilities or both is managed and its performance is evaluated on a fair value basis, in accordance with a documented risk management or investment strategy, and information about the group is provided internally on that basis to the entity s key management personnel (as defined in HKAS 24) e.g. the entity s board of directors and chief executive officer. 3. Managed on Fair Value Basis 3 Conditions to Designate 2005-06 Nelson 40 20

Fair Value Option Example The entity is a venture capital organisation, mutual fund, unit trust or similar entity whose business is investing in financial assets with a view to profiting from their total return in the form of interest or dividends and changes in fair value. HKAS 28 Investments in Associates and HKAS 31 Interests in Joint Ventures allow such investments to be excluded from their scope provided they are measured at fair value through profit or loss. 3. Managed on Fair Value Basis 3 Conditions to Designate An entity may apply the same accounting policy to to other investments managed on a total return basis but over which its influence is is insufficient for them to to be within the scope of of HKAS 28 or or HKAS 31. 2005-06 Nelson 41 Fair Value Option Example Entity A has financial assets and financial liabilities that share one or more risks and it originates fixed interest rate loans and manages the resulting benchmark interest rate risk using a mix of derivative and non-derivative financial instruments. Those risks are managed and evaluated on a fair value basis in accordance with a documented policy of asset and liability management. 3. Managed on Fair Value Basis 3 Conditions to Designate The circumstances show when the condition to to designate could be be met. 2005-06 Nelson 42 21

Financial Guarantee Contracts 2005-06 Nelson 43 Financial Guarantee Contracts The amended requirements for financial guarantee contracts are issued in the form of limited amendments to HKAS 39 Financial Instruments: Recognition and Measurement and HKFRS 4 Insurance Contracts 2005-06 Nelson 44 22

Financial Guarantee Contracts The amendments are intended to ensure that issuers of financial guarantee contracts include the resulting liabilities in their balance sheet. Before these amendments, financial guarantee contracts were within the scope of HKFRS 4 HKAS 39 para. BC 22 states that IASB finalised IFRS 4 in early 2004 without specifying the accounting for these contracts (the financial guarantee contracts) and then published an exposure draft (of this amendment) 2005-06 Nelson 45 Financial Guarantee Contracts Financial guarantee contract is defined as: a contract that requires the issuer to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payment when due in accordance with the original or modified terms of a debt instrument. Financial guarantee contracts may have various legal forms, such as a guarantee some types of letter of credit a credit default contract or an insurance contract 2005-06 Nelson 46 23

Financial Guarantee Contracts The amendments set out that: Although a financial guarantee contract meets the definition of an insurance contract in HKFRS 4 if the risk transferred is significant, the issuer applies HKAS 39. Nevertheless, if the issuer has previously asserted explicitly that it regards such contracts as insurance contracts and has used accounting applicable to insurance contracts, the issuer may elect to apply either HKAS 39 or HKFRS 4 to such financial guarantee contracts. 2005-06 Nelson 47 Financial Guarantee Contracts HKAS 39 (para. 47c and AG4) requires the issuer of a financial guarantee contract to measure the contract: Initially, at fair value. If the financial guarantee contract was issued to an unrelated party in a stand-alone arm s length transaction, its fair value at inception is likely to equal the premium received, unless there is evidence to the contrary. Subsequently, at the higher of: i) the amount determined in accordance with HKAS 37 Provisions, Contingent Liabilities and Contingent Assets; and ii) the amount initially recognised less, when appropriate, cumulative amortisation recognised in accordance with HKAS 18 Revenue. unless the financial guarantee contract was designated at inception as at fair value through profit or loss or unless paragraphs 29-37 and AG47-AG52 apply (when a transfer of a financial asset does not qualify for derecognition or the continuing involvement approach applies), 2005-06 Nelson 48 24

Financial Guarantee Contracts Case Early adopted Financial Guarantee Contracts in 2005 and its annual report stated that (extract only): A financial guarantee contract is a contract that requires the Group to make specified payments to reimburse the holder for a loss it incurs because a specified entity or person fails to make payment when due in accordance with the original or modified terms of a debt instrument. Financial guarantee contracts are accounted for as financial instruments under HKAS 39 and are initially recognised at fair value. Subsequently, such contracts are measured at the higher of the amount determined in accordance with HKAS 37 Provisions, Contingent Liabilities and Contingent Assets and the amount initially recognised less, where appropriate, cumulative amortisation recognised over the life of the guarantee on a straightline basis. 2005-06 Nelson 49 Financial Guarantee Contracts Case How did HKEx calculate the fair value? Its annual report stated that: The fair values are based on the fees charged by financial institutions for granting such guarantees discounted using a ten-year Hong Kong Government bond rate to perpetuity. 2005-06 Nelson 50 25

Financial Guarantee Contracts HKAS 39 does not contain exemptions for parents, subsidiaries or other entities under common control. However, any differences are reflected only in the separate or individual financial statements of the parent, subsidiaries or common control entities An entity shall apply the amendment for annual periods beginning on or after 1 January 2006. Earlier application is encouraged. If an entity applies these changes for an earlier period, it shall disclose that fact and apply the related amendments to HKAS 32 and HKFRS 4 at the same time. 2005-06 Nelson 51 Capital Disclosures For 2007 2005-06 Nelson 52 26

Capital Disclosures An entity shall disclose information that enables users of its financial statements to evaluate the entity s objectives, policies and processes for managing capital. To To comply with with the the capital disclosures, the the entity discloses the the following: a) a) qualitative information about about its its objectives, policies and and processes for for managing capital, capital, including (but (but not not limited limited to): to): i) i) a description of of what whatit it manages as as capital; capital; ii) ii) when when an an entity entity is is subject subject to to externally imposed capital capital requirements, the the nature natureof of those those requirements and and how howthose requirements are are incorporated into intothe the management of of capital; capital; and and iii) iii) how howit it is is meeting its its objectives for for managing capital. capital. 2005-06 Nelson 53 Capital Disclosures An entity shall disclose information that enables users of its financial statements to evaluate the entity s objectives, policies and processes for managing capital. To To comply with with the the capital disclosures, the the entity discloses the the following: b) summary quantitative data about what it manages as capital. Some entities regard some financial liabilities (e.g. some forms of subordinated debt) as part of capital. Other entities regard capital as excluding some components of equity (e.g. components arising from cash flow hedges). c) any changes in (a) and (b) from the previous period. 2005-06 Nelson 54 27

Capital Disclosures An entity shall disclose information that enables users of its financial statements to evaluate the entity s objectives, policies and processes for managing capital. To To comply with with the the capital disclosures, the the entity discloses the the following: d) whether during the period it complied with any externally imposed capital requirements to which it is subject. e) when the entity has not complied with such externally imposed capital requirements, the consequences of such non-compliance. These disclosures shall be based on the information provided internally to the entity s key management personnel. 2005-06 Nelson 55 Capital Disclosures Case Early adopted capital disclosure in 2005 and its annual report states that (extract only): The Group s objectives when managing capital are: To safeguard the Group s ability to continue as a going concern, so that it continues to provide returns for shareholders and benefits for other stakeholders; To support the Group s stability and growth; and To provide capital for the purpose of strengthening the Group s risk management capability. 2005-06 Nelson 56 28

Capital Disclosures Case Early adopted capital disclosure in 2005 and its annual report states that (extract only): The Group actively and regularly reviews and manages its capital structure to ensure optimal capital structure and shareholder returns, taking into consideration the future capital requirements of the Group and capital efficiency The Group adopts a dividend policy while retaining 10 per cent of the profit as capital of the Group for future use. The Group has set aside $1,500 million of retained earnings for the purpose of strengthening the risk management regime of the clearing houses and supporting their roles as central counterparties. As in prior years, the Group monitors capital by reviewing the level of capital that is at the disposal of the Group ( adjusted capital ). Adjusted capital comprises all components of shareholders equity other than the hedging reserve relating to cash flow hedges, designated reserves and investment revaluation reserve 2005-06 Nelson 57 HKFRS 7 and Amendments to HKAS 1 & 39 16 October 2006 Full set of the slides can be found in www.nelsoncpa.com.hk Nelson Lam 林智遠 nelson@nelsoncpa.com.hk www.nelsoncpa.com.hk 2005-06 Nelson 58 29

HKFRS 7 and Amendments to HKAS 1 & 39 16 October 2006 Full set of the slides can be found in www.nelsoncpa.com.hk Q&A Session Nelson Lam 林智遠 nelson@nelsoncpa.com.hk www.nelsoncpa.com.hk 2005-06 Nelson 59 30