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In this newsletter, we look at the following topics:
Hong Kong Financial Reporting Standards - 'mandatory' and 'permitted' in 2006
Under Hong Kong Financial Reporting Standards (HKFRS), certain new standards, amendments and interpretations have been published and are applicable for the accounting periods beginning on or after 1 January 2006 or later periods. This newsletter outlines the requirements of the recently published standards, amendments and interpretations that are mandatory for 2006 year-ends and those with early adoption permitted.
Mandatory adoption in 2006 (calendar year-end)
HKAS 19 Amendment - Actuarial gains and losses, group plans and disclosures
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This amendment introduces an option to immediately recognise actuarial gains and losses outside profit or loss in a statement of recognised income and expense (SoRIE). It also requires additional disclosures, such as details of the SoRIE, composition of assets, sensitivity analysis and five-year disclosure of the defined benefit obligation. This amendment is effective for annual periods beginning on or after 1 January 2006, with earlier application encouraged. Retrospective application is required, except for the specific transitional provision as indicated in HKAS 19 paragraph 160.
HKAS 21 Amendment - Net investment in a foreign operation
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This amendment requires that in the financial statements including the foreign operation, the exchange differences on monetary items that formed part of the net investment in the foreign operation should be reclassified as equity, whether or not the monetary item is denominated in the functional currency of either the reporting entity or the foreign operation. An additional example is included to clarify that sister-company loans can form part of a group's net investment in a foreign operation. This amendment is effective for annual periods beginning on or after 1 January 2006, with earlier application encouraged. Retrospective application is required.
Revisions to HKAS 1, HKAS 27 and HKFRS 3 - Applicable to Hong Kong incorporated parent companies
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There were revisions to HKAS 1 Presentation of Financial Statements, HKAS 27 Consolidated and Separate Financial Statements and HKFRS 3 Business Combinations with effect for annual periods beginning on or after 1 January 2006. With the introduction of the Companies (Amendment) Ordinance 2005, the previous special provision for Hong Kong incorporated companies not to consolidate subsidiaries that do not meet the legal definition of subsidiary was removed from the revised standard. Hong Kong incorporated companies that have previously applied the special provision should restate the comparative amounts retrospectively for its annual accounts beginning on or after 1 January 2006 to include in their consolidated financial statement all subsidiaries as set out in the revised HKAS 27.
HKAS 39 Amendment - Cash flow hedge accounting of forecast intragroup transactions
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This amendment allows the foreign currency risk of a highly probable forecast intragroup transaction to qualify as a hedged item in the consolidated financial statements, provided that: (a) the transaction is denominated in a currency other than the functional currency of the entity entering into that transaction; and (b) the foreign currency risk will affect consolidated profit or loss. This amendment is effective for annual periods beginning on or after 1 January 2006, with earlier application encouraged. No retrospective application is required.
HKAS 39 Amendment - The fair value option
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This amendment changes the definition of financial instruments classified at fair value through profit or loss and restricts the ability to designate financial instruments as part of this category into certain circumstances: to eliminate accounting mismatch; for items in a portfolio that are managed and whose performance is evaluated on a fair value basis; and to hybrid instruments containing substantive embedded derivatives. This amendment is effective for annual periods beginning on or after 1 January 2006, with earlier application encouraged. Comparatives should be restated based on the transitional provision in HKAS 39 paragraph 105D.
HKAS 39 and HKFRS 4 Amendment - Financial guarantee contracts
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This amendment requires an entity to account for the financial guarantee under HKAS 39 Financial Instruments: Recognition and Measurement, unless it elects to apply HKFRS Insurance Contract. HKFRS should be applied only when the entity: (a) previously asserted explicitly that it regards such contracts as insurance contracts; and (b) used accounting specifically applicable to insurance contracts. Financial guarantees accounted for under HKAS 39 are initially recognised at fair value and subsequently measured at the higher of: (a) the unamortized balance of the related fees received and deferred; and (b) the expenditure required to settle the commitment at the balance sheet date. This amendment is effective for annual periods beginning on or after 1 January 2006, with earlier application encouraged. Retrospective application is required.
HKFRS 6 - Exploration for and evaluation of mineral resources
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This standard introduces and permits an entity to determine its own accounting policy for expenditures recognised as exploration and evaluation assets. These assets should be initially measure at cost and subsequently measured at either the cost model or the revaluation model. Impairment should be measured at cash-generating-unit level when the carrying amount exceeds the recoverable amount. This standard is effective for annual periods beginning on or after 1 January 2006, with earlier application encouraged. Retrospective application is required.
HKFRS 1 and HKFRS 6 Amendment - First-time adoption of HKFRS and exploration for and evaluation of mineral resources
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Entities that adopt HKFRS 6 before 1 January 2006 are exempt from applying the recognition, measurement and disclosure requirements in HKFRS 6 for comparative information in the first HKFRS financial statements. An entity that adopts HKFRSs before 1 January 2006 and chooses to adopt HKFRS 6 in its first HKFRS financial statements before 1 January 2006 need not apply HKFRS 6 to the comparative period presented in its first HKFRS financial statements.
HK(IFRIC)-Interpretation 4 - Determining whether an arrangement contains a lease
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This interpretation requires the determination of whether an arrangement is or contains a lease to be based on the substance of the arrangement. It requires an assessment of whether: (a) fulfilment of the arrangement is dependent on the use of a specific asset or assets (the asset); and (b) the arrangement conveys a right to use the asset. If both criteria are met, the arrangement is, or contains, a lease. This interpretation is effective for annual periods beginning on or after 1 January 2006, with earlier application encouraged. Comparatives should be restated based on the transitional provision in HK(IFRIC)-Int 4 paragraph 17.
HK(IFRIC)-Interpretation 5 - Rights to interests arising from decommissioning, restoration and environmental rehabilitation funds
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Management should recognise: a) an obligation to pay decommissioning costs as a liability; b) an interest in a fund under HKAS 27 Consolidated and Separate Financial Statements, HKAS 28 Investments in Associates, HKAS 31 Investments in Joint Ventures or SIC-12 Consolidation - Special Purpose Entities, depending on whether the contributor has control, joint control or significant influence over fund. In all other cases, it should be accounted for as a right to receive reimbursement from the fund under HKAS 37 Provisions, Contingent Liabilities and Contingent Assets at the lower of amount of the decommissioning obligations recognised and contributor's share of the fair value of net assets of the fund. This interpretation is effective for annual periods beginning on or after 1 January 2006, with earlier application encouraged. Retrospective application is required.
Early adoption permitted in 2006 (calendar year-end)
HKAS 1 Amendment - Presentation of financial statements: Capital disclosures
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This amendment to HKAS 1 introduces disclosures about the level of an entity's capital and how it manages capital, with qualitative and quantitative disclosure information required. This amendment is effective for annual periods beginning on or after 1 January 2007, with earlier application encouraged. Retrospective application is required.
HKFRS 7 - Financial instruments: Disclosures
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This standard introduces new disclosures to improve the information about financial instruments. It requires the disclosure of qualitative and quantitative information about exposure to risks arising from financial instruments, including specified minimum disclosures about credit risk, liquidity risk and market risk, including sensitivity analysis to market risk. It replaces HKAS 30 Disclosures in the Financial Statements of Banks and Similar Financial Institutions, and disclosure requirements in HKAS 32 Financial Instruments: Disclosure and Presentation. It is applicable to all entities that report under HKFRS. This standard is effective for annual periods beginning on or after 1 January 2007, with earlier application encouraged. Retrospective application is required, except for the specific transitional provision as indicated in HKFRS 7 paragraph 44.
HKFRS 8 - Operating segments
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This standard supersedes HKAS 14 Segment Reporting, under which segments were identified and reported on risk and return analysis. Items were reported on the accounting policies used for external reporting. Under HKFRS 8, segments are components of an entity regularly reviewed by an entity's chief operating decision-maker. Items are reported based on the internal reporting. This standard is effective for annual periods beginning on or after 1 January 2009, with earlier application encouraged. This standard should be applied retrospectively.
HK(IFRIC)-Interpretation 7 - Applying the restatement approach under HKAS 29, financial reporting in hyperinflationary economies
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This interpretation provides guidance on how to apply requirements of HKAS 29 in a reporting period in which an entity identifies the existence of hyperinflation in the economy of its functional currency, when the economy was not hyperinflationary in the prior period. This interpretation is effective for annual periods beginning on or after 1 March 2006, with earlier application encouraged. Retrospective application is required.
HK(IFRIC)-Interpretation 8 - Scope of HKFRS 2
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If the identifiable consideration given appears to be less than the fair value of the equity instruments granted or liability incurred, this means that unidentifiable consideration has been or will be received; HKFRS 2 Share-based payment will therefore apply. This interpretation is effective for annual periods beginning on or after 1 May 2006, with earlier application encouraged. Retrospective application is required, but subject to the transitional provision of HKFRS 2.
HK(IFRIC)-Interpretation 9 - Reassessment of embedded derivatives
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This interpretation requires an entity to assess whether an embedded derivative is required to be separated from the host contract and accounted for as a derivative when the entity first becomes a party to the contract. Subsequent reassessment is prohibited unless there is a change in the terms of the contract that significantly modifies the cash flows that otherwise would be required under the contract. In this case, reassessment is required. This interpretation is effective for annual periods beginning on or after 1 June 2006, with earlier application encouraged. Retrospective application is required.
HK(IFRIC)-Interpretation 10 - Interim reporting and impairment
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This interpretation prohibits the impairment losses recognised in an interim period on goodwill, investments in equity instruments and investments in financial assets carried at cost to be reversed at a subsequent balance sheet date. This interpretation is effective for annual periods beginning on or after 1 November 2006, with earlier application encouraged. Comparatives should be restated based on the transitional provision stated in HK(IFRIC)-Int 10 paragraph 10.
HK(IFRIC)-Interpretation 11 - HKFRS 2 - Group and treasury share transactions
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HKFRS 2 Share-based Payment was clear that an expense should be recognised by the entity receiving employee services; it was unclear exactly how it should be calculated where employees of a subsidiary received the shares of a parent. This interpretation clarifies that certain types of transaction are accounted for as equity-settled or cash-settled transactions under HKFRS 2. It also addresses the accounting for share-based payment transactions involving two or more entities within one group. This interpretation is effective for annual periods beginning on or after 1 March 2007, with earlier application encouraged. Retrospective application is required, but subject to the transitional provision of HKFRS 2.
HK(IFRIC)-Interpretation 12 - Service concession arrangements
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It applies to companies that participate in service concession arrangements and provides guidance on the accounting by operators in public-to-private service concession arrangements. This interpretation is effective for annual periods beginning on or after 1 January 2008, with earlier application encouraged. Retrospective application is required, but subject to the transitional provision in HK(IFRIC)-Int 12 paragraph 30.
Get Your Copy Here
Download our HKFRS News - Jan 2007 (pdf file, 263KB) for your reference.
Note: HKFRS has converged with IFRS effective from 1 January 2005. Contents contained in this newsletter are relevant to both HKFRS preparers and IFRS preparers. Other Issues of HKFRS News
Accounting and Listing Rules Updates.
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