HKFRS 5 and HKAS 36 and 38 - Nelson CPA · 4/19/2006 · • Assets classified as non-current in...

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© 2005-06 Nelson 1

Nelson Lam Nelson Lam CFA FCCA FCPA(Practising)MBA MSc BBA CPA(US) ACA

HKFRS 5 and HKAS 36 and 3819 April 2006

5 38 36

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Today’s Agenda

HKFRS 5 Non-current Assets Held for Sale and Discontinued OperationsHKFRS 5 Non-current Assets Held

for Sale and Discontinued Operations

Major Changes onHKAS 38 Intangible Assets

Major Changes onHKAS 38 Intangible Assets

Major Changes onHKAS 36 Impairment of Assets

Major Changes onHKAS 36 Impairment of Assets

Simple but Comprehensive

Simple but Comprehensive

Issues and ImplicationIssues and Implication

Real Cases andExamples

Real Cases andExamples

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Non-current Assets Held for Sale and Discontinued Operations (HKFRS 5)

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Objective of HKFRS 5

• To specify

ClassificationClassification

MeasurementMeasurement

PresentationPresentation

• The accounting forassets held for sale

• The presentation and disclosureof discontinued operations

Non-Current Assets

NonNon--Current Current AssetsAssets

Disposal Groups

Disposal Disposal GroupsGroups

PresentationPresentationDiscontinued Operations

Discontinued Discontinued OperationsOperations

Disposal Group may be Discontinued Operation if it is an operation

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Objective of HKFRS 5 (Summary)

• To specify

• The accounting forassets held for sale

• The presentation and disclosureof discontinued operations

• In particular, to require– asset that meet the criteria to be

classified as held for sale to be:• measured at

– the lower of carrying amount andfair value less costs to sell, and

– depreciation on such assets to cease; and• presented separately on the face of the

balance sheet, and– the results of discontinued operations to be

presented separately in the income statement




Strict Criteria Imposed


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Scope of HKFRS 5



• Classification and presentationrequirements of HKFRS 5 apply to– all recognised non-current asset– all disposal groups of an entity

Non-Current Assets

NonNon--Current Current AssetsAssets

Disposal Groups

Disposal Disposal GroupsGroups

No non-current assets can be classified as current unless HKFRS 5 is fulfilled



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Scope of HKFRS 5



• Classification and presentationrequirements of HKFRS 5 apply to– all recognised non-current asset– all disposal groups of an entity

• Assets classified as non-current in accordance with HKAS 1 shall not be reclassified as current assets– until they meet the criteria to be classified as held for

sale in accordance with HKFRS 5• Assets of a class that an entity would normally

regard as non-current that are acquired exclusively with a view to resale shall not be classified as current– unless they meet the criteria to be classified as held

for sale in accordance with HKFRS 5

• Assets classified as non-current in accordance with HKAS 1 shall not be reclassified as current assets– until they meet the criteria to be classified as held for

sale in accordance with HKFRS 5• Assets of a class that an entity would normally

regard as non-current that are acquired exclusively with a view to resale shall not be classified as current– unless they meet the criteria to be classified as held

for sale in accordance with HKFRS 5

No non-current assets can be classified as current unless HKFRS 5 is fulfilled

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Scope of HKFRS 5CaseCase

2005 Interim Financial Statements (issued on 1 Aug. 2005)

• Non-financial assets acquired in exchange for loans in order to achieve an orderly realisation– are recorded as assets held for sale and– reported in ‘Other assets’.

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Scope of HKFRS 5



• a group of assets to be disposed of, by sale or otherwise, together as a group in a single transaction, and

• liabilities directly associated with those assets that will be transferred in the transaction

• a group of assets to be disposed of, by sale or otherwise, together as a group in a single transaction, and

• liabilities directly associated with those assets that will be transferred in the transaction

Disposal Group

Disposal Disposal GroupGroup

• The group includes goodwill acquired in a business combination– if the group is a cash-generating unit (CGU) to

which goodwill has been allocated in accordance with the requirements of HKAS 36, or

– if it is an operation within such a CGU• It may be a group, a single, or part of a CGU• If a non-current asset within the scope of the

measurement requirements of HKFRS 5 is part of a disposal group, the measurement requirements of HKFRS 5 apply to the disposal group as a whole

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Items to be reclassified:Property: $4MLiabilities: $2MGoodwill: $1MNet $3M

Items to be reclassified:Property: $4MLiabilities: $2MGoodwill: $1MNet $3M

Goodwill: $2MGoodwill: $2M

Scope of HKFRS 5ExampleExample

• Entity A, a garment manufacturing company, has acquired a property holding company, Entity X for HK$6 million

• At the date of acquisition, Entity X holds 2 properties with same fair value at HK$4 million each

• Entity X has 2 separate outstanding bank loans of HK$2 million each to finance the purchase of its 2 properties and the loan is secured by the properties.

• Entity X has no other assets and liabilities.• Entity A intends to dispose of one of the

above properties.• If the disposal fulfils the criteria in

HKFRS 5, what is the consequence of the reclassification?

Cost of acquisition: $6MCost of acquisition: $6M

Total assets: $8MTotal assets: $8M

Total liabilities: $4MTotal liabilities: $4M

Cost of property: $4MCost of property: $4M

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Scope of HKFRS 5

Interim Report 2005:• The adoption of HKFRS 5 has resulted in the

reclassification of– certain assets which the Group had the intention to sell

as non-current assets classified as held for sale and– certain liabilities as liabilities directly associated with

non-current assets classified as held for sale.

CaseCase

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Scope of HKFRS 5

• Measurement requirements of HKFRS 5 also apply to all recognised non-current asset and to all disposal groups, except for(either as individual assets or as part of a disposal group)

Classification


Presentation

HKAS 19Assets arising from employee benefits

HKAS 40Non-current assets accounted for in fair value model in HKAS 40

HKAS 41Non-current assets measured at fair value less estimated point-of-sale costs under HKAS 41

HKFRS 4Contractual rights under insurance contracts as defined in HKFRS 4

Relevant HKFRS/HKASExcluded items

HKAS 39Financial assets within the scope of HKAS 39

HKAS 12Deferred tax assets

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For this to be the caseFor this to be the case

Classification as Held For Sale


Measurement

Presentation

• An entity shall classify a non-current asset (or disposal group) as held for sale if– its carrying amount will be recovered principally

• through a sale transaction• rather than through continuing use

• the asset (or disposal group) must be available for immediate sale

• its sale must be highly probable

Available for Immediate SaleAvailable for

Immediate Sale

Highly ProbableHighly Probable

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Immediate Sale

To be classified as held for sale• the asset (or disposal group) must be

available for immediate sale– in its present condition– subject only to terms that are

usual and customary for sales of such assets (or disposal groups)

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An entity is committed to a plan to sell its headquarters building and has initiated actions to locate a buyer.

However, the entity has 2 plans and intends to:

1. transfer the building to the buyer after it vacates the building; or

2. continue to use the building untilconstruction of a new headquartersbuilding is completed

Classification as Held For SaleExampleExample

The time necessary to vacate is usual and customary for sale of such asset

The delay in time implies not available for immediate sale

The time necessary to vacate is usual and customary for sale of such asset

The delay in time implies not available for immediate sale

√

×

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An entity is committed to a plan to sell a manufacturing facility and has initiated actions to locate a buyer.At the plan commitment date, there is a backlog of uncompleted customer orders.

The entity has 2 plans and intends to:1. sell the facility with its operations.

Any uncompleted customer orders at the sale date will be transferred to the buyer.

2. sell the facility, but without its operations. The entity does not intend to transfer the facility to a buyer until after it ceases all operations of the facility and eliminates the backlog of uncompleted customer orders.

Classification as Held For SaleExampleExample

It will not affect the timing of the transfer.

It will not affect the timing of the transfer. √

×The delay in the timing of the transfer of the facility imposed by the entity (seller) demonstrates that the facility is not available for immediate sale.

The delay in the timing of the transfer of the facility imposed by the entity (seller) demonstrates that the facility is not available for immediate sale.

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• Highly probable– Significantly more likely than probable– Probable ⇒ more likely than not

• For the sale to be highly probable

Active programme to locate a buyer and complete the plan must have been initiated

The sale expected to qualify for recognition as a completed sale within 1 year from the date of classification, except as permitted under HKFRS 5; and

Unlikely that significant changes to the plan will be made or that the plan will be withdrawn

Asset (or disposal group) must be actively marketed for sale at a price that is reasonable in relation to its current fair value

Appropriate level of management must be committed to a plan to sell the asset (or disposal group)

Extension to Complete Beyond 1 year



Available for Immediate Sale

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Can the following situations fulfill the criteria to be classified as held for sale:

a) Entity A, a commercial leasing and finance company, is holding for sale or lease equipment that• has recently ceased to be leased

and• the ultimate form of a future

transaction (sale or lease) has not yet been determined.

b) Entity B is committed to a plan to ‘sell’ a property that is in use, and the transfer of the property will be accounted for as “a sale and finance leaseback”.

ExampleExample

Not yet committed to plan to sell

Not yet committed to plan to sell

×

× Committed but not a completed sale within one year

Committed but not a completed sale within one year

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Extension to complete sale beyond one year• Events or circumstances may extend the period to

complete the sale beyond one year• Not preclude an asset from being classified as held

for sale if1. the delay is caused by events or circumstances

beyond the entity’s control, and2. there is sufficient evidence that the entity

remains committed to its plan to sell the asset (or disposal group)

Beyond ControlBeyond Control

Remain CommittedRemain Committed

1 Year

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Sale transactions include– exchanges of non-current assets for other non-current

assets when the exchange has commercial substance


Implication to subsidiary acquired for disposal?

Implication to subsidiary acquired for disposal?


Immediate Sale


Non-current asset (or disposal group) acquired exclusively with a view to its subsequent disposalshall be classified as held for sale at the acquisition date only if– the one-year requirement is met and– it is highly probable that any other criteria that are

not met at that date will be met within a short periodfollowing the acquisition (usually within 3 months)

If the criteria to be classified as asset held for saleare met after the balance sheet date– an entity shall not classify a non-current asset (or disposal

group) as held for sale in those financial statements when issued

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Immediate Sale


Non-current assets (or disposal group) that are to be abandoned

• Non-current assets (or disposal groups) to be abandoned include non-current assets (disposal group)– used to the end of their economic life– closed rather than sold– but excluded those temporarily taken out of use (i.e.

such operation cannot be classified as discontinued)

• Shall not classify them as held for sale• Because its carrying amount will be

– recovered principally through continuing use,– not recovered principally through a sale transaction

• If such disposal group meets the criteria as an operation(discussed later)– the entity shall still present the results and cash

flows of the disposal group as discontinued operations at the date on which it ceases to be used

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Measurement

• Measure non-current asset (or disposal group) classified as held for sale at the lower of its• Carrying amount and• Fair value less costs to sell

(or Net Selling Price in the past)

• Same for those newly acquired asset (or disposal group) meets the criteria to be classified as held for sale

• When the sale is expected to occur beyond one year,– the entity shall measure the costs to sell at their

present value– examples:

those situations with exception to one-year requirement







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Measurement

Measurement after Reclassification


• Immediately before the initial classification of the asset (or disposal group) as held for sale– the carrying amounts of the asset (or all the

assets and liabilities in the group) shall be measured in accordance with applicable HKFRSs

Disposal group containing assets/liabilities not within scope of HKFRS 5

Other assets or disposal groups

Immediately Before Reclassification


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Measurement

• some assets and liabilities included in disposal group may not be measured in accordance with HKFRS 5

• because they are not within the measurement requirements of HKFRS 5– say deferred tax assets and investment properties

• Firstly, the carrying amounts of such assets and liabilities– shall be re-measured in accordance with applicable

HKFRSs before the fair value less costs to sell ofthe disposal group is remeasured

Disposal group containing assets/liabilities not within scope of HKFRS 5


Re-measure individually

Re-measure individually

Re-measure whole groupRe-measure whole group

• Then, the whole disposal group– shall be remeasured at lower of the whole disposal group’s

carrying amount or fair value less costs to selli.e. then follows

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Measurement

HKAS 36 becomes ineffective on those assets or disposal groups when they are classified as held for sale under HKFRS 5

• in recognition of impairment loss under HKFRS 5– fair value less costs to sell is used– instead of recoverable amount

• an entity shall– recognise an impairment loss for

• any initial or subsequent write-down of the asset (or disposal group) to fair value less costs to sell

– also recognise a gain for• any subsequent increase in fair value less costs to sell of an asset,

– but not in excess of the cumulative impairment loss that has been recognised either under HKFRS 5 or HKAS 36


Recognition of impairment losses and reversals

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Measurement

Recognition of impairment losses and reversals• The impairment loss (or any subsequent gain) recognised for a

disposal group shall reduce (or increase) the carrying amount of the non-current assets in the group– that are within the scope of the measurement requirements of HKFRS 5, in

the order of allocation set out in paragraphs 104(a) and (b) and 122 of HKAS 36 Impairment of Assets, that is ……

Recognition of impairment lossa) first, to reduce the carrying amount of any

goodwill allocated to the disposal group; andb) then, to the other assets of the disposal group pro rata on

the basis of the carrying amount of each asset in the group.


Goodwill first

Goodwill first

Other on pro rata

Other on pro rataReversal of impairment loss

– allocated to the assets of the group, except for goodwill,pro rata with the carrying amounts of those assets.

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MeasurementExampleExample

Carrying amount at the Carrying amount asreporting date before remeasured immediately

classification as before classification asheld for sale held for sale

Goodwill $ 1,500 $ 1,500Property, plant and equipment

(carried at revalued amounts) 4,600 4,000Property, plant and equipment

(carried at cost) 5,700 5,700Inventory 2,400 2,200AFS financial assets 1,800 1,500

Total 16,000 14,900

• Pursuant to the classification of the group of assets as disposal group, the entity estimates that fair value less costs to sell of the disposal group amounts to $13,000.

• Calculate the impairment loss and allocate to the individual asset.

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• The entity recognises the loss of $1,100($16,000 - $14,900) immediately before classifying the disposal group as held for sale.

• The entity recognises the loss of $1,100($16,000 - $14,900) immediately before classifying the disposal group as held for sale.





• Since an entity measures a disposal group classified as held for sale at the lower of its carrying amount and fair value less costs to sell• the entity recognises an impairment loss of

$1,900 ($14,900 - $13,000) when the group is initially classified as held for sale.

• Since an entity measures a disposal group classified as held for sale at the lower of its carrying amount and fair value less costs to sell• the entity recognises an impairment loss of

$1,900 ($14,900 - $13,000) when the group is initially classified as held for sale.

Then, allocate $1,900 ……

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• Then, the residual loss is allocated to other non-current assets pro rata based on their carrying amounts (no allocation is made to current assets, inventory and AFS financial assets)


Carrying amount asremeasured immediately Carrying amount

before classification as Allocated after allocation ofheld for sale impairment loss impairment loss

Goodwill $ 1,500 $ (1,500) $ 0Property, plant and equipment

(carried at revalued amounts) 4,000 (165) 3,835Property, plant and equipment

(carried at cost) 5,700 (235) 5,465Inventory 2,200 - 2,200AFS financial assets 1,500 - 1,500

Total 14,900 (1,900) 13,000

• Firstly, the impairment loss reduces any amount of goodwill

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Measurement

• No depreciation (or amortisation) made on non-current asset while– it is classified as held for sale, or – while it is part of a disposal group classified as held for sale

• Interest and other expenses attributable to the liabilities of a disposal group classified as held for sale shall continue to be recognised.

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Measurement

Changes to a plan of saleIf the criteria to be classified as held for saleare no longer met– the entity shall cease to classify the asset as held for sale– then, an entity shall measure such non-current asset that ceases to be

classified as held for sale at the lower of:• its carrying amount before the asset was classified as held for sale

– adjusted for any depreciation, amortisation or revaluations thatwould have been recognised had the asset not been classified as held for sale, and

• its recoverable amount at the date of the subsequent decision not to sell– Any consequential adjustment shall be included

• in income from continuing operations in the period in which the criteria on asset to be classified as held for sale are no longer met

• unless revaluation under HKAS 16/38 is adopted before classification as held for sale

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• At beginning of Year 1, Entity A acquired a motor vehicle with an estimated useful of 10 years at $800,000 (with no residual value)

• After the receipt of the vehicle 5 days later, Entity A decided to sell it


Vehicle is carried at $800,000 and classified as non-current asset held for sale.

Vehicle is carried at $800,000 and classified as non-current asset held for sale.

Cease to classify it as held for sale• had the asset not been classified

as held for sale, the carrying amount would be $720,000 (depreciated over 10 years)

Cease to classify it as held for sale• had the asset not been classified

as held for sale, the carrying amount would be $720,000 (depreciated over 10 years)

• A year later, Entity A decided to withdraw the sale and use the vehicle for its own travelling purpose.

• At that date, Entity A estimates that the recoverable amount may be:

1) $750,000, or2) $600,000

• Calculate the necessary adjustments?

• The planned disposal fulfilled the criteria under HKFRS 5 and the fair value less estimated costs to sell is same as cost.

Vehicle carried at $720K and adjustment to P/L is $80KVehicle carried at $720K and adjustment to P/L is $80K

Vehicle carried at $600K and adjustment to P/L is $200KVehicle carried at $600K and adjustment to P/L is $200K

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Measurement

Changes to a plan of saleRemoval from disposal group• If an entity removes an individual asset or liability

from a disposal group classified as held for sale– the remaining assets and liabilities of the disposal group to be sold

shall continue to be measured as a group only if• the group (as a whole) meets the criteria on asset to be

classified as held for sale– Otherwise, the remaining non-current assets of the group that

individually meet the criteria to be classified as held for sale• shall be measured individually at the lower of their carrying

amounts and fair values less costs to sell at that date.– Any non-current assets that do not meet the criteria shall cease to

be classified as held for sale

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Measurement

2005 Interim Financial Statements (issued on 1 Aug. 2005)

• Non-financial assets acquired in exchange for loans in order to achieve an orderly realisation are recorded as assets held for sale and reported in ‘Other assets’.

• The asset acquired is recorded at the lower of– its fair value less costs to sell and– the carrying amount of the loan, net of impairment allowance amounts, at

the date of exchange.• No depreciation is provided in respect of assets held for sale.• Any subsequent write-down of the acquired asset to fair value less

costs to sell– is recorded as an impairment loss and included in the income statement.

• Any subsequent increase in the fair value less costs to sell, to the extent this does not exceed the cumulative impairment loss– is recognised in the income statement.

CaseCase

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Presentation

2. Presenting discontinued operations2. Presenting discontinued operations

3. Additional disclosures3. Additional disclosuresClassificationClassification






1. Presenting non-current asset(or disposal group) held for sale


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Presentation

• Such non-current asset or disposal groupshall be presented separately from other assets in the balance sheet.

• The liabilities of a disposal group classified as held for saleshall be presented separately from other liabilities in the balance sheet.

• Such assets and liabilities shall not be offset and presentedas a single amount.

• The major classes of assets and liabilities classified as held for sale shall be separately disclosed either– on the face of the balance sheet or– in the notes, except for newly acquired subsidiary

classified as held for sale• An entity shall present separately any cumulative income or

expense recognised directly in equity relating to a non-current asset (or disposal group) classified as held for sale.



Presented separatelyPresented separately

Offset not allowed

Offset not allowed

Disclose major classes


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Presentation

2005 2004AssetsNon current assets

Item 1 $ x $ xItem 2 x x

x xCurrent assets

Item 3 x xItem 4 x x

x xNon-current assets classified as held for sale 8,000 -

x xTotal assets x x

2005 2004AssetsNon current assets


x xCurrent assets


x xNon-current assets classified as held for sale 8,000 -

x xTotal assets x x



ExampleExample

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2005 2004LiabilitiesNon-current liabilities


x xCurrent liabilities


x xLiabilities directly associated with non-current

assets classified as held for sale 3,300 -x x

Total liabilities x x

2005 2004LiabilitiesNon-current liabilities


x xCurrent liabilities


x xLiabilities directly associated with non-current

assets classified as held for sale 3,300 -x x

Total liabilities x x

Presentation 1. Presenting non-current asset(or disposal group) held for sale


ExampleExample

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2005 2004EquityEquity attributable to equity holders of the parent


Amounts recognised directly in equity relatingto non-current assets held for sale 400 -

x xMinority interest x xTotal equity x x

2005 2004EquityEquity attributable to equity holders of the parent


Amounts recognised directly in equity relatingto non-current assets held for sale 400 -

x xMinority interest x xTotal equity x x

Presentation

e.g. revaluation reserves



ExampleExample

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Presentation

• If the disposal group is a newly acquired subsidiary that meets the criteria to be classified as held for sale on acquisition

disclosure of the major classes of assets and liabilities is not required.



Presented separatelyPresented separately

Offset not allowed

Offset not allowed



• Prior period’s presentation shall not be revisedAn entity shall not reclassify or re-present amounts presented for non-current assets (or for the assets and liabilities of disposal groups) classified as held for sale in the balance sheets for prior periods to reflect the classification in the balance sheet for the latest period presented(except for associate and jointly controlled entities accounted for under equity method or proportionate consolidation, not covered today)

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Presentation 1. Presenting non-current asset(or disposal group) held for sale


• Discontinued operation replaced discontinuing operation• A discontinued operation is defined as

– a component of an entity that either has been disposed of or is classified as held for sale and:• represents a separate major line of business or geographical area of

operations,• is part of a single coordinated plan to dispose of a separate major line

of business or geographical area of operations, or• is a subsidiary acquired exclusively with a view to resale

• A component of an entity is defined as– operations and cash flows that can be clearly distinguished, operationally

and for financial reporting purposes, from the rest of the entity• In other words, a component of an entity will have been a cash-

generating unit or a group of cash-generating units while being held for use


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Presentation

Operation is a component of

an entity?


an entity?


Has beendisposed of?Has been

disposed of?Classified asheld for sale?Classified asheld for sale?

Meet one of the 3 criteria as an

operation?


operation?

Discontinued Operation


YesYes

• operations and cash flows clearly distinguished, operationally and for financial reporting purposes, from the rest of the entity

1. a separate major line of business or geographical area of operations,

2. part of a single coordinated plan to dispose of a separate major line of business or geographical area of operations, or

3. a subsidiary acquired exclusively with a view to resale

Yes

No

Yes

Discontinued?

Operation?

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Presentation

• As discussed before, a discontinued operation also includes a disposal group to be abandoned– at the date on which it ceases to be used (i.e. abandoned), – so long as it also meets the following criteria:

• represents a separate major line of business or geographical area of operations,

• is part of a single coordinated plan to dispose of a separate major line of business or geographical area of operations, or

• is a subsidiary acquired exclusively with a view to resale


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Presentation


an entity?


an entity?


Has beendisposed of?Has been

disposed of?Classified asheld for sale?Classified asheld for sale?

YesYes

Disposal group

Disposal group

Ceases to be used?

Ceases to be used?

Yes

• operations and cash flows clearly distinguished, operationally and for financial reporting purposes, from the rest of the entity

No

Yes


operation?


operation?



Yes

1. a separate major line of business or geographical area of operations,

2. part of a single coordinated plan to dispose of a separate major line of business or geographical area of operations, or

3. a subsidiary acquired exclusively with a view to resale

Yes

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Presentation

Tian TeckTian Teck Land Limited (266)Land Limited (266)• Land owner of the Hyatt Regency Hotel in TST, has early adopted only

one new HKFRS, states in its 2004/05 Annual Report:– The Group has not early adopted these new HKFRSs in the financial

statements for the year ended 31 March 2005, except for HKFRS 5 “Non-current assets held for sale and discontinued operations”.

– The HKFRS 5 has defined the timing of the classification of an operation as “discontinued” to be the date• when the operation

– meets the criteria as “held for sale” or– has already been disposed of, or

• the assets have ceased to be used.– Following the adoption of this HKFRS, the hotel operation (see note 3) will

not be disclosed as discontinuing operation until the operation has ceased.– The early adoption of HKFRS 5 has no significant impact on the Group’s

results of operations and financial position.

CaseCase

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Presentation

• An entity shall disclose:– a single amount on the face of the income statement comprising the total

of:• the post-tax profit or loss of discontinued operations and• the post-tax gain or loss recognised on the measurement to fair value

less costs to sell or on the disposal of the assets or disposal group(s) constituting the discontinued operation

• A further analysis of the above single amount is required and may be presented in the notes or on the face of the income statement, e.g.i) the revenue, expenses and pre-tax profit or loss of discontinued

operations;ii) the gain or loss recognised on the measurement to fair value less costs

to sell; andiii) the related income tax expense as required by HKAS 12


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Presentation

• An entity shall disclose:– the net cash flows attributable to the operating, investing and

financing activities of discontinued operations (but it is not required for newly acquired subsidiaries classified as held for sale on acquisition).These disclosures may be presented either in the notes or on the face of the financial statements.

• An entity shall re-present the above disclosures for prior periods presented in the financial statements– so that the disclosures relate to all operations that have been

discontinued by the balance sheet date for the latest period presented.


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Presentation

2002 2001Continuing operationsRevenue $1,200 $1,000

…… ………… ……

Profit before tax 700 500Income tax expense (80) (75)Profit for the period from continuing operations 620 425

Discontinued operationsProfit for the period from discontinued operations* 120 105Profit for the period 740 530Attributable to:

Equity holders of the parent 600 400Minority interest 140 130

740 530

* As permitted by HKFRS 5, the required analysis would be given in the notes to the financial statements

2002 2001Continuing operationsRevenue $1,200 $1,000

…… ………… ……

Profit before tax 700 500Income tax expense (80) (75)Profit for the period from continuing operations 620 425

Discontinued operationsDiscontinued operationsProfit for the period from discontinued operations* 120 105Profit for the period 740 530Attributable to:

Equity holders of the parent 600 400Minority interest 140 130

740 530

* As permitted by HKFRS 5, the required analysis would be given in the notes to the financial statements


ExampleExample

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Presentation

• Prohibit retroactive classification of an operation as discontinued– when the criteria for that classification are not met until after

the balance sheet date.


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Presentation

Adjustments in current period relating to amounts previously presented in discontinued operations– Such adjustments (if directly related to the disposal of a

discontinued operation in a prior period) shall be classified separately in discontinued operations.

– The nature and amount of such adjustments shall be disclosed.• Examples of circumstances in which these adjustments may arise

include the resolution of uncertainties:– that arise from the terms of the disposal transaction

(say resolution of purchase price adjustments)– arise from and are directly related to the operations of the

component before its disposal(say environmental and product warranty obligations)


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Presentation

Cease to be Held for Sale• If an entity ceases to classify a component of an entity as held for

salethe results of operations of the component previously presented in discontinued operations in accordance with above requirements• shall be reclassified and included in income from continuing

operations for all periods presented. the amounts for prior periods shall be described as having been re-presented.


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Presentation

Gains or Losses Relating to Continuing Operations• Any gain or loss on the remeasurement of a non-current asset (or

disposal group) classified as held for sale that does not meet the definition of a discontinued operation

shall be included in profit or loss from continuing operations.


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Presentation

• An entity shall disclose the following information in the notes in the period in which a non-current asset (or disposal group) has been either classified as held for sale or sold:a) a description of the non-current asset (or disposal group);b) a description of the facts and circumstances of the sale, or leading to

the expected disposal, and the expected manner and timing of that disposal;

c) the gain or loss recognised in respect of the impairment loss (or reversal) and, if not separately presented on the face of the income statement, the caption in the income statement that includes that gain or loss;

d) if applicable, the segment in which the non-current asset (or disposal group) is presented in accordance with HKAS 14 Segment Reporting.

2. Presenting discontinued operations2. Presenting discontinued operations3. Additional disclosures3. Additional disclosures

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Transitional Provisions

• The HKFRS shall be applied prospectively to– non-current assets (or disposal groups) that meet the

criteria to be classified as held for sale, and– operations that meet the criteria to be classified as

discontinuedafter the effective date of the HKFRS.

• An entity may apply the requirements of the HKFRS to– all non-current assets (or disposal groups) that meet the

criteria to be classified as held for sale and– operations that meet the criteria to be classified as

discontinuedafter any date before the effective date of the HKFRS,provided the valuations and other information needed to apply the HKFRS were obtained at the time those criteria were originally met.

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Implication

Beijing Enterprises Holdings Ltd.Beijing Enterprises Holdings Ltd.• Has early adopted all new HKFRS in 2004 and stated that:

– The adoption of HKFRS 5, which has resulted in a change in accounting policy on the recognition of a discontinued operation.

– Prior to the adoption of HKFRS 5, the Group would have previously recognised a discontinued operation at the earlier of when:

• The group enters into a binding agreement, and• The board of directors have approved and announced a formal disposal plan

– HKFRS 5 now requires an operation to be classified as discontinued when the criteria to be classified as held for sale have been met or the Group has disposed of the operation.

– Held for sale is when the carrying amount of an operation will be recovered principally through a sale transaction and not through continuing use.

– The result of this change in accounting policy is that a discontinued operation is recognised by the Group at a later point than (always?) the accounting policy previously adopted due to the recognition criteria being stricter under HKFRS 5.

CaseCase

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Implication – Newly Acquired Subsidiary

• A subsidiary acquired with a view to sale is not exempt from consolidation in accordance with HKAS 27 Consolidated and Separate Financial Statements.

• However, if it meets the criteria (as discussed before):– the one-year requirement is met, and– it is highly probable that any other criteria that are not met at the acquisition

date will be met within a short period following the acquisition (usually within 3 months)

then, it is presented as a disposal group classified as held for sale.

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Implication – Newly Acquired SubsidiaryExampleExample

• Entity A acquires an entity H, which is a holding company with 2subsidiaries, S and SS.

• SS is acquired exclusively with a view to sale and meets the criteria to be classified as held for sale.

• In accordance with the definition of discontinued operation in HKFRS 5, SS is also a discontinued operation.

• Given that– initially, the estimated fair value less costs to sell of SS is $135.

• Identifiable liabilities of SS at fair value is $40– at the balance sheet date, the disposal group at the lower of its cost

and fair value less costs to sell is at $130• Liabilities are stated in accordance with applicable HKFRSs, say

at $35

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Implication – Newly Acquired SubsidiaryExampleExample

• Initially, Entity A measures– the identifiable liabilities of SS at fair value at $ 40– the acquired total assets at ($135 + $40) 175

• At the balance sheet date, Entity A– remeasures the disposal group at 130– remeasured the liabilities in accordance with applicable HKFRSs at 35– the total assets are measured at $130 + $35, i.e. at 165– in its consolidated financial statements, presents

• the assets and liabilities separately from other assets and liabilities– in the income statement, presents

• the total of the post-tax profit or loss of SS and• the post-tax loss (or gain in other cases) recognised on the

subsequent remeasurement of SS, which equals theremeasurement of the disposal group from $135 to $130

• Further analysis of the assets and liabilities or of the change in value of the disposal group is not required.

• Initially, Entity A measures– the identifiable liabilities of SS at fair value at $ 40– the acquired total assets at ($135 + $40) 175

• At the balance sheet date, Entity A– remeasures the disposal group at 130– remeasured the liabilities in accordance with applicable HKFRSs at 35– the total assets are measured at $130 + $35, i.e. at 165– in its consolidated financial statements, presents

• the assets and liabilities separately from other assets and liabilities– in the income statement, presents

• the total of the post-tax profit or loss of SS and• the post-tax loss (or gain in other cases) recognised on the

subsequent remeasurement of SS, which equals theremeasurement of the disposal group from $135 to $130

• Further analysis of the assets and liabilities or of the change in value of the disposal group is not required.

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Implication – Newly Acquired SubsidiaryEntity A acquired 100% of Entity X at year end by issuing 2,000 shares of HK$1 each and their financial statements are set out below:

ExampleExample

A XNon-current assetsInvestment in subsidiary 2,000 0Property, plant & equipment 1,500 2,000

3,500 2,000Current assetsInventories 100 500

Cash at bank 100 100 200 600

Current liabilities

Account payables (100) (600)

Net current assets 100 0

Net assets 3,600 2,000

NormalConsol.

03,500 3,500

600

200800

(700)

100

3,600

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Implication – Newly Acquired SubsidiaryAssume the subsidiary, Entity X, is held for sale (HKFRS 5 met)and costs to sell are zero:

NormalConsol.

01,500 1,500

1002,600

1002,800

(600)(100)(700)

2,100

3,600

ExampleExample

A XNon-current assetsInvestment in subsidiary 2,000 0Property, plant & equipment 1,500 2,000

3,500 2,000Current assetsInventories 100 500

Cash at bank 100 100 200 600

Current liabilities

Account payables (100) (600)

Net current assets 100 0

Net assets 3,600 2,000

Subsidiary held for sale

Subsidiary held for sale

Be Careful!

Be Be Careful!Careful!

Further analysis in

notes?

Further Further analysis in analysis in

notes?notes?

In Income Statement?In Income In Income

Statement?Statement?

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Intangible Assets (HKAS 38)

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Intangible Assets (HKAS 38)

Discussion points on HKAS 38 include the amended areas on:1. Definition2. Recognition and Initial

Measurement• Acquisition as part of a business

combination3. Measurement after recognition4. Disclosures5. Transition and Effective Date

HKAS 38 is amended as a result of the introduction of HKFRS 3

Revise certain areas in recognition and measurementMore disclosure and definition amended slightly at the same time

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1. Definition of Intangible AssetsAn intangible asset is• an identifiable non-monetary asset without

physical substance.An asset is a resource:

a) controlled by an entity as a result of past events; and

b) from which future economic benefits are expected to flow to the entity.

Identifiability

Control

Future economic benefit

In SSAP 29, an intangible asset is defined as• an identifiable non-monetary asset without physical substance• held for use in the production or supply of goods or services,

for rental to others, or for administrative purposes.

In SSAP 29, an intangible asset is defined as• an identifiable non-monetary asset without physical substance• held for use in the production or supply of goods or services,

for rental to others, or for administrative purposes.

Now, the use of the intangible asset is irrelevant.

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1. Definition of Intangible Assets

• An asset meets the Identifiability Criterion in the definition of an intangible asset when it:a) is separable

• i.e. is capable of being separated or divided from the entity, and

• sold, transferred, licensed, rented or exchanged, either individually or together with a related contract, asset or liability; or

b) arises from contractual or other legal rights• regardless of whether those rights are

transferable or separable from the entity or from other rights and obligations.

IdentifiabilityMore clarification on its meaning

Control

Future economic benefit

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2. Recognition and Initial Measurement

The recognition of an item as an intangible asset requires an entity to demonstrate that the item meets:a) the definition of an intangible asset (as discussed); andb) the recognition criteria.

Same as before!

HKAS 38 also sets out that intangible assets may arise from:

1. Separate acquisition

2. Acquisition as part of a business combination

3. Acquisition by way of a government grant

4. Exchange of assets

5. Internally generated goodwill

6. Internally generated intangible assets (research and development)

More guidance nowMore guidance now

New requirements, to align HKAS 16

New requirements, to align HKAS 16

© 2005-06 Nelson 66


• In accordance with HKFRS 3 Business Combinations, if an intangible asset is acquired in a business combination, the cost of that intangible asset is its fair value at the acquisition date.– The fair value of an intangible asset reflects market expectations

about the probability that the future economic benefits embodiedin the asset will flow to the entity.

– In other words, the effect of probability is reflected in the fair value measurement of the intangible asset.

– Therefore, the probability recognition criterion is always considered to be satisfied for intangible assets acquired in business combinations.

Acquisition as part of a business combination


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In accordance with HKAS 38 and HKFRS 3– an acquirer recognises at the

acquisition date separately from goodwill an intangible asset of the acquiree• if the asset’s fair value can be

measured reliably,• irrespective of whether the asset

had been recognised by the acquiree before the business combination.



Some items, like in-process R&D project,– that were ineligible for recognition

in the acquiree’s books if it is generally internally,

– may be recognised by the acquirer (separately from goodwill) in the business combination if the item• meets the definition of an

intangible asset, and• The asset’s fair value can be

measured reliably.

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• Intangible assets should be recognised separately from goodwill in a business combination – where they arise from contractual or other legal rights, or– if separable ……

• Intangible assets include– the value of in-force long-term assurance business,– computer software,– trade names,– mortgage servicing rights,– customer lists,– core deposit relationships,– credit card customer relationships and– merchant or other loan relationships.

CaseCase

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• The fair value of intangible assets acquire in business combinations can normally be measured with sufficient reliability to be recognised separately from goodwill.

• If it has a finite useful life,there is a rebuttable presumption that its fair value can be measured reliably.

Fair ValueFair Value

© 2005-06 Nelson 70


• The acquirer can recognise the group of assets (or complementary assets) as a single asset separately from goodwill

– if the individual fair values of the assets in the group (or complementary assets) are not reliably measurable.

• If the individual fair values of the complementary assets are reliably measurable, an acquirer may recognise them as a single asset

– provided the individual assets have similar useful lives.


Acquisition as part of a business combination Fair ValueFair Value

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In initially measuring the fair value of an intangible asset

Quoted market prices in an active market provide the most reliable estimate of the fair value of an intangible assetThe appropriate market price is usually the current bid price.If current bid prices are unavailable, the price of the most recent similar transaction may provide a basis from which to estimate fair value,• provided that there has not been a significant change in

economic circumstances between the transaction date and the date at which the asset’s fair value is estimated.

Active market exist



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No active market

Fair value is the amount that the entity would have paid for the asset, at the acquisition date, in an arm’s length transaction between knowledgeable and willing parties, on the basis of the best information available.In determining this amount, an entity considers the outcome of recent transactions for similar assets.



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For example:• multiples of revenue, market shares or profit, or• discounting estimated future net cash flows

May be used for initial measurement of an intangible asset acquired in a business combination• if the objective is to estimate fair value and• if they reflect current transactions and practices in the

industry to which the asset belongs.

Other Methods




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Beijing Enterprises Holdings Ltd.Beijing Enterprises Holdings Ltd.• Has early adopted all new HKFRS in 2004 Annual Report and stated its

accounting policy on intangible assets as follows:– Intangible assets acquired

• separately are capitalised at cost and• from a business acquisition are capitalised at fair value as at the

date of acquisition.– Following initial recognition, the cost model is applied to the class of

intangible assets.– Intangible assets, excluding development costs, created within the

business are not capitalised and expenditure is charged against profits in the year in which the expenditure is incurred.

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It may result in the recognition of an in-process R&D projectBut how should the subsequent expenditure on such acquired in-process R&D project be recognised?



• Such research or development expenditure that is incurred after the acquisition of that in-process R&D project shall be accounted for• in the same practice as other research or development

expenditure (or internally generated intangible assets),i.e. the practice tobe discussed in (but not covered today)

Internally generatedintangible assets

Internally generatedintangible assets

© 2005-06 Nelson 76

If finite– the length of, or number

of production or similar units constituting, that useful life.

3. Measurement after Recognition

• The measurement after recognition still allow an entity to choose either one of the following model as its accounting policy

• However, HKAS 38 sets out that an entity shall assess whether the useful life of an intangible asset is

FiniteFinite IndefiniteIndefiniteor

Cost ModelCost Model Revaluation ModelRevaluation Modelor

An intangible asset has an indefinite useful life when– based on an analysis of all of the relevant

factors– there is no foreseeable limit to the period over

which the asset is expected to generate net cash inflows for the entity.

New ConceptNew Concept

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3. Measurement after RecognitionIntangible asset arising from contractual or other legal rights• The useful life of such intangible asset

– shall not exceed the period of the contractual or other legal rights,– but may be shorter depending on the period over which the entity expects

to use the asset.• If the contractual or other legal rights can be renewed, the useful life of

the intangible asset shall include the renewal period only if– there is evidence to support renewal by the entity without significant cost.

Amortisation required

Amortisation not required

FiniteFinite IndefiniteIndefinite New ConceptNew Concept

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IndefiniteIndefinite New ConceptNew Concept

• An intangible asset with an indefinite useful life shall not be amortised. • In accordance with HKAS 36 Impairment of Assets

– an entity is required to test such intangible asset for impairment by comparing its recoverable amount with its carrying amounta) annually, andb) whenever there is an indication that the intangible asset may be

impaired.

• The useful life of such intangible asset shall be reviewed each period– to determine whether events and circumstances continue to support an

indefinite useful life assessment for that asset.– If they do not

• such change in the useful life assessment shall be accounted for as a change in an accounting estimate in accordance with HKAS 8

• It may also imply an impairment on such intangible asset and an impairment test on such asset is required

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Next Media LimitedNext Media Limited• 2005 Interim Announcement stated that

– HKAS 38 Intangible Assets requires intangible assets to be assessed at the individual asset level as having either• finite or• indefinite life.

– A finite-life intangible asset• is amortised over its estimated useful life whereas an

intangible asset with an indefinite useful life is carried at cost less accumulated impairment losses (if any).

– Intangible assets with indefinite lives• are not subject to amortisation but are tested for impairment

annually or more frequently when there are indications of impairment.

CaseCase

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Beijing Enterprises Holdings Ltd.Beijing Enterprises Holdings Ltd.• Further stated its accounting policy on intangible assets as follows:

– Useful lives of acquired intangible assets are assessed to be either• finite or• indefinite.

– Intangible assets with finite useful lives• are stated at cost less accumulated amortisation and any

accumulated impairment losses. – Intangible assets with indefinite useful lives

• are stated at cost and not amortised.

CaseCase

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© 2005-06 Nelson 81


• The product protected by the patented technology is expected to be a source of net cash inflows for at least 15 years.

• The entity has a commitment from a third party to purchase that patent in 5 years for 60% of the fair value of the patent at the date it was acquired, and the entity intends to sell the patent in 5 years.

ExampleExample

Assessing the useful lives of intangible assets

The patent would be• amortised over its 5-year useful life to the entity with a residual value

equal to the present value of 60% of the patent’s fair value at the date it was acquired.

• reviewed for impairment in accordance with HKAS 36 by assessing at each reporting date whether there is any indication that it may be impaired.

The patent would be• amortised over its 5-year useful life to the entity with a residual value

equal to the present value of 60% of the patent’s fair value at the date it was acquired.

• reviewed for impairment in accordance with HKAS 36 by assessing at each reporting date whether there is any indication that it may be impaired.

© 2005-06 Nelson 82


• The broadcasting licence is renewable every 10 years if the entity– provides at least an average level of service to its customers and– complies with the relevant legislative requirements.

• The licence may be renewed indefinitely at little cost and has been renewed twice before the most recent acquisition.

• The acquiring entity intends to renew the licence indefinitely and evidence supports its ability to do so.

• Historically, there has been no compelling challenge to the licencerenewal.

• The technology used in broadcasting is not expected to be replaced by another technology at any time in the foreseeable future.

• Therefore, the licence is expected to contribute to the entity’s net cash inflows indefinitely.

ExampleExample


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3. Measurement after RecognitionExampleExample


• The broadcasting licence would be treated as having an indefinite useful life because it is expected to contribute to the entity’s net cash inflows indefinitely.

• Therefore, the licence would not be amortised until its useful life is determined to be finite.

• The licence would be tested for impairment in accordance with HKAS 36 annually and whenever there is an indication that it may be impaired.

• The broadcasting licence would be treated as having an indefinite useful life because it is expected to contribute to the entity’s net cash inflows indefinitely.

• Therefore, the licence would not be amortised until its useful life is determined to be finite.

• The licence would be tested for impairment in accordance with HKAS 36 annually and whenever there is an indication that it may be impaired.

© 2005-06 Nelson 84


• Same as the previous example• The licensing authority subsequently decides that it will no longer renew

broadcasting licences, but rather will auction the licences.• At the time the licensing authority’s decision is made, the entity’s

broadcasting licence has three years until it expires.• The entity expects that the licence will continue to contribute to net cash

inflows until the licence expires.

ExampleExample


• Because the broadcasting licence can no longer be renewed, its useful life is no longer indefinite.

• Thus, the acquired licence would be amortised over its remaining three-year useful life and immediately tested for impairment in accordance with HKAS 36.

• Because the broadcasting licence can no longer be renewed, its useful life is no longer indefinite.

• Thus, the acquired licence would be amortised over its remaining three-year useful life and immediately tested for impairment in accordance with HKAS 36.

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4. Disclosure

• HKAS 38 introduces some additional disclosure requirements• Changes are mainly amendments for the changes on finite and

indefinite useful life and include disclosure of:– whether the useful lives are indefinite or finite and, if finite, the useful

lives or the amortisation rates used for the intangible assets– the carrying amount of the intangible assets assessed as having an

indefinite useful life, and the reasons supporting the assessment of an indefinite useful life

– the methods and significant assumptions applied in estimating the assets’ fair values for intangible assets measured after recognition using the revaluation model

– comparative information is required

© 2005-06 Nelson 86

4. Disclosure

Esprit Holdings LimitedEsprit Holdings Limited• Adopted HK GAAP to 30 June 2003• Begin to adopt all the new/revised IFRS in 2004 Annual

Report– On the first time adoption of IFRS, the Group reassessed the

useful life of previously recognised intangible assets.– As a result of this assessment, the acquired Esprit trademarks

were classified as an indefinite-lived intangible asset in accordance with IAS 38 Intangible Assets.

– This conclusion is supported by the fact that Esprit trademark legal rights are• capable of being renewed indefinitely at insignificant cost and• therefore are perpetual in duration, relate to a well known and

long established fashion brand since 1968, and• based on future financial performance of the Group, they are

expected to generate positive cash flows indefinitely.

CaseCase

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© 2005-06 Nelson 87

4. Disclosure

– This view is supported by an independent professional appraiser, who has been appointed by the Group to perform an assessment of the useful life of Esprit trademarks in accordance with the requirements set out in IAS 38.

– Having considered the factors specific to the Group, the appraiser opined that Esprit trademarks should be regarded as an intangible asset with an indefinite useful life.

– Under IAS 38, the Group reevaluates the useful life of Esprit trademarks each year to determine whether events or circumstances continue to support the view of indefinite useful life for this asset.

Esprit Holdings LimitedEsprit Holdings Limited

CaseCase

© 2005-06 Nelson 88

5. Transitions and Effective Date

Early adoption together with HKFRS 3• If an entity elects in accordance with paragraph 85 of

HKFRS 3 Business Combinations to apply HKFRS 3 from any date before the effective dates of HKFRS 3, it also shall apply HKAS 38 prospectively from that same date.

• Thus, the entity shall not adjust the carrying amountof intangible assets recognised at that date.

• However, the entity shall, at that date, apply HKAS 38 to reassess the useful lives of its recognised intangible assets.

• If, as a result of that reassessment, the entity changes its assessment of the useful life of an asset, that change shall be accounted for as a change in an accounting estimate in accordance with HKAS 8.

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Other cases• Otherwise, an entity shall apply HKAS 38:

a) to the accounting for intangible assets acquired in business combinations for which the agreement date is on or after 1 January 2005; and

b) to the accounting for all other intangible assets prospectivelyfrom the beginning of the first annual period beginning on or after 1 January 2005.• Thus, the entity shall not adjust the carrying amount of intangible

assets recognised at that date.• However, the entity shall, at that date, apply HKAS 38 to reassess

the useful lives of such intangible assets.• If, as a result of that reassessment, the entity changes its

assessment of the useful life of an asset, that change shall be accounted for as a change in an accounting estimate in accordance with HKAS 8.

© 2005-06 Nelson 90


Exchange of Assets• New requirement on exchange of assets to be applied

prospectively• It means that if an exchange of assets was measured before

the effective date of HKAS 38 on the basis of the carrying amount of the asset given up, the entity does not restate the carrying amount of the asset acquired to reflect its fair value at the acquisition date.

Early Application• Entities are encouraged to apply the requirements of HKAS 38

before the effective dates.• However, if an entity HKAS 38 before those effective dates, it

also shall apply HKFRS 3 and HKAS 36 at the same time.

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– In accordance with the transitional provisions in HKAS 38, the Group• reassessed the useful lives of its intangible assets on 1

April 2005 and• concluded that intangible assets with a total carrying

amount of HK$1,345,881,000 (27% of the total assets)recognised under the predecessor accounting standard have indefinite useful lives.

CaseCase

© 2005-06 Nelson 92



CaseCase

– The Group has applied the revised useful lives prospectively and discontinued amortising intangible assets with indefinite useful lives from 1 April 2005.

– No amortisation has been charged in relation to intangible assets with indefinite useful lives for the six months ended 30 September 2005.

– Comparative figures for the six months ended 30 September 2004 have not been restated.

– Should the intangible assets were amortised under SSAP 29, amortisation expense of HK$41,065,000 (15% of the profit before tax for the period) would have been recognised in the six months ended 30 September 2005.

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• Amendment as a result of the introduction of HKFRS 3

Revise the impairment requirements on cash-generating unit and goodwill

Impairment of Assets (HKAS 36)

© 2005-06 Nelson 94

Impairment of Assets

• Goodwill is tested for impairment annually by comparing– the present value of the expected future

cash flows from a business with– the carrying value of its net assets,

including attributable goodwill.• Goodwill is stated at cost less accumulated

impairment losses.

GoodwillGoodwillGoodwill

CaseCase

48

© 2005-06 Nelson 95

• Assets that have an indefinite useful life– are tested for impairment annually.

• Assets that are subject to depreciation and amortisation– are reviewed to determine whether there is any indication

that the carrying value of these assets may not be recoverable and have suffered an impairment loss.

• If any such indication exists– the recoverable amount of the asset is estimated in order

to determine the extent of the impairment loss, if any.– The recoverable amount is the higher of an asset’s fair

value less costs to sell and value in use.– Such impairment loss is recognised in the consolidated

profit and loss account• except where the asset is carried at valuation

and the impairment loss does not exceed therevaluation surplus for that asset, in which caseit is treated as a revaluation decrease.

Impairment of Assets

Intangible AssetsIntangible AssetsIntangible Assets


CaseCase

© 2005-06 Nelson 96

Impairment of Assets - Summary

It is the higher of an asset’s

Triggering events

Recoverable Amount

Impairment Loss

At each reporting date, an entity shall assess whether there is any indication that an asset may be impaired.If any such indication exists, the entity shall estimate the recoverable amount of the asset.

If, and only if, the recoverable amount of an asset is less than its carrying amount• The carrying amount of the asset shall be

reduced to its recoverable amount.• That reduction is an impairment loss.

andNet Selling Price Value in UseFair value less costs to sell

49

© 2005-06 Nelson 97


HKEX HKEX (2004 Annual Report)

Accounting Policy on Impairment of Assets• Assets that have an indefinite useful life are not subject to

amortisation and are tested annually for impairment.• Assets that are subject to amortisation are reviewed for impairment

whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.

• An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount (i.e., the higher of an asset’s fair value less costs to sell and value in use).

• Such impairment losses are recognised in the profit and loss accountexcept where the asset is carried at valuation and the impairment loss does not exceed the revaluation surplus for that same asset, in which case it is treated as a decline in revaluation.

CaseCase

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• In respects of assets other than goodwill, an impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount and the circumstances and events leading to the impairment cease to exist.

• A reversal of impairment loss is limited to the asset’s carrying amount that would have been determined had no impairment loss been recognised in prior years.

• Reversal of impairment losses are credited to the profit and loss accountexcept when the asset is carried at valuation, in which case the reversal of impairment loss is treated as a revaluation movement.


Accounting Policy on Impairment of Assets

CaseCase

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Identify An Asset That May Be Impaired

Triggering events

At each reporting date, an entity shall assess whether there is any indication that an asset may be impaired.If any such indication exists, the entity shall estimate the recoverable amount of the asset.

Except for• Intangible assets, and• Goodwill ……



© 2005-06 Nelson 100


Triggering events

• Irrespective of whether there is any indication of impairment, an entity shall also:a) test

• an intangible asset with an indefinite useful life, or

• an intangible asset not yet available for use

for impairment annually by comparing its carrying amount with its recoverable amount.

b) test• goodwill acquired in a business

combinationfor impairment annually



51

© 2005-06 Nelson 101

Timing of impairment test on intangible assets• This impairment test may be performed at any time

during an annual period– provided it is performed at the same time every

year.• Different intangible assets may be tested for

impairment at different times.• However, if such an intangible asset was initially

recognised during the current annual period– that intangible asset shall be tested for

impairment before the end of the current annual period.



GoodwillGoodwillGoodwill Timing of impairment test on goodwill• To be discussed later ……

© 2005-06 Nelson 102



• Intangible assets that have an indefinite useful life, or are not yet ready for use– are tested for impairment annually.

• This impairment test– may be performed at any time during an

annual period,– provided it is performed at the same time

every year.• An intangible asset recognised during the

current period– is tested before the end of the current

annual period.

CaseCase

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Cash-Generating Unit and Goodwill

• If it is not possible to estimate the recoverable amount of the individual asset– an entity shall determine the recoverable

amount of the cash-generating unit to which the asset belongs (the asset’s cash-generating unit).

• Intangible assets may be such individual asset.

• Goodwill is definitely such individual asset.


GoodwillGoodwillGoodwillAmendments of HKAS 36 are mainly for the requirements on cash-generating unit and goodwill

Amendments of HKAS 36 are mainly for the requirements on cash-generating unit and goodwill

© 2005-06 Nelson 104


• A cash-generating unit (CGU)– is the smallest identifiable group of assets that generates cash inflows that

are largely independent of the cash inflows from other assets or groups of assets.

• Discussion points on CGU and goodwill include:

Allocating Goodwill to CGUAllocating Goodwill to CGUAllocating Goodwill to CGU

Testing CGU with Goodwill for ImpairmentTesting CGU with Goodwill for ImpairmentTesting CGU with Goodwill for Impairment

Minority InterestMinority InterestMinority Interest

Timing of Impairment TestsTiming of Impairment TestsTiming of Impairment Tests

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• For the purpose of impairment testing, goodwill acquired in a business combination shall– from the acquisition date, be allocated to each of the acquirer’s CGUs (or

groups of CGUs) that are expected to benefit from the synergies of the combination

– irrespective of whether other assets or liabilities of the acquiree are assigned to those units or groups of units.


CGU 1 CGU 2 CGU 3

Goodwill

Initial allocationInitial allocation

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• Each unit or group of units to which the goodwill is so allocated shall:a) represent the lowest level within the entity at which the goodwill is

monitored for internal management purposes; andb) not be larger than a segment

• based on either the entity’s primary or the entity’s secondary reporting format determined in accordance with HKAS 14 Segment Reporting.


CGU 1 CGU 2 CGU 3

Goodwill


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• If the initial allocation of goodwill cannot be completed as required– that initial allocation shall be completed before the end of the first annual

period beginning after the acquisition date (i.e. within 12 months).


CGU 1 CGU 2 CGU 3

Goodwill

• In accordance with HKFRS 3– if the initial accounting for a business

combination can be determined only provisionally, the acquirer:a) accounts for the combination using those

provisional values; andb) recognises any adjustments to those

provisional values as a result of completing the initial accounting within 12 months of the acquisition date.


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CGU 1 CGU 2 CGU 3

Goodwill


• Goodwill is allocated to cash-generating units for the purposes of impairment testing.

• Goodwill is tested for impairment at the lowest level at which goodwill is monitored for internal management purposes.

• This is not at a higher level than a segment based on either the primary or secondary reporting format (as determined in accordance with IAS 14 ‘Segment reporting’).

CaseCase

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• If goodwill has been allocated to a CGU and the entity disposes of an operation within that CGU– the goodwill associated with the operation disposed of shall be:

a) included in the carrying amount of the operation• when determining the gain or loss on disposal; and

b) measured on the basis of the relative values of• the operation disposed of, and• the portion of the CGU retained,

unless the entity can demonstrate that some other method better reflects the goodwill associated with the operation disposed of.

Allocating Goodwill to CGUAllocating Goodwill to CGUAllocating Goodwill to CGU DisposalDisposal

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• An entity sells for $100 an operation that was part of a CGU to which goodwill has been allocated.

• The goodwill allocated to the unit cannot be identified or associated with an asset group at a level lower than that unit, except arbitrarily.

• The recoverable amount of the portion of the CGU retained is $300.

ExampleExample

• Because the goodwill allocated to the CGU cannot be non-arbitrarily identified or associated with an asset group at a level lower than that unit, the goodwill associated with the operation disposed of is measured on the basis of the relative values of• the operation disposed of, and• the portion of the unit retained.

• Therefore, 25% of the goodwill allocated to the CGU is included in the carrying amount of the operation that is sold.

• Because the goodwill allocated to the CGU cannot be non-arbitrarily identified or associated with an asset group at a level lower than that unit, the goodwill associated with the operation disposed of is measured on the basis of the relative values of• the operation disposed of, and• the portion of the unit retained.

• Therefore, 25% of the goodwill allocated to the CGU is included in the carrying amount of the operation that is sold.

Allocating Goodwill to CGUAllocating Goodwill to CGUAllocating Goodwill to CGU DisposalDisposal

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• At the date of disposal of a business– attributable goodwill is included in the

Group’s share of net assets in the calculation of the gain or loss on disposal.

DisposalDisposal

CaseCase

• In its 2005 Interim Report, full setof HKFRS was adopted:– Goodwill is tested annually for impairment and carried at

cost less accumulated impairment losses.– Gains and losses on the disposal of an entity include the

carrying amount of goodwill relating to the entity sold.– Goodwill is allocated to cash-generating units for the

purpose of impairment testing.

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• If an entity reorganises its reporting structure in a way that changes the composition of one or more CGUs to which goodwill has been allocated– the goodwill shall be reallocated to the

CGUs affected.

Allocating Goodwill to CGUAllocating Goodwill to CGUAllocating Goodwill to CGU ReorganiseReorganise

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• Goodwill had previously been allocated to CGU A.

• The goodwill allocated to CGU A cannot be identified or associated with an asset group at a level lower than CGU A, except arbitrarily.

• A is to be divided and integrated into 3 other CGUs, namely B, C and D.

ExampleExample

• Because the goodwill allocated to CGU A cannot be non-arbitrarily identified or associated with an asset group at a level lower than CGU A.

• Goodwill is reallocated to CGU B, C and D on the basis of the relative values of the 3 portions of CGU A before those portions are integrated with CGU B, C and D.

• Because the goodwill allocated to CGU A cannot be non-arbitrarily identified or associated with an asset group at a level lower than CGU A.

• Goodwill is reallocated to CGU B, C and D on the basis of the relative values of the 3 portions of CGU A before those portions are integrated with CGU B, C and D.

Allocating Goodwill to CGUAllocating Goodwill to CGUAllocating Goodwill to CGU ReorganiseReorganise

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• When goodwill relates to a CGU but has not been allocated to that unit– the unit shall be tested for impairment, whenever

there is an indication that the CGU may be impaired– any impairment loss shall be recognised

Testing CGU with Goodwill for ImpairmentTesting CGU with Goodwill for ImpairmentTesting CGU with Goodwill for Impairment

Goodwill Unallocated

Goodwill Allocated

• A CGU to which goodwill has been allocated– shall be tested for impairment

• annually, and• whenever there is an indication that the unit may

be impaired– If the carrying amount of the CGU exceeds its

recoverable amount, the entity shall recognise any impairment loss

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• In accordance with HKFRS 3– goodwill recognised in a business combination represents

• the goodwill acquired by a parent based on the parent’s ownership interest,

• rather than the amount of goodwill controlled by the parent as a result of the business combination.

– Thus, goodwill attributable to a minority interest is not recognised in the parent’s consolidated financial statements.


New requirement ……

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• For the purpose of impairment testing a non-wholly-owned CGU with goodwill– the carrying amount of that CGU is notionally adjusted, before being

compared with its recoverable amount• Notional adjustment

– accomplished by grossing up the carrying amount of goodwill allocated to the CGU to include the goodwill attributable to the minority interest.

– this notionally adjusted carrying amount is then compared with the recoverable amount of the unit to determine whether the CGU is impaired.

– If it is impaired, the entity allocates the impairment loss first to reduce the carrying amount of goodwill allocated to the CGU.


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• Entity A acquires 80% interest in GV at $1,600 on 1 Jan. 2005 • It implies that 100% interest of GV to Entity A would be $2,000.• Subsidiary GV has identifiable net assets at a fair value of $1,500

80% 100%Cost of combination $1,600 $2,000Fair value of GV 1,200 1,500Goodwill 400 500

• Goodwill recognised in the consolidation is $400.• Assume at 30 Jun. 2005, the carrying amount of all the balances are the

same but the recoverable amount of GV (a single CGU) is $1,900.• Compare the calculation with or without notional adjustment on goodwill

attributable to minority interest


ExampleExample

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ExampleExample

Without Notional AdjustmentCarrying amount of GV in A’s consolidation $ 1,500Goodwill recognised (attributable to A) 400Total carrying amount $ 1,900Recoverable amount of GV $ 1,900

Without Notional AdjustmentCarrying amount of GV in A’s consolidation $ 1,500Goodwill recognised (attributable to A) 400Total carrying amount $ 1,900Recoverable amount of GV $ 1,900

With Notional AdjustmentTotal carrying amount (as above) $ 1,900Notional adjustment• Goodwill attributable to minority interest 100Notionally adjusted carrying amount $ 2,000Recoverable amount of GV $ 1,900

With Notional AdjustmentTotal carrying amount (as above) $ 1,900Notional adjustment• Goodwill attributable to minority interest 100Notionally adjusted carrying amount $ 2,000Recoverable amount of GV $ 1,900

No impairment observed

Impairment loss of $100

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• Annual impairment test for a CGU to which goodwill has been allocated– may be performed at any time during an annual period, provided the test is

performed at the same time every year.• Different CGUs may be tested for impairment at different times.• However, if some or all of the goodwill allocated to a CGU was

acquired in a business combination during the current annual period,– that unit shall be tested for impairment before the end of the current annual

period.


Similar to that for Intangible Assets!

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• The most recent detailed calculation made in a preceding period of the recoverable amount of a CGU to which goodwill has been allocated– may be used in the impairment test of that CGU in the current period

provided all of the following criteria are met:a) the assets and liabilities making up the CGU have not changed

significantlyb) the most recent recoverable amount calculation resulted in an

amount that exceeded the carrying amount of the CGU by a substantial margin; and

c) the likelihood that a current recoverable amount determination would be less than the current carrying amount of the CGU is remote.


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Corporate AssetsCorporate Assets are assets other than goodwill that contribute to the future cash flows of both• the CGU under review and• other CGUs.

• In testing a CGU for impairment– an entity shall identify all the corporate

assets that relate to the CGU under review.– The allocation approach of the corporate

assets is also amended ……

Examples include:• Building of a headquarter• EDP Equipment• Research centre

Examples include:• Building of a headquarter• EDP Equipment• Research centre

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such portion shall be included as part of the carrying amount of the CGU for impairment test

Corporate AssetsCorporate Assets

Can be allocated on a reasonable and consistent basis

Cannot be allocated on a reasonable and consistent basis

The entity shall:1) compare the carrying amount of the CGU (excluding the

corporate asset) with its recoverable amount• recognise any impairment loss first

Firstly, test smaller CGU

Then, test larger CGU containing the goodwill

2) identify the smallest group of CGUs that includes the CGU under review and to which a portion of the carrying amount of the corporate asset can be allocated on a reasonable and consistent basis; and

3) compare the carrying amount of that group of CGUs, including the portion of the carrying amount of the corporate asset allocated to that group of CGUs, with the recoverable amount of the group of CGUs.

• Any impairment loss shall be recognised.

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Impairment loss for CGU

• An impairment loss– shall be recognised for a CGU

• if, and only if, the recoverable amount of the CGU (group of CGUs) is less than the carrying amount of the CGU (group of CGUs).

– shall be allocated to reduce the carrying amount of the assets of the CGU (group of CGUs) in the following order:a) first, to reduce the carrying amount of any goodwill

allocated to the CGU (group of CGUs); andb) then, to the other assets of the CGU (group of

CGUs) pro rata on the basis of the carrying amount of each asset in the CGU (group of CGUs).These reductions in carrying amounts shall be treated as impairment losses on individual assets

Goodwill first

Goodwill first

Other on pro rata

Other on pro rata

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Impairment loss for CGU

• In allocating an impairment loss for a CGU, an entity shall not reduce the carrying amount of an asset below the highest of:a) its fair value less costs to sell (if determinable);b) its value in use (if determinable); andc) zero.

• The amount of the impairment loss that would otherwise have beenallocated to the asset shall be allocated pro rata to the other assets of the CGU (group of CGUs).

• A liability shall be recognised for any remaining amount of an impairment loss for a CGU– if, and only if, that is required by another HKAS/HKFRS.

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• Largely the same as SSAP 31, except for reversal of impairment loss on goodwill

• An impairment loss recognised for goodwill shall not be reversed in a subsequent period.

• HKAS 38 Intangible Assets prohibits the recognition of internally generated goodwill.

• Any increase in the recoverable amount of goodwill subsequent to the recognition of an impairment loss for that goodwill is

– likely to be an increase in internally generated goodwill,

– rather than a reversal of the impairment loss recognised for the acquired goodwill.

Reversing an Impairment Loss

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• In respects of assets other than goodwill, an impairment loss is reversedif there has been a change in the estimates used to determine the recoverable amount and the circumstances and events leading to the impairment cease to exist.

• A reversal of impairment loss is limited to the asset’s carrying amount that would have been determined had no impairment loss been recognised in prior years.

• Reversal of impairment losses are credited to the profit and loss accountexcept when the asset is carried at valuation, in which case the reversal of impairment loss is treated as a revaluation movement.


Accounting Policy on Impairment of Assets

Reversing an Impairment LossCaseCase

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Transition and Effective Date• If an entity elects to apply HKFRS 3 from any date

before the effective dates set out in HKFRS 3, it also shall apply HKAS 36 prospectively from that same date.

• Otherwise, an entity shall apply HKAS 36:a) to goodwill and intangible assets acquired in business

combinations for which the agreement date is on or after 1 January 2005; and

b) to all other assets prospectively from the beginning of the first annual period beginning on or after 1 January 2005.

• Entities to which the above paragraph applies are encouraged to apply the requirements of HKAS 36 before the effective dates specified above.

• However, if an entity applies HKAS 36 before those effective dates, it also shall apply HKFRS 3 and HKAS 38 Intangible Assets at the same time.

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Disclosure

• More extensive disclosure required now• Main additional disclosure requirements include:

– Extensive information for each CGU (or group of CGUs) for which the carrying amount of goodwill or intangible assets with indefinite useful lives allocated, including• Key assumptions used and the management approach to

measure the recoverable amounts (aligned with revised HKAS 1)• Period for cash flow projection, growth rate, discount rate ……• Certain other information when a reasonably possible change in

a key assumption would cause the carrying amount of CGUs to exceed its recoverable amount

– any portion of the goodwill acquired in a business combination during the period has not been allocated to a CGU (group of CGUs) at the reporting date• the amount of the unallocated goodwill shall be disclosed

together with the reasons why that amount remains unallocated.

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Disclosure

Esprit Holdings LimitedEsprit Holdings Limited• In accordance with IAS 36, the Group completed its annual

impairment test for Esprit trademarks by comparing their recoverable amount to their carrying amount as at June 30, 2004.

• The Group appointed independent professional valuers to conduct a valuation of the Esprit trademarks as one corporate asset based on value-in-use calculation.

• The resulting value of the Esprit trademarks as at June 30, 2004was significantly higher than their carrying amount.

Only these ……

CaseCase

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Disclosure

• This valuation uses cash flow projections based on financial estimates covering a three-year period, expected royalty ratesderiving from the Esprit trademarks in the range of 3% to 8% and a discount rate of 14%.

• The cash flows beyond the three-year period are extrapolated using a steady 3% growth rate.

• This growth rate does not exceed the long-term average growth rate for apparel markets in which the Group operates.

• Management has considered the above assumptions and valuation and also taken into account the business expansion plan going forward, the current wholesale order books and the strategic retail expansion worldwide and believes that there is no impairment in the Esprit trademarks.

• Management believes that any reasonably foreseeable change in any of the above key assumptions would not cause the aggregate carrying amount of trademarks to exceed the aggregate recoverable amount.

Esprit Holdings LimitedEsprit Holdings LimitedCaseCase

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Final Remarks

• The Group tests goodwill for impairment annually, or more frequently if there are indications that goodwill might be impaired. The recoverable amounts are determined based on a value-in-use calculation.

• These calculations use cash flow projections based on financial budgets and forecasts approved by senior management covering a 5-year period, taking into account projected regulatory capital requirements.

• Cash flows beyond the 5-year period are extrapolated using the estimated growth rates stated below.

• The growth rates do not exceed the long-term average growth rate for the market in which the businesses operate.

CaseCase

Annual Report 2005 and Announcement

Acquired in 2001, see how’s the effect on that?

Based on Singapore FRS 103 which is largely the same as IFRS 3

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Final Remarks

• Key assumptions used for value-in-use calculations in assessing DBS Bank (Hong Kong) Limited– Growth rate 4.5%– Discount rate 9.5%

• For the year ended 31 December 2005, an impairment charge of S$1,128 million has been recorded in ‘Goodwill charges’ in the income statement.

• This is attributed to goodwill arising from acquisition ofDBS Bank (Hong Kong) Limited.

• The reduced value-in-use resulted from revised cash flow projections on a lower profit base in 2005.

CaseCase



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Final Remarks

In DBS Group’s consolidated balance sheet as at 31 Dec. 2005:

S$ billionCarrying value of DBS Hong Kong 10.8 Estimated recoverable value 9.6Impairment charge 1.2

CaseCase


The reduced value-in-use resulted• from revised cash flow projections• on a lower profit base in 2005.

Why?Why?Why?


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Final RemarksCaseCase


(440)0 Goodwill charge - amortisation

1,995824Net profit attributable to shareholders

0(1,128)Goodwill charge - impairment

2,4351,952Net profit attributable to shareholders before goodwill charges

2004(S$ million)

2005 (S$ million)

Impact to whole group?

Impact to whole Impact to whole group?group?

58% of net profit


The reduced value-in-use resulted• from revised cash flow projections• on a lower profit base in 2005.

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Nelson Lam Nelson Lam [email protected]

5 38 36

Updated version of the slides can be found in www.NelsonCPA.com.hk

© 2005-06 Nelson 136

Nelson Lam Nelson Lam [email protected]


Q&A SessionQ&A SessionQ&A Session

Updated version of the slides can be found in www.NelsonCPA.com.hk

HKFRS 5 and HKAS 36 and 38 - Nelson CPA · 4/19/2006 · • Assets classified as non-current in...

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