Amendments to HKFRS 7 on disclosures about financial instruments

In March 2009, the Hong Kong Institute of Certified Public Accountants (HKICPA) issued amendments to HKFRS 7 Financial Instruments: Disclosures – Improving Disclosures about Financial Instruments. The amendments are identical to the amendments to IFRS 7 Financial Instruments: Disclosures, also issued in March.

The disclosures required by the amendments are classified using a fair value hierarchy that reflects the significance of the inputs used in making the measurements. The following three-level hierarchy is introduced:

• Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities
• Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e., as prices) or indirectly (i.e., derived from prices).
• Level 3: Inputs for the asset or liability that are not based on observable market data (unobservable inputs).

The amendments also require entities to provide additional disclosures about the relative reliability of fair value measurements and additional disclosures are required for fair value measurements in Level 3 of the fair value hierarchy. In addition, the amendments clarify and enhance the existing requirements for the disclosure of liquidity risk.

The amendments to HKFRS 7 apply for annual periods beginning on or after 1 January 2009. However, an entity is not required to provide comparative disclosures in the first year of application. Click here to access Update No. 62 to the Member's Handbook on the HKICPA website which contains the detailed text of the amendment.

Amendments to HKAS 39 and HK(IFRIC)-Int 9 on embedded derivatives

In March 2009, the HKICPA issued amendments to HK(IFRIC)-Int 9 Reassessment of Embedded Derivatives and HKAS 39 Financial Instruments: Recognition and Measurement – Embedded Derivatives. The amendments are identical to the amendments to IAS 39 Financial Instruments: Recognition and Measurement and IFRIC 9 Reassessment of Embedded Derivatives also issued in March 2009.

The amendments clarify the accounting treatment of embedded derivatives for entities that make use of the reclassification amendment issued in October 2008 – which is that on reclassification of a financial asset out of the 'fair value through profit or loss' category all embedded derivatives have to be assessed and, if necessary, separately accounted for.

The amendments set out in Embedded Derivatives apply retrospectively and are required to be applied for annual periods ending on or after 30 June 2009.

Update on convergence of CASs and HKFRSs

In December 2007, the HKICPA signed Joint Declarations with the China Accounting Standards Committee and the Chinese Auditing Standards Board in relation to the financial reporting and auditing standards in Hong Kong and the People's Republic of China. In March 2009, the HKICPA issued an update on the current status of convergence of China Accounting Standards for Business Enterprises (ASBEs, also known as the new Chinese Accounting Standards (CASs)) and Hong Kong Financial Reporting Standards (HKFRSs).

Click here to access the Update Report (Update 1 March 2009) on the current status of convergence as at 31 December 2008 on the HKICPA website. The report is in Chinese. An English translation of the update report will be posted on the Institute's website soon.

Second issue of HKICPA financial reporting and audit alerts

In the February 2009 version of Track Changes, we reported that the Standards and Quality division of the HKICPA will issue a series of alerts for its members highlighting topical financial reporting and auditing issues that should be given particular attention. The first alert was issued last month and dealt with key issues in applying HKFRS 7 Financial Instruments: Disclosures. In March 2009, the HKICPA issued a second alert to remind members who are preparers of financial statements or auditors of financial statements of the importance of carrying out an appropriate assessment of an entity's ability to continue as a going concern.

In the context of the current global financial crisis it is clear that the judgement that management, those charged with governance and auditors must make on whether an entity is a going concern is emerging as a highly sensitive issue. Accordingly, addressing these challenges early in the process of the preparation of annual reports and financial statements and the audit are important to help avoid last minute problems or surprises that may unnecessarily unsettle investors, lenders regulators and analysts. The HKICPA strongly recommends that HKAS 1 (revised) Presentation of Financial Statements and HKSA 570 Going Concern are read carefully.

Click here to access Issue 2, Going concern – Assessing an entity's ability to continue as a going concern on the HKICPA website.