microsoft powerpoint - acca-20051130-(presented)

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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



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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© 2005 Nelson 5




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


SME Financial Reporting Framework




• 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


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© 2005 Nelson 7

2. SME Framework



• Sets out Conceptual BasisConceptual Basis

Qualifying Criteria (Qualifying Entity)Qualifying Criteria (Qualifying Entity)


© 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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© 2005 Nelson 9

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


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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© 2005 Nelson 11

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







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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© 2005 Nelson 13

• 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




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


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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© 2005 Nelson 15


• 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



No Public Accountability


Different from S.141DDifferent from S.141D

In writing? In writing? Not mention!

© 2005 Nelson 16

All Owners Agreed



No Public Accountability


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


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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© 2005 Nelson 17

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








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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© 2005 Nelson 19


• 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)


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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© 2005 Nelson 21

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





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© 2005 Nelson 23

3. SME Standard in HK





• Dividedinto

DefinitionsDefinitions



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


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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© 2005 Nelson 25

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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© 2005 Nelson 27

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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© 2005 Nelson 29

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


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


exemption

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© 2005 Nelson 31

HKFRS(Main HKFRS)

HKFRS(Main HKFRS)


SME-FRSSME-FRS



• 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)


exemption


exemption

© 2005 Nelson 32

HKFRS(Main HKFRS)

HKFRS(Main HKFRS)


Main HKFRS before 2005

Main HKFRS before 2005

HK SSAPbefore 2005HK SSAP

before 2005HKFRS

(Main HKFRS)HKFRS

(Main HKFRS)


before 2005

SME-FRSSME-FRS

If you are in 2005/06 ……

Should be

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© 2005 Nelson 33


HKFRS(Main HKFRS)

HKFRS(Main HKFRS)


before 2005

SME-FRSSME-FRS

If you are in 2005/06 ……

Should be

© 2005 Nelson 34


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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© 2005 Nelson 35


• 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


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


before 2005

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© 2005 Nelson 37


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


• 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)


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

microsoft powerpoint - acca-20051130-(presented)

Documents

choiceentitysmefrf smefrfand

onesuch financial year

reporting need

orand financial statement

hk ssap hkfrs

main of hkasssap hkfrs

qualifying entities

main principlesneed