1 Financial Reporting in China 24 September 2008 © 2006-08 Nelson 1 Nelson Lam Nelson Lam 林智遠 林智遠 MBA MSc BBA ACA ACIS CFA CPA(Aust.) CPA(US) FCCA FCPA(Practising) MSCA A Simple Test First …… To ask yourself whether you agree with the following statements …… – Assets = Liabilities + Capital What do you What do you think? think? – Assets = Liabilities + Capital – Fundamental errors should be adjusted by prior year adjustments …… – Provision for bad debt is determined by ageing analysis – Deposits in bank should be current assets © 2006-08 Nelson 2 – Property in HK and PRC purchased by an entity is a fixed asset – Only cost of improvement to a fixed asset is capitalised in the balance sheet – Non-profit making entities can have exemptions on some accounting requirements
Welcome message from author
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Transcript
Microsoft PowerPoint - PEO-2008-09-24 [Compatibility Mode]© 2006-08
Nelson 1
Nelson LamNelson Lam MBA MSc BBA ACA ACIS CFA CPA(Aust.) CPA(US) FCCA FCPA(Practising) MSCA
A Simple Test First ……
To ask yourself whether you agree with the following statements …… – Assets = Liabilities + Capital
What do you What do you think?think?
– Assets = Liabilities + Capital – Fundamental errors should be
adjusted by prior year adjustments …… – Provision for bad debt is
determined by ageing analysis – Deposits in bank should be current
assets
© 2006-08 Nelson 2
– Property in HK and PRC purchased by an entity is a fixed asset
– Only cost of improvement to a fixed asset is capitalised in the balance sheet
– Non-profit making entities can have exemptions on some accounting requirements
2
Major Differences between ASBE and IFRS
Practical Issues in Applying ASBE
© 2006-08 Nelson 3
pp y g
Today’s Agenda
© 2006-08 Nelson 4
Development in PRC: Before 2007
• In addition to PRC accounting law and financial accounting and reporting rules, the pronouncements of current PRC accounting requirements for profit-oriented enterprises include: q p p – Chinese Accounting Standards for Business Enterprises
– Accounting System for Business Enterprises
– Accounting System for Small Business Enterprises
Accounting System for Financial Institutions
© 2006-08 Nelson 5
– Accounting System for Financial Institutions
– Accounting Guidelines for Enterprises within Specialised Industries and ad hoc accounting pronouncements (known as “” ) Announced by Ministry of Announced by Ministry of
Finance PRC (MOF) Finance PRC (MOF)
Development in PRC: From 2007
• On 15 Feb. 2006, the MOF released 39 new Chinese Accounting Standards for Business Enterprises (ASBE)
– Effective from 1 Jan. 2007 and mandatory for all listed Chinese enterprises (2007 11)
© 2006-08 Nelson 6
• The new ASBE are substantially in line with IFRSs () – except for certain modifications that reflect China’s
unique circumstances and environment
• On 15 Feb. 2006, the MOF released
– 39 Chinese Accounting Standards for B i E t i (ASBE) Business Enterprises (ASBE) which comprises
• 1 Basic Standard ---
• 38 Specific ASBE ()
O 30 O t 2006 th MOF l d
`
• 32 Application Guidance
Development in PRC: From 2007
• The accounting standards system – Suits the development of China’s market
economy and convergence economy and convergence with the international practices.
– Emphasizes the new philosophy of providing decision-useful accounting information to investors and the public.
:
• Effective from 1 Jan. 2007 and mandatory for all listed Chinese enterprises
© 2006-08 Nelson 8
(Basic Standard) 1 (Inventories)
ASBEASBE IAS/IFRSIAS/IFRS
IAS 2 ( ) 2 (Long-term equity investment) 3 (Investment property) 4 (Fixed assets) 5 (Biological assets) 6 (Intangible assets) 7 (Exchange of non-monetary assets) 8 (Impairment of assets)
IAS 39 IAS 40 IAS 16 IAS 41 IAS 38 IAS 16, 18 IAS 36
© 2006-08 Nelson 10
8 (Impairment of assets) 9 (Employee compensation) 10 (Enterprise annuity fund) 11 (Share-based payment) 12 (Debt restructuring) 13 (Contingencies)
IAS 36 IAS 19 IAS 26 IFRS 2 IAS 39 IAS 37
6
14 (Revenue) 15 (Construction contracts)
ASBEASBE IAS/IFRSIAS/IFRS
IAS 18 IAS 11 ( )
16 (Government grants) 17 (Borrowing costs) 18 (Income taxes) 19 (Foreign currency translation) 20 (Business combinations) 21 (Leases) 22 (Recognition and measurement of
IAS 20 IAS 23 IAS 12 IAS 21 IFRS 3 IAS 17 IAS 39
© 2006-08 Nelson 11
22 (Recognition and measurement of financial instruments)
23 (Transfer of financial assets) 24 (Hedging) 25 (Direct insurance contracts) 26 (Re-insurance contracts)
IAS 39
Overview of Convergence in PRC
27 (Extraction of petroleum and natural gas) 28 (Changes in
ASBEASBE IAS/IFRSIAS/IFRS
IFRS 6 IAS 88 (C g
accounting policies and estimates and correction of errors) 29 (Events occurring after the balance
sheet date) 30 (Presentation of financial statements) 31 (Cash flow statements) 32 (Interim financial reporting) 33 (Consolidated financial statements)
IAS 10
© 2006-08 Nelson 12
34 (Earnings per share) 35 (Segment reporting) 36 (Related party disclosure) 37 (Presentation of financial
instruments) 38 (First-time adoption of ASBE)
IAS 33 IAS 14 IAS 24 IAS 32 / IFRS 7 IFRS 1
7
Comparison of ASBE and IFRS
• For those entities required or electing to adopt the new ASBE the new ABSE replaces the existing Chinese Accounting Standards and an
ASBEASBE
– the new ABSE replaces the existing Chinese Accounting Standards and an earlier version of the ASBE
• The new ASBE are substantially in line with IFRSs – except for certain modifications that
reflect China’s unique circumstances and environment
© 2006-08 Nelson 13
Today’s Agenda
© 2006-08 Nelson 14
Introduction of IFRS
IASB (I t ti l A ti St d d B d)• IASB (International Accounting Standards Board)
– An independent and privately-funded accounting standard setter, based in London
– Responsible to issue () IFRSs (International Financial Reporting Standards)
• IASC (International Accounting Standards Committee)
© 2006-08 Nelson 15
Standards)
comprise: – International Financial Reporting Standards
(IFRS ) ; – International Accounting Standards
(IAS ); and – Interpretations ().
© 2006-08 Nelson 16
• On top of these, IASB also has a set of: – Framework for the Preparation and Presentation of Financial
Statements ()
Canada (2011)
Financial Position (in balance sheet) • a resource controlled ()by the enterprise as a result of
past events () and from which future economic benefits ( ) t d t fl t th t i
Balance Sheet Approach
Financial Performance (in income statement)
) are expected to flow to the enterprise • a present obligation () of the enterprise arising from past
events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits
• the residual interest () in the assets of the enterprise after deducting all its liabilities
© 2006-08 Nelson 18
(Income)
(Expense)
• increases () in economic benefits during a period in the form of – inflows or enhancements of assets or – decreases of liabilities that result in increases in equity – other than those relating to contributions from equity participants
• decreases () in economic benefits during a period in the form of – outflows or depletions of assets or – incurrences of liabilities that result in decreases in equity, – other than those relating to distributions to equity participants
10
© 2006-08 Nelson 19
How is it showed in the financial statements?
Introduction: Property, Plant and E.
• Property, plant and equipment (PPE) is clearly defined and properties not within the definition are not accounted for by
Example IAS 16 Property, plant and equipment
DefinitionDefinition using IAS 16
e.g. property held to earn rental is not covered by IAS 16 • PPE is recognised if it meets the recognition criteria:
a) it is probable that future economic benefits associated with the item will flow to the entity; and
b) the cost of the item can be measured reliably.
• Initially measured at cost while subsequently measured by sing either
RecognitionRecognition
MeasurementMeasurement
• Certain information is required to be disclosed in the financial statementsDisclosureDisclosure
11
DefinitionDefinition items shall be accounted for by using IAS 39
• Financial asset is recognised if it meets the recognition criteria:
the entity becomes a party to the contractual provisions of the instrument (“probable” flow-in is not required)
• Initially measured at fair value (plus transaction cost in most cases) hile s bseq entl meas red at either
RecognitionRecognition
MeasurementMeasurement
© 2006-08 Nelson 21
cases) while subsequently measured at either Fair value or Amortised cost (if conditions can be met)
• Certain information is required to be disclosed in the financial statements IAS 32 and IFRS 7 provides more requirements on
presentation and disclosure of financial instruments
DisclosureDisclosure
Introduction: Investment Property
• Property held for rental and/or capital appreciation and meets other conditions is investment property (IP) that is
Example IAS 40 Investment property
DefinitionDefinition accounted for by using IAS 40
• IP is recognised if it meets the recognition criteria: a) it is probable that future economic benefits associated
with the item will flow to the entity; and b) the cost of the item can be measured reliably.
• Initially measured at cost while subsequently measured by sing either
RecognitionRecognition
MeasurementMeasurement
• Certain information is required to be disclosed in the financial statementsDisclosureDisclosure
Any difference between revaluation model and fair value model?
12
Introduction: Fair Value
• For g, fair value is used or mentioned in most IFRSs
• Fair value is defined as: – the amount for which an asset could be exchanged, or a liability settled,
between knowledgeable, willing parties in an arm’s length transaction • The same definition is used in different IFRSs,
– The application to different assets and liabilities may not be the same,
© 2006-08 Nelson 23
pp y , for example: • IAS 16 Property, plant and equipment • IAS 18 Revenue • IAS 39 Financial instruments: recognition and measurement • IAS 40 Investment property • IFRS 2 Share-based payment
Introduction: Fair Value
Example
– subsequent measurement, or – both
q • Held-to-maturity (IAS 39) • Loans and receivables (IAS 39) • Business combination (IFRS 3)
Not applied to initial measurement but applied to subsequent
Applied to both initial and subsequent measurement: • Inventories (IAS 2) • Financial assets and liabilities at
© 2006-08 Nelson 24
16) • Intangible assets (IAS 38) • Investment property (IAS 40)
fair value through P/L (IAS 39) • Available for sale financial assets
(IAS 39) • Agriculture (IAS 41)
13
• Refers to fair value • Refers to fair value
Revaluation model (e.g. IAS 16)
Example
• Changes in fair value recognised in profit or loss
• Changes in fair value recognised in equity (or other comprehensive income)
• No depreciation or amortisation is required
• Depreciation or amortisation is required
© 2006-08 Nelson 25
• Revalued at each reporting date • Not clearly defined, only require sufficient regular that no material different from fair value
• N/A • Deficit about fair value below depreciated cost is recognised in profit or loss
Introduction: Fair Value
• Refers to fair value • Refers to fair value
Revaluation model (e.g. IAS 16)
Example
• Changes in fair value recognised in profit or loss
• Changes in fair value recognised in equity (or other comprehensive income)
• No depreciation or amortisation is required
• Depreciation or amortisation is required
© 2006-08 Nelson 26
• Revalued at each reporting date • Not clearly defined, only require sufficient regular that no material different from fair value
• N/A • Deficit about fair value below depreciated cost is recognised in profit or loss
Let’s highlight Let’s highlight some major differences from some major differences from
IFRSIFRS (IFRS IFRS )
• Share the same definition of asset and liability as IFRS
• IFRS and liability as IFRS
• Enterprise should use historical cost in measuring an element
• If the enterprise uses replacement cost, realisable value or fair value in measuring an element – It should make sure the
measurement basis can be
© 2006-08 Nelson 27
No such requirement in IFRS measurement basis can be obtained reliably
Major Difference of ASBE from IFRS Presentation of Financial StatementsPresentation of Financial Statements
• The presentation currency of the financial statements should be
• ASBE 19: financial statements should be
Renminbi – IAS 21 has no such compulsory
requirement
•
© 2006-08 Nelson 28
• ASBE 30: statement) can only be presented
by function – IAS 1 allows presentation by
nature or by function
• Direct method to present operating cash flow in cash flow statement should be used
• ASBE 31:
• A parent should prepare consolidated financial statements
• ASBE 33: consolidated financial statements
– IAS 27 sets out exemption on conditional basis
• Except for the disclosure required on ASBE 4 (fixed assets held for handle) and ASBE 30 (discontinued operations) , no
© 2006-08 Nelson 30
ASBE has similar requirements as set out in IFRS 5 – IFRS 5 has specific accounting
treatments on non-current assets held for sale
16
Major Difference of ASBE from IFRS Balance Sheet ItemsBalance Sheet Items
• ASBE 3 does not include some investment properties within the
• ASBE 3: investment properties within the
scope of IAS 40 – land held for a currently
undetermined future use is not an investment property under ASBE 3
• Fair value model on investment l b d h
–
© 2006-08 Nelson 31
property can only be used when there is evidence that its fair value can be reliably and continuously measured – IAS 40 has no such requirement
on fair value model
–
Major Difference of ASBE from IFRS Balance Sheet ItemsBalance Sheet Items
• Land use right carried at cost model is subsequently measured
• ASBE 3 model is subsequently measured
in accordance with ASBE 6 Intangible Assets, except for – Land and building, leased out
under operating lease and held by lessor, that are accounted for in accordance with ASBE 3 Investment Property
17
Major Difference of ASBE from IFRS Balance Sheet ItemsBalance Sheet Items
• Subsequently measurement of fixed assets and intangible assets
• ASBE 4 and 6 fixed assets and intangible assets
can only be at cost – IAS 16 and 38 provides a choice
to state the property, plant and equipment at revalued amount
• Fair value of biological assets can only be stated when there is
• ASBE 5:
© 2006-08 Nelson 33
evidence that its fair value can be reliably and continuously measured – IAS 40 has no such requirement
on fair value model
–
Major Difference of ASBE from IFRS Income Statement and Other IssuesIncome Statement and Other Issues
• No reversal of impairment loss is allowed in ASBE 5 and 8
• ASBE 5 (): allowed in ASBE 5 and 8
– IAS 36 allows reversal of impairment loss (except for impairment loss on goodwill)
• Borrowing costs should be it li d h th t th
• ASBE 17 ():
© 2006-08 Nelson 34
capitalised when they meet the capitalisation conditions – IAS 23 has a choice to expense all
borrowing costs (expense option in IAS 23 eliminated in 2007)
18
Major Difference of ASBE from IFRS Income Statement and Other IssuesIncome Statement and Other Issues
• No separate IFRS for exchange of non-monetary assets
• ASBE 7 (): of non-monetary assets
– IAS 16 and 38 set out the same requirements as ASBE 7 • Commercial substance • Fair value can be reliably
measured – IAS 18 sets out different practice
(using “similar and dissimilar”
–
approach)
Major Difference of ASBE from IFRS Income Statement and Other IssuesIncome Statement and Other Issues
• An entity should use equity method to account for those
• ASBE 2 (): method to account for those
entities that it can jointly control (joint venture) and significantly influence (associate) – IAS 31 allows equity method or
proportionate consolidation to account for jointly controlled entities
()( )
Major Difference of ASBE from IFRS Related Party DisclosureRelated Party Disclosure
• Similar requirements as IAS 24, except for “state controlled
• ASBE 36: except for state controlled
enterprises exemption” – 2 or more enterprises common
controlled by state without any other relationship would not imply be regarded as related party under ASBE 36
– In 2007, IASB has proposed to amend IAS 24 to align ith the
© 2006-08 Nelson 37
amend IAS 24 to align with the practice of ASBE 36
Today’s Agenda
© 2006-08 Nelson 38
pp y g
1. Financial Position and Performance ()
2. Human Resources()
3 M k t E t ti ()3. Market Expectation ()
4. Judgements and Estimates ()
5. Tax implication ()
6. Legal implication ()
Practical Issues: HK Experience
21
Practical Issues: HK Experience
22
Practical Issues: PRC Experience
• 1,5572007 45,625.49
2007.1.1 (After adjustment)
2006.12.31 (Before adjustment
• 2007 1,002.67() 2.42%
23
– (minority interests) 1,267 313.6 7.56%
© 2006-08 Nelson 45 Sourced from (2008)
Practical Issues: PRC Experience
• 454 795.041.92%
From cost to fair value
24
• (Minority Interests) – “”
1 2671 55781 37% 1,2671,55781.37% 3,136.18 7.56%
– :
• “”
Now: included in equity
Practical Issues: PRC Experience
(improper application)(improper application) (improper
judgement) A+H
(A and H share in the same company disclose with different policies on the same transaction or event)
(earning management)
management)
–
–
– 78
–
1. (not the same basis in determining fair value) –
– : »
»
»
26
Practical Issues: PRC Experience
A+H (A and H share in the same company disclose with different policies on the same transaction or event)p )
– A+H:
• (asset value) • (business combination) • (depreciation method)
© 2006-08 Nelson 51 Sourced from (2008)
Practical Issues: PRC Experience
(earning management)
impairment loss) –
1,570 20072007
© 2006-08 Nelson 52 Sourced from (2008)
2. (loan waived by related party)
–
27
1. (classification of financial assets) –
A shares and H shares so far?
© 2006-08 Nelson 54
Statements under PRC’s ASBE (under A shares)
•
•
•
•
•
Practical Issues in Applying ASBE Case
(ASBE) 2007
2006
261,757 212,776
© 2006-08 Nelson 56
130,468 108,145 392,225 320,921 300,949 259,382 25,398 22,417 326,347 281,799 718,572 602,720
29
(IFRS) 2007
2006
547,609 464,342 185,116 146,490 265,355 216,372 (80,239) (69,882) 467,370 394,460
© 2006-08 Nelson 57
307,433 264,334 25,325 22,323 332,758 286,657
Practical Issues in Applying ASBE Case
(ASBE):
2007
2006
8,364 7,698 12,851 8,462 22,947 15,144 11,822 10,955 9,402 5,331
© 2006-08 Nelson 58
, , 116,049 94,912 100 596 181,535 143,098
30
(IFRS):
2007
2006
7,696 7,063 668 635 22,947 15,144 12,851 8,462 116,032 94,894
© 2006-08 Nelson 59
Practical Issues in Applying ASBE Case
(ASBE):
2007
2006
31,335 23,544 361,148 346,240 95,408 53,000 15,232 9,265 15,690 14,525
© 2006-08 Nelson 60
5,842 4,757 10,192 6,760 2,190 1,531 537,037 459,622
31
(IFRS):
2007
2006
375,142 355,757 95,408 52,871 15,490 14,325 16,865 11,898 12,723 9,236
© 2006-08 Nelson 61
3,194 2,926 10,439 7,182 8,224 2,574 10,124 7,573 547,609 464,342
Practical Issues in Applying ASBE Case
(ASBE) 2007
2006
1,204,843 1,061,669 1,012,961 896,373 34,304 28,977 22,564 19,590 35,964 33,491
© 2006-08 Nelson 62
, 4,890 5,780 11,105 7,983 7,458 1,004 3,211
5,756 3,769 78,142 72,240
32
(ASBE) 2007
2006
6,828 6,020 2,059 2,877 82,911 75,383 25,758 22,400 57,153 52,983
© 2006-08 Nelson 63
54,947 52,086 2,206 897
0.63 0.60
(ASBE)
2007
2006
835,037 688,978 (487,112) (362,590)
(68,678) (51,692) (41,345) (35,050) (49 324) (44 429)
© 2006-08 Nelson 64
6,301 1,344 6,283 1,253
193,958 192,325
(ASBE)
2007
2006
(49 331) (47 043)
© 2006-08 Nelson 65
134,574 136,229 8,920 6,518
(
(IFRS) 2007
1,204,843 1,061,741 4,863 5,161
© 2006-08 Nelson 66
(IFRS) 2007
(970,929) (854,236) (37,843) (37,514) (43,315) (33,554) (11,105) (7,983) (22,745) (20,956)
© 2006-08 Nelson 67
(399) (236) (34,304) (29,330) (3,202) (2,461) (1,123,842) (986,270) 85,864 80,632
Practical Issues in Applying ASBE Case
(IFRS) 2007
(7,314) (7,101) 405 538 (3,211) — (311) (140) 2,330 890
© 2006-08 Nelson 68
(8,101) (5,813) 1,657 289 4,044 3,434 83,464 78,542 (24,721) (23,504) 58,743 55,038
35
(ASBE) 2007
2006
370 384 5,161 2 793 3 700
© 2006-08 Nelson 69
2,793 3,700
1,403,511 1,248,331
Direct MethodDirect Method
(ASBE) 2007
2006
© 2006-08 Nelson 70
(15,005) (14,062) (1,279,261) (1,149,461)
124,250 98,870
(ASBE) 2007
2006
© 2006-08 Nelson 71
(824,411) (802,872)
633 (7,701)
Practical Issues in Applying ASBE
30
Latest Development
To ask yourself whether you agree with the following statements …… – Assets = Liabilities + Capital Assets = Liabilities + Equity
All should be All should be adjusted now!adjusted now! All should be All should be adjusted now!adjusted now!
– Assets = Liabilities + Capital – Fundamental errors should be
adjusted by prior year adjustments …… – Provision for bad debt is
determined by ageing analysis – Deposits in bank should be current
assets
Assets Liabilities + Equity No fundamental error any more The term PYA is adjusted Impairment loss (by individual and collective assessment) Depend on the deposit term
© 2006-08 Nelson 74
– Property in HK and PRC purchased by an entity is a fixed asset
– Only cost of improvement to a fixed asset is capitalised in the balance sheet
– Non-profit making entities can have exemptions on some accounting requirements
Not always!
38
Statement of Financial Position A complete set of financial statements comprises:
a) a balance sheet;
Effective for the period Effective for the period beginning on or afterbeginning on or after
1 Jan. 20091 Jan. 2009
Statement of Comprehensive Incomeb) an income statement; c) a statement of changes in equity showing
either: i) all changes in equity, or ii) changes in equity other than those arising
from transactions with equity holders acting in their capacity as equity holders;
© 2006-08 Nelson 75
Statement of Cash Flowd) a cash flow statement; and e) notes,
comprising a summary of significant accounting policies and other explanatory notes.
(IAS 1, amended in 2005)
Future Development
• The US FASB and the IASB reaffirmed their commitment in 2005 to the convergence of US GAAP and IFRSs
• In Nov. 2007, the US SEC approved the financial statements from foreign private
issuers in the US will be accepted without reconciliation to US GAAP only if they are prepared using IFRSs
• In 2008, The AICPA proposed incorporating IFRS
elements in its Uniform CPA Examination Th AICPA l h d d i d b i
© 2006-08 Nelson 76
The AICPA launched a designated website for its members and public, www.IFRS.com
• On 27 August 2008, US SEC voted to publish for public comment
a proposed Roadmap that could lead to the use of IFRS by U.S. issuers beginning in 2014
39
Future Development: Challenges
1. National differences not easily reconciled and/or removed 2. Inevitable and continuous changes 3 Lack of or limited experience in IFRS application3. Lack of or limited experience in IFRS application
– Any proactive (or reactive) mechanism to resolve dispute – Sufficient and appropriate advisors and consultants
4. Reliance on external experts – Surveyors and business valuation
5. Complicated IFRSs ……
© 2006-08 Nelson 77
IFRS Issued RecentlyIFRS Issued Recently Selected new interpretations and amendments to IFRS issued in 2007 to 2008 • IFRIC12 Service Concession Arrangements (2007)
Effective for periods beginning on/after
1 Jan. 2008 • IFRIC 13 Customer Loyalty Programmes (2007) • IFRIC 14 IAS 19 —The Limit on a Defined Benefit
Asset, Minimum Funding Requirements and their Interaction (2007)
• IFRS 8 Operating Segments (2007) • IFRS 23 Borrowing Costs (2007) • IAS 1 Presentation of Financial Statements (2007)
1 Jul. 2008 1 Jan. 2008
1 Jan. 2009 1 Jan. 2009 1 Jan. 2009
© 2006-08 Nelson 78
• IAS 27 Consolidated and Separate Financial Statements (2008)
• IFRS 3 Business Combination (2008) • Amendments to IAS 32 and IAS 1 Puttable Financial
Instruments and Obligations Arising on Liquidation (2008)
1 Jul. 2009
40
© 2006-08 Nelson 79
Background
• IFRS 8 arises from the IASB’s consideration of – FASB Statement No. 131 Disclosures about Segments of
an Enterprise and Related Information issued in 1997, p , compared with IAS 14 Segment Reporting, which is similar to IAS 14.
• IFRS 8 achieves convergence with the requirements of SFAS 131. – The wording of IFRS 8 is the same as that of SFAS 131
except for changes necessary to make the terminology consistent with that in other IFRSs.
© 2006-08 Nelson 80
Core Principle • An entity shall disclose information to enable users
of its financial statements to evaluateof its financial statements to evaluate – the nature and financial effects of the business
activities in which it engages and – the economic environments in which it operates.
Scope • IFRS 8 applies to:
– the separate or individual financial statements of an entity with listed debt and equity
© 2006-08 Nelson 81
q y – the consolidated financial statements of a group with a parent with listed debt
and equity – The segment information of an entity which chooses to follow IFRS 8
• If a financial report contains both the parent’s consolidated financial statements and separate financial statements, – segment information is required only in the consolidated financial statements.
Operating Segments
• An operating segment is a component of an entity: a) that engages in business activities from which it may
earn revenues and incur expenses (including A business activity
i ht h t tearn revenues and incur expenses (including revenues and expenses relating to transactions with other components of the same entity),
b) whose operating results are regularly reviewed by the entity’s chief operating decision maker to • make decisions about resources to be allocated
to the segment and • assess its performance, and
might have not yet earned any revenue For example: CEO, COO, or a group of executive directors Not necessary be geographical areas or products
© 2006-08 Nelson 82
c) for which discrete financial information is available.
• Not every part of an entity is necessarily an operating segment or part of an operating segment, say corporate headquarter
Operating Operating SegmentsSegments
Disclosure – Measurement
• An entity shall report a measure of profit or loss and total assets for each reportable segment.
• An entity shall report a measure of liabilities for• An entity shall report a measure of liabilities for each reportable segment if such an amount is regularly provided to the chief operating decision maker.
Other Information
Disclosure – Measurement
• The amount of each segment item reported shall be the measure reported to the chief operating decision maker
– for the purposes of making decisions about allocating resources to thefor the purposes of making decisions about allocating resources to the segment and assessing its performance.
• Compared with IAS 14, – IAS 14 required segment information to be prepared
in conformity with the accounting policies adopted for preparing and presenting the financial statements of the consolidated group or entity. IAS 14 defines segment revenue segment expense
© 2006-08 Nelson 84
– IAS 14 defines segment revenue, segment expense, segment result, segment assets and segment liabilities
– IFRS 8 does not define these terms but requires an explanation of how segment profit or loss, segment assets and segment liabilities are measured for each reportable segment.
43
© 2006-08 Nelson 85
Introduction
• The revised IFRS 3 is part of a joint effort by the IASB and the US Financial Accounting Standards Board (FASB) to improve financial reporting while promoting the international convergence p g p g g of accounting standards.
• The IASB and FASB decided to address the accounting for business combinations in two phases.
– The IASB and the FASB deliberated the first phase separately. The IASB concluded its first phase in March 2004 by issuing the previous version of IFRS 3 Business Combinations.
– The IASB’s and FASB’s primary conclusion in the first phase was
© 2006-08 Nelson 86
that virtually all business combinations are acquisitions and used one method of accounting for business combinations — the acquisition method.
44
Introduction
• Then, IFRS 3 revised …… – The second phase of the project addressed the guidance for
applying the acquisition method.applying the acquisition method. – The IASB and FASB decided that a significant improvement could
be made to financial reporting if they had similar standards for accounting for business combinations.
– Thus, they decided to conduct the second phase of the project as a joint effort with the objective of reaching the same conclusions.
– The IASB and FASB concluded the second phase of the project by issuing IFRS 3 and FASB Statement No. 141 Business C bi ti d
© 2006-08 Nelson 87
Introduction
• The objective of IFRS 3 (revised 2008) is – to improve the relevance, reliability and comparability of
the information that a reporting entity provides in its
Scope the information that a reporting entity provides in its financial statements about a business combination and its effects.
• To accomplish that, IFRS 3 establishes principles and requirements for how the acquirer: a) recognises and measures in its financial statements the
identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquiree;
Application of the method
Method of accounting
What is it?
© 2006-08 Nelson 88
b) recognises and measures • the goodwill acquired in the business combination or • a gain from a bargain purchase; and
c) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination.
What is it?
Application of the method
• An entity shall account for each business combination by applying the acquisition method. (IFRS 3.4)
Method of accounting
• Applying the acquisition method requires: a) identifying the acquirer; b) determining the acquisition date; c) recognising and measuring
Guidance in IAS 27
Date of control obtained
© 2006-08 Nelson 89
) g g g • the identifiable assets acquired, • the liabilities assumed and • any non-controlling interest in the acquiree; and
d) recognising and measuring • goodwill or • a gain from a bargain purchase. (IFRS 3.5)
The Acquisition Method
• Recognising and measuring the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquiree
• The acquirer shall measure the identifiable assets acquired and the liabilities assumed
– at their acquisition-date fair values. (IFRS 3.18)
• For each business combination, the acquirer shall measure any non-controlling interest in the acquiree either
– at fair value or
Affect acquisition in stages
© 2006-08 Nelson 90
– at the non-controlling interest’s proportionate share of the acquiree’s identifiable net assets. (IFRS 3.19) Existing practice
( g )
2 calculated 2 calculated amounts of goodwill amounts of goodwill
resultedresulted
46
The Acquisition Method
• Recognising and measuring goodwill or a gain from a bargain purchase
Critical Amendment
• The acquirer shall recognise goodwill as of the acquisition date measured as the excess of (a) over (b) below: a) the aggregate of:
i) the consideration transferred measured in accordance with IFRS 3, which generally requires acquisition-date fair value;
ii) the amount of any non-controlling interest in the acquiree measured in accordance with IFRS 3; andIf fair value is adopted it will
Application of the method
© 2006-08 Nelson 91
measured in accordance with IFRS 3; and iii) in a business combination achieved in stages, the
acquisition-date fair value of the acquirer’s previously held equity interest in the acquiree.
b) the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed measured in accordance with IFRS 3. (IFRS 3. 32)
If fair value is adopted, it will affect the amount of goodwill
Practices changed
• Acquisition-related costs
• Acquisition-related costs are costs the acquirer incurs to effect a business combination.
– Those costs include finder’s fees; advisory, legal, accounting, valuation and other professional or consulting fees; general administrative costs, including the costs of maintaining an internal acquisitions department; and costs of registering and issuing debt and equity securities.
• The acquirer shall account for acquisition-related costs as expenses in the periods in which the costs are incurred and the services are
© 2006-08 Nelson 92
p received, with one exception.
• The costs to issue debt or equity securities shall be recognised in accordance with IAS 32 and IAS 39.
47
© 2006-08 Nelson 93
Summary of Changes
• A complete set of financial statements comprises: a) a statement of financial position as at the end of the
period;
Previously, we call it “Balance Sheet”period;
b) a statement of comprehensive income for the period; c) a statement of changes in equity for the period; d) a statement of cash flows for the period; e) notes, comprising a summary of significant accounting
policies and other explanatory information; and f) a statement of financial position as at the beginning of
the earliest comparative period
3 years’ “balance sheets”
© 2006-08 Nelson 94
the earliest comparative period • when an entity applies an accounting policy
retrospectively or makes a retrospective restatement of items in its financial statements, or
• when it reclassifies items in its financial statements. • An entity may use titles for the statements other than
those used in IAS 1. (IAS 1.10)
48
Summary of Changes
• A complete set of financial statements comprises: a) a statement of financial position as at the end of the
period;
period; b) a statement of comprehensive income for the period; c) a statement of changes in equity for the period; d) a statement of cash flows for the period; e) notes, comprising a summary of significant accounting
policies and other explanatory information; and f) a statement of financial position as at the beginning of
the earliest comparative period
© 2006-08 Nelson 95
the earliest comparative period • when an entity applies an accounting policy
retrospectively or makes a retrospective restatement of items in its financial statements, or
• when it reclassifies items in its financial statements. • An entity may use titles for the statements other than
those used in IAS 1. (IAS 1.10)
Summary of Changes
• Statement of comprehensive income can be further divided into 2 statements ……
• An entity shall present all items of income and• An entity shall present all items of income and expense recognised in a period: a) in a single statement of comprehensive income, or b) in two statements:
i. a statement displaying components of profit or loss (separate income statement) and
ii. a second statement beginning with profit or loss and displaying components of other
One Statement One Statement ModelModel
Two Statements Two Statements ModelModel
© 2006-08 Nelson 96
loss and displaying components of other comprehensive income (statement of comprehensive income). (IAS 1.81)
Comprehensive income Comprehensive income concept used in US concept used in US
since 90ssince 90s
One Statement One Statement ModelModel
Two Statements Two Statements ModelModel
Components of profit or loss
Components of other
Presented in statement of comprehensive income
Presented in statement of comprehensive income
Other comprehensive income ()
Summary of Changes
Before amendment
Components of other
Statement of Comprehensive
Statement of changes in equity
50
Future Development
• Globalisation C d t US GAAP• Converged to US GAAP
• Less accounting choices • Off-balance-sheet item no longer “off” again • Emphasis on fair value accounting
• More assets and liabilities to be stated at fair value • e.g. contingent liabilities (proposed in ED to IFRS 3)
• Beyond fair value more risk oriented
© 2006-08 Nelson 100
• Beyond fair value, more risk-oriented • e.g. sensitivity analysis on market risk (IFRS 7)
Future Development
• Fitch Ratings made the following two comments IFRS: The devil is in the detail () Companies face the risk that investors will misinterpret
information ()
© 2006-08 Nelson 102
• Professor Sir David Tweedie, IASB Chairman, also said Anyone who says they understand IAS 39 has not read it (39,)
52
© 2006-08 Nelson 103
“There is a long road, we keep on search here and there.”
Li Sao of Qu Yuan (340-278 B.C.)
Financial Reporting in China 24 September 2008
© 2006-08 Nelson 104
Nelson LamNelson Lam MBA MSc BBA ACA ACIS CFA CPA(Aust.) CPA(US) FCCA FCPA(Practising) MSCA
A Simple Test First ……
To ask yourself whether you agree with the following statements …… – Assets = Liabilities + Capital
What do you What do you think?think?
– Assets = Liabilities + Capital – Fundamental errors should be
adjusted by prior year adjustments …… – Provision for bad debt is
determined by ageing analysis – Deposits in bank should be current
assets
© 2006-08 Nelson 2
– Property in HK and PRC purchased by an entity is a fixed asset
– Only cost of improvement to a fixed asset is capitalised in the balance sheet
– Non-profit making entities can have exemptions on some accounting requirements
2
Major Differences between ASBE and IFRS
Practical Issues in Applying ASBE
© 2006-08 Nelson 3
pp y g
Today’s Agenda
© 2006-08 Nelson 4
Development in PRC: Before 2007
• In addition to PRC accounting law and financial accounting and reporting rules, the pronouncements of current PRC accounting requirements for profit-oriented enterprises include: q p p – Chinese Accounting Standards for Business Enterprises
– Accounting System for Business Enterprises
– Accounting System for Small Business Enterprises
Accounting System for Financial Institutions
© 2006-08 Nelson 5
– Accounting System for Financial Institutions
– Accounting Guidelines for Enterprises within Specialised Industries and ad hoc accounting pronouncements (known as “” ) Announced by Ministry of Announced by Ministry of
Finance PRC (MOF) Finance PRC (MOF)
Development in PRC: From 2007
• On 15 Feb. 2006, the MOF released 39 new Chinese Accounting Standards for Business Enterprises (ASBE)
– Effective from 1 Jan. 2007 and mandatory for all listed Chinese enterprises (2007 11)
© 2006-08 Nelson 6
• The new ASBE are substantially in line with IFRSs () – except for certain modifications that reflect China’s
unique circumstances and environment
• On 15 Feb. 2006, the MOF released
– 39 Chinese Accounting Standards for B i E t i (ASBE) Business Enterprises (ASBE) which comprises
• 1 Basic Standard ---
• 38 Specific ASBE ()
O 30 O t 2006 th MOF l d
`
• 32 Application Guidance
Development in PRC: From 2007
• The accounting standards system – Suits the development of China’s market
economy and convergence economy and convergence with the international practices.
– Emphasizes the new philosophy of providing decision-useful accounting information to investors and the public.
:
• Effective from 1 Jan. 2007 and mandatory for all listed Chinese enterprises
© 2006-08 Nelson 8
(Basic Standard) 1 (Inventories)
ASBEASBE IAS/IFRSIAS/IFRS
IAS 2 ( ) 2 (Long-term equity investment) 3 (Investment property) 4 (Fixed assets) 5 (Biological assets) 6 (Intangible assets) 7 (Exchange of non-monetary assets) 8 (Impairment of assets)
IAS 39 IAS 40 IAS 16 IAS 41 IAS 38 IAS 16, 18 IAS 36
© 2006-08 Nelson 10
8 (Impairment of assets) 9 (Employee compensation) 10 (Enterprise annuity fund) 11 (Share-based payment) 12 (Debt restructuring) 13 (Contingencies)
IAS 36 IAS 19 IAS 26 IFRS 2 IAS 39 IAS 37
6
14 (Revenue) 15 (Construction contracts)
ASBEASBE IAS/IFRSIAS/IFRS
IAS 18 IAS 11 ( )
16 (Government grants) 17 (Borrowing costs) 18 (Income taxes) 19 (Foreign currency translation) 20 (Business combinations) 21 (Leases) 22 (Recognition and measurement of
IAS 20 IAS 23 IAS 12 IAS 21 IFRS 3 IAS 17 IAS 39
© 2006-08 Nelson 11
22 (Recognition and measurement of financial instruments)
23 (Transfer of financial assets) 24 (Hedging) 25 (Direct insurance contracts) 26 (Re-insurance contracts)
IAS 39
Overview of Convergence in PRC
27 (Extraction of petroleum and natural gas) 28 (Changes in
ASBEASBE IAS/IFRSIAS/IFRS
IFRS 6 IAS 88 (C g
accounting policies and estimates and correction of errors) 29 (Events occurring after the balance
sheet date) 30 (Presentation of financial statements) 31 (Cash flow statements) 32 (Interim financial reporting) 33 (Consolidated financial statements)
IAS 10
© 2006-08 Nelson 12
34 (Earnings per share) 35 (Segment reporting) 36 (Related party disclosure) 37 (Presentation of financial
instruments) 38 (First-time adoption of ASBE)
IAS 33 IAS 14 IAS 24 IAS 32 / IFRS 7 IFRS 1
7
Comparison of ASBE and IFRS
• For those entities required or electing to adopt the new ASBE the new ABSE replaces the existing Chinese Accounting Standards and an
ASBEASBE
– the new ABSE replaces the existing Chinese Accounting Standards and an earlier version of the ASBE
• The new ASBE are substantially in line with IFRSs – except for certain modifications that
reflect China’s unique circumstances and environment
© 2006-08 Nelson 13
Today’s Agenda
© 2006-08 Nelson 14
Introduction of IFRS
IASB (I t ti l A ti St d d B d)• IASB (International Accounting Standards Board)
– An independent and privately-funded accounting standard setter, based in London
– Responsible to issue () IFRSs (International Financial Reporting Standards)
• IASC (International Accounting Standards Committee)
© 2006-08 Nelson 15
Standards)
comprise: – International Financial Reporting Standards
(IFRS ) ; – International Accounting Standards
(IAS ); and – Interpretations ().
© 2006-08 Nelson 16
• On top of these, IASB also has a set of: – Framework for the Preparation and Presentation of Financial
Statements ()
Canada (2011)
Financial Position (in balance sheet) • a resource controlled ()by the enterprise as a result of
past events () and from which future economic benefits ( ) t d t fl t th t i
Balance Sheet Approach
Financial Performance (in income statement)
) are expected to flow to the enterprise • a present obligation () of the enterprise arising from past
events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits
• the residual interest () in the assets of the enterprise after deducting all its liabilities
© 2006-08 Nelson 18
(Income)
(Expense)
• increases () in economic benefits during a period in the form of – inflows or enhancements of assets or – decreases of liabilities that result in increases in equity – other than those relating to contributions from equity participants
• decreases () in economic benefits during a period in the form of – outflows or depletions of assets or – incurrences of liabilities that result in decreases in equity, – other than those relating to distributions to equity participants
10
© 2006-08 Nelson 19
How is it showed in the financial statements?
Introduction: Property, Plant and E.
• Property, plant and equipment (PPE) is clearly defined and properties not within the definition are not accounted for by
Example IAS 16 Property, plant and equipment
DefinitionDefinition using IAS 16
e.g. property held to earn rental is not covered by IAS 16 • PPE is recognised if it meets the recognition criteria:
a) it is probable that future economic benefits associated with the item will flow to the entity; and
b) the cost of the item can be measured reliably.
• Initially measured at cost while subsequently measured by sing either
RecognitionRecognition
MeasurementMeasurement
• Certain information is required to be disclosed in the financial statementsDisclosureDisclosure
11
DefinitionDefinition items shall be accounted for by using IAS 39
• Financial asset is recognised if it meets the recognition criteria:
the entity becomes a party to the contractual provisions of the instrument (“probable” flow-in is not required)
• Initially measured at fair value (plus transaction cost in most cases) hile s bseq entl meas red at either
RecognitionRecognition
MeasurementMeasurement
© 2006-08 Nelson 21
cases) while subsequently measured at either Fair value or Amortised cost (if conditions can be met)
• Certain information is required to be disclosed in the financial statements IAS 32 and IFRS 7 provides more requirements on
presentation and disclosure of financial instruments
DisclosureDisclosure
Introduction: Investment Property
• Property held for rental and/or capital appreciation and meets other conditions is investment property (IP) that is
Example IAS 40 Investment property
DefinitionDefinition accounted for by using IAS 40
• IP is recognised if it meets the recognition criteria: a) it is probable that future economic benefits associated
with the item will flow to the entity; and b) the cost of the item can be measured reliably.
• Initially measured at cost while subsequently measured by sing either
RecognitionRecognition
MeasurementMeasurement
• Certain information is required to be disclosed in the financial statementsDisclosureDisclosure
Any difference between revaluation model and fair value model?
12
Introduction: Fair Value
• For g, fair value is used or mentioned in most IFRSs
• Fair value is defined as: – the amount for which an asset could be exchanged, or a liability settled,
between knowledgeable, willing parties in an arm’s length transaction • The same definition is used in different IFRSs,
– The application to different assets and liabilities may not be the same,
© 2006-08 Nelson 23
pp y , for example: • IAS 16 Property, plant and equipment • IAS 18 Revenue • IAS 39 Financial instruments: recognition and measurement • IAS 40 Investment property • IFRS 2 Share-based payment
Introduction: Fair Value
Example
– subsequent measurement, or – both
q • Held-to-maturity (IAS 39) • Loans and receivables (IAS 39) • Business combination (IFRS 3)
Not applied to initial measurement but applied to subsequent
Applied to both initial and subsequent measurement: • Inventories (IAS 2) • Financial assets and liabilities at
© 2006-08 Nelson 24
16) • Intangible assets (IAS 38) • Investment property (IAS 40)
fair value through P/L (IAS 39) • Available for sale financial assets
(IAS 39) • Agriculture (IAS 41)
13
• Refers to fair value • Refers to fair value
Revaluation model (e.g. IAS 16)
Example
• Changes in fair value recognised in profit or loss
• Changes in fair value recognised in equity (or other comprehensive income)
• No depreciation or amortisation is required
• Depreciation or amortisation is required
© 2006-08 Nelson 25
• Revalued at each reporting date • Not clearly defined, only require sufficient regular that no material different from fair value
• N/A • Deficit about fair value below depreciated cost is recognised in profit or loss
Introduction: Fair Value
• Refers to fair value • Refers to fair value
Revaluation model (e.g. IAS 16)
Example
• Changes in fair value recognised in profit or loss
• Changes in fair value recognised in equity (or other comprehensive income)
• No depreciation or amortisation is required
• Depreciation or amortisation is required
© 2006-08 Nelson 26
• Revalued at each reporting date • Not clearly defined, only require sufficient regular that no material different from fair value
• N/A • Deficit about fair value below depreciated cost is recognised in profit or loss
Let’s highlight Let’s highlight some major differences from some major differences from
IFRSIFRS (IFRS IFRS )
• Share the same definition of asset and liability as IFRS
• IFRS and liability as IFRS
• Enterprise should use historical cost in measuring an element
• If the enterprise uses replacement cost, realisable value or fair value in measuring an element – It should make sure the
measurement basis can be
© 2006-08 Nelson 27
No such requirement in IFRS measurement basis can be obtained reliably
Major Difference of ASBE from IFRS Presentation of Financial StatementsPresentation of Financial Statements
• The presentation currency of the financial statements should be
• ASBE 19: financial statements should be
Renminbi – IAS 21 has no such compulsory
requirement
•
© 2006-08 Nelson 28
• ASBE 30: statement) can only be presented
by function – IAS 1 allows presentation by
nature or by function
• Direct method to present operating cash flow in cash flow statement should be used
• ASBE 31:
• A parent should prepare consolidated financial statements
• ASBE 33: consolidated financial statements
– IAS 27 sets out exemption on conditional basis
• Except for the disclosure required on ASBE 4 (fixed assets held for handle) and ASBE 30 (discontinued operations) , no
© 2006-08 Nelson 30
ASBE has similar requirements as set out in IFRS 5 – IFRS 5 has specific accounting
treatments on non-current assets held for sale
16
Major Difference of ASBE from IFRS Balance Sheet ItemsBalance Sheet Items
• ASBE 3 does not include some investment properties within the
• ASBE 3: investment properties within the
scope of IAS 40 – land held for a currently
undetermined future use is not an investment property under ASBE 3
• Fair value model on investment l b d h
–
© 2006-08 Nelson 31
property can only be used when there is evidence that its fair value can be reliably and continuously measured – IAS 40 has no such requirement
on fair value model
–
Major Difference of ASBE from IFRS Balance Sheet ItemsBalance Sheet Items
• Land use right carried at cost model is subsequently measured
• ASBE 3 model is subsequently measured
in accordance with ASBE 6 Intangible Assets, except for – Land and building, leased out
under operating lease and held by lessor, that are accounted for in accordance with ASBE 3 Investment Property
17
Major Difference of ASBE from IFRS Balance Sheet ItemsBalance Sheet Items
• Subsequently measurement of fixed assets and intangible assets
• ASBE 4 and 6 fixed assets and intangible assets
can only be at cost – IAS 16 and 38 provides a choice
to state the property, plant and equipment at revalued amount
• Fair value of biological assets can only be stated when there is
• ASBE 5:
© 2006-08 Nelson 33
evidence that its fair value can be reliably and continuously measured – IAS 40 has no such requirement
on fair value model
–
Major Difference of ASBE from IFRS Income Statement and Other IssuesIncome Statement and Other Issues
• No reversal of impairment loss is allowed in ASBE 5 and 8
• ASBE 5 (): allowed in ASBE 5 and 8
– IAS 36 allows reversal of impairment loss (except for impairment loss on goodwill)
• Borrowing costs should be it li d h th t th
• ASBE 17 ():
© 2006-08 Nelson 34
capitalised when they meet the capitalisation conditions – IAS 23 has a choice to expense all
borrowing costs (expense option in IAS 23 eliminated in 2007)
18
Major Difference of ASBE from IFRS Income Statement and Other IssuesIncome Statement and Other Issues
• No separate IFRS for exchange of non-monetary assets
• ASBE 7 (): of non-monetary assets
– IAS 16 and 38 set out the same requirements as ASBE 7 • Commercial substance • Fair value can be reliably
measured – IAS 18 sets out different practice
(using “similar and dissimilar”
–
approach)
Major Difference of ASBE from IFRS Income Statement and Other IssuesIncome Statement and Other Issues
• An entity should use equity method to account for those
• ASBE 2 (): method to account for those
entities that it can jointly control (joint venture) and significantly influence (associate) – IAS 31 allows equity method or
proportionate consolidation to account for jointly controlled entities
()( )
Major Difference of ASBE from IFRS Related Party DisclosureRelated Party Disclosure
• Similar requirements as IAS 24, except for “state controlled
• ASBE 36: except for state controlled
enterprises exemption” – 2 or more enterprises common
controlled by state without any other relationship would not imply be regarded as related party under ASBE 36
– In 2007, IASB has proposed to amend IAS 24 to align ith the
© 2006-08 Nelson 37
amend IAS 24 to align with the practice of ASBE 36
Today’s Agenda
© 2006-08 Nelson 38
pp y g
1. Financial Position and Performance ()
2. Human Resources()
3 M k t E t ti ()3. Market Expectation ()
4. Judgements and Estimates ()
5. Tax implication ()
6. Legal implication ()
Practical Issues: HK Experience
21
Practical Issues: HK Experience
22
Practical Issues: PRC Experience
• 1,5572007 45,625.49
2007.1.1 (After adjustment)
2006.12.31 (Before adjustment
• 2007 1,002.67() 2.42%
23
– (minority interests) 1,267 313.6 7.56%
© 2006-08 Nelson 45 Sourced from (2008)
Practical Issues: PRC Experience
• 454 795.041.92%
From cost to fair value
24
• (Minority Interests) – “”
1 2671 55781 37% 1,2671,55781.37% 3,136.18 7.56%
– :
• “”
Now: included in equity
Practical Issues: PRC Experience
(improper application)(improper application) (improper
judgement) A+H
(A and H share in the same company disclose with different policies on the same transaction or event)
(earning management)
management)
–
–
– 78
–
1. (not the same basis in determining fair value) –
– : »
»
»
26
Practical Issues: PRC Experience
A+H (A and H share in the same company disclose with different policies on the same transaction or event)p )
– A+H:
• (asset value) • (business combination) • (depreciation method)
© 2006-08 Nelson 51 Sourced from (2008)
Practical Issues: PRC Experience
(earning management)
impairment loss) –
1,570 20072007
© 2006-08 Nelson 52 Sourced from (2008)
2. (loan waived by related party)
–
27
1. (classification of financial assets) –
A shares and H shares so far?
© 2006-08 Nelson 54
Statements under PRC’s ASBE (under A shares)
•
•
•
•
•
Practical Issues in Applying ASBE Case
(ASBE) 2007
2006
261,757 212,776
© 2006-08 Nelson 56
130,468 108,145 392,225 320,921 300,949 259,382 25,398 22,417 326,347 281,799 718,572 602,720
29
(IFRS) 2007
2006
547,609 464,342 185,116 146,490 265,355 216,372 (80,239) (69,882) 467,370 394,460
© 2006-08 Nelson 57
307,433 264,334 25,325 22,323 332,758 286,657
Practical Issues in Applying ASBE Case
(ASBE):
2007
2006
8,364 7,698 12,851 8,462 22,947 15,144 11,822 10,955 9,402 5,331
© 2006-08 Nelson 58
, , 116,049 94,912 100 596 181,535 143,098
30
(IFRS):
2007
2006
7,696 7,063 668 635 22,947 15,144 12,851 8,462 116,032 94,894
© 2006-08 Nelson 59
Practical Issues in Applying ASBE Case
(ASBE):
2007
2006
31,335 23,544 361,148 346,240 95,408 53,000 15,232 9,265 15,690 14,525
© 2006-08 Nelson 60
5,842 4,757 10,192 6,760 2,190 1,531 537,037 459,622
31
(IFRS):
2007
2006
375,142 355,757 95,408 52,871 15,490 14,325 16,865 11,898 12,723 9,236
© 2006-08 Nelson 61
3,194 2,926 10,439 7,182 8,224 2,574 10,124 7,573 547,609 464,342
Practical Issues in Applying ASBE Case
(ASBE) 2007
2006
1,204,843 1,061,669 1,012,961 896,373 34,304 28,977 22,564 19,590 35,964 33,491
© 2006-08 Nelson 62
, 4,890 5,780 11,105 7,983 7,458 1,004 3,211
5,756 3,769 78,142 72,240
32
(ASBE) 2007
2006
6,828 6,020 2,059 2,877 82,911 75,383 25,758 22,400 57,153 52,983
© 2006-08 Nelson 63
54,947 52,086 2,206 897
0.63 0.60
(ASBE)
2007
2006
835,037 688,978 (487,112) (362,590)
(68,678) (51,692) (41,345) (35,050) (49 324) (44 429)
© 2006-08 Nelson 64
6,301 1,344 6,283 1,253
193,958 192,325
(ASBE)
2007
2006
(49 331) (47 043)
© 2006-08 Nelson 65
134,574 136,229 8,920 6,518
(
(IFRS) 2007
1,204,843 1,061,741 4,863 5,161
© 2006-08 Nelson 66
(IFRS) 2007
(970,929) (854,236) (37,843) (37,514) (43,315) (33,554) (11,105) (7,983) (22,745) (20,956)
© 2006-08 Nelson 67
(399) (236) (34,304) (29,330) (3,202) (2,461) (1,123,842) (986,270) 85,864 80,632
Practical Issues in Applying ASBE Case
(IFRS) 2007
(7,314) (7,101) 405 538 (3,211) — (311) (140) 2,330 890
© 2006-08 Nelson 68
(8,101) (5,813) 1,657 289 4,044 3,434 83,464 78,542 (24,721) (23,504) 58,743 55,038
35
(ASBE) 2007
2006
370 384 5,161 2 793 3 700
© 2006-08 Nelson 69
2,793 3,700
1,403,511 1,248,331
Direct MethodDirect Method
(ASBE) 2007
2006
© 2006-08 Nelson 70
(15,005) (14,062) (1,279,261) (1,149,461)
124,250 98,870
(ASBE) 2007
2006
© 2006-08 Nelson 71
(824,411) (802,872)
633 (7,701)
Practical Issues in Applying ASBE
30
Latest Development
To ask yourself whether you agree with the following statements …… – Assets = Liabilities + Capital Assets = Liabilities + Equity
All should be All should be adjusted now!adjusted now! All should be All should be adjusted now!adjusted now!
– Assets = Liabilities + Capital – Fundamental errors should be
adjusted by prior year adjustments …… – Provision for bad debt is
determined by ageing analysis – Deposits in bank should be current
assets
Assets Liabilities + Equity No fundamental error any more The term PYA is adjusted Impairment loss (by individual and collective assessment) Depend on the deposit term
© 2006-08 Nelson 74
– Property in HK and PRC purchased by an entity is a fixed asset
– Only cost of improvement to a fixed asset is capitalised in the balance sheet
– Non-profit making entities can have exemptions on some accounting requirements
Not always!
38
Statement of Financial Position A complete set of financial statements comprises:
a) a balance sheet;
Effective for the period Effective for the period beginning on or afterbeginning on or after
1 Jan. 20091 Jan. 2009
Statement of Comprehensive Incomeb) an income statement; c) a statement of changes in equity showing
either: i) all changes in equity, or ii) changes in equity other than those arising
from transactions with equity holders acting in their capacity as equity holders;
© 2006-08 Nelson 75
Statement of Cash Flowd) a cash flow statement; and e) notes,
comprising a summary of significant accounting policies and other explanatory notes.
(IAS 1, amended in 2005)
Future Development
• The US FASB and the IASB reaffirmed their commitment in 2005 to the convergence of US GAAP and IFRSs
• In Nov. 2007, the US SEC approved the financial statements from foreign private
issuers in the US will be accepted without reconciliation to US GAAP only if they are prepared using IFRSs
• In 2008, The AICPA proposed incorporating IFRS
elements in its Uniform CPA Examination Th AICPA l h d d i d b i
© 2006-08 Nelson 76
The AICPA launched a designated website for its members and public, www.IFRS.com
• On 27 August 2008, US SEC voted to publish for public comment
a proposed Roadmap that could lead to the use of IFRS by U.S. issuers beginning in 2014
39
Future Development: Challenges
1. National differences not easily reconciled and/or removed 2. Inevitable and continuous changes 3 Lack of or limited experience in IFRS application3. Lack of or limited experience in IFRS application
– Any proactive (or reactive) mechanism to resolve dispute – Sufficient and appropriate advisors and consultants
4. Reliance on external experts – Surveyors and business valuation
5. Complicated IFRSs ……
© 2006-08 Nelson 77
IFRS Issued RecentlyIFRS Issued Recently Selected new interpretations and amendments to IFRS issued in 2007 to 2008 • IFRIC12 Service Concession Arrangements (2007)
Effective for periods beginning on/after
1 Jan. 2008 • IFRIC 13 Customer Loyalty Programmes (2007) • IFRIC 14 IAS 19 —The Limit on a Defined Benefit
Asset, Minimum Funding Requirements and their Interaction (2007)
• IFRS 8 Operating Segments (2007) • IFRS 23 Borrowing Costs (2007) • IAS 1 Presentation of Financial Statements (2007)
1 Jul. 2008 1 Jan. 2008
1 Jan. 2009 1 Jan. 2009 1 Jan. 2009
© 2006-08 Nelson 78
• IAS 27 Consolidated and Separate Financial Statements (2008)
• IFRS 3 Business Combination (2008) • Amendments to IAS 32 and IAS 1 Puttable Financial
Instruments and Obligations Arising on Liquidation (2008)
1 Jul. 2009
40
© 2006-08 Nelson 79
Background
• IFRS 8 arises from the IASB’s consideration of – FASB Statement No. 131 Disclosures about Segments of
an Enterprise and Related Information issued in 1997, p , compared with IAS 14 Segment Reporting, which is similar to IAS 14.
• IFRS 8 achieves convergence with the requirements of SFAS 131. – The wording of IFRS 8 is the same as that of SFAS 131
except for changes necessary to make the terminology consistent with that in other IFRSs.
© 2006-08 Nelson 80
Core Principle • An entity shall disclose information to enable users
of its financial statements to evaluateof its financial statements to evaluate – the nature and financial effects of the business
activities in which it engages and – the economic environments in which it operates.
Scope • IFRS 8 applies to:
– the separate or individual financial statements of an entity with listed debt and equity
© 2006-08 Nelson 81
q y – the consolidated financial statements of a group with a parent with listed debt
and equity – The segment information of an entity which chooses to follow IFRS 8
• If a financial report contains both the parent’s consolidated financial statements and separate financial statements, – segment information is required only in the consolidated financial statements.
Operating Segments
• An operating segment is a component of an entity: a) that engages in business activities from which it may
earn revenues and incur expenses (including A business activity
i ht h t tearn revenues and incur expenses (including revenues and expenses relating to transactions with other components of the same entity),
b) whose operating results are regularly reviewed by the entity’s chief operating decision maker to • make decisions about resources to be allocated
to the segment and • assess its performance, and
might have not yet earned any revenue For example: CEO, COO, or a group of executive directors Not necessary be geographical areas or products
© 2006-08 Nelson 82
c) for which discrete financial information is available.
• Not every part of an entity is necessarily an operating segment or part of an operating segment, say corporate headquarter
Operating Operating SegmentsSegments
Disclosure – Measurement
• An entity shall report a measure of profit or loss and total assets for each reportable segment.
• An entity shall report a measure of liabilities for• An entity shall report a measure of liabilities for each reportable segment if such an amount is regularly provided to the chief operating decision maker.
Other Information
Disclosure – Measurement
• The amount of each segment item reported shall be the measure reported to the chief operating decision maker
– for the purposes of making decisions about allocating resources to thefor the purposes of making decisions about allocating resources to the segment and assessing its performance.
• Compared with IAS 14, – IAS 14 required segment information to be prepared
in conformity with the accounting policies adopted for preparing and presenting the financial statements of the consolidated group or entity. IAS 14 defines segment revenue segment expense
© 2006-08 Nelson 84
– IAS 14 defines segment revenue, segment expense, segment result, segment assets and segment liabilities
– IFRS 8 does not define these terms but requires an explanation of how segment profit or loss, segment assets and segment liabilities are measured for each reportable segment.
43
© 2006-08 Nelson 85
Introduction
• The revised IFRS 3 is part of a joint effort by the IASB and the US Financial Accounting Standards Board (FASB) to improve financial reporting while promoting the international convergence p g p g g of accounting standards.
• The IASB and FASB decided to address the accounting for business combinations in two phases.
– The IASB and the FASB deliberated the first phase separately. The IASB concluded its first phase in March 2004 by issuing the previous version of IFRS 3 Business Combinations.
– The IASB’s and FASB’s primary conclusion in the first phase was
© 2006-08 Nelson 86
that virtually all business combinations are acquisitions and used one method of accounting for business combinations — the acquisition method.
44
Introduction
• Then, IFRS 3 revised …… – The second phase of the project addressed the guidance for
applying the acquisition method.applying the acquisition method. – The IASB and FASB decided that a significant improvement could
be made to financial reporting if they had similar standards for accounting for business combinations.
– Thus, they decided to conduct the second phase of the project as a joint effort with the objective of reaching the same conclusions.
– The IASB and FASB concluded the second phase of the project by issuing IFRS 3 and FASB Statement No. 141 Business C bi ti d
© 2006-08 Nelson 87
Introduction
• The objective of IFRS 3 (revised 2008) is – to improve the relevance, reliability and comparability of
the information that a reporting entity provides in its
Scope the information that a reporting entity provides in its financial statements about a business combination and its effects.
• To accomplish that, IFRS 3 establishes principles and requirements for how the acquirer: a) recognises and measures in its financial statements the
identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquiree;
Application of the method
Method of accounting
What is it?
© 2006-08 Nelson 88
b) recognises and measures • the goodwill acquired in the business combination or • a gain from a bargain purchase; and
c) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination.
What is it?
Application of the method
• An entity shall account for each business combination by applying the acquisition method. (IFRS 3.4)
Method of accounting
• Applying the acquisition method requires: a) identifying the acquirer; b) determining the acquisition date; c) recognising and measuring
Guidance in IAS 27
Date of control obtained
© 2006-08 Nelson 89
) g g g • the identifiable assets acquired, • the liabilities assumed and • any non-controlling interest in the acquiree; and
d) recognising and measuring • goodwill or • a gain from a bargain purchase. (IFRS 3.5)
The Acquisition Method
• Recognising and measuring the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquiree
• The acquirer shall measure the identifiable assets acquired and the liabilities assumed
– at their acquisition-date fair values. (IFRS 3.18)
• For each business combination, the acquirer shall measure any non-controlling interest in the acquiree either
– at fair value or
Affect acquisition in stages
© 2006-08 Nelson 90
– at the non-controlling interest’s proportionate share of the acquiree’s identifiable net assets. (IFRS 3.19) Existing practice
( g )
2 calculated 2 calculated amounts of goodwill amounts of goodwill
resultedresulted
46
The Acquisition Method
• Recognising and measuring goodwill or a gain from a bargain purchase
Critical Amendment
• The acquirer shall recognise goodwill as of the acquisition date measured as the excess of (a) over (b) below: a) the aggregate of:
i) the consideration transferred measured in accordance with IFRS 3, which generally requires acquisition-date fair value;
ii) the amount of any non-controlling interest in the acquiree measured in accordance with IFRS 3; andIf fair value is adopted it will
Application of the method
© 2006-08 Nelson 91
measured in accordance with IFRS 3; and iii) in a business combination achieved in stages, the
acquisition-date fair value of the acquirer’s previously held equity interest in the acquiree.
b) the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed measured in accordance with IFRS 3. (IFRS 3. 32)
If fair value is adopted, it will affect the amount of goodwill
Practices changed
• Acquisition-related costs
• Acquisition-related costs are costs the acquirer incurs to effect a business combination.
– Those costs include finder’s fees; advisory, legal, accounting, valuation and other professional or consulting fees; general administrative costs, including the costs of maintaining an internal acquisitions department; and costs of registering and issuing debt and equity securities.
• The acquirer shall account for acquisition-related costs as expenses in the periods in which the costs are incurred and the services are
© 2006-08 Nelson 92
p received, with one exception.
• The costs to issue debt or equity securities shall be recognised in accordance with IAS 32 and IAS 39.
47
© 2006-08 Nelson 93
Summary of Changes
• A complete set of financial statements comprises: a) a statement of financial position as at the end of the
period;
Previously, we call it “Balance Sheet”period;
b) a statement of comprehensive income for the period; c) a statement of changes in equity for the period; d) a statement of cash flows for the period; e) notes, comprising a summary of significant accounting
policies and other explanatory information; and f) a statement of financial position as at the beginning of
the earliest comparative period
3 years’ “balance sheets”
© 2006-08 Nelson 94
the earliest comparative period • when an entity applies an accounting policy
retrospectively or makes a retrospective restatement of items in its financial statements, or
• when it reclassifies items in its financial statements. • An entity may use titles for the statements other than
those used in IAS 1. (IAS 1.10)
48
Summary of Changes
• A complete set of financial statements comprises: a) a statement of financial position as at the end of the
period;
period; b) a statement of comprehensive income for the period; c) a statement of changes in equity for the period; d) a statement of cash flows for the period; e) notes, comprising a summary of significant accounting
policies and other explanatory information; and f) a statement of financial position as at the beginning of
the earliest comparative period
© 2006-08 Nelson 95
the earliest comparative period • when an entity applies an accounting policy
retrospectively or makes a retrospective restatement of items in its financial statements, or
• when it reclassifies items in its financial statements. • An entity may use titles for the statements other than
those used in IAS 1. (IAS 1.10)
Summary of Changes
• Statement of comprehensive income can be further divided into 2 statements ……
• An entity shall present all items of income and• An entity shall present all items of income and expense recognised in a period: a) in a single statement of comprehensive income, or b) in two statements:
i. a statement displaying components of profit or loss (separate income statement) and
ii. a second statement beginning with profit or loss and displaying components of other
One Statement One Statement ModelModel
Two Statements Two Statements ModelModel
© 2006-08 Nelson 96
loss and displaying components of other comprehensive income (statement of comprehensive income). (IAS 1.81)
Comprehensive income Comprehensive income concept used in US concept used in US
since 90ssince 90s
One Statement One Statement ModelModel
Two Statements Two Statements ModelModel
Components of profit or loss
Components of other
Presented in statement of comprehensive income
Presented in statement of comprehensive income
Other comprehensive income ()
Summary of Changes
Before amendment
Components of other
Statement of Comprehensive
Statement of changes in equity
50
Future Development
• Globalisation C d t US GAAP• Converged to US GAAP
• Less accounting choices • Off-balance-sheet item no longer “off” again • Emphasis on fair value accounting
• More assets and liabilities to be stated at fair value • e.g. contingent liabilities (proposed in ED to IFRS 3)
• Beyond fair value more risk oriented
© 2006-08 Nelson 100
• Beyond fair value, more risk-oriented • e.g. sensitivity analysis on market risk (IFRS 7)
Future Development
• Fitch Ratings made the following two comments IFRS: The devil is in the detail () Companies face the risk that investors will misinterpret
information ()
© 2006-08 Nelson 102
• Professor Sir David Tweedie, IASB Chairman, also said Anyone who says they understand IAS 39 has not read it (39,)
52
© 2006-08 Nelson 103
“There is a long road, we keep on search here and there.”
Li Sao of Qu Yuan (340-278 B.C.)
Financial Reporting in China 24 September 2008
© 2006-08 Nelson 104
Related Documents
