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Hong Kong
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Update for May 2008
Update for December 2007
Update for September 2007
Update for April 2007
Update for February 2007
Update for October 2006
Update for July 2006
Update for April 2006
Update for January 2006
Update for November 2005
Update for August 2005
Update for June 2005
Update for May 2005
Update for April 2005
Update for March 2005
Update for January 2005
Update for October 2004
Update for September 2004
Update for July 2004
Update for April 2004
Update for January 2004
Update for July 2003
Update for January 2003
Update for October 2002
Update for July 2002
Update for April 2002
Update for January 2002
Update for October 2001
Update for July 2001
Update for April 2001
Update for January 2001
Update for October 2000
Hong Kong:
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Financial Reporting Framework in Hong Kong
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Mandatory Sources of GAAP
There are both mandatory and advisory sources of generally accepted accounting principles (GAAP) in Hong Kong. Mandatory sources are the following:
- Companies Ordinance. Legal requirements include maintenance of accounting records, content of financial statements, and audits of companies incorporated in Hong Kong.
- Hong Kong Financial Reporting Standards (HKFRSs). The term HKFRSs includes both Standards (HKFRSs andHKASs) and Interpretations (HK(IFRIC)-Ints, HK(SIC)-Ints, and HK-Ints).
- Standards and Interpretations are developed by the Financial Accounting Standards Committee of the Hong Kong Institute of Certified Public Accountants (HKICPA).
- Standards and Interpretations are virtually identical to their international equivalents (International Financial Reporting Standards) except for three Hong Kong Interpretations (HK-Ints) which have been developed locally by the HKICPA.
- Standards and Interpretations are primarily identical to their international equivalents (International Financial Reporting Standards).
- Listing Rules. The Stock Exchange of Hong Kong Limited (SEHK) has adopted rules governing the listing of securities on its Main Board (the Listing Rules) and on its Growth Enterprise Market (the GEM Rules). These include some accounting and disclosure requirements.
Other Sources of GAAP
Hong Kong Accounting Standard 8 Accounting Policies, Changes in Accounting Estimates and Errors (HKAS 8, which is identical to IAS 8) states:
10. In the absence of a Standard or an Interpretation that specifically applies to a transaction, other event or condition, management shall use its judgement in developing and applying an accounting policy that results in information that is:
- (a) relevant to the economic decision-making needs of users; and
- (b) reliable, in that the financial statements:
- (i) represent faithfully the financial position, financial performance and cash flows of the entity;
- (ii) reflect the economic substance of transactions, other events and conditions, and not merely the legal form;
- (iii) are neutral, ie free from bias;
- (iv) are prudent; and
- (v) are complete in all material respects.
11. In making the judgement described in paragraph 10, management shall refer to, and consider the applicability of, the following sources in descending order:
- (a) the requirements and guidance in Standards and Interpretations dealing with similar and related issues; and
- (b) the definitions, recognition criteria and measurement concepts for assets, liabilities, income and expenses in the Framework.
12. In making the judgement described in paragraph 10, management may also consider the most recent pronouncements of other standard-setting bodies that use a similar conceptual framework to develop accounting standards, other accounting literature* and accepted industry practices, to the extent that these do not conflict with the sources in paragraph 11.
*In the context of Hong Kong, other accounting literature includes Accounting Guidelines and Accounting Bulletins.
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The Accounting Guidelines and Accounting Bulletins referred to in the footnote to paragraph 12 of HKAS 8 (above) are 'best practice' guidance documents that have been published by the HKICPA to assist its members in applying HKFRSs. Accounting Guidelines, and Industry Accounting Guidelines, are persuasive in intent and, whilst not mandatory, should normally be followed. Accounting Bulletins are intended to assist members of the HKICPA in dealing with accounting issues and to stimulate debate on subjects of topical interest.
TechWatch is a monthly publication prepared by the HKICPA to alert HKICPA members to topics and issues that impact on accountants and their working environment. It is intended for general guidance only.
GAAP for Small and Medium-sized Entities
The HKICPA released its own Small and Medium-sized Entity Financial Reporting Framework and Financial Reporting Standard (SME-FRF & FRS) in August 2005. The SME-FRF & FRS became effective for optional use by a qualifying entity's first financial statements that cover a period beginning on or after 1 January 2005. Entities that qualify include Hong Kong incorporated companies that meet certain legal requirements and overseas companies that have no public accountability, meet size requirements and where the owners agree to use the SME-FRF & FRS.
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Background: Financial Reporting in Hong Kong
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We have prepared a comprehensive page of background information on financial reporting in Hong Kong. Click to Go to Hong Kong Background Page.
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Comparison of Hong Kong Financial Reporting Standards and IFRSs
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Comparison of IFRSs and Hong Kong Financial Reporting Standards, 1 January 2008 (PDF 36k), prepared by the Hong Kong Institute of CPAs.
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January 2008: Financial Reporting in Hong Kong
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In January 2008, Deloitte (China) published Financial Reporting in Hong Kong. This book is aimed at professionals engaged in preparing, analysing, and interpreting financial information prepared in accordance with the Hong Kong financial reporting framework. Financial Reporting in Hong Kong:
- Deals comprehensively with Hong Kong Financial Reporting Standards (HKFRSs) and other pronouncements issued up to 31 August 2007, including those that are not yet mandatory
- Addresses the legal and regulatory requirements of Hong Kong's financial reporting environment
- Includes a high-level comparison between HKFRSs and both pre-2007 PRC GAAP and new Chinese Accounting Standards that became effective for listed companies in 2007.
Financial Reporting in Hong Kong may be purchased through your contact at Deloitte or through CCH Online or by phone at +852 800 968 667 or by email: support@cch.com.hk (cite product code 1779H). |
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Financial Reporting in Hong Kong – Illustrative Financial Statements and Disclosure Checklist 2007 |
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In February 2008 Deloitte (China) published Financial Reporting in Hong Kong – Illustrative Financial Statements and Disclosure Checklist 2007. This book contains:
- An illustrative 2007 annual report issued by a fictitious listed company in accordance with HKFRSs and the disclosure requirements of Hong Kong Companies Ordinance and Listing Rules
- A comprehensive checklist to guide you in meeting the applicable presentation and disclosure requirements
- An overview on HKFRSs that are effective for annual periods beginning on 1 March 2006 or after, as well as an update on Listing Rules.
To assist you with the challenges of HKFRS 7, first effective after 1 January 2007, detailed guidance and illustrative examples are provided. This book compliments Financial Reporting in Hong Kong (see immediately above). Printed copies of the book may be purchased through your contact at Deloitte or through CCH Online or by phone at +852 800 968 667 or by email: support@cch.com.hk (cite product code 1790H).
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May 2008 Update
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Study on impact of converging to IFRSs in Hong Kong
The Hong Kong Institute of Certified Public Accountants has published Consultancy on the Impact of HKFRS Convergence Project: A Review of the Hang Seng Index Constituent Stocks. The Hang Seng Index (HSI) is an index currently reflecting 43 leading stocks listed on the Stock Exchange of Hong Kong. Hong Kong Financial Reporting Standards (HKFRSs) were fully converged with IFRSs effective 1 January 2005. The HKICPA commissioned this research to assess the impact on HSI constituent companies of adopting the converged HKFRSs in 2005 and to identify the resulting changes in operating performance and financial position. The study also identified specific standards that contributed the most to those changes. The study focussed on the 32 HSI companies that adopted HKFRSs in 2005 (others had elected earlier adoption). The study is copyright HKICPA, and we are grateful to them for giving us permission to post it on IAS Plus. Click to Download the HKICPA Study (PDF 1,472k). Selected findings:
Impact on profit:
- Average increase in net income was 53.63% (median increase 2.59%) – hence wide disparity in impact.
- The five standards that had the greatest effect on profit were:
- HKAS 32 HKAS 39 (Financial Instruments),
- HKFRS 2 (Share-based Payment),
- HKAS 40 (Investment Property) and and Int 21 (Income Taxes – Recovery of Revalued Non-Depreciable Assets),
- HKAS 17 (Leases), and
- HKFRS 3 (Business Combinations) and HKAS 36 (Impairment of Assets)
- On average, HKFRS 2 and HKAS 17 reduced profit, while the others increased it.
- The study did not find any discernible relationships between the magnitude of profit change and company characteristics such as size, debt level, profitability level, or change before the new standards.
Impact on opening equity:
- On average, the new standards decreased opening equity by 2.00% (median decrease 0.92%).
- The five standards that had the greated effect on opening equity were:
- HKAS 32 and HKAS 39 (Financial Instruments),
- HKAS 40 (Investment Property) and Int 21 (Income Taxes – Recovery of Revalued Non-Depreciable Assets),
- HKAS 17 (Leases),
- HKAS 16 (Property, Plant and Equipment), and
- HKFRS 3 (Business Combinations) and HKAS 36 (Impairment of Assets)
- On average, HKAS 32/HKAS 39 and HKFRS 3/HKAS 36 reduced equity, while the others increased it.
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December 2007 Update
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December 2007: HK-PRC joint declarations on accounting and auditing standards
The mainland Chinese and Hong Kong accounting and auditing standard setters have signed joint declarations regarding mutual recognition of their accounting and auditing standards.
Under the Joint Declaration on Accounting Standards (PDF 48k), the two parties agree:
- That there are only two substantive differences between Hong Kong Financial Reporting Standards (HKFRSs, which are virtually identical to IFRSs) and the new Chinese Accounting Standards (CASs*) that went into effect in 2007. The differences involve related party disclosures and reversal of impairment losses.
- That financial statements prepared using CASs, after adjustments for those two differences, 'should achieve substantially the same effect'.
- To work to eliminate the two differences and to maintain ongoing convergence of their accounting standards.
- To work to obtain mutual exemption from the relevant papers on the Hong Kong and Chinese CPA examinations.
- To work obtain mutual acceptance of each other's accounting standards for purposes of securities listings. [Currently, mainland Chinese companies listed in Hong Kong must use either HKFRSs or IFRSs].
*CASs are also sometimes referred to as Accounting Standards for Business Enterprises or ASBEs
Under the Joint Declaration on Auditing Standards (PDF 44k), the two parties agree:
- That a CPA applying either Chinese or Hong Kong auditing standards will be complying with the same requirements and, therefore, should reach the same conclusions for assurance or other related services engagements, including audits of financial statements.
- To maintain ongoing convergence of their auditing standards.
- To work to obtain mutual exemption from the accounting papers on the Hong Kong and Chinese CPA examinations.
- To work obtain mutual acceptance of each other's auditing standards for purposes of securities listings.
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September 2007 Update
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Consultation Paper on Quarterly and Half-yearly Reporting for Listed Companies
On 31 August 2007, the Hong Kong Stock Exchange published a Consultation Paper on Periodic Financial Reporting (PDF 248k). The paper sets out HKEx's proposals to:
- Shorten the half-year and annual reporting deadlines for Main Board issuers from three months to two months, starting wtih periods ending on or after 30 June 2008 (two years later for small listed companies).
- Introduce mandatory quarterly reporting for Main Board issuers. Quarterly reporting has been a recommended practice since 2005, starting wtih quarterly periods ending on or after 30 September 2008 (two years later for small listed companies). See below for details.
- Align the GEM quarterly reporting requirements with the proposed new Main Board requirements, effective for GEM issuers' three months quarterly accounting periods ending on or after 30 September 2010.
Responses are requested by 5 November 2007 via a Questionnaire (DOC 230k) that accompanies the consultation paper.
Proposed Quarterly Reporting Requirements for Listed Companies
The Exchange proposes to require Main Board issuers to publish (via posting on the Exchange's website and on the company's website) quarterly reports within 45 days after the end of the relevant quarter. They would not be required to be audited, but would have to include certain key information, including:
- A condensed consolidated income statement, with comparatives;
- A condensed consolidated balance sheet, with comparatives;
- A condensed consolidated cash flow statement, with comparatives;
- A concise and fair business review covering:
- (i) a review of significant developments of the business of the listed issuer and its subsidiaries during the financial period and of the financial position of the group at the end of the period;
- (ii) details of important events and transactions affecting the Group which have occurred between the end of the financial period and the date the report is released i.e. details of significant post balance sheet events; and
- (iii) an indication of future developments in the business of the Group, including prospects for the current financial year.
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April 2007 Update
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In January 2007, HK(IFRIC)-Int 11, IFRS 2 - Group and Treasury Share Transactions was released based on its international equivalent, IFRIC 11. Further, in March 2007, HKFRS 8 Operating Segments and HK(IFRIC)-Int 12 Service Concession Arrangements were also released, based on their international counterparts IFRS 8 and IFRIC 12.
On 17 and 18 January 2007 Hong Kong was the location of the round-table discussions by the IASB and the US Financial Accounting Standards Board (FASB) on measurement in conjunction with their joint conceptual framework project.
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February 2007 Update
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The fourth quarter of 2006 was quiet, and no new Hong Kong Standards, Interpretations or Amendments were released. However HK(IFRIC)-Int 11, IFRS 2 - Group and Treasury Share Transactions was released in January 2007 based on its international equivalent, IFRIC 11. The other two new IFRSs released in the fourth quarter of 2006 (namely IFRS 8 and IFRIC 12) are also expected to be adopted by the HKICPA in early 2007.
During the fourth quarter of 2006, the HKICPA invited comments on the IASB discussion paper on fair value measurements.
On 17 and 18 January 2007 Hong Kong was the location of the round-table discussions by the IASB and Financial Accounting Standards Board (FASB) on measurement in conjunction with their joint conceptual framework project.
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October 2006 Update
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During September 2006, the HKICPA issued a new interpretation, HK (IFRIC)-Int 10 Interim Financial Reporting and Impairment, identical to the international interpretation IFRIC 10. HK(IFRIC)-Int 10 addresses an apparent conflict between the requirements of HKAS 34 Interim Financial Reporting and those in other standards on the recognition and reversal in financial statements of impairment losses on goodwill and certain financial assets.
HK(IFRIC)-Int 10 concludes that:
- An entity shall not reverse an impairment loss recognised in a previous interim period in respect of goodwill or an investment in either an equity instrument or a financial asset carried at cost.
- An entity shall not extend this consensus by analogy to other areas of potential conflict between HKAS 34 and other standards.
HK(IFRIC)-Int 10 is effective for annual periods beginning on or after 1 November 2006. Earlier application is encouraged.
During the third quarter of 2006, the HKICPA also invited comments on four IFRS proposals:
- IASB Exposure Draft of Proposed Amendments to IAS 32 Financial Instruments: Presentation and IAS 1 Presentation of Financial Statements - Financial Instruments Puttable at Fair Value and Obligations Arising on Liquidation
- Discussion Paper on Preliminary Views on an Improved Conceptual Framework for Financial Reporting: The Objective of Financial Reporting and Qualitative Characteristics of Decision-useful Financial Reporting Information
- IFRIC Draft Interpretation D20 Customer Loyalty Programmes
- IFRIC Draft Interpretation D19 IAS 19 The Asset Ceiling Availability Of Economic Benefits And Minimum Funding Requirements
In October 2006, a new Preface to Hong Kong Financial Reporting Standards (HKFRSs) was issued. The Preface sets out the objectives and the due process of the Council of the HKICPA in respect of setting HKFRSs and explains the scope, authority, and timing of application of HKFRSs.
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July 2006 Update
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In May 2006, the Hong Kong Institute of CPAs issued two new Interpretations:
- HK(IFRIC)-Int 8 Scope of HKFRS 2; and
- HK(IFRIC)-Int 9 Reassessment of Embedded Derivatives
Both are fully converged with the international interpretations IFRIC 8 and IFRIC 9.
HK(IFRIC)-Int 8 clarifies that HKFRS 2 Share-based Payment applies to arrangements where an entity makes share-based payments for apparently nil or inadequate consideration. It explains that, if the identifiable consideration given appears to be less than the fair value of the equity instruments granted or liability incurred, this situation typically indicates that other consideration has been or will be received and HKFRS 2 therefore applies. HK(IFRIC)-Int 8 is effective for annual periods beginning on or after 1 May 2006, with earlier application encouraged.
HK(IFRIC)-Int 9 addresses whether the treatment of an embedded derivative needs to be reassessed subsequently if certain events occur. It concludes that an entity must assess whether an embedded derivative is required to be separated from the host contract and accounted for separately 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 which case reassessment is required. HK(IFRIC)-Int 9 is effective for annual periods beginning on or after 1 June 2006, with earlier application encouraged.
The HKICPA also revised HKFRS 1 First-time Adoption of Hong Kong Financial Reporting Standards. The revised standard consolidates all the necessary changes resulting from the issue of new standards, interpretations and amendments to standards during 2004 and 2005 (e.g. HKFRS 6 and 7, HK (IFRIC) - Int 1 and 4, Amendments to HKAS 19 and HKAS 39).
During the second quarter of 2006, the HKICPA also invited comments on two IFRS proposals:
- IASB Discussion Paper on Management Commentary
- IASB Exposure Draft of Proposed Amendments to IAS 23 Borrowing Costs
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April 2006 Update
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During January 2006, the Hong Kong Institute of Certified Public Accountants (HKICPA) issued a new Interpretation, HK(IFRIC)-Int 7 Applying the Restatement Approach under IAS 29 Financial Reporting in Hyperinflationary Economies. HK(IFRIC)-Int 7, based on IFRIC 7, contains guidance on how an entity would restate its financial statements in the first year it identifies the existence of hyperinflation in the economy of its functional currency. The Interpretation is effective for annual periods beginning on or after 1 March 2006.
Also in January, Amendments to HKAS 21 The Effects of Changes in Foreign Exchange Rates and HKAS 39 Financial Instruments: Recognition and Measurement were released. The Amendment to HKAS 21 was released in response to an identical amendment to IAS 21 and is effective for annual periods beginning on or after 1 January 2006. It clarifies the requirements of HKAS 21 regarding an entity's investment in a foreign operation and associated hedges of that investment. The Amendment to HKAS 39 amends the transitional provisions for available-for-sale assets set out in paragraph 104(d) of HKAS 39.
In March 2006, Accounting Guideline AG 7 Preparation of Pro Forma Financial Information for Inclusion in Investment Circulars was released. AG 7 is effective for engagements where the investment circular is dated on or after 1 April 2006. The Guideline is intended primarily for the purpose of assisting listed issuers or listing applicants in preparing and presenting pro forma financial information under the Stock Exchange Listing Rules.
The HKICPA also adopted the IASB Revised Guidance on Implementing IFRS 4 (the international equivalent to HKFRS 4). The revised guidance applies when an entity adopts HKFRS 7 Financial Instruments: Disclosures, which is effective for annual periods beginning on or after 1 January 2007.
During the first quarter of 2006, the HKICPA also invited comments on three IFRS proposals:
- IFRS ED 8 Operating Segments
- IFRIC Draft Interpretation D18 Interim Financial Reporting and Impairment
- Proposed Amendments to IAS 1 Presentation of Financial Statements
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January 2006 Update
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During November 2005 the Hong Kong Institute of CPAs (HKICPA) issued a new Accounting Guideline 5 Merger Accounting for Common Control Combinations (AG 5) and also amended the following Standards
- HKAS 16 Property, Plant and Equipment
- HKAS 27 Consolidated and Separate Financial Statements
- HKAS 40 Investment Property
- HKFRS 3 Business Combinations
AG 5 sets out the basic principles and procedures of merger accounting when recognising a common control combination and replaces SSAP 27 Accounting for Group Reconstructions, the last remaining SSAP.
As a result of the Companies (Amendment) Ordinance 2005 (see the November 2005 IAS Plus Newsletter for details), HKAS 27 and HKFRS 3 have been amended to limit the application of the special provisions for Hong Kong incorporated companies currently provided within the Standards to annual periods beginning before 1 January 2006 and to require retrospective application of the amended Standards in annual periods beginning on or after 1 January 2006.
The HKICPA issued new transitional provisions for HKAS 16 and HKAS 40 concerning entities that had previously followed the scope exemption from compliance with the requirements of SSAP 13 Accounting for Investment Properties and SSAP 17 Property, Plant and Equipment, for example, certain not-for-profit organisations. The new provisions allow such entities to deem the carrying amount of an item of PP&E or investment property immediately before the application of HKAS 16 and HKAS 40 as the cost of that item.
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November 2005 Update
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During July 2005, the HKICPA issued the following new amendments to standards, based on the equivalent international amendments issued by the IASB:
- Amendments to HKFRS 1 First-time Adoption of Hong Kong Financial Reporting Standards and 6 and Exploration for and Evaluation of Mineral Resources
- Two Amendments to HKAS 39 Financial Instruments: Recognition and Measurement: - one for Cash Flow Hedge Accounting of Forecast Intragroup Transactions and the other for The Fair Value Option
Also during July 2005, the HKICPA adopted the IASB's June 2005 decision to withdraw, with immediate effect, HK(IFRIC) - 3 Emission Rights.
The Companies (Amendment) Ordinance 2005, which was gazetted on 8 July 2005, amends the definition of 'subsidiary' in the Companies Ordinance so as to enable Hong Kong incorporated companies to use the definition of 'subsidiary' in IAS 27 Consolidated and Separate Financial Statements (and the equivalent Hong Kong Standard, HKAS 27) for the purpose of preparing group accounts. As a result of the amendment, a parent company, including holding companies incorporated in Hong Kong, will consolidate all entities over which it has control.
During August 2005, the HKICPA issued its Financial Reporting Framework and Standard for Small and Medium-sized Entities.
During September 2005 the HKICPA issued the following new standards, interpretations, and amendments to standards, based on the equivalent international requirements issued by the IASB:
- HKFRS 7 Financial Instruments: Disclosures
- HK(IFRIC) - Int 6, Liabilities Arising from Participating in a Specific Market - Waste Electrical and Electronic Equipment
- Amendment to HKAS 1 Presentation of Financial Statements - Capital Disclosures
- Amendments to HKAS 39 Financial Instruments: Recognition and Measurement and HKFRS 4 and Insurance Contracts - Financial Guarantee Contracts
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August 2005 Update
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The Hong Kong Institute of Certified Public Accountants has issued its Financial Reporting Framework and Standard for Small and Medium-sized Entities.
The standard is applicable to the following companies:
- Hong Kong companies that prepare financial statements under section 141D of the Companies Ordinance. These are private companies where all owners agree to apply that section, and
- Overseas incorporated entities that do not have public accountability and qualify on the basis of size thresholds given in the Standard.
The new standard is effective for qualifying entities with financial statements covering a period beginning on or after 1 January 2005. Earlier application is permitted.
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June 2005 Update
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Hong Kong interview with Sir David Tweedie
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We have posted "Take It from the Top", an Interview with IASB Chairman Sir David Tweedie (PDF 97k) from the June 2005 issue of A Plus, the newly revamped magazine of the Hong Kong Institute of Certified Public Accountants (copyright 2005 by HKICPA and posted with permission). Hong Kong has adopted every IFRS word for word as Hong Kong Financial Reporting Standards effective in 2005, replacing old Hong Kong GAAP. Issues that Sir David addresses in the interview include the pace of change, the need for further improvements in existing standards, bringing the US on board with IFRSs, and the need for simplified standards for small and medium-sized entities. |
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May 2005 Update
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SEHK Adopts IFRS Transition Disclosures
The Stock Exchange of Hong Kong has adopted IFRS Transition Disclosure Requirements for initial listing documents and circulars (PDF 49k). These disclosures relate to the impact of the transition in Hong Kong, as of 1 January 2005, to accounting standards that (except for effective dates) are word-for-word equivalents of IFRSs.
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April 2005 Update
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During January 2005, the Hong Kong Institute of Certified Public Accountants (HKICPA) issued guidance encouraging preparers to disclose the impact of new and revised Hong Kong Financial Reporting Standards and Hong Kong Accounting Standards effective for accounting periods beginning on or after 1 January 2005.
During February 2005 the HKICPA issued the following new standards, interpretations, and amendments to standards/interpretations, based on the equivalent international standards issued by the IASB:
- HKFRS 6, Exploration for and Evaluation of Mineral Resources
- HKFRS-Int 2, Members' Shares in c-operative Entities and Similar instruments
- HKFRS-Int 3, Emission Rights
- HKFRS-Int 4, Determining whether an Arrangement contains a Lease
- HKFRS-Int 5, Rights to Interests arising from Decommissioning, Restoration and Environmental Rehabilitation Funds
- Amendments to HKAS 19, Employee Benefits-Actuarial Gains and Losses, Group Plans and Disclosures
- Amendments to HKAS 39, Financial Instruments: Recognition and Measurement-Transition and Initial Recognition of Financial Assets and Financial Liabilities.
- Amendments to HKAS Int 12, Scope of HKAS Int 12 Consolidation-Special Purpose Entities
In March 2005, the HKICPA issued its final proposal in the form of an Exposure Draft on the financial reporting framework and standard for small and medium- sized entities (SME). It is largely based on the Institute's Consultation Paper, which was issued in June 2004.
Also in March 2005, the Institute issued Interpretation 24, Revenue-Pre-completion Contracts for the Sale of Development Properties, which will lead to more consistent accounting by property developers, and an Exposure Draft that contains a proposed Accounting Guideline on Merger Accounting. The Exposure Draft sets out the proposed basic principles and procedures of merger accounting and will result in the withdrawal of SSAP 27, Accounting for Group Reconstructions when it is finalised.
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March 2005 Update
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On 2 March 2005, the Council of the Hong Kong Institute of CPAs issued for comment Exposure Draft: Proposed Small and Medium-sized Entity Financial Reporting Framework
and Financial Reporting Standard. Comments are requested by 30 April 2005. You can Download the Exposure Draft from the HKICPA website (PDF 781k).
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January 2005 Update
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In December 2004, the Hong Kong Institute of CPAs released the outstanding standards under its convergence policy. Therefore, the suite of standards Hong Kong accounting standards is fully harmonised with the International Financial Reporting Standards (IFRSs) issued by the IASB effective for financial reporting periods beginning on or after 1 January 2005.
All existing Statements of Standard Accounting Practice (SSAP) and Interpretations have been renamed as Hong Kong Accounting Standards (HKAS) and HKAS Interpretations (HKAS-Int), and their numbering has been aligned with the equivalent IAS and SIC Interpretations, respectively. The term Hong Kong Financial Reporting Standards (HKFRSs) will include all HKFRSs, HKASs, and Interpretations. The term Interpretations refers to both Interpretations of HKFRSs (HKFRS-Int) and Interpretations of HKASs (HKAS-Int). In future, new IFRSs and Interpretations of IFRSs (developed by the IFRIC) will be mirrored by the equivalent HKFRS and HKFRS-Int.
The HKFRSs released are fully converged with IFRSs, except for the ongoing exception that applies only to Hong Kong companies regarding which entities are subsidiaries for the purpose of preparing consolidated financial statements
The following HKFRSs, based on their equivalent IFRSs, were released in the final quarter of 2005:
- HKAS 7 Cash Flow Statements.
- HKAS 11 Construction Contracts.
- HKAS 12 Income Taxes.
- HKAS 14 Segment Reporting.
- HKAS 17 Leases.
- HKAS 18 Revenue.
- HKAS 23 Borrowing Costs.
- HKAS 24 Related Party Disclosures.
- HKAS 30 Disclosures in the Financial Statements of Banks and Similar Financial Institutions.
- HKAS 31 Investments in Joint Ventures.
- HKAS 34 Interim Financial Reporting.
- HKAS 37 Provisions, Contingent Liabilities and Contingent Assets.
- HKAS 40 Investment Property.
In October 2004 the HKICPA released two new SSAP interpretations:
- Interpretation 22 The Appropriate Policies for Infrastructure Facilities. Conclusion: The sinking fund method is not an appropriate method of depreciating or amortising infrastructure assets.
- Interpretation 23 The Appropriate Policies for Hotel Properties. Conclusion: Hotel Properties should be accounted for either as investment property or as property, plant, and equipment.
During December 2004, the HKICPA also released a number of interpretations based on the corresponding IFRS interpretations:
- HKAS-Int 10 Government Assistance - No Specific Relation to Operating Activities.
- HKAS-Int 13 Jointly Controlled Entities - Non-Monetary Contributions by Venturers.
- HKAS-Int 15 Operating Leases - Incentives.
- HKAS-Int 21 Income Taxes - Recovery of Revalued Non-Depreciable Assets.
- HKAS-Int 25 Income Taxes - Changes in the Tax Status of an Enterprise or its Shareholders.
- HKAS-Int 27 Evaluating the Substance of Transaction Involving the Legal Form of a Lease.
- HKAS-Int 29 Disclosure - Service Concession Arrangements.
- HKAS-Int 31 Revenue - Barter Transactions Involving Advertising Services.
- HKAS-Int 32 Intangible Assets - Web Site Costs.
In December 2004, the HKICPA announced that by mid-2005 it would release its final financial reporting framework and standards for small and medium-sized entities, and that those standards will apply to the financial statements of qualifying entities covering reporting periods that begin on or after 1 January 2005.
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October 2004 Update
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During August 2004, the HKICPA issued the following standards and interpretation, which are all available on its website:
- HKAS 26, Accounting and Reporting by Retirement Benefit Plans
- HKAS 36, Impairment of Assets
- HKAS 38, Intangible Assets
- HKFRS 3, Business Combinations
- HKFRS 4, Insurance Contracts
- HKFRS 5, Non-current Assets Held for Sale and Discontinued Operations
- HKFRS -Int 1, Changes in Existing Decommissioning, Restoration and Similar Liabilities
All of the above standards are effective for accounting periods beginning on or after 1 January 2005. HKAS 36, HKAS 38 and HKFRS 3 are effective for business combinations for which the agreement date is on or after 1 January 2005. The interpretation is effective for accounting periods beginning on or after 1 September 2004.
There are no major textual differences between the above standards and the relevant IFRS, other than to specify that a company incorporated under the Hong Kong Companies Ordinance does not consolidate a subsidiary failing to meet the definition of a subsidiary under the Ordinance.
Some of the significant changes from current Hong Kong GAAP proposed by the above standards are:
- Amortisation of goodwill is prohibited; instead an annual impairment test is required. Negative goodwill is no longer recognised, resulting in an immediate credit to profit and loss.
- An acquirer must initially measure at fair value the identifiable assets acquired, and the liabilities and contingent liabilities incurred or assumed, in a business combination.
- New guidance and enhanced disclosures that apply to virtually all insurance contracts (including reinsurance contracts) that an entity issues and to reinsurance contracts that it holds.
- Assets that are expected to be sold and meet specific criteria must be presented separately and measured at the lower of carrying amount and fair value less costs to sell. Depreciation on these assets is prohibited.
Most Hong Kong accounting standards have changed in the past year, in most cases with very substantial changes in recognition and measurement principles, new disclosures, and elimination of accounting policy choices. While things will remain basically stable for 2005, further significant changes are pending. It is the policy of the Financial Accounting Standards Committee (FASC) of the HKICPA to achieve convergence "as far as practicable" with IFRSs, so every agenda project, exposure draft, or draft interpretation of the IASB automatically becomes an agenda project of the FASC and hence will become the foundation of a new or revised Hong Kong Financial Reporting Standard. There are currently a significant number of Hong Kong exposure drafts in issue, and these are available on the HKICPA website.
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September 2004 Update
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New Name: Hong Kong Institute of Certified Public Accountants
The Hong Kong Society of Accountants has officially changed its name to the Hong Kong Institute of Certified Public Accountants (HKICPA) and its members will carry the new title of certified public accountant rather than chartered accountant. New web address: www.hkicpa.org.hk.
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July 2004 Update
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In the second quarter of 2004, the Hong Kong Society of Accountants (HKSA) advanced significantly toward its objective to have Hong Kong's financial reporting standards 'fully converged' with IFRSs effective for accounting periods beginning on or after 1 January 2005 by adopting HKAS 32 Financial Instruments: Disclosure and Presentation and HKAS 39 Financial Instruments: Recognition and Measurement and proposing changes to certain existing Hong Kong's accounting standards, including radical changes for investment property accounting despite objection from some property companies. Details of standards/interpretation adopted and exposure drafts, consultation and discussion papers issued by the HKSA in the second quarter of 2004 are listed below:
Standards/Interpretation Adopted
- HKAS 1 Presentation of Financial Statements
- HKAS 2 Inventories
- HKAS 8 Accounting Policies, Changes in Accounting Estimates and Errors
- HKAS 10 Events after the Balance Sheet Date
- HKAS 16 Property, Plant and Equipment
- HKAS 21 The Effects of Changes in Foreign Exchange Rates
- HKAS 27 Consolidated and Separate Financial Statements
- HKAS 28 Investments in Associates
- HKAS 29 Financial Reporting in Hyperinflationary Economies
- HKAS 32 Financial Instruments: Disclosure and Presentation
- HKAS 33 Earnings Per Share
- HKAS 39 Financial Instruments: Recognition and Measurement
- HKFRS 2 Share-based Payment
- HKAS-Int-12 Consolidation - Special Purpose Entities
All the above are effective for accounting periods beginning on or after 1 January 2005. There are no major textual differences between the above standards/interpretation and the relevant standards and interpretation under the IFRS framework. However, unlike the transition provisions in IAS 32 and IAS 39, HKAS 32 and HKAS 39 are to be applied prospectively.
Exposure Drafts for Comment
- ED/HKAS 7 Cash Flow Statements
- ED/HKAS 17 Leases
- ED/HKAS 23 Borrowing Costs
- ED/HKAS 24 Related Party Disclosures
- ED/HKAS 30 Disclosures in the Financial Statement of Banks and Similar Financial Institutions
- ED/HKAS 31 Interests in Joint Ventures
- ED/HKAS 40 Investment Property
- ED/HKAS-Int 13 Jointly Controlled Entities - Non-Monetary Contributions by Ventures
- ED/HKAS-Int 15 Operating Leases - Incentives
- ED/HKAS-Int 21 Income Taxes - Recovery of Revalued Non-Depreciable Assets
The above exposure drafts are the last in series of documents that would finally result in Hong Kong's accounting standards being fully harmonized with the IFRS and eliminate, to the greatest extent, all differences that previously existed between the Hong Kong accounting standards and the equivalent IASs. Some of the significant changes proposed by the above exposure drafts are:
- Changes in fair values of investment property should be accounted through income statement under the fair value model.
- Borrowing costs will now need to be expensed as a preferred treatment but may be capitalized on meeting certain criteria as an allowed alternative treatment.
- Wholly-owned subsidiaries would be required to include related party disclosures in their financial statements.
- The introduction of proportionate consolidation option for joint venture accounting.
- Leasehold land should be classified as an operating lease unless title is expected to pass to the lessee by the end of the lease term.
In addition to the above exposure drafts, the HKSA has also issued a Consultation Paper for comment on a proposed implementation of a Small and Medium-Sized Entity Financial Reporting Framework and Financial Reporting Standard in Hong Kong. The Financial Accounting Standards Committee (FASC) of the HKSA has also invited comment on the IASB's proposals on Proposed Limited Amendment to IAS 39 Financial Instruments: Recognition and Measurement on the Fair Value Option; Proposed Amendment to IAS 19 Employee Benefits - Actuarial Gains and Losses, Group Plans and Disclosures; Proposed Limited Amendment to IFRS 3 Business Combinations - Combinations by Contract Alone or Involving Mutual Entities; and IASB discussion paper, Preliminary Views on Accounting Standards for Small and Medium-sized Entities.
Hong Kong exposure drafts on IFRS 3 Business Combinations and related amendments to IAS 36 Impairment of Assets and IAS 38 Intangible Assets, IFRS 4 Insurance Contracts and IFRS 5 Non-current Assets Held for Sale and Discontinued Operations are still outstanding. The FASC intends to adopt all of these as Hong Kong standards to be effective for accounting periods beginning on or after 1 January 2005.
A difference between the definition of a subsidiary under the Companies Ordinance and under HKAS 27 (equivalent to IAS 27) continues to be under study by the government. Because the legal definition must be used in applying HKAS 27, this may be the most significant difference between HKASs and IFRSs that may not be resolved by 1 January 2005.
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April 2004 Update
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Restructuring of Hong Kong Standards Along IASB Lines
It is the policy of the Financial Accounting Standards Committee (FASC) of the Hong Kong Society of Accountants (HKSA) to base Hong Kong accounting standards on IFRSs. The goal is to achieve convergence "as far as practicable". In recent years most standards are nearly identical, and in most cases compliance with the Hong Kong standard will ensure compliance with the relevant IFRS. Each Hong Kong Statement of Standard Accounting Practice (SSAP) contains a section explaining how it relates to the IFRS dealing with the same topic.
Hong Kong standards will be restructured to coordinate better with IFRSs. SSAPs will be renamed as Hong Kong Accounting Standards (HKASs), and their numbering will be aligned with the IASs. Just as new IASB standards are known as International Financial Reporting Standards, so new HK standards will be known as Hong Kong Financial Reporting Standards (HKFRSs). FASC interpretations will be similarly reorganised to conform to the IASB structure.
IFRSs and IASs Recently Issued by the IASB
In December 2003, the IASB completed its "Improvements Project" by issuing revised versions of 14 standards. The FASC is developing updates to its related standards. The committee has already sent to the HKSA Council for approval the converged versions of IAS 1, IAS 2, IAS 8, IAS 10, IAS 16, IAS 21, IAS 27, IAS 28, and IAS 33. Also pending before the council was the Hong Kong equivalent of IAS 29. In mid-April 2004, the Council approved issuance of all of these as Hong Kong standards. Council also approved the issuance of the Hong Kong equivalent of SIC 12.
The FASC has some further issues to deliberate with respect to IAS 24 before it is sent to the HKSA Council.
Also, in the next several months, the FASC plans to issue an exposure draft proposing convergence with the other IASB standards, including those on leases (IAS 17), borrowing costs (IAS 23), joint ventures (IAS 31), and investment property (IAS 40).
Hong Kong exposure drafts on IAS 32 and IAS 39 are also outstanding. When issued, the final standards are expected to incorporate the IASB's recent macro hedging amendments to those two standards. In addition, the FASC has already invited comment on the IASB's proposals that have resulted in IFRS 3, IFRS 4, and IFRS 5, and the recent amendments to IAS 36 and IAS 38. The FASC intends to adopt all of these as Hong Kong standards without further exposure. All of the revised Hong Kong standards will be published in the HKSA's new A4-sized Handbook due for release in May 2004.
All will come into effect for periods beginning on or after 1 January 2005 (earlier in the case of IFRS 3 and related revisions to IASs 36 and 38), same as the international standards.
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January 2004 Update
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Improved IASs
The Hong Kong Society of Accountants has announced its intention to issue the recently finalised revised IASs resulting from IASB's Improvements Project as Hong Kong standards. A document outlining the significant differences is being developed. Several - including reversion to proportionate consolidation for joint ventures, which is currently prohibited in Hong Kong - may have to be exposed for public comment. Certain IASB Interpretations that previously had been incorporated directly into Hong Kong standards will be extracted and issued as Hong Kong interpretations. The HKSA also intends to renumber its existing Statements of Standard Accounting Practice to conform the numbering to the IAS numbers.
IAS 32 and IAS 39
Also, the Financial Accounting Standards Committee of the Hong Kong Society of Accountants (HKSA) has announced that it intends to seek approval of the HKSA's Council to adopt the IASB's newly revised standards on financial instruments - IAS 32 and IAS 39 - in full as Hong Kong Statements of Standard Accounting Practice (SSAPs). The HKSA's goal is to have the final SSAPs approved in January. They had previously been exposed for comment in Hong Kong. The HKSA stated: "These two accounting standards provide comprehensive guidance on the accounting for financial instruments. The need for such guidance is crucial. Financial instruments are a large part of the assets and liabilities of virtually every company, in particular financial institutions. They also play a central role in the efficient operation of financial markets."
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July 2003 Update
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In the second quarter of 2003, the Hong Kong Society of Accountants (HKSA) issued the following documents:
- a revised Framework for the Preparation and Presentation of Financial Statements;
- an amendment to SSAP 34, Employee Benefits; and
- an exposure draft of a proposed Preface to Hong Kong Financial Reporting Standards and Accounting Guidelines.
The Framework has been amended to bring about convergence with the equivalent IASB Framework. The amendments made include:
- widening the scope to cover "general purpose" financial statements rather than solely "true and fair view" financial statements;
- the recognition that a wide range of users places reliance on financial statements for making economic decisions; and
- the elimination of textual differences previously existing between the Framework and its IASB equivalent.
SSAP 34, Employee Benefits, first issued in December 2001, is based on IAS 19. In drafting SSAP 34, the HKSA had included supplementary material in relation to legal requirements in Hong Kong and, specifically, had determined that "long service payments" payable under Hong Kong's Employment Ordinance should be classified as "other long-term employee benefits" under the Standard. The HKSA ha s now reconsidered the nature of the payments and determined that such long service payments are more appropriately classified as "post-employment benefits". The revised requirement is effective for periods beginning on or after 1 January 2003.
The proposed Preface is the first document issued that reflects the Society's previous decision that new accounting standards based on the equivalent IFRS should be named "Hong Kong Financial Reporting Standards" (HKFRS). In future, where reference is made to HKFRS, that term is to be taken to include Statements of Standard Accounting Practice (SSAPs) previously issued by the Society.
The proposed Preface would replace the current Foreword to Statements of Standard Accounting Practice, Interpretations, and Accounting Guidelines and, if adopted, would achieve closer convergence with the equivalent Preface issued by the IASB. The most significant changes proposed are:
- to recognise the HKSA Council's objective of achieving convergence of HKFRS with IFRS;
- to recognise that close coordination of the HKSA's due process with the IASB's due process is important to achieve convergence;
- to clarify that the "benchmark" and "allowed alternative" treatments permitted in a number of Hong Kong Standards are of equal standing;
- to clarify that paragraphs in bold typeface and plain typeface in HKFRS have equivalent authority; and
- to require an HKSA member who assumes responsibilities for financial statements prepared on a basis or standard of accounting other than HKFRS to observe that other basis or standard of accounting and to justify departure. This will permit the HKSA to initiate disciplinary action under the Professional Accountants Ordinance against a HKSA member for an alleged breach of non-HKSA standards.
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January 2003 Update
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During the final quarter of 2002, the Hong Kong Society of Accountants (HKSA) issued the following documents:
- Interpretation 19, Intangible Assets-Website Costs (effective 15 October 2002). This Interpretation is identical to SIC 32 of the same title. Under the specific transitional provisions set out in INT 19, websites that were previously recognised as assets but that do not meet the criteria for recognition under SSAP 29, Intangible Assets, should be derecognised from the effective date of the Interpretation. In contrast, websites that were not previously recognised but would meet the criteria for recognition under SSAP 29 should not be recognised at the date when the Interpretation becomes effective;
- SSAP 36, Agriculture, which is based on IAS 41 of the same title. SSAP 36 is effective for accounting periods beginning on or after 1 January 2004, although earlier implementation is permitted; and
- an Exposure Draft for a Standard based on IAS 29, Financial Reporting in Hyperinflationary Economies. The deadline for comments is 30 January 2003
In addition, in line with its policy of convergence with IFRS, the Society has issued the following IASB Exposure Drafts for comment:
- ED 2, Share Based Payment; and
- ED 3, Business Combinations and related Exposure Draft of Proposed Amendments to IAS 36, Impairment of Assets, and IAS 38, Intangible Assets.
In relation to share-based payment, the proposed IFRS (which, it is proposed, would be adopted as a Hong Kong Standard with the same effective date as the IFRS) would introduce the first measurement rules in this area in Hong Kong. Although both the Listing Rules and SSAP 34, Employee Benefits, contain detailed disclosure requirements in relation to share options granted to directors and employees, there is currently no requirement to recognise a cost for such instruments. The deadline for submission of comments on ED 2 to the HKSA is 15 February 2003.
The proposals on Business Combinations are of significant interest in Hong Kong. Although the proposed abolition of the pooling of interests method of accounting will have no effect, since that method is already prohibited in Hong Kong other than in the circumstances of qualifying group reconstructions, the proposals for revisions to the rules for amortisation of goodwill, negative goodwill, and intangible assets would result in significant changes to Hong Kong GAAP. In addition to the matters raised for comment by the IASB, the HKSA has identified one item specific to Hong Kong relating to the transitional arrangements for goodwill and negative goodwill on which they invite comment.
As permitted by the transitional provisions set out in the current SSAP 30, Business Combinations, some entities continue to carry goodwill and negative goodwill arising on business combinations before 1 January 2001 in reserves (equity). Because of the HKSA's desire for convergence with IFRS, and for consistency of accounting treatment between entities, they propose that all goodwill in reserves should be reinstated on the balance sheet at its carrying amount at the date of adoption of the new standard. Negative goodwill held in reserves will be transferred to retained earnings. The deadline for submission of comments on ED3 to the HKSA is 15 March 2003.
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October 2002 Update
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During the third quarter of 2002, the HKSA has:
- adopted SSAP 12, Income Taxes, effective for periods beginning on or after 1 January 2003. SSAP 12 is identical to IAS 12 except for (a) certain guidance in IAS 12 that relates to provisions in other IAS for which there is no Hong Kong equivalent and (b) the addition of some guidance taken from Australian Standard AASB 1020, Income Taxes;
- adopted SSAP 36, Agriculture. SSAP 36 is identical to IAS 41.
- adopted the IASB's recent "asset ceiling" amendment to its employee benefits standard;
- issued seven final Interpretations that are the equivalents of:
- SIC 21: income taxes - revalued assets,
- SIC 25: changes in tax status,
- SIC 27: substance of leases),
- SIC 28: business combinations - date of exchange,
- SIC 29: service concession agreements,
- SIC 30: advertising barter transactions), and
- SIC 33: potential voting rights);
- issued an Exposure Draft of proposed revisions to its Framework for the Preparation and Presentation of Financial Statements to conform the Hong Kong Framework with that of the IASB; and
- published a Consultation Paper on a Proposed Framework for Differential Reporting. Differential reporting means the exemption of small entities from parts of certain Hong Kong accounting standards.
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July 2002 Update
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IASB Improvements Exposure Draft
On 15 May 2002, the IASB published its exposure draft of Improvements to IFRS. The Hong Kong Society of Accountants (HKSA) is not intending to issue a comparable stand-alone Hong Kong exposure draft. Instead, consistent with its mandate to achieve convergence with International Financial Reporting Standards issued by the IASB, HKSA is requesting that comments on the IASB exposure draft be submitted to the HKSA Financial Accounting Standards Committee (FASC) for inclusion in the Society's response to the IASB. Following the IASB's approval of the amendments, the FASC intends to recommend the identical amendments to the equivalent Hong Kong Statements of Standard Accounting Practice (SSAP).
However, some significant differences currently exist between three of the IASs being amended and their equivalent SSAPs:
- IAS 40, Investment Property, and SSAP 13, Investment Property.
- IAS 17, Leases, and SSAP 14, Leases.
- IAS 21, The Effects of Changes in Foreign Exchange Rates, and SSAP 11, Foreign Currency Translation.
Regarding SSAP 13 and 14, FASC expects to issue separate Hong Kong exposure drafts for those statements reflecting both the proposals set out in the IAS Improvements exposure draft and additional amendments to align the Hong Kong Statements with their IAS equivalents.
Regarding SSAP 11, FASC has indicated its intention to replace SSAP 11 with the revised IAS 21 that results from the IASB Improvements Project. FASC does not expect to publish an exposure draft on this SSAP.
With respect to the remaining IAS being amended, the HKSA is proposing to amend its own SSAPs in line with international standards without further exposure. The final revised Hong Kong standards will be issued in tandem with the equivalent IASB standards. The FASC is also taking this opportunity to continue its convergence process and has requested additional views from Hong Kong commentators in respect of how the HKSA should address certain drafting differences that have arisen over the development of the affected Hong Kong standards as a result of legal requirements or best practices in Hong Kong.
Other FASC Exposure Drafts
FASC has published an exposure draft on Agriculture that is, in all material respects, a verbatim equivalent of IAS 41, Agriculture. IAS 41 prescribes a fair value model for financial reporting of agricultural activity.
FASC has published Draft Interpretation 19, Intangible Assets-Website Costs, that is identical to SIC 32.
FASC has invited comments on a proposed amendment to the 'asset ceiling' provisions of SSAP 34, Employee Benefits. This amendment would be identical to the one recently adopted by the IASB for IAS 19 (see page 6 of this newsletter).
Changes to the Exposure Draft Process
FASC has adopted new operating procedures for setting Hong Kong accounting standards. A key element in the standard-setting due process is to invite views on proposed accounting standards at various stages. The publication of an exposure draft is one such important stage. Now that exposure drafts issued by the IASB will typically be the final consultation document prior to the adoption of a Hong Kong SSAP that complies with the IASB's standard, IASB's exposure drafts will be published electronically and posted on the HKSA website, with a Hong Kong “wrap-around” invitation to comment. Printed copies in A4 size will be available on request and will not be part of the Members' Handbook.
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April 2002 Update
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SSAP 35, Government Grants
The Hong Kong Society of Accountants (HKSA) has issued one new Standard in the first quarter of 2002 - SSAP 35, Accounting for Government Grants and Disclosure of Government Assistance. This SSAP, which is closely modelled on IAS 20 of the same title, requires government grants not to be credited directly to equity but to be recognised as income in a way that matches with the related costs. SSAP 35 is effective for accounting periods beginning on or after 1 July 2002. On implementation, reporting enterprises can opt for retrospective application or, alternatively, can elect to apply the accounting provisions of the Standard only to grants or portions of grants becoming receivable or repayable after the effective date.
Two Exposure Drafts on Financial Instruments
The HKSA has also issued two exposure drafts for new Accounting Standards: Financial Instruments: Disclosure and Presentation and Financial Instruments: Recognition and Measurement. These exposure drafts are based on IAS 32 and IAS 39 and propose to establish principles for presenting, recognising, measuring, and disclosing information about financial instruments so as to bring financial statements prepared under Hong Kong Generally Accepted Accounting Practice into line with international accounting practice.
In addition, the HKSA has issued (in CD ROM format) proposed Implementation Guidance based on the Implementation Guidance issued by the IAS 39 Implementation Guidance Committee of the International Accounting Standards Board. Comments on the proposed standards and implementation guidance should be submitted to the HKSA on or before 15 July 2002.
In issuing the two financial instruments exposure drafts, the HKSA acknowledged that IASB has under way a project to amend IAS 32 and IAS 39. HKSA intends to take into account the results of that project before it issues final Standards based on IAS 32 and IAS 39.
Five Draft Interpretations
Finally, the HKSA has issued 5 draft interpretations on which comments are invited on or before 30 April 2002. Each of the drafts is based on an equivalent Interpretation of the Standing Interpretations Committee of the International Accounting Standards Committee. They are:
- Evaluating the Substance of Transactions Involving the Legal Form of a Lease (Draft Interpretation 14)
- Business Combinations - 'Date of Exchange' and Fair Value of Equity Instruments (Draft Interpretation 15)
- Disclosure - Service Concession Arrangements (Draft Interpretation 16)
- Revenue - Barter Transactions Involving Advertising Services (Draft Interpretation 17)
- Consolidation and Equity Method - Potential Voting Rights and Allocation of Ownership Interests (Draft Interpretation 18)
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January 2002 Update
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The Hong Kong Society of Accountants (HKSA) has issued the following new or revised Standards in the fourth quarter of 2001:
- SSAP 11 (Revised), Foreign Currency Translation. The revised Standard is effective for accounting periods beginning on or after 1 January 2002. The changes made eliminate the option available under the previous version of SSAP 11 to translate the income statement of a foreign subsidiary at the closing rate. As revised, only the average rate may be used. The difference between the income statement translated at an average rate and at the closing rate is recorded as a movement of reserves. The revision ensures consistency with the exchange rate used for the translation of cash flows under SSAP 15 (Revised) and brings SSAP 11 more closely into line with IAS 21, The Effects of Changes in Foreign Exchange Rates. However, a number of differences continue to exist between IAS 21 and SSAP 11.
- SSAP 15 (Revised), Cash Flow Statements. The revised Standard is effective for accounting periods beginning on or after 1 January 2002. SSAP 15 is consistent in all material respects with IAS 7, Cash Flow Statements, except that SSAP 15 (Revised) continues to exempt certain enterprises from the requirement to prepare a cash flow statement, whereas IAS 7 includes no such exemption.
- SSAP 33, Discontinuing Operations. This Standard is nearly identical to IAS 35, Discontinuing Operations, and is effective for periods beginning on or after 1 January 2002.
HKSA has also issued the following exposure draft:
- Proposed SSAP, Income Taxes. The proposed SSAP would supersede SSAP 12, Accounting for Deferred Tax, and is closely modelled on IAS 12, Income Taxes. Comment deadline is 15 January 2002.
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October 2001 Update
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The Hong Kong Society of Accountants (HKSA) has issued the following revised Accounting Standards and Exposure Drafts:
- SSAP 1, Presentation of Financial Statements
- SSAP 25, Interim Financial Reporting
- SSAP 26, Segment Reporting
Following the issue of revised Accounting Guideline 2.302, Financial Statement of Retirement Schemes (see below), the above standards have been revised to remove the option of preparing a statement of movements in net assets as an alternative to a cash flow statement.
- Exposure Draft, Accounting for Government Grants and Disclosure of Government Assistance. This proposed standard is closely modelled on IAS 20 of the same title.
- Accounting Guideline, Financial Statement of Retirement Schemes. The guideline was revised primarily to incorporate guidance on the financial statements of Mandatory Provident Fund schemes.
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July 2001 Update
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The Hong Kong Society of Accountants (HKSA) has issued the following revised Accounting Standards, Interpretations and Exposure Drafts:
- SSAP 10, Accounting for Investment in Associates
- SSAP 21, Accounting for Investment in Joint Ventures
The above revised statements are closely modelled on the equivalent IAS and update the requirements and layout of the existing standards. The revisions are as a consequence of the adoption of SSAP 30, Business Combinations, SSAP 31, Impairment of Assets, and SSAP 32, Consolidated Financial Statements and Accounting for Investments in Subsidiaries.
- SSAP 18, Revenue, is revised as a consequence of SSAP 9 (revised), Events after the Balance Sheet Date. This revision aligns the treatment of dividends received by a parent company with the recognition criteria for other dividends received.
- SSAP 30, Business Combinations, is revised to incorporate two additional transitional provisions to allow enterprises: -to account for any impairment losses that arose on goodwill eliminated against revenues retrospectively; and-not to have to apply the provision relating to reverse acquisitions for acquisitions prior to the introduction of SSAP 30.
- SSAP 27 (revised), Accounting for Group Reconstructions, amends and clarifies the definition of merger relief. The revised definition removes the overriding requirement that the transaction is a result of a share-for-share exchange and is effective for transactions entered into on or after 19 June 2001, although earlier adoption is encouraged.
- Interpretation 12, Business Combinations-Subsequent Adjustments of Fair Values and Goodwill Initially Reported, closely modelled on SIC 22 has been issued.
- Interpretation 13, Goodwill-Continuing Requirement for Goodwill and Negative Goodwill Previously Eliminated Against/Credited to Reserves. Clarifies the treatment of goodwill previously written off reserves as a matter of accounting policy and which have not been restated as a result of the transitional provisions on adoption of SSAP 30, Business Combination. See additional SSAP 30 revisions above.
- Exposure Draft: Employee Benefits. This proposed SSAP sets out for the first time in Hong Kong a comprehensive Accounting Standard dealing with all forms of employee benefits. The Standard is closely modelled on IAS 19 of the same name.
- Exposure Draft: Revisions to SSAP 1, Presentation of Financial Statements, proposes a change in disclosure requirements, from requiring a statement of recognised gains and losses, to requiring a statement of changes in equity. This change has resulted from difficulties in practice in understanding the statement of recognised gains. Both statements would be available options under the equivalent IAS 1; however, the statement of changes in equity is more comprehensive and is a reconcilable statement.
- Exposure Draft: Cash Flow Statement. This proposed SSAP is closely modelled on IAS 7, Cash Flow Statements. This revision is part of the continuing IAS convergence programme being followed by HKSA.
- Exposure Draft: Revisions to SSAP 11, Foreign Currency Translation. The revision proposes to eliminate the option under the current Standard of translating the income statement of a foreign subsidiary at the closing rate and instead would require transactions at the average rate for the period in accordance with the requirements set out in IAS 21.
In addition the HKSA also released Accounting Bulletin 4, Deemed Acquisitions and Disposals, which sets out guidance on the appropriate accounting treatment to be followed for deemed acquisitions and disposals.
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April 2001 Update
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Hong Kong Society of Accountants
The Hong Kong Society of Accountants has issued the following Exposure Drafts and Draft Interpretations:
- ED - Discontinuing operations (Comments by 15 June 2001)
- ED Revision SSAP 27 Accounting for group reconstruction (Comments by 30 April 2001)
- DI 12 - Business Combinations - subsequent adjustment of fair values and goodwill initially reported (Comments by 30 April 2001)
- DI 13 - Accounting for goodwill previously eliminated against reserves (Comments by 30 April 2001)
Stock Exchange of Hong Kong
Effective 1 April, companies that have a primary listing on the main board of the Stock Exchange of Hong Kong (SEHK) are permitted to adopt IAS instead of Hong Kong GAAP. They will be required to explain any significant differences with Hong Kong GAAP, including a reconciliation of the financial effect on net profit or loss. Overseas-incorporated issuers and applicants that have or will have a secondary listing on the SEHK are permitted to follow US GAAP.
As a result of these changes, the accounting standards requirements for companies listed on the SEHK are as follows:
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January 2001 Update
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In January 2001, the Hong Kong Society of Accountants (HKSA) approved six new Hong Kong Statements of Standard Accounting Practice (SSAP). These standards are compliant in nearly all respects with the related IAS. All six standards are effective for periods beginning on or after 1 January 2001:
- SSAP 28, Provisions, Contingent Liabilities and Contingent Assets (IAS 37)
- SSAP 29, Intangible Assets (IAS 38)
- SSAP 30, Business Combinations (IAS 22)
- SSAP 31, Impairment of Assets (IAS 36)
- SSAP 32, Consolidated Financial Statements and Accounting for Investments in Subsidiaries, (IAS 27)
- SSAP 9 (revised), Events after the Balance Sheet Date, (IAS 10)
There are two significant differences between the new Hong Kong Standards and the equivalent IAS:
SSAP 30 deals only with acquisition accounting whereas the equivalent IAS 22 deals with both acquisition accounting and merger accounting (pooling of interests).
The definition used for subsidiary in SSAP 30 and SSAP 32 differs from the equivalent in IAS insofar as Hong Kong incorporated companies are concerned.
The first of these differences arises because, with the publication of INT 7, Application of Acquisition Accounting, the Hong Kong Society of Accountants has effectively banned the use of merger accounting other than in the circumstances of certain group reconstructions. This action reflects the HKSA's anticipation of future developments in this area internationally.
The second difference arises as a result of legal opinion obtained by the HKSA to the effect that the definition of subsidiary to be applied in preparing financial statements for Hong Kong incorporated companies must be as stated in the Companies Ordinance. If financial statements were to encompass enterprises that were not subsidiaries as defined in the Ordinance, then they would not comply with the law. Unfortunately, this has the effect of the standard setting different rules for Hong Kong and non-Hong Kong incorporated companies - an anomaly that we hope will be addressed on a timely basis by a change in the law.
Interpretation 10, Earnings Per Share - Financial Instruments and Other Contracts that May Be Settled in Shares, was issued in December 2000. It is closely modelled on the equivalent SIC 24.
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October 2000 Update
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The Hong Kong Society of Accountants (HKSA) is continuing its policy of harmonising Hong Kong Statements of Standard Accounting Practice (SSAP) with IAS.
For 31 December 1999 year-ends, the following SSAPs came into effect (their equivalent IAS is indicated for reference):
- SSAP 1 (revised), Presentation of Financial Statements (IAS 1)
- SSAP 2 (revised), Net Profit or Loss for the Period, Fundamental Errors and Changes in Accounting Policies (IAS 8)
- SSAP 10 (revised), Accounting for Investments in Associates (IAS 28)
- SSAP 24, Accounting for Investments in Securities
- SSAP 27, Accounting for Group Reconstructions
SSAP 24 and SSAP 27 were prompted by specific reporting issues in Hong Kong and are not strictly equivalent, or in compliance, with relevant IAS. Accordingly these standards may need to be revisited at a later date.
In addition the following SSAPs go into effect for periods beginning on the dates indicated:
- SSAP 14, Leases (IAS 17), 1 July 2000
- SSAP 25, Interim Financial Reporting (IAS 34), 1 January 2000
Click here to download the 161 Page Deloitte Guide to SSAP 25 (PDF 368k).
- SSAP 26, Segment Reporting (IAS 14), 1 January 2001
The HKSA has set up an Interpretations Committee the Urgent Issues and Interpretation Sub-Committee to issue interpretations of Hong Kong SSAPs. The Committee has so far issued nine Interpretations (INT), many of which mirror relevant SICs. The interpretations issued in 2000 are as follows:
- INT 7, Application of Acquisition Accounting
- INT 8, Presentation of Financial Statements-Current Assets
- Classification of Restricted and Appropriated Cash Balances
- INT 9, Accounting for Pre-operating Costs
The main outstanding project for the HKSA is issuance of a suite of standards that are currently at their exposure stage:
- Provisions, Contingent Liabilities and Contingent Assets (IAS 37)
- Intangible Assets (IAS 38)
- Business Combinations (IAS 22)
- Impairment of Assets (IAS 36)
- Events after the Balance Sheet Date, (IAS 10)
- Consolidated Financial Statements and Accounting for Investments in Subsidiaries, (IAS 27)
The above package of IAS compliant standards is expected to be released in January 2001 and will represent a major step in the IAS harmonisation process.
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