NSS Enriching Knowledge for the BAFS Curriculum Series: Hong Kong Accounting Standards (New)

Transcription

1 NSS Enriching Knowledge for the BAFS Curriculum Series: Hong Kong Accounting Standards (New) Li Tak Ming, Andy Deputy Head, Department of Business Administration Hong Kong Institute of Vocational Education (Kwai Chung) March

2 Part 1 Accounting Principles and Conventions 2

3 Conceptual Framework for Financial Reporting 2010 The Conceptual Framework for Financial Reporting (Conceptual Framework) was issued in October 2010 to supersede the Framework for the Preparation and Presentation of Financial Statements (Framework). 3

4 Conceptual Framework for Financial Reporting 2010 The purpose of the Conceptual Framework is to: Assist the Council of Hong Kong Institute of Certified Accountants (HKICPA) to develop future Hong Kong Financial Reporting Standards (HKFRSs) Assist preparers of financial statements in applying HKFRS 4

5 Conceptual Framework for Financial Reporting 2010 Assist auditors in forming an opinion as to whether financial statements conform with HKFRSs Assist users of financial statements in interpreting the information contained in financial statements prepared in conformity with HKFRSs To provide those who are interested in the work of the Council with information about its approach to the formulation of HKFRSs and Accounting Guidelines 5

6 Scope of the Conceptual Framework The Conceptual Framework deals with: The objective of financial reporting; The qualitative characteristics of useful financial information; The definition, recognition and measurement of the elements from which financial statements are constructed; and Concepts of capital and capital maintenance 6

7 Generally Accepted Accounting Principles Generally Accepted Accounting Principles (GAAP) refers to the overall body of financial reporting principles and practices used in any given jurisdiction. 7

8 Generally Accepted Accounting Principles HK GAAP includes the standards, conventions and rules that accountants should follow in recognising, measuring and reporting transactions and in the preparation of financial statements in Hong Kong. 8

9 Objective of Financial Statements Hong Kong Accounting Standard 1 (HKAS 1) Presentation of Financial Statements states that the objective of general purpose financial statements is to provide information about the financial position, financial performance and cash flows of an entity that is useful to a wide range of users in making economic decisions. 9

10 Objective of Financial Statements General purpose financial statements are defined in HKAS 1 as those intended to meet the needs of users who are not in a position to require an entity to prepare report tailored to their particular information needs. 10

11 Users of Financial Information Equity investors (shareholders) Lenders Suppliers and other trade creditors Employees and unions Customers Governments and their agencies Public 11

12 General Features for Presentation of Financial Statements (HKAS 1) True and fair view and compliance with HKFRSs Going concern Accrual basis of accounting Materiality and aggregation Off-setting 12

13 General Features for Presentation of Financial Statements Frequency of reporting Comparative information Consistency of presentation 13

14 True and Fair View and Compliance with HKFRSs True and fair view requires the faithful representation of the effects of transactions, other events and conditions in accordance with the definitions and recognition criteria for assets, liabilities, income and expenses. The application of HKFRSs, with additional disclosure when necessary, is presumed to result in financial statements that achieve a true and fair view. 14

15 Going Concern When preparing financial statements, management shall make an assessment of an entity s ability to continue as a going concern. An entity shall prepare financial statements on a going concern basis unless management either intends to liquidate the entity or to cease trading, or has no realistic alternative but to do so. 15

16 Accrual Basis of Accounting The effects of transactions and other events are recognised when they occur (and not as cash or its equivalent is received or paid) and they are recorded in the accounting records and reported in the financial statements of the periods to which they relate. 16

17 Materiality and Aggregation An entity shall present separately each material class of similar items. An entity shall present separately items of a dissimilar nature or function unless they are immaterial. 17

18 Off-setting An entity shall not offset assets and liabilities or income and expenses, unless required or permitted by an HKFRS. 18

19 Frequency of Reporting An entity shall present a complete set of financial statements (including comparative information) at least annually. When an entity changes the end of its reporting period and presents financial statements for a period longer or shorter than one year, an entity shall disclose, in addition to the period covered by the financial statements: (a) the reason for using a longer or shorter period, and (b) the fact that amounts presented in the financial statements are not entirely comparable. 19

20 Comparative Information An entity shall disclose comparative information in respect of the previous period for all amounts reported in the current period s financial statements. An entity shall include comparative information for narrative and descriptive information when it is relevant to an understanding of the current period s financial statements. 20

21 Consistency of Presentation An entity shall retain the presentation and classification of items in the financial statements from one period to the next unless: (a) it is apparent, following a significant change in the nature of the entity s operations or a review of its financial statements, that another presentation or classification would be more appropriate; or (b) an HKFRS requires a change in presentation. 21

22 Accounting Concepts, Principles and Conventions Accounting concepts, principles and conventions are very often used interchangeably. Accounting concepts are broad basic assumptions that underlie the preparation and presentation of financial statements. 22

23 Accounting Concepts, Principles and Conventions Apart from the accounting concepts explicitly shown in HKAS 1, namely, going concern, accrual basis of accounting, consistency and materiality, there are other accounting concepts (or principles, or conventions). Some of the popular ones are: Prudence Substance over form Business entity Historical cost Money measurement Realisation, etc 23

24 Accounting Concepts, Principles and Conventions Prudence: The inclusion of a degree of caution in the exercise of the judgements needed in making the estimates required under conditions of uncertainty, such that assets or income are not overstated and liabilities or expenses are not understated. Substance over form: The principle that transactions and other events are accounted for and presented in accordance with their substance and economic reality and not merely their legal form. 24

25 Qualitative Characteristics of Useful Financial Information The qualitative characteristics of useful financial information, as stated in the Conceptual Framework, identify the types of information that are likely to be most useful to users for making decisions about the reporting entity on the basis of the information in its financial report (financial information). 25

26 Qualitative Characteristics of Useful Financial Information If financial information is to be useful, it must be relevant and faithfully represents what it purports to represent. The usefulness of financial information is enhanced if it is comparable, verifiable, timely and understandable. 26

27 Fundamental Qualitative Characteristics Relevance Relevant financial information is capable of making a difference in the decisions made by users. Financial information is capable of making a difference in decisions if it has predictive value, confirmatory value or both. 27

28 Fundamental Qualitative Characteristics Predictive value: can be used as an input to processes employed by users to predict future outcomes Confirmatory value: provides feedback about (confirms or changes) previous evaluations The predictive value and confirmatory value of financial information are interrelated. 28

29 Fundamental Qualitative Characteristics Information that has predictive value often also has confirmatory value. For example, revenue information for the current year, which can be used as the basis for predicting future revenues, can also be compared with revenue predictions for the current year that were made in past years. 29

30 Fundamental Qualitative Characteristics Relevance depends largely on materiality. Information is material if omitting it or misstating it could influence decisions that users make on the basis of financial information about a reporting entity. Materiality depends on the nature and amount of the item judged in the particular circumstances of its omission or misstatement. 30

31 Fundamental Qualitative Characteristics Faithful representation To be useful, financial information must not only represent relevant phenomena, but it must also faithfully represent the phenomena that it purports to represent. To be a perfectly faithful representation, a depiction would have three characteristics: complete, neutral and free from error. 31

32 Fundamental Qualitative Characteristics Completeness: A complete depiction includes all information necessary for a user to understand the phenomenon being depicted, including all necessary descriptions and explanations. Neutrality: A neutral depiction is without bias in the selection or presentation of financial information. 32

33 Fundamental Qualitative Characteristics Free from error: It means there are no errors or omission in the description of the phenomenon, and the process used to produce the reported information has been selected and applied with no errors in the process. 33

34 Replacement of the Term Reliability The former Framework used the term reliability to describe what is now called faithful representation. The Framework said: Information has the quality of reliability when it is free from material error and bias and can be depended upon by users to represent faithfully that which it either purports to represent or could reasonably be expected to represent. 34

35 Enhancing Qualitative Characteristics Comparability, verifiability, timeliness and understandability are qualitative characteristics that enhance the usefulness of information that is relevant and faithfully represented. 35

36 Enhancing Qualitative Characteristics Comparability: Information about a reporting entity is more useful if it can be compared with similar information about other entities and with similar information about the same entity for another period or another date. 36

37 Enhancing Qualitative Characteristics Verifiability: It means that different knowledgeable and independent observers could reach consensus, although not necessarily complete agreement, that a particular depiction is a faithful representation. 37

38 Enhancing Qualitative Characteristics Timeliness: It means having information available to decision-makers in time to be capable of influencing their decisions. Generally, the older the information is the less useful it is. 38

39 Enhancing Qualitative Characteristics Understandability: Classifying, characterising and presenting information clearly and concisely makes it understandable. Financial reports are prepared for users who have a reasonable knowledge of business and economic activities and who review and analyse the information diligently. 39

40 Part 2 Regulatory Framework of Financial Reporting in Hong Kong 40

41 Regulatory Framework of Financial Reporting Companies Ordinance Hong Kong Financial Reporting Standards Rules Governing the Listing of Securities (Listing Rules) applicable to companies listed on the Stock Exchange of Hong Kong (SEHK) 41

42 Role of Govt. of HKSAR The Government of HKSAR exerts influence on financial reporting by the enforcement of the Companies Ordinance, in particular the Tenth Schedule, which sets out the disclosure requirements for certain items in the financial statements. 42

43 Role of Govt. of HKSAR There is no prescribed format for the presentation of financial statements in the Companies Ordinance. Hence, a reasonable flexibility is allowed in practice. 43

44 Role of HKICPA Hong Kong Institute of Certified Public Accountants (HKICPA) is the only statutory licensing accounting body in HK for the regulation and development of the accounting profession and promulgation of financial reporting standards. 44

45 Role of HKICPA HKICPA has mandated the Financial Reporting Standards Committee to develop financial reporting standards (HKFRS) to achieve convergence with International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB). 45

46 Role of HKICPA HKAS 1 Presentation of Financial Statements requires that financial statements must present a true and fair view of the financial position, financial performance and the cash flows of an entity. 46

47 Role of HKICPA HKAS 1 also specifies the presumption that in virtually all circumstances, an entity achieves a true and fair view by compliance with applicable HKFRSs. 47

48 Financial Regulatory Role of the SEHK The SEHK is the operator and frontline regulator of the central securities and derivatives market. The SEHK operatives two markets: the Main Board and the Growth Enterprise Market (GEM). 48

49 Financial Regulatory Role of the SEHK The annual financial statements of companies listed on the Main Board of the SEHK should be prepared in accordance with the provisions to the Companies Ordinance, the HKFRSs and the Main Board Listing Rules. 49

50 Hong Kong Financial Reporting Standards (HKFRSs) HKFRSs are Standards and Interpretations issued by the HKICPA. They comprise: Hong Kong Financial Reporting Standards (HKFRSs); Hong Kong Accounting Standards (HKASs) Interpretations 50

51 Purpose of Financial Statements The objective of financial statements is to provide information about the financial position, financial performance and cash flows of an entity that is useful to a wide range of users in making economic decisions. Financial statements also show the results of the management s stewardship of the resources entrusted to it. 51

52 Complete Set of Financial Statements A complete set of financial statements comprises: (a) a statement of financial position as at the end of the period; (b) a statement of comprehensive income for the period; (c) a statement of changes in equity for the period; (d) a statement of cash flows for the period; 52

53 Complete Set of Financial Statements (e) notes, comprising a summary of significant accounting policies and other explanatory information; and (f) a statement of financial position as at the beginning of the earliest comparative period when an entity applies an accounting policy retrospectively or makes a retrospective restatement of items in its financial statements, or when it reclassifies items in its financial statements. 53

54 Statement of Financial Position A statement of financial position (formerly known as balance sheet) presents an entity s assets, liability and equity as of a specific date, which is the end of the reporting period. 54

55 Statement of Financial Position of a Single Entity XYZ Limited, Statement of Financial Position as at 31 December 20XX $ m ASSETS Non-current assets Property, plant and equipment 350 Investment property 120 Intangible assets 408 Financial assets investments in shares 22 Total non-current assets 900 Current assets Inventories 135 Trade receivables 91 Other current assets 25 Cash and cash equivalents 312 Total current assets 563 Total assets 1,463 55

56 Statement of Financial Position of a Single Entity EQUITY AND LIABILITIES Equity Share capital 650 Share premium 5 Retained earnings 293 Revaluation reserve 23 Total equity 971 Non-current liabilities Bank loans 160 Finance lease liability 18 Long-term provisions 44 Total non-current liabilities

57 Statement of Financial Position of a Single Entity Current liabilities Trade and other payables 70 Short-term borrowings 140 Current portion of bank loans 20 Current portion of finance lease liability 15 Current tax payable 20 Short-term provisions 4 Bank overdrafts 1 Total current liabilities 270 Total liabilities 492 Total equity and liabilities 1,463 57

58 Statement of Comprehensive Income An entity should present its total comprehensive income for a period in either of the following: In a single statement of comprehensive income In two statements: (a) a separate income statement that displays components of profit or loss (b) a statement of comprehensive income, beginning with profit or loss and displaying components of other comprehensive income 58

59 Statement of Comprehensive Income - Single-statement Format Statement of Comprehensive Income for the year ended 31 December 20XX $ m Revenue 390 Cost of sales (245) Gross profit 145 Other income 55 Distribution costs (9) Administration expenses (20) Other expenses (2) Finance costs (8) Profit before tax 161 Income tax expense (40) Profit for the year 121 Other comprehensive income: Gains on property revaluation 1 Other comprehensive income for the year, net of tax 1 Total comprehensive Income for the year

60 Statement of Comprehensive Income -Two-statement Format Income Statement for the year ended 31 December 20XX $ m Revenue 390 Cost of sales (245) Gross profit 145 Other income 55 Distribution costs (9) Administration expenses (20) Other expenses (2) Finance costs (8) Profit before tax 161 Income tax expense (40) Profit for the year

61 Statement of Comprehensive Income -Two-statement Format Statement of Comprehensive Income for the year ended 31 December 20XX $ m Profit for the year 121 Other comprehensive income: Gains on property revaluation 1 Other comprehensive income for the year, net of tax 1 Total comprehensive Income for the year

62 Information to be Presented in the Statement of Comprehensive Income or in the Notes The entity should present an analysis of expenses using a classification based on either the nature of expenses or function of expenses (as illustrated in slide 59) within the entity, whichever provides information that is reliable and more relevant. 62

63 Information to be Presented in the Statement of Comprehensive Income or in the Notes Analysis by Nature of Expenses Statement of Comprehensive Income for the year ended 31 December 20XX Revenue 390 Other income 55 Changes in inventories of finished goods and work in progress (115) Work performed by the entity and capitalised 16 Raw material and consumables used (96) Employee benefits expense (45) Depreciation and amortisation expense (19) Impairment of property, plant and equipment (4) Other expenses (6) Finance costs (15) Profit before tax 161 Income tax expense (40) Profit for the year 121 Other comprehensive income: Gains on property revaluation 1 $ m Other comprehensive income for the year, net of tax 1 Total comprehensive Income for the year

64 Statement of Changes in Equity An entity shall present a statement of changes in equity showing in the statement: total comprehensive income for the period, showing separately the total amounts attributable to owners of the parent and to minority noncontrolling interests; for each component of equity, the effects of retrospective application or retrospective restatement recognised in accordance with HKAS 8; and 64

65 Statement of Changes in Equity for each component of equity, a reconciliation between the carrying amount at the beginning and the end of the period, separately disclosing each changes. resulting from: (a) profit or loss; (b) each item of other comprehensive income; and (c) transactions with owners in their capacity as owners, showing separately contributions by and distributions to owners and changes in ownership interests in subsidiaries that not result in a loss of control. 65

66 Statement of Changes in Equity An entity shall present, either in the statement of changes in equity or in the notes, the amount of dividends recognised as distributions to owners during the period, and the related amount per share. 66

67 Part 3 Accounting Standards and Terminologies Updates 67

68 HKFRSs The individual HKFRSs up to March 2011 are as follows: (a) Hong Kong Accounting Standards (HKAS) HKAS 1 Presentation of Financial Statements HKAS 2 Inventories HKAS 7 Statement of Cash Flows HKAS 8 Accounting Policies, Changes in Accounting Estimates and Errors HKAS 10 Events after the Reporting Period 68

69 HKFRSs HKAS 11 Constructions Contracts HKAS 12 Income Taxes HKAS 16 Property, Plant and Equipment HKAS 17 Leases HKAS 18 Revenue HKAS 19 Employee Benefits HKAS 20 Accounting for Government Grants and Disclosure of Government Assistance HKAS 21 The Effects of Changes in Foreign Exchange Rates 69

70 HKFRSs HKAS 23 Borrowing Costs HKAS 24 Related Party Disclosures HKAS 26 Accounting and Reporting by Retirement Benefit Plans HKAS 27 Consolidated and Separate Financial Statements HKAS 28 Investments in Associates HKAS 29 Financial Reporting in Hyperinflationery Economies 70

71 HKFRSs HKAS 31 Interests in Joint Ventures HKAS 32 Financial Instruments: Presentation HKAS 33 Earnings per Share HKAS 34 Interim Financial Reporting HKAS 36 Impairment of Assets HKAS 37 Provisions, Contingent Liabilities and Contingent Assets HKAS 38 Intangible Assets HKAS 39 Financial Instruments: Recognition and Measurement 71

72 HKFRSs HKAS 40 Investment Property HKAS 41 Agriculture 72

73 HKFRSs (b) Hong Kong Financial Reporting Standards (HKFRS) HKFRS 1 First-time Adoption of Hong Kong Financial Reporting Standards HKFRS 2 Share-based Payment HKFRS 3 Business Combinations HKFRS 4 Insurance Contracts HKFRS 5 Non-current Assets Held for Sale and Discontinued Operations 73

74 HKFRSs HKFRS 6 Exploration for and Evaluation of Mineral Resources HKFRS 7 Financial Instruments: Disclosures HKFRS 8 Operating Segments HKFRS 9 Financial Instruments 74

75 New Accounting Terminologies New title Trade receivables Allowance for impairment loss on trade receivables/ Allowance for doubtful debts Old terminology Accounts receivable; trade debtors Provision for doubtful debts 75

76 New Accounting Terminologies New title Inventory Non-current assets Accumulated depreciation Trade payables Old terminology Stock Fixed assets Provision for depreciation Accounts payable, trade creditors 76

77 New Accounting Terminologies New title Non-current liabilities Statement of cash flows Statement of financial position Old terminology Long-term liabilities Cash flow statement Balance sheet 77

78 New Accounting Terminologies New title Statement of comprehensive income (presents in one statement) Income statement, statement of comprehensive income (presents in two statements) Old terminology Income statement, trading and profit and loss account 78

79 New Accounting Terminologies New title End of the reporting period Retained earnings Old terminology Balance sheet date Accumulated profits Non-controlling interest Minority interest 79

80 Source of Information and References HKAS I (Revised) Presentation of Financial Statements, Hong Kong Institute of Certified Public Accountants, May 2010 Concept Framework for Financial Reporting 2010, Hong Kong Institute of Certified Public Accountants, October 2010 Glossary of Terms Relating to Hong Kong Financial Reporting Standards, Hong Kong Institute of Certified Public Accountants, September

81 Source of Information and References Patrick P.H. Ng, AAT Official Study Text - Paper 7 Financial Accounting, Pearson, 2011 Applied Learning, Practical Accounting for SMEs Learning Pack Theory, HKIAAT,

82 The End 82