Alumni Seminar - Capital Market Updates and Preparing for ... · Chapter 8A - with WVRstructures...
Transcript of Alumni Seminar - Capital Market Updates and Preparing for ... · Chapter 8A - with WVRstructures...
Alumni Seminar -Capital Market Updates and Preparing for HKFRS 1623 November 2018
© 2018. For information, contact Deloitte China.
Disclaimer
This presentation contains general information only and Deloitte Touche Tohmatsu is not, by means of this presentation, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This presentation is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte Touche Tohmatsu, its affiliates and related entities shall not be responsible for any loss sustained by any person who relies on this presentation.
2© 2018. For information, contact Deloitte China.
© 2018. For information, contact Deloitte China.
Speakers
Kenneth ChanPartnerAudit & AssuranceDeloitte China
[email protected]+852 2852 5622
Edward AuCo-LeaderNational Public Offering Group
PartnerAudit & AssuranceDeloitte China
[email protected]+852 2852 1266
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IPO Market Update
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The Rules Changes
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Updated listing requirements for MB and GEM
§ Aggregated positive cash flow from operating activities for the 2 years prior to listing > HK$30 million
§ Market capitalization at the time of listing > HK$150 million§ Substantially the same management for 2 years• The removal of the streamlined process for GEM transfers to the Main Board
(including that a sponsor must be appointed at least two months before the submission of a listing application)
• An increase in the minimum public float value at the time of listing to HK$45 million• A mandatory public offering requirement (at least 10% of the total offer size) for all
GEM IPOs• An extension of the post-IPO lock-up requirement on controlling shareholders to 2
years
Main Board
HK’s Listing Framework
GEM
1. Profit Test§ Profits in the last 3 financial years > HK$50 million§ Preceding 2 years' aggregate profits > HK$30 million§ Most recent year's net profit > HK$20 million§ Market capitalization at the time of listing > HK$500 million
2. Market Capitalization/ Revenue/ Cash Flow Test§ Market capitalization at the time of listing > HK$2 billion§ Most recent audited financial year's revenue > HK$500 million§ Preceding 3 financial years’ aggregated positive cash flow from operating activities >
HK$100 million
3. Market Capitalization/ Revenue Test§ Market capitalization at the time of listing > HK$4 billion§ Most recent audited financial year's revenue > HK$500 million
§ The minimum public float value at the time of listing increases to HK$125 million
A Main Board new applicant must meet one of the three financial criteria above.
Effective 15 February 2018
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3 new chapters in the Main Board Listing Rules for biotech issuers, companies with weighted voting rights (WVR) and a new concessionary secondary
listing route
Companies from the innovative sectors(Min. expected market capitalisation of HK$10 billion at listing
time)
A new listing regime since 30 April 2018
• Only applications for listing from new applicants will be considered
• If below HK$40 billion of expected market capitalisation at time of listing, it would need to have at least HK$1 billion revenue in its most recent audited financial year (“Revenue Test”)
• WVR shares must not seek for a listing
• The voting power attached to WVR shares to be capped to not more than 10 times of the voting power of ordinary shares
• A minimum expected market capitalisation of HK$1.5 billion at time of listing
• Has been in operation in its current line of business for at least two financial years under substantially the same management prior to listing
• Must meet the available working capital requirements to cover at least 125% of the issuer’s costs (including general, administrative, operating and R&D costs) for at least 12 months from the date of publication of its listing document after taking the IPO proceeds into account
• Must have previously received meaningful third party investment from at least one sophisticated investor at least six months before the date of the proposed listing*
• To attract Greater China issuers that have been primary listed on the New York Stock Exchange, Nasdaq or the London Stock Exchange’s Main Market (“premium” only) for at least two full financial years to list in HK
• If the secondary listing applicants with a WVR structure and/or is a Greater China issuer will also have to meet the Revenue Test if it has an expected market capitalisation below HK$40 billion at time of secondary listing
• A non-Greater China issuer without a WVR structure must have an expected market capitalization at time of secondary listing of at least HK$10 billion
• Listing applications can be submitted on a confidential basis.
Chapter 8A -with WVR structures
Chapter 19C -new secondary
listing regime
Chapter 18A -biotech companies that do not meet any of the MB financial
eligibility tests
1. 2. 3.
*HKEX Guidance Letter HKEX-GL92-18
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The Market Perspective
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The market spotlights fall on
New technology
board in Shanghai
Shanghai-London Stock
Connect
Full circulation of H Shares
NEEQ + H Share
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184
104
95
Hong KongStock Exchange
New YorkStock Exchange
Nasdaq
Deutsche Börse
Shanghai StockExchange
HK regains no. 1, NYSE trails with six mega IPOsIPO proceeds raised by key global stock exchanges (Jan-Oct 2018)
176 new listings
52 new listings
56 new listings
139 new listings
17 new listings
(HK$ billion)
HKEX regained no. 1 position with the world’s two largest IPOs year-to-date, China Tower and Xiaomi
NYSE surpassed other stock exchanges with two mega IPOs that raised funds nearly as much as China Tower’s IPO
Two Chinese concept stocks that raised over HK$10 billion each helped Nasdaq cemented its 3rd place
Deustsche Börse surpassed Shanghai through another new listing that raised more than HK$10 billion in the first half of October
Shanghai Stock Exchange could only take up the 5th position with one small new listing in October although completed the listings of Foxconn Industrial Internet and others earlier
Source: NYSE, Nasdaq, CSRC, Deutsche Börse, HKEX, Bloomberg and Deloitte's analysis as at 31 October 2018; excluding proceeds raised from the exercise of over-allotment options after 31 October 2018 by IPOs that were debuted in October 2018. Including proceeds raised from the listings of real estate investment trusts, but excluding proceeds raised from investment trust companies, close-end investment companies, and close-end funds and special purpose acquisition companies
11©2018. For information, contact Deloitte China.
Source: HKEX and Deloitte’s analysis as of 31 October 2018; excluding proceeds raised from the exercise of over-allotment options of the newly listed companies on MB, which did not announce their price stabilization actions by 31 October 2018.
Jan-Oct 2017
121new
listings
HK$89.2billion
Jan-Oct 2018
176new
listings
HK$255.8billion
Both the number of new listings and IPO proceeds in the first 10 months of 2018 rose strongly in HK
New listings+46%
Proceeds raised
+187%
• Both the number of new listings and IPO proceeds scaled new heights
• The number of MB listings continued to exceed that of GEM
• Three new economy giants contributed more than 30% of the total proceeds raised
12©2018. For information, contact Deloitte China.
5. Jiangxi Bank – H Shares
(HK$8.6 billion)
2. Xiaomi Corp - W(HK$42.6 billion)
Jan-Oct 2017
1. Guotai Junan Securities – H Shares
(HK$17.2 billion)
5. Wuxi Biologics(HK$4.6 billion)
4. Guangzhou Rural Commercial Bank – H Shares
(HK$9.3 billion)
4 . Ping An Healthcare & Technology(HK$8.8 billion)
W
3. Zhongyuan Bank – H Shares(HK$9.3 billion)
Jan-Oct 2018
1. China Tower –H Shares
(HK$58.8 billion)
W3. Meituan
Dianping - W(HK$33.1 billion)
2. ZhongAn Online –H Shares
(HK$13.7 billion)Source: HKEX and Deloitte’s analysis as of 31 October 2018.
Overview of HK’s IPO market – Jan-Oct 2018Thanks to the three IPOs raising more than HK$30 billion of proceeds each, total proceeds raised from the top 5 IPOs in the first 10 months of 2018 reached HK$151.9 billion, almost a threefold increase over HK$54.1 billion of the same period of 2018. New economy IPOs played an important role in HK’s IPO market.
13©2018. For information, contact Deloitte China.
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Jan-Oct 2018 Jan-Oct 2017
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Source: HKEX and Deloitte’s analysis as of 31 October 2018.*Includes application(s) by investment vehicle(s) pursuant to Chapters 20 and 21 of the Main Board Listing Rules, application(s) for transfer of listing from GEM to the Main Board, and deemed new applicant(s)pursuant to Main Board Listing Rule 8.21C or Main Board Listing Rule 14.84, and very substantial acquisition(s) treated as reverse takeover(s) pursuant to Main Board Listing Rule 14.06(6)/GEM Listing Rule 19.06(6). **Figure of the first 10 months of 2018 includes new IPO applications accepted since 1 January 2018 and figure of the first 10 months of 2018 includes new IPO applications accepted since 1 January 2018
Total no. of applications received*
Lapsed applications (i.e. approval in principle granted but not listed prior to applications lapsed)
Rejected applications
Withdrawn applications
Returned applications
333
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19%
64%
IPO applications received and under processing, lapsed applications with approval in principle granted, and rejected applications in the first 10 months of the year all rose in number.
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157%
208 28%IPO applications under
processing this year**
36%
-0
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2%10%
42%15%
8%
15%
8% X < 5 times
5 times < X < 10times10 times < X < 20 times20 times < X < 30 times
In the first 10 months of 2018, nearly 40% of IPOs were priced at P/E ratios of at least 20 times.
• 42% of IPOs were priced at P/E ratios of 10-20 times, down by 10 percentage points from 52% of the same period last year.
• Nearly 40% (38%) of IPOs were priced at P/E ratios of 20 times or above, up by 10 percentage points from 28% of last year.
Source: HKEX and Deloitte’s analysis as of 31 October 2018; excluding proceeds raised from the exercise of over-allotment options of the newly listed companies on MB, which did not announce their price stabilization actions by 31 October 2018.
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HKFRS 16
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HKFRS 16What are the key impacts?
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Highlights
HKAS 17Risk and rewards model
HKFRS 16Control model
The finance lease/operating lease distinction under HKAS 17 is no longer relevant under HKFRS 16 for lessees. Instead, most leases will have to be recognised as “right-of-use” asset with a related liability, with subsequent accounting similar to the finance lease model under HKAS 17.
HKFRS 16 key change
for lessees
Shift in leasing principles
New lease model and
revised definition of a
lease
Most leases brought on-
balance sheet for lessees
Lessor accounting
largely unchanged
Partial convergence
with U.S. GAAP achieved
Effective on 1 January 2019
What is the impact on our client’s assets and liabilities?
Assets and liabilities will increaseA
Assets will increase, liabilities will decreaseB
Assets will decrease, liabilities will increaseC
Knowledge Check
Your Company now applies HKFRS 16…
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What is the impact on our client’s assets and liabilities?
Assets and liabilities will increaseA
Assets will increase, liabilities will decreaseB
Assets will decrease, liabilities will increaseC
Knowledge Check
Your Company now applies HKFRS 16…
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What is the impact on our client’s net cash flows from operating activities?
IncreaseA
DecreaseB
It dependsC
Knowledge Check
Your Company now applies HKFRS 16…
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What is the impact on our client’s net cash flows from operating activities?
IncreaseA
DecreaseB
It dependsC
Knowledge Check
Your Company now applies HKFRS 16…
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What is the impact on our client’s Earnings Before Interest, Tax, Depreciation and Amortization (EBITDA)?
IncreaseA
DecreaseB
It dependsC
Knowledge Check
Your Company now applies HKFRS 16…
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IncreaseA
DecreaseB
It dependsC
Knowledge Check
Your Company now applies HKFRS 16… What is the impact on our client’s Earnings
Before Interest, Tax, Depreciation and Amortization (EBITDA)?
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IncreaseA
DecreaseB
It dependsC
Knowledge Check
Your Company now applies HKFRS 16…
What is the impact on our client’s current ratio (current assets/current liabilities)?
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Knowledge Check
Your Company now applies HKFRS 16…
What is the impact on our client’s current ratio (current assets/current liabilities)?
IncreaseA
DecreaseB
It dependsC
25© 2018. For information, contact Deloitte China.
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Impacts on Financials – Greater Lease Assets & LiabilitiesUnder HKFRS 16, all leases will be recognized as finance leases going forward. This puts significant amount of lease assets and liabilities back on the balance sheet and affects the expense composition and timing.
Finance Statement Level
Account Balances / Classes of Transactions
HKAS 17 (Old Standard)
HKFRS 16 (New Standard)
Finance Leases Operating Leases All Leases
Balance Sheet &Footnotes
Assets
Liabilities
Lease Commitment
Income Statement
Rental Income
Finance Income
Rental Expenses
EBITDA
Depreciation
Operating Profit
Finance Costs
Profit before tax
1. Wide-spread impacts over financial compositions, with increase in assets and liabilities as well as higher expense in earlier years of the lease (see graph on the left)
Major Impacts
$ $
$
$
$
$
$ $
$ $$ $
$ $
$ $
$
$
2. Changes in key financial ratios, in which higher gearing ratio, lower asset turnover, and greater EBITDA and operating profits are expected.
3. Potential increase in capital requirement/borrowing costs / compensation, resulted from the change in financial ratios / compositions
4. Additional burden in financial reporting, as more complex calculation and processing are needed to record and report finance leases.
5. How do you do business with your customers? Increase demand from customer for shorter lease terms, more variable lease payments, put pressure on pricing leases amount, etc. This may impact your business model & lease products such as increase focus on services rather than physical assets.
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HKFRS 16Are we really need to consider all leases?
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HKFRS 16 applies to all leases, except in the following cases…..Practical Expedients-Recognition exemptions
Short term lease(12 months or less)
Accounting policy option:Apply HKFRS 16 or apply exemptions
Election by underlying asset class Election on a lease-by-lease basis
Low value assets
Leases that include purchase options are not short term leases Evaluate on an absolute basis
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HKFRS 16What is a lease?
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Definition of a leaseScope
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The customer has both the right:
• To direct the identified asset’s use.
• To obtain substantially all the economic benefits from that use.
Typically identified by being explicitly specified in a contract, but can also be implicitly specified at the time made available for use by customer.
No identified asset if supplier has both:
• The practical ability to substitute alternative assets throughout the period of use, and
• They would economically benefit from substitution.
Capacity portions
• A capacity portion is an identified asset if physically distinct (e.g., a floor of a building).
• If not physically distinct (e.g., capacity portion of a pipeline or fibre optic cable), then not an identified asset…unless it represents substantially all of the capacity, such that customer has right to substantially all of the economic benefits.
• Even so, customer is unlikely to have right to control the use of non-physically distinct capacity portion, as decisions are typically made at the larger asset level.
A lease conveys the right to control the use of an identified asset for a period of time in exchange for consideration.
On transition can make policy choice whether to ‘grandfather’ previous conclusions as to whether existing contracts are leases.
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What to consider…Identified asset
Is it an identified asset?
Substantive substitutions rights Portions of assets
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Portions of assets Identified asset (cont’d)
Is it an identified asset?
Capacity portion
Substantially all of the capacity?
e.g., 100% capacity of a specified unit within a
storage facility
e.g., 20% capacity of a storage facility
Physically distinct portion
e.g., a floor of a building
ûü
ü
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Substitution rights of supplier Identified asset (cont’d)
If customer cannot readily determine, presume that
supplier does nothave substantive substitution
right
Supplier has a substantive substitution right
Supplier does not have a substantive
substitution right
It is an identified asset
üIt is not an
identified asset
û üIt is an
identified asset
• Does the supplier have the practical ability to substitute alternative assets?and
• Would the supplier economically benefit from exercise of right to substitute?
Substantive substitution rights
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Right to obtain economic benefits Control the use of the identified asset
Substantially all
Examples:
• Primary output and by-products
• Using asset in commercial transactions with third parties
Economic benefits within the scope of rights to use
Not the economic benefits from ownership
Economic benefits over the life of the asset
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Right to direct the useControl the use of the identified asset
Are decisions predetermined?
Does the customer have the right to
direct how and for what purpose the
asset is used throughout the period
of use?
Does customer have right to operate the
asset without the supplier having the right
to change operating instructions?
OrDid the customer design
the asset to predetermine how and
for what purpose?
NoYes
• Relevant decisions?
• Type, when, where, whether output is produced?
• Decisions determined during and before the period of use?
(This is not about rights to operate and maintain the asset)
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Example-Identified asset
A contract between Customer and Supplier requires Supplier to supply a truck (Plate # 2456) for a period of one year. Customer hired driver for the truck.
The value of the truck is US$3,500 and Supplier cannot change the truck unless repair and maintenance is needed.
Example
Is there an identified asset?Yes. The contract specifies a truck.
Is there a substantive right to substitute the assets?
No. Supplier cannot change the truck anytime.
Does the customer have the right to direct the use of the identified asset?
Yes.
Is there a lease?Yes. It is a lease. BUT, customer can apply the exemption of short term lease.
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HKFRS 16How should we calculate the lease assets and liabilities?
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Initial measurementMeasurement
Lease liability
Exercise price of
purchase option
(reasonably certain)
Fixed payments
less incentives
Variable payments (e.g. CPI/
rate)
Expected residual value
guarantee
Penalty for terminating
(if reasonably
certain)
Right-of-use asset
Initial direct cost
Payments less
incentives before
commence-ment date
Lease liability
NPV =
Estimated cost for
dismantling restoring
asset
Discount rate
Lease term
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Lease term extension and termination options Lessee accounting (cont’d)
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Option to extend
Option to terminate
Non-cancellable period
Reassess significant event or change in circumstances that lessee controls and affects whether exercise ‘reasonably certain’.
Revise: change in non-cancellable period.
‘Reasonably certain’
Consider all facts and circumstances that create an economic incentive, includingexpected changes:
• Contractual terms for optional periods
• Significant leasehold improvements
• Costs of termination and return
• Importance to operations (specialised, location, alternatives)
• Conditionality associated with option
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The discount rateLessee accounting (cont’d)
Determining appropriate discount rates
• The interest rate implicit in the lease should be used if it can be readily determined; otherwise, use the incremental borrowing rate.
• Determining the rate implicit in the lease requires knowledge of the underlying asset’s residual value and its fair value; information unlikely to be readily available to lessees.
• Property yields can potentially be used as a starting point for determining an incremental borrowing rate.
• There will still be considerable judgement as to what particular adjustments will need to be made and it may require occupiers to understand more about the alternative use value of their estate to do so.
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Interest rate implicit in the leaseThe rate of interest that causes the present value of (a) the lease payments and (b) the unguaranteed residual value to
equal the sum of (i) the fair value of the underlying
asset and (ii) Any initial direct costs of the lessor.
Incremental borrowing rateThe rate of interest that a lessee would have to pay to borrow over a similar term, and with a similar security, the funds necessary to obtain an asset of a similar value to the right-of-use asset in a similar economic environment.
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How to calculate an incremental borrowing rateDiscount rate
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IBR methodology thoughts
Risk free rate
• Align weighted average payment term of the lease with the term for the source of the risk free rate
• Adjust risk free rates for unusual items such as hyperinflationary economies, currency unions and countries which use a currency that is not their own
• Ensure credit spread data points are relevant at the lease inception date• Use credit spreads from debt that best matches the weighted average
payment term of the lease, otherwise estimate• Be aware that group funding policies may not be relevant
considerations for determining the IBR
• Make an adjustment if there is benefit to the lender in the form of a secured asset
• Get data from banks or lenders as unlikely to have secured borrowing rates
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The discount rateLessee accounting
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Why does it matter?
Example fact pattern:
• On 1 Jan 2020, a company enters into 700 new 10-year leases with rentals of HK$48,000 each per year paid in arrears.
• Under IAS 17 it would have recognised a straight-line expense of HK$33.6m per year.
Discount rate 5% 7% 10%Initial liability $259m $236m $206m
Year 1 expense
$39m $40m $41m
Year 5 expense
$34m $35m $35m
Year 9 expense
$29m $28m $26m
Total payable $336m $336m $336m
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Initial measurement: ExampleMeasurement
Initial Direct Cost T1 T2 T3 T4 T5
100 250 300 350 400 450
Lease term: 5 yearsDiscount rate: 5%
Present Value = 1,494
Lease liability 1,494
Right of use asset 1,594(1,494 + 100)
Lease start date
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Subsequent measurementMeasurement
YearLease Liability
Depreciation TablePrincipal Interest Rental
T1 1,494 75 250.00T2 1,319 66 300.00T3 1,085 54 350.00T4 789 39 400.00T5 429 21 450.00
HKFRS 16:
YearAsset
Depreciation TableBeg. Bal Depreciation End. Bal
T1 1,594 319 1,275T2 1,275 319 956T3 956 319 638T4 637 319 319T5 319 319 0.00
HKAS 17:(250+300+350+400+450)/5 = 350/year
Lease term: 5 years
Discount Rate: 5%
Present Value=
1,494
Lease Liability 1,494Right of use asset 1,594(1,494 + 100)
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Subsequent measurement: Lease liabilityMeasurement
Time
Cos
t
Effective interest rate (Profit and loss –financing cost)
Increase the lease liability to reflect the interest accrued (and recognized in profit or loss).
Deduct lease payments made from the liability
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Subsequent measurement: Right of use assetMeasurement
Time
Cos
t
Apply depreciation provisions in HKAS 16
Apply depreciation over the useful life (consider renew option)
Measuring impairment according to HKAS 36
(Profit and Loss –Depreciation)
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HKAS 17 vs HKFRS 16Measurement
Time
Cos
t
Interest and depreciation in accordance with HKFRS 16
HKFRS 16 leads to recognition of more lease expenses in early periods of a lease
HKAS 17 unwinds the profit and loss impact
Straight-line expense under HKAS 17
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HKFRS 16What are the additional Disclosures under HKFRS 16?
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Balance sheet Presentation and disclosure
Balance sheet 20xx $Lease assets Xxx
Lease liabilities Xxx
Present separately (except if
investment property)
Balance Sheet 20xx $Property, plant and equipment
Xxx
Other liabilities Xxx
Present in the line item it would have
been if it was owned
Disclose the line item in which
they are included
OR
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Income statement Presentation and disclosure (cont’d)
Income statement 20xx $Variable lease payments, re-measurement gains/losses, short term, low value leases
Xxx
Depreciation XxxFinance cost XxxProfit before tax Xxx
Present interest expense separate from depreciation
(Interest is a component of finance cost under HKAS 1)
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Cash flow statement Presentation and disclosure (cont’d)
Cash payments for principal portion of the lease liability within finance activities
Apply HKAS 7 to cash payments for interest portion of the lease liability (finance or operating)
Short-term or low-value lease payments and variable lease payments not included in the
measurement of the lease liability in operating activities
Cash flow statement 20xx $Operating activities XxxFinancing activities Xxx
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In the notes Presentation and disclosure (cont’d)
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HKFRS 16Should we restate our financial statements uponAdoption of HKFRS 16?
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TransitionLessee accounting
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Effective for periods beginning on or after
1 Jan 2019
Earlier application permitted
Not required to reassess whether a
contract is, or contains, a lease at the date of initial
application
Challenge for systems to capture
all data?
A lessee must make a single choice on how to transition
Transition choice will impact net assets,
distributable reserves and future
P&L
Choice of transition approach determines impact on
transition date balance sheet and future P&L
Retrospective application or cumulative catch-up approach? This is a single choice that must be applied to all leases
Options for transitioning to HKFRS 16
Option 1 – retrospective• Restate comparatives as if HKFRS 16 always applied
Option 2 – cumulative catch-up• Leave comparatives as previously reported• Any difference between asset and liability recognised in opening
retained earnings at transition• Carry forward existing finance lease liabilities• Calculate outstanding liability for existing operating leases using
incremental borrowing rate at date of transition• Choose how to measure asset on lease-by-lease basis
Option 2AMeasure asset as if HKFRS 16 had been applied from lease commencement (but using incremental borrowing rate at date of transition.
Option 2BMeasure asset at amount equal to liability (adjusted for accruals and prepayments)
@2018. For information, contact Deloitte China.
TransitionLessee accounting (cont’d)
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Application of transition options – example Example facts:• 5-year lease, entered into on 1 Jan 2018; HK$100k payable on second day of each year.• 8% discount rate at lease commencement; 12% incremental borrowing rate at date of transition.• Right-of-use asset is depreciated straight-line.
Option 1 Option 2A Option 2B
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Are you ready?
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Preparing your planReadiness
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Are your systems and processes
capturing all the required information?
Are systems and processes capable
of monitoring leases and
keeping track of the required
ongoing assessments?
Have you considered
the impact of changes on
financial results and position?
Have you considered the potential use of HKFRS 16’s
recognition exemptions
and practical expedients?
Do you know what
transitional reliefs are
available, and whether you will apply any
of them?
Have you planned
when you will consider the tax impacts?
How will you communicate this impact to
affected stake-
holders?
Have you considered
whether your leasing strategy requires revision?
Do you know which of your contracts are, or contain, a
lease?
Do you know what
discount rates you’ll be using for
your different leases?
1. Lease identification
2. Assess accounting judgements
3. Communication with stakeholders,
technology and leasing strategy
©2018. For information, contact Deloitte China.
Questions & answers
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