HKAS 16 and December 2007

Transcription

1 HKAS 16 and December 2007 Nelson Lam 林 智 遠 MBA MSc BBA ACA ACS CFA CPA(Aust) CPA(US) FCCA FCPA(Practising) MSCA Nelson 1 Today s Agenda Property, Plant and Equipment (HKAS 16) Simple but Comprehensive Contentious and key issues Impairment of Assets (HKAS 36) A number of latest real cases and examples Nelson 2 1

2 Today s Agenda Property, Plant and Equipment (HKAS 16) Nelson 3 Agenda on Property, Plant & Equipment Definition 1. Objective e and Scope 2. Definitions Recognition 3. Recognition 4. Measurement At Recognition Measurement 5. Measurement After Recognition 6. Derecognition Presentation and Disclosure 7. Disclosure Nelson 4 2

3 Agenda on Property, Plant & Equipment 1. Objective and Scope Nelson 5 1. Objective and Scope The objective of HKAS 16 is to prescribe the accounting treatment for property, plant and equipment (PPE) so that users of the financial statements can discern information about an entity s investment in its PPE and the changes in such investment. Definitions What are PPE? The principal issues in accounting for property, plant and equipment (PPE) are: a) the recognition of the assets, Recognition b) the determination of their carrying amounts and c) the depreciation charges and impairment losses Measurement to be recognised in relation to them Nelson 6 3

4 1. Objective and Scope HKAS 16 shall be applied in accounting for PPE except when another standard requires or permits a different accounting treatment. HKAS 16 does not apply to: a) property, plant and equipment classified as held for sale in accordance with HKFRS 5 Non-current Assets Held for Sale and Discontinued Operations; b) biological assets related to agricultural activity (see HKAS 41 Agriculture); c) the recognition and measurement of exploration and evaluation assets (see HKFRS 6 Exploration for and Evaluation of Mineral Resources); or d) mineral rights and mineral reserves such as oil, natural gas and similar non-regenerative resources. However, HKAS 16 applies to PPE used to develop or maintain the assets described in (a) and (d) Nelson 7 1. Objective and Scope Example What are PPE? Are the following PPE? Building acquired under an operating lease Building acquired under finance leases Freehold property used for rental purpose Investment property under re-development Property held for a currently undetermined future use Leasehold land separated from the leasehold building HKAS 17 HKAS 40 HKAS 40 HKAS 40 HKAS Nelson 8 4

5 1. Objective and Scope Implication Exemption for not-for-profit entities eliminated The exemption in SSAP 17 for charitable, government subvented and not-for-profit organisations was eliminated in HKAS 16 Specific transitional provisions for this elimination additionally introduced in Nov Charities, not-for-profit entities must follow Implies that all such entities are required to depreciate its PPE from the financial period beginning from 1 Jan Those entities that have previously taken advantage of the exemption under SSAP 17 are permitted to deem the carrying amount of an item of PPE immediately before applying HKAS 16 on its effective date (or earlier) as the cost of that item Nelson 9 Agenda on Property, Plant & Equipment Definition 1. Objective e and Scope 2. Definitions What are PPE? Nelson 10 5

6 2. Definitions Property, plant and equipment (PPE) are tangible items that: a) are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes; and b) are expected to be used during more than one period Nelson Definitions Cost Residual value is the amount of cash or cash equivalents paid or the fair value of other consideration given to acquire an asset at the time of its acquisition or construction, or where applicable, the amount attributed to that asset when initially recognised in accordance with the specific requirements of other HKFRSs e.g. HKAS 39, HKFRS 2 Revised but discussed later Nelson 12 6

7 2. Definitions Example Entity GV buys a machine by granting share options to the supplier, who can subscribe 100 shares of Entity GV. The cash price of the machine is $200. The fair value of the options at the grant date is $300. How much should be recognised as the cost of machine? Per HKAS 16, the amount attributed to the machine should refer to the specific requirements of HKFRS 2 Share-based Payments. Under HKFRS 2, GV shall recognise an increase in equity if the machine is received in an equity-settled share-based payment transaction. While the transaction is with a party other than employees and other providing similar services, there is a rebuttable presumption that the fair value of goods received can be estimated reliably (i.e. $200 in this case). In rare case (if presumption rebutted), the transaction is measured by reference to the fair value of the equity instruments (i.e. share options) granted Nelson 13 Agenda on Property, Plant & Equipment Definition 1. Objective e and Scope 2. Definitions Recognition 3. Recognition Nelson 14 7

8 3. Recognition The cost of an item of PPE shall be recognised as an asset if, and only if: a) it is probable that future economic benefits associated with the item will flow to the entity; and b) the cost of the item can be measured reliably. Recognition Criteria Major spare parts, servicing equipment, replacement and inspection can also be qualified as PPE. If the recognition criteria is met, such cost is recognised; the carrying amount of the replaced parts or previous inspection is derecognised Nelson Recognition Principle Updated Recognition criteria (capitalisation) for Previous Criteria not the same Initial Cost Probable that future economic benefit of the asset will flow to the enterprise Cost measured reliably Improvement is no longer a threshold Subsequent Expenditure Probable that future economic benefits in excess of the originally assessed Improvement standard of performance of the existing asset will flow to the entity Now Same criteria Probable that future economic benefit of the asset will flow to the entity Cost measured reliably Same criteria applied to both costs Expenditure not fulfilling the recognition criteria will be charged to income statement Clearer approach on so-called Component Accounting Nelson 16 8

9 3. Recognition Principle Updated Case Capitalise Expense Hong Kong Aircraft Engineering Company Limited Annual Report 2005 states: Property, plant and equipment are carried at cost less accumulated depreciation and accumulated impairment losses. Cost includes expenditure that is directly attributable to the acquisition of the items. Subsequent costs are included in the asset s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. All other repairs and maintenance are expensed in the profit and loss account during the financial period in which they are incurred Nelson Recognition Principle Updated Case Galaxy Entertainment Group Limited (2005 Annual Report) Major costs incurred in restoring assets to their normal working condition are charged to the profit and loss statement. Improvements are capitalised and depreciated over their expected useful lives to the Group. Denway Motors Limited (2005 Annual Report) Major costs incurred in restoring the plant components to their normal working condition to allow continued use of the overall asset are capitalised and depreciated over the period to the next overhaul. Improvements are capitalised and depreciated over their expected useful lives to the Group Nelson 18 9

10 Agenda on Property, Plant & Equipment Definition 1. Objective e and Scope 2. Definitions Recognition Measurement 3. Recognition 4. Measurement At Recognition Nelson Measurement at Recognition An item of PPE that qualifies for recognition as an asset shall be measured at its cost. The cost of an item of PPE comprises: a) its purchase price, including import duties and nonrefundable purchase taxes, after deducting trade discounts and rebates; b) any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management. c) the initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located, the obligation for which an entity incurs either when the item is acquired or as a consequence of having used the item during a particular period for purposes other than to produce inventories during that period. Purchase Price Directly Attributable Cost Dismantling Cost Nelson 20 10

11 4. Measurement at Recognition Entity A leased an office for a lease term of 5 years in 2005 and incurred $500, million in decorating the office. The lease requires Entity A to restore the office to its original status when the lease expires. Entity A estimates that the cost of restoration will be around $60,000 at that time. Determine the cost of the decoration. IFRIC Interpretation 1 Changes in Existing Decommissioning, Restoration and Similar Liabilities set out how to account for the change of this estimate The cost of the decoration: Cost of decoration: Example $500,000 Initial estimate of restoring the site: Present value of $60, Assuming discount rate is 6%, PV of $60,000 is $ 44,835 Total initial cost is $ 544, Nelson Measurement at Recognition Example Several same air-condition plants have been installed by GV in several leasehold properties. When the properties are returned to the landlord in 4 years, the plants should be removed. The properties include factory (3 plants installed), show room (1 plant installed) and head office (2 plants installed). The purchase cost of each plant is $1,000. The installation cost is $1,000 for each plant. Present value of removal costs of the plant include $400 resulted from installation only and $400 from the usage during the 4 years. What is the cost of each plant to be recognised? In accordance with HKAS 16 the cost of each plant installed in the factory should be $2,400 (the purchase cost, installation cost and present value of removal cost from installation). the cost of each plant installed in the show room and head office should be $2,800 (including the present value of all removal costs) Since the removal costs of such plants are incurred as a consequence of having used the machine during a particular period for purposes, other than to produce inventories during that period Nelson 22 11

12 4. Measurement at Recognition Case A-Max Holding Limited ( 奧 瑪 仕 控 股 有 限 公 司 ) Notes to the financial statements for year ended The cost of self-constructed items of property, plant and equipment includes the cost of materials, direct labour, the initial estimate, where relevant, of the costs of dismantling and removing the items and restoring the site on which they are located, and an appropriate proportion of production overheads and borrowing costs Nelson Measurement at Recognition Element of cost extended Rule on Exchange of Assets Revised Same amendment in HKAS 38 and HKAS 40 Cost of PPE acquired in exchange is measured at fair value But not required if: Commercial Substance Fair Value of Exchanged Asset In SSAP 17 it is an exchange for similar assets In HKAS 16 the exchange transaction lack of Commercial Substance, or the Fair Value is not reliably measurable (both asset received and given up) If the acquired item is not measured at fair value, its cost is measured at the carrying amount of the asset given up Nelson 24 12

13 Agenda on Property, Plant & Equipment Definition 1. Objective e and Scope 2. Definitions Recognition 3. Recognition 4. Measurement At Recognition Measurement 5. Measurement After Recognition Nelson Measurement after Recognition An entity shall choose either: Cost Model Revaluation Model as its accounting policy and the entity shall apply that policy to an entire class of PPE Nelson 26 13

14 5. Measurement after Recognition Cost Model Revaluation Model After recognition as an asset, an item of PPE shall be carried at Its cost less any accumulated depreciation and any accumulated impairment losses After recognition as an asset, an item of PPE shall be carried at a revalued amount, being its fair value at the date of the revaluation, Less any subsequent accumulated depreciation and subsequent accumulated impairment losses Nelson Measurement after Recognition Revaluation Model What is fair value? Fair value is the amount for which h an asset could be exchanged between knowledgeable, willing parties in an arm s length transaction. All HKFRS/HKAS have same definition on fair value now. The fair value of land and buildings is usually determined from market-based evidence by appraisal that is normally undertaken by professionally qualified valuers. items of PPE is usually their market value determined by appraisal. If there is no market-based evidence of fair value because of the specialised nature of the item of PPE and the item is rarely sold, an entity may need to estimate fair value using an income or a depreciated replacement cost approach Nelson 28 14

15 5. Measurement after Recognition Revaluation Model Revaluations shall be made with sufficient regularity to ensure that the carrying amount does not differ materially from the fair value at the balance sheet date. When an item of PPE is revalued, any accumulated depreciation at the date of the revaluation is treated in one of the following ways: a) restated proportionately with the change in the gross carrying amount of the asset so that the carrying amount of the asset after revaluation equals its revalued amount. This method is often used when an asset is revalued by means of applying an index to its depreciated replacement cost. b) eliminated against the gross carrying amount of the asset and the net amount restated to the revalued amount of the asset. This method is often used for buildings Nelson Measurement after Recognition At year end, a class of motor vehicles has: Cost of $100,000 and accumulated depreciation of $40,000 Revalued amount of that class of motor vehicles is $90,000 Show the revaluation effect Example Accumulated depreciation restated proportionately with the change in the gross carrying amount of the asset so that the carrying amount of the asset after revaluation equals its revalued amount. Cost restated ($100,000 x 90,000 / 60,000) $ 150,000 Accumulated depreciation restated ($40,000 x 90,000 / 60,000) ($ 60,000 ) Accumulated depreciation eliminated against the gross carrying amount of the asset and the net amount restated to the revalued amount Cost $ 100,000 Accumulated depreciation eliminated ($40,000 - $30,000) ($ 10,000 ) Nelson 30 15

16 5. Measurement after Recognition Revaluation Model If an item of property, p plant and equipment is revalued, the entire class of PPE to which that asset belongs shall Class be revalued If an asset s carrying amount is increased as a result of a revaluation, the increase shall be credited directly to equity under the heading of revaluation surplus. However, the increase shall be recognised in profit or loss to the extent that it reverses a revaluation decrease of the same asset previously recognised in profit or loss. If an asset s carrying amount is decreased as a result of a revaluation, the decrease shall be recognised in profit or loss. However, the decrease shall be debited directly to equity under the heading of revaluation surplus to the extent of any credit balance existing in the revaluation surplus in respect of that asset. Entire class To Equity directly Negative to P/L Nelson Measurement after Recognition Revaluation Model Example In 2005, an entity buys a PPE at $1,000 and adopts revaluation model. At year end of 2005, PPE s fair value rises to $1,500. At year end of 2006, PPE s fair value falls to $800. Dr PPE 1,000 Cr Cash 1,000 Dr PPE (1,500 1,000) 500 Cr Revaluation reserves 500 Dr Revaluation reserves 500 Profit and loss 200 Cr PPE (1, ) 700 Ignore the depreciation, prepare journal for each situation above Nelson 32 16

17 5. Measurement after Recognition Revaluation Model The revaluation surplus included in equity in respect of an item of PPE may be transferred directly to retained earnings when the asset is derecognised. However, some of the surplus may be transferred as the asset is used by an entity. In such a case, the amount of the surplus transferred would be the difference between depreciation based on the revalued carrying amount of the asset and depreciation based on the asset s original cost. Dr Revaluation surplus (depreciation based on the revalued carrying amount less depreciation based on the asset s historical cost) Cr Retained earnings Transfers from revaluation surplus to retained earnings are not made through profit or loss Nelson Measurement after Recognition Revaluation Model CJS Limited bought a car with a cost of $50,000 on 1 Jan and adopted the revaluation model. The estimated useful life of the car is 5 years. On 1 Jan. 2006, the car was revalued with a fair value of $48,000 at that date. Prepare the journal entries for the year ended 31 December 2005 and 31 December Year ended Example Dr PPE 50, Cr Cash 50,000 Dr P/L ($50K 5 years) 10,000 Cr Accumulated depreciation 10,000 Dr Accumulated depreciation (48K (50K 10K)) 8,000 Cr Revaluation reserves 8,000 Year ended Dr P/L ($48K 4 years) 12,000 Cr Accumulated depreciation 12,000 Dr Revaluation reserves 2,000 Cr Retained earnings 2, Nelson 34 17

18 5. Measurement after Recognition Cost Model Depreciation Revaluation Model Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life. Depreciable amount is the cost of an asset, or other amount substituted for cost, less its residual value. Useful life is: a) the period over which an asset is expected to be available for use by an entity; or b) the number of production or similar units expected to be obtained from the asset by an entity. The residual value of an asset is the estimated amount that an entity would currently obtain from disposal of the asset, after deducting the estimated costs of disposal, if the asset were already of the age and in the condition expected at the end of its useful life Nelson Measurement after Recognition Depreciation Each part of an item of PPE with a cost that is significant in relation to the total cost of the item shall be depreciated separately. e.g. it may be appropriate to depreciate separately the airframe and engines of an aircraft The depreciation charge for each period shall be recognised in profit or loss unless it is included in the carrying amount of another asset. Each significant component shall be depreciated separately (not clearly required in the past) Clearer approach on so-called Component Accounting Nelson 36 18

19 5. Measurement after Recognition Example Depreciation At 1 Jan. 2005, AX bought a laser printing machine of HK$50 million The machine will be used for 5 years (maximum useful life) and then dispose of at zero value The machine s laser head can operate 500 hours, after that replacement of a new laser head is needed The cost of a new laser head was HK$10 million at that time and its residual value is zero. Cost of each part is significant in relation to the total cost of the parts Each part should be depreciated separately Laser machine other than laser head is depreciated over 5 years Laser head is depreciated over 500 hours Under usage methods of depreciation, the depreciation charges can be zero while there is no production Nelson Measurement after Recognition Example Depreciation At 1 Jan. 2005, AX bought a laser printing machine of HK$50 million The machine will be used for 5 years (maximum useful life) and then dispose of at zero value The machine s laser head can operate 500 hours, after that replacement of a new laser head is needed The cost of a new laser head was HK$10 million at that time and its residual value is zero. Assume the laser head can operate 500 hours or 5 years, which is shorter. If the machine has not been used in the 2nd year, calculate depreciation on the laser head under different depreciation methods Depreciation for 2nd year If the laser head is depreciated over 500 hours (unit of production) zero 5 years on a straight-line basis $2 million Nelson 38 19

20 5. Measurement after Recognition The depreciable amount of an asset shall be allocated on a systematic basis over its useful life. The residual value and the useful life of an asset shall be reviewed at least at each financial year-end if expectations differ from previous estimates, the change shall be accounted for as a change in an accounting estimate in accordance with HKAS 8 Depreciation Depreciable amount Nelson Measurement after Recognition Depreciation Residual Value Depreciable amount Residual Value is revised as the estimated amount that an entity would currently obtain from disposal of the asset, after deducting the estimated costs of disposal, if the asset were already of the age and in the condition expected at the end of its useful life Inflation may be incorporated in residual value Implication: If estimated residual value > carrying amount no depreciation is required But feasible only if the management clearly intends to dispose of the PPE before the end of its physical usage life otherwise, the estimated residual value is minimal or even zero Nelson 40 20

21 5. Measurement after Recognition Example Same laser machine example as before At 1 Jan. 2005, AX bought a laser At 31 Dec. 2005, the price of a printing machine of HK$50 million new laser machine increases to The machine will be used for HK$75 million 5 years (maximum useful life) No change in cost of a new laser and then dispose of at zero head and estimated maximum value useful life The machine s laser head can Shall AX revise the residual value operate 500 hours, after that at 31 Dec. 2005? replacement of a new laser head is needed No! The cost of a new laser head AX has not changed its usage was HK$10 million at that time plan and the residual value after and its residual value is zero. the estimated useful live would still be zero Nelson Measurement after Recognition Example Another one At 1 Jan. 1985, Entity A bought a flat in Tai Koo Shing at HK$ 500,000. Entity A aimed to use it for 50 years until the end of its estimated useful life The original estimated residual value is zero Depreciation is calculated on a straight-line basis At 31 Dec. 2004, the depreciated historical cost (and carrying amount) of the property was HK$0.3 million Now, the price of a similar flat in Tai Koo is about HK$ 3M Shall A revise the residual value? No! A has not changed its usage plan and the residual value after the estimated useful live would still be around zero If A changes its intention and aims to dispose of the flat in 10 years (i.e. 2015) Shall A revise the residual value? Yes! If A can demonstrate that it has an intention to dispose of it before the end of its economic life Nelson 42 21

22 5. Measurement after Recognition Case Annual Report 2005 Where an item of property and equipment comprises major components having different useful lives, they are accounted for as separate items of property and equipment. Depreciation is calculated to write off the cost or deemed cost, less residual value if applicable, of property and equipment and is charged to the income statement on a straight-line basis over the estimated useful lives of each part of an item of property and equipment Nelson Measurement after Recognition Depreciation Depreciation of an asset begins when it is available for use i.e. when it is in the location and condition necessary for it to be capable of operating in the manner intended by management. Depreciation of an asset ceases at the earlier of the date that the asset is classified as held for sale (or included in a disposal group that is classified as held for sale) in accordance with HKFRS 5 and the date that the asset is derecognised Land and buildings are separable assets and are accounted for separately, even when they are acquired together. Depreciable amount Implied that depreciation still required even PPE becomes idle or is retired from active use Nelson 44 22

23 5. Measurement after Recognition The depreciation method used shall reflect the pattern in which the asset s s future economic benefits are expected to be consumed by the entity shall be reviewed at least at each financial year-end and such a change shall be accounted for as a change in an accounting estimate in accordance with HKAS 8 Other than the above, that method is applied consistently from period to period unless there is a change in the expected pattern of consumption of those future economic benefits. Depreciation Depreciable amount Depreciation method Nelson Measurement after Recognition HKAS 16 states that: Depreciation A variety of depreciation methods Depreciable amount can be used to allocate the depreciable amount of an asset on Depreciation method a systematic basis over its useful life. These methods include: results in a constant charge over the useful Straight Line life if the asset s residual value does not change Diminishing Balance results in a decreasing charge over the useful life Units of Production results in a charge based on the expected use or output Nelson 46 23

24 5. Measurement after Recognition To determine whether an item of PPE is impaired, an entity applies HKAS 36 Compensation from third parties for items of property, plant and equipment that were impaired, lost or given up shall be included in profit or loss when the compensation becomes receivable Depreciation Depreciable amount Depreciation method Impairment Nelson 47 Agenda on Property, Plant & Equipment Definition 1. Objective e and Scope 2. Definitions Recognition 3. Recognition 4. Measurement At Recognition Measurement 5. Measurement After Recognition 6. Derecognition Nelson 48 24

25 6. Derecognition The carrying amount of an item of PPE shall be derecognised: a) on disposal; or b) when no future economic benefits are expected from its use or disposal. The gain or loss arising from the derecognition of an item of PPE shall be included in profit or loss when the item is derecognised (unless HKAS 17 requires otherwise on a sale and leaseback). Gains shall not be classified as revenue Nelson Derecognition Derecognition on disposal The disposal of an item of PPE may occur in a variety of ways (e.g. by sale, by entering into a finance lease or by donation). In determining the date of disposal of an item, an entity applies the criteria in HKAS 18 Revenue for recognising revenue from the sale of goods. HKAS 17 Leases applies to disposal by a sale and leaseback Nelson 50 25

26 6. Derecognition Derecognition on replacement If, under the initial recognition principle, an entity recognises in the carrying amount of an item of PPE the cost of a replacement for part of the item, then it derecognises the carrying amount of the replaced part regardless of whether the replaced part had been depreciated separately. The gain or loss arising from the derecognition of an item of PPE shall be determined as the difference between the net disposal proceeds, if any, and the carrying amount of the item Nelson Derecognition Example Same laser machine example as before At 1 Jan. 2005, AX bought a laser printing machine of HK$50 million The machine will be used for 5 years (maximum useful life) and then dispose of at zero value The machine s laser head can operate 500 hours, after that replacement of a new laser head is needed The cost of a new laser head was HK$10 million at that time and its residual value is zero. At 31 Dec. 2006, replacement of the laser head is needed after 400 hours of operation The carrying amount of the laser head alone would be HK$ 2 million at that date [$10M ($10M 500 x 400)] The cost of a new laser head is HK$ 8 million. If the laser head is replaced Replaced laser head with HK$ 2 million shall be derecognised New laser head of HK$ 8 million shall be recognised Nelson 52 26

27 Agenda on Property, Plant & Equipment Definition 1. Objective e and Scope 2. Definitions Recognition 3. Recognition 4. Measurement At Recognition Measurement 5. Measurement After Recognition 6. Derecognition Presentation and Disclosure 7. Disclosure Nelson Disclosure The financial statements shall disclose, for each class of PPE: a) the measurement bases used for determining the gross carrying amount; b) the depreciation methods used; c) the useful lives or the depreciation rates used; d) the gross carrying amount and the accumulated depreciation (aggregated with accumulated impairment losses) at the beginning and end of the period; and Nelson 54 27

28 7. Disclosure Detailed information and reconciliation of the carrying amount of PPE are required The reconciliation of the carrying amount of PPE for prior period, i.e. comparative reconciliation is now required The carrying amount of the PPE net book value of PPE In HK SSAP 17, the requirement is a reconciliation of the gross carrying amount and the accumulated depreciation at the beginning and end of the period Nelson Disclosure Information include: i) additions; ii) disposals; iii) acquisitions through business combinations; iv) increases or decreases resulting from revaluations and from impairment losses recognised or reversed directly in equity in accordance with HKAS 36; v) impairment losses recognised in profit or loss in accordance with HKAS 36; vi) impairment losses reversed in profit or loss in accordance with HKAS 36; vii) depreciation; viii) the net exchange differences arising on the translation of the financial statements from the functional currency into a different presentation currency, including the translation of a foreign operation into the presentation currency of the reporting entity; and ix) other changes Nelson 56 28

29 7. Disclosure Case Melco Development Limited (2005 Annual Report) Nelson Disclosure The financial statements shall also disclose: a) the existence and amounts of restrictions on title, and PPE pledged d as security for liabilities; b) the amount of expenditures recognised in the carrying amount of an item of PPE in the course of its construction; c) the amount of contractual commitments for the acquisition of PPE; and d) if it is not disclosed separately on the face of the income statement, the amount of compensation from third parties for items of PPE that were impaired, lost or given up that is included in profit or loss. Similar disclosures are required on the PPE measured by using Revaluation Model. Other disclosures Nelson 58 29

30 Today s Agenda Impairment of Assets (HKAS 36) Nelson 59 Impairment of Assets Summary 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. It is the higher of an asset s Fair Value Less and Value in Use Costs to Sell 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 Nelson 60 30

31 Agenda for Impairment of Assets Definition iti Recognition Measurement Presentation and Disclosure 1. Objective 2. Scope 3. Identifying an Asset That May Be Impaired 4. Measuring Recoverable Amount 5. Recognising and Measuring an Impairment Loss 6. Cash-generating Unit and Goodwill 7. Impairment Loss 8. Reversing an Impairment Loss 9. Disclosures Nelson Objective HKAS 36 Impairment of Assets is to prescribe the procedures that an entity applies to ensure that its assets are carried at no more than their recoverable amount The recoverable amount of an asset or a cashgenerating unit is the higher of its fair value less costs to sell and its value in use Nelson 62 31

32 1. Objective HKAS 36 Impairment of Assets An asset is carried at more than its recoverable amount if its carrying amount exceeds the amount to be recovered through use or sale of the asset. If this is the case, the asset is described as impaired and HKAS 36 requires the entity to recognise an impairment loss. Carrying amount is the amount at which an asset is recognised after deducting any accumulated depreciation (amortisation) and accumulated impairment losses thereon. An impairment loss is the amount by which the carrying amount of an asset (or a cash-generating unit) exceeds its recoverable amount Nelson 63 Agenda for Impairment of Assets 1. Objective 2. Scope Nelson 64 32

33 2. Scope HKAS 36 shall be applied in accounting for the impairment of all assets, other than: a) inventories (see HKAS 2) b) assets arising from construction contracts (see HKAS 11) c) deferred tax assets (see HKAS 12) d) assets arising from employee benefits (see HKAS 19) e) financial assets that are within the scope of HKAS 39 Financial Instruments: Recognition and Measurement (see HKAS 39) f) investment property that is measured at fair value (see HKAS 40) g) biological assets related to agricultural activity that are measured at fair value less estimated point-of-sale costs (see HKAS 41) h) deferred acquisition costs, and intangible assets, arising from an insurer s contractual rights under insurance contracts within the scope of HKFRS 4 Insurance Contracts (see HKFRS 4) i) non-current assets (or disposal groups) classified as held for sale in accordance with HKFRS 5 Non-current Assets Held for Sale and Discontinued Operations (see HKFRS 5) Nelson Scope HKAS 36 applies to financial assets classified as: a) subsidiaries, as defined in HKAS 27 Consolidated and Separate Financial Statements; b) associates, as defined in HKAS 28 Investments in Associates; and c) joint ventures, as defined in HKAS 31 Interests in Joint Ventures. For impairment of other financial assets, refer to HKAS Nelson 66 33

34 Agenda for Impairment of Assets 1. Objective 2. Scope 3. Identifying an Asset That May Be Impaired Nelson Identify An Asset That May Be Impaired Triggering events An entity shall assess at each reporting date 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. For all assets within the scope of HKAS 36, except for Nelson 68 34

35 3. Identify An Asset That May Be Impaired Triggering events Intangible Assets Goodwill 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 combination for impairment annually Nelson Identify An Asset That May Be Impaired Case Intangible Assets Goodwill 2006 Annual Report states: Assets that have an indefinite useful life are not subject to amortisation, but are tested at least annually for impairment and also reviewed for impairment whenever events ents or changes in circumstances indicate that the carrying amount may not be recoverable. Goodwill is tested annually for impairment and carried at cost less accumulated impairment losses Nelson 70 35

36 3. Identify An Asset That May Be Impaired Case Galaxy Entertainment Group Limited (2005 Annual Report) Accounting policy on impairment of assets Assets that have an indefinite useful life are not subject to amortisation, which are at least tested annually for impairment and are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. 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 Nelson Identify An Asset That May Be Impaired Intangible Assets Goodwill 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. Timing of impairment test on goodwill To be discussed later Nelson 72 36

37 3. Identify An Asset That May Be Impaired In assessing whether there is any indication that an asset may be impaired, an entity shall consider, as a minimum, the following indications: External sources of information a) an asset s market value declined significantly more than would be expected b) significant changes with an adverse effect on the entity in the technological, market, economic or legal environment c) market interest rates or other rates increased that likely affects the discount rate used in calculating an asset s value in use d) the carrying amount of the net assets of the entity is more than its market capitalisation Internal sources of information e) evidence is available of obsolescence or physical damage of an asset f) significant changes with an adverse effect on the entity in which, an asset is used or is expected to be used. g) evidence is available from internal reporting that indicates that the economic performance of an asset is, or will be, worse than expected Nelson 73 Agenda for Impairment of Assets 1. Objective 2. Scope 3. Identifying an Asset That May Be Impaired 4. Measuring Recoverable Amount Nelson 74 37

38 4. Measuring Recoverable Amount Triggering events Recoverable Amount It is the higher of an asset s Fair value less & costs to sell Value in Use Nelson Measuring Recoverable Amount HKAS 36 defines recoverable amount as the higher of an asset s or cash-generating unit s Fair Value Less Costs to Sell and Value in Use Recoverable amount is determined for an individual asset unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets. If this is the case, recoverable amount is determined for the cash-generating unit to which the asset belongs Nelson 76 38

39 4. Measuring Recoverable Amount Fair Value Less Costs to Sell It is the amount obtainable from the sale of an asset or cash-generating unit in an arm s length transaction between knowledgeable, willing parties, less the costs of disposal. The best evidence is a price in a binding sale agreement in an arm s length transaction, adjusted for incremental costs to the disposal If no binding sale agreement but an asset is traded in an active market the asset s s market price less the costs of disposal If there is no binding sale agreement or active market for an asset based on the best information available to reflect the amount that an entity could obtain, at the balance sheet date, from the disposal of the asset in an arm s length transaction between knowledgeable, willing parties, after deducting the costs of disposal Nelson Measuring Recoverable Amount Value in Use Value in use is the present value of the future cash flows expected to be derived d from an asset or cashgenerating unit. The following elements shall be reflected in the calculation of an asset s value in use: a) an estimate of the future cash flows the entity expects to derive from the asset; b) expectations about possible variations in the (b), (d) and (e) can amount or timing of those future cash flows; be reflected as c) time value of money, represented by the current adjustments t to market risk-free rate of interest; either d) price for bearing the uncertainty inherent in the future cash asset; and flows or e) other factors, such as illiquidity, that market participants would reflect in pricing the future cash discount rate flows the entity expects to derive from the asset. Not precisely stated before! Nelson 78 39

40 4. Measuring Recoverable Amount Estimating the value in use of an asset involves the following steps: a) estimating the future cash inflows and outflows to be derived from continuing use of the asset, and from its ultimate disposal; and b) applying the appropriate discount rate to those future cash flows. Value in Use Basis for Estimates of Future Cash Flows Composition of Estimates of Future Cash Flows Foreign Currency Future Cash Flows Discount Rates Nelson Measuring Recoverable Amount In measuring value in use an entity shall: Value in Use a) base cash flow projections on reasonable Basis for Estimates of and supportable assumptions that represent Future Cash Flows management s best estimate of the range of economic conditions that will exist over the remaining useful life of the asset. Greater weight shall be given to external evidence. b) base cash flow projections on the most recent financial budgets/forecasts approved by management, but shall exclude any estimated future cash inflows or outflows expected to arise from future restructurings or from improving or enhancing the asset s performance. Projections based on these budgets/forecasts shall cover a maximum period of five years, unless a longer period can be justified. c) estimate cash flow projections beyond the period covered by the most recent budgets/forecasts by extrapolating the projections based on the budgets/forecasts using a steady or declining growth rate for subsequent years, unless an increasing rate can be justified. This growth rate shall not exceed the long-term average growth rate for the products, industries, or country or countries in which the entity operates, or for the market in which the asset is used, unless a higher rate can be justified Nelson 80 40

41 4. Measuring Recoverable Amount Value in Use Composition of Estimates of Future Cash Flows Estimates of future cash flows shall include: a) projections of cash inflows from the continuing use of the asset; b) projections of cash outflows that are necessarily incurred to generate the cash inflows from continuing use of the asset (including cash outflows to prepare the asset for use) and can be directly attributed, or allocated on a reasonable and consistent basis, to the asset; and c) net cash flows, if any, to be received (or paid) for the disposal of the asset at the end of its useful life Nelson Measuring Recoverable Amount Value in Use Future cash flows are estimated in the currency in which they will be generated and then discounted using a discount rate appropriate for that currency. An entity translates the present value using the spot exchange rate at the date of the value in use calculation. The discount rate(s) shall be a pre-tax rate(s) that reflect current market assessments of: a) the time value of money; and b) the risks specific to the asset for which the future cash flow estimates have not been adjusted. Foreign Currency Future Cash Flows Discount Rates Nelson 82 41

42 Agenda for Impairment of Assets 1. Objective 2. Scope 3. Identifying an Asset That May Be Impaired 4. Measuring Recoverable Amount 5. Recognising and Measuring an Impairment Loss Nelson Recognising an Impairment Loss Triggering events Recoverable Amount Impairment Loss 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. An impairment loss shall be recognised immediately in profit or loss, unless the asset is carried at revalued amount in accordance with another Standard for example, in accordance with the revaluation model in HKAS 16 Property, Plant and Equipment any impairment loss of a revalued asset shall be treated as a revaluation decrease in accordance with that other Standard Nelson 84 42

43 5. Recognising an Impairment Loss When the amount estimated for an impairment loss is greater than the carrying amount of the asset to which it relates, an entity shall recognise a liability if, and only if, that is required by another Standard (for example, HKAS 37) After the recognition of an impairment loss, the depreciation (amortisation) charge for the asset shall be adjusted in future periods to allocate the asset s revised carrying amount, less its residual value (if any), on a systematic basis over its remaining useful life. Impairment Loss Nelson Recognising an Impairment Loss Case Cash- generating Unit Galaxy Entertainment Group Limited (2005 Annual Report) Accounting policy on impairment of assets An impairment loss is recognised for the amount by which the carrying amount of the asset exceeds its recoverable amount. The recoverable amount is the higher of the fair value of an asset less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows Nelson 86 43

44 Agenda for Impairment of Assets 1. Objective 2. Scope 3. Identifying an Asset That May Be Impaired 4. Measuring Recoverable Amount 5. Recognising and Measuring an Impairment Loss 6. Cash-generating Unit and Goodwill Nelson Cash-Generating Unit & 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 Intangible assets may be such individual asset. Goodwill is definitely such individual asset. Goodwill Amendments of HKAS 36 are mainly for the requirements on cash-generating unit and goodwill Nelson 88 44

45 6. Cash-Generating Unit & Goodwill 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 CGU Testing CGU with Goodwill for Impairment Minority Interest Timing of Impairment Tests Nelson Cash-Generating Unit & Goodwill Allocating Goodwill to CGU Initial allocation For the purpose p 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. Goodwill CGU 1 CGU 2 CGU Nelson 90 45

46 6. Cash-Generating Unit & Goodwill Allocating Goodwill to CGU Initial allocation 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; and b) 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. Goodwill As amended by HKFRS 8: not be larger than an operating segment determined in accordance with HKFRS 8O Operating Segments CGU 1 CGU 2 CGU Nelson Cash-Generating Unit & Goodwill Allocating Goodwill to CGU Initial allocation 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). 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; and Goodwill b) recognises any adjustments to those provisional values as a result of completing the initial accounting within 12 months of the acquisition date. CGU 1 CGU 2 CGU Nelson 92 46

47 6. Cash-Generating Unit & Goodwill Case Allocating Goodwill to CGU Initial allocation 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 HKAS 14 Segment reporting ). CGU 1 CGU 2 CGU Nelson Cash-Generating Unit & Goodwill Allocating Goodwill to CGU Disposal 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 What kind of value? 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 Nelson 94 47

48 6. Cash-Generating Unit & Goodwill Example Allocating Goodwill to CGU Disposal 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. $100 $300 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 ($100 / $400) allocated to the CGU is included in the carrying amount of the operation that is sold Nelson Cash-Generating Unit & Goodwill Case Allocating Goodwill to CGU Disposal 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. In its 2006 Annual Report, full set of fhkfrs was adopted: d Separately recognized 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. Any improvement? Nelson 96 48