Module A Financial Reporting

Q u a l i f i c a t i o n P r o g r a m m e

Module A Financial Reporting

D E C E M B E R 2 0 1 4 A N D J U N E 2 0 1 5 S U P P L E M E N T

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Changes at a glance

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Changes at a glance

Amended on Learning Pack and Flashcards Supplement

Chapter Name Page

Part A: Identified Errata

Learning Pack

1 Legal environment 1

Part B: Technical Updates

Learning Pack

1 Legal environment 2

2 Financial reporting framework 2

3 Small company reporting 5

5 Property, plant and equipment 8

6 Investment property 8

8 Intangible assets and impairment of assets 9

9 Leases 10

11 Provisions, contingent liabilities and contingent assets 11

12 Construction contracts 11

13 Share-based payment 11

14 Revenue 13

16 Employee benefits 13

18 Financial instruments 15

20 Related party disclosures 22

22 Earnings per share 24

23 Operating segments 24

26 Principles of consolidation 24

30 Consolidation of foreign operations 25

Flashcards

2 Financial reporting framework 29

3 Small company reporting 29

8 Intangible assets and impairment of assets 30

18 Financial instruments 30

20 Related party disclosures 30

23 Operating segments 30

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Reminder of the examination cut-off rule

HKICPA operates a ’cut-off’ rule whereby students will only be examined on standards and legislation that had been released on or before 31 May each year.

The same examinable contents applies to the December session of 2014 and the June session of 2015. Examinable contents are applicable to both module and final examinations.

In determining what is examinable, reference must be made to both the release date of the pronouncements (or the enactment date of the legislation) and their corresponding effective date.

Legislation and the Institute's pronouncements that meet the following conditions will be examined:

Condition 1: Have been released/enacted six months prior to the reference date of 1 December 2014 (cut-off being 31 May 2014) AND

Condition 2: Have been effective/will be effective on or before the 13th month from the reference date i.e. 1 January 2016.

Examinable standards

You will find a list of the standards that are examinable in your examination session by logging onto the HKICPA online QP Learning Centre.

Introduction

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Introduction

This Supplement has been produced for those candidates preparing for the December 2014 and June 2015 examination sessions of the HKICPA Qualification Programme.

It is designed to be used in conjunction with the fourth edition of the Learning Pack, and it will bring you fully up to date for developments that have occurred in the period since publication of the Learning Pack and 31 May 2014, the cut-off date for examinable standards and legislation for the December 2014 and June 2015 examinations.

The Supplement comprises a technical update on developments that will be examinable in December 2014 and June 2015 examination sessions that are not currently covered in the Learning Pack. The topics covered are listed on the contents page, and again are covered in chapter order.

In each case the text in the Supplement explains how the Learning Pack is affected by the change, for example whether the new material should be read in addition to the current material in the Learning Pack, or whether the new material should be regarded as a replacement.

Good luck with your studies!

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December 2014 and June 2015 Supplement

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Part A: Identified Errata – Learning Pack

Chapter 1 Legal environment

Section 1.3

Page 10

The following typos should be corrected:

Second line of (c) in middle of page: 'director' should be 'directors'

Third bullet of (b) at foot of page: 'educing' should be 'reducing'

Second line of (c) at foot of page: a closing bracket should be inserted after 'reporting' (i.e. those that do not qualify for simplified reporting)

Section 2.1.1

Page 13

The following typo should be corrected:

Third bullet of (c) at top of page: 'roper' should 'proper'

Section 3.2.1

Page 16


First line of second paragraph: 'Land Office' should be 'Lands Office'

Section 3.4.1

Page 17


First line of section 3.4.1: 'Where new auditors are to be appointed…'

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Part B: Technical Update – Learning Pack

Chapter 1 Legal environment

Section 1.2

Page 7

Replace the first paragraph of the section with the following:

Companies are established under the provisions of the Companies Ordinance (Chapter 32 of the Law of Hong Kong). A company operates under an agreement between subscribers or shareholders. It is common to also have articles of association for a company, which are more detailed rules and regulations regarding meetings, resolutions and activities of the company.

Section 2.1.1

Page 12

Replace the fourth paragraph of section (a) with the following:

Directors must agree not to fetter their discretion. As the powers delegated to the directors are held in trust for them by the company, they must not restrict their exercise of future discretion.

Chapter 2 Financial reporting framework

Section 1.3.1

Page 28 Additional bullet point in left hand column of table, first row (after 'asset management')

Providing credit rating services

New section 15 Insert the following text as a new section 15 after the existing section on management commentary:

15 Integrated Reporting

In recent years users of financial statements have become increasingly interested not only in the financial performance of a company, but also in the social, environmental and ethical performance. Understanding a company's approach to corporate social responsibility is relevant to these users because they want assurance that the company that they have invested in or have dealings with complies with legal requirements, ethical standards and other international norms. Furthermore, investors and other parties increasingly expect companies to actively engage in actions that have a positive impact on the environment, consumers, communities, employees and other stakeholders. Integrated reporting is the latest development in corporate social responsibility reporting.

15.1 Development of integrated reporting

Initially reporting on corporate social responsibility took the form of environmental and social reports.

Environmental reports detail the effect, both positive and negative, on the environment of a company's operations, such as levels of waste and pollution, and recycling levels.

Social reports detail the impact of a business on society, for example through social networks, the effect of business methods on health and human rights and employment policies.


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More recently the concept of social and environmental reporting expanded to form sustainability reporting. This incorporates the wider issue of sustainability in an environmental, social and ethical context. It addresses the issue of whether a business can meet the needs of the present world without compromising the ability of future generations to meet their own needs. For example, a company which uses renewable energy or recycled products is contributing to environmental sustainability.

15.1.1 Sustainability reporting in Hong Kong

In August 2012, the HKEx issued its Environmental, Social and Governance (ESG) Reporting Guide and announced that it would make sustainability reporting 'recommended best practice' for listed companies for reporting periods ending on or after 31 December 2012. Companies following the Guide provide disclosures on workplace quality, environmental protection, operating practices and community involvement.

Subject to consultation, the HKEx is likely to increase the obligation level of certain ESG disclosures to 'comply or explain' by 2015.

15.1.2 More recent developments

The most recent development in corporate social responsibility reporting is the emergence of integrated reporting. This links environmental, social and sustainability issues to financial strategy and results. It is sometimes referred to as 'triple bottom line reporting' i.e. reporting on 'profit, the planet and people' (financial, environmental and social issues).

An integrated report is described by the International Integrated Reporting Council (the IIRC) as 'a concise communication about how an organisation's strategy, governance, performance and prospects, in the context of its external environment, leads to the creation of value in the short, medium and long term.'

15.2 Drivers of integrated reporting

Demand from stakeholders has accelerated the development of integrated reporting. In particular, stakeholders are concerned with how a business is operating in a sustainable way. There are three key reasons for this:

(1) Social, environmental and ethical considerations are a key part of the investment decision for many investors, with ethical investment growing in popularity.

(2) The ethical performance of a company also impacts on business relationships; for example, a reporting entity may not wish to be associated with a supplier whose ethical stance does not fit with its own.

(3) Environmental and ethical issues in particular represent a source of risk to a company with possible financial implications.

15.3 Benefits of integrated reporting

Integrated reporting has benefits for both the reporting entity and investors. From the reporting entity's perspective, integrated reporting provides a reporting environment that is conducive to understanding and implementing their strategy. This helps to drive internal performance and attract capital. Specific benefits include:

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Better stakeholder relations

Lower operational and strategic risk

Enhanced reputation and a stronger brand

Customer loyalty

Improved access to capital at a lower cost

Reduced regulatory intervention

New business opportunities

Opportunities for business alliances

From an investor's perspective, integrated reporting makes the connections between strategy, governance, performance and prospects and as a result investors can assess more effectively the combined impact of diverse factors.

15.4 Integrated reporting framework

The IIRC issues the Integrated Reporting Framework (the IR Framework) in December 2013, with the intention that this is used to accelerate the adoption of integrated reporting globally.

Currently integrated reporting is adopted by certain entities on a voluntary basis. Most of those entities that have adopted this form of reporting are large multinational corporations and are taking part in the IIRC’s pilot programme. This programme is running until September 2014. Companies taking part in it include PepsiCo, Unilever, HSBC and CLP Holdings Limited of China.

The IR Framework includes two sections:

Part 1 provides guidance on using the Framework and the fundamental concepts of integrated reporting.

Part 2 discusses guiding principles and content elements related to the preparation and presentation of an integrated report.

15.4.1 Fundamental concepts

The fundamental concepts of integrated reporting are:

Value creation for the organisation and others

The capitals (resources and the relationships used and affected by the organisation)

The value creation process (the linkage between business model and ability to create value)

15.4.2 Guiding principles

Seven guiding principles underlie the preparation and presentation of an integrated report:

(1) Strategic focus and future orientation

(2) Connectivity of information

(3) Stakeholder relationships

(4) Materiality

(5) Conciseness

(6) Reliability and completeness

(7) Consistency and comparability


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15.4.3 Content elements

An integrated report must include the following eight key content elements:

(1) Organisational overview and external environment

(2) Governance

(3) Business model

(4) Risks and opportunities

(5) Strategy and resource allocation

(6) Performance

(7) Outlook

(8) Basis of preparation and presentation

Existing section 15.1 (will be section 16.1)

Page 60

Replace the last paragraph of section 15.1 with the following:

Subsequent to the completion of phase 1 of the project in 2010, remaining work was deferred. In late 2012, however, the project was reactivated as an IASB-only project. A Conceptual Framework discussion paper was issued in 2013 to obtain feedback from constituents on the remaining phases of the project before the development of an exposure draft (expected in 2014). In particular the discussion paper suggests:

Improvements to the existing definitions of assets and liabilities and additional guidance to support those definitions

Improvements to the guidance on when assets and liabilities should be recognised

New Guidance on when assets and liabilities should be derecognised

Guidance to assist standard setters in selecting the most appropriate measurement basis for an asset or liability

Increased disclosure of information about different classes of equity

Principles to assist standard setters in deciding which items of income and expense should be recognised in profit or loss, and which should be recognised in other comprehensive income, and when items of other comprehensive income should be reclassified to profit or loss

The development of disclosure concepts for the Conceptual Framework

Chapter 3 Small company reporting

Section 3.1.1 and 3.1.2

Page 68 – 69

Replace section 3.1.1 and 3.1.2 with the following:

3.1.1 Qualifying Hong Kong Companies

A company incorporated under the Hong Kong Companies Ordinance qualifies for reporting under the SME-FRF and SME-FRS if it satisfies the reporting exemption criteria set out in section 359 of the new Companies Ordinance. The qualifying categories are:

A private company that is not a member of a group

Any size 100% written approval from shareholders is required each year

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Small private company Must not exceed two of:

Total annual revenue of HK$100m

Total assets of HK$100m at the reporting date

100 employees

No shareholder approval is required

A group of small private companies

Each company in the group must qualify as a small private company and the aggregate amounts for the group must not exceed 2 of 3 of the size tests for small private companies

No shareholder approval is required

Small company limited by guarantee

Total annual revenue no more than HK$25m

No member approval is required

Group of small companies limited by guarantee

Each company in the group must qualify as a small private company limited by guarantee and the aggregate annual revenue must not exceed HK$25m

No member approval required

Larger eligible private company

Must not exceed two of:

Total annual revenue of HK$200m

Total assets of HK$200m at the reporting date

100 employees

75% shareholder approval required with no objections

Group of eligible companies

Each company in the group must qualify as a small private company or eligible larger company and the aggregate amounts for the group must not exceed 2 of 3 of the size tests for larger eligible private companies

The parent and all of the subsidiaries that are not small private companies must have obtained the relevant shareholder approval

Where size limits apply, in general a company will be required to pass the size tests for two consecutive years before becoming eligible in the third year. Similarly a company would have to fail the tests for two consecutive years in order to become ineligible in the third year.


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The following types of company are not eligible for the reporting exemption and may not apply the SME-FRF and SME-FRS:

(a) Companies that are authorised under the Banking Ordinance to carry out banking business

(b) Companies that accept, by way of trade or business (other than banking business), loans of money at interest or repayable at a premium other than on terms involving the issue of debentures or other securities

(c) Companies that are licensed under Part V of the Securities and Futures Ordinance to carry on a regulated business

(d) Companies that carry on an insurance business, other than solely as an agent

In addition, groups that contain such companies are not eligible for the reporting exemption and cannot apply the SME-FRF and SME-FRS in the preparation of their consolidated financial statements.

Section 3.1.3

Page 69

Replace the existing section 3.1.3 with the following:

3.1.3 Overseas companies

Subject to any specific requirements imposed by the law of the company's place of incorporation and subject to its constitution, overseas companies qualify for reporting under the SME-FRF and SME-FRS when they meet the same requirements that a Hong Kong company is required to meet.

Section 3.2

Page 71

Replace the existing section 3.2 with the following:

Section 3.2 The requirements of the SME-FRF and SME-FRS

The SME-FRF and SME-FRS are a briefer and simpler set of accounting rules than full HKFRS. They provide an accruals base framework in which the use of fair value for re-measuring assets or liabilities is not allowed. Disclosure requirements focus on basic financial information.

If the SME-FRS does not cover an event or transaction, management are required to apply judgment in order to develop an accounting policy consistent with the historical cost convention. There is no requirement to fall back to full HKFRS.

The SME-FRF and SME-FRS were first issued in 2005 and have been revised in 2014 as a result of the new Companies Ordinance.

Key areas in which the SME-FRS differs from full HKFRS include the following:

(a) There is no requirement to provide a statement of cash flows; however guidance is provided for its preparation should an entity choose to do so. (SME-FRS para 1.1)

(b) Changes in equity may be disclosed in a note rather than in a separate primary statement. (SME-FRS para 1.32)

(c) Leasehold interests in land from the Government of the HKSAR, or elsewhere with similar features, are accounted for as property, plant and equipment. (SME-FRS para 3.13)

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(d) There is no separate category of 'investment property'. Instead, the definition of property, plant and equipment includes properties held for rental purposes or investment potential. (SME-FRS para 3.1)

(e) The recognition of deferred tax is prohibited. Instead the only tax expense recognised is that calculated based on profits assessed for tax purposes for the period, i.e. as is payable to the taxation authorities in respect of that period. (SME-FRS para 14.6)

(f) Only investments in securities are covered; these are carried at historical cost (less impairment). (SME-FRS paras 6.1 & 6.7)

(g) Entities can choose whether or not to use a discounting technique in the impairment test. (SME-FRS para 9.8)

(h) There is no specific section of the SME-FRS dealing with share-based payments or employee benefits, nor lease accounting for lessors.

Chapter 5 Property, plant and equipment

Section 1.3.3

Page 106 Add the following text immediately under the heading 'Small separate assets', before the existing text.

Although HKAS 16 provides criteria that must be met in order for an item of property, plant or equipment to be recognised as an asset, it does not prescribe a unit of measurement for recognition i.e. what value an item should have in order to be recognised as an asset rather than expensed.

Section 1.10

Page 118

Replace the existing text with the following:

1.10 Current developments The IASB issued Clarification of Acceptable Methods of Depreciation and Amortisation (Amendments to IAS 16 and IAS 38) in May 2014. This is to be adopted by HKICPA and so result in amendments to HKAS 16 and HKAS 38.

The amendments clarify that depreciation methods must reflect a pattern of consumption of economic benefits from an asset rather than a pattern of generation of economic benefits by an asset. Therefore a revenue-based method of depreciation is not allowed.

A revenue-based method of depreciation is a method whereby the depreciation charge in a given year is calculated based on the revenue earned in that year as a proportion of total revenues expected to be generated by the asset over its useful life.

Chapter 6 Investment property

Section 1.1

Page 126 Immediately before self-test question 1 add the following text:

1.1.1 Use of judgment

HKAS 40 is clear that judgment should be applied in order to determine whether a property is an investment property. Judgment should also be used to determine whether the acquisition of an investment property is the acquisition of an asset/group of assets or a business combination within the scope of HKFRS 3. In order to determine this, the guidance in both HKAS 40 and HKFRS 3 should be applied.


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Chapter 8 Intangible assets and impairment of assets

Section 2.10

Page 160

Replace the existing text with the following:

1.10 Current developments The IASB issued Clarification of Acceptable Methods of Depreciation and Amortisation (Amendments to IAS 16 and IAS 38) in May 2014. This is to be adopted by HKICPA and so result in amendments to HKAS 16 and HKAS 38.

The amendments clarify that amortisation methods must reflect a pattern of consumption of economic benefits from an asset rather than a pattern of generation of economic benefits by an asset. Therefore a revenue-based method of amortisation is not allowed.

A revenue-based method of amortisation is a method whereby the amortisation charge in a given year is calculated based on the revenue earned in that year as a proportion of total revenues expected to be generated by the asset over its useful life.

Section 4.4.1

Page 166 Additional points under the heading (b) Internal sources of information

(vi) There is a significant decline in budgeted net cash flows or operating profit, or a significant increase in budgeted loss flowing from the asset.

(vii) There are operating losses or net cash outflows for the asset when current period amounts are aggregated with budgeted amounts for the future.

Section 4.5

Page 166

Add the following text immediately before the heading 4.5.1 Fair value less costs to sell

Note that where either fair value less costs to sell or value in use exceed an asset's carrying amount, the asset is not impaired and it is not necessary to estimate the other amount.

Section 4.8

Page 171

Add the following text to the introduction. The final sentence of the existing introduction is included for clarity:

If it is not possible to calculate the recoverable amount for an individual asset, the recoverable amount of the asset's cash generating unit should be measured instead, unless:

(a) The asset's fair value less costs to sell is higher than its carrying amount, or

(b) The asset's value in use can be estimated to be close to its fair value less costs to sell and fair value less costs to sell can be measured.

Section 4.13

Page 180

Replace points (e) and (f) with the following text:

(e) The recoverable amount of the asset (cash-generating unit) and whether the recoverable amount of the asset (cash-generating unit) is its fair value less costs to sell or its value in use.

(f) If the recoverable amount is fair value less costs to sell, the entity should disclose the following information:

(i) The level of the HKFRS 13 fair value hierarchy within which the fair value measurement of the asset (or CGU) is categorised in its entirety (without taking into account whether the costs to sell are observable).

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(ii) For fair value measurements categorised within Levels 2 and 3 of the fair value hierarchy, a description of the valuation technique(s) used to measure fair value less costs to sell. If there has been a change in valuation technique, the entity should disclose that change and the reasons for making it.

(iii) For fair value measurements categorised within Levels 2 and 3 of the fair value hierarchy, each key assumption on which management has based its determination of fair value less costs to sell. Key assumptions are those to which the asset's (CGU's) recoverable amount is most sensitive. The entity should also disclose the discount rate used in the current measurement and previous measurement if fair value less costs to sell is measured using a present value technique.

Section 4.14

Page 180

Ignore this section as amendments to HKAS 36 have now been made and are reflected in changes to the Learning Pack made above.

Chapter 9 Leases

Section 7

Page 209 Replace the text in section 7 under the heading Current Developments with the following:

In August 2010, the IASB and American standards board, FASB, issued an Exposure Draft of a new standard on leases with the intention of replacing IAS 17. A revised exposure draft was issued in May 2013. It is highly likely that such a new standard will in turn be adopted by the HKICPA and so replace HKAS 17.

The 2010 and 2013 Exposure Drafts both propose that there is no distinction between operating and finance leases, and instead all leases are accounted for in the same way. In the lessee's accounts, for all leases lasting more than one year a lease liability and a right-of-use asset would be recognised, initially measured at the present value of fixed lease payments during the non-cancellable period. The recognition of lease expenses and cash flows would depend on whether the underlying asset is consumed by the lessee. Type A leases would be those where the underlying asset is consumed by the lessee (e.g. motor vehicles and equipment); Type B leases would be those where not more than an insignificant amount of the underlying asset is consumed by the lessee (e.g. property). Expenses and cash flows would be recognised as follows:

TYPE A LEASES TYPE B LEASES

Statement of profit or loss

Amortisation and interest

Single lease expense

Statement of cash flows Principal paid and interest paid

Total cash paid

From a lessor perspective, leases are classified as type A or Type B and accounted for as follows:


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TYPE A LEASES TYPE B LEASES

Statement of financial position

The asset is derecognised and instead a lease receivable is recognised together with a residual asset (a retained interest in the underlying asset)

The asset continues to be recognised

Statement of profit or loss

Profit on the lease at the start of the lease is recognised together with interest income

Rental income is recognised

The 2013 exposure draft is currently being redeliberated.

Chapter 11 Provisions, contingent liabilities and contingent assets

Section 5

Page 240 Replace the last paragraph of this section with the following:

The project was deferred in 2010 and added to the IASB's research programme in 2012. The issues have been considered in conjunction with the Conceptual Framework work on elements and measurement (see Chapter 2, section 16.1 above). The IASB intends to discuss how IAS 37 (HKAS 37) could be replaced or revised in 2015 in the light of likely revisions to the Conceptual Framework.

Chapter 12 Construction contracts

Section 3

Page 260 Replace the text in section 3 under the heading Current Developments with the following:

The IASB issued IFRS 15 Revenue from Contracts with Customers in May 2014. The new standard replaces IAS 11 and IAS 18; HKICPA will adopt the new standard as HKFRS 15 and it will replace HKAS 11 and HKAS 18 in due course.

The new standard is considered in more detail in Chapter 14.

Chapter 13 Share-based payment

Section 1.3

Page 269

Replace the definition of vesting conditions with the following:

A vesting condition is a condition that determines whether the entity receives the services that entitle the counterparty to receive cash, other assets or equity instruments of the entity under a share-based payment arrangement. A vesting condition is either a service condition or a performance condition.

Section 1.3

Page 269

Add the following definitions:

A service condition is a vesting condition that requires the counterparty to complete a specified period of service during which services are provided to the entity. If the counterparty, regardless of the reason, ceases to provide service during the vesting period, it has failed to satisfy the condition. A service condition does not require a performance target to be met.

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A performance condition is a vesting condition that requires:

(a) The counterparty to complete a specified period of service (i.e. a service condition); the service requirement can be explicit or implicit; and

(b) Specified performance targets to be met while the counterparty is rendering the service required in (a).

The period of achieving the performance target(s):

(a) Shall not extend beyond the end of the service period; and

(b) May start before the service period on the condition that the commencement date of the performance target is not substantially before the commencement of the service period.

A performance target is defined by reference to:

(a) The entity's own operations (or activities) or the operations or activities of another entity in the same group (i.e. a non-market condition); or

(b) The price (or value) of the entity's equity instruments or the equity instruments of another entity in the same group (including shares and share options) (i.e. a market condition).

A performance target might relate either to the performance of the entity as a whole or to some part of the entity (or part of the group), such as a division or an individual employee.

A market condition is a performance condition upon which the exercise price, vesting or exercisability of an equity instrument depends that is related to the market price (or value) of the entity's equity instruments (or the equity instruments of another entity in the same group) such as:

(a) Attaining a specified share price or a specified amount of intrinsic value of a share option; or

(b) Achieving a specified target that is based on the market price (or value) of the entity's equity instruments (or the equity instruments of another entity in the same group) relative to an index of market prices of equity instruments in other entities.

A market condition requires the counterparty to complete a specified period of service (i.e. a service condition); the service condition can be explicit or implicit.

Section 2.1.3

Page 271

Add the following text as a new fourth paragraph immediately before the sentence 'On the vesting date the entity should revise the estimate to equal the number of equity instruments that actually vest':

When estimating the number of equity instruments that are expected to vest, all service conditions and performance conditions other than market conditions should be taken into account. Market performance conditions (i.e. conditions related to share price) are not considered when estimating the number of equity instruments expected to vest as they are instead taken into account when determining the fair value of the equity instrument at the grant date.


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Chapter 14 Revenue

Section 4

Page 312 Replace the text within section 4 under the heading Current Developments with the following:

The IASB issued IFRS 15 Revenue from Contracts with Customers in May 2014; this standard replaces both IAS 11 and IAS 18 as well as IFRIC 13, IFRIC 15, IFRIC 18 and SIC 31. When adopted by HKICPA as HKFRS 15, the new standard will replace HKAS 11 and HKAS 18, together with the relevant Hong Kong interpretations.

The new standard takes a five step approach to revenue recognition:

(1) Identify a contract with a customer.

(2) Identify separate performance obligations in the contract (such that if more than one good or service is promised, each is accounted for separately only if it could be sold separately or the customer could benefit from the good or service either alone or together with resources which are readily available).

(3) Determine the transaction price as the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties.

(4) Allocate the transaction price to the separate performance obligations in proportion to the standalone selling price of the goods or services underlying each performance obligation.

(5) Recognise revenue when (or as) the entity satisfies a performance obligation.

The standard also addresses the accounting treatment of the costs of obtaining a contract with a customer. It states that the costs of fulfilling a contract which are not eligible for capitalisation in accordance with another standard are capitalised only if they:

Relate directly to a contract

Generate or enhance resources which will be used to satisfy future performance obligations, and

Are expected to be recovered.

For many companies this new approach will not result in a significant change to the amount or timing of revenue recognised. In other cases there will be a change, for example, when a mobile phone contract is sold and a handset is provided free of charge, the standard would now require separate up front recognition of revenue relating to the handset.

Chapter 16 Employee benefits

Section 5

Page 372

Add a new section 5.9 between the existing 5.8 Further issues – the asset ceiling and 5.9 Summary of accounting treatment

5.9 Further issues – employee contributions

Where employees make contributions to defined benefit plans, the accounting treatment of the contributions depends on whether they are discretionary or required by the plan and whether they are linked to service or not. Employee contributions are not linked to service when they are required to reduce a deficit in the plan.

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If employee contributions are discretionary, they reduce service cost for the entity.

If employee contributions are required by the formal terms of the plan:

– If they are linked to service, they reduce service cost for the entity

– If they are not linked to service, they affect remeasurements of the net defined benefit liability/asset

Where contributions from employees are set out in the formal terms of the plan and they are linked to service, the timing of recognition of the contributions is dependent on whether the amount of contribution is related to the number of years of service. The amount of contribution is not related to the number of years of service where it is a fixed amount, a fixed percentage of salary or dependent on the employee's age.

If the amount of contribution is related to the number of years of service, the contribution is attributed to the periods of service.

If the amount of contribution is not related to the number of years of service it may be recognised as a reduction of the service cost in the period in which the related service is rendered.

The following diagram provided in Appendix A of HKAS 19 summarises the varying treatments:

Contributions from employees or third parties

Set out in the terms of the plan (or arise from a constructive obligation that goes beyond those terms)

Discretionary

Linked to service Not linked to service (e.g. to

reduce a deficit)

Dependent on number of years of service

Independent of number of years of service

Reduce service cost by

being attributed to periods of

service

Reduce service cost in the period in

which the related service

is rendered

Affect re-measurements

Reduce service cost upon

payment to the plan

Section 7

Page 375

Ignore this section as the proposal has now been issued as an amendment to HKAS 19 and is reflected in the changes to the chapter above.


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Chapter 18 Financial instruments

Section 2.4.4 Page 402

Replace the existing text after Self-test question 3 with the following: At maturity a compound instrument may be redeemed or converted. Where the instrument is redeemed for cash, the liability element of the instrument is derecognised and cash payment recognised; where the instrument is converted, the liability element is derecognised and instead recognised as equity. The original equity element of the instrument remains within equity, however may be transferred to a different account within equity.

Convertible instruments which are not compound instruments Certain types of convertible debt instrument meet the definition of a financial liability and therefore are not compound instruments and do not require the split-accounting approach described above.

As we have seen the definition of a financial liability includes a contract that will or may be settled in the entity's own equity instruments and is a:

(i) Non-derivative for which the entity is or may be obliged to deliver a variable number of the entity's own equity instruments

(ii) Derivative that will or may be settled other than by the exchange of a fixed amount of cash or other financial asset for a fixed number of the entity's own equity instruments.

Where the 'fixed for fixed test' described in (ii) is failed, i.e. a fixed amount of cash (or other financial asset) is not exchanged for a fixed number of equity instruments, the convertible debt instrument is classified as a liability in its entirety.

The 'fixed for fixed' test is always failed in the following circumstances, and may be failed in others:

Where the conversion ratio changes based on the issuing entity's share price, since the number of equity instruments issued on conversion is not fixed

Where the convertible debt instrument is denominated in a foreign currency, since the amount of cash exchanged for shares on conversion is not fixed in the functional currency of the issuing entity

Where the conversion option is not classified as equity it is an embedded derivative. Although the convertible instrument is classified in its entirety as a liability, it is therefore made up of two liability elements:

(i) A financial liability host instrument

(ii) A financial liability embedded derivative

The accounting treatment applied to embedded derivatives and their host instruments is considered in more detail in section 5 of this chapter.

Section 4.2.1

Page 410

Replace the existing text within section 4.2.1 with the following (the example should be retained):

Where a financial asset is measured at fair value, the gain or loss resulting from remeasurement at each reporting date is recognised in profit or loss unless:

(a) It is part of a hedging relationship (see section 6)

(b) It is an investment in an equity instrument and the entity has made an irrevocable election to present gains and losses on that investment in other comprehensive income

Financial Reporting

16

Section 4.3.2

Page 414

Replace the first paragraph with the following:

A financial liability which is held for trading and classified as fair value through profit or loss is remeasured to fair value each year in accordance with HKFRS 13 with any gain or loss recognised in profit or loss unless it is part of a hedging relationship (see section 6).

New section 4.4

Page 414

Insert the following text as a new section 4.4 before the existing section 4.4

4.4 Measurement of financial instruments at fair value

HKFRS 13 Fair Value Measurement was issued in 2011 and must be applied when measuring financial instruments that HKFRS 9 requires to be measured at fair value.

4.4.1 Determining fair value – basic principles

HKFRS 13 defines fair value as 'the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date'. This is an exit price i.e. the price to dispose of a financial instrument rather than acquire one.

Fair value is a market-based measurement, not an entity-specific measurement and it takes into account market conditions at the measurement date.

Because it is a market-based measurement, fair value is measured using the assumptions that market participants would use when pricing an asset, taking into account any relevant characteristics of that asset.

It is assumed that the transaction to sell the asset or transfer the liability takes place either:

(a) In the principal market for the asset or liability; or

(b) In the absence of a principle market, in the most advantageous market for the asset or liability.

The principal market is the market which is the most liquid (has the greatest volume and level of activity) for that asset or liability. In most cases the principal market and the most advantageous market will be the same.

Fair value is not adjusted for transaction costs. Under HKFRS 13, these are not a feature of the asset or liability, but may be taken into account when determining the most advantageous market.

4.4.2 Valuation techniques

In order to determine the fair value of a financial instrument, a valuation technique must be applied. Approaches to the valuation of financial instruments may include:

(a) Income approaches. Valuation techniques that convert future amounts (e.g. cash flows or income and expenses) to a single current (i.e. discounted) amount. The fair value measurement is determined on the basis of the value indicated by current market expectations about those future amounts.

(b) Market approaches. Valuation techniques that use prices and other relevant information generated by market transactions involving identical or comparable (i.e. similar) assets, liabilities or a group of assets and liabilities, such as a business.


17

(c) Cost approaches. Valuation techniques that reflect the amount that would be required currently to replace the service capacity of an asset (often referred to as current replacement cost).

HKFRS 13 does not require the use of a specific valuation technique, nor does it provide a hierarchy of techniques, however in given circumstances it accepts that one technique may be more appropriate than another.

Entities may use more than one valuation technique to measure fair value in a given situation. A change of valuation technique is considered to be a change of accounting estimate in accordance with HKAS 8, and must be disclosed in the financial statements.

4.4.3 Inputs to valuation techniques

HKFRS 13 states that valuation techniques applied must be those which are appropriate and for which sufficient data are available. Entities should maximise the use of relevant observable inputs and minimise the use of unobservable inputs.

The standard contains a fair value hierarchy that categorises the inputs into valuation techniques:

Level 1 Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity can access at the measurement date

Level 2 Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, for example:

Quoted prices for similar assets in active markets

Quoted prices for identical or similar assets in non-active markets

Inputs other than quoted prices that are observable for the asset such as interest rates

Level 3 Unobservable inputs for the asset or liability, using the entity's own assumptions about market exit value.

Level 3 inputs are used to measure fair value to the extent that relevant observable inputs are not available, so allowing for situations where there is little, if any, market activity for an asset at the measurement date.

The fair value measurement of an item is categorised in its entirety at the same level of the fair value hierarchy as the lowest level input that is significant to the entire measurement.

4.4.4 Considerations when applying HKFRS 13 to financial instruments

The following should be considered when applying HKFRS 13 to various financial instruments:

If a quoted item has a bid price (the price that buyers are willing to pay) and an ask price (the price that sellers are willing to achieve), the price within the bid-ask spread that is most representative of fair value is used to measure fair value. The use of bid prices for financial assets and the use of ask prices for financial liabilities is permitted but not required. IFRS 13 does not preclude the use of mid-market pricing.

Financial Reporting

18

In the case of equity shares, a control premium is considered when measuring the fair value of a controlling interest. Similarly, any non-controlling interest discount is considered where measuring a non-controlling interest.

The valuation of unlisted equity investments involves significant judgment and different valuation techniques are likely to result in different fair values; however this does not mean that any of the techniques are incorrect. Certain techniques are better suited to particular types of business, for example an asset based approach is relevant to property companies whilst an income approach is more relevant to service businesses. It is likely that valuation will be based on some unobservable inputs and as a result the overall fair value will be classified as a Level 3 measurement.

When determining the fair value of loans, counterparty credit risk must be taken into account ie the risk that the counterparty will fail to pay an amount of the loan. This may be achieved when using an income approach to valuation by applying a current market credit spread in the discount rate applied to the cash flows of the loan.

When determining the fair value of a financial liability, own credit risk (i.e. the risk that the entity will fail to discharge its own obligation) must be taken into account.

The fair value of a financial liability from the perspective of the issuer is the same in absolute amount as the fair value of the asset from the perspective of the holder.

4.4.5 Disclosure

An entity should disclose the fair value measurement of a financial instrument measured at fair value at the reporting date, together with the level of fair value hierarchy within which the fair value measurement is categorised.

Additional disclosures are required where a fair value measurement is classified as a Level 3 measurement:

A description of the valuation technique and the inputs used in the fair value measurement together with quantitative information about the significant unobservable inputs used in the fair value measurement

A reconciliation from the opening balance to the closing balance, disclosing separately changes attributable to purchases and gains and losses recognised in other comprehensive income. The line item in other comprehensive income must also be disclosed

A description of the valuation processes used by the entity

A narrative description of the sensitivity of the fair value measurement to changes in unobservable inputs if a change in those inputs might result in a significantly higher or lower fair value measurement

A narrative description of any interrelationships between unobservable inputs used in the measurement

A statement (if relevant) that changing one or more of the unobservable inputs to reflect reasonably possible alternative assumptions would change fair value significantly, together with disclosure of the calculation of the effect of such a change


19

Existing section 4.4

Pages 414 – 418

Existing section 4.4 is renumbered 4.5

Existing section 4.4.1 is renumbered 4.6

Existing section 4.4.2 is renumbered 4.6.1

Existing section 4.4.3 is renumbered 4.6.2



Section 5.2

Page 419

Add the following text immediately before section 5.2.1:

Earlier in the chapter we saw that where convertible debt is denominated in a foreign currency or has a variable conversion ratio based on share price, then it is not split into equity and liability components for accounting purposes. Instead the conversion option is treated as an embedded derivative within a financial liability host contract.

Applying the HKFRS 9 guidance detailed above, the embedded derivative is separated from the debt instrument host and accounted for separately since:

(a) The economic characteristics and risks of a debt contract are not closely related to those of a share warrant

(b) A separate share warrant meets the definition of a derivative

(c) The debt instrument is not measured at fair value through profit or loss (unless specifically designated as such to provide more relevant information)

Therefore two financial liabilities are recognised:

(i) A debt instrument measured at amortised cost, and

(ii) An embedded derivative (representing the conversion option) measured at fair value through profit or loss.

Section 8.1

Page 437

Replace the existing text within section 8.1 with the following:

The issue of the first part of IFRS 9 in 2009 represented the culmination of the first stage of a long-standing project carried out by the IASB and FASB to reduce complexity surrounding financial instruments. As more stages in the project are completed, IFRS 9 is added to such that it will eventually replace IAS 39 in its entirety. As each part of IFRS 9 is issued, it is adopted by HKICPA to become HKFRS 9.

The current HKFRS 9 was issued in three stages:

HKFRS 9 (2009) deals with the recognition and measurement of financial assets.

HKFRS 9 (2010) expands this to include the recognition and measurement of financial liabilities and embedded derivatives.

HKFRS 9 (2013) further expands this to include hedge accounting.

HKFRS 9 as issued in 2009 and 2010 is examinable in Module A and included within the main body of this chapter. The chapters of HKFRS 9 which were issued in 2013 and deal with hedge accounting are not fully examinable and are dealt with in this section as a current development.

Financial Reporting

20

The outstanding stage of the financial instruments project on impairment is also dealt with in this section.

18.1.1 Hedge Accounting

New requirements on hedge accounting were incorporated into IFRS 9/HKFRS 9 in 2013. The requirements replace the 'rule-based' requirements for hedge accounting currently in IAS 39/HKAS 39, and align the accounting more closely with risk management activities of an entity. Note that although the new hedge accounting requirements have been incorporated into HKFRS 9, there is no effective date for their application and therefore they do not fall within the cut off rules for Module A and will not be examinable at the December 2014 or June 2015 sittings.

The new model for hedge accounting differs from that in IAS 39/HKAS 39 in the following key areas:

Eligibility of hedging instruments

Eligibility of hedged items

Qualifying criteria for applying hedge accounting

Rebalancing

Discontinuation of hedging relationships

Accounting for the time value component of options and forward contracts

There are also limited changes in the accounting for hedge relationships.

Eligibility of hedging instruments

IAS 39/HKAS 39 permit entities to designate derivative instruments as hedging instruments; in addition non-derivative financial instruments may be hedging instruments for hedges of foreign currency risk.

Under IFRS 9/HKFRS 9 eligibility of a financial instrument as a hedging instrument depends on whether the instrument is measured at fair value through profit or loss (FVTPL) rather than whether it is a derivative instrument. Therefore non-derivative instruments may be used as a hedging instrument for all types of risks, not only foreign currency risks, provided they are measured at FVTPL.

Eligibility of hedged items

IAS 39/HKAS 39 permits entities to designate recognised assets or liabilities, firm commitments, highly probable forecast transactions, and net investments in foreign operations as hedged items. In addition, for financial assets and financial liabilities, entities may designate certain risk components of the asset or liability (e.g. interest-rate risk, foreign currency risk) as the hedged item, provided that the risk is separately identifiable and reliably measurable.

IFRS 9/HKFRS 9 also allows entities to designate risk components of non-financial assets and liabilities as hedged items provided that the risk component is separately identifiable and can be reliably measured.

In addition the new standard allows certain group exposures to be designated as a hedged item.

Qualifying criteria for applying hedge accounting

The IAS 39/HKAS 39 80%-125% hedge effectiveness test of whether a hedging relationship qualifies for hedge accounting has been removed by IFRS 9/HKFRS 9 and replaced with a principles-based approach. To qualify for hedge


21

accounting under IFRS 9/HKFRS 9, the following criteria must all apply:

(a) An economic relationship must exist between the hedged item and the hedging instrument, i.e. the hedging instrument and the hedged item must be expected to have offsetting changes in fair value;

(b) The effect of credit risk must not dominate the fair value changes, i.e. the fair value changes due to credit risk are not a significant driver of the fair value changes of either the hedging instrument or the hedged item; and

(c) The hedge ratio of the hedging relationship (quantity of hedging instrument vs quantity of hedged item) must be the same as that resulting from the quantity of the hedged item that the entity actually hedges and the quantity of the hedging instrument that the entity actually uses to hedge that quantity of hedged item.

This allows genuine hedging relationships to be accounted for as such whereas the IAS 39/HKAS 39 rules sometimes prevented management from accounting for an actual hedging transaction as a hedge.

Rebalancing

Rebalancing is a new concept introduced in IFRS 9/HKFRS 9. It refers to adjustments (where there is already a hedging relationship) to the designated quantities of the hedged item or the hedging instrument for the purpose of maintaining a hedge ratio that complies with the hedge.

The standard requires rebalancing to be undertaken if the risk management objective remains the same, but the hedge effectiveness requirements are no longer met. Where the risk management objective for a hedging relationship has changed, rebalancing does not apply and the hedging relationship must be discontinued.

Discontinuation of hedging relationships

Unlike under IAS 39/HKAS 39, under the new standard, an entity is not allowed to discontinue hedge accounting where the hedging relationship still meets the risk management objective and continues to meet all other qualifying criteria.

Accounting for the time value component of options and forward contracts

Under IAS 39/HKAS 39 the part of an option that reflects time value and the forward element of a forward contract are treated as derivatives held for trading purposes so creating volatility in profit or loss.

Under IFRS 9/HKFRS 9, the time value component of an option is treated as a cost of hedging, and presented in other comprehensive income. This is intended to decrease inappropriate volatility in profit or loss and it should be more consistent with risk management practices.

The new standard also allows an entity to elect for the forward element of a forward contract either in the same way as IAS 39/HKAS 39 (in profit or loss) or in a similar way to the part of an option that reflects time value

Accounting for hedge relationships

IFRS 9/HKFRS 9 retains the three types of hedge recognised in IAS 39/HKAS 39: fair value hedges, cash flow hedges and hedges of a net investment.

The accounting for these has generally not changed, with the following exceptions:

Financial Reporting

22

In a fair value hedge, if the hedged item is an investment in an equity instrument held at fair value through other comprehensive income, the gains and losses on both the hedged investment and the hedging instrument are recognised in other comprehensive income. This ensures that hedges of investments of equity instruments held at fair value through other comprehensive income can be accounted for as hedges.

In a cash flow hedge of a forecast transaction, if a non-financial asset or liability is recognised, an entity must remove the effective portion of the hedge recognised in other comprehensive income and include it in the initial cost or carrying amount of the non-financial item. The option which existed under IAS 39/HKAS 39 to reclassify the effective portion to profit or loss when the hedged item affects earnings is removed.

8.1.2 Impairment

A Request for Information on the feasibility of an expected loss model for the impairment of financial assets was published on 25 June 2009. This formed the basis of an Exposure Draft, Financial Instruments: Amortised Cost and Impairment, published in November 2009. A supplement to the ED was issued in January 2011 and the topic was re-exposed in March 2013 in the ED Expected Credit Losses.

The latest exposure draft builds upon previous EDs to develop a more forward-looking provisioning model which recognises credit losses on a more timely basis. IAS 39 currently applies an incurred loss model, requiring that credit losses (impairments) are recognised only when a credit loss event has occurred; the ED proposes that credit losses are recognised before a credit loss event occurs.

The final sections of IFRS 9/HKFRS 9 on impairment are expected to be issued in 2014.

Chapter 20 Related party disclosures

Section 1.3

Page 477 Add the following point within the definition of a related party:

(b)(viii) The entity, or any member of a group of which it is a part, provides key management personnel services to the reporting entity or to the parent of the reporting entity.

Section 1.4

Page 480

Replace this section with the following: A notable feature of HKAS 24 is that it is almost wholly concerned with disclosures. Its provisions supplement those disclosure requirements required by national company legislation and other HKAS (especially HKAS 1 and HKFRS 12).

1.4.1 Parent – subsidiary relationship Relationships between parents and subsidiaries must be disclosed irrespective of whether any transactions have taken place between the related parties. An entity must disclose the name of its parent and, if different, the ultimate controlling party. This will enable a reader of the financial statements to be able to form a view about the effects of a related party relationship on the reporting entity.


23

If neither the parent nor the ultimate controlling party produces financial statements available for public use, the name of the next most senior parent that does so shall also be disclosed.

1.4.2 Key management personnel

An entity should disclose key management personnel compensation in total for each of the following categories:

Short-term employee benefits

Post-employment benefits

Other long-term benefits

Termination benefits

Share-based payment

If an entity obtains key management personnel services from another entity ('the management entity'), the entity is not required to apply these requirements to the compensation paid or payable by the management entity to the management entity's employees or directors.

1.4.3 Related party transactions

Where related party transactions have occurred during the period, the nature of the related party relationship should be disclosed together with (as a minimum):

(a) The amount of the transactions

(b) The amount of outstanding balances, including commitments, and

(i) Their terms and conditions including whether they are secured and the nature of the consideration to be provided in settlement; and

(ii) Details of any guarantees given or received

(c) Provisions for doubtful debts related to the amount of outstanding balances, and

(d) The expense recognised during the period in respect of bad and doubtful debts due from related parties.

Amounts incurred by the entity for the provision of key management personnel services that are provided by a separate management entity should be disclosed.

These disclosures should be made separately for the following categories of related party:

The parent

Entities with joint control or significant influence over the entity

Subsidiaries

Associates

Joint ventures in which the entity is a venture

Key management personnel of the entity or its parent

Other related parties

Substantiation is a must if an entity decides to disclose that related party transactions were made on terms equivalent to those that prevail in arm's length transactions.

Items of a similar nature may be disclosed in aggregate except when separate disclosure is necessary for an understanding of the effects of related party transactions on the financial statements of the entity.

Financial Reporting

24

Chapter 22 Earnings per share

Section 1.4.1

Page 509 Within the example, replace the second last bullet point before the solution with:

Irredeemable cumulative preference shares: 3c every six months

Chapter 23 Operating segments

Section 1.5

Page 532 Replace part (a) at the start of this section with the following:

(a) General information

(i) Factors used to identify the entity's reportable segments

(ii) Judgments made by management in applying the aggregation criteria (see section 1.4.1)

(iii) Types of products and services from which each reportable segment derives its revenues

Chapter 26 Principles of consolidation

Section 4.1

Page 590

Replace the first bullet point with the following:

The accounting for the formation of a joint arrangement in the financial statements of the joint arrangement itself

Section 5.1.1

Page 595 Replace the text immediately before Example: Contingent consideration (2) with the following:

(b) If the change is due to events that took place after the acquisition date, for example, meeting earnings targets:

(i) Contingent consideration classified as equity is not remeasured and its subsequent settlement is accounted for within equity.

(ii) Contingent consideration classified as an asset or a liability that:

Is within the scope of HKFRS 9 is measured at fair value at each reporting date with any gain or loss recognised in profit or loss in accordance with that standard

Is not within the scope of HKFRS 9 is measured at fair value at each reporting date with changes in fair value recognised in profit or loss


25

Chapter 30 Consolidation of foreign operations

Section 3.4.4

Page 742 Replace self-test question 2 with the following:

Trinity acquired 90% of its foreign subsidiary Merrion on 1 January 20X2. Merrion is based in Uberland where the local currency is the Uber (U). Trinity's investment in Merrion cost U68 million and on the acquisition date, the retained earnings of Merrion amounted to U66 million.

The statements of financial position of the two companies at 31 December 20X4 are as follows:

Trinity Merrion $'000 U'000 Non-current assets Property plant and equipment 128,000 112,500 Investments 34,000 – 162,000 112,500 Current assets Inventories 12,000 15,000 Receivables 17,500 22,500 Cash 3,500 2,500 195,000 152,500 Equity Share capital 10,000 4,000 Retained earnings 116,000 80,000 126,000 84,000 Long-term liabilities Long-term borrowings 20,000 12,000 Deferred tax 15,500 20,000 35,500 32,000

Trinity Merrion $'000 U'000 Current liabilities Trade payables 19,500 18,500 Tax 12,000 10,000 Bank overdraft 2,000 8,000 33,500 36,500 195,000 152,500

The following information is relevant:

(1) As a result of the movement in exchange rates, Trinity have decided to impair the goodwill arising on the acquisition of Merrion in full at 31 December 20X3.

(2) Trinity measures the non-controlling interest as a proportion of the fair value of the net assets of the acquiree.

(3) During 20X3 Merrion began selling goods to Trinity, achieving a margin of 25%. At the reporting date, Trinity held goods in stock which it had purchased from Merrion on the last day of the year for U2.5 million. Trinity had recorded these goods using the closing exchange rate of U2.5:$1.

(4) Merrion reported profits of U6 million and U8 million in the years ended 31 December 20X2 and 20X3 respectively. It has paid no dividends in either year.

Financial Reporting

26

Exchange rates are as follows:

1 January 20X2 U2.0:$1

Average for 20X2 U2.1:$1

31 December 20X2 U2.2:$1

1 August 20X3 U2.3:$1

31 December 20X3 U2.5:$1

Average for 20X3 U2.4:$1

Required

Translate the statement of financial position of Merrion at 31 December 20X3 into $ and prepare the consolidated statement of financial position of the Trinity group at 31 December 20X3.

You should work to the nearest $'000.

Answers to self-test questions

Page 746

Replace Answer 2 with the following:

Workings

Consolidated statement of financial position for the Trinity Group at 31 December 20X3 Trinity Merrion W3 W4(i) W4(ii) W4(iii) W5 W6 Consolidated

$000 $000 $000 $000 $000 $000 $000 $000 $000 Property plant and equipment

128,000 45,000 173,000

Investments 34,000 – (34,000) – Goodwill 2,500 (500) (2,000) – 162,000 45,000 173,000 Inventories 12,000 6,000 (250) 17,750 Receivables 17,500 9,000 26,500 Cash 3,500 1,000 4,500 195,000 61,000 221,750 Share capital 10,000 2,000 (2,000) 10,000 Retained earnings

116,000 39,190 (33,000)

(2,000) (619) (225) 119,346

FX reserve (7,590) 759 (500) (7,331) NCI (759) 3,500 619 (25) 3,335 126,000 33,600 125,350 Long-term borrowings

20,000 4,800 24,800

Deferred tax 15,500 8,000 23,500 35,500 12,800 48,300 Trade payables 19,500 7,400 26,900 Tax 12,000 4,000 16,000 Bank overdraft 2,000 3,200 5,200 33,500 14,600 48,100 195,000 61,000 221,750

(1) Translation of Merrion's statement of financial position

Merrion Rate Merrion U'000 $'000 Non-current assets Property plant and equipment

112,500 2.5 45,000

Current assets Inventories 15,000 2.5 6,000 Receivables 22,500 2.5 9,000 Cash 2,500 2.5 1,000 152,500 61,000


27

Equity Share capital 4,000 2 2,000 Pre-acquisition retained earnings

66,000 2 33,000

Post-acquisition retained earnings

14,000 W2 6,190

Exchange difference W3 (7,590) 84,000 33,600 Long-term liabilities Long-term borrowings 12,000 2.5 4,800 Deferred tax 20,000 2.5 8,000 32,000 12,800 Current liabilities Trade payables 18,500 2.5 7,400 Tax 10,000 2.5 4,000 Bank overdraft 8,000 2.5 3,200 36,500 14,600 152,500 61,000

(2) Translation of post-acquisition retained earnings

Year Profits Exchange Profits U’000 Rate $’000 20X2 6,000 2.1 2,857 20X3 8,000 2.4 3,333 6,190

(3) Exchange difference

The exchange difference since acquisition must be calculated

Arising in 20X2 Opening net assets $ $ Opening rate (70,000,000/2.0) (35,000,000) Closing rate (70,000,000/2.2) 31,818,182 Loss (3,181,818) Profit for the year Average rate (6,000,000/2.1) (2,857,143) Closing rate (6,000,000/2.2) 2,727,273 Loss (129,870) Exchange loss for the year (3,311,688)

Arising in 20X3 Opening net assets (84m – 8m) $ $ Opening rate (76,000,000/2.2) (34,545,454) Closing rate (76,000,000/2.5) 30,400,000 Loss (4,145,454) Profit for the year Average rate (8,000,000/2.4) (3,333,333) Closing rate (8,000,000/2.5) 3,200,000 Loss (133,333) Exchange loss for the year (4,278,787)

$ Exchange loss in 20X2 3,311,688 Exchange loss in 20X3 4,278,787 Cumulative exchange loss in the exchange rate reserve 7,590,475 To the nearest ‘000 7,590

Financial Reporting

28

On consolidation, the NCI share of the exchange loss is allocated to the NCI by ($'000):

DEBIT NCI 759 CREDIT Foreign exchange reserve (10% 7,590) 759

(4) Goodwill U'000 $’000 Consideration 68,000 NCI (10% 70m) 7,000 Net assets (66 + 4) (70,000) Goodwill 5,000 Retranslation of goodwill At 1.1.X3 5,000 2 2,500 At 31.12.X3 5,000 2.5 2,000 Foreign exchange reserve 500

(i) The consolidation journal to originally recognise the acquisition is ($'000):

DEBIT Share capital (U4,000/2) 2,000 DEBIT Retained earnings 33,000 DEBIT Goodwill 2,500 CREDIT NCI (U7,000/2) 3,500 CREDIT Investment (U68,000/2) 34,000

(ii) The retranslation of goodwill is effected by ($'000):

DEBIT Foreign exchange reserve 500 CREDIT Goodwill 500

(iii) The goodwill impairment is effected by ($'000):

DEBIT Retained earnings 2,000 CREDIT Goodwill 2,000

(5) Post acquisition retained earnings

The NCI is allocated its share of post acquisition retained earnings being $6,190,000 10% = $619,000 ($'000):

DEBIT Retained earnings 619 CREDIT NCI 619

(6) Unrealised profit

Merrion has charged a margin of 25% and therefore 25% of the cost to Trinity is profit. The unrealised profit on the $1m (U2.5m/2.5) is therefore $250,000.

The seller is Merrion and therefore 10% of the profit is attributable to the NCI ($'000):

DEBIT Retained earnings (90%) 225 DEBIT NCI (10%) 25 CREDIT Inventory 250


29

Part B: Technical Update – Flashcards

Chapter 2 Financial reporting framework

Page 16 On the current developments page the following should be added as a new text box:

Integrated Reporting

Triple bottom line reporting (profit, planet, people)

Links social, environmental and ethical considerations to financial performance and strategy

Guidance on concepts, principles and content in the IR Framework

Page 16 In the Improved conceptual framework text box replace the second bullet point with the following:

Discussion paper issued 2013; exposure draft expected 2014

Chapter 3 Small company reporting

Page 19 Replace this page with the following text:

SME-FRF and SME-FRS

Entities that qualify for reporting under the SME-FRF and preparing financial statements in accordance with the SME-FRS include:

Hong Kong Companies

Individual private companies of any size (with 100% shareholder approval)

Small private companies

Groups of small private companies

Small companies limited by guarantee

Groups of small companies limited by guarantee

Larger eligible companies (75% shareholder approval)

Groups of larger eligible companies (all larger eligible companies to have 75% shareholder approval)

Small private companies must not exceed two of HK$100m total annual revenue, HK$100m total assets, 100 employees.

Small companies limited by guarantee must not exceed total annual revenue of HK$25m.

Larger eligible companies must not exceed two of HK$200m total annual revenue, HK$200m total assets, 100 employees.

Overseas companies

The same requirements apply provided that law in the country of incorporation does not prohibit use of SME-FRS.

Financial Reporting

30

Chapter 8 Intangible assets and impairment of assets

Page 46 Under the heading internal indicators add the following:

Significant decline in budgeted net cash flows/operating profit from asset.

Operating losses/net cash outflows for asset when current period amounts aggregated with budgeted amounts.

Chapter 18 Financial instruments

Page 103 The black text box at the bottom of the page should be disregarded

Page 103 The following text is added as a new page after existing page 103:

Measurement of financial instruments at fair value

Use HKFRS 13 Fair Value Measurement

Fair value is an exit (i.e. selling) price and is not adjusted for transaction costs

Assumes sale in the principle (or most advantageous) market

A valuation technique is applied (e.g. income, market or cost approach)

Inputs to the valuation technique are categorised as Levels 1-3 in the fair value hierarchy:

– Level 1 – unadjusted quoted prices in active markets

– Level 2 – observable inputs other than Level 1 inputs

– Level 3 – unobservable inputs

Use of Level 1 inputs is maximised; the measurement is categorised as a whole depending on the lowest level input

Chapter 20 Related party disclosures

Page 120

Add the following text to the bottom of the left hand column:

PLUS where a person controls or jointly controls an entity and has significant influence or is key management personnel of another, the entities are related

(b)(vii) The entity, or any member of a group of which it is a part, provides key management personnel services to the reporting entity or to the parent of the reporting entity.

Page 120 Add the following text to the right hand column: (6) One entity provides key management personnel services to another (or its

parent)

Chapter 23 Operating segments

Page 135

Add a bullet point to the 'also disclose' section:

Judgments made by management in applying the aggregation criteria

Module A Financial Reporting

Documents

Transcript of Module A Financial Reporting