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1 Development of IFRS & ASBE 4 February 2008 Nelson Lam 林智遠 MBA MSc BBA ACA ACS CFA CPA(Aust.) CPA(US) FCCA FCPA(Practising) MSCA Nelson 1 A Simple Test First To ask yourself whether you agree with the following statements Assets = Liabilities + Capital Fundamental errors should be adjusted by prior year adjustments Provision for bad debt is determined by ageing analysis Deposits in bank should be current assets Property in HK purchased by an entity is a fixed asset Only cost of improvement to a fixed asset is capitalised in the balance sheet Non-profit making entities can have exemptions on some accounting requirements What do you think? Nelson 2 1

2 Today s Agenda Introduction of International Financial Reporting Standards (IFRS) Introduction of PRC Accounting Standards for Business Enterprises (ASBE) Comparison of ASBE and IFRS Future Development of IFRS and ASBE Nelson 3 Today s Agenda Introduction of International Financial Reporting Standards (IFRS) Nelson 4 2

Introduction International Financial Reporting Standards are: Standards and Interpretations issued by the International Accounting Standards Board (IASB) and comprise: International Financial

30 sets in issue (from IAS 1 to 41 while 11 IASs has been withdrawn) 10 SIC and 13 IFRIC in issue What is the difference between IFRS and IAS?

3 Introduction International Financial Reporting Standards are: Standards and Interpretations issued by the International Accounting Standards Board (IASB) and comprise: International Financial Reporting 8 sets in issue (from IFRS 1 to 8) Standards (IFRSs); International Accounting Standards (IASs); and Interpretations (SIC and IFRIC). 30 sets in issue (from IAS 1 to 41 while 11 IASs has been withdrawn) 10 SIC and 13 IFRIC in issue What is the difference between IFRS and IAS? IASB has designated its standards as IFRS, while the accounting standards (AS) issued by its predecessor, the International Accounting Standards Committee (IASC), continue to be designated as IAS. For example, in HK, HKICPA follows the system of IASB and has issued HKFRS ( IFRS) and HKAS ( IAS) Nelson 5 Introduction: Global Recognition Nearly 100 countries currently require or permit the use of, or have a policy of convergence with, IFRSs The countries or places which have converged to IFRSs include: Australia, Europe, Hong Kong, Singapore The US FASB and the IASB reaffirmed their commitment in 2005 to the convergence of US GAAP and IFRSs A common set of high quality global standards remains the long-term strategic priority of both the FASB and the IASB. In Nov. 2007, the US SEC approved the financial statements from foreign private issuers in the US will be accepted without reconciliation to US GAAP only if they are prepared using IFRSs Nelson 6 3

4 Introduction: Financial Reporting A complete set of financial statements comprises: a) a balance sheet; b) an income statement; c) a statement of changes in equity showing either: i) all changes in equity, or ii) changes in equity other than those arising from transactions with equity holders acting in their capacity as equity holders; d) a cash flow statement; and e) notes, comprising a summary of significant accounting policies and other explanatory notes. (IAS 1, amended in 2005) Nelson 7 Introduction: IFRS Framework Financial Position (in balance sheet) Asset Liability Equity Balance Sheet Approach a resource controlled by the enterprise as a result of past events and from which future economic benefits are expected to flow to the enterprise a present obligation of the enterprise arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits the residual interest in the assets of the enterprise after deducting all its liabilities Financial Performance (in income statement) Income Expenses increases in economic benefits during a period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity other than those relating to contributions from equity participants decreases in economic benefits during a period in the form of outflows or depletions of assets or incurrences of liabilities that result in decreases in equity, other than those relating to distributions to equity participants Nelson 8 4

5 Introduction: IFRS Framework Balance Sheet Approach Definition What is it? Recognition When is it recognised? Measurement How much is it recognised and carried? Disclosure How is it showed in the financial statements? Nelson 9 Introduction: Property, Plant and E. IAS 16 Property, plant and equipment Definition Recognition Measurement Disclosure Example Property, plant and equipment (PPE) is clearly defined and properties not within the definition are not accounted for by using IAS 16 e.g. property held to earn rental is not covered by IAS 16 PPE is recognised if it meets the recognition criteria: 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. Initially measured at cost while subsequently measured by using either Cost model or Revaluation model Certain information is required to be disclosed in the financial statements Nelson 10 5

6 Introduction: Financial Assets Example IAS 39 Financial Instruments: Recognition and Measurement Definition Recognition Measurement Disclosure Financial instruments, including financial assets, financial liabilities and derivatives, are clearly defined and all such items shall be accounted for by using IAS 39 Financial asset is recognised if it meets the recognition criteria: the entity becomes a party to the contractual provisions of the instrument ( probable flow-in is not required) Initially measured at fair value (plus transaction cost in most cases) while subsequently entl measured at either Fair value or Amortised cost (if conditions can be met) Certain information is required to be disclosed in the financial statements IAS 32 and IFRS 7 provides more requirements on presentation and disclosure of financial instruments Nelson 11 Introduction: Investment Property IAS 40 Investment property Definition Example Property held for rental and/or capital appreciation and meets other conditions is investment property (IP) that is accounted for by using IAS 40 Recognition Measurement Disclosure IP is recognised if it meets the recognition criteria: 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. Initially measured at cost while subsequently measured by using either Cost model or Fair value model Any difference between revaluation model and fair value model? Certain information is required to be disclosed in the financial statements Nelson 12 6

7 Introduction: Fair Value For financial reporting, fair value is used or mentioned in most IFRSs and IASs Fair value is defined as: the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm s length transaction The same definition is used in different IFRSs, The application to different assets and liabilities may not be the same, for example: IAS 16 Property, plant and equipment IAS 18 Revenue IAS 39 Financial instruments: recognition and measurement IAS 40 Investment property IFRS 2 Share-based payment Nelson 13 Introduction: Fair Value Example Fair value can be applied to initial measurement, subsequent measurement, or both Applied to both initial and subsequent measurement: Inventories (IAS 2) Financial assets and liabilities at fair value through P/L (IAS 39) Available for sale financial assets (IAS 39) Agriculture (IAS 41) Applied to initial measurement but not subsequent measurement: Held-to-maturity (IAS 39) Loans and receivables (IAS 39) Business combination (IFRS 3) Not applied to initial measurement but applied to subsequent measurement (incl. selective): Property, plant and equipment (IAS 16) Intangible assets (IAS 38) Investment property (IAS 40) Nelson 14 7

8 Introduction: Fair Value Fair value model (IAS 40) Revaluation model (IAS 16) Refers to fair value Changes in fair value recognised in income statement Revalued each balance sheet date N/A Refers to fair value Changes in fair value recognised in equity (or reserve) Not clearly defined, only require sufficient regular that no material different from fair value Deficit about fair value below depreciated cost is recognised in income statement Nelson 15 Introduction: Current Trend From financial reporting perspective, Fair value is considered as more relevant (IAS 8) Fallback from fair value to cost is often not allowed Independent professional valuation is encouraged but not required e.g. IAS 39, 40 & 41 and IFRS 2 Changes in fair value to be recognised in income statement, instead of equity or reserves e.g. IAS 39, 40 & 41 and ED of IFRS for SME Reflect market condition at the balance sheet date, not just annual or regular revaluation e.g. IAS 39 & 40 and IFRS 2 and Nelson 16 8

9 Today s Agenda Introduction of PRC Accounting Standards for Business Enterprises (ASBE) Nelson 17 Development in PRC: Before 2007 In addition to PRC accounting law and financial accounting and reporting rules, the pronouncements of current PRC accounting requirements for profit-oriented enterprises include: Chinese Accounting Standards for Business Enterprises 企业会计准则 Accounting System for Business Enterprises 企业会计制度 Accounting System for Small Business Enterprises 小企业会计制度 Accounting System for Financial Institutions 金融企业会计制度 Accounting Guidelines for Enterprises within Specialised Industries and ad hoc accounting pronouncements Announced by Ministry of (known as 财会 ) Finance PRC (MOF) 财政部 Nelson 18 9

10 Development in PRC: From 2007 On 15 Feb. 2006, the MOF released 39 new Chinese Accounting Standards for Business Enterprises (ASBE) 企业会计准则 Effective from 1 Jan and mandatory for all listed Chinese enterprises ( 新会计准则将于 2007 年 1 月 1 日起在上市公司率先实施 ) The new ASBE are substantially in line with IFRSs ( 趋同 ) except for certain modifications that reflect China s unique circumstances and environment Nelson 19 Development in PRC: From 2007 On 15 Feb. 2006, the MOF released 39 Chinese Accounting Standards for Business Enterprises (ASBE) 财政部副部长会计准则委员企业会计准则 which comprises 会主席楼继伟 : 基本准则是纲, 在整个准则体系中起统驭作用 ` 1 Basic Standard 企业会计准则 --- 基本准则 38 Specific ASBE 企业会计准则 ( 具体准则 ) On 30 Oct. 2006, the MOF released 32 Application Guidance 应用指南具体准则是目, 是依据基本准则原则要求对有关业务或报告作出的具体规定应用指南是补充, 是对具体准则的操作指引 Announced by Ministry of Finance PRC (MOF) 财政部 Nelson 20 10

11 Development in PRC: From 2007 The accounting standards system Suits the development of China s market economy and convergence 财政部副部长会计准则委员 with the international practices. 会主席楼继伟 : Emphasizes the new philosophy of 强化了为投资者和社会公众 providing decision-useful accounting 提供决策有用会计信息的新 information to investors and the public. 理念 Effective from 1 Jan and mandatory for all listed Chinese enterprises ( 新会计准则将于 2007 年 1 月 1 日起在上市公司率先实施 ) Other Chinese enterprises are encouraged to apply ( 鼓励其他企业执行 ) Nelson 21 Overview of Convergence in PRC ASBE 基本准则 (Basic Standard) 1 存货 (Inventories) 2 长期股权投资 (Long-term equity investment) 3 投资性房地产 (Investment property) 4 固定资产 (Fixed assets) 5 生物资产 (Biological assets) 6 无形资产 (Intangible assets) 7 非货币性资产交换 (Exchange of non-monetary assets) 8 资产减值 (Impairment of assets) 9 职工薪酬 (Employee compensation) 10 企业年金基金 (Enterprise annuity fund) 11 股份支付 (Share-based payment) 12 债务重组 (Debt restructuring) 13 或有事项 (Contingencies) IAS/IFRS IAS 2 IAS 39 IAS 40 IAS 16 IAS 41 IAS 38 IAS 16, 18 IAS 36 IAS 19 IAS 26 IFRS 2 IAS 39 IAS Nelson 22 11

12 Overview of Convergence in PRC ASBE 14 收入 (Revenue) 15 建造合同 (Construction contracts) 16 政府补助 (Government grants) 17 借款费用 (Borrowing costs) 18 所得税 (Income taxes) 19 外币折算 (Foreign currency translation) 20 企业合并 (Business combinations) 21 租赁 (Leases) 22 金融工具确认和计量 (Recognition and measurement of financial instruments) 23 金融资产转移 (Transfer of financial assets) 24 套期保值 (Hedging) 25 原保险合同 (Direct insurance contracts) 26 再保险合同 (Re-insurance contracts) IAS/IFRS IAS 18 IAS 11 IAS 20 IAS 23 IAS 12 IAS 21 IFRS 3 IAS 17 IAS 39 IAS 39 IAS 39 IFRS 4 IFRS Nelson 23 Overview of Convergence in PRC ASBE IAS/IFRS 27 石油天然气开采 (Extraction of petroleum and natural gas) 28 会计政策会计估计变更和差错更正 (Changes in IFRS 6 IAS 8 accounting policies and estimates and correction of errors) 29 资产负债表日后事项 (Events occurring after the balance IAS 10 sheet date) 30 财务报表列报 (Presentation of financial statements) IAS 1 31 现金流量表 (Cash flow statements) IAS 7 32 中期财务报告 (Interim financial reporting) IAS 合并财务报表 (Consolidated financial statements) IAS 每股收益 (Earnings per share) IAS 分部报告 (Segment reporting) IAS 关联方披露 (Related party disclosure) IAS 金融工具列报 (Presentation of financial instruments) IAS 首次执行企业会计准则 (First-time adoption of ASBE) IFRS Nelson 24 12

13 Comparison of ASBE and IFRS ASBE For those entities required or electing to adopt the new ASBE the new ABSE replaces the existing Chinese Accounting Standards and an earlier version of the ASBE The new ASBE are substantially in line with IFRSs except for certain modifications that reflect China s unique circumstances and environment 新会计准则体系基本实现了与国际财务报告准则的趋同除小部分事项根据中国情况予以特别处理外 Let s highlight some major differences from IFRS ( 与 IFRS 的主要差异 ) Nelson 25 Today s Agenda Comparison of ASBE and IFRS 面牆見人影真面故難知清朝王國維 Nelson 26 13

14 Major Difference of ASBE from IFRS Main Principles Share the same definition of asset and liability as IFRS Enterprise should use historical cost in measuring an element If the enterprise uses replacement cost, realisable value or fair value in measuring an element It should make sure the measurement basis can be obtained reliably 资产和负债的定义与 IFRS 相同企业在对会计要素进行计量时, 一般应当采用历史成本如采用重置成本可变现净值现值公允价值计量的应当保证所确定的会计要素金额能够取得并可靠计量 No such requirement in IFRS Nelson 27 Major Difference of ASBE from IFRS Presentation of Financial Statements The presentation currency of the financial statements should be Renminbi IAS 21 has no such compulsory requirement ASBE 19: 企业通常应选择人民币作为记账本位币业务收支以人民币以外的货币为主的企业, 可以按照本准则第五条规定选定其中一种货币作为记账本位币但是, 编报的财务报表应当折算为人民币 Nelson 28 14

15 Major Difference of ASBE from IFRS Presentation of Financial Statements Expenses (presented in income statement) can only be presented by function IAS 1 allows presentation by nature or by function ASBE 30: 费用应当按照功能分类, 分为从事经营业务发生的成本管理费用销售费用和财务费用等 Direct method to present operating cash flow in cash flow statement should be used IAS 7 encourage direct method but allow indirect method ASBE 31: 企业应当采用直接法列示经营活动产生的现金流量 Nelson 29 Major Difference of ASBE from IFRS Presentation of Financial Statements A parent should prepare consolidated financial statements IAS 27 sets out exemption on conditional basis ASBE 33: 母公司应当编制合并财务报表 Except for the disclosure required on ASBE 4 (fixed assets held for handle) and ASBE 30 (discontinued operations), no ASBE has similar requirements as set out in IFRS 5 IFRS 5 has specific accounting treatments on non-current assets held for sale ASBE 4: 企业应当在附注中披露准备处置的固定资产名称账面价值公允价值预计处置费用和预计处置时间等 ASBE 30: 附注一般应当披露终止经营税后利润的金额及其构成情况等 Nelson 30 15

16 Major Difference of ASBE from IFRS Balance Sheet Items ASBE 3 does not include some investment properties within the scope of IAS 40 land held for a currently undetermined future use is not an investment property under ASBE 3 Fair value model on investment property can only be used when there is evidence that its fair value can be reliably and continuously measured IAS 40 has no such requirement on fair value model ASBE 3: 本准则规范下列投资性房地产 : 已出租的土地使用权持有并准备增值后转让的土地使用权已出租的建筑物不包括未确定用途的土地等 ASBE 3: 有确凿证据表明投资性房地产的公允价值能够持续可靠取得的可以对投资性房地产采用公允价值模式进行后续计量 Nelson 31 Major Difference of ASBE from IFRS Balance Sheet Items Land use right carried at cost model is subsequently measured in accordance with ASBE 6 Intangible Assets, except for Land and building, leased out under operating lease and held by lessor, that are accounted for in accordance with ASBE 3 Investment Property ASBE 3 采用成本模式计量的土地使用权的后续计量适用企业会计准则第 6 号无形资产 ASBE 21 出租人以经营租赁方式租出的土地使用权和建筑物适用企业会计准则第 3 号投资性房地产 Nelson 32 16

17 Major Difference of ASBE from IFRS Balance Sheet Items Subsequently measurement of fixed assets and intangible assets can only be at cost IAS 16 and 38 provides a choice to state the property, plant and equipment at revalued amount Fair value of biological assets can only be stated when there is evidence that its fair value can be reliably and continuously measured IAS 40 has no such requirement on fair value model ASBE 4 and 6 固定资产和无形资产只允许采用成本模式进行后续计量 ASBE 5: 有确凿证据表明生物资产的公允价值能够持续可靠取得的应当对生物资产采用公允价值计量 Nelson 33 Major Difference of ASBE from IFRS Income Statement and Other Issues No reversal of impairment loss is allowed in ASBE 5 and 8 IAS 36 allows reversal of impairment loss (except for impairment loss on goodwill) ASBE 5 ( 生物资产 ): 生产性生物资产减值准备一经计提, 不得转回 ASBE 8 ( 资产减值 ): 资产减值损失一经确认, 在以后会计期间不得转回 Borrowing costs should be capitalised when they meet the capitalisation conditions IAS 23 has a choice to expense all borrowing costs (expense option in IAS 23 eliminated in 2007) ASBE 17 ( 借款费用 ): 企业发生的借款费用, 可直接归属于符合资本化条件的资产的购建或者生产的, 应当予以资本化, 计入相关资产成本 Nelson 34 17

18 Major Difference of ASBE from IFRS Income Statement and Other Issues No separate IFRS for exchange of non-monetary assets IAS 16 and 38 set out the same requirements as ASBE 7 Commercial substance Fair value can be reliably measured IAS 18 sets out different practice (using similar and dissimilar approach) ASBE 7 ( 非货币性资产交换 ): 非货币性资产交换同时满足下列条件的, 应当以公允价值和应支付的相关税费作为换入资产的成本, 公允价值与换出资产账面价值的差额计入当期损益 : 该项交换具有商业实质 ; 换入资产或换出资产的公允价值能够可靠地计量 Nelson 35 Major Difference of ASBE from IFRS Income Statement and Other Issues An entity should use equity method to account for those entities that it can jointly control (joint venture) and significantly influence (associate) IAS 31 allows equity method or proportionate consolidation to account for jointly controlled entities ASBE 2 ( 长期股权投资 ): 投资企业对被投资单位具有共同控制 ( 合营企业 ) 或重大影响 ( 联营企业 ) 的长期股权投资应当按照本准则第九条至第十三条规定, 采用权益法核算 ( 即不可采用比例合并法 ) Nelson 36 18

19 Major Difference of ASBE from IFRS Related Party Disclosure Similar requirements as IAS 24, except for state controlled enterprises exemption 2 or more enterprises common controlled by state without any other relationship would not imply be regarded as related party under ASBE 36 In 2007, IASB has proposed to amend IAS 24 to align with the practice of ASBE 36 ASBE 36: 仅仅同受国家控制而不存在其他关联方关系的企业, 不构成关联方 Nelson 37 Transition to ASBE ASBE 38 First-time time Adoption of ASBE Applicable to the ASBE issued in 2006 On the date of first-time adoption, the enterprise should classify, recognise and measure in accordance with the ASBE to prepare the initial balance sheet. 适用于首次采用 2006 年发布的企业会计准则 (ASBE) 在首次执行日, 企业应当对所有资产负债和所有者权益按照企业会计准则的规定进行重新分类确认和计量, 并编制期初资产负债表 Nelson 38 19

Transition to ASBE ASBE 38 First-time time Adoption of ASBE Except for the retrospective adjustments set out in ASBE 38, no items should be retrospectively adjusted.

20 Transition to ASBE ASBE 38 First-time time Adoption of ASBE Except for the retrospective adjustments set out in ASBE 38, no items should be retrospectively adjusted. The initial set of financial statements prepared under the ASBE should have at least 1-year comparative information. 编制期初资产负债表时, 除按照本准则第五条至第十九条规定要求追溯调整的项目外, 其他项目不应追溯调整首份年度财务报表至少应当包括上年度按照企业会计准则列报的比较信息 ( 即 2006 年的比较信息 ) Nelson 39 Today s Agenda Future Development of IFRS and ASBE Nelson 40 20

Latest Development of ASBE 39 Chinese Accounting Standards for Business Enterprises (ASBE) 企业会计准则 which comprises 1 Basic Standard 企业会计准则 --- 基本准则 38 Specific ASBE 企业会计准则 ( 具体准则 ) 32 Application

Assets = Liabilities + Capital Assets = Liabilities + Equity Fundamental errors should be adjusted by prior year adjustments Provision for bad debt is determined by ageing analysis Deposits in bank

21 Latest Development of ASBE 39 Chinese Accounting Standards for Business Enterprises (ASBE) 企业会计准则 which comprises 1 Basic Standard 企业会计准则 --- 基本准则 38 Specific ASBE 企业会计准则 ( 具体准则 ) 32 Application Guidance 应用指南 2008 年, 将新准则的实施范围扩大到中央国有企业 ; 2009 年, 进一步扩大新准则实施范围, 目标是用三年左右时间使中国的大中型企业全面实施新准则体系 Nelson 41 Latest Development To ask yourself whether you agree with the following statements Assets = Liabilities + Capital Assets = Liabilities + Equity Fundamental errors should be adjusted by prior year adjustments Provision for bad debt is determined by ageing analysis Deposits in bank should be current assets Property in HK purchased by an entity is a fixed asset No fundamental error any more The term PYA is adjusted Impairment loss (by individual and collective assessment) Depend All on should the deposit be term adjusted now! Not always! Only cost of improvement to a fixed Not only improvement! asset is capitalised in the balance sheet Is it still a balance sheet? Non-profit making entities can have exemptions No exemption! on some accounting requirements Nelson 42 21

22 Future Development A complete set of financial statements comprises: a) a balance sheet; Statement of Financial Position b) an income statement; Statement of Comprehensive Income c) a statement of changes in equity showing either: i) all changes in equity, or ii) changes in equity other than those arising from transactions with equity holders acting in their capacity as equity holders; d) a cash flow statement; and Statement of Cash Flow e) notes, comprising a summary of significant accounting Effective for the period policies and other explanatory notes. beginning on or after (IAS 1, amended in 2005) 1 Jan Nelson 43 Future Development Globalisation Converged to US GAAP Less accounting choices Off-balance-sheet item no longer off again Emphasis on fair value accounting More assets and liabilities to be stated at fair value e.g. contingent liabilities (proposed in ED to IFRS 3) Beyond fair value, more risk-oriented e.g. sensitivity analysis on market risk (HKFRS 7) 天下大勢合久必分分久必合三國演義 Nelson 44 22

23 Closing Remarks 路漫漫其修遠兮吾將上下而求索屈原離騷 Nelson 45 Development of IFRS & ASBE 4 February 2008 Full set of slides in PDF can be found in Nelson Lam 林智遠 nelson@nelsoncpa.com.hk Nelson 46 23

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當代會計第五卷第一期民國九十三年五月 121-137 頁 Journal of Contemporary Accounting Volume 5 Number 1, May 2004 PP.121-137 我國財務會計處理及資訊揭露邁向國際接軌 * 鍾慧貞壹前言資本市場全球化為時勢所趨, 隨著