Framework and IAS 1 - Nelson CPA · 5/22/2007 · • The accounting standards issued by its predecessor, the International Accounting Standards Committee (IASC), continue to be

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Framework and IAS 122 May 2007

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Nelson LamNelson Lam 林智遠林智遠MBA MSc BBA ACA CFA CPA(Aust) CPA(US) FCCA FCPA(Practising) MSCA

Introduction

Today’s AgendaSimple but

Comprehensive

Contentious and key issues

Framework

Presentation of Financial Statements (IAS 1)

Real Life Cases and Examples

Capital Disclosures

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p(Amendments to IAS 1)

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Introduction

Today’s Agenda

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Introduction

International Financial Reporting Standards are:• Standards and Interpretations issued and

endorsed by the International Accountingendorsed by the International Accounting Standard Board and comprise:– International Financial

Reporting Standards (IFRSs);– International Accounting

Standards (IASs); and– Interpretations.

8 Sets in issue (from IFRS 1 to IFRS 8)

31 Sets in issue (from IAS 1 to IAS 41)

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• What is the difference between IFRS and IAS?• IASB has designated its standards as IFRS• The accounting standards issued by its predecessor, the International

Accounting Standards Committee (IASC), continue to be designated as IAS.• IASB endorsed all IASs and designated the IFRSs to include IASs

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Introduction ……

After the training, you may realise that some traditional thinking ……– Assets = Liabilities + CapitalAssets Liabilities + Capital– Extraordinary items should be

reported in the income statement ……– Cash at bank and deposits in bank

should be current assetsAll should All should

be adjusted be adjusted now!now!

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now!now!

Today’s Agenda

Framework

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What is Framework?

• Sets out the concepts that underlie the preparation and presentation of

Framework

financial statements for external users• Assists preparers of financial statements in applying accounting

standards• Assists users of financial statements in interpreting the information

contained in financial statements prepared in conformity with accounting standards

• But is not a standard or guideline,

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– so does not override any specific accounting standard

What is Framework?

• Deals withFramework

a) The objective of financial statements;b) The qualitative characteristics of financial information;c) The definition, recognition and measurement of the elements in the

financial statements; andd) Concepts of capital and capital maintenance.

• Concerned with general purpose financial statements

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• The users of financial statements include:– present and potential investors, employees, lenders, suppliers and

other trade creditors, customers, governments and their agencies and the public

Objective Qualitative Characteristics ElementsConcepts of

Capital

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Objective of Financial Statements

Process of communicationProcess of communication

Compan ’s UserCompany’s activities Accounting

User perception

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Objective

Objective of Financial Statements

Process of communicationProcess of communication

Compan ’s Financial UserCompany’s activities

FinancialReporting

User perception

IAS 1 states that:• The objective of general purpose financial statements is to provide

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Objective

j g p p pinformation about the financial position, financial performance and cash flows of an entity that is useful to a wide range of users in making economic decisions.

• Similar to the objective stated in the Framework

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Objective AssumptionsUnderlying Assumptions include:• Accrual Basis

– In order to meet their objectives, financial statements are prepared on the accrual basis of accounting.

– Under this basis,• the effects of transactions and other events are recognised when they

occur (and not as cash or its equivalent is received or paid) and• they are recorded in the accounting records and reported in the

financial statements of the periods to which they relate. • Going Concern

– The financial statements are normally prepared on the assumption that

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The financial statements are normally prepared on the assumption that an entity is a going concern and will continue in operation for the foreseeable future.

– Hence, it is assumed that the entity has neither the intention nor the need to liquidate or curtail materially the scale of its operations; if such an intention or need exists, the financial statements may have to be prepared on a different basis and, if so, the basis used is disclosed.

Qualitative Characteristics

Primary qualitative characteristicsof financial statements

• Relating to content- Relevance (Predictive value, Confirmatory value, Interrelated)- Reliability (Faithful representation, Substance over form, Neutrality,

Prudence and Completeness)

• Relating to presentation- Comparability (Consistency and Disclosure)

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Objective Qualitative Characteristics

Comparability (Consistency and Disclosure)- Understandability (Users’ ability, Aggregation and Classification)

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Primary qualitative characteristicsof financial statements

• Relating to content- Relevance- Reliability

• Relating to presentation- Comparability

Management Decision

Management Decision

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Objective Qualitative Characteristics

Comparability- Understandability

Financial Financial reportingreportingFinancial Financial reportingreporting


Emerging International PracticesEmerging International Practices•• Financial reporting framework clearly definedFinancial reporting framework clearly definedFinancial reporting framework clearly definedFinancial reporting framework clearly defined•• Definition of assets and liabilities clearly establishedDefinition of assets and liabilities clearly established•• Beginning to adopt fair value model (instead of only historical Beginning to adopt fair value model (instead of only historical

cost)cost)•• Discussing convergence in certain practicesDiscussing convergence in certain practices•• From IASC to IASB (International Accounting Standard Board)From IASC to IASB (International Accounting Standard Board)•• From IAS to IFRS (International Financial Reporting From IAS to IFRS (International Financial Reporting

St d d )St d d )

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Standards) ……Standards) ……

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All aims atAll aims atR lR l


RelevanceRelevanceReliabilityReliabilityComparabilityComparabilityUnderstandabilityUnderstandability

Management Decision

Management Decision

Fi i lFinancialFinancial

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Financial reportingFinancial Financial reportingreporting

Elements of Financial Statements

Asset

Financial Position (in balance sheet)• a resource controlled by the enterprise as a result of past events

and from which future economic benefits are expected to flow tothe enterprise

Balance Sheet Approach

Liability

Equity

Income

Financial Performance (in income statement)

• a present obligation of the enterprise arising from past events,the settlement of which is expected to result in an outflow fromthe enterprise of resources embodying economic benefits

• the residual interest in the assets of the enterprise after deducting all its liabilities

• increases in economic benefits during a period in the form of– inflows or enhancements of assets or

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Objective Qualitative Characteristics Elements

Expenses

inflows or enhancements of assets or– decreases of liabilities that result in increases in equity– other than those relating to contributions from equity participants

• decreases in economic benefits during a period in the form of– outflows or depletions of assets or– incurrences of liabilities that result in decreases in equity,– other than those relating to distributions to equity participants

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Asset

Financial Position (in balance sheet)• a resource controlled by the enterprise as a result of past events

and from which future economic benefits are expected to flow tothe enterpriseDefinition

Balance Sheet Approach

Liability

Equity

Income

Financial Performance (in income statement)

• a present obligation of the enterprise arising from past events,the settlement of which is expected to result in an outflow fromthe enterprise of resources embodying economic benefits

• the residual interest in the assets of the enterprise after deducting all its liabilities

• increases in economic benefits during a period in the form of– inflows or enhancements of assets or

Definition

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Expenses

inflows or enhancements of assets or– decreases of liabilities that result in increases in equity– other than those relating to contributions from equity participants

• decreases in economic benefits during a period in the form of– outflows or depletions of assets or– incurrences of liabilities that result in decreases in equity,– other than those relating to distributions to equity participants


Definition

IFRS ApproachIFRS ApproachDefinition

Recognition

Measurement

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Presentation and disclosure

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IFRS ApproachIFRS ApproachDefinition

Frameworkgives a general overview

Definition

Recognition

Measurement

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Presentation and disclosure

Definition

Recognition is the process of incorporating in the balance sheet or income statement an item that1. meets the Definition of an element and


Definition

Criteria for recognition – an item that meets the definition of an element should be recognized if:1 it is probable that any future economic benefit

2. satisfies the Criteria for Recognition

Recognition

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1. it is probable that any future economic benefitassociated with the item will flow to or from the enterprise; and

2. the item has a cost or value that can be measured with reliability.


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Definition

Historical cost

Current cost

Recognition

Definition Current cost

Realisable (settlement) value

Present value

Measurement

Fair value less cost to sell

Value in use

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Concept of CapitalFinancial concept of capital• is adopted by most enterprises in

Capital and Capital MaintenanceConcept of Capital Maintenance

Financial concept maintenance• Under this concept a profit is• is adopted by most enterprises in

preparing their financial statements• Under it, such as invested money or

invested purchasing power, capital is synonymous with the net assets or equity of the enterprise.

Physical concept of capital• Under it, such as operating capability,

Under this concept, a profit is earned only if

• the financial (or money) amount of the net assets at the end of the period

• exceeds the financial (or money) amount of net assets at the beginning of the period

• after excluding any distributions to, and contributions from, owners d i th i d

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capital is regarded as the productive capacity of the enterprise based on

• For example, units of output per day


Capital

during the period.• Financial capital maintenance can

be measured in either nominal monetary units or units of constant purchasing power

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Concept of CapitalFinancial concept of capital• is adopted by most enterprises in

Capital and Capital MaintenanceConcept of Capital Maintenance

Physical concept maintenance• Under this concept a profit is• is adopted by most enterprises in

preparing their financial statements• Under it, such as invested money or

invested purchasing power, capital is synonymous with the net assets or equity of the enterprise.

Physical concept of capital• Under it, such as operating capability,

Under this concept, a profit is earned only if

• the physical productive capacity (or operating capability) of the enterprise (or the resources or funds needed to achieve that capacity) at the end of the period

• exceeds the physical productive capacity at the beginning of the period

ft l di di t ib ti t

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capital is regarded as the productive capacity of the enterprise based on

• For example, units of output per day


Capital

• after excluding any distributions to, and contributions from, owners during the period.

Summary of IFRSs

International Financial Reporting Standards are:• Standards and Interpretations issued and endorsed by the

International Accounting Standard Board and comprise:International Accounting Standard Board and comprise:– International Financial Reporting Standards (IFRSs);– International Accounting Standards (IASs); and– Interpretations.

• IASs (International Accounting Standards) – Totally 31 sets

• IFRSs (International Financial Reporting Standards) – Totally 8 sets( t 4 F b 2007)

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(up to 4 February 2007)

More are coming ……

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Key Points

IFRSs set out• Recognition,• Measurement,• Presentation and

disclosure requirements

Main changes:• Changes in recognition

and measurement

•• Less ChoicesLess Choices•• TowardsTowards

Fair Value ModelFair Value Model •• Aim at enhancing Aim at enhancing the informationthe information

e.g. market value,value by appraisal ……

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• Changes in presentation and disclosure •• More and clearer More and clearer presentation and presentation and

disclosuredisclosure

the information the information for users’ for users’ decision makingdecision making

Inter alia, one more change ……

Today’s Agenda


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Presentation of Financial Statements(IAS 1)

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1. Purpose of financial statements2. Components of financial statementsp3. Overall considerations4. Structure and content

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1. Purpose of Financial Statements

• To provide information about– financial position,

• To meet this objective, financial statements provide information p ,

– financial performance,and

– cash flows of an entity,That is useful to a wide range of users in making economic decisions

• To also show the results of

about the entity’s:– Assets– Liabilities– Equity– Income and expenses,

including gains and losses– Other changes in equity

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• To also show the results of management’s stewardship of the resources entrusted to it

– Other changes in equity– Cash flows

Thus, we have ……

2. Components of Financial Statements

A complete set of financial statements comprises:a) a balance sheet;) ;b) an income statement;c) a statement of changes in equity showing either:

i) all changes in equity, orii) changes in equity other than those arising from transactions with

equity holders acting in their capacity as equity holders;d) a cash flow statement; and

another name?

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e) notes, comprising a summary of significant accounting policies and other explanatory notes.

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3. Overall Consideration

a) Fair presentation and compliance with IFRSsb) Going concernc) Accrual basis of accountingc) Accrual basis of accountingd) Consistency of presentatione) Materiality and aggregationf) Offsettingg) Comparative information

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• Financial statements shall present fairly of the financial position, financial performance and cash flows of an entity

a) Fair presentation and compliance with IFRSs

financial performance and cash flows of an entity.

– Fair presentation requires the faithful representation of the effects of transactions, other events and conditions in accordance with

• the definitions and recognition criteria for assets, liabilities, income and expenses set out in the Framework.

– The application of IFRSs, with additional disclosure when

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pp ,necessary, is presumed to result in financial statements that give a true and fair view.

No such precisely statement before!

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• Statement of complianceAn entity whose financial statements comply


– An entity whose financial statements comply with IFRSs shall make an explicit and unreserved statement of such compliance in the notes.

– Financial statements shall not be described as complying with IFRSs• unless they comply with all the

requirements of IFRSs

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requirements of IFRSs.– In virtually all circumstances, a fair

presentation is achieved by • compliance with applicable IFRSs.


Melco Development Limited (新濠國際發展有限公司)

Case

Melco Development Limited (新濠國際發展有限公司)Notes to the financial statements for year ended 31.12.2005– The consolidated financial statements have been prepared in

accordance with HKFRSs.– In addition, the consolidated financial statements include applicable

disclosures required by the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited and by the Companies Ordinance

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the Companies Ordinance.

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• A fair presentation also requires an entity:a) to select and apply accounting policies in accordance


a) to select and apply accounting policies in accordance with IAS 8

b) to present information, including accounting policies,in a manner that provides relevant, reliable, comparable and understandable information.

c) to provide additional disclosures– when compliance with the specific requirements in

IFRSs is insufficient to enable users to understand the

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impact of particular transactions, other events and conditions on the entity’s financial position and financial performance.

• Inappropriate accounting policies are not rectified either– by disclosure of the accounting policies used, or– by notes or explanatory material.


• Departure from Standard or Interpretation (Simplified)In the extremely rare circumstances in which


– In the extremely rare circumstances in which management concludes that• compliance with a requirement in a standard or an

interpretation would be so misleading that• it would conflict with the objective of financial

statements set out in the Frameworkthe entity shall depart from that requirement if the relevant regulatory framework requires, or

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otherwise does not prohibit, such a departure.

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• Departure from Standard or Interpretation (Simplified)a) Fair presentation and compliance with IFRSs

Then the following disclosure is required:– Then, the following disclosure is required:a) management has concluded that the financial

statements give a true and fair view;b) that it has complied with applicable standards and

interpretations, except that it has departed from a particular requirement;

c) the title of the standard or interpretation from which the entity has departed, the nature of the departure,

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the reason why that treatment would be so misleading, and the treatment adopted; and

d) for each period presented, the financial impact of the departure on each item in the financial statements that would have been reported in complying with the requirement.


Interim Report 2005 clearly stated that:Interim Report 2005 clearly stated that:

Case

• The directors consider it inappropriate for the company to adopt two particular aspects of the new/revised HKFRSs as these would result in the financial statements, in the view of the directors, either:• not reflecting the commercial substance of the business or• being subject to significant potential short-term volatility, as

explained below …….

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3. Overall ConsiderationCase


• HKAS 40 “Investment property” requires an assessment of the fair value of investment properties.

• The group intends to follow the same accounting treatment as adopted in 2004, which is to value such investment properties on an annual basis.

• Accordingly, the investment properties were not revalued at 30 June 2005, since the directors consider that such change of practice could

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introduce a significant element of short-term volatility into the income statement in respect of assets which are being held on a long-term basis by the group ……

• It is not practicable to estimate the financial effect of this non-compliance as no interim valuation of the properties has been conducted.

At year-end, revaluation would still be conducted.



• HKAS 12 “Income Taxes”, together with HKAS-INT 21 “Income Taxes –Recovery of Revalued Non-Depreciable Assets”, requires deferred taxation to be recognised on any revaluation movements on investment properties.• It is further provided that any such deferred tax liability should be calculated

at the profits tax rate in the case of assets which the management has no definite intention to sell.

• The company has not made such provision in respect of its HK investment properties since the directors consider that such provision would result in the fi i l t t t t fl ti th i l b t f th b i

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financial statements not reflecting the commercial substance of the business• since, should any such sale eventuate, any gain would be regarded as capital

in nature and would not be subject to any tax in HK.• Should this aspect of HKAS 12 have been adopted, deferred tax liabilities

amounting to HK$2,008 million on the revaluation surpluses arising from revaluation of HK investment properties would have been provided.

(estimate - over 12% of the net assets at 30 June 2005)

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• Departure but such departure is prohibitedIn the extremely rare circumstances in which


– In the extremely rare circumstances in which management concludes that • compliance with a requirement in a

standard or an interpretation would be so misleading that

• it would conflict with the objective of financial statements set out in the Framework

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Framework• but the relevant regulatory framework

prohibits departure from the requirement, the entity shall, to the maximum extent possible, reduce the perceived misleading aspects of compliance by disclosing ……


a) Fair presentation and compliance with IFRSs• Departure but such departure is prohibited

– by disclosing:a) the title of the standard or interpretation in

question, the nature of the requirement, and the reason why management has concluded that complying with that requirement is so misleading in the circumstances that it conflicts with the objective of financial statements set out in th F k d

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the Framework; andb) for each period presented, the

adjustments to each item in the financial statements that management has concluded would be necessary to give a fair presentation.

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• When assessing whether complying with a specific requirement in a standard or an interpretation would be so misleading that it would


standard or an interpretation would be so misleading that it would conflict with the objective of financial statements set out in the Framework– management considers:

a) why the objective of financial statements is not achieved in the particular circumstances; and

b) how the entity’s circumstances differ from those of other entities that comply with the requirement.

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p y q– If other entities in similar circumstances comply with the

requirement, » there is a rebuttable presumption that the entity’s compliance

with the requirement would not be so misleading that it would conflict with the objective of financial statements set out in the Framework.


How’s about this How’s about this

However, However, 2005 Final Results Announcement2005 Final Results Announcementdisclosed that disclosed that •• provision for deferred tax was finally made provision for deferred tax was finally made

with regard to revaluation of the HK with regard to revaluation of the HK

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investment properties (total HK$2.2 billion) at investment properties (total HK$2.2 billion) at 2005 year2005 year--end.end.

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b) Going Concern


• When preparing financial statements, management shall make an assessment of an entity’s ability to continue as a going concernassessment of an entity s ability to continue as a going concern.

• Financial statements shall be prepared on a going concern basis– unless management either intends to liquidate the entity or to cease

trading, or has no realistic alternative but to do so. • When management is aware, in making its assessment, of

material uncertainties related to events or conditions that may cast significant doubt upon the entity’s ability to continue as a going concern those uncertainties shall be disclosed

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going concern, those uncertainties shall be disclosed.• When financial statements are not prepared on a going concern

basis, that fact shall be disclosed, together with the basis on which the financial statements are prepared and the reason why the entity is not regarded as a going concern.

c) Accrual Basis of Accounting


• An entity shall prepare its financial statements, except for cash flow information using the accrual basis of accountingflow information, using the accrual basis of accounting.

• When the accrual basis of accounting is used, items are recognised as assets, liabilities, equity, income and expenses– when they satisfy the definitions and recognition criteria for those

elements in the Framework.

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• The presentation and classification of items in the financial statements shall be retained from one period to the next unless:

d) Consistency of presentation

statements shall be retained from one period to the next unless:a) it is apparent,

• following a significant change in the nature of the entity’s operations (e.g. significant acquisition or disposal) or

• a review of its financial statements,that another presentation or classification would be more appropriatehaving regard to the criteria for the selection and application of accounting policies in IAS 8; or

b) IFRS i h i t ti

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b) a IFRS requires a change in presentation.

An entity changes the presentation of its financial statements only if– the changed presentation provides information that is reliable and is

more relevant to users of the financial statements, and– the revised structure is likely to continue, so that comparability is not

impaired.


• Each material class of similar items shall bepresented separately in the financial

e) Materiality and Aggregation

– presented separately in the financial statements.

• Items of a dissimilar nature or function shall be– presented separately unless they are

immaterial.• Applying the concept of materiality means that a

specific disclosure requirement in a IFRS needt b ti fi d if th i f ti i t t i l

What is theWhat is theWhat is the What is the situation of situation of recognition recognition

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not be satisfied if the information is not material.measurement?measurement?and and measurement?measurement?

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• What is material?Omissions or misstatements of items are

e) Materiality and Aggregation

– Omissions or misstatements of items are material if they could, individually or collectively, influence the economic decisions of users taken on the basis of the financial statements.

– Materiality depends on the size and nature of the omission or misstatement judged in the surrounding circumstances

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surrounding circumstances.• The size or nature of the item, or a combination

of both, could be the determining factor.


• Assets and liabilities, and income and expenses shall not be offset

f) Offsetting

expenses, shall not be offset– unless required or permitted by a IFRS.

• It is important that assets and liabilities, and income and expenses, are reported separately.– Measuring assets net of valuation allowances —

for example, obsolescence allowances on inventories and doubtful debts allowances on receivables — is not offsetting.

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g

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• During ordinary activities, some transactions that do not generate revenue but are incidental to the

f) Offsetting

do not generate revenue but are incidental to the main revenue-generating activities.– The results of such transactions are presented,

when this presentation reflects the substance of the transaction or other event, by netting any income with related expenses arising on the same transaction.

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• For example:a) gains and losses on the disposal of non current

f) Offsetting

Example

a) gains and losses on the disposal of non-current assets, including investments and operating assets,- are reported by deducting from the proceeds on

disposal the carrying amount of the asset and related selling expenses; and

b) expenditure related to a provision that is- recognised in accordance with IAS 37 and - reimbursed under a contractual arrangement with

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a third party (for example, a supplier’s warranty agreement)

may be netted against the related reimbursement.

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G i d l i i f f i il t ti

Can foreign exchange gains and losses be offset?

Example

• Gains and losses arising from a group of similar transactions are reported on a net basis– For example,

• foreign exchange gains and losses or • gains and losses arising on financial instruments held for trading.

• Such gains and losses are, however, reported separately if they are material.

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• Except when a IFRS permits or requires otherwise

g) Comparative information

otherwise, – comparative information shall be disclosed in

respect of the previous period for all amountsreported in the financial statements.

• When the presentation or classification of items in the financial statements is amended, – comparative amounts shall be reclassified unless

the reclassification is impracticable.

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• When comparative amounts are reclassified, an entity shall disclose:

g) Comparative information

Amended requirements

shall disclose:a) the nature of the reclassification;b) the amount of each item or class of items that is

reclassified; andc) the reason for the reclassification.

• In the pastonly the reason for and a description of the nature of material

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only the reason for and a description of the nature of materialreclassifications should be disclosed.Exemption for disclosure of comparative information for the reconciliation of movements in fixed assets is also removed


Melco Development Limited (新濠國際發展有限公司)

Case

Melco Development Limited (新濠國際發展有限公司)Notes to the financial statements for year ended 31.12.2005– Because HKAS 32 requires retrospective application, comparative

figures for 2004 have been restated (see Note 2A for the financial impact).

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Galaxy Entertainment Group LimitedNotes to the financial statements (y.e. 31.12.2005)

Case

– All changes in the accounting policies require retrospective application, except HKAS 39 and HKFRS 2 for which transitional provisions are applied.

– As a result, the 2004 comparative figures have also been restated or amended in accordance with the relevant requirements. Th ff t f ll th h i ti

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– The effects of all the changes in accounting policies are summarised in notes (b) and (c) below.

• Identification of the financial statements• Reporting period• Balance sheet

4. Structure and Content

Balance sheet1. Current/Non-current distinction2. Current assets3. Current liabilities4. Information to be presented on the face of the balance sheet5. Information to be presented either on the face of the balance sheet or in

the notes• Income statement

1 Profit or loss for the period

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1. Profit or loss for the period2. Information to be presented on the face of the income statement3. Information to be presented either on the face of the income statement or

in the notes• Statement of changes in equity• Cash flow statement• Notes

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Identification of Financial Statements

• The financial statements shall be identified clearly and distinguished from other information in the same published document.

• The following information shall be displayed prominently and repeatedThe following information shall be displayed prominently, and repeated when it is necessary for a proper understanding of the information presented:

a) the name of the reporting entity or other means of identification, and any change in that information from the preceding balance sheet date;

b) whether the financial statements cover the individual entity or a group of entities;

c) the balance sheet date or the period covered by the financial statements,

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whichever is appropriate to that component of the financial statements;d) the presentation currency, as defined in HKAS 21 The Effects of

Changes in Foreign Exchange Rates; ande) the level of rounding used in presenting amounts in the financial

statements.

Identification of Financial Statements

• Can the units of the presentation currency be rounded to thousands or millions?

Example

• Financial statements are often made more understandableby presenting information in thousands or millions of units of the presentation currency.

• This is acceptable as long as– the level of rounding in presentation is disclosed and

• Financial statements are often made more understandableby presenting information in thousands or millions of units of the presentation currency.

• This is acceptable as long as– the level of rounding in presentation is disclosed and

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– material information is not omitted.– material information is not omitted.

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Reporting Period

• Financial statements shall be presented at least annually.

• When an entity’s balance sheet date changes andWhen an entity s balance sheet date changes and the annual financial statements are presented for a period longer or shorter than one year, an entity shall disclose, in addition to the period covered by the financial statements:a) the reason for using a longer or shorter period; andb) the fact that comparative amounts for the income

statement, statement of changes in equity, cash

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flow statement and related notes are not entirely comparable.

Reporting Period

• Can a set of financial statements cover 52-week, instead of a year?

Example

• Normally, financial statements are consistently prepared covering a one-year period.

• However, for practical reasons, some entities prefer to report, for example, for a 52-week period.

• IAS 1 does not preclude this practice, because the resulting financial statements are unlikely to be materially different from those that would be

• Normally, financial statements are consistently prepared covering a one-year period.

• However, for practical reasons, some entities prefer to report, for example, for a 52-week period.

• IAS 1 does not preclude this practice, because the resulting financial statements are unlikely to be materially different from those that would be

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materially different from those that would be presented for one year.materially different from those that would be presented for one year.

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Current/Non-current Distinction

• An entity shall present– current and non-current assets, and

current and non current liabilities– current and non-current liabilities,as separate classifications on the face of its balance sheet

• Except when a presentation based on liquidity provides information– If that information is reliable and is more relevant– When that exception applies, all assets and liabilities shall be

presented broadly in order of liquidity

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Current/Non-current Distinction

• Whichever method of presentation is adopted, for each asset and liability line item that combines amounts expected to be recovered or settled a) no more than 12 months after the balance sheet date

andb) more than 12 months after the balance sheet date,(i.e. combines both current and non-current)

an entity shall disclose the amount expected to be recovered or settled after more than 12 months.

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Current Assets

• An asset shall be classified as current when it satisfies any of the following criteria:a) it is expected to be realised in or is intended for sale ora) it is expected to be realised in, or is intended for sale or

consumption in, the entity’s normal operating cycle; b) it is held primarily for the purpose of being traded;c) it is expected to be realised within 12 months after the balance

sheet date; ord) it is cash or a cash equivalent

• unless it is restricted from being exchanged or used to settle a li bilit f t l t 12 th ft th b l h t d t

What is it?

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New requirementsliability for at least 12 months after the balance sheet date.

• All other assets shall be classified as non-current.

Examples:• Deposits pledged to bank (how long?)• Fixed deposits over 1 year maturity

Current Assets

• What is operating cycle?

Example

• The operating cycle of an entity is the time between – the acquisition of assets for processing and – their realisation in cash or cash equivalents.

• When the entity’s normal operating cycle is not clearly identifiable, – its duration is assumed to be 12 months.

• The operating cycle of an entity is the time between – the acquisition of assets for processing and – their realisation in cash or cash equivalents.

• When the entity’s normal operating cycle is not clearly identifiable, – its duration is assumed to be 12 months.

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34

Current Assets Case

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Current Assets

• Can a non-current asset reclassified if it fulfil the definition of current asset later?• Assets classified as non-current in accordance• Assets classified as non-current in accordance

with IAS 1 shall not be reclassified as current assets– until they meet the criteria to be classified as held for sale in

accordance with IFRS 5• Assets of a class that an entity would normally regard as non-

current that are acquired exclusively with a view to resale shall notbe classified as current– unless they meet the criteria to be classified as held for sale in

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yaccordance with IFRS 5

No non-current assets can be classified as current unless the criteria in IFRS 5 are fulfilled, mainly• Available for immediate sale• Highly probable to make the sale

35

Current AssetsCase

• In its 2005 Interim Report, full set of HKFRS was adopted and the report set out that:– Available-for-sale financial assets are non-

derivatives that are either• designated in this category or• not classified in any of the other categories (i.e.

loans and receivables, financial assets at fair

Similar in 2005 Annual Report

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Is it current?

value through profit or loss and held-to-maturity investments).

– They are included in non-current assets• unless management intends to dispose of the

investment within 12 months of the balance sheet date.

Current Liabilities

• A liability shall be classified as current when it satisfies any of the following criteria:a) it is expected to be settled in the entity’s normal operating cycle;

New requirements

a) it is expected to be settled in the entity s normal operating cycle;b) it is held primarily for the purpose of being traded;c) it is due to be settled within 12 months after the balance sheet

date; ord) the entity does not have an unconditional right to defer settlement

of the liability for at least 12 months after the balance sheet date.

All th li biliti h ll b l ifi d t

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• All other liabilities shall be classified as non-current.

Implication

36

Current Liabilities Revised rules on classifying a liability as current or non-current• A liability held for being traded ⇒ current• A financial liability due within 12 months after the B/S date ⇒ currentA financial liability due within 12 months after the B/S date ⇒ current

– even if an agreement to refinance on a long-term basis is completed after the B/S date (only disclosed as non-adjusting event)• If an entity has discretion to refinance ⇒ non-current• If an entity without discretion to refinance ⇒ current

• A non-current financial liability is payable on demand with a breach on a

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condition of its loan agreement on or before the B/S date– If the lender agreed not to demand payment

• after the B/S date ⇒ current (only disclosed as non-adjusting event)• by the B/S date ⇒ non-current

Implication

Current LiabilitiesCase

Note 12 to Interim Report 2006• Breach of loan covenants

• As at 30 June 2006, in respect of certain bank loans with an aggregate carrying amount of HK$1,529,806,000, the Group breached certain financial covenants of the banks loans.

• Since the lenders have not agreed to waive its right to demand immediate payment as at the balance sheet date the loans have

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immediate payment as at the balance sheet date, the loans have been classified as current liabilities in these financial statements at 30 June 2006.

37

Current Assets and LiabilitiesExample

Can the following be classified as current assets?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?

××

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• 5-year term loan matured after year end but renewedfor another 5 years after year end (before the issuanceof the financial statements)

• 2-year term loan to be matured with 12 months and theentity has a right to renew for another 2 years

×

√

Balance Sheet• As a minimum, the face of the balance sheet shall

include line items that present the following amounts:a) property, plant and equipment;b) investment property;b) investment property;c) intangible assets;d) financial assets (excl. amounts shown under (e), (h) and (I));e) investments accounted for using the equity method;f) biological assets;g) inventories;h) trade and other receivables;i) cash and cash equivalents;j) trade and other payables;

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k) provisions;l) financial liabilities (excl. amounts shown under (j) and (k));m) liabilities and assets for current tax, as defined in HKAS 12 Income Taxes;n) deferred tax liabilities and deferred tax assets, as defined in HKAS 12;o) minority interest, presented within equity; andp) issued capital and reserves attributable to equity holders of the parent.

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Balance Sheet• The face of the balance sheet shall also include line

items that present the following amounts:a) The total of assets classified as held for sale and

assets included in disposal groups classified as held for sale in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations; and

b) Liabilities included in disposal groups classified as held for sale in accordance with IFRS 5

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Balance Sheet• Additional line items, headings and subtotals shall

be presented on the face of the balance sheet when such presentation is relevant to an understanding of the entity’s financial position.

• When an entity presents current and non-current assets, and current and non-current liabilities, as separate classifications on the face of its balance sheet, – it shall not classify deferred tax assets

(liabilities) as current assets (liabilities).

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39

Balance Sheet

• The use of different measurement bases for different classes of assets suggests that their nature or function differs and, therefore, that they should be presented as separate line items.

For example different classes of property plant and

In the past, it

need”

In the past, it use “may need”

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– For example, different classes of property, plant and equipment can be carried at• Cost, or• Revalued amountsin accordance with IAS 16 PPE.

Balance Sheet

Galaxy Entertainment Group LimitedConsolidated balance sheet as at 31.12.2005

Case

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40

Balance Sheet

Melco Development Limited (新濠國際發展有限公司)Consolidated balance sheet as at 31.12.2005

Case

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Income Statement Minimum requirements on the face of the income statement• As a minimum, the face of the income statement shall include line items

that present the following amounts for the period:p g pa) revenue;b) finance costs;c) share of the profit or loss of associates and joint ventures accounted

for using the equity method;d) pre-tax gain or loss recognised on the disposal of assets or

settlement of liabilities attributable to discontinuing operations;e) tax expense; and

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e) tax expense; andf) profit or loss.

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Income Statement • The following items shall be disclosed on the face of the income

statement as allocations of profit or loss for the period:a) Profit or loss attributable to minority interest, and) y ,b) Profit or loss attributable to equity holders of the parent

A similar requirement has been added for the statement of changes in equity and such allocated amounts are not to be presented as items of income or expense

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Income Statement

Melco Dev Ltd

Case

Melco Dev. Ltd.Consolidated income statementas at 31.12.2005

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Income Statement • Not require to disclose the results of operating

activities as a line item on the face of the incomestatement Entities can still show it

• An entity shall not present any items of income and expense as extraordinary items, either onthe face of the income statements or in the notes

Entities can’t use it

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Income Statement Either on the face of the income statement or in the notes:• An entity shall present an analysis of expenses using a classification

based on either• the nature of expenses or• their function within the entity,

whichever provides information that is reliable and more relevant

• Entities classifying expenses by function shall disclose additional information on the nature of expenses, including

depreciation and amortisation expense and

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• depreciation and amortisation expense and • employee benefits expense.

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Income StatementCase

Nature or Nature or Function?Function?

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Statement of Changes in Equity • An entity shall present a statement of changes in equity showing on the

face of the statement:a) profit or loss for the period; b) h it f i d f th i d th t i d bb) each item of income and expense for the period that, as required by

IFRSs, is recognised directly in equity, and the total of these items;c) total income and expense for the period (calculated as the sum of (a) and

(b)), showing separately the total amounts attributable• to equity holders of the parent and• to minority interest; and

d) for each component of equity, the effects of changes in accounting policies and corrections of errors recognised in accordance with IAS 8.

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Any Change?

A revised requirement:• A statement of changes in equity that comprises only these items

shall be titled a statement of recognised income and expenses

44

Statement of Changes in Equity • An entity shall also present, either on the face of the

statement of changes in equity or in the notes:a) the amounts of transactions with equity holders acting in

their capacity as equity holders, showing separately distributions to equity holders;

b) the balance of retained earnings (ie accumulated profit or loss) at the beginning of the period and at the balance sheet date, and the changes during the period; and

c) a reconciliation between the carrying amount of each class of contributed equity and each reserve at the beginning and the end of the period, separately disclosing each

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p p y gchange.

Statement of Changes in EquityCase

Consolidated SCE as at 31.12.2005

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45

Notes Structure (an entity is required to disclose the following)• The notes shall:

a) present information about the basis of preparation of the financial statementsa) present information about the basis of preparation of the financial statements and the specific accounting policies used;

b) disclose the information required by HKFRSs that is not presented on the face of the balance sheet, income statement, statement of changes in equity or cash flow statement; and

c) provide additional information that is not presented on the face of the balance sheet, income statement, statement of changes in equity or cash flow statement, but is relevant to an understanding of any of them.

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• Notes shall, as far as practicable, be presented in a systematic manner. • Each item on the face of the balance sheet, income statement, statement

of changes in equity and cash flow statement shall be cross-referencedto any related information in the notes.

Notes Disclosures (an entity is required to disclose the following)• Disclosure of accounting policies:

An entity shall disclose in the summary of significant accounting policies:An entity shall disclose in the summary of significant accounting policies:a) the measurement basis (or bases) used in preparing the financial

statements; andb) the other accounting policies used that are relevant to an understanding of

the financial statements.

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NotesCase

Galaxy Entertainment Group LimitedNotes to the financial statement (y.e. 31.12.2005)– The financial statements have been prepared in

accordance with Hong Kong Financial Reporting Standards (‘‘HKFRS’’) issued by the Hong Kong Institute of Certified Public Accountants • under the historical cost convention as modified by the

revaluation of investment properties, available-for-sale financial assets, derivative financial instruments and other investments, which are carried at fair values ……

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,– The principal accounting policies applied in the

preparation of these financial statements are set out below. These policies have been consistently applied to all the years presented, except for those stated in note 2(a) above.

Notes Disclosures (an entity is required to disclose the following)• Disclosure of accounting policies

The judgements apart from those involving estimations management has– The judgements, apart from those involving estimations, management has made• in the process of applying the entity’s accounting policies that have the

most significant effect on the amounts recognised in the financial statements (in the summary of significant accounting policies or other notes)

Examples – Management makes judgements in determining:a) whether financial assets are held-to-maturity investments;b) when substantially all the significant risks and rewards of

© 2005-07 Nelson 92

) y gownership of financial assets and lease assets are transferred to other entities;

c) whether, in substance, particular sales of goods are financing arrangements and therefore do not give rise to revenue; and

d) whether the substance of the relationship between the entity and a special purpose entity indicates that the special purpose entity is controlled by the entity.

47

Notes Disclosures (an entity is required to disclose the following)• Key sources of estimation uncertainty

– Information about the key assumptions concerning the future and– Information about the key assumptions concerning the future, andother key sources of estimation uncertainty at the balance sheet date,• that have a significant risk of causing a material adjustment to the

carrying amounts of assets and liabilities within the next financial year– In respect of those assets and liabilities, the notes shall include details of:

a) their nature; andb) their carrying amount as at the balance sheet date

Examples – in the absence of recently observed market prices used

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p y pto measure the following assets and liabilities, future-oriented estimates are necessary to measure:• the recoverable amount of classes of PPE• the effect of technological obsolescence on inventories

Estimates involve assumptions about such items as• the risk adjustment to cash flows or discount rates used• future changes in salaries and in prices affecting other costs.

Notes

Esprit Holdings LimitedEsprit Holdings Limited• Critical Accounting Estimates and Judgements

Case

– Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.

– Critical accounting estimates and assumptions• The Group makes estimates and assumptions concerning

the future. The resulting accounting estimates will, by definition, seldom equal the related actual results.

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q• The estimates and assumptions that have a significant risk

of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below …… (including (1) useful life and impairment of trademarks and (2) income taxes)

48

Notes

Melco Development Limited (新濠國際發展有限公司)Notes to the financial statements for the year ended 31.12.2005

Case

y– The key assumptions concerning the future, and other key sources

of estimation uncertainty at the balance sheet date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year, are discussed below ……(The issues discussed include:• Allowances for inventories

© 2005-07 Nelson 95

• Estimated impairment of goodwill Income taxes)

NotesCase

Galaxy Entertainment Group LimitedNotes to the financial statement (y.e. 31.12.2005)

Estimates and judgements used in preparing the– Estimates and judgements used in preparing the financial statements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.

– The Group makes estimates and assumptionsconcerning the future.

– The resulting accounting estimates will, by definition, seldom equal the related actual results

© 2005-07 Nelson 96

seldom equal the related actual results. – The estimates and assumptions that have a significant

effect on the carrying amounts of assets and liabilities are discussed below ….. (including impairment of goodwill, impairment of gaming

licence, Useful lives of property, plant and equipment, fair value of investment properties …..)

49

Notes Disclosures (an entity is required to disclose the following)• Other disclosures

An entity shall disclose in the notes:An entity shall disclose in the notes:a) the amount of dividends proposed or declared before the

financial statements were authorised for issue but not recognised as a distribution to equity holders during the period, and the related amount per share(HK incorporated companies are required to show the aggregate amount which is recommended for distribution by way of dividend under a separate heading(s) in their balance h t (HK C O d 10th S h 9(1)( )) d

© 2005-07 Nelson 97

sheet (HK Co. Ord. 10th Sch., para 9(1)(e)); andb) the amount of any cumulative preference dividends not

recognised.

Notes Disclosures (an entity is required to disclose the following)

An entity shall disclose the following if not disclosed• Other disclosures

An entity shall disclose the following, if not disclosedelsewhere in information published with the financial statements:a) the domicile and legal form of the entity,

its country of incorporation andthe address of its registered office(or principal place of business, if different from the registered office);

b) d i ti f th t f th tit ’ ti d

“shall disclose” now, instead of “encouraged to disclose”

Any special?

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b) a description of the nature of the entity’s operations and its principal activities; and

c) the name of the parent and the ultimate parent of the group.

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NotesCase

Galaxy Entertainment Group LimitedNotes to the financial statement (y.e. 31.12.2005)

The principal activities of Galaxy Entertainment Group• The principal activities of Galaxy Entertainment Group Ltd. (the ‘‘Company’’) (formerly known as K. Wah Construction Materials Ltd.) and its subsidiaries (together the ‘‘Group’’) are to– operate in casino games of chance or games of other forms

in Macau, (and) manufacture, sale and distribution of construction materials in HK, Macau and Mainland China.

• The Company is

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– a limited liability company incorporated in Hong Kong and – has its listing on the Main Board of The Stock Exchange of

Hong Kong Limited.• The address of its registered office and its principal place

of business is Room 1606, 16th Floor, Hutchison House, 10 Harcourt Road, Central, HK.

Effective Date

• An entity shall apply IAS 1 for annual periods beginning on or after 1 Jan. 2005.

Earlier application is encouraged– Earlier application is encouraged.– If an entity applies IAS 1 for an earlier period, it shall

disclose this fact.• For the amendments relating to the Statement of

Changes in Equity– An entity shall apply it for annual periods beginning on

or after 1 Jan. 2006.– If an entity applies the amendments to IAS 19

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If an entity applies the amendments to IAS 19 Employee Benefits – Actuarial Gains and Losses, Group Plans and Disclosures for an earlier period, that amendment shall be applied for that earlier period.

51

Today’s Agenda

Capital Disclosures

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p(Amendments to IAS 1)

Capital Disclosures – For 2007

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52

Capital Disclosures

What is capital? Is it ……

Capital Assets Liabilities= –

• IAS 1.BC47 considers “whether an entity can have a view of capital that differs from what IFRSs define as equity.”

• It further clarifies that, although for the purposes of this disclosure capital would often equate with equity as defined in IFRSs

© 2005-07 Nelson 103

capital would often equate with equity as defined in IFRSs,– it might also include or exclude some components.

• It also noted that the capital disclosure in IAS 1 is intended to give entities the opportunity to describe– how they view the components of capital they manage, if this is

different from what IFRSs define as equity ……

Capital Disclosures

Based on the Framework & IFRSs, the accounting equation should be:

EquityEquity Assets Liabilities= –

Capital Assets Liabilities= –

© 2005-07 Nelson 104

q yq y

• An entity’s capital may be part of its equity plus part of its liabilities, depending on how it manage “its capital” ……

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 comply with the capital disclosures, the entity discloses the following:a) qualitative information about its objectives, policies and processes for

managing capital, including (but not limited to):

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i) a description of what it manages as capital;ii) when an entity is subject to externally imposed capital requirements,

the nature of those requirements and how those requirements are incorporated into the management of capital; and

iii) how it is meeting its objectives for managing capital.

Capital Disclosures

Example disclosure• The Group’s objectives when managing capital are:

to safeguard the entity’s ability to continue as a going

Example

Objectives– to safeguard the entity s ability to continue as a going

concern, • so that it can continue to provide returns for

shareholders and benefits for other stakeholders, and

– to provide an adequate return to shareholders by pricing products and services commensurately with the level of risk.

G f

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• The Group sets the amount of capital in proportion to risk.

54

Capital Disclosures

• The Group manages the capital structure and makes adjustments to it in the light of

Example

Example disclosureHow

adjustments to it in the light of– changes in economic conditions and – the risk characteristics of the underlying assets.

• In order to maintain or adjust the capital structure, the Group may– adjust the amount of dividends paid to shareholders, – return capital to shareholders,

issue new shares or

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– issue new shares, or – sell assets to reduce debt.

Capital Disclosures

• Consistently with others in the industry, the Group monitors capital on the basis of

Example

Example disclosureHow

monitors capital on the basis of – the debt-to-adjusted capital ratio.

• This ratio is calculated as net debt ÷ adjusted capital.

• Net debt is calculated as – Total debt (as shown in the

balance sheet)

• Adjusted capital – comprises all components of

equity (i.e. share capital, share premium, minority interest,

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)– Less: cash & cash equivalents retained earnings, and

revaluation reserve) – other than amounts

recognised in equity relating to cash flow hedges, and

– includes some forms of subordinated debt.

55

Capital Disclosures


• To comply with the capital disclosures, the entity discloses the following:b) summary quantitative data about what it manages as capital.

Some entities regard some financial liabilities (e.g. some forms of

© 2005-07 Nelson 109

g ( gsubordinated 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.

Capital Disclosures

Example disclosure (continued from previous example)

Example

• During 20X4, the Group’s strategy, which was unchanged from 20X3, was to maintain the debt-to-adjusted capital ratio at the lower end of the range 6:1 tomaintain the debt to adjusted capital ratio at the lower end of the range 6:1 to 7:1, in order to secure access to finance at a reasonable cost by maintaining a BB credit rating. The debt-to-adjusted capital ratios at 31 December 20X4 and at 31 December 20X3 were as follows:

31.12.X4 ($’M) 31.12.X3 ($’M) Total debt 1,000 1,100 Less: cash and cash equivalents (90) (150)Net debt 910 950

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Total equity 110 105 Add: subordinated debt instruments 38 38 Less: amounts recognised in equity

relating to cash flow hedges (10) (5)Adjusted capital 138 138

Debt-to-adjusted capital ratio 6.6 6.9

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Capital Disclosures


• To comply with the capital disclosures, the entity discloses the following:d) whether during the period it complied with any externally imposed capital

requirements to which it is subject.

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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.

Capital DisclosuresExample

Example disclosure• Entity A filed its quarterly regulatory capital return for

30 September 20X7 on 20 October 20X730 September 20X7 on 20 October 20X7. • At that date, Entity A’s regulatory capital was below the

capital requirement imposed by Regulator B by $1 million.

• As a result, Entity A was required to submit a plan to the regulator indicating how it would increase its regulatory capital to the amount required.

• Entity A submitted a plan that entailed selling part of its

For example, SFC or banks

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• Entity A submitted a plan that entailed selling part of its unquoted equities portfolio with a carrying amount of $11.5 million in the fourth quarter of 20X7.

• In the fourth quarter of 20X7, Entity A sold its fixed interest investment portfolio for $12.6 million and met its regulatory capital requirement.

57

Capital DisclosuresCase

• Early adopted capital disclosure in 2005 and itsannual 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.

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Capital DisclosuresCase

• Early adopted capital disclosure in 2005 and itsannual 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

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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 ……

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Capital Disclosures – Transition

• An entity shall apply the requirements of capital disclosure for

annual periods beginning on or after 1 January– annual periods beginning on or after 1 January 2007.

• Early application is encouraged.

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Full set of slides in PDF can be found in www.NelsonCPA.com.hk


© 2005-07 Nelson 116

Nelson LamNelson Lam 林智遠林智遠[email protected]

59


Full set of slides in PDF can be found in www.NelsonCPA.com.hk

Q&A SessionQ&A SessionQ&A SessionQ&A Session

© 2005-07 Nelson 117

Nelson LamNelson Lam 林智遠林智遠[email protected]

Documents

Framework and IAS 1 - Nelson CPA · 5/22/2007 · • The accounting standards issued by its predecessor, the International Accounting Standards Committee (IASC), continue to be