microsoft powerpoint - acca-20051130-(presented)
TRANSCRIPT
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© 2005 Nelson 1
HK SME Financial Reporting Framework and Standard 30 November 2005
New IFRS New IFRS
Nelson Lam Nelson Lam CFA FCCA FCPA(Practising)MBA MSc BBA CPA(US)
We are small! HELP!
© 2005 Nelson 2
SME Financial SME Financial Reporting FrameworkReporting Framework
SME Financial Reporting Standard
and
HK SME Financial Reporting Framework and Standard
• In August 2005, HKICPA issued its locally developed “Small and Medium-sized Entity (SME) Financial Reporting Framework (SME-FRF) and Financial Reporting Standard (SME-FRS)”.
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© 2005 Nelson 3
Today’s Agenda
• Brief Introduction• SME Financial Reporting Framework
(SME-FRF)• SME Financial Reporting Standard (SME-
FRS)• Choose or Not Choose?
• Brief Introduction• SME Financial Reporting Framework
(SME-FRF)• SME Financial Reporting Standard (SME-
FRS)• Choose or Not Choose?
© 2005 Nelson 4
1. Brief Introduction
SME Financial SME Financial Reporting FrameworkReporting Framework
SME Financial Reporting Standard
and
The SME-FRF and SME-FRS have the following characteristics:
• Independence, self-contained andcomprehensive
• A simplified versionof HKAS/SSAP
• Follow historicalcost convention
• Reduce disclosurerequirements significantly
• To balance cost and benefit
• Only qualifying entities can choose to adopt
• Not directly linked to Main HKFRS
• Selective fallback is not allowed
• Not directly linked to Main HKFRS
• Selective fallback is not allowed
• Mainly derived from Main HKFRS (or HK SSAP)
• Definitions largely the same
• Recognition on some items not required
• Mainly derived from Main HKFRS (or HK SSAP)
• Definitions largely the same
• Recognition on some items not required
Main Principles
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1. Brief Introduction
SME Financial SME Financial Reporting FrameworkReporting Framework
SME Financial Reporting Standard
and
• Explicitly, compliance with SME-FRF and SME-FRS cannot enable an entity to claim• compliance with Main HKFRS, or• financial statement giving “a true and
fair view”• Explicitly, compliance with SME-FRF and
SME-FRS would only result in financial statements achieving• achieving “a proper presentation
appropriate for SMEs", and/or• exhibiting “a true and correct view”.
Main PrinciplesBe careful …...
fit your reporting need?
Be careful …...Be careful …...fit your reporting fit your reporting
need?need?
© 2005 Nelson 6
1. Brief Introduction
SME Financial Reporting Framework
SME Financial SME Financial Reporting FrameworkReporting Framework
SME Financial Reporting Standard
SME Financial Reporting Standard
• Sets out
• Dividedinto
Conceptual BasisConceptual Basis
Qualifying Criteria (Qualifying Entity)Qualifying Criteria (Qualifying Entity)
DefinitionsDefinitions
Specific Requirements (in 17 sections)Specific Requirements (in 17 sections)
Transitions and Effective DateTransitions and Effective Date
AppendicesAppendices
Transitions and Effective DateTransitions and Effective Date
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© 2005 Nelson 7
2. SME Framework
SME Financial Reporting Framework
SME Financial SME Financial Reporting FrameworkReporting Framework
• Sets out Conceptual BasisConceptual Basis
Qualifying Criteria (Qualifying Entity)Qualifying Criteria (Qualifying Entity)
Transitions and Effective DateTransitions and Effective Date
© 2005 Nelson 8
SME-FRF adopts Historical Cost Convention, but further restricted that assets:– should not be revalued– nor should future cash flows be
discountedin the measurement of assets and liabilities
SME-FRF adopts Historical Cost Convention, but further restricted that assets:– should not be revalued– nor should future cash flows be
discountedin the measurement of assets and liabilities
SME Framework – Conceptual Basis
Conceptual BasisConceptual Basis
for the preparation of financial statements in accordance with the SME Financial Reporting Standard
UsersUsersUsers
ObjectiveObjectiveObjective
Underlying AssumptionsUnderlying Underlying
AssumptionsAssumptions
Qualitative Characteristics
Qualitative Qualitative CharacteristicsCharacteristics
ElementsElementsElements
RecognitionRecognitionRecognition
MeasurementMeasurementMeasurement
Even SME-FRF is similar to the Framework of Main HKFRS• 2 frameworks should be considered as independent
framework.
One of the major differences is:
• Ruled out Revaluation or Fair Value Model?
• Value in use?
• Ruled out Revaluation or Fair Value Model?
• Value in use?
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Adopted S.141DAdopted S.141D
SME Framework – Qualifying Entity
HK Incorporated
Entity
Non-HK Incorporated
Entity
Satisfies S.141DSatisfies S.141D
SME-FRF and
SME-FRS
SME-FRF and
SME-FRSSatisfies the requirements imposed by the law of the
entity’s place of incorporation and its constitution
Satisfies the requirements imposed by the law of the
entity’s place of incorporation and its constitution
No Public AccountabilityNo Public Accountability
All Owners AgreedAll Owners Agreed
Fulfilled Size TestFulfilled Size Test
Canchoose
Must use
Canchoose
Entity
No Choice
© 2005 Nelson 10
Qualifying Entity – Section 141D
In order to apply section 141DAll the shareholders of a private company agree in writing that section 141D shall apply with respect to a financial yearThe shareholders shall not in any financial year enter into an agreement for the above purposes for more than one such financial year.
But the following private companies are not allowed to apply section 141Da) a company has any subsidiary or is a subsidiary of
another company formed and registered under the HK Companies Ordinance or an existing company; or
b) a bank, a securities dealer, an insurance company, money lender, or a company owning and operating ships/aircraft engaged in the carriage of cargo into or out of HK
Group companies under the HK Co.
Ordinance
Group companies under the HK Co.
Ordinance
Companies in Specific Industries
Companies in Specific Industries
Satisfies S.141DSatisfies S.141D
All Owners Agreed in Writing
Each Year
All Owners Agreed in Writing
Each Year
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Adopted S.141DAdopted S.141D
Qualifying Entity – Section 141D
HK Incorporated
Entity
SME-FRF (para. 16) also clearly states that• Compliance with the SME-FRF and SME-FRS is necessary in
order for financial statements to give a “true and correct view”• When a HK incorporated company prepares its financial
statements in accordance with section 141D
SME-FRF and
SME-FRS
SME-FRF and
SME-FRS
Must use
No Choice
• In other word, all HK incorporated company has adopted section 141D,they must use SME-FRF and SME-FRS.
True andCorrect =
Compliance with SME-FRF and
SME-FRS
© 2005 Nelson 12
Qualifying EntityQualifying Entity – Overseas Entity
Non-HK Incorporated
Entity
SME-FRF and
SME-FRS
SME-FRF and
SME-FRSSatisfies the requirements imposed by the law of the
entity’s place of incorporation and its constitution
Satisfies the requirements imposed by the law of the
entity’s place of incorporation and its constitution
No Public AccountabilityNo Public Accountability
All Owners AgreedAll Owners Agreed
Fulfilled Size TestFulfilled Size Test
Canchoose
Check for the relevant law
and its constitution first
Check for the relevant law
and its constitution first
HK Incorporated
Entity
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• an entity (it is a subsidiary or a holding company of another entity)can elect SME-FRS for its own financial statements if italso satisfies the conditions for non-HK incorporated entity
Qualifying Entity – Overseas Entity
Satisfies the requirements imposed by the law of the
entity’s place of incorporation and its constitution
No Public AccountabilityNo Public Accountability
An entity has Public AccountabilityPublic Accountability for the purposes of the SME-FRF if:a) at any time during the current or preceding reporting period, the entity (whether
in the public or private sector) is an issuer of securities, that is, its equity or debt securities are publicly traded or it is in the process of issuing publicly tradedequity or debt securities;
b) the entity is an institution authorised under the Banking Ordinance;c) the entity is an insurer authorised under the Insurance Companies Ordinance; ord) the entity is a corporation which is granted a licence under the Securities and
Futures Ordinance to carry on business in a regulated activity in HK.
Similar to S.141DSimilar to S.141DBut different from s.141D that
Consolidated?Consolidated?Consolidation?Consolidation?
© 2005 Nelson 14
Qualifying Entity – Overseas Entity
HK Incorporated
Entity
Non-HK Incorporated
Entity
Such entity having a subsidiary cannot elect
S.141D
Such entity having a subsidiary cannot elect
S.141D
SME-FRF and
SME-FRS
SME-FRF and
SME-FRS
Such entity may elect SME-FRS for its own financial statements (subject to
satisfying other conditions)
Such entity may elect SME-FRS for its own financial statements (subject to
satisfying other conditions)
Cannotchoose
Entity
No Choice
If it chooses to prepare consolidation, it cannot elect SME-FRS for its consolidated
financial statements
If it chooses to prepare consolidation, it cannot elect SME-FRS for its consolidated
financial statements
Consolidation?Consolidation?In other words, an entity having a subsidiary cannot use SME-FRF• unless it is a non-HK incorporated entity and it only chooses to
elect SME-FRS for its own financial statements.
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Qualifying Entity – Overseas Entity
• Unless the law requires otherwise, it is presumed that, once an agreement is made by all owners to prepare the financial statements in accordance with the SME-FRS
the agreement will remain valid• until there is a change in the ownership or• the agreement is revoked by an owner or• an entity no longer qualifies for reporting under the SME-FRF
Satisfies the requirements imposed by the law of the
entity’s place of incorporation and its constitution
No Public Accountability
All Owners AgreedAll Owners Agreed
Different from S.141DDifferent from S.141D
In writing? In writing? Not mention!
© 2005 Nelson 16
All Owners Agreed
Satisfies the requirements imposed by the law of the
entity’s place of incorporation and its constitution
No Public Accountability
Qualifying Entity – Overseas Entity
An entity is considered to be an SME if it does not exceed any 2 of the following:
a) Total annual revenue of HK$50 million
b) Total assets of HK$50 million at the balance sheet date
c) 50 employees
• The total revenue and total assets are determined after the application of the SME-FRS
• In the case where the reporting period is shorter or longer than a year, the total revenue shall be annualised
Fulfilled Size TestFulfilled Size Test
No. of employees is the entity’s average no. of persons employed during the reporting period (incl. part-timer) determined on a monthly basis as follows:a) Determine the no. of employees as at the end of each calendar month.b) Add together all the monthly numbers in (a).c) Divide the no. in (b) by the no. of months in the reporting period.
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Qualifying Entity – Overseas Entity• When an entity has not been considered to be an SME in terms of its
size and subsequently becomes an SME– the entity will not qualify for reporting under SME-FRF in term of
the size test until the entity has been determined to be an SME for two consecutive reporting periods
• Where an entity has previously qualified for reporting under SME-FRF– the entity will no longer qualify for reporting under SME-FRF in
terms of the size test until the entity is no longer an SME for two consecutive reporting periods
Non-HK Incorporated
Entity
Satisfies the requirements imposed by the law of the
entity’s place of incorporation and its constitution
Satisfies the requirements imposed by the law of the
entity’s place of incorporation and its constitution
No Public AccountabilityNo Public Accountability
All Owners AgreedAll Owners Agreed
Fulfilled Size TestFulfilled Size Test
Before Qualifying
Before Qualifying
After Qualifying
After Qualifying
© 2005 Nelson 18
Transitional Provisions
SME-FRSSME-FRSHKFRS(Main HKFRS)
HKFRS(Main HKFRS)
Transition to SME-FRF and SME-FRS is accounted for as follows:a) All times recognised previously not
meeting the recognition criteria under the SME-FRF and SME-FRS to be derecognised
b) All items not recognised previously but meeting the recognition criteria under the SME-FRF and SME-FRS to be recognised
c) All items recognised previously but required to be re-measured in accordance with SME-FRS
dealt with as a change of accounting policy under the SME-FRS
Retrospective application• “As if” always been in used• Adjust opening balance of
reserves for the earlier period presented
• Adjust all comparatives
Retrospective application• “As if” always been in used• Adjust opening balance of
reserves for the earlier period presented
• Adjust all comparatives
Except for undue cost or effort
Except for undue cost or effort
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Transitional Provisions
• Derivatives• Deferred tax• Component replacement of
property, plant and equipment
ExampleExample
Suggest any items that:a) Not meeting the recognition criteria
under the SME-FRF and SME-FRS to be derecognised
b) Not recognised previously but meeting the recognition criteria under the SME-FRF and SME-FRS to be recognised
c) Recognised previously but required to be re-measured in accordance with SME-FRS
• Long leasehold interest in land without title pass
• Intangible asset not meeting the previous definition
• Decommissioning cost
• Property, plant and equipment re-measured to cost
• Intangible asset re-measured to cost
• Investments re-measured to cost• Value in use fallback to expected
future cash flow
© 2005 Nelson 20
HKFRS(Main HKFRS)
HKFRS(Main HKFRS)
Transitional Provisions
The transition from the SME-FRF and SME-FRS• is not explicitly stated in the SME-FRF and SME-
FRS.
However, HKICPA clarifies in its set of Questions and Answers that• when an entity no longer qualifies for reporting
under the SME-FRS, the entity has to apply• HKFRS 1 First-time Adoption of HK Financial
Reporting Standardsfor its first HKFRS financial statements
SME-FRSSME-FRS
• HKFRS 1 imposes some additional requirements during transition
• But it also provides some exemptions not available in SME-FRS
• HKFRS 1 imposes some additional requirements during transition
• But it also provides some exemptions not available in SME-FRS
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Effective Date
• The SME-FRF becomes effective for a Qualifying Entity’s financial statements that cover a period beginning on or after 1 January 2005.
• Earlier application is permitted.
© 2005 Nelson 22
3. SME Standard in HK
SME Financial Reporting Framework
SME Financial SME Financial Reporting FrameworkReporting Framework
SME Financial Reporting Standard
SME Financial Reporting Standard
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3. SME Standard in HK
SME Financial Reporting Framework
SME Financial SME Financial Reporting FrameworkReporting Framework
SME Financial Reporting Standard
SME Financial Reporting Standard
• Dividedinto
DefinitionsDefinitions
Specific Requirements (in 17 sections)Specific Requirements (in 17 sections)
Transitions and Effective DateTransitions and Effective Date
AppendicesAppendices
The SME Financial Reporting Standard (SME-FRS) is structured as a single document with the following 4 main areas:
© 2005 Nelson 24
SME Standard – Requirements
Specific Requirements (in 17 sections)Specific Requirements (in 17 sections)
HK SSAPHK SSAP Main HKFRSMain HKFRS
SME-FRSSME-FRS• Specific requirements in SME-FRS
are divided into 17 sections• Each section discusses one topic,
which is a topic covered in separate HKFRS or HK SSAP– Obviously, such requirements are
originated from the HKFRS or HK SSAP
– But cover less topics, are more simplified, and have less disclosure requirements
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SME Framework and Standard – Summary
No fallback to Main HKFRS (if there is no guidance in SME-FRS for an item)
No fallback to Main HKFRS (if there is no guidance in SME-FRS for an item)
Self-containedSelfSelf--containedcontained Historical Cost Convention
Historical Cost Historical Cost ConventionConvention
Properly Present Only
Properly Properly Present OnlyPresent Only
Not Applicable to Consol.
Not Applicable Not Applicable to Consol.to Consol.
Except for those permitted or required under SME-FRS, incl.
• PPE exchanged-in• Finance lease• Investment acquired
by share or by asset exchange
• Revenue• Foreign currency
monetary items
Except for those permitted or required under SME-FRS, incl.
• PPE exchanged-in• Finance lease• Investment acquired
by share or by asset exchange
• Revenue• Foreign currency
monetary items
• No true and fair• Only properly
presented and/or true and correct
• No true and fair• Only properly
presented and/or true and correct
• Either not choose SME-FRS, or
• Apply to only separate financial statements
• Either not choose SME-FRS, or
• Apply to only separate financial statements
© 2005 Nelson 26
4. Choose or Not Choose ……
Choose
Not Not ChooseChoose
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4. Choose or Not Choose ……
• Some points to be considered in transiting to SME-FRF and SME-FRS:
Self-containedSelfSelf--containedcontained Historical Cost Convention
Historical Cost Historical Cost ConventionConvention
Properly Present Only
Properly Properly Present OnlyPresent Only
Not Applicable to Consol.
Not Applicable Not Applicable to Consol.to Consol.
Users’ PerceptionUsers’ Perception
Shareholders’ agreements
Shareholders’ agreements
Entity’s future development plan
Entity’s future development plan
All qualifying criteria
All qualifying criteria
• Would users, say creditors and bankers satisfy only “properly presented”?
• Consents from all shareholders continuously?
• Any expansion, say purchase of subsidiary, increase in revenue, assets and employee?
• Can all the criteria be met continuously?
Pros and ConsPros and Cons
Switching – cost and effort
Switching – cost and effort
More discussion ……
© 2005 Nelson 28
Pros and Cons (If Chosen)
• Saving the cost of compliance• Following historical cost convention – simple• No deferred tax is required• No cash flow statement is required• No separate statement of changes in equity is required• Fair value accounting on financial instruments can be
avoided• Separation of lease of land and building is not required• Leasehold land in HK can still be classified as PPE• Fair value accounting on investment property can be
avoided• Less disclosure requirements• Discounting is not required (but permitted in some
cases)• In 2005, directly switch from HK SSAP to SME-FRS• More ……
Tax Implication!
Tax Implication!
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Pros and Cons (If Chosen)
• No more revaluation is allowed– say, market value of property cannot be reflected in
the balance sheet• No “true and fair view” on the financial statements• Resulting image to the external users, say
bankers and creditors• All shareholders’ continuous agreement required• Less guidance on some items
– say, future cash flow, employee benefits, trade and other receivable
• Has to fulfil the size test (for non-HK incorporated entity)• Subject to uncertainty – possible changes
imposed by IASB in 2007• Applicable to single entity only• Additional cost may be incurred in switching to
and from Main HKFRS ……Additional
switching costAdditional
switching cost
© 2005 Nelson 30
HKFRS(Main HKFRS)
HKFRS(Main HKFRS)
Switching – Cost and Effort
Transitional Provisions (as discussed)
• From Main HKFRS to SME-FRSRetrospectively application
• From SME-FRS to Main HKFRSFollowing HKFRS 1
SME-FRSSME-FRS
Additional switching cost
Additional switching cost
As a change in accounting policy• “As if” always been in used• Adjust opening balance of reserves for
the earlier period presented• Adjust all comparatives
Impose detailed guidance with• some exemptions, say at the transition
date, fair value as deemed cost, foreign exchange reserves deemed as zero
• some additional requirements, say reconciliation of equity and profit from SME-FRS to Main HKFRS
Undue cost or effort
exemption
Undue cost or effort
exemption
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HKFRS(Main HKFRS)
HKFRS(Main HKFRS)
Switching – Cost and Effort
SME-FRSSME-FRS
Additional switching cost
Additional switching cost
• Restatement of opening balances and comparative amounts is time-consuming and costly
• Information must be available for both 2 sets of GAAP• Keeping up to date with the developments of 2 sets of GAAP is also
required• Cost may be significant
– especially if frequent switching is resulted by circumstances (something out of company’s control)
Undue cost or effort
exemption
Undue cost or effort
exemption
© 2005 Nelson 32
HKFRS(Main HKFRS)
HKFRS(Main HKFRS)
Switching – Cost and Effort
Main HKFRS before 2005
Main HKFRS before 2005
HK SSAPbefore 2005HK SSAP
before 2005HKFRS
(Main HKFRS)HKFRS
(Main HKFRS)
HK SSAPbefore 2005HK SSAP
before 2005
SME-FRSSME-FRS
If you are in 2005/06 ……
Should be
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Switching – Cost and Effort
HKFRS(Main HKFRS)
HKFRS(Main HKFRS)
HK SSAPbefore 2005HK SSAP
before 2005
SME-FRSSME-FRS
If you are in 2005/06 ……
Should be
© 2005 Nelson 34
Switching – Cost and Effort
1 Presentation of Financial Statements2 Accounting Policies, Changes in Accounting Estimates and Errors 3 Property, Plant and Equipment4 Intangible Assets5 Leases6 Investments7 Inventories8 Construction Contracts9 Impairment of Assets10 Provision, Contingent Liabilities and Contingent Assets11 Revenue12 Government Grants and Other Government Assistance13 Borrowing Costs14 Income Taxes15 The Effects of Changes in Foreign Exchange Rates 16 Related Party Disclosures17 Events After the Balance Sheet Date
9 Sections out of 17 sections in SME-FRS with similar contents as HK SSAP
• No material differences from HK SSAP are noted on these sections.
• How are the remaining sections?
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Switching – Cost and Effort
• Updated to HKAS 24 with new disclosures16 Related Party Disclosures• No deferred tax required14 Income Taxes• No CGU concept and no discounting required9 Impairment of Assets• Significant difference from HK SSAP 246 Investments
• Follow SSAP 29• Update the definitions as HKAS 38• Revaluation model not allowed under SME-FRS
4 Intangible Assets
• Follow SSAP 17 (leasehold land still PPE)• Not updated to HKAS 16• Extended to investment property• Revaluation model not allowed under SME-FRS
3 Property, Plant and Equipment
• Updated to HKAS 8 (no fundamental errors & etc.)• Emphasise historical cost convention• Having “undue cost and effort” exemption
2 Accounting Policies, Changes in Accounting Estimates and Errors
• Only “true and correct” and/or “properly present”• Cash flow exempted in SME-FRS• Current assets and liabilities updated as HKAS 1• New disclosure required in SME-FRS
1 Presentation of Financial Statements
Differences from HK SSAP- Summary for Reference
Remaining 8 sections with differences from HK SSAP
• Adjustments mainly on deferred tax, investments, revaluation ……
• They are still needed even SME-FRS will not be adopted ……
© 2005 Nelson 36
Switching – Cost and Effort
If adopted SME-FRS in 2005/06, orif continued HKFRS in 2005/06,
Then, after 2005/06 ……
HKFRS(Main HKFRS)
HKFRS(Main HKFRS) SME-FRSSME-FRS
HK SSAPbefore 2005HK SSAP
before 2005
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Switching – Cost and Effort
1 Presentation of Financial Statements2 Accounting Policies, Changes in Accounting Estimates and Errors 3 Property, Plant and Equipment4 Intangible Assets5 Leases6 Investments7 Inventories8 Construction Contracts9 Impairment of Assets10 Provision, Contingent Liabilities and Contingent Assets11 Revenue12 Government Grants and Other Government Assistance13 Borrowing Costs14 Income Taxes15 The Effects of Changes in Foreign Exchange Rates16 Related Party Disclosures17 Events After the Balance Sheet Date
7 Sections out of 17 sections in SME-FRS with similar contents as HKAS
• No material differences from HKAS are noted on these sections.
• How are the remaining sections?
© 2005 Nelson 38
Switching – Cost and Effort
• Benchmark (expense) treatment in HKAS 2313 Borrowing cost
• Leasehold land without title pass not PPE in HKAS 175 Leases
• Functional currency incorporated in HKAS 2115 Foreign Exchange Rates • No deferred tax required in SME-FRS14 Income Taxes
• No CGU concept and no discounting required9 Impairment of Assets• Significant difference from HKAS 396 Investments
• Follow SSAP 29, except definitions• Indefinite useful life allowed in HKAS 38• Revaluation model not allowed in SME-FRS
4 Intangible Assets
• Follow SSAP 17 (leasehold land still PPE)• No clear component accounting adopted in SME-FRS• Investment property is in HKAS 40• Revaluation model not allowed in SME-FRS
3 Property, Plant and Equipment
• Emphasise historical cost convention• “Undue cost and effort” exemption in SME-FRS
2 Accounting Policies, Changes in Accounting Estimates and Errors
• Only “true and correct” and/or “properly present”• Cash flow exempted in SME-FRS• More disclosure requirements in HKAS 1
1 Presentation of Financial Statements
Differences from HKAS- Summary for Reference
Remaining 10 sections with differences from HKAS
• More and different kinds of adjustments are required when switching back to HKAS
• More cost and effort?
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© 2005 Nelson 39
Choose or Not Choose ……
HKFRS(Main HKFRS)
HKFRS(Main HKFRS)
HK SSAPbefore 2005HK SSAP
before 2005
SME-FRSSME-FRS
• Evaluate the pros and cons• Aware of the potential cost
Make a choice appropriate for you!
Make a choice appropriate for you!
© 2005 Nelson 40
HK SME Financial Reporting Framework and Standard 30 November 2005
New IFRS New IFRS
We are small! HELP!
Nelson Lam Nelson Lam [email protected]
Updated version of the slides and a more detailed version can be found in
www.NelsonCPA.com.hk