Framework and IAS 1 - Nelson CPA · Statements (IAS 1) Presentation of Financial Statements (IAS 1)...
Transcript of Framework and IAS 1 - Nelson CPA · Statements (IAS 1) Presentation of Financial Statements (IAS 1)...
1
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Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠MBA MSc BBA ACA CFA CPA(Aust) CPA(US) FCCA FCPA(Practising)
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IntroductionIntroduction
FrameworkFramework
Presentation of Financial Statements (IAS 1)
Presentation of Financial Statements (IAS 1)
Todayrsquos AgendaSimple but
ComprehensiveSimple but
Comprehensive
Contentious and key issuesContentious
and key issues
Real Life Cases and Examples
Real Life Cases and Examples
Capital Disclosures (Amendments to IAS 1)
Capital Disclosures (Amendments to IAS 1)
2
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IntroductionIntroduction
Todayrsquos Agenda
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Introduction
International Financial Reporting Standards arebull Standards and Interpretations issued and
endorsed by the International Accounting Standard Board and comprisendash International Financial
Reporting Standards (IFRSs)ndash International Accounting
Standards (IASs) andndash Interpretations
7 Sets in issue (from IFRS 1 to IFRS 7)7 Sets in issue (from IFRS 1 to IFRS 7)
31 Sets in issue (from IAS 1 to IAS 41)31 Sets in issue (from IAS 1 to IAS 41)
bull What is the difference between IFRS and IASbull IASB has designated its standards as IFRSbull The accounting standards issued by its predecessor the International
Accounting Standards Committee (IASC) continue to be designated as IAS
bull IASB endorsed all IASs and designated the IFRSs to include IASs
bull What is the difference between IFRS and IASbull IASB has designated its standards as IFRSbull The accounting standards issued by its predecessor the International
Accounting Standards Committee (IASC) continue to be designated as IAS
bull IASB endorsed all IASs and designated the IFRSs to include IASs
3
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Introduction helliphellip
After the training you may realise that some traditional thinking helliphellipndash Assets = Liabilities + Capitalndash Extraordinary items should be
reported in the income statement helliphellipndash Cash at bank and deposits in bank
should be current assetsAll should be
adjusted now
All should be All should be adjusted adjusted
nownow
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Todayrsquos Agenda
FrameworkFramework
4
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What is Framework
bull Sets out the concepts that underlie the preparation and presentation of financial statements for external users
bull Assists preparers of financial statements in applying accountingstandards
bull Assists users of financial statements in interpreting the information contained in financial statements prepared in conformity with accounting standards
bull But is not a standard or guideline ndash so does not override any specific accounting standard
Framework
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What is Framework
bull Deals witha) The objective of financial statementsb) The qualitative characteristics of financial informationc) The definition recognition and measurement of the elements in the
financial statements andd) Concepts of capital and capital maintenance
bull Concerned with general purpose financial statementsbull The users of financial statements include
ndash present and potential investors employees lenders suppliers and other trade creditors customers governments and their agenciesand the public
Framework
ObjectiveObjective Qualitative Characteristics
Qualitative Characteristics ElementsElements Concepts of
CapitalConcepts of
Capital
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Objective of Financial Statements
ObjectiveObjective
Process of communicationProcess of communicationProcess of communication
Companyrsquos activities Accounting User
perception
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Objective of Financial Statements
ObjectiveObjective
Process of communicationProcess of communicationProcess of communication
Companyrsquos activities
FinancialReporting
User perception
IAS 1 states thatbull 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
bull Similar to the objective stated in the Framework
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Objective AssumptionsUnderlying Assumptions includebull Accrual Basis
ndash In order to meet their objectives financial statements are prepared on the accrual basis of accounting
ndash Under this basisbull the effects of transactions and other events are recognised when they
occur (and not as cash or its equivalent is received or paid) andbull they are recorded in the accounting records and reported in the
financial statements of the periods to which they relate bull Going Concern
ndash The financial statements are normally prepared on the assumption that an entity is a going concern and will continue in operation for the foreseeable future
ndash Hence it is assumed that the entity has neither the intention nor the need to liquidate or curtail materially the scale of its operations if such an intention or need exists the financial statements may have to be prepared on a different basis and if so the basis used is disclosed
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Qualitative Characteristics
Objective Qualitative Characteristics
Qualitative Characteristics
Primary qualitative characteristicsof financial statements
bull Relating to content- Relevance (Predictive value Confirmatory value Interrelated)
- Reliability (Faithful representation Substance over form NeutralityPrudence and Completeness)
bull Relating to presentation- Comparability (Consistency and Disclosure)
- Understandability (Usersrsquo ability Aggregation and Classification)
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Qualitative Characteristics
Objective Qualitative Characteristics
Qualitative Characteristics
Primary qualitative characteristicsof financial statements
bull Relating to content- Relevance- Reliability
bull Relating to presentation- Comparability- Understandability
Management Decision
Management Decision
Financial reportingFinancial Financial reportingreporting
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Qualitative Characteristics
Emerging International PracticesEmerging International Practicesbullbull Financial reporting framework clearly definedFinancial reporting framework clearly definedbullbull Definition of assets and liabilities clearly establishedDefinition of assets and liabilities clearly establishedbullbull Beginning to adopt fair value model (instead of only historical Beginning to adopt fair value model (instead of only historical
cost)cost)bullbull Discussing convergence in certain practicesDiscussing convergence in certain practicesbullbull From IASC to IASB (International Accounting Standard Board)From IASC to IASB (International Accounting Standard Board)bullbull From IAS to IFRS (International Financial Reporting From IAS to IFRS (International Financial Reporting
Standards) Standards) helliphelliphelliphellip
8
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All aims atAll aims atRelevanceRelevanceReliabilityReliabilityComparabilityComparabilityUnderstandabilityUnderstandability
Qualitative Characteristics
Management Decision
Management Decision
Financial reportingFinancial Financial reportingreporting
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Elements of Financial Statements
Objective Qualitative Characteristics ElementsElements
Asset
Liability
Equity
Income
Expenses
Financial Position (in balance sheet)
Financial Performance (in income statement)
bull a resource controlled by the enterprise as a result of past eventsand from which future economic benefits are expected to flow tothe enterprise
bull a present obligation of the enterprise arising from past eventsthe settlement of which is expected to result in an outflow fromthe enterprise of resources embodying economic benefits
bull the residual interest in the assets of the enterprise after deducting all its liabilities
bull increases in economic benefits during a period in the form ofndash inflows or enhancements of assets orndash decreases of liabilities that result in increases in equityndash other than those relating to contributions from equity participants
bull decreases in economic benefits during a period in the form ofndash outflows or depletions of assets orndash incurrences of liabilities that result in decreases in equityndash other than those relating to distributions to equity participants
Balance Sheet Approach
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Elements of Financial Statements
Objective Qualitative Characteristics ElementsElements
Asset
Liability
Equity
Income
Expenses
Financial Position (in balance sheet)
Financial Performance (in income statement)
bull a resource controlled by the enterprise as a result of past eventsand from which future economic benefits are expected to flow tothe enterprise
bull a present obligation of the enterprise arising from past eventsthe settlement of which is expected to result in an outflow fromthe enterprise of resources embodying economic benefits
bull the residual interest in the assets of the enterprise after deducting all its liabilities
bull increases in economic benefits during a period in the form ofndash inflows or enhancements of assets orndash decreases of liabilities that result in increases in equityndash other than those relating to contributions from equity participants
bull decreases in economic benefits during a period in the form ofndash outflows or depletions of assets orndash incurrences of liabilities that result in decreases in equityndash other than those relating to distributions to equity participants
DefinitionDefinition
Balance Sheet Approach
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Elements of Financial Statements
Objective Qualitative Characteristics ElementsElements
DefinitionDefinition
RecognitionRecognition
MeasurementMeasurement
Presentation and disclosurePresentation and disclosure
IFRS ApproachIFRS Approach
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Elements of Financial Statements
Objective Qualitative Characteristics ElementsElements
IFRS ApproachIFRS Approach
Presentation and disclosurePresentation and disclosure
Frameworkgives a general overview
DefinitionDefinition
RecognitionRecognition
MeasurementMeasurement
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Definition
Criteria for recognition ndash an item that meets the definition of an element should be recognized if1 it is probable that any future economic benefit
associated with the item will flow to or from the enterprise and
2 the item has a cost or value that can be measured with reliability
Criteria for recognition ndash an item that meets the definition of an element should be recognized if1 it is probable that any future economic benefit
associated with the item will flow to or from the enterprise and
2 the item has a cost or value that can be measured with reliability
Recognition is the process of incorporating in the balance sheet or income statement an item that1 meets the Definition of an element and2 satisfies the Criteria for Recognition
Recognition is the process of incorporating in the balance sheet or income statement an item that1 meets the Definition of an element and2 satisfies the Criteria for Recognition
Elements of Financial Statements
Objective Qualitative Characteristics ElementsElements
RecognitionRecognition
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Elements of Financial Statements
Objective Qualitative Characteristics ElementsElements
Recognition
Definition
Historical cost
Current cost
Realisable (settlement) value
Present value
Historical cost
Current cost
Realisable (settlement) value
Present value
MeasurementMeasurement
Fair value less cost to sell
Value in use
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Concept of CapitalFinancial concept of capitalbull is adopted by most enterprises in
preparing their financial statementsbull Under it such as invested money or
invested purchasing power capital is synonymous with the net assets or equity of the enterprise
Physical concept of capitalbull Under it such as operating capability
capital is regarded as the productive capacity of the enterprise based on
bull For example units of output per day
Capital and Capital Maintenance
Objective Qualitative Characteristics Elements Concepts of
CapitalConcepts of
Capital
Concept of Capital MaintenanceFinancial concept maintenancebull Under this concept a profit is
earned only ifbull the financial (or money) amount of
the net assets at the end of the period
bull exceeds the financial (or money) amount of net assets at the beginning of the period
bull after excluding any distributions to and contributions from owners during the period
bull Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power
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Concept of CapitalFinancial concept of capitalbull is adopted by most enterprises in
preparing their financial statementsbull Under it such as invested money or
invested purchasing power capital is synonymous with the net assets or equity of the enterprise
Physical concept of capitalbull Under it such as operating capability
capital is regarded as the productive capacity of the enterprise based on
bull For example units of output per day
Capital and Capital Maintenance
Objective Qualitative Characteristics Elements Concepts of
CapitalConcepts of
Capital
Concept of Capital MaintenancePhysical concept maintenancebull Under this concept a profit is
earned only ifbull the physical productive capacity (or
operating capability) of the enterprise (or the resources or funds needed to achieve that capacity) at the end of the period
bull exceeds the physical productive capacity at the beginning of the period
bull after excluding any distributions to and contributions from owners during the period
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Summary of IFRSs
International Financial Reporting Standards arebull Standards and Interpretations issued and endorsed by the
International Accounting Standard Board and comprisendash International Financial Reporting Standards (IFRSs)ndash International Accounting Standards (IASs) andndash Interpretations
bull IASs (International Accounting Standards) ndash Totally 31 sets
bull IFRSs (International Financial Reporting Standards) ndash Totally 8 sets(up to 4 February 2007)
More are coming helliphellipMore are coming helliphellip
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Key Points
IFRSs set outbull Recognitionbull Measurementbull Presentation and
disclosure requirements
Main changesbull Changes in recognition
and measurementbull Changes in presentation
and disclosure
bull Less Choicesbull Towards
Fair Value Model
bullbull Less ChoicesLess Choicesbullbull TowardsTowards
Fair Value ModelFair Value Model
bull More and clearer presentation and disclosure
bullbull More and clearer More and clearer presentation and presentation and disclosuredisclosure
bull Aim at enhancing the information for usersrsquo decision making
bullbull Aim at enhancing Aim at enhancing the information the information for usersrsquo for usersrsquo decision makingdecision making
eg market valuevalue by appraisal helliphellip
Inter alia one more change helliphellip
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Todayrsquos Agenda
Presentation of Financial Statements (IAS 1)
Presentation of Financial Statements (IAS 1)
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Presentation of Financial Statements(IAS 1)
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Presentation of Financial Statements (IAS 1)
1 Purpose of financial statements2 Components of financial statements3 Overall considerations4 Structure and content
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1 Purpose of Financial Statements
bull To provide information aboutndash financial positionndash financial performance
andndash cash flows of an entity
That is useful to a wide range of users in making economic decisions
bull To also show the results of managementrsquos stewardship of the resources entrusted to it
bull To meet this objective financial statements provide information about the entityrsquosndash Assetsndash Liabilitiesndash Equityndash Income and expenses
including gains and lossesndash Other changes in equityndash Cash flows
Thus we have helliphellip
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2 Components of Financial Statements
A complete set of financial statements comprisesa) a balance sheetb) an income statementc) a statement of changes in equity showing either
i) all changes in equity orii) changes in equity other than those arising from transactions with
equity holders acting in their capacity as equity holdersd) a cash flow statement ande) notes comprising a summary of significant accounting policies and
other explanatory notes
another nameanother name
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3 Overall Consideration
a) Fair presentation and compliance with IFRSsb) Going concernc) Accrual basis of accountingd) Consistency of presentatione) Materiality and aggregationf) Offsettingg) Comparative information
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3 Overall Consideration
bull Financial statements shall present fairly of the financial position financial performance and cash flows of an entity
ndash Fair presentation requires the faithful representation of the effects of transactions other events and conditions in accordance with
bull the definitions and recognition criteria for assets liabilities income and expenses set out in the Framework
ndash The application of IFRSs with additional disclosure when necessary is presumed to result in financial statements that give a true and fair view
a) Fair presentation and compliance with IFRSs
No such precisely statement before
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3 Overall Consideration
bull Statement of compliancendash An entity whose financial statements comply
with IFRSs shall make an explicit and unreserved statement of such compliance in the notes
ndash Financial statements shall not be described as complying with IFRSsbull unless they comply with all the
requirements of IFRSsndash In virtually all circumstances a fair
presentation is achieved by bull compliance with applicable IFRSs
a) Fair presentation and compliance with IFRSs
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3 Overall Consideration
Melco Development Limited (新濠國際發展有限公司)Notes to the financial statements for year ended 31122005ndash The consolidated financial statements have been prepared in
accordance with HKFRSsndash In addition the consolidated financial statements include applicable
disclosures required by the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited and by the Companies Ordinance
CaseCase
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3 Overall Consideration
bull A fair presentation also requires an entitya) to select and apply accounting policies in accordance
with IAS 8b) to present information including accounting policies
in a manner that provides relevant reliable comparable and understandable information
c) to provide additional disclosuresndash when compliance with the specific requirements in
IFRSs is insufficient to enable users to understand the impact of particular transactions other events and conditions on the entityrsquos financial position and financial performance
bull Inappropriate accounting policies are not rectified eitherndash by disclosure of the accounting policies used orndash by notes or explanatory material
a) Fair presentation and compliance with IFRSs
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3 Overall Consideration
bull Departure from Standard or Interpretation (Simplified)ndash In the extremely rare circumstances in which
management concludes thatbull compliance with a requirement in a standard or an
interpretation would be so misleading thatbull it would conflict with the objective of financial
statements set out in the Frameworkthe entity shall depart from that requirement if the relevant regulatory framework requires or otherwise does not prohibit such a departure
a) Fair presentation and compliance with IFRSs
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3 Overall Consideration
bull Departure from Standard or Interpretation (Simplified)
a) Fair presentation and compliance with IFRSs
ndash Then the following disclosure is requireda) management has concluded that the financial
statements give a true and fair viewb) that it has complied with applicable standards and
interpretations except that it has departed from a particular requirement
c) the title of the standard or interpretation from which the entity has departed the nature of the departure the reason why that treatment would be so misleading and the treatment adopted and
d) for each period presented the financial impact of the departure on each item in the financial statements that would have been reported in complying with the requirement
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3 Overall Consideration
Interim Report 2005 clearly stated thatInterim Report 2005 clearly stated that
CaseCase
bull The directors consider it inappropriate for the company to adopt two particular aspects of the newrevised HKFRSs as these would result in the financial statements in the view of the directors eitherbull not reflecting the commercial substance of the business orbull being subject to significant potential short-term volatility as
explained below helliphellip
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3 Overall ConsiderationCaseCase
bull HKAS 40 ldquoInvestment propertyrdquo requires an assessment of the fair value of investment properties
bull The group intends to follow the same accounting treatment as adopted in 2004 which is to value such investment properties on an annual basis
bull Accordingly the investment properties were not revalued at 30 June 2005 since the directors consider that such change of practice could introduce a significant element of short-term volatility into the income statement in respect of assets which are being held on a long-term basis by the group helliphellip
bull It is not practicable to estimate the financial effect of this non-compliance as no interim valuation of the properties has been conducted
Interim Report 2005 clearly stated thatInterim Report 2005 clearly stated that
At year-end revaluation would still be conductedAt year-end revaluation would still be conducted
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3 Overall ConsiderationCaseCase
bull HKAS 12 ldquoIncome Taxesrdquo together with HKAS-INT 21 ldquoIncome Taxes ndashRecovery of Revalued Non-Depreciable Assetsrdquo requires deferred taxation to be recognised on any revaluation movements on investment propertiesbull It is further provided that any such deferred tax liability should be calculated
at the profits tax rate in the case of assets which the management has no definite intention to sell
bull The company has not made such provision in respect of its HK investment properties since the directors consider that such provision would result in the financial statements not reflecting the commercial substance of the businessbull since should any such sale eventuate any gain would be regarded as capital
in nature and would not be subject to any tax in HKbull Should this aspect of HKAS 12 have been adopted deferred tax liabilities
amounting to HK$2008 million on the revaluation surpluses arising from revaluation of HK investment properties would have been provided
(estimate - over 12 of the net assets at 30 June 2005)
Interim Report 2005 clearly stated thatInterim Report 2005 clearly stated that
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3 Overall Consideration
bull Departure but such departure is prohibitedndash In the extremely rare circumstances in which
management concludes that bull compliance with a requirement in a
standard or an interpretation would be so misleading that
bull it would conflict with the objective of financial statements set out in the Framework
bull but the relevant regulatory framework prohibits departure from the requirement the entity shall to the maximum extent possible reduce the perceived misleading aspects of compliance by disclosing helliphellip
a) Fair presentation and compliance with IFRSs
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3 Overall Consideration
ndash by disclosinga) the title of the standard or interpretation in
question the nature of the requirement and the reason why management has concluded that complying with that requirement is so misleading in the circumstances that it conflicts with the objective of financial statements set out in the Framework and
b) for each period presented the adjustments to each item in the financial statements that management has concluded would be necessary to give a fair presentation
a) Fair presentation and compliance with IFRSsbull Departure but such departure is prohibited
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3 Overall Consideration
bull When assessing whether complying with a specific requirement in a standard or an interpretation would be so misleading that it would conflict with the objective of financial statements set out in the Frameworkndash management considers
a) why the objective of financial statements is not achieved in the particular circumstances and
b) how the entityrsquos circumstances differ from those of other entities that comply with the requirement ndash If other entities in similar circumstances comply with the
requirement raquo there is a rebuttable presumption that the entityrsquos compliance
with the requirement would not be so misleading that it would conflict with the objective of financial statements set out in the Framework
a) Fair presentation and compliance with IFRSs
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3 Overall ConsiderationCaseCase
Howrsquos about this Howrsquos about this
However 2005 Final Results Announcementdisclosed that bull provision for deferred tax was finally made
with regard to revaluation of the HK investment properties (total HK$22 billion) at 2005 year-end
However However 2005 Final Results Announcement2005 Final Results Announcementdisclosed that disclosed that bullbull provision for deferred tax was finally made provision for deferred tax was finally made
with regard to revaluation of the HK with regard to revaluation of the HK investment properties (total HK$22 billion) at investment properties (total HK$22 billion) at 2005 year2005 year--endend
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b) Going Concern
3 Overall Consideration
bull When preparing financial statements management shall make an assessment of an entityrsquos ability to continue as a going concern
bull Financial statements shall be prepared on a going concern basisndash unless management either intends to liquidate the entity or to cease
trading or has no realistic alternative but to do so bull When management is aware in making its assessment of
material uncertainties related to events or conditions that may cast significant doubt upon the entityrsquos ability to continue as a going concern those uncertainties shall be disclosed
bull When financial statements are not prepared on a going concern basis that fact shall be disclosed together with the basis on which the financial statements are prepared and the reason why the entity is not regarded as a going concern
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c) Accrual Basis of Accounting
3 Overall Consideration
bull An entity shall prepare its financial statements except for cash flow information using the accrual basis of accounting
bull When the accrual basis of accounting is used items are recognised as assets liabilities equity income and expensesndash when they satisfy the definitions and recognition criteria for those
elements in the Framework
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3 Overall Consideration
bull The presentation and classification of items in the financial statements shall be retained from one period to the next unlessa) it is apparent
bull following a significant change in the nature of the entityrsquos operations (eg significant acquisition or disposal) or
bull a review of its financial statementsthat another presentation or classification would be more appropriatehaving regard to the criteria for the selection and application of accounting policies in IAS 8 or
b) a IFRS requires a change in presentation
d) Consistency of presentation
An entity changes the presentation of its financial statements only ifndash the changed presentation provides information that is reliable and is
more relevant to users of the financial statements andndash the revised structure is likely to continue so that comparability is not
impaired
An entity changes the presentation of its financial statements only ifndash the changed presentation provides information that is reliable and is
more relevant to users of the financial statements andndash the revised structure is likely to continue so that comparability is not
impaired
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3 Overall Consideration
bull Each material class of similar items shall bendash presented separately in the financial
statementsbull Items of a dissimilar nature or function shall be
ndash presented separately unless they are immaterial
bull Applying the concept of materiality means that a specific disclosure requirement in a IFRS neednot be satisfied if the information is not material
e) Materiality and Aggregation
What is the situation of recognition and measurement
What is the What is the situation of situation of recognition and recognition and measurementmeasurement
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3 Overall Consideration
bull What is materialndash Omissions or misstatements of items are
material if they could individually or collectively influence the economic decisions of users taken on the basis of the financial statements
ndash Materiality depends on the size and nature of the omission or misstatement judged in the surrounding circumstancesbull The size or nature of the item or a combination
of both could be the determining factor
e) Materiality and Aggregation
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3 Overall Consideration
bull Assets and liabilities and income and expenses shall not be offsetndash unless required or permitted by a IFRS
bull It is important that assets and liabilities and income and expenses are reported separatelyndash Measuring assets net of valuation allowances mdash
for example obsolescence allowances on inventories and doubtful debts allowances on receivables mdash is not offsetting
f) Offsetting
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3 Overall Consideration
bull During ordinary activities some transactions that do not generate revenue but are incidental to the main revenue-generating activitiesndash The results of such transactions are presented
when this presentation reflects the substance of the transaction or other event by netting any income with related expenses arising on the same transaction
f) Offsetting
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3 Overall Consideration
bull For examplea) gains and losses on the disposal of non-current
assets including investments and operating assets- are reported by deducting from the proceeds on
disposal the carrying amount of the asset and related selling expenses and
b) expenditure related to a provision that is- recognised in accordance with IAS 37 and - reimbursed under a contractual arrangement with
a third party (for example a supplierrsquos warranty agreement)
may be netted against the related reimbursement
f) Offsetting
ExampleExample
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3 Overall Consideration
bull Gains and losses arising from a group of similar transactions are reported on a net basisndash For example
bull foreign exchange gains and losses or bull gains and losses arising on financial instruments held for trading
bull Such gains and losses are however reported separately if they are material
bull Gains and losses arising from a group of similar transactions are reported on a net basisndash For example
bull foreign exchange gains and losses or bull gains and losses arising on financial instruments held for trading
bull Such gains and losses are however reported separately if they are material
Can foreign exchange gains and losses be offset
ExampleExample
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3 Overall Consideration
bull Except when a IFRS permits or requires otherwise ndash comparative information shall be disclosed in
respect of the previous period for all amountsreported in the financial statements
bull When the presentation or classification of items in the financial statements is amended ndash comparative amounts shall be reclassified unless
the reclassification is impracticable
g) Comparative information
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Amended requirementsAmended requirements
3 Overall Consideration
bull When comparative amounts are reclassified an entity shall disclosea) the nature of the reclassificationb) the amount of each item or class of items that is
reclassified andc) the reason for the reclassification
g) Comparative information
bull In the pastonly the reason for and a description of the nature of materialreclassifications should be disclosedExemption for disclosure of comparative information for the reconciliation of movements in fixed assets is also removed
bull In the pastonly the reason for and a description of the nature of materialreclassifications should be disclosedExemption for disclosure of comparative information for the reconciliation of movements in fixed assets is also removed
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3 Overall Consideration
Melco Development Limited (新濠國際發展有限公司)Notes to the financial statements for year ended 31122005ndash Because HKAS 32 requires retrospective application comparative
figures for 2004 have been restated (see Note 2A for the financial impact)
CaseCase
29
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3 Overall Consideration
Galaxy Entertainment Group LimitedNotes to the financial statements (ye 31122005)ndash All changes in the accounting policies require
retrospective application except HKAS 39 and HKFRS 2 for which transitional provisions are applied
ndash As a result the 2004 comparative figures have also been restated or amended in accordance with the relevant requirements
ndash The effects of all the changes in accounting policies are summarised in notes (b) and (c) below
CaseCase
copy 2005-07 Nelson 58
bull Identification of the financial statementsbull Reporting periodbull Balance sheet
1 CurrentNon-current distinction2 Current assets3 Current liabilities4 Information to be presented on the face of the balance sheet5 Information to be presented either on the face of the balance sheet or in
the notesbull Income statement
1 Profit or loss for the period2 Information to be presented on the face of the income statement3 Information to be presented either on the face of the income statement or
in the notesbull Statement of changes in equitybull Cash flow statementbull Notes
4 Structure and Content
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copy 2005-07 Nelson 59
Identification of Financial Statements
bull The financial statements shall be identified clearly and distinguished from other information in the same published document
bull The following information shall be displayed prominently and repeated when it is necessary for a proper understanding of the information presented
a) the name of the reporting entity or other means of identification and any change in that information from the preceding balance sheet date
b) whether the financial statements cover the individual entity or a group of entities
c) the balance sheet date or the period covered by the financial statements whichever is appropriate to that component of the financial statements
d) the presentation currency as defined in HKAS 21 The Effects of Changes in Foreign Exchange Rates and
e) the level of rounding used in presenting amounts in the financial statements
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Identification of Financial Statements
bull Can the units of the presentation currency be rounded to thousands or millions
bull Financial statements are often made more understandableby presenting information in thousands or millions of units of the presentation currency
bull This is acceptable as long asndash the level of rounding in presentation is disclosed and ndash material information is not omitted
bull Financial statements are often made more understandableby presenting information in thousands or millions of units of the presentation currency
bull This is acceptable as long asndash the level of rounding in presentation is disclosed and ndash material information is not omitted
ExampleExample
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copy 2005-07 Nelson 61
Reporting Period
bull Financial statements shall be presented at least annually
bull When an entityrsquos balance sheet date changes and the annual financial statements are presented for a period longer or shorter than one year an entity shall disclose in addition to the period covered by the financial statementsa) the reason for using a longer or shorter period andb) the fact that comparative amounts for the income
statement statement of changes in equity cash flow statement and related notes are not entirely comparable
copy 2005-07 Nelson 62
Reporting Period
bull Can a set of financial statements cover 52-week instead of a year
bull Normally financial statements are consistently prepared covering a one-year period
bull However for practical reasons some entities prefer to report for example for a 52-week period
bull IAS 1 does not preclude this practice because the resulting financial statements are unlikely to be materially different from those that would be presented for one year
bull Normally financial statements are consistently prepared covering a one-year period
bull However for practical reasons some entities prefer to report for example for a 52-week period
bull IAS 1 does not preclude this practice because the resulting financial statements are unlikely to be materially different from those that would be presented for one year
ExampleExample
32
copy 2005-07 Nelson 63
CurrentNon-current Distinction
bull An entity shall presentndash current and non-current assets andndash current and non-current liabilitiesas separate classifications on the face of its balance sheet
bull Except when a presentation based on liquidity provides informationndash If that information is reliable and is more relevantndash When that exception applies all assets and liabilities shall be
presented broadly in order of liquidity
copy 2005-07 Nelson 64
CurrentNon-current Distinction
bull Whichever method of presentation is adopted for each asset and liability line item that combines amounts expected to be recovered or settled a) no more than 12 months after the balance sheet date
andb) more than 12 months after the balance sheet date(ie combines both current and non-current)
an entity shall disclose the amount expected to be recovered or settled after more than 12 months
33
copy 2005-07 Nelson 65
New requirementsNew requirements
Current Assets
bull An asset shall be classified as current when it satisfies any of the following criteriaa) it is expected to be realised in or is intended for sale or
consumption in the entityrsquos normal operating cycle b) it is held primarily for the purpose of being tradedc) it is expected to be realised within 12 months after the balance
sheet date ord) it is cash or a cash equivalent
bull unless it is restricted from being exchanged or used to settle aliability for at least 12 months after the balance sheet date
bull All other assets shall be classified as non-current
Examplesbull Deposits pledged to bank (how long)bull Fixed deposits over 1 year maturity
Examplesbull Deposits pledged to bank (how long)bull Fixed deposits over 1 year maturity
What is itWhat is it
copy 2005-07 Nelson 66
Current Assets
bull What is operating cycle
bull The operating cycle of an entity is the time between ndash the acquisition of assets for processing and ndash their realisation in cash or cash equivalents
bull When the entityrsquos normal operating cycle is not clearly identifiable ndash its duration is assumed to be 12 months
bull The operating cycle of an entity is the time between ndash the acquisition of assets for processing and ndash their realisation in cash or cash equivalents
bull When the entityrsquos normal operating cycle is not clearly identifiable ndash its duration is assumed to be 12 months
ExampleExample
34
copy 2005-07 Nelson 67
Current Assets CaseCase
copy 2005-07 Nelson 68
Current Assets
bull Can a non-current asset reclassified if it fulfil the definition of current asset later
bull Assets classified as non-current in accordancewith IAS 1 shall not be reclassified as current assetsndash until they meet the criteria to be classified as held for sale in
accordance with IFRS 5bull Assets of a class that an entity would normally regard as non-
current that are acquired exclusively with a view to resale shall notbe classified as currentndash unless they meet the criteria to be classified as held for sale in
accordance with IFRS 5
bull Assets classified as non-current in accordancewith IAS 1 shall not be reclassified as current assetsndash until they meet the criteria to be classified as held for sale in
accordance with IFRS 5bull Assets of a class that an entity would normally regard as non-
current that are acquired exclusively with a view to resale shall notbe classified as currentndash unless they meet the criteria to be classified as held for sale in
accordance with IFRS 5
No non-current assets can be classified as current unless the criteria in IFRS 5 are fulfilled mainlybull Available for immediate salebull Highly probable to make the sale
35
copy 2005-07 Nelson 69
Is it currentIs it current
Current Assets
bull In its 2005 Interim Report full set of HKFRS was adopted and the report set out thatndash Available-for-sale financial assets are non-
derivatives that are eitherbull designated in this category orbull not classified in any of the other categories (ie
loans and receivables financial assets at fair value through profit or loss and held-to-maturity investments)
CaseCase
Similar in 2005 Annual Report
Similar in 2005 Annual Report
ndash They are included in non-current assetsbull unless management intends to dispose of the
investment within 12 months of the balance sheet date
copy 2005-07 Nelson 70
New requirementsNew requirements
Current Liabilities
bull A liability shall be classified as current when it satisfies any of the following criteriaa) it is expected to be settled in the entityrsquos normal operating cycleb) it is held primarily for the purpose of being tradedc) it is due to be settled within 12 months after the balance sheet
date ord) the entity does not have an unconditional right to defer settlement
of the liability for at least 12 months after the balance sheet date
bull All other liabilities shall be classified as non-current
ImplicationImplication
36
copy 2005-07 Nelson 71
Current Liabilities Revised rules on classifying a liability as current or non-currentbull A liability held for being traded rArr currentbull A financial liability due within 12 months after the BS date rArr current
ndash even if an agreement to refinance on a long-term basis is completed after the BS date (only disclosed as non-adjusting event)
bull If an entity has discretion to refinance rArr non-currentbull If an entity without discretion to refinance rArr current
bull A non-current financial liability is payable on demand with a breach on a condition of its loan agreement on or before the BS datendash If the lender agreed not to demand payment
bull after the BS date rArr current (only disclosed as non-adjusting event)
bull by the BS date rArr non-current
ImplicationImplication
copy 2005-07 Nelson 72
Current LiabilitiesCaseCase
Note 12 to Interim Report 2006bull Breach of loan covenants
bull As at 30 June 2006 in respect of certain bank loans with an aggregate carrying amount of HK$1529806000 the Group breached certain financial covenants of the banks loans
bull Since the lenders have not agreed to waive its right to demand immediate payment as at the balance sheet date the loans have been classified as current liabilities in these financial statements at 30 June 2006
37
copy 2005-07 Nelson 73
Current Assets and LiabilitiesExampleExample
Can the following be classified as current assetsbull 3-month fixed deposits pledged to a bank to secure
a mortgage loan of 5 yearsbull 2-year fixed deposits with a bank
Can the following be classified as current assetsbull 3-month fixed deposits pledged to a bank to secure
a mortgage loan of 5 yearsbull 2-year fixed deposits with a bank
Can the following be classified as non-current liabilitiesbull 5-year term loan matured after year end but renewed
for another 5 years after year end (before the issuanceof the financial statements)
bull 2-year term loan to be matured with 12 months and theentity has a right to renew for another 2 years
Can the following be classified as non-current liabilitiesbull 5-year term loan matured after year end but renewed
for another 5 years after year end (before the issuanceof the financial statements)
bull 2-year term loan to be matured with 12 months and theentity has a right to renew for another 2 years
timestimes
times
radic
copy 2005-07 Nelson 74
Balance Sheetbull As a minimum the face of the balance sheet shall
include line items that present the following amountsa) property plant and equipmentb) investment propertyc) intangible assetsd) financial assets (excl amounts shown under (e) (h) and (I))e) investments accounted for using the equity methodf) biological assetsg) inventoriesh) trade and other receivablesi) cash and cash equivalentsj) trade and other payablesk) provisionsl) financial liabilities (excl amounts shown under (j) and (k))m) liabilities and assets for current tax as defined in HKAS 12 Income Taxesn) deferred tax liabilities and deferred tax assets as defined in HKAS 12o) minority interest presented within equity andp) issued capital and reserves attributable to equity holders of the parent
38
copy 2005-07 Nelson 75
Balance Sheetbull The face of the balance sheet shall also include line
items that present the following amountsa) The total of assets classified as held for sale and
assets included in disposal groups classified as held for sale in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations and
b) Liabilities included in disposal groups classified as held for sale in accordance with IFRS 5
copy 2005-07 Nelson 76
Balance Sheetbull Additional line items headings and subtotals shall
be presented on the face of the balance sheet when such presentation is relevant to an understanding of the entityrsquos financial position
bull When an entity presents current and non-current assets and current and non-current liabilities as separate classifications on the face of its balance sheet ndash it shall not classify deferred tax assets
(liabilities) as current assets (liabilities)
39
copy 2005-07 Nelson 77
Balance Sheet
bull The use of different measurement bases for different classes of assets suggests that their nature or function differs and therefore that they should be presented as separate line itemsndash For example different classes of property plant and
equipment can be carried atbull Cost orbull Revalued amountsin accordance with IAS 16 PPE
In the past it use ldquomay needrdquoIn the past it use ldquomay needrdquo
copy 2005-07 Nelson 78
Balance Sheet
Galaxy Entertainment Group LimitedConsolidated balance sheet as at 31122005
CaseCase
40
copy 2005-07 Nelson 79
Balance Sheet
Melco Development Limited (新濠國際發展有限公司)Consolidated balance sheet as at 31122005
CaseCase
copy 2005-07 Nelson 80
Income Statement Minimum requirements on the face of the income statementbull As a minimum the face of the income statement shall include line items
that present the following amounts for the perioda) revenueb) finance costsc) share of the profit or loss of associates and joint ventures accounted
for using the equity methodd) pre-tax gain or loss recognised on the disposal of assets or
settlement of liabilities attributable to discontinuing operationse) tax expense andf) profit or loss
41
copy 2005-07 Nelson 81
Income Statement bull The following items shall be disclosed on the face of the income
statement as allocations of profit or loss for the perioda) Profit or loss attributable to minority interest andb) Profit or loss attributable to equity holders of the parent
A similar requirement has been added for the statement of changes in equity and such allocated amounts are not to be presented as items of income or expense
copy 2005-07 Nelson 82
Income Statement
Melco Dev LtdConsolidated income statementas at 31122005
CaseCase
42
copy 2005-07 Nelson 83
Income Statement bull Not require to disclose the results of operating
activities as a line item on the face of the incomestatement
bull An entity shall not present any items of income and expense as extraordinary items either onthe face of the income statements or in the notes
Entities canrsquot use itEntities canrsquot use it
Entities can still show itEntities can still show it
copy 2005-07 Nelson 84
Income Statement Either on the face of the income statement or in the notesbull An entity shall present an analysis of expenses using a classification
based on eitherbull the nature of expenses orbull their function within the entity
whichever provides information that is reliable and more relevant
bull Entities classifying expenses by function shall disclose additional information on the nature of expenses includingbull depreciation and amortisation expense and bull employee benefits expense
43
copy 2005-07 Nelson 85
Income StatementCaseCase
Nature or FunctionNature or Nature or FunctionFunction
copy 2005-07 Nelson 86
Statement of Changes in Equity bull An entity shall present a statement of changes in equity showing on the
face of the statementa) profit or loss for the period b) each item of income and expense for the period that as required by
IFRSs is recognised directly in equity and the total of these itemsc) total income and expense for the period (calculated as the sum of (a) and
(b)) showing separately the total amounts attributablebull to equity holders of the parent andbull to minority interest and
d) for each component of equity the effects of changes in accounting policies and corrections of errors recognised in accordance with IAS 8
Any ChangeAny Change
A revised requirementbull A statement of changes in equity that comprises only these items
shall be titled a statement of recognised income and expenses
A revised requirementbull A statement of changes in equity that comprises only these items
shall be titled a statement of recognised income and expenses
44
copy 2005-07 Nelson 87
Statement of Changes in Equity bull An entity shall also present either on the face of the
statement of changes in equity or in the notesa) the amounts of transactions with equity holders acting in
their capacity as equity holders showing separately distributions to equity holders
b) the balance of retained earnings (ie accumulated profit or loss) at the beginning of the period and at the balance sheet date and the changes during the period and
c) a reconciliation between the carrying amount of each class of contributed equity and each reserve at the beginning and the end of the period separately disclosing each change
copy 2005-07 Nelson 88
Statement of Changes in Equity
Consolidated SCE as at 31122005
CaseCase
45
copy 2005-07 Nelson 89
Notes Structure (an entity is required to disclose the following)
bull The notes shalla) present information about the basis of preparation of the financial statements
and the specific accounting policies usedb) disclose the information required by HKFRSs that is not presented on the
face of the balance sheet income statement statement of changes in equity or cash flow statement and
c) provide additional information that is not presented on the face of the balance sheet income statement statement of changes in equity or cash flow statement but is relevant to an understanding of any of them
bull Notes shall as far as practicable be presented in a systematic manner bull Each item on the face of the balance sheet income statement statement
of changes in equity and cash flow statement shall be cross-referencedto any related information in the notes
copy 2005-07 Nelson 90
Notes Disclosures (an entity is required to disclose the following)
bull Disclosure of accounting policiesAn entity shall disclose in the summary of significant accounting policiesa) the measurement basis (or bases) used in preparing the financial
statements andb) the other accounting policies used that are relevant to an understanding of
the financial statements
46
copy 2005-07 Nelson 91
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)ndash The financial statements have been prepared in
accordance with Hong Kong Financial Reporting Standards (lsquolsquoHKFRSrsquorsquo) issued by the Hong Kong Institute of Certified Public Accountants bull under the historical cost convention as modified by the
revaluation of investment properties available-for-sale financial assets derivative financial instruments and other investments which are carried at fair values helliphellip
ndash The principal accounting policies applied in the preparation of these financial statements are set out below These policies have been consistently applied to all the years presented except for those stated in note 2(a) above
copy 2005-07 Nelson 92
Notes Disclosures (an entity is required to disclose the following)
bull Disclosure of accounting policiesndash The judgements apart from those involving estimations management has
madebull in the process of applying the entityrsquos accounting policies that have the
most significant effect on the amounts recognised in the financial statements (in the summary of significant accounting policies or other notes)
Examples ndash Management makes judgements in determininga) whether financial assets are held-to-maturity investmentsb) when substantially all the significant risks and rewards of
ownership of financial assets and lease assets are transferred to other entities
c) whether in substance particular sales of goods are financing arrangements and therefore do not give rise to revenue and
d) whether the substance of the relationship between the entity and a special purpose entity indicates that the special purpose entity is controlled by the entity
Examples ndash Management makes judgements in determininga) whether financial assets are held-to-maturity investmentsb) when substantially all the significant risks and rewards of
ownership of financial assets and lease assets are transferred to other entities
c) whether in substance particular sales of goods are financing arrangements and therefore do not give rise to revenue and
d) whether the substance of the relationship between the entity and a special purpose entity indicates that the special purpose entity is controlled by the entity
47
copy 2005-07 Nelson 93
Notes Disclosures (an entity is required to disclose the following)
bull Key sources of estimation uncertaintyndash Information about the key assumptions concerning the future and
other key sources of estimation uncertainty at the balance sheet datebull that have a significant risk of causing a material adjustment to the
carrying amounts of assets and liabilities within the next financial yearndash In respect of those assets and liabilities the notes shall include details of
a) their nature andb) their carrying amount as at the balance sheet date
Examples ndash in the absence of recently observed market prices used to measure the following assets and liabilities future-oriented estimates are necessary to measurebull the recoverable amount of classes of PPEbull the effect of technological obsolescence on inventories
Estimates involve assumptions about such items asbull the risk adjustment to cash flows or discount rates usedbull future changes in salaries and in prices affecting other costs
Examples ndash in the absence of recently observed market prices used to measure the following assets and liabilities future-oriented estimates are necessary to measurebull the recoverable amount of classes of PPEbull the effect of technological obsolescence on inventories
Estimates involve assumptions about such items asbull the risk adjustment to cash flows or discount rates usedbull future changes in salaries and in prices affecting other costs
copy 2005-07 Nelson 94
Notes
Esprit Holdings LimitedEsprit Holdings Limitedbull Critical Accounting Estimates and Judgements
ndash Estimates and judgements are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonableunder the circumstances
ndash Critical accounting estimates and assumptionsbull The Group makes estimates and assumptions concerning
the future The resulting accounting estimates will by definition seldom equal the related actual results
bull The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below helliphellip (including (1) useful life and impairment of trademarks and (2) income taxes)
CaseCase
48
copy 2005-07 Nelson 95
Notes
Melco Development Limited (新濠國際發展有限公司)Notes to the financial statements for the year ended 31122005ndash The key assumptions concerning the future and other key sources
of estimation uncertainty at the balance sheet date that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below helliphellip(The issues discussed includebull Allowances for inventories bull Estimated impairment of goodwill Income taxes)
CaseCase
copy 2005-07 Nelson 96
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)ndash Estimates and judgements used in preparing the
financial statements are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonable under the circumstances
ndash The Group makes estimates and assumptionsconcerning the future
ndash The resulting accounting estimates will by definition seldom equal the related actual results
ndash The estimates and assumptions that have a significant effect on the carrying amounts of assets and liabilities are discussed below hellip (including impairment of goodwill impairment of gaming
licence Useful lives of property plant and equipment fair value of investment properties hellip)
49
copy 2005-07 Nelson 97
Notes Disclosures (an entity is required to disclose the following)
bull Other disclosuresAn entity shall disclose in the notesa) the amount of dividends proposed or declared before the
financial statements were authorised for issue but not recognised as a distribution to equity holders during the period and the related amount per share(HK incorporated companies are required to show the aggregate amount which is recommended for distribution by way of dividend under a separate heading(s) in their balance sheet (HK Co Ord 10th Sch para 9(1)(e)) and
b) the amount of any cumulative preference dividends not recognised
copy 2005-07 Nelson 98
Notes Disclosures (an entity is required to disclose the following)
An entity shall disclose the following if not disclosedelsewhere in information published with the financial statementsa) the domicile and legal form of the entity
its country of incorporation andthe address of its registered office(or principal place of business if different from the registered office)
b) a description of the nature of the entityrsquos operations and its principal activities and
c) the name of the parent and the ultimate parent of the group
ldquoshall discloserdquo now instead of ldquoencouraged to discloserdquo
ldquoshall discloserdquo now instead of ldquoencouraged to discloserdquo
bull Other disclosures
Any specialAny special
50
copy 2005-07 Nelson 99
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)bull The principal activities of Galaxy Entertainment Group
Ltd (the lsquolsquoCompanyrsquorsquo) (formerly known as K WahConstruction Materials Ltd) and its subsidiaries (together the lsquolsquoGrouprsquorsquo) are tondash operate in casino games of chance or games of other forms
in Macau (and) manufacture sale and distribution of construction materials in HK Macau and Mainland China
bull The Company is ndash a limited liability company incorporated in Hong Kong and ndash has its listing on the Main Board of The Stock Exchange of
Hong Kong Limitedbull The address of its registered office and its principal place
of business is Room 1606 16th Floor Hutchison House 10 Harcourt Road Central HK
copy 2005-07 Nelson 100
Effective Date
bull An entity shall apply IAS 1 for annual periods beginning on or after 1 Jan 2005
ndash Earlier application is encouragedndash If an entity applies IAS 1 for an earlier period it shall
disclose this factbull For the amendments relating to the Statement of
Changes in Equityndash An entity shall apply it for annual periods beginning on
or after 1 Jan 2006ndash If an entity applies the amendments to IAS 19
Employee Benefits ndash Actuarial Gains and Losses Group Plans and Disclosures for an earlier period that amendment shall be applied for that earlier period
51
copy 2005-07 Nelson 101
Todayrsquos Agenda
Capital Disclosures (Amendments to IAS 1)
Capital Disclosures (Amendments to IAS 1)
copy 2005-07 Nelson 102
Capital Disclosures ndash For 2007
52
copy 2005-07 Nelson 103
Capital Disclosures
What is capital Is it helliphellip
CapitalCapital AssetsAssets LiabilitiesLiabilities= ndash
bull IAS 1BC47 considers ldquowhether an entity can have a view of capital that differs from what IFRSs define as equityrdquo
bull It further clarifies that although for the purposes of this disclosure capital would often equate with equity as defined in IFRSsndash it might also include or exclude some components
bull It also noted that the capital disclosure in IAS 1 is intended to give entities the opportunity to describendash how they view the components of capital they manage if this is
different from what IFRSs define as equity helliphellip
copy 2005-07 Nelson 104
EquityEquityEquity AssetsAssets LiabilitiesLiabilities= ndash
Capital Disclosures
Based on the Framework amp IFRSs the accounting equation should be
CapitalCapital AssetsAssets LiabilitiesLiabilities= ndash
bull An entityrsquos capital may be part of its equity plus part of its liabilities depending on how it manage ldquoits capitalrdquo helliphellip
53
copy 2005-07 Nelson 105
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowinga) qualitative information about its objectives policies and processes for
managing capital including (but not limited to)i) a description of what it manages as capitalii) when an entity is subject to externally imposed capital requirements
the nature of those requirements and how those requirements are incorporated into the management of capital and
iii) how it is meeting its objectives for managing capital
bull To comply with the capital disclosures the entity discloses thefollowinga) qualitative information about its objectives policies and processes for
managing capital including (but not limited to)i) a description of what it manages as capitalii) when an entity is subject to externally imposed capital requirements
the nature of those requirements and how those requirements are incorporated into the management of capital and
iii) how it is meeting its objectives for managing capital
copy 2005-07 Nelson 106
Capital Disclosures
Example disclosurebull The Grouprsquos objectives when managing capital are
ndash to safeguard the entityrsquos ability to continue as a going concern
bull so that it can continue to provide returns for shareholders and benefits for other stakeholders and
ndash to provide an adequate return to shareholders by pricing products and services commensurately with the level of risk
bull The Group sets the amount of capital in proportion to risk
ExampleExample
ObjectivesObjectives
54
copy 2005-07 Nelson 107
Capital Disclosures
bull The Group manages the capital structure and makes adjustments to it in the light ofndash changes in economic conditions and ndash the risk characteristics of the underlying assets
bull In order to maintain or adjust the capital structure the Group mayndash adjust the amount of dividends paid to shareholders ndash return capital to shareholders ndash issue new shares or ndash sell assets to reduce debt
ExampleExample
Example disclosure
HowHow
copy 2005-07 Nelson 108
Capital Disclosures
bull Consistently with others in the industry the Group monitors capital on the basis of ndash the debt-to-adjusted capital ratio
bull This ratio is calculated as net debt divide adjusted capital
ExampleExample
Example disclosure
HowHow
bull Net debt is calculated as ndash Total debt (as shown in the
balance sheet)ndash Less cash amp cash equivalents
bull Net debt is calculated as ndash Total debt (as shown in the
balance sheet)ndash Less cash amp cash equivalents
bull Adjusted capital ndash comprises all components of
equity (ie share capital share premium minority interest retained earnings and revaluation reserve) ndash other than amounts
recognised in equity relating to cash flow hedges and
ndash includes some forms of subordinated debt
bull Adjusted capital ndash comprises all components of
equity (ie share capital share premium minority interest retained earnings and revaluation reserve) ndash other than amounts
recognised in equity relating to cash flow hedges and
ndash includes some forms of subordinated debt
55
copy 2005-07 Nelson 109
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowing
bull To comply with the capital disclosures the entity discloses thefollowingb) summary quantitative data about what it manages as capital
Some entities regard some financial liabilities (eg some forms of subordinated debt) as part of capitalOther entities regard capital as excluding some components of equity (eg components arising from cash flow hedges)
c) any changes in (a) and (b) from the previous period
copy 2005-07 Nelson 110
Capital Disclosures
Example disclosure (continued from previous example)
ExampleExample
bull During 20X4 the Grouprsquos strategy which was unchanged from 20X3 was to maintain the debt-to-adjusted capital ratio at the lower end of the range 61 to 71 in order to secure access to finance at a reasonable cost by maintaining a BB credit rating The debt-to-adjusted capital ratios at 31 December 20X4 and at 31 December 20X3 were as follows
3112X4 ($rsquoM) 3112X3 ($rsquoM) Total debt 1000 1100 Less cash and cash equivalents (90) (150)Net debt 910 950
Total equity 110 105 Add subordinated debt instruments 38 38 Less amounts recognised in equity
relating to cash flow hedges (10) (5)Adjusted capital 138 138
Debt-to-adjusted capital ratio 66 69
56
copy 2005-07 Nelson 111
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowing
bull To comply with the capital disclosures the entity discloses thefollowingd) whether during the period it complied with any externally imposed capital
requirements to which it is subjecte) when the entity has not complied with such externally imposed capital
requirements the consequences of such non-complianceThese disclosures shall be based on the information provided internally to the entityrsquos key management personnel
copy 2005-07 Nelson 112
Capital DisclosuresExampleExample
Example disclosurebull Entity A filed its quarterly regulatory capital return for
30 September 20X7 on 20 October 20X7 bull At that date Entity Arsquos regulatory capital was below
the capital requirement imposed by Regulator B by $1 million
bull As a result Entity A was required to submit a plan to the regulator indicating how it would increase its regulatory capital to the amount required
bull Entity A submitted a plan that entailed selling part of its unquoted equities portfolio with a carrying amount of $115 million in the fourth quarter of 20X7
bull In the fourth quarter of 20X7 Entity A sold its fixed interest investment portfolio for $126 million and met its regulatory capital requirement
For example SFC or banks
For example SFC or banks
57
copy 2005-07 Nelson 113
Capital DisclosuresCaseCase
bull Early adopted capital disclosure in 2005 and itsannual report states that (extract only)ndash The Grouprsquos objectives when managing capital are
bull To safeguard the Grouprsquos ability to continue as a going concern so that it continues to provide returns for shareholders and benefits for other stakeholders
bull To support the Grouprsquos stability and growth andbull To provide capital for the purpose of strengthening the
Grouprsquos risk management capability
copy 2005-07 Nelson 114
Capital DisclosuresCaseCase
ndash The Group actively and regularly reviews and manages its capital structure to ensure optimal capital structure and shareholder returns taking into consideration the future capital requirements of the Group and capital efficiency helliphellip
ndash The Group adopts a dividend policy helliphellip while retaining 10 per cent of the profit as capital of the Group for future use
ndash The Group has set aside $1500 million of retained earnings for the purpose of strengthening the risk management regime of the clearing houses and supporting their roles as central counterparties
ndash As in prior years the Group monitors capital by reviewing the level of capital that is at the disposal of the Group (ldquoadjusted capitalrdquo) Adjusted capital comprises all components of shareholdersrsquo equity other than the hedging reserve relating to cash flow hedges designated reserves and investment revaluation reserve helliphellip
bull Early adopted capital disclosure in 2005 and itsannual report states that (extract only)
58
copy 2005-07 Nelson 115
Capital Disclosures ndash Transition
bull An entity shall apply the requirements of capital disclosure for
ndash annual periods beginning on or after 1 January 2007
bull Early application is encouraged
copy 2005-07 Nelson 116
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk
59
copy 2005-07 Nelson 117
QampA SessionQampA SessionQampA Session
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk
2
copy 2005-07 Nelson 3
IntroductionIntroduction
Todayrsquos Agenda
copy 2005-07 Nelson 4
Introduction
International Financial Reporting Standards arebull Standards and Interpretations issued and
endorsed by the International Accounting Standard Board and comprisendash International Financial
Reporting Standards (IFRSs)ndash International Accounting
Standards (IASs) andndash Interpretations
7 Sets in issue (from IFRS 1 to IFRS 7)7 Sets in issue (from IFRS 1 to IFRS 7)
31 Sets in issue (from IAS 1 to IAS 41)31 Sets in issue (from IAS 1 to IAS 41)
bull What is the difference between IFRS and IASbull IASB has designated its standards as IFRSbull The accounting standards issued by its predecessor the International
Accounting Standards Committee (IASC) continue to be designated as IAS
bull IASB endorsed all IASs and designated the IFRSs to include IASs
bull What is the difference between IFRS and IASbull IASB has designated its standards as IFRSbull The accounting standards issued by its predecessor the International
Accounting Standards Committee (IASC) continue to be designated as IAS
bull IASB endorsed all IASs and designated the IFRSs to include IASs
3
copy 2005-07 Nelson 5
Introduction helliphellip
After the training you may realise that some traditional thinking helliphellipndash Assets = Liabilities + Capitalndash Extraordinary items should be
reported in the income statement helliphellipndash Cash at bank and deposits in bank
should be current assetsAll should be
adjusted now
All should be All should be adjusted adjusted
nownow
copy 2005-07 Nelson 6
Todayrsquos Agenda
FrameworkFramework
4
copy 2005-07 Nelson 7
What is Framework
bull Sets out the concepts that underlie the preparation and presentation of financial statements for external users
bull Assists preparers of financial statements in applying accountingstandards
bull Assists users of financial statements in interpreting the information contained in financial statements prepared in conformity with accounting standards
bull But is not a standard or guideline ndash so does not override any specific accounting standard
Framework
copy 2005-07 Nelson 8
What is Framework
bull Deals witha) The objective of financial statementsb) The qualitative characteristics of financial informationc) The definition recognition and measurement of the elements in the
financial statements andd) Concepts of capital and capital maintenance
bull Concerned with general purpose financial statementsbull The users of financial statements include
ndash present and potential investors employees lenders suppliers and other trade creditors customers governments and their agenciesand the public
Framework
ObjectiveObjective Qualitative Characteristics
Qualitative Characteristics ElementsElements Concepts of
CapitalConcepts of
Capital
5
copy 2005-07 Nelson 9
Objective of Financial Statements
ObjectiveObjective
Process of communicationProcess of communicationProcess of communication
Companyrsquos activities Accounting User
perception
copy 2005-07 Nelson 10
Objective of Financial Statements
ObjectiveObjective
Process of communicationProcess of communicationProcess of communication
Companyrsquos activities
FinancialReporting
User perception
IAS 1 states thatbull 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
bull Similar to the objective stated in the Framework
6
copy 2005-07 Nelson 11
Objective AssumptionsUnderlying Assumptions includebull Accrual Basis
ndash In order to meet their objectives financial statements are prepared on the accrual basis of accounting
ndash Under this basisbull the effects of transactions and other events are recognised when they
occur (and not as cash or its equivalent is received or paid) andbull they are recorded in the accounting records and reported in the
financial statements of the periods to which they relate bull Going Concern
ndash The financial statements are normally prepared on the assumption that an entity is a going concern and will continue in operation for the foreseeable future
ndash Hence it is assumed that the entity has neither the intention nor the need to liquidate or curtail materially the scale of its operations if such an intention or need exists the financial statements may have to be prepared on a different basis and if so the basis used is disclosed
copy 2005-07 Nelson 12
Qualitative Characteristics
Objective Qualitative Characteristics
Qualitative Characteristics
Primary qualitative characteristicsof financial statements
bull Relating to content- Relevance (Predictive value Confirmatory value Interrelated)
- Reliability (Faithful representation Substance over form NeutralityPrudence and Completeness)
bull Relating to presentation- Comparability (Consistency and Disclosure)
- Understandability (Usersrsquo ability Aggregation and Classification)
7
copy 2005-07 Nelson 13
Qualitative Characteristics
Objective Qualitative Characteristics
Qualitative Characteristics
Primary qualitative characteristicsof financial statements
bull Relating to content- Relevance- Reliability
bull Relating to presentation- Comparability- Understandability
Management Decision
Management Decision
Financial reportingFinancial Financial reportingreporting
copy 2005-07 Nelson 14
Qualitative Characteristics
Emerging International PracticesEmerging International Practicesbullbull Financial reporting framework clearly definedFinancial reporting framework clearly definedbullbull Definition of assets and liabilities clearly establishedDefinition of assets and liabilities clearly establishedbullbull Beginning to adopt fair value model (instead of only historical Beginning to adopt fair value model (instead of only historical
cost)cost)bullbull Discussing convergence in certain practicesDiscussing convergence in certain practicesbullbull From IASC to IASB (International Accounting Standard Board)From IASC to IASB (International Accounting Standard Board)bullbull From IAS to IFRS (International Financial Reporting From IAS to IFRS (International Financial Reporting
Standards) Standards) helliphelliphelliphellip
8
copy 2005-07 Nelson 15
All aims atAll aims atRelevanceRelevanceReliabilityReliabilityComparabilityComparabilityUnderstandabilityUnderstandability
Qualitative Characteristics
Management Decision
Management Decision
Financial reportingFinancial Financial reportingreporting
copy 2005-07 Nelson 16
Elements of Financial Statements
Objective Qualitative Characteristics ElementsElements
Asset
Liability
Equity
Income
Expenses
Financial Position (in balance sheet)
Financial Performance (in income statement)
bull a resource controlled by the enterprise as a result of past eventsand from which future economic benefits are expected to flow tothe enterprise
bull a present obligation of the enterprise arising from past eventsthe settlement of which is expected to result in an outflow fromthe enterprise of resources embodying economic benefits
bull the residual interest in the assets of the enterprise after deducting all its liabilities
bull increases in economic benefits during a period in the form ofndash inflows or enhancements of assets orndash decreases of liabilities that result in increases in equityndash other than those relating to contributions from equity participants
bull decreases in economic benefits during a period in the form ofndash outflows or depletions of assets orndash incurrences of liabilities that result in decreases in equityndash other than those relating to distributions to equity participants
Balance Sheet Approach
9
copy 2005-07 Nelson 17
Elements of Financial Statements
Objective Qualitative Characteristics ElementsElements
Asset
Liability
Equity
Income
Expenses
Financial Position (in balance sheet)
Financial Performance (in income statement)
bull a resource controlled by the enterprise as a result of past eventsand from which future economic benefits are expected to flow tothe enterprise
bull a present obligation of the enterprise arising from past eventsthe settlement of which is expected to result in an outflow fromthe enterprise of resources embodying economic benefits
bull the residual interest in the assets of the enterprise after deducting all its liabilities
bull increases in economic benefits during a period in the form ofndash inflows or enhancements of assets orndash decreases of liabilities that result in increases in equityndash other than those relating to contributions from equity participants
bull decreases in economic benefits during a period in the form ofndash outflows or depletions of assets orndash incurrences of liabilities that result in decreases in equityndash other than those relating to distributions to equity participants
DefinitionDefinition
Balance Sheet Approach
copy 2005-07 Nelson 18
Elements of Financial Statements
Objective Qualitative Characteristics ElementsElements
DefinitionDefinition
RecognitionRecognition
MeasurementMeasurement
Presentation and disclosurePresentation and disclosure
IFRS ApproachIFRS Approach
10
copy 2005-07 Nelson 19
Elements of Financial Statements
Objective Qualitative Characteristics ElementsElements
IFRS ApproachIFRS Approach
Presentation and disclosurePresentation and disclosure
Frameworkgives a general overview
DefinitionDefinition
RecognitionRecognition
MeasurementMeasurement
copy 2005-07 Nelson 20
Definition
Criteria for recognition ndash an item that meets the definition of an element should be recognized if1 it is probable that any future economic benefit
associated with the item will flow to or from the enterprise and
2 the item has a cost or value that can be measured with reliability
Criteria for recognition ndash an item that meets the definition of an element should be recognized if1 it is probable that any future economic benefit
associated with the item will flow to or from the enterprise and
2 the item has a cost or value that can be measured with reliability
Recognition is the process of incorporating in the balance sheet or income statement an item that1 meets the Definition of an element and2 satisfies the Criteria for Recognition
Recognition is the process of incorporating in the balance sheet or income statement an item that1 meets the Definition of an element and2 satisfies the Criteria for Recognition
Elements of Financial Statements
Objective Qualitative Characteristics ElementsElements
RecognitionRecognition
11
copy 2005-07 Nelson 21
Elements of Financial Statements
Objective Qualitative Characteristics ElementsElements
Recognition
Definition
Historical cost
Current cost
Realisable (settlement) value
Present value
Historical cost
Current cost
Realisable (settlement) value
Present value
MeasurementMeasurement
Fair value less cost to sell
Value in use
copy 2005-07 Nelson 22
Concept of CapitalFinancial concept of capitalbull is adopted by most enterprises in
preparing their financial statementsbull Under it such as invested money or
invested purchasing power capital is synonymous with the net assets or equity of the enterprise
Physical concept of capitalbull Under it such as operating capability
capital is regarded as the productive capacity of the enterprise based on
bull For example units of output per day
Capital and Capital Maintenance
Objective Qualitative Characteristics Elements Concepts of
CapitalConcepts of
Capital
Concept of Capital MaintenanceFinancial concept maintenancebull Under this concept a profit is
earned only ifbull the financial (or money) amount of
the net assets at the end of the period
bull exceeds the financial (or money) amount of net assets at the beginning of the period
bull after excluding any distributions to and contributions from owners during the period
bull Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power
12
copy 2005-07 Nelson 23
Concept of CapitalFinancial concept of capitalbull is adopted by most enterprises in
preparing their financial statementsbull Under it such as invested money or
invested purchasing power capital is synonymous with the net assets or equity of the enterprise
Physical concept of capitalbull Under it such as operating capability
capital is regarded as the productive capacity of the enterprise based on
bull For example units of output per day
Capital and Capital Maintenance
Objective Qualitative Characteristics Elements Concepts of
CapitalConcepts of
Capital
Concept of Capital MaintenancePhysical concept maintenancebull Under this concept a profit is
earned only ifbull the physical productive capacity (or
operating capability) of the enterprise (or the resources or funds needed to achieve that capacity) at the end of the period
bull exceeds the physical productive capacity at the beginning of the period
bull after excluding any distributions to and contributions from owners during the period
copy 2005-07 Nelson 24
Summary of IFRSs
International Financial Reporting Standards arebull Standards and Interpretations issued and endorsed by the
International Accounting Standard Board and comprisendash International Financial Reporting Standards (IFRSs)ndash International Accounting Standards (IASs) andndash Interpretations
bull IASs (International Accounting Standards) ndash Totally 31 sets
bull IFRSs (International Financial Reporting Standards) ndash Totally 8 sets(up to 4 February 2007)
More are coming helliphellipMore are coming helliphellip
13
copy 2005-07 Nelson 25
Key Points
IFRSs set outbull Recognitionbull Measurementbull Presentation and
disclosure requirements
Main changesbull Changes in recognition
and measurementbull Changes in presentation
and disclosure
bull Less Choicesbull Towards
Fair Value Model
bullbull Less ChoicesLess Choicesbullbull TowardsTowards
Fair Value ModelFair Value Model
bull More and clearer presentation and disclosure
bullbull More and clearer More and clearer presentation and presentation and disclosuredisclosure
bull Aim at enhancing the information for usersrsquo decision making
bullbull Aim at enhancing Aim at enhancing the information the information for usersrsquo for usersrsquo decision makingdecision making
eg market valuevalue by appraisal helliphellip
Inter alia one more change helliphellip
copy 2005-07 Nelson 26
Todayrsquos Agenda
Presentation of Financial Statements (IAS 1)
Presentation of Financial Statements (IAS 1)
14
copy 2005-07 Nelson 27
Presentation of Financial Statements(IAS 1)
copy 2005-07 Nelson 28
Presentation of Financial Statements (IAS 1)
1 Purpose of financial statements2 Components of financial statements3 Overall considerations4 Structure and content
15
copy 2005-07 Nelson 29
1 Purpose of Financial Statements
bull To provide information aboutndash financial positionndash financial performance
andndash cash flows of an entity
That is useful to a wide range of users in making economic decisions
bull To also show the results of managementrsquos stewardship of the resources entrusted to it
bull To meet this objective financial statements provide information about the entityrsquosndash Assetsndash Liabilitiesndash Equityndash Income and expenses
including gains and lossesndash Other changes in equityndash Cash flows
Thus we have helliphellip
copy 2005-07 Nelson 30
2 Components of Financial Statements
A complete set of financial statements comprisesa) a balance sheetb) an income statementc) a statement of changes in equity showing either
i) all changes in equity orii) changes in equity other than those arising from transactions with
equity holders acting in their capacity as equity holdersd) a cash flow statement ande) notes comprising a summary of significant accounting policies and
other explanatory notes
another nameanother name
16
copy 2005-07 Nelson 31
3 Overall Consideration
a) Fair presentation and compliance with IFRSsb) Going concernc) Accrual basis of accountingd) Consistency of presentatione) Materiality and aggregationf) Offsettingg) Comparative information
copy 2005-07 Nelson 32
3 Overall Consideration
bull Financial statements shall present fairly of the financial position financial performance and cash flows of an entity
ndash Fair presentation requires the faithful representation of the effects of transactions other events and conditions in accordance with
bull the definitions and recognition criteria for assets liabilities income and expenses set out in the Framework
ndash The application of IFRSs with additional disclosure when necessary is presumed to result in financial statements that give a true and fair view
a) Fair presentation and compliance with IFRSs
No such precisely statement before
17
copy 2005-07 Nelson 33
3 Overall Consideration
bull Statement of compliancendash An entity whose financial statements comply
with IFRSs shall make an explicit and unreserved statement of such compliance in the notes
ndash Financial statements shall not be described as complying with IFRSsbull unless they comply with all the
requirements of IFRSsndash In virtually all circumstances a fair
presentation is achieved by bull compliance with applicable IFRSs
a) Fair presentation and compliance with IFRSs
copy 2005-07 Nelson 34
3 Overall Consideration
Melco Development Limited (新濠國際發展有限公司)Notes to the financial statements for year ended 31122005ndash The consolidated financial statements have been prepared in
accordance with HKFRSsndash In addition the consolidated financial statements include applicable
disclosures required by the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited and by the Companies Ordinance
CaseCase
18
copy 2005-07 Nelson 35
3 Overall Consideration
bull A fair presentation also requires an entitya) to select and apply accounting policies in accordance
with IAS 8b) to present information including accounting policies
in a manner that provides relevant reliable comparable and understandable information
c) to provide additional disclosuresndash when compliance with the specific requirements in
IFRSs is insufficient to enable users to understand the impact of particular transactions other events and conditions on the entityrsquos financial position and financial performance
bull Inappropriate accounting policies are not rectified eitherndash by disclosure of the accounting policies used orndash by notes or explanatory material
a) Fair presentation and compliance with IFRSs
copy 2005-07 Nelson 36
3 Overall Consideration
bull Departure from Standard or Interpretation (Simplified)ndash In the extremely rare circumstances in which
management concludes thatbull compliance with a requirement in a standard or an
interpretation would be so misleading thatbull it would conflict with the objective of financial
statements set out in the Frameworkthe entity shall depart from that requirement if the relevant regulatory framework requires or otherwise does not prohibit such a departure
a) Fair presentation and compliance with IFRSs
19
copy 2005-07 Nelson 37
3 Overall Consideration
bull Departure from Standard or Interpretation (Simplified)
a) Fair presentation and compliance with IFRSs
ndash Then the following disclosure is requireda) management has concluded that the financial
statements give a true and fair viewb) that it has complied with applicable standards and
interpretations except that it has departed from a particular requirement
c) the title of the standard or interpretation from which the entity has departed the nature of the departure the reason why that treatment would be so misleading and the treatment adopted and
d) for each period presented the financial impact of the departure on each item in the financial statements that would have been reported in complying with the requirement
copy 2005-07 Nelson 38
3 Overall Consideration
Interim Report 2005 clearly stated thatInterim Report 2005 clearly stated that
CaseCase
bull The directors consider it inappropriate for the company to adopt two particular aspects of the newrevised HKFRSs as these would result in the financial statements in the view of the directors eitherbull not reflecting the commercial substance of the business orbull being subject to significant potential short-term volatility as
explained below helliphellip
20
copy 2005-07 Nelson 39
3 Overall ConsiderationCaseCase
bull HKAS 40 ldquoInvestment propertyrdquo requires an assessment of the fair value of investment properties
bull The group intends to follow the same accounting treatment as adopted in 2004 which is to value such investment properties on an annual basis
bull Accordingly the investment properties were not revalued at 30 June 2005 since the directors consider that such change of practice could introduce a significant element of short-term volatility into the income statement in respect of assets which are being held on a long-term basis by the group helliphellip
bull It is not practicable to estimate the financial effect of this non-compliance as no interim valuation of the properties has been conducted
Interim Report 2005 clearly stated thatInterim Report 2005 clearly stated that
At year-end revaluation would still be conductedAt year-end revaluation would still be conducted
copy 2005-07 Nelson 40
3 Overall ConsiderationCaseCase
bull HKAS 12 ldquoIncome Taxesrdquo together with HKAS-INT 21 ldquoIncome Taxes ndashRecovery of Revalued Non-Depreciable Assetsrdquo requires deferred taxation to be recognised on any revaluation movements on investment propertiesbull It is further provided that any such deferred tax liability should be calculated
at the profits tax rate in the case of assets which the management has no definite intention to sell
bull The company has not made such provision in respect of its HK investment properties since the directors consider that such provision would result in the financial statements not reflecting the commercial substance of the businessbull since should any such sale eventuate any gain would be regarded as capital
in nature and would not be subject to any tax in HKbull Should this aspect of HKAS 12 have been adopted deferred tax liabilities
amounting to HK$2008 million on the revaluation surpluses arising from revaluation of HK investment properties would have been provided
(estimate - over 12 of the net assets at 30 June 2005)
Interim Report 2005 clearly stated thatInterim Report 2005 clearly stated that
21
copy 2005-07 Nelson 41
3 Overall Consideration
bull Departure but such departure is prohibitedndash In the extremely rare circumstances in which
management concludes that bull compliance with a requirement in a
standard or an interpretation would be so misleading that
bull it would conflict with the objective of financial statements set out in the Framework
bull but the relevant regulatory framework prohibits departure from the requirement the entity shall to the maximum extent possible reduce the perceived misleading aspects of compliance by disclosing helliphellip
a) Fair presentation and compliance with IFRSs
copy 2005-07 Nelson 42
3 Overall Consideration
ndash by disclosinga) the title of the standard or interpretation in
question the nature of the requirement and the reason why management has concluded that complying with that requirement is so misleading in the circumstances that it conflicts with the objective of financial statements set out in the Framework and
b) for each period presented the adjustments to each item in the financial statements that management has concluded would be necessary to give a fair presentation
a) Fair presentation and compliance with IFRSsbull Departure but such departure is prohibited
22
copy 2005-07 Nelson 43
3 Overall Consideration
bull When assessing whether complying with a specific requirement in a standard or an interpretation would be so misleading that it would conflict with the objective of financial statements set out in the Frameworkndash management considers
a) why the objective of financial statements is not achieved in the particular circumstances and
b) how the entityrsquos circumstances differ from those of other entities that comply with the requirement ndash If other entities in similar circumstances comply with the
requirement raquo there is a rebuttable presumption that the entityrsquos compliance
with the requirement would not be so misleading that it would conflict with the objective of financial statements set out in the Framework
a) Fair presentation and compliance with IFRSs
copy 2005-07 Nelson 44
3 Overall ConsiderationCaseCase
Howrsquos about this Howrsquos about this
However 2005 Final Results Announcementdisclosed that bull provision for deferred tax was finally made
with regard to revaluation of the HK investment properties (total HK$22 billion) at 2005 year-end
However However 2005 Final Results Announcement2005 Final Results Announcementdisclosed that disclosed that bullbull provision for deferred tax was finally made provision for deferred tax was finally made
with regard to revaluation of the HK with regard to revaluation of the HK investment properties (total HK$22 billion) at investment properties (total HK$22 billion) at 2005 year2005 year--endend
23
copy 2005-07 Nelson 45
b) Going Concern
3 Overall Consideration
bull When preparing financial statements management shall make an assessment of an entityrsquos ability to continue as a going concern
bull Financial statements shall be prepared on a going concern basisndash unless management either intends to liquidate the entity or to cease
trading or has no realistic alternative but to do so bull When management is aware in making its assessment of
material uncertainties related to events or conditions that may cast significant doubt upon the entityrsquos ability to continue as a going concern those uncertainties shall be disclosed
bull When financial statements are not prepared on a going concern basis that fact shall be disclosed together with the basis on which the financial statements are prepared and the reason why the entity is not regarded as a going concern
copy 2005-07 Nelson 46
c) Accrual Basis of Accounting
3 Overall Consideration
bull An entity shall prepare its financial statements except for cash flow information using the accrual basis of accounting
bull When the accrual basis of accounting is used items are recognised as assets liabilities equity income and expensesndash when they satisfy the definitions and recognition criteria for those
elements in the Framework
24
copy 2005-07 Nelson 47
3 Overall Consideration
bull The presentation and classification of items in the financial statements shall be retained from one period to the next unlessa) it is apparent
bull following a significant change in the nature of the entityrsquos operations (eg significant acquisition or disposal) or
bull a review of its financial statementsthat another presentation or classification would be more appropriatehaving regard to the criteria for the selection and application of accounting policies in IAS 8 or
b) a IFRS requires a change in presentation
d) Consistency of presentation
An entity changes the presentation of its financial statements only ifndash the changed presentation provides information that is reliable and is
more relevant to users of the financial statements andndash the revised structure is likely to continue so that comparability is not
impaired
An entity changes the presentation of its financial statements only ifndash the changed presentation provides information that is reliable and is
more relevant to users of the financial statements andndash the revised structure is likely to continue so that comparability is not
impaired
copy 2005-07 Nelson 48
3 Overall Consideration
bull Each material class of similar items shall bendash presented separately in the financial
statementsbull Items of a dissimilar nature or function shall be
ndash presented separately unless they are immaterial
bull Applying the concept of materiality means that a specific disclosure requirement in a IFRS neednot be satisfied if the information is not material
e) Materiality and Aggregation
What is the situation of recognition and measurement
What is the What is the situation of situation of recognition and recognition and measurementmeasurement
25
copy 2005-07 Nelson 49
3 Overall Consideration
bull What is materialndash Omissions or misstatements of items are
material if they could individually or collectively influence the economic decisions of users taken on the basis of the financial statements
ndash Materiality depends on the size and nature of the omission or misstatement judged in the surrounding circumstancesbull The size or nature of the item or a combination
of both could be the determining factor
e) Materiality and Aggregation
copy 2005-07 Nelson 50
3 Overall Consideration
bull Assets and liabilities and income and expenses shall not be offsetndash unless required or permitted by a IFRS
bull It is important that assets and liabilities and income and expenses are reported separatelyndash Measuring assets net of valuation allowances mdash
for example obsolescence allowances on inventories and doubtful debts allowances on receivables mdash is not offsetting
f) Offsetting
26
copy 2005-07 Nelson 51
3 Overall Consideration
bull During ordinary activities some transactions that do not generate revenue but are incidental to the main revenue-generating activitiesndash The results of such transactions are presented
when this presentation reflects the substance of the transaction or other event by netting any income with related expenses arising on the same transaction
f) Offsetting
copy 2005-07 Nelson 52
3 Overall Consideration
bull For examplea) gains and losses on the disposal of non-current
assets including investments and operating assets- are reported by deducting from the proceeds on
disposal the carrying amount of the asset and related selling expenses and
b) expenditure related to a provision that is- recognised in accordance with IAS 37 and - reimbursed under a contractual arrangement with
a third party (for example a supplierrsquos warranty agreement)
may be netted against the related reimbursement
f) Offsetting
ExampleExample
27
copy 2005-07 Nelson 53
3 Overall Consideration
bull Gains and losses arising from a group of similar transactions are reported on a net basisndash For example
bull foreign exchange gains and losses or bull gains and losses arising on financial instruments held for trading
bull Such gains and losses are however reported separately if they are material
bull Gains and losses arising from a group of similar transactions are reported on a net basisndash For example
bull foreign exchange gains and losses or bull gains and losses arising on financial instruments held for trading
bull Such gains and losses are however reported separately if they are material
Can foreign exchange gains and losses be offset
ExampleExample
copy 2005-07 Nelson 54
3 Overall Consideration
bull Except when a IFRS permits or requires otherwise ndash comparative information shall be disclosed in
respect of the previous period for all amountsreported in the financial statements
bull When the presentation or classification of items in the financial statements is amended ndash comparative amounts shall be reclassified unless
the reclassification is impracticable
g) Comparative information
28
copy 2005-07 Nelson 55
Amended requirementsAmended requirements
3 Overall Consideration
bull When comparative amounts are reclassified an entity shall disclosea) the nature of the reclassificationb) the amount of each item or class of items that is
reclassified andc) the reason for the reclassification
g) Comparative information
bull In the pastonly the reason for and a description of the nature of materialreclassifications should be disclosedExemption for disclosure of comparative information for the reconciliation of movements in fixed assets is also removed
bull In the pastonly the reason for and a description of the nature of materialreclassifications should be disclosedExemption for disclosure of comparative information for the reconciliation of movements in fixed assets is also removed
copy 2005-07 Nelson 56
3 Overall Consideration
Melco Development Limited (新濠國際發展有限公司)Notes to the financial statements for year ended 31122005ndash Because HKAS 32 requires retrospective application comparative
figures for 2004 have been restated (see Note 2A for the financial impact)
CaseCase
29
copy 2005-07 Nelson 57
3 Overall Consideration
Galaxy Entertainment Group LimitedNotes to the financial statements (ye 31122005)ndash All changes in the accounting policies require
retrospective application except HKAS 39 and HKFRS 2 for which transitional provisions are applied
ndash As a result the 2004 comparative figures have also been restated or amended in accordance with the relevant requirements
ndash The effects of all the changes in accounting policies are summarised in notes (b) and (c) below
CaseCase
copy 2005-07 Nelson 58
bull Identification of the financial statementsbull Reporting periodbull Balance sheet
1 CurrentNon-current distinction2 Current assets3 Current liabilities4 Information to be presented on the face of the balance sheet5 Information to be presented either on the face of the balance sheet or in
the notesbull Income statement
1 Profit or loss for the period2 Information to be presented on the face of the income statement3 Information to be presented either on the face of the income statement or
in the notesbull Statement of changes in equitybull Cash flow statementbull Notes
4 Structure and Content
30
copy 2005-07 Nelson 59
Identification of Financial Statements
bull The financial statements shall be identified clearly and distinguished from other information in the same published document
bull The following information shall be displayed prominently and repeated when it is necessary for a proper understanding of the information presented
a) the name of the reporting entity or other means of identification and any change in that information from the preceding balance sheet date
b) whether the financial statements cover the individual entity or a group of entities
c) the balance sheet date or the period covered by the financial statements whichever is appropriate to that component of the financial statements
d) the presentation currency as defined in HKAS 21 The Effects of Changes in Foreign Exchange Rates and
e) the level of rounding used in presenting amounts in the financial statements
copy 2005-07 Nelson 60
Identification of Financial Statements
bull Can the units of the presentation currency be rounded to thousands or millions
bull Financial statements are often made more understandableby presenting information in thousands or millions of units of the presentation currency
bull This is acceptable as long asndash the level of rounding in presentation is disclosed and ndash material information is not omitted
bull Financial statements are often made more understandableby presenting information in thousands or millions of units of the presentation currency
bull This is acceptable as long asndash the level of rounding in presentation is disclosed and ndash material information is not omitted
ExampleExample
31
copy 2005-07 Nelson 61
Reporting Period
bull Financial statements shall be presented at least annually
bull When an entityrsquos balance sheet date changes and the annual financial statements are presented for a period longer or shorter than one year an entity shall disclose in addition to the period covered by the financial statementsa) the reason for using a longer or shorter period andb) the fact that comparative amounts for the income
statement statement of changes in equity cash flow statement and related notes are not entirely comparable
copy 2005-07 Nelson 62
Reporting Period
bull Can a set of financial statements cover 52-week instead of a year
bull Normally financial statements are consistently prepared covering a one-year period
bull However for practical reasons some entities prefer to report for example for a 52-week period
bull IAS 1 does not preclude this practice because the resulting financial statements are unlikely to be materially different from those that would be presented for one year
bull Normally financial statements are consistently prepared covering a one-year period
bull However for practical reasons some entities prefer to report for example for a 52-week period
bull IAS 1 does not preclude this practice because the resulting financial statements are unlikely to be materially different from those that would be presented for one year
ExampleExample
32
copy 2005-07 Nelson 63
CurrentNon-current Distinction
bull An entity shall presentndash current and non-current assets andndash current and non-current liabilitiesas separate classifications on the face of its balance sheet
bull Except when a presentation based on liquidity provides informationndash If that information is reliable and is more relevantndash When that exception applies all assets and liabilities shall be
presented broadly in order of liquidity
copy 2005-07 Nelson 64
CurrentNon-current Distinction
bull Whichever method of presentation is adopted for each asset and liability line item that combines amounts expected to be recovered or settled a) no more than 12 months after the balance sheet date
andb) more than 12 months after the balance sheet date(ie combines both current and non-current)
an entity shall disclose the amount expected to be recovered or settled after more than 12 months
33
copy 2005-07 Nelson 65
New requirementsNew requirements
Current Assets
bull An asset shall be classified as current when it satisfies any of the following criteriaa) it is expected to be realised in or is intended for sale or
consumption in the entityrsquos normal operating cycle b) it is held primarily for the purpose of being tradedc) it is expected to be realised within 12 months after the balance
sheet date ord) it is cash or a cash equivalent
bull unless it is restricted from being exchanged or used to settle aliability for at least 12 months after the balance sheet date
bull All other assets shall be classified as non-current
Examplesbull Deposits pledged to bank (how long)bull Fixed deposits over 1 year maturity
Examplesbull Deposits pledged to bank (how long)bull Fixed deposits over 1 year maturity
What is itWhat is it
copy 2005-07 Nelson 66
Current Assets
bull What is operating cycle
bull The operating cycle of an entity is the time between ndash the acquisition of assets for processing and ndash their realisation in cash or cash equivalents
bull When the entityrsquos normal operating cycle is not clearly identifiable ndash its duration is assumed to be 12 months
bull The operating cycle of an entity is the time between ndash the acquisition of assets for processing and ndash their realisation in cash or cash equivalents
bull When the entityrsquos normal operating cycle is not clearly identifiable ndash its duration is assumed to be 12 months
ExampleExample
34
copy 2005-07 Nelson 67
Current Assets CaseCase
copy 2005-07 Nelson 68
Current Assets
bull Can a non-current asset reclassified if it fulfil the definition of current asset later
bull Assets classified as non-current in accordancewith IAS 1 shall not be reclassified as current assetsndash until they meet the criteria to be classified as held for sale in
accordance with IFRS 5bull Assets of a class that an entity would normally regard as non-
current that are acquired exclusively with a view to resale shall notbe classified as currentndash unless they meet the criteria to be classified as held for sale in
accordance with IFRS 5
bull Assets classified as non-current in accordancewith IAS 1 shall not be reclassified as current assetsndash until they meet the criteria to be classified as held for sale in
accordance with IFRS 5bull Assets of a class that an entity would normally regard as non-
current that are acquired exclusively with a view to resale shall notbe classified as currentndash unless they meet the criteria to be classified as held for sale in
accordance with IFRS 5
No non-current assets can be classified as current unless the criteria in IFRS 5 are fulfilled mainlybull Available for immediate salebull Highly probable to make the sale
35
copy 2005-07 Nelson 69
Is it currentIs it current
Current Assets
bull In its 2005 Interim Report full set of HKFRS was adopted and the report set out thatndash Available-for-sale financial assets are non-
derivatives that are eitherbull designated in this category orbull not classified in any of the other categories (ie
loans and receivables financial assets at fair value through profit or loss and held-to-maturity investments)
CaseCase
Similar in 2005 Annual Report
Similar in 2005 Annual Report
ndash They are included in non-current assetsbull unless management intends to dispose of the
investment within 12 months of the balance sheet date
copy 2005-07 Nelson 70
New requirementsNew requirements
Current Liabilities
bull A liability shall be classified as current when it satisfies any of the following criteriaa) it is expected to be settled in the entityrsquos normal operating cycleb) it is held primarily for the purpose of being tradedc) it is due to be settled within 12 months after the balance sheet
date ord) the entity does not have an unconditional right to defer settlement
of the liability for at least 12 months after the balance sheet date
bull All other liabilities shall be classified as non-current
ImplicationImplication
36
copy 2005-07 Nelson 71
Current Liabilities Revised rules on classifying a liability as current or non-currentbull A liability held for being traded rArr currentbull A financial liability due within 12 months after the BS date rArr current
ndash even if an agreement to refinance on a long-term basis is completed after the BS date (only disclosed as non-adjusting event)
bull If an entity has discretion to refinance rArr non-currentbull If an entity without discretion to refinance rArr current
bull A non-current financial liability is payable on demand with a breach on a condition of its loan agreement on or before the BS datendash If the lender agreed not to demand payment
bull after the BS date rArr current (only disclosed as non-adjusting event)
bull by the BS date rArr non-current
ImplicationImplication
copy 2005-07 Nelson 72
Current LiabilitiesCaseCase
Note 12 to Interim Report 2006bull Breach of loan covenants
bull As at 30 June 2006 in respect of certain bank loans with an aggregate carrying amount of HK$1529806000 the Group breached certain financial covenants of the banks loans
bull Since the lenders have not agreed to waive its right to demand immediate payment as at the balance sheet date the loans have been classified as current liabilities in these financial statements at 30 June 2006
37
copy 2005-07 Nelson 73
Current Assets and LiabilitiesExampleExample
Can the following be classified as current assetsbull 3-month fixed deposits pledged to a bank to secure
a mortgage loan of 5 yearsbull 2-year fixed deposits with a bank
Can the following be classified as current assetsbull 3-month fixed deposits pledged to a bank to secure
a mortgage loan of 5 yearsbull 2-year fixed deposits with a bank
Can the following be classified as non-current liabilitiesbull 5-year term loan matured after year end but renewed
for another 5 years after year end (before the issuanceof the financial statements)
bull 2-year term loan to be matured with 12 months and theentity has a right to renew for another 2 years
Can the following be classified as non-current liabilitiesbull 5-year term loan matured after year end but renewed
for another 5 years after year end (before the issuanceof the financial statements)
bull 2-year term loan to be matured with 12 months and theentity has a right to renew for another 2 years
timestimes
times
radic
copy 2005-07 Nelson 74
Balance Sheetbull As a minimum the face of the balance sheet shall
include line items that present the following amountsa) property plant and equipmentb) investment propertyc) intangible assetsd) financial assets (excl amounts shown under (e) (h) and (I))e) investments accounted for using the equity methodf) biological assetsg) inventoriesh) trade and other receivablesi) cash and cash equivalentsj) trade and other payablesk) provisionsl) financial liabilities (excl amounts shown under (j) and (k))m) liabilities and assets for current tax as defined in HKAS 12 Income Taxesn) deferred tax liabilities and deferred tax assets as defined in HKAS 12o) minority interest presented within equity andp) issued capital and reserves attributable to equity holders of the parent
38
copy 2005-07 Nelson 75
Balance Sheetbull The face of the balance sheet shall also include line
items that present the following amountsa) The total of assets classified as held for sale and
assets included in disposal groups classified as held for sale in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations and
b) Liabilities included in disposal groups classified as held for sale in accordance with IFRS 5
copy 2005-07 Nelson 76
Balance Sheetbull Additional line items headings and subtotals shall
be presented on the face of the balance sheet when such presentation is relevant to an understanding of the entityrsquos financial position
bull When an entity presents current and non-current assets and current and non-current liabilities as separate classifications on the face of its balance sheet ndash it shall not classify deferred tax assets
(liabilities) as current assets (liabilities)
39
copy 2005-07 Nelson 77
Balance Sheet
bull The use of different measurement bases for different classes of assets suggests that their nature or function differs and therefore that they should be presented as separate line itemsndash For example different classes of property plant and
equipment can be carried atbull Cost orbull Revalued amountsin accordance with IAS 16 PPE
In the past it use ldquomay needrdquoIn the past it use ldquomay needrdquo
copy 2005-07 Nelson 78
Balance Sheet
Galaxy Entertainment Group LimitedConsolidated balance sheet as at 31122005
CaseCase
40
copy 2005-07 Nelson 79
Balance Sheet
Melco Development Limited (新濠國際發展有限公司)Consolidated balance sheet as at 31122005
CaseCase
copy 2005-07 Nelson 80
Income Statement Minimum requirements on the face of the income statementbull As a minimum the face of the income statement shall include line items
that present the following amounts for the perioda) revenueb) finance costsc) share of the profit or loss of associates and joint ventures accounted
for using the equity methodd) pre-tax gain or loss recognised on the disposal of assets or
settlement of liabilities attributable to discontinuing operationse) tax expense andf) profit or loss
41
copy 2005-07 Nelson 81
Income Statement bull The following items shall be disclosed on the face of the income
statement as allocations of profit or loss for the perioda) Profit or loss attributable to minority interest andb) Profit or loss attributable to equity holders of the parent
A similar requirement has been added for the statement of changes in equity and such allocated amounts are not to be presented as items of income or expense
copy 2005-07 Nelson 82
Income Statement
Melco Dev LtdConsolidated income statementas at 31122005
CaseCase
42
copy 2005-07 Nelson 83
Income Statement bull Not require to disclose the results of operating
activities as a line item on the face of the incomestatement
bull An entity shall not present any items of income and expense as extraordinary items either onthe face of the income statements or in the notes
Entities canrsquot use itEntities canrsquot use it
Entities can still show itEntities can still show it
copy 2005-07 Nelson 84
Income Statement Either on the face of the income statement or in the notesbull An entity shall present an analysis of expenses using a classification
based on eitherbull the nature of expenses orbull their function within the entity
whichever provides information that is reliable and more relevant
bull Entities classifying expenses by function shall disclose additional information on the nature of expenses includingbull depreciation and amortisation expense and bull employee benefits expense
43
copy 2005-07 Nelson 85
Income StatementCaseCase
Nature or FunctionNature or Nature or FunctionFunction
copy 2005-07 Nelson 86
Statement of Changes in Equity bull An entity shall present a statement of changes in equity showing on the
face of the statementa) profit or loss for the period b) each item of income and expense for the period that as required by
IFRSs is recognised directly in equity and the total of these itemsc) total income and expense for the period (calculated as the sum of (a) and
(b)) showing separately the total amounts attributablebull to equity holders of the parent andbull to minority interest and
d) for each component of equity the effects of changes in accounting policies and corrections of errors recognised in accordance with IAS 8
Any ChangeAny Change
A revised requirementbull A statement of changes in equity that comprises only these items
shall be titled a statement of recognised income and expenses
A revised requirementbull A statement of changes in equity that comprises only these items
shall be titled a statement of recognised income and expenses
44
copy 2005-07 Nelson 87
Statement of Changes in Equity bull An entity shall also present either on the face of the
statement of changes in equity or in the notesa) the amounts of transactions with equity holders acting in
their capacity as equity holders showing separately distributions to equity holders
b) the balance of retained earnings (ie accumulated profit or loss) at the beginning of the period and at the balance sheet date and the changes during the period and
c) a reconciliation between the carrying amount of each class of contributed equity and each reserve at the beginning and the end of the period separately disclosing each change
copy 2005-07 Nelson 88
Statement of Changes in Equity
Consolidated SCE as at 31122005
CaseCase
45
copy 2005-07 Nelson 89
Notes Structure (an entity is required to disclose the following)
bull The notes shalla) present information about the basis of preparation of the financial statements
and the specific accounting policies usedb) disclose the information required by HKFRSs that is not presented on the
face of the balance sheet income statement statement of changes in equity or cash flow statement and
c) provide additional information that is not presented on the face of the balance sheet income statement statement of changes in equity or cash flow statement but is relevant to an understanding of any of them
bull Notes shall as far as practicable be presented in a systematic manner bull Each item on the face of the balance sheet income statement statement
of changes in equity and cash flow statement shall be cross-referencedto any related information in the notes
copy 2005-07 Nelson 90
Notes Disclosures (an entity is required to disclose the following)
bull Disclosure of accounting policiesAn entity shall disclose in the summary of significant accounting policiesa) the measurement basis (or bases) used in preparing the financial
statements andb) the other accounting policies used that are relevant to an understanding of
the financial statements
46
copy 2005-07 Nelson 91
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)ndash The financial statements have been prepared in
accordance with Hong Kong Financial Reporting Standards (lsquolsquoHKFRSrsquorsquo) issued by the Hong Kong Institute of Certified Public Accountants bull under the historical cost convention as modified by the
revaluation of investment properties available-for-sale financial assets derivative financial instruments and other investments which are carried at fair values helliphellip
ndash The principal accounting policies applied in the preparation of these financial statements are set out below These policies have been consistently applied to all the years presented except for those stated in note 2(a) above
copy 2005-07 Nelson 92
Notes Disclosures (an entity is required to disclose the following)
bull Disclosure of accounting policiesndash The judgements apart from those involving estimations management has
madebull in the process of applying the entityrsquos accounting policies that have the
most significant effect on the amounts recognised in the financial statements (in the summary of significant accounting policies or other notes)
Examples ndash Management makes judgements in determininga) whether financial assets are held-to-maturity investmentsb) when substantially all the significant risks and rewards of
ownership of financial assets and lease assets are transferred to other entities
c) whether in substance particular sales of goods are financing arrangements and therefore do not give rise to revenue and
d) whether the substance of the relationship between the entity and a special purpose entity indicates that the special purpose entity is controlled by the entity
Examples ndash Management makes judgements in determininga) whether financial assets are held-to-maturity investmentsb) when substantially all the significant risks and rewards of
ownership of financial assets and lease assets are transferred to other entities
c) whether in substance particular sales of goods are financing arrangements and therefore do not give rise to revenue and
d) whether the substance of the relationship between the entity and a special purpose entity indicates that the special purpose entity is controlled by the entity
47
copy 2005-07 Nelson 93
Notes Disclosures (an entity is required to disclose the following)
bull Key sources of estimation uncertaintyndash Information about the key assumptions concerning the future and
other key sources of estimation uncertainty at the balance sheet datebull that have a significant risk of causing a material adjustment to the
carrying amounts of assets and liabilities within the next financial yearndash In respect of those assets and liabilities the notes shall include details of
a) their nature andb) their carrying amount as at the balance sheet date
Examples ndash in the absence of recently observed market prices used to measure the following assets and liabilities future-oriented estimates are necessary to measurebull the recoverable amount of classes of PPEbull the effect of technological obsolescence on inventories
Estimates involve assumptions about such items asbull the risk adjustment to cash flows or discount rates usedbull future changes in salaries and in prices affecting other costs
Examples ndash in the absence of recently observed market prices used to measure the following assets and liabilities future-oriented estimates are necessary to measurebull the recoverable amount of classes of PPEbull the effect of technological obsolescence on inventories
Estimates involve assumptions about such items asbull the risk adjustment to cash flows or discount rates usedbull future changes in salaries and in prices affecting other costs
copy 2005-07 Nelson 94
Notes
Esprit Holdings LimitedEsprit Holdings Limitedbull Critical Accounting Estimates and Judgements
ndash Estimates and judgements are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonableunder the circumstances
ndash Critical accounting estimates and assumptionsbull The Group makes estimates and assumptions concerning
the future The resulting accounting estimates will by definition seldom equal the related actual results
bull The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below helliphellip (including (1) useful life and impairment of trademarks and (2) income taxes)
CaseCase
48
copy 2005-07 Nelson 95
Notes
Melco Development Limited (新濠國際發展有限公司)Notes to the financial statements for the year ended 31122005ndash The key assumptions concerning the future and other key sources
of estimation uncertainty at the balance sheet date that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below helliphellip(The issues discussed includebull Allowances for inventories bull Estimated impairment of goodwill Income taxes)
CaseCase
copy 2005-07 Nelson 96
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)ndash Estimates and judgements used in preparing the
financial statements are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonable under the circumstances
ndash The Group makes estimates and assumptionsconcerning the future
ndash The resulting accounting estimates will by definition seldom equal the related actual results
ndash The estimates and assumptions that have a significant effect on the carrying amounts of assets and liabilities are discussed below hellip (including impairment of goodwill impairment of gaming
licence Useful lives of property plant and equipment fair value of investment properties hellip)
49
copy 2005-07 Nelson 97
Notes Disclosures (an entity is required to disclose the following)
bull Other disclosuresAn entity shall disclose in the notesa) the amount of dividends proposed or declared before the
financial statements were authorised for issue but not recognised as a distribution to equity holders during the period and the related amount per share(HK incorporated companies are required to show the aggregate amount which is recommended for distribution by way of dividend under a separate heading(s) in their balance sheet (HK Co Ord 10th Sch para 9(1)(e)) and
b) the amount of any cumulative preference dividends not recognised
copy 2005-07 Nelson 98
Notes Disclosures (an entity is required to disclose the following)
An entity shall disclose the following if not disclosedelsewhere in information published with the financial statementsa) the domicile and legal form of the entity
its country of incorporation andthe address of its registered office(or principal place of business if different from the registered office)
b) a description of the nature of the entityrsquos operations and its principal activities and
c) the name of the parent and the ultimate parent of the group
ldquoshall discloserdquo now instead of ldquoencouraged to discloserdquo
ldquoshall discloserdquo now instead of ldquoencouraged to discloserdquo
bull Other disclosures
Any specialAny special
50
copy 2005-07 Nelson 99
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)bull The principal activities of Galaxy Entertainment Group
Ltd (the lsquolsquoCompanyrsquorsquo) (formerly known as K WahConstruction Materials Ltd) and its subsidiaries (together the lsquolsquoGrouprsquorsquo) are tondash operate in casino games of chance or games of other forms
in Macau (and) manufacture sale and distribution of construction materials in HK Macau and Mainland China
bull The Company is ndash a limited liability company incorporated in Hong Kong and ndash has its listing on the Main Board of The Stock Exchange of
Hong Kong Limitedbull The address of its registered office and its principal place
of business is Room 1606 16th Floor Hutchison House 10 Harcourt Road Central HK
copy 2005-07 Nelson 100
Effective Date
bull An entity shall apply IAS 1 for annual periods beginning on or after 1 Jan 2005
ndash Earlier application is encouragedndash If an entity applies IAS 1 for an earlier period it shall
disclose this factbull For the amendments relating to the Statement of
Changes in Equityndash An entity shall apply it for annual periods beginning on
or after 1 Jan 2006ndash If an entity applies the amendments to IAS 19
Employee Benefits ndash Actuarial Gains and Losses Group Plans and Disclosures for an earlier period that amendment shall be applied for that earlier period
51
copy 2005-07 Nelson 101
Todayrsquos Agenda
Capital Disclosures (Amendments to IAS 1)
Capital Disclosures (Amendments to IAS 1)
copy 2005-07 Nelson 102
Capital Disclosures ndash For 2007
52
copy 2005-07 Nelson 103
Capital Disclosures
What is capital Is it helliphellip
CapitalCapital AssetsAssets LiabilitiesLiabilities= ndash
bull IAS 1BC47 considers ldquowhether an entity can have a view of capital that differs from what IFRSs define as equityrdquo
bull It further clarifies that although for the purposes of this disclosure capital would often equate with equity as defined in IFRSsndash it might also include or exclude some components
bull It also noted that the capital disclosure in IAS 1 is intended to give entities the opportunity to describendash how they view the components of capital they manage if this is
different from what IFRSs define as equity helliphellip
copy 2005-07 Nelson 104
EquityEquityEquity AssetsAssets LiabilitiesLiabilities= ndash
Capital Disclosures
Based on the Framework amp IFRSs the accounting equation should be
CapitalCapital AssetsAssets LiabilitiesLiabilities= ndash
bull An entityrsquos capital may be part of its equity plus part of its liabilities depending on how it manage ldquoits capitalrdquo helliphellip
53
copy 2005-07 Nelson 105
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowinga) qualitative information about its objectives policies and processes for
managing capital including (but not limited to)i) a description of what it manages as capitalii) when an entity is subject to externally imposed capital requirements
the nature of those requirements and how those requirements are incorporated into the management of capital and
iii) how it is meeting its objectives for managing capital
bull To comply with the capital disclosures the entity discloses thefollowinga) qualitative information about its objectives policies and processes for
managing capital including (but not limited to)i) a description of what it manages as capitalii) when an entity is subject to externally imposed capital requirements
the nature of those requirements and how those requirements are incorporated into the management of capital and
iii) how it is meeting its objectives for managing capital
copy 2005-07 Nelson 106
Capital Disclosures
Example disclosurebull The Grouprsquos objectives when managing capital are
ndash to safeguard the entityrsquos ability to continue as a going concern
bull so that it can continue to provide returns for shareholders and benefits for other stakeholders and
ndash to provide an adequate return to shareholders by pricing products and services commensurately with the level of risk
bull The Group sets the amount of capital in proportion to risk
ExampleExample
ObjectivesObjectives
54
copy 2005-07 Nelson 107
Capital Disclosures
bull The Group manages the capital structure and makes adjustments to it in the light ofndash changes in economic conditions and ndash the risk characteristics of the underlying assets
bull In order to maintain or adjust the capital structure the Group mayndash adjust the amount of dividends paid to shareholders ndash return capital to shareholders ndash issue new shares or ndash sell assets to reduce debt
ExampleExample
Example disclosure
HowHow
copy 2005-07 Nelson 108
Capital Disclosures
bull Consistently with others in the industry the Group monitors capital on the basis of ndash the debt-to-adjusted capital ratio
bull This ratio is calculated as net debt divide adjusted capital
ExampleExample
Example disclosure
HowHow
bull Net debt is calculated as ndash Total debt (as shown in the
balance sheet)ndash Less cash amp cash equivalents
bull Net debt is calculated as ndash Total debt (as shown in the
balance sheet)ndash Less cash amp cash equivalents
bull Adjusted capital ndash comprises all components of
equity (ie share capital share premium minority interest retained earnings and revaluation reserve) ndash other than amounts
recognised in equity relating to cash flow hedges and
ndash includes some forms of subordinated debt
bull Adjusted capital ndash comprises all components of
equity (ie share capital share premium minority interest retained earnings and revaluation reserve) ndash other than amounts
recognised in equity relating to cash flow hedges and
ndash includes some forms of subordinated debt
55
copy 2005-07 Nelson 109
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowing
bull To comply with the capital disclosures the entity discloses thefollowingb) summary quantitative data about what it manages as capital
Some entities regard some financial liabilities (eg some forms of subordinated debt) as part of capitalOther entities regard capital as excluding some components of equity (eg components arising from cash flow hedges)
c) any changes in (a) and (b) from the previous period
copy 2005-07 Nelson 110
Capital Disclosures
Example disclosure (continued from previous example)
ExampleExample
bull During 20X4 the Grouprsquos strategy which was unchanged from 20X3 was to maintain the debt-to-adjusted capital ratio at the lower end of the range 61 to 71 in order to secure access to finance at a reasonable cost by maintaining a BB credit rating The debt-to-adjusted capital ratios at 31 December 20X4 and at 31 December 20X3 were as follows
3112X4 ($rsquoM) 3112X3 ($rsquoM) Total debt 1000 1100 Less cash and cash equivalents (90) (150)Net debt 910 950
Total equity 110 105 Add subordinated debt instruments 38 38 Less amounts recognised in equity
relating to cash flow hedges (10) (5)Adjusted capital 138 138
Debt-to-adjusted capital ratio 66 69
56
copy 2005-07 Nelson 111
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowing
bull To comply with the capital disclosures the entity discloses thefollowingd) whether during the period it complied with any externally imposed capital
requirements to which it is subjecte) when the entity has not complied with such externally imposed capital
requirements the consequences of such non-complianceThese disclosures shall be based on the information provided internally to the entityrsquos key management personnel
copy 2005-07 Nelson 112
Capital DisclosuresExampleExample
Example disclosurebull Entity A filed its quarterly regulatory capital return for
30 September 20X7 on 20 October 20X7 bull At that date Entity Arsquos regulatory capital was below
the capital requirement imposed by Regulator B by $1 million
bull As a result Entity A was required to submit a plan to the regulator indicating how it would increase its regulatory capital to the amount required
bull Entity A submitted a plan that entailed selling part of its unquoted equities portfolio with a carrying amount of $115 million in the fourth quarter of 20X7
bull In the fourth quarter of 20X7 Entity A sold its fixed interest investment portfolio for $126 million and met its regulatory capital requirement
For example SFC or banks
For example SFC or banks
57
copy 2005-07 Nelson 113
Capital DisclosuresCaseCase
bull Early adopted capital disclosure in 2005 and itsannual report states that (extract only)ndash The Grouprsquos objectives when managing capital are
bull To safeguard the Grouprsquos ability to continue as a going concern so that it continues to provide returns for shareholders and benefits for other stakeholders
bull To support the Grouprsquos stability and growth andbull To provide capital for the purpose of strengthening the
Grouprsquos risk management capability
copy 2005-07 Nelson 114
Capital DisclosuresCaseCase
ndash The Group actively and regularly reviews and manages its capital structure to ensure optimal capital structure and shareholder returns taking into consideration the future capital requirements of the Group and capital efficiency helliphellip
ndash The Group adopts a dividend policy helliphellip while retaining 10 per cent of the profit as capital of the Group for future use
ndash The Group has set aside $1500 million of retained earnings for the purpose of strengthening the risk management regime of the clearing houses and supporting their roles as central counterparties
ndash As in prior years the Group monitors capital by reviewing the level of capital that is at the disposal of the Group (ldquoadjusted capitalrdquo) Adjusted capital comprises all components of shareholdersrsquo equity other than the hedging reserve relating to cash flow hedges designated reserves and investment revaluation reserve helliphellip
bull Early adopted capital disclosure in 2005 and itsannual report states that (extract only)
58
copy 2005-07 Nelson 115
Capital Disclosures ndash Transition
bull An entity shall apply the requirements of capital disclosure for
ndash annual periods beginning on or after 1 January 2007
bull Early application is encouraged
copy 2005-07 Nelson 116
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk
59
copy 2005-07 Nelson 117
QampA SessionQampA SessionQampA Session
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk
3
copy 2005-07 Nelson 5
Introduction helliphellip
After the training you may realise that some traditional thinking helliphellipndash Assets = Liabilities + Capitalndash Extraordinary items should be
reported in the income statement helliphellipndash Cash at bank and deposits in bank
should be current assetsAll should be
adjusted now
All should be All should be adjusted adjusted
nownow
copy 2005-07 Nelson 6
Todayrsquos Agenda
FrameworkFramework
4
copy 2005-07 Nelson 7
What is Framework
bull Sets out the concepts that underlie the preparation and presentation of financial statements for external users
bull Assists preparers of financial statements in applying accountingstandards
bull Assists users of financial statements in interpreting the information contained in financial statements prepared in conformity with accounting standards
bull But is not a standard or guideline ndash so does not override any specific accounting standard
Framework
copy 2005-07 Nelson 8
What is Framework
bull Deals witha) The objective of financial statementsb) The qualitative characteristics of financial informationc) The definition recognition and measurement of the elements in the
financial statements andd) Concepts of capital and capital maintenance
bull Concerned with general purpose financial statementsbull The users of financial statements include
ndash present and potential investors employees lenders suppliers and other trade creditors customers governments and their agenciesand the public
Framework
ObjectiveObjective Qualitative Characteristics
Qualitative Characteristics ElementsElements Concepts of
CapitalConcepts of
Capital
5
copy 2005-07 Nelson 9
Objective of Financial Statements
ObjectiveObjective
Process of communicationProcess of communicationProcess of communication
Companyrsquos activities Accounting User
perception
copy 2005-07 Nelson 10
Objective of Financial Statements
ObjectiveObjective
Process of communicationProcess of communicationProcess of communication
Companyrsquos activities
FinancialReporting
User perception
IAS 1 states thatbull 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
bull Similar to the objective stated in the Framework
6
copy 2005-07 Nelson 11
Objective AssumptionsUnderlying Assumptions includebull Accrual Basis
ndash In order to meet their objectives financial statements are prepared on the accrual basis of accounting
ndash Under this basisbull the effects of transactions and other events are recognised when they
occur (and not as cash or its equivalent is received or paid) andbull they are recorded in the accounting records and reported in the
financial statements of the periods to which they relate bull Going Concern
ndash The financial statements are normally prepared on the assumption that an entity is a going concern and will continue in operation for the foreseeable future
ndash Hence it is assumed that the entity has neither the intention nor the need to liquidate or curtail materially the scale of its operations if such an intention or need exists the financial statements may have to be prepared on a different basis and if so the basis used is disclosed
copy 2005-07 Nelson 12
Qualitative Characteristics
Objective Qualitative Characteristics
Qualitative Characteristics
Primary qualitative characteristicsof financial statements
bull Relating to content- Relevance (Predictive value Confirmatory value Interrelated)
- Reliability (Faithful representation Substance over form NeutralityPrudence and Completeness)
bull Relating to presentation- Comparability (Consistency and Disclosure)
- Understandability (Usersrsquo ability Aggregation and Classification)
7
copy 2005-07 Nelson 13
Qualitative Characteristics
Objective Qualitative Characteristics
Qualitative Characteristics
Primary qualitative characteristicsof financial statements
bull Relating to content- Relevance- Reliability
bull Relating to presentation- Comparability- Understandability
Management Decision
Management Decision
Financial reportingFinancial Financial reportingreporting
copy 2005-07 Nelson 14
Qualitative Characteristics
Emerging International PracticesEmerging International Practicesbullbull Financial reporting framework clearly definedFinancial reporting framework clearly definedbullbull Definition of assets and liabilities clearly establishedDefinition of assets and liabilities clearly establishedbullbull Beginning to adopt fair value model (instead of only historical Beginning to adopt fair value model (instead of only historical
cost)cost)bullbull Discussing convergence in certain practicesDiscussing convergence in certain practicesbullbull From IASC to IASB (International Accounting Standard Board)From IASC to IASB (International Accounting Standard Board)bullbull From IAS to IFRS (International Financial Reporting From IAS to IFRS (International Financial Reporting
Standards) Standards) helliphelliphelliphellip
8
copy 2005-07 Nelson 15
All aims atAll aims atRelevanceRelevanceReliabilityReliabilityComparabilityComparabilityUnderstandabilityUnderstandability
Qualitative Characteristics
Management Decision
Management Decision
Financial reportingFinancial Financial reportingreporting
copy 2005-07 Nelson 16
Elements of Financial Statements
Objective Qualitative Characteristics ElementsElements
Asset
Liability
Equity
Income
Expenses
Financial Position (in balance sheet)
Financial Performance (in income statement)
bull a resource controlled by the enterprise as a result of past eventsand from which future economic benefits are expected to flow tothe enterprise
bull a present obligation of the enterprise arising from past eventsthe settlement of which is expected to result in an outflow fromthe enterprise of resources embodying economic benefits
bull the residual interest in the assets of the enterprise after deducting all its liabilities
bull increases in economic benefits during a period in the form ofndash inflows or enhancements of assets orndash decreases of liabilities that result in increases in equityndash other than those relating to contributions from equity participants
bull decreases in economic benefits during a period in the form ofndash outflows or depletions of assets orndash incurrences of liabilities that result in decreases in equityndash other than those relating to distributions to equity participants
Balance Sheet Approach
9
copy 2005-07 Nelson 17
Elements of Financial Statements
Objective Qualitative Characteristics ElementsElements
Asset
Liability
Equity
Income
Expenses
Financial Position (in balance sheet)
Financial Performance (in income statement)
bull a resource controlled by the enterprise as a result of past eventsand from which future economic benefits are expected to flow tothe enterprise
bull a present obligation of the enterprise arising from past eventsthe settlement of which is expected to result in an outflow fromthe enterprise of resources embodying economic benefits
bull the residual interest in the assets of the enterprise after deducting all its liabilities
bull increases in economic benefits during a period in the form ofndash inflows or enhancements of assets orndash decreases of liabilities that result in increases in equityndash other than those relating to contributions from equity participants
bull decreases in economic benefits during a period in the form ofndash outflows or depletions of assets orndash incurrences of liabilities that result in decreases in equityndash other than those relating to distributions to equity participants
DefinitionDefinition
Balance Sheet Approach
copy 2005-07 Nelson 18
Elements of Financial Statements
Objective Qualitative Characteristics ElementsElements
DefinitionDefinition
RecognitionRecognition
MeasurementMeasurement
Presentation and disclosurePresentation and disclosure
IFRS ApproachIFRS Approach
10
copy 2005-07 Nelson 19
Elements of Financial Statements
Objective Qualitative Characteristics ElementsElements
IFRS ApproachIFRS Approach
Presentation and disclosurePresentation and disclosure
Frameworkgives a general overview
DefinitionDefinition
RecognitionRecognition
MeasurementMeasurement
copy 2005-07 Nelson 20
Definition
Criteria for recognition ndash an item that meets the definition of an element should be recognized if1 it is probable that any future economic benefit
associated with the item will flow to or from the enterprise and
2 the item has a cost or value that can be measured with reliability
Criteria for recognition ndash an item that meets the definition of an element should be recognized if1 it is probable that any future economic benefit
associated with the item will flow to or from the enterprise and
2 the item has a cost or value that can be measured with reliability
Recognition is the process of incorporating in the balance sheet or income statement an item that1 meets the Definition of an element and2 satisfies the Criteria for Recognition
Recognition is the process of incorporating in the balance sheet or income statement an item that1 meets the Definition of an element and2 satisfies the Criteria for Recognition
Elements of Financial Statements
Objective Qualitative Characteristics ElementsElements
RecognitionRecognition
11
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Elements of Financial Statements
Objective Qualitative Characteristics ElementsElements
Recognition
Definition
Historical cost
Current cost
Realisable (settlement) value
Present value
Historical cost
Current cost
Realisable (settlement) value
Present value
MeasurementMeasurement
Fair value less cost to sell
Value in use
copy 2005-07 Nelson 22
Concept of CapitalFinancial concept of capitalbull is adopted by most enterprises in
preparing their financial statementsbull Under it such as invested money or
invested purchasing power capital is synonymous with the net assets or equity of the enterprise
Physical concept of capitalbull Under it such as operating capability
capital is regarded as the productive capacity of the enterprise based on
bull For example units of output per day
Capital and Capital Maintenance
Objective Qualitative Characteristics Elements Concepts of
CapitalConcepts of
Capital
Concept of Capital MaintenanceFinancial concept maintenancebull Under this concept a profit is
earned only ifbull the financial (or money) amount of
the net assets at the end of the period
bull exceeds the financial (or money) amount of net assets at the beginning of the period
bull after excluding any distributions to and contributions from owners during the period
bull Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power
12
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Concept of CapitalFinancial concept of capitalbull is adopted by most enterprises in
preparing their financial statementsbull Under it such as invested money or
invested purchasing power capital is synonymous with the net assets or equity of the enterprise
Physical concept of capitalbull Under it such as operating capability
capital is regarded as the productive capacity of the enterprise based on
bull For example units of output per day
Capital and Capital Maintenance
Objective Qualitative Characteristics Elements Concepts of
CapitalConcepts of
Capital
Concept of Capital MaintenancePhysical concept maintenancebull Under this concept a profit is
earned only ifbull the physical productive capacity (or
operating capability) of the enterprise (or the resources or funds needed to achieve that capacity) at the end of the period
bull exceeds the physical productive capacity at the beginning of the period
bull after excluding any distributions to and contributions from owners during the period
copy 2005-07 Nelson 24
Summary of IFRSs
International Financial Reporting Standards arebull Standards and Interpretations issued and endorsed by the
International Accounting Standard Board and comprisendash International Financial Reporting Standards (IFRSs)ndash International Accounting Standards (IASs) andndash Interpretations
bull IASs (International Accounting Standards) ndash Totally 31 sets
bull IFRSs (International Financial Reporting Standards) ndash Totally 8 sets(up to 4 February 2007)
More are coming helliphellipMore are coming helliphellip
13
copy 2005-07 Nelson 25
Key Points
IFRSs set outbull Recognitionbull Measurementbull Presentation and
disclosure requirements
Main changesbull Changes in recognition
and measurementbull Changes in presentation
and disclosure
bull Less Choicesbull Towards
Fair Value Model
bullbull Less ChoicesLess Choicesbullbull TowardsTowards
Fair Value ModelFair Value Model
bull More and clearer presentation and disclosure
bullbull More and clearer More and clearer presentation and presentation and disclosuredisclosure
bull Aim at enhancing the information for usersrsquo decision making
bullbull Aim at enhancing Aim at enhancing the information the information for usersrsquo for usersrsquo decision makingdecision making
eg market valuevalue by appraisal helliphellip
Inter alia one more change helliphellip
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Todayrsquos Agenda
Presentation of Financial Statements (IAS 1)
Presentation of Financial Statements (IAS 1)
14
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Presentation of Financial Statements(IAS 1)
copy 2005-07 Nelson 28
Presentation of Financial Statements (IAS 1)
1 Purpose of financial statements2 Components of financial statements3 Overall considerations4 Structure and content
15
copy 2005-07 Nelson 29
1 Purpose of Financial Statements
bull To provide information aboutndash financial positionndash financial performance
andndash cash flows of an entity
That is useful to a wide range of users in making economic decisions
bull To also show the results of managementrsquos stewardship of the resources entrusted to it
bull To meet this objective financial statements provide information about the entityrsquosndash Assetsndash Liabilitiesndash Equityndash Income and expenses
including gains and lossesndash Other changes in equityndash Cash flows
Thus we have helliphellip
copy 2005-07 Nelson 30
2 Components of Financial Statements
A complete set of financial statements comprisesa) a balance sheetb) an income statementc) a statement of changes in equity showing either
i) all changes in equity orii) changes in equity other than those arising from transactions with
equity holders acting in their capacity as equity holdersd) a cash flow statement ande) notes comprising a summary of significant accounting policies and
other explanatory notes
another nameanother name
16
copy 2005-07 Nelson 31
3 Overall Consideration
a) Fair presentation and compliance with IFRSsb) Going concernc) Accrual basis of accountingd) Consistency of presentatione) Materiality and aggregationf) Offsettingg) Comparative information
copy 2005-07 Nelson 32
3 Overall Consideration
bull Financial statements shall present fairly of the financial position financial performance and cash flows of an entity
ndash Fair presentation requires the faithful representation of the effects of transactions other events and conditions in accordance with
bull the definitions and recognition criteria for assets liabilities income and expenses set out in the Framework
ndash The application of IFRSs with additional disclosure when necessary is presumed to result in financial statements that give a true and fair view
a) Fair presentation and compliance with IFRSs
No such precisely statement before
17
copy 2005-07 Nelson 33
3 Overall Consideration
bull Statement of compliancendash An entity whose financial statements comply
with IFRSs shall make an explicit and unreserved statement of such compliance in the notes
ndash Financial statements shall not be described as complying with IFRSsbull unless they comply with all the
requirements of IFRSsndash In virtually all circumstances a fair
presentation is achieved by bull compliance with applicable IFRSs
a) Fair presentation and compliance with IFRSs
copy 2005-07 Nelson 34
3 Overall Consideration
Melco Development Limited (新濠國際發展有限公司)Notes to the financial statements for year ended 31122005ndash The consolidated financial statements have been prepared in
accordance with HKFRSsndash In addition the consolidated financial statements include applicable
disclosures required by the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited and by the Companies Ordinance
CaseCase
18
copy 2005-07 Nelson 35
3 Overall Consideration
bull A fair presentation also requires an entitya) to select and apply accounting policies in accordance
with IAS 8b) to present information including accounting policies
in a manner that provides relevant reliable comparable and understandable information
c) to provide additional disclosuresndash when compliance with the specific requirements in
IFRSs is insufficient to enable users to understand the impact of particular transactions other events and conditions on the entityrsquos financial position and financial performance
bull Inappropriate accounting policies are not rectified eitherndash by disclosure of the accounting policies used orndash by notes or explanatory material
a) Fair presentation and compliance with IFRSs
copy 2005-07 Nelson 36
3 Overall Consideration
bull Departure from Standard or Interpretation (Simplified)ndash In the extremely rare circumstances in which
management concludes thatbull compliance with a requirement in a standard or an
interpretation would be so misleading thatbull it would conflict with the objective of financial
statements set out in the Frameworkthe entity shall depart from that requirement if the relevant regulatory framework requires or otherwise does not prohibit such a departure
a) Fair presentation and compliance with IFRSs
19
copy 2005-07 Nelson 37
3 Overall Consideration
bull Departure from Standard or Interpretation (Simplified)
a) Fair presentation and compliance with IFRSs
ndash Then the following disclosure is requireda) management has concluded that the financial
statements give a true and fair viewb) that it has complied with applicable standards and
interpretations except that it has departed from a particular requirement
c) the title of the standard or interpretation from which the entity has departed the nature of the departure the reason why that treatment would be so misleading and the treatment adopted and
d) for each period presented the financial impact of the departure on each item in the financial statements that would have been reported in complying with the requirement
copy 2005-07 Nelson 38
3 Overall Consideration
Interim Report 2005 clearly stated thatInterim Report 2005 clearly stated that
CaseCase
bull The directors consider it inappropriate for the company to adopt two particular aspects of the newrevised HKFRSs as these would result in the financial statements in the view of the directors eitherbull not reflecting the commercial substance of the business orbull being subject to significant potential short-term volatility as
explained below helliphellip
20
copy 2005-07 Nelson 39
3 Overall ConsiderationCaseCase
bull HKAS 40 ldquoInvestment propertyrdquo requires an assessment of the fair value of investment properties
bull The group intends to follow the same accounting treatment as adopted in 2004 which is to value such investment properties on an annual basis
bull Accordingly the investment properties were not revalued at 30 June 2005 since the directors consider that such change of practice could introduce a significant element of short-term volatility into the income statement in respect of assets which are being held on a long-term basis by the group helliphellip
bull It is not practicable to estimate the financial effect of this non-compliance as no interim valuation of the properties has been conducted
Interim Report 2005 clearly stated thatInterim Report 2005 clearly stated that
At year-end revaluation would still be conductedAt year-end revaluation would still be conducted
copy 2005-07 Nelson 40
3 Overall ConsiderationCaseCase
bull HKAS 12 ldquoIncome Taxesrdquo together with HKAS-INT 21 ldquoIncome Taxes ndashRecovery of Revalued Non-Depreciable Assetsrdquo requires deferred taxation to be recognised on any revaluation movements on investment propertiesbull It is further provided that any such deferred tax liability should be calculated
at the profits tax rate in the case of assets which the management has no definite intention to sell
bull The company has not made such provision in respect of its HK investment properties since the directors consider that such provision would result in the financial statements not reflecting the commercial substance of the businessbull since should any such sale eventuate any gain would be regarded as capital
in nature and would not be subject to any tax in HKbull Should this aspect of HKAS 12 have been adopted deferred tax liabilities
amounting to HK$2008 million on the revaluation surpluses arising from revaluation of HK investment properties would have been provided
(estimate - over 12 of the net assets at 30 June 2005)
Interim Report 2005 clearly stated thatInterim Report 2005 clearly stated that
21
copy 2005-07 Nelson 41
3 Overall Consideration
bull Departure but such departure is prohibitedndash In the extremely rare circumstances in which
management concludes that bull compliance with a requirement in a
standard or an interpretation would be so misleading that
bull it would conflict with the objective of financial statements set out in the Framework
bull but the relevant regulatory framework prohibits departure from the requirement the entity shall to the maximum extent possible reduce the perceived misleading aspects of compliance by disclosing helliphellip
a) Fair presentation and compliance with IFRSs
copy 2005-07 Nelson 42
3 Overall Consideration
ndash by disclosinga) the title of the standard or interpretation in
question the nature of the requirement and the reason why management has concluded that complying with that requirement is so misleading in the circumstances that it conflicts with the objective of financial statements set out in the Framework and
b) for each period presented the adjustments to each item in the financial statements that management has concluded would be necessary to give a fair presentation
a) Fair presentation and compliance with IFRSsbull Departure but such departure is prohibited
22
copy 2005-07 Nelson 43
3 Overall Consideration
bull When assessing whether complying with a specific requirement in a standard or an interpretation would be so misleading that it would conflict with the objective of financial statements set out in the Frameworkndash management considers
a) why the objective of financial statements is not achieved in the particular circumstances and
b) how the entityrsquos circumstances differ from those of other entities that comply with the requirement ndash If other entities in similar circumstances comply with the
requirement raquo there is a rebuttable presumption that the entityrsquos compliance
with the requirement would not be so misleading that it would conflict with the objective of financial statements set out in the Framework
a) Fair presentation and compliance with IFRSs
copy 2005-07 Nelson 44
3 Overall ConsiderationCaseCase
Howrsquos about this Howrsquos about this
However 2005 Final Results Announcementdisclosed that bull provision for deferred tax was finally made
with regard to revaluation of the HK investment properties (total HK$22 billion) at 2005 year-end
However However 2005 Final Results Announcement2005 Final Results Announcementdisclosed that disclosed that bullbull provision for deferred tax was finally made provision for deferred tax was finally made
with regard to revaluation of the HK with regard to revaluation of the HK investment properties (total HK$22 billion) at investment properties (total HK$22 billion) at 2005 year2005 year--endend
23
copy 2005-07 Nelson 45
b) Going Concern
3 Overall Consideration
bull When preparing financial statements management shall make an assessment of an entityrsquos ability to continue as a going concern
bull Financial statements shall be prepared on a going concern basisndash unless management either intends to liquidate the entity or to cease
trading or has no realistic alternative but to do so bull When management is aware in making its assessment of
material uncertainties related to events or conditions that may cast significant doubt upon the entityrsquos ability to continue as a going concern those uncertainties shall be disclosed
bull When financial statements are not prepared on a going concern basis that fact shall be disclosed together with the basis on which the financial statements are prepared and the reason why the entity is not regarded as a going concern
copy 2005-07 Nelson 46
c) Accrual Basis of Accounting
3 Overall Consideration
bull An entity shall prepare its financial statements except for cash flow information using the accrual basis of accounting
bull When the accrual basis of accounting is used items are recognised as assets liabilities equity income and expensesndash when they satisfy the definitions and recognition criteria for those
elements in the Framework
24
copy 2005-07 Nelson 47
3 Overall Consideration
bull The presentation and classification of items in the financial statements shall be retained from one period to the next unlessa) it is apparent
bull following a significant change in the nature of the entityrsquos operations (eg significant acquisition or disposal) or
bull a review of its financial statementsthat another presentation or classification would be more appropriatehaving regard to the criteria for the selection and application of accounting policies in IAS 8 or
b) a IFRS requires a change in presentation
d) Consistency of presentation
An entity changes the presentation of its financial statements only ifndash the changed presentation provides information that is reliable and is
more relevant to users of the financial statements andndash the revised structure is likely to continue so that comparability is not
impaired
An entity changes the presentation of its financial statements only ifndash the changed presentation provides information that is reliable and is
more relevant to users of the financial statements andndash the revised structure is likely to continue so that comparability is not
impaired
copy 2005-07 Nelson 48
3 Overall Consideration
bull Each material class of similar items shall bendash presented separately in the financial
statementsbull Items of a dissimilar nature or function shall be
ndash presented separately unless they are immaterial
bull Applying the concept of materiality means that a specific disclosure requirement in a IFRS neednot be satisfied if the information is not material
e) Materiality and Aggregation
What is the situation of recognition and measurement
What is the What is the situation of situation of recognition and recognition and measurementmeasurement
25
copy 2005-07 Nelson 49
3 Overall Consideration
bull What is materialndash Omissions or misstatements of items are
material if they could individually or collectively influence the economic decisions of users taken on the basis of the financial statements
ndash Materiality depends on the size and nature of the omission or misstatement judged in the surrounding circumstancesbull The size or nature of the item or a combination
of both could be the determining factor
e) Materiality and Aggregation
copy 2005-07 Nelson 50
3 Overall Consideration
bull Assets and liabilities and income and expenses shall not be offsetndash unless required or permitted by a IFRS
bull It is important that assets and liabilities and income and expenses are reported separatelyndash Measuring assets net of valuation allowances mdash
for example obsolescence allowances on inventories and doubtful debts allowances on receivables mdash is not offsetting
f) Offsetting
26
copy 2005-07 Nelson 51
3 Overall Consideration
bull During ordinary activities some transactions that do not generate revenue but are incidental to the main revenue-generating activitiesndash The results of such transactions are presented
when this presentation reflects the substance of the transaction or other event by netting any income with related expenses arising on the same transaction
f) Offsetting
copy 2005-07 Nelson 52
3 Overall Consideration
bull For examplea) gains and losses on the disposal of non-current
assets including investments and operating assets- are reported by deducting from the proceeds on
disposal the carrying amount of the asset and related selling expenses and
b) expenditure related to a provision that is- recognised in accordance with IAS 37 and - reimbursed under a contractual arrangement with
a third party (for example a supplierrsquos warranty agreement)
may be netted against the related reimbursement
f) Offsetting
ExampleExample
27
copy 2005-07 Nelson 53
3 Overall Consideration
bull Gains and losses arising from a group of similar transactions are reported on a net basisndash For example
bull foreign exchange gains and losses or bull gains and losses arising on financial instruments held for trading
bull Such gains and losses are however reported separately if they are material
bull Gains and losses arising from a group of similar transactions are reported on a net basisndash For example
bull foreign exchange gains and losses or bull gains and losses arising on financial instruments held for trading
bull Such gains and losses are however reported separately if they are material
Can foreign exchange gains and losses be offset
ExampleExample
copy 2005-07 Nelson 54
3 Overall Consideration
bull Except when a IFRS permits or requires otherwise ndash comparative information shall be disclosed in
respect of the previous period for all amountsreported in the financial statements
bull When the presentation or classification of items in the financial statements is amended ndash comparative amounts shall be reclassified unless
the reclassification is impracticable
g) Comparative information
28
copy 2005-07 Nelson 55
Amended requirementsAmended requirements
3 Overall Consideration
bull When comparative amounts are reclassified an entity shall disclosea) the nature of the reclassificationb) the amount of each item or class of items that is
reclassified andc) the reason for the reclassification
g) Comparative information
bull In the pastonly the reason for and a description of the nature of materialreclassifications should be disclosedExemption for disclosure of comparative information for the reconciliation of movements in fixed assets is also removed
bull In the pastonly the reason for and a description of the nature of materialreclassifications should be disclosedExemption for disclosure of comparative information for the reconciliation of movements in fixed assets is also removed
copy 2005-07 Nelson 56
3 Overall Consideration
Melco Development Limited (新濠國際發展有限公司)Notes to the financial statements for year ended 31122005ndash Because HKAS 32 requires retrospective application comparative
figures for 2004 have been restated (see Note 2A for the financial impact)
CaseCase
29
copy 2005-07 Nelson 57
3 Overall Consideration
Galaxy Entertainment Group LimitedNotes to the financial statements (ye 31122005)ndash All changes in the accounting policies require
retrospective application except HKAS 39 and HKFRS 2 for which transitional provisions are applied
ndash As a result the 2004 comparative figures have also been restated or amended in accordance with the relevant requirements
ndash The effects of all the changes in accounting policies are summarised in notes (b) and (c) below
CaseCase
copy 2005-07 Nelson 58
bull Identification of the financial statementsbull Reporting periodbull Balance sheet
1 CurrentNon-current distinction2 Current assets3 Current liabilities4 Information to be presented on the face of the balance sheet5 Information to be presented either on the face of the balance sheet or in
the notesbull Income statement
1 Profit or loss for the period2 Information to be presented on the face of the income statement3 Information to be presented either on the face of the income statement or
in the notesbull Statement of changes in equitybull Cash flow statementbull Notes
4 Structure and Content
30
copy 2005-07 Nelson 59
Identification of Financial Statements
bull The financial statements shall be identified clearly and distinguished from other information in the same published document
bull The following information shall be displayed prominently and repeated when it is necessary for a proper understanding of the information presented
a) the name of the reporting entity or other means of identification and any change in that information from the preceding balance sheet date
b) whether the financial statements cover the individual entity or a group of entities
c) the balance sheet date or the period covered by the financial statements whichever is appropriate to that component of the financial statements
d) the presentation currency as defined in HKAS 21 The Effects of Changes in Foreign Exchange Rates and
e) the level of rounding used in presenting amounts in the financial statements
copy 2005-07 Nelson 60
Identification of Financial Statements
bull Can the units of the presentation currency be rounded to thousands or millions
bull Financial statements are often made more understandableby presenting information in thousands or millions of units of the presentation currency
bull This is acceptable as long asndash the level of rounding in presentation is disclosed and ndash material information is not omitted
bull Financial statements are often made more understandableby presenting information in thousands or millions of units of the presentation currency
bull This is acceptable as long asndash the level of rounding in presentation is disclosed and ndash material information is not omitted
ExampleExample
31
copy 2005-07 Nelson 61
Reporting Period
bull Financial statements shall be presented at least annually
bull When an entityrsquos balance sheet date changes and the annual financial statements are presented for a period longer or shorter than one year an entity shall disclose in addition to the period covered by the financial statementsa) the reason for using a longer or shorter period andb) the fact that comparative amounts for the income
statement statement of changes in equity cash flow statement and related notes are not entirely comparable
copy 2005-07 Nelson 62
Reporting Period
bull Can a set of financial statements cover 52-week instead of a year
bull Normally financial statements are consistently prepared covering a one-year period
bull However for practical reasons some entities prefer to report for example for a 52-week period
bull IAS 1 does not preclude this practice because the resulting financial statements are unlikely to be materially different from those that would be presented for one year
bull Normally financial statements are consistently prepared covering a one-year period
bull However for practical reasons some entities prefer to report for example for a 52-week period
bull IAS 1 does not preclude this practice because the resulting financial statements are unlikely to be materially different from those that would be presented for one year
ExampleExample
32
copy 2005-07 Nelson 63
CurrentNon-current Distinction
bull An entity shall presentndash current and non-current assets andndash current and non-current liabilitiesas separate classifications on the face of its balance sheet
bull Except when a presentation based on liquidity provides informationndash If that information is reliable and is more relevantndash When that exception applies all assets and liabilities shall be
presented broadly in order of liquidity
copy 2005-07 Nelson 64
CurrentNon-current Distinction
bull Whichever method of presentation is adopted for each asset and liability line item that combines amounts expected to be recovered or settled a) no more than 12 months after the balance sheet date
andb) more than 12 months after the balance sheet date(ie combines both current and non-current)
an entity shall disclose the amount expected to be recovered or settled after more than 12 months
33
copy 2005-07 Nelson 65
New requirementsNew requirements
Current Assets
bull An asset shall be classified as current when it satisfies any of the following criteriaa) it is expected to be realised in or is intended for sale or
consumption in the entityrsquos normal operating cycle b) it is held primarily for the purpose of being tradedc) it is expected to be realised within 12 months after the balance
sheet date ord) it is cash or a cash equivalent
bull unless it is restricted from being exchanged or used to settle aliability for at least 12 months after the balance sheet date
bull All other assets shall be classified as non-current
Examplesbull Deposits pledged to bank (how long)bull Fixed deposits over 1 year maturity
Examplesbull Deposits pledged to bank (how long)bull Fixed deposits over 1 year maturity
What is itWhat is it
copy 2005-07 Nelson 66
Current Assets
bull What is operating cycle
bull The operating cycle of an entity is the time between ndash the acquisition of assets for processing and ndash their realisation in cash or cash equivalents
bull When the entityrsquos normal operating cycle is not clearly identifiable ndash its duration is assumed to be 12 months
bull The operating cycle of an entity is the time between ndash the acquisition of assets for processing and ndash their realisation in cash or cash equivalents
bull When the entityrsquos normal operating cycle is not clearly identifiable ndash its duration is assumed to be 12 months
ExampleExample
34
copy 2005-07 Nelson 67
Current Assets CaseCase
copy 2005-07 Nelson 68
Current Assets
bull Can a non-current asset reclassified if it fulfil the definition of current asset later
bull Assets classified as non-current in accordancewith IAS 1 shall not be reclassified as current assetsndash until they meet the criteria to be classified as held for sale in
accordance with IFRS 5bull Assets of a class that an entity would normally regard as non-
current that are acquired exclusively with a view to resale shall notbe classified as currentndash unless they meet the criteria to be classified as held for sale in
accordance with IFRS 5
bull Assets classified as non-current in accordancewith IAS 1 shall not be reclassified as current assetsndash until they meet the criteria to be classified as held for sale in
accordance with IFRS 5bull Assets of a class that an entity would normally regard as non-
current that are acquired exclusively with a view to resale shall notbe classified as currentndash unless they meet the criteria to be classified as held for sale in
accordance with IFRS 5
No non-current assets can be classified as current unless the criteria in IFRS 5 are fulfilled mainlybull Available for immediate salebull Highly probable to make the sale
35
copy 2005-07 Nelson 69
Is it currentIs it current
Current Assets
bull In its 2005 Interim Report full set of HKFRS was adopted and the report set out thatndash Available-for-sale financial assets are non-
derivatives that are eitherbull designated in this category orbull not classified in any of the other categories (ie
loans and receivables financial assets at fair value through profit or loss and held-to-maturity investments)
CaseCase
Similar in 2005 Annual Report
Similar in 2005 Annual Report
ndash They are included in non-current assetsbull unless management intends to dispose of the
investment within 12 months of the balance sheet date
copy 2005-07 Nelson 70
New requirementsNew requirements
Current Liabilities
bull A liability shall be classified as current when it satisfies any of the following criteriaa) it is expected to be settled in the entityrsquos normal operating cycleb) it is held primarily for the purpose of being tradedc) it is due to be settled within 12 months after the balance sheet
date ord) the entity does not have an unconditional right to defer settlement
of the liability for at least 12 months after the balance sheet date
bull All other liabilities shall be classified as non-current
ImplicationImplication
36
copy 2005-07 Nelson 71
Current Liabilities Revised rules on classifying a liability as current or non-currentbull A liability held for being traded rArr currentbull A financial liability due within 12 months after the BS date rArr current
ndash even if an agreement to refinance on a long-term basis is completed after the BS date (only disclosed as non-adjusting event)
bull If an entity has discretion to refinance rArr non-currentbull If an entity without discretion to refinance rArr current
bull A non-current financial liability is payable on demand with a breach on a condition of its loan agreement on or before the BS datendash If the lender agreed not to demand payment
bull after the BS date rArr current (only disclosed as non-adjusting event)
bull by the BS date rArr non-current
ImplicationImplication
copy 2005-07 Nelson 72
Current LiabilitiesCaseCase
Note 12 to Interim Report 2006bull Breach of loan covenants
bull As at 30 June 2006 in respect of certain bank loans with an aggregate carrying amount of HK$1529806000 the Group breached certain financial covenants of the banks loans
bull Since the lenders have not agreed to waive its right to demand immediate payment as at the balance sheet date the loans have been classified as current liabilities in these financial statements at 30 June 2006
37
copy 2005-07 Nelson 73
Current Assets and LiabilitiesExampleExample
Can the following be classified as current assetsbull 3-month fixed deposits pledged to a bank to secure
a mortgage loan of 5 yearsbull 2-year fixed deposits with a bank
Can the following be classified as current assetsbull 3-month fixed deposits pledged to a bank to secure
a mortgage loan of 5 yearsbull 2-year fixed deposits with a bank
Can the following be classified as non-current liabilitiesbull 5-year term loan matured after year end but renewed
for another 5 years after year end (before the issuanceof the financial statements)
bull 2-year term loan to be matured with 12 months and theentity has a right to renew for another 2 years
Can the following be classified as non-current liabilitiesbull 5-year term loan matured after year end but renewed
for another 5 years after year end (before the issuanceof the financial statements)
bull 2-year term loan to be matured with 12 months and theentity has a right to renew for another 2 years
timestimes
times
radic
copy 2005-07 Nelson 74
Balance Sheetbull As a minimum the face of the balance sheet shall
include line items that present the following amountsa) property plant and equipmentb) investment propertyc) intangible assetsd) financial assets (excl amounts shown under (e) (h) and (I))e) investments accounted for using the equity methodf) biological assetsg) inventoriesh) trade and other receivablesi) cash and cash equivalentsj) trade and other payablesk) provisionsl) financial liabilities (excl amounts shown under (j) and (k))m) liabilities and assets for current tax as defined in HKAS 12 Income Taxesn) deferred tax liabilities and deferred tax assets as defined in HKAS 12o) minority interest presented within equity andp) issued capital and reserves attributable to equity holders of the parent
38
copy 2005-07 Nelson 75
Balance Sheetbull The face of the balance sheet shall also include line
items that present the following amountsa) The total of assets classified as held for sale and
assets included in disposal groups classified as held for sale in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations and
b) Liabilities included in disposal groups classified as held for sale in accordance with IFRS 5
copy 2005-07 Nelson 76
Balance Sheetbull Additional line items headings and subtotals shall
be presented on the face of the balance sheet when such presentation is relevant to an understanding of the entityrsquos financial position
bull When an entity presents current and non-current assets and current and non-current liabilities as separate classifications on the face of its balance sheet ndash it shall not classify deferred tax assets
(liabilities) as current assets (liabilities)
39
copy 2005-07 Nelson 77
Balance Sheet
bull The use of different measurement bases for different classes of assets suggests that their nature or function differs and therefore that they should be presented as separate line itemsndash For example different classes of property plant and
equipment can be carried atbull Cost orbull Revalued amountsin accordance with IAS 16 PPE
In the past it use ldquomay needrdquoIn the past it use ldquomay needrdquo
copy 2005-07 Nelson 78
Balance Sheet
Galaxy Entertainment Group LimitedConsolidated balance sheet as at 31122005
CaseCase
40
copy 2005-07 Nelson 79
Balance Sheet
Melco Development Limited (新濠國際發展有限公司)Consolidated balance sheet as at 31122005
CaseCase
copy 2005-07 Nelson 80
Income Statement Minimum requirements on the face of the income statementbull As a minimum the face of the income statement shall include line items
that present the following amounts for the perioda) revenueb) finance costsc) share of the profit or loss of associates and joint ventures accounted
for using the equity methodd) pre-tax gain or loss recognised on the disposal of assets or
settlement of liabilities attributable to discontinuing operationse) tax expense andf) profit or loss
41
copy 2005-07 Nelson 81
Income Statement bull The following items shall be disclosed on the face of the income
statement as allocations of profit or loss for the perioda) Profit or loss attributable to minority interest andb) Profit or loss attributable to equity holders of the parent
A similar requirement has been added for the statement of changes in equity and such allocated amounts are not to be presented as items of income or expense
copy 2005-07 Nelson 82
Income Statement
Melco Dev LtdConsolidated income statementas at 31122005
CaseCase
42
copy 2005-07 Nelson 83
Income Statement bull Not require to disclose the results of operating
activities as a line item on the face of the incomestatement
bull An entity shall not present any items of income and expense as extraordinary items either onthe face of the income statements or in the notes
Entities canrsquot use itEntities canrsquot use it
Entities can still show itEntities can still show it
copy 2005-07 Nelson 84
Income Statement Either on the face of the income statement or in the notesbull An entity shall present an analysis of expenses using a classification
based on eitherbull the nature of expenses orbull their function within the entity
whichever provides information that is reliable and more relevant
bull Entities classifying expenses by function shall disclose additional information on the nature of expenses includingbull depreciation and amortisation expense and bull employee benefits expense
43
copy 2005-07 Nelson 85
Income StatementCaseCase
Nature or FunctionNature or Nature or FunctionFunction
copy 2005-07 Nelson 86
Statement of Changes in Equity bull An entity shall present a statement of changes in equity showing on the
face of the statementa) profit or loss for the period b) each item of income and expense for the period that as required by
IFRSs is recognised directly in equity and the total of these itemsc) total income and expense for the period (calculated as the sum of (a) and
(b)) showing separately the total amounts attributablebull to equity holders of the parent andbull to minority interest and
d) for each component of equity the effects of changes in accounting policies and corrections of errors recognised in accordance with IAS 8
Any ChangeAny Change
A revised requirementbull A statement of changes in equity that comprises only these items
shall be titled a statement of recognised income and expenses
A revised requirementbull A statement of changes in equity that comprises only these items
shall be titled a statement of recognised income and expenses
44
copy 2005-07 Nelson 87
Statement of Changes in Equity bull An entity shall also present either on the face of the
statement of changes in equity or in the notesa) the amounts of transactions with equity holders acting in
their capacity as equity holders showing separately distributions to equity holders
b) the balance of retained earnings (ie accumulated profit or loss) at the beginning of the period and at the balance sheet date and the changes during the period and
c) a reconciliation between the carrying amount of each class of contributed equity and each reserve at the beginning and the end of the period separately disclosing each change
copy 2005-07 Nelson 88
Statement of Changes in Equity
Consolidated SCE as at 31122005
CaseCase
45
copy 2005-07 Nelson 89
Notes Structure (an entity is required to disclose the following)
bull The notes shalla) present information about the basis of preparation of the financial statements
and the specific accounting policies usedb) disclose the information required by HKFRSs that is not presented on the
face of the balance sheet income statement statement of changes in equity or cash flow statement and
c) provide additional information that is not presented on the face of the balance sheet income statement statement of changes in equity or cash flow statement but is relevant to an understanding of any of them
bull Notes shall as far as practicable be presented in a systematic manner bull Each item on the face of the balance sheet income statement statement
of changes in equity and cash flow statement shall be cross-referencedto any related information in the notes
copy 2005-07 Nelson 90
Notes Disclosures (an entity is required to disclose the following)
bull Disclosure of accounting policiesAn entity shall disclose in the summary of significant accounting policiesa) the measurement basis (or bases) used in preparing the financial
statements andb) the other accounting policies used that are relevant to an understanding of
the financial statements
46
copy 2005-07 Nelson 91
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)ndash The financial statements have been prepared in
accordance with Hong Kong Financial Reporting Standards (lsquolsquoHKFRSrsquorsquo) issued by the Hong Kong Institute of Certified Public Accountants bull under the historical cost convention as modified by the
revaluation of investment properties available-for-sale financial assets derivative financial instruments and other investments which are carried at fair values helliphellip
ndash The principal accounting policies applied in the preparation of these financial statements are set out below These policies have been consistently applied to all the years presented except for those stated in note 2(a) above
copy 2005-07 Nelson 92
Notes Disclosures (an entity is required to disclose the following)
bull Disclosure of accounting policiesndash The judgements apart from those involving estimations management has
madebull in the process of applying the entityrsquos accounting policies that have the
most significant effect on the amounts recognised in the financial statements (in the summary of significant accounting policies or other notes)
Examples ndash Management makes judgements in determininga) whether financial assets are held-to-maturity investmentsb) when substantially all the significant risks and rewards of
ownership of financial assets and lease assets are transferred to other entities
c) whether in substance particular sales of goods are financing arrangements and therefore do not give rise to revenue and
d) whether the substance of the relationship between the entity and a special purpose entity indicates that the special purpose entity is controlled by the entity
Examples ndash Management makes judgements in determininga) whether financial assets are held-to-maturity investmentsb) when substantially all the significant risks and rewards of
ownership of financial assets and lease assets are transferred to other entities
c) whether in substance particular sales of goods are financing arrangements and therefore do not give rise to revenue and
d) whether the substance of the relationship between the entity and a special purpose entity indicates that the special purpose entity is controlled by the entity
47
copy 2005-07 Nelson 93
Notes Disclosures (an entity is required to disclose the following)
bull Key sources of estimation uncertaintyndash Information about the key assumptions concerning the future and
other key sources of estimation uncertainty at the balance sheet datebull that have a significant risk of causing a material adjustment to the
carrying amounts of assets and liabilities within the next financial yearndash In respect of those assets and liabilities the notes shall include details of
a) their nature andb) their carrying amount as at the balance sheet date
Examples ndash in the absence of recently observed market prices used to measure the following assets and liabilities future-oriented estimates are necessary to measurebull the recoverable amount of classes of PPEbull the effect of technological obsolescence on inventories
Estimates involve assumptions about such items asbull the risk adjustment to cash flows or discount rates usedbull future changes in salaries and in prices affecting other costs
Examples ndash in the absence of recently observed market prices used to measure the following assets and liabilities future-oriented estimates are necessary to measurebull the recoverable amount of classes of PPEbull the effect of technological obsolescence on inventories
Estimates involve assumptions about such items asbull the risk adjustment to cash flows or discount rates usedbull future changes in salaries and in prices affecting other costs
copy 2005-07 Nelson 94
Notes
Esprit Holdings LimitedEsprit Holdings Limitedbull Critical Accounting Estimates and Judgements
ndash Estimates and judgements are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonableunder the circumstances
ndash Critical accounting estimates and assumptionsbull The Group makes estimates and assumptions concerning
the future The resulting accounting estimates will by definition seldom equal the related actual results
bull The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below helliphellip (including (1) useful life and impairment of trademarks and (2) income taxes)
CaseCase
48
copy 2005-07 Nelson 95
Notes
Melco Development Limited (新濠國際發展有限公司)Notes to the financial statements for the year ended 31122005ndash The key assumptions concerning the future and other key sources
of estimation uncertainty at the balance sheet date that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below helliphellip(The issues discussed includebull Allowances for inventories bull Estimated impairment of goodwill Income taxes)
CaseCase
copy 2005-07 Nelson 96
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)ndash Estimates and judgements used in preparing the
financial statements are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonable under the circumstances
ndash The Group makes estimates and assumptionsconcerning the future
ndash The resulting accounting estimates will by definition seldom equal the related actual results
ndash The estimates and assumptions that have a significant effect on the carrying amounts of assets and liabilities are discussed below hellip (including impairment of goodwill impairment of gaming
licence Useful lives of property plant and equipment fair value of investment properties hellip)
49
copy 2005-07 Nelson 97
Notes Disclosures (an entity is required to disclose the following)
bull Other disclosuresAn entity shall disclose in the notesa) the amount of dividends proposed or declared before the
financial statements were authorised for issue but not recognised as a distribution to equity holders during the period and the related amount per share(HK incorporated companies are required to show the aggregate amount which is recommended for distribution by way of dividend under a separate heading(s) in their balance sheet (HK Co Ord 10th Sch para 9(1)(e)) and
b) the amount of any cumulative preference dividends not recognised
copy 2005-07 Nelson 98
Notes Disclosures (an entity is required to disclose the following)
An entity shall disclose the following if not disclosedelsewhere in information published with the financial statementsa) the domicile and legal form of the entity
its country of incorporation andthe address of its registered office(or principal place of business if different from the registered office)
b) a description of the nature of the entityrsquos operations and its principal activities and
c) the name of the parent and the ultimate parent of the group
ldquoshall discloserdquo now instead of ldquoencouraged to discloserdquo
ldquoshall discloserdquo now instead of ldquoencouraged to discloserdquo
bull Other disclosures
Any specialAny special
50
copy 2005-07 Nelson 99
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)bull The principal activities of Galaxy Entertainment Group
Ltd (the lsquolsquoCompanyrsquorsquo) (formerly known as K WahConstruction Materials Ltd) and its subsidiaries (together the lsquolsquoGrouprsquorsquo) are tondash operate in casino games of chance or games of other forms
in Macau (and) manufacture sale and distribution of construction materials in HK Macau and Mainland China
bull The Company is ndash a limited liability company incorporated in Hong Kong and ndash has its listing on the Main Board of The Stock Exchange of
Hong Kong Limitedbull The address of its registered office and its principal place
of business is Room 1606 16th Floor Hutchison House 10 Harcourt Road Central HK
copy 2005-07 Nelson 100
Effective Date
bull An entity shall apply IAS 1 for annual periods beginning on or after 1 Jan 2005
ndash Earlier application is encouragedndash If an entity applies IAS 1 for an earlier period it shall
disclose this factbull For the amendments relating to the Statement of
Changes in Equityndash An entity shall apply it for annual periods beginning on
or after 1 Jan 2006ndash If an entity applies the amendments to IAS 19
Employee Benefits ndash Actuarial Gains and Losses Group Plans and Disclosures for an earlier period that amendment shall be applied for that earlier period
51
copy 2005-07 Nelson 101
Todayrsquos Agenda
Capital Disclosures (Amendments to IAS 1)
Capital Disclosures (Amendments to IAS 1)
copy 2005-07 Nelson 102
Capital Disclosures ndash For 2007
52
copy 2005-07 Nelson 103
Capital Disclosures
What is capital Is it helliphellip
CapitalCapital AssetsAssets LiabilitiesLiabilities= ndash
bull IAS 1BC47 considers ldquowhether an entity can have a view of capital that differs from what IFRSs define as equityrdquo
bull It further clarifies that although for the purposes of this disclosure capital would often equate with equity as defined in IFRSsndash it might also include or exclude some components
bull It also noted that the capital disclosure in IAS 1 is intended to give entities the opportunity to describendash how they view the components of capital they manage if this is
different from what IFRSs define as equity helliphellip
copy 2005-07 Nelson 104
EquityEquityEquity AssetsAssets LiabilitiesLiabilities= ndash
Capital Disclosures
Based on the Framework amp IFRSs the accounting equation should be
CapitalCapital AssetsAssets LiabilitiesLiabilities= ndash
bull An entityrsquos capital may be part of its equity plus part of its liabilities depending on how it manage ldquoits capitalrdquo helliphellip
53
copy 2005-07 Nelson 105
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowinga) qualitative information about its objectives policies and processes for
managing capital including (but not limited to)i) a description of what it manages as capitalii) when an entity is subject to externally imposed capital requirements
the nature of those requirements and how those requirements are incorporated into the management of capital and
iii) how it is meeting its objectives for managing capital
bull To comply with the capital disclosures the entity discloses thefollowinga) qualitative information about its objectives policies and processes for
managing capital including (but not limited to)i) a description of what it manages as capitalii) when an entity is subject to externally imposed capital requirements
the nature of those requirements and how those requirements are incorporated into the management of capital and
iii) how it is meeting its objectives for managing capital
copy 2005-07 Nelson 106
Capital Disclosures
Example disclosurebull The Grouprsquos objectives when managing capital are
ndash to safeguard the entityrsquos ability to continue as a going concern
bull so that it can continue to provide returns for shareholders and benefits for other stakeholders and
ndash to provide an adequate return to shareholders by pricing products and services commensurately with the level of risk
bull The Group sets the amount of capital in proportion to risk
ExampleExample
ObjectivesObjectives
54
copy 2005-07 Nelson 107
Capital Disclosures
bull The Group manages the capital structure and makes adjustments to it in the light ofndash changes in economic conditions and ndash the risk characteristics of the underlying assets
bull In order to maintain or adjust the capital structure the Group mayndash adjust the amount of dividends paid to shareholders ndash return capital to shareholders ndash issue new shares or ndash sell assets to reduce debt
ExampleExample
Example disclosure
HowHow
copy 2005-07 Nelson 108
Capital Disclosures
bull Consistently with others in the industry the Group monitors capital on the basis of ndash the debt-to-adjusted capital ratio
bull This ratio is calculated as net debt divide adjusted capital
ExampleExample
Example disclosure
HowHow
bull Net debt is calculated as ndash Total debt (as shown in the
balance sheet)ndash Less cash amp cash equivalents
bull Net debt is calculated as ndash Total debt (as shown in the
balance sheet)ndash Less cash amp cash equivalents
bull Adjusted capital ndash comprises all components of
equity (ie share capital share premium minority interest retained earnings and revaluation reserve) ndash other than amounts
recognised in equity relating to cash flow hedges and
ndash includes some forms of subordinated debt
bull Adjusted capital ndash comprises all components of
equity (ie share capital share premium minority interest retained earnings and revaluation reserve) ndash other than amounts
recognised in equity relating to cash flow hedges and
ndash includes some forms of subordinated debt
55
copy 2005-07 Nelson 109
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowing
bull To comply with the capital disclosures the entity discloses thefollowingb) summary quantitative data about what it manages as capital
Some entities regard some financial liabilities (eg some forms of subordinated debt) as part of capitalOther entities regard capital as excluding some components of equity (eg components arising from cash flow hedges)
c) any changes in (a) and (b) from the previous period
copy 2005-07 Nelson 110
Capital Disclosures
Example disclosure (continued from previous example)
ExampleExample
bull During 20X4 the Grouprsquos strategy which was unchanged from 20X3 was to maintain the debt-to-adjusted capital ratio at the lower end of the range 61 to 71 in order to secure access to finance at a reasonable cost by maintaining a BB credit rating The debt-to-adjusted capital ratios at 31 December 20X4 and at 31 December 20X3 were as follows
3112X4 ($rsquoM) 3112X3 ($rsquoM) Total debt 1000 1100 Less cash and cash equivalents (90) (150)Net debt 910 950
Total equity 110 105 Add subordinated debt instruments 38 38 Less amounts recognised in equity
relating to cash flow hedges (10) (5)Adjusted capital 138 138
Debt-to-adjusted capital ratio 66 69
56
copy 2005-07 Nelson 111
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowing
bull To comply with the capital disclosures the entity discloses thefollowingd) whether during the period it complied with any externally imposed capital
requirements to which it is subjecte) when the entity has not complied with such externally imposed capital
requirements the consequences of such non-complianceThese disclosures shall be based on the information provided internally to the entityrsquos key management personnel
copy 2005-07 Nelson 112
Capital DisclosuresExampleExample
Example disclosurebull Entity A filed its quarterly regulatory capital return for
30 September 20X7 on 20 October 20X7 bull At that date Entity Arsquos regulatory capital was below
the capital requirement imposed by Regulator B by $1 million
bull As a result Entity A was required to submit a plan to the regulator indicating how it would increase its regulatory capital to the amount required
bull Entity A submitted a plan that entailed selling part of its unquoted equities portfolio with a carrying amount of $115 million in the fourth quarter of 20X7
bull In the fourth quarter of 20X7 Entity A sold its fixed interest investment portfolio for $126 million and met its regulatory capital requirement
For example SFC or banks
For example SFC or banks
57
copy 2005-07 Nelson 113
Capital DisclosuresCaseCase
bull Early adopted capital disclosure in 2005 and itsannual report states that (extract only)ndash The Grouprsquos objectives when managing capital are
bull To safeguard the Grouprsquos ability to continue as a going concern so that it continues to provide returns for shareholders and benefits for other stakeholders
bull To support the Grouprsquos stability and growth andbull To provide capital for the purpose of strengthening the
Grouprsquos risk management capability
copy 2005-07 Nelson 114
Capital DisclosuresCaseCase
ndash The Group actively and regularly reviews and manages its capital structure to ensure optimal capital structure and shareholder returns taking into consideration the future capital requirements of the Group and capital efficiency helliphellip
ndash The Group adopts a dividend policy helliphellip while retaining 10 per cent of the profit as capital of the Group for future use
ndash The Group has set aside $1500 million of retained earnings for the purpose of strengthening the risk management regime of the clearing houses and supporting their roles as central counterparties
ndash As in prior years the Group monitors capital by reviewing the level of capital that is at the disposal of the Group (ldquoadjusted capitalrdquo) Adjusted capital comprises all components of shareholdersrsquo equity other than the hedging reserve relating to cash flow hedges designated reserves and investment revaluation reserve helliphellip
bull Early adopted capital disclosure in 2005 and itsannual report states that (extract only)
58
copy 2005-07 Nelson 115
Capital Disclosures ndash Transition
bull An entity shall apply the requirements of capital disclosure for
ndash annual periods beginning on or after 1 January 2007
bull Early application is encouraged
copy 2005-07 Nelson 116
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk
59
copy 2005-07 Nelson 117
QampA SessionQampA SessionQampA Session
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk
4
copy 2005-07 Nelson 7
What is Framework
bull Sets out the concepts that underlie the preparation and presentation of financial statements for external users
bull Assists preparers of financial statements in applying accountingstandards
bull Assists users of financial statements in interpreting the information contained in financial statements prepared in conformity with accounting standards
bull But is not a standard or guideline ndash so does not override any specific accounting standard
Framework
copy 2005-07 Nelson 8
What is Framework
bull Deals witha) The objective of financial statementsb) The qualitative characteristics of financial informationc) The definition recognition and measurement of the elements in the
financial statements andd) Concepts of capital and capital maintenance
bull Concerned with general purpose financial statementsbull The users of financial statements include
ndash present and potential investors employees lenders suppliers and other trade creditors customers governments and their agenciesand the public
Framework
ObjectiveObjective Qualitative Characteristics
Qualitative Characteristics ElementsElements Concepts of
CapitalConcepts of
Capital
5
copy 2005-07 Nelson 9
Objective of Financial Statements
ObjectiveObjective
Process of communicationProcess of communicationProcess of communication
Companyrsquos activities Accounting User
perception
copy 2005-07 Nelson 10
Objective of Financial Statements
ObjectiveObjective
Process of communicationProcess of communicationProcess of communication
Companyrsquos activities
FinancialReporting
User perception
IAS 1 states thatbull 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
bull Similar to the objective stated in the Framework
6
copy 2005-07 Nelson 11
Objective AssumptionsUnderlying Assumptions includebull Accrual Basis
ndash In order to meet their objectives financial statements are prepared on the accrual basis of accounting
ndash Under this basisbull the effects of transactions and other events are recognised when they
occur (and not as cash or its equivalent is received or paid) andbull they are recorded in the accounting records and reported in the
financial statements of the periods to which they relate bull Going Concern
ndash The financial statements are normally prepared on the assumption that an entity is a going concern and will continue in operation for the foreseeable future
ndash Hence it is assumed that the entity has neither the intention nor the need to liquidate or curtail materially the scale of its operations if such an intention or need exists the financial statements may have to be prepared on a different basis and if so the basis used is disclosed
copy 2005-07 Nelson 12
Qualitative Characteristics
Objective Qualitative Characteristics
Qualitative Characteristics
Primary qualitative characteristicsof financial statements
bull Relating to content- Relevance (Predictive value Confirmatory value Interrelated)
- Reliability (Faithful representation Substance over form NeutralityPrudence and Completeness)
bull Relating to presentation- Comparability (Consistency and Disclosure)
- Understandability (Usersrsquo ability Aggregation and Classification)
7
copy 2005-07 Nelson 13
Qualitative Characteristics
Objective Qualitative Characteristics
Qualitative Characteristics
Primary qualitative characteristicsof financial statements
bull Relating to content- Relevance- Reliability
bull Relating to presentation- Comparability- Understandability
Management Decision
Management Decision
Financial reportingFinancial Financial reportingreporting
copy 2005-07 Nelson 14
Qualitative Characteristics
Emerging International PracticesEmerging International Practicesbullbull Financial reporting framework clearly definedFinancial reporting framework clearly definedbullbull Definition of assets and liabilities clearly establishedDefinition of assets and liabilities clearly establishedbullbull Beginning to adopt fair value model (instead of only historical Beginning to adopt fair value model (instead of only historical
cost)cost)bullbull Discussing convergence in certain practicesDiscussing convergence in certain practicesbullbull From IASC to IASB (International Accounting Standard Board)From IASC to IASB (International Accounting Standard Board)bullbull From IAS to IFRS (International Financial Reporting From IAS to IFRS (International Financial Reporting
Standards) Standards) helliphelliphelliphellip
8
copy 2005-07 Nelson 15
All aims atAll aims atRelevanceRelevanceReliabilityReliabilityComparabilityComparabilityUnderstandabilityUnderstandability
Qualitative Characteristics
Management Decision
Management Decision
Financial reportingFinancial Financial reportingreporting
copy 2005-07 Nelson 16
Elements of Financial Statements
Objective Qualitative Characteristics ElementsElements
Asset
Liability
Equity
Income
Expenses
Financial Position (in balance sheet)
Financial Performance (in income statement)
bull a resource controlled by the enterprise as a result of past eventsand from which future economic benefits are expected to flow tothe enterprise
bull a present obligation of the enterprise arising from past eventsthe settlement of which is expected to result in an outflow fromthe enterprise of resources embodying economic benefits
bull the residual interest in the assets of the enterprise after deducting all its liabilities
bull increases in economic benefits during a period in the form ofndash inflows or enhancements of assets orndash decreases of liabilities that result in increases in equityndash other than those relating to contributions from equity participants
bull decreases in economic benefits during a period in the form ofndash outflows or depletions of assets orndash incurrences of liabilities that result in decreases in equityndash other than those relating to distributions to equity participants
Balance Sheet Approach
9
copy 2005-07 Nelson 17
Elements of Financial Statements
Objective Qualitative Characteristics ElementsElements
Asset
Liability
Equity
Income
Expenses
Financial Position (in balance sheet)
Financial Performance (in income statement)
bull a resource controlled by the enterprise as a result of past eventsand from which future economic benefits are expected to flow tothe enterprise
bull a present obligation of the enterprise arising from past eventsthe settlement of which is expected to result in an outflow fromthe enterprise of resources embodying economic benefits
bull the residual interest in the assets of the enterprise after deducting all its liabilities
bull increases in economic benefits during a period in the form ofndash inflows or enhancements of assets orndash decreases of liabilities that result in increases in equityndash other than those relating to contributions from equity participants
bull decreases in economic benefits during a period in the form ofndash outflows or depletions of assets orndash incurrences of liabilities that result in decreases in equityndash other than those relating to distributions to equity participants
DefinitionDefinition
Balance Sheet Approach
copy 2005-07 Nelson 18
Elements of Financial Statements
Objective Qualitative Characteristics ElementsElements
DefinitionDefinition
RecognitionRecognition
MeasurementMeasurement
Presentation and disclosurePresentation and disclosure
IFRS ApproachIFRS Approach
10
copy 2005-07 Nelson 19
Elements of Financial Statements
Objective Qualitative Characteristics ElementsElements
IFRS ApproachIFRS Approach
Presentation and disclosurePresentation and disclosure
Frameworkgives a general overview
DefinitionDefinition
RecognitionRecognition
MeasurementMeasurement
copy 2005-07 Nelson 20
Definition
Criteria for recognition ndash an item that meets the definition of an element should be recognized if1 it is probable that any future economic benefit
associated with the item will flow to or from the enterprise and
2 the item has a cost or value that can be measured with reliability
Criteria for recognition ndash an item that meets the definition of an element should be recognized if1 it is probable that any future economic benefit
associated with the item will flow to or from the enterprise and
2 the item has a cost or value that can be measured with reliability
Recognition is the process of incorporating in the balance sheet or income statement an item that1 meets the Definition of an element and2 satisfies the Criteria for Recognition
Recognition is the process of incorporating in the balance sheet or income statement an item that1 meets the Definition of an element and2 satisfies the Criteria for Recognition
Elements of Financial Statements
Objective Qualitative Characteristics ElementsElements
RecognitionRecognition
11
copy 2005-07 Nelson 21
Elements of Financial Statements
Objective Qualitative Characteristics ElementsElements
Recognition
Definition
Historical cost
Current cost
Realisable (settlement) value
Present value
Historical cost
Current cost
Realisable (settlement) value
Present value
MeasurementMeasurement
Fair value less cost to sell
Value in use
copy 2005-07 Nelson 22
Concept of CapitalFinancial concept of capitalbull is adopted by most enterprises in
preparing their financial statementsbull Under it such as invested money or
invested purchasing power capital is synonymous with the net assets or equity of the enterprise
Physical concept of capitalbull Under it such as operating capability
capital is regarded as the productive capacity of the enterprise based on
bull For example units of output per day
Capital and Capital Maintenance
Objective Qualitative Characteristics Elements Concepts of
CapitalConcepts of
Capital
Concept of Capital MaintenanceFinancial concept maintenancebull Under this concept a profit is
earned only ifbull the financial (or money) amount of
the net assets at the end of the period
bull exceeds the financial (or money) amount of net assets at the beginning of the period
bull after excluding any distributions to and contributions from owners during the period
bull Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power
12
copy 2005-07 Nelson 23
Concept of CapitalFinancial concept of capitalbull is adopted by most enterprises in
preparing their financial statementsbull Under it such as invested money or
invested purchasing power capital is synonymous with the net assets or equity of the enterprise
Physical concept of capitalbull Under it such as operating capability
capital is regarded as the productive capacity of the enterprise based on
bull For example units of output per day
Capital and Capital Maintenance
Objective Qualitative Characteristics Elements Concepts of
CapitalConcepts of
Capital
Concept of Capital MaintenancePhysical concept maintenancebull Under this concept a profit is
earned only ifbull the physical productive capacity (or
operating capability) of the enterprise (or the resources or funds needed to achieve that capacity) at the end of the period
bull exceeds the physical productive capacity at the beginning of the period
bull after excluding any distributions to and contributions from owners during the period
copy 2005-07 Nelson 24
Summary of IFRSs
International Financial Reporting Standards arebull Standards and Interpretations issued and endorsed by the
International Accounting Standard Board and comprisendash International Financial Reporting Standards (IFRSs)ndash International Accounting Standards (IASs) andndash Interpretations
bull IASs (International Accounting Standards) ndash Totally 31 sets
bull IFRSs (International Financial Reporting Standards) ndash Totally 8 sets(up to 4 February 2007)
More are coming helliphellipMore are coming helliphellip
13
copy 2005-07 Nelson 25
Key Points
IFRSs set outbull Recognitionbull Measurementbull Presentation and
disclosure requirements
Main changesbull Changes in recognition
and measurementbull Changes in presentation
and disclosure
bull Less Choicesbull Towards
Fair Value Model
bullbull Less ChoicesLess Choicesbullbull TowardsTowards
Fair Value ModelFair Value Model
bull More and clearer presentation and disclosure
bullbull More and clearer More and clearer presentation and presentation and disclosuredisclosure
bull Aim at enhancing the information for usersrsquo decision making
bullbull Aim at enhancing Aim at enhancing the information the information for usersrsquo for usersrsquo decision makingdecision making
eg market valuevalue by appraisal helliphellip
Inter alia one more change helliphellip
copy 2005-07 Nelson 26
Todayrsquos Agenda
Presentation of Financial Statements (IAS 1)
Presentation of Financial Statements (IAS 1)
14
copy 2005-07 Nelson 27
Presentation of Financial Statements(IAS 1)
copy 2005-07 Nelson 28
Presentation of Financial Statements (IAS 1)
1 Purpose of financial statements2 Components of financial statements3 Overall considerations4 Structure and content
15
copy 2005-07 Nelson 29
1 Purpose of Financial Statements
bull To provide information aboutndash financial positionndash financial performance
andndash cash flows of an entity
That is useful to a wide range of users in making economic decisions
bull To also show the results of managementrsquos stewardship of the resources entrusted to it
bull To meet this objective financial statements provide information about the entityrsquosndash Assetsndash Liabilitiesndash Equityndash Income and expenses
including gains and lossesndash Other changes in equityndash Cash flows
Thus we have helliphellip
copy 2005-07 Nelson 30
2 Components of Financial Statements
A complete set of financial statements comprisesa) a balance sheetb) an income statementc) a statement of changes in equity showing either
i) all changes in equity orii) changes in equity other than those arising from transactions with
equity holders acting in their capacity as equity holdersd) a cash flow statement ande) notes comprising a summary of significant accounting policies and
other explanatory notes
another nameanother name
16
copy 2005-07 Nelson 31
3 Overall Consideration
a) Fair presentation and compliance with IFRSsb) Going concernc) Accrual basis of accountingd) Consistency of presentatione) Materiality and aggregationf) Offsettingg) Comparative information
copy 2005-07 Nelson 32
3 Overall Consideration
bull Financial statements shall present fairly of the financial position financial performance and cash flows of an entity
ndash Fair presentation requires the faithful representation of the effects of transactions other events and conditions in accordance with
bull the definitions and recognition criteria for assets liabilities income and expenses set out in the Framework
ndash The application of IFRSs with additional disclosure when necessary is presumed to result in financial statements that give a true and fair view
a) Fair presentation and compliance with IFRSs
No such precisely statement before
17
copy 2005-07 Nelson 33
3 Overall Consideration
bull Statement of compliancendash An entity whose financial statements comply
with IFRSs shall make an explicit and unreserved statement of such compliance in the notes
ndash Financial statements shall not be described as complying with IFRSsbull unless they comply with all the
requirements of IFRSsndash In virtually all circumstances a fair
presentation is achieved by bull compliance with applicable IFRSs
a) Fair presentation and compliance with IFRSs
copy 2005-07 Nelson 34
3 Overall Consideration
Melco Development Limited (新濠國際發展有限公司)Notes to the financial statements for year ended 31122005ndash The consolidated financial statements have been prepared in
accordance with HKFRSsndash In addition the consolidated financial statements include applicable
disclosures required by the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited and by the Companies Ordinance
CaseCase
18
copy 2005-07 Nelson 35
3 Overall Consideration
bull A fair presentation also requires an entitya) to select and apply accounting policies in accordance
with IAS 8b) to present information including accounting policies
in a manner that provides relevant reliable comparable and understandable information
c) to provide additional disclosuresndash when compliance with the specific requirements in
IFRSs is insufficient to enable users to understand the impact of particular transactions other events and conditions on the entityrsquos financial position and financial performance
bull Inappropriate accounting policies are not rectified eitherndash by disclosure of the accounting policies used orndash by notes or explanatory material
a) Fair presentation and compliance with IFRSs
copy 2005-07 Nelson 36
3 Overall Consideration
bull Departure from Standard or Interpretation (Simplified)ndash In the extremely rare circumstances in which
management concludes thatbull compliance with a requirement in a standard or an
interpretation would be so misleading thatbull it would conflict with the objective of financial
statements set out in the Frameworkthe entity shall depart from that requirement if the relevant regulatory framework requires or otherwise does not prohibit such a departure
a) Fair presentation and compliance with IFRSs
19
copy 2005-07 Nelson 37
3 Overall Consideration
bull Departure from Standard or Interpretation (Simplified)
a) Fair presentation and compliance with IFRSs
ndash Then the following disclosure is requireda) management has concluded that the financial
statements give a true and fair viewb) that it has complied with applicable standards and
interpretations except that it has departed from a particular requirement
c) the title of the standard or interpretation from which the entity has departed the nature of the departure the reason why that treatment would be so misleading and the treatment adopted and
d) for each period presented the financial impact of the departure on each item in the financial statements that would have been reported in complying with the requirement
copy 2005-07 Nelson 38
3 Overall Consideration
Interim Report 2005 clearly stated thatInterim Report 2005 clearly stated that
CaseCase
bull The directors consider it inappropriate for the company to adopt two particular aspects of the newrevised HKFRSs as these would result in the financial statements in the view of the directors eitherbull not reflecting the commercial substance of the business orbull being subject to significant potential short-term volatility as
explained below helliphellip
20
copy 2005-07 Nelson 39
3 Overall ConsiderationCaseCase
bull HKAS 40 ldquoInvestment propertyrdquo requires an assessment of the fair value of investment properties
bull The group intends to follow the same accounting treatment as adopted in 2004 which is to value such investment properties on an annual basis
bull Accordingly the investment properties were not revalued at 30 June 2005 since the directors consider that such change of practice could introduce a significant element of short-term volatility into the income statement in respect of assets which are being held on a long-term basis by the group helliphellip
bull It is not practicable to estimate the financial effect of this non-compliance as no interim valuation of the properties has been conducted
Interim Report 2005 clearly stated thatInterim Report 2005 clearly stated that
At year-end revaluation would still be conductedAt year-end revaluation would still be conducted
copy 2005-07 Nelson 40
3 Overall ConsiderationCaseCase
bull HKAS 12 ldquoIncome Taxesrdquo together with HKAS-INT 21 ldquoIncome Taxes ndashRecovery of Revalued Non-Depreciable Assetsrdquo requires deferred taxation to be recognised on any revaluation movements on investment propertiesbull It is further provided that any such deferred tax liability should be calculated
at the profits tax rate in the case of assets which the management has no definite intention to sell
bull The company has not made such provision in respect of its HK investment properties since the directors consider that such provision would result in the financial statements not reflecting the commercial substance of the businessbull since should any such sale eventuate any gain would be regarded as capital
in nature and would not be subject to any tax in HKbull Should this aspect of HKAS 12 have been adopted deferred tax liabilities
amounting to HK$2008 million on the revaluation surpluses arising from revaluation of HK investment properties would have been provided
(estimate - over 12 of the net assets at 30 June 2005)
Interim Report 2005 clearly stated thatInterim Report 2005 clearly stated that
21
copy 2005-07 Nelson 41
3 Overall Consideration
bull Departure but such departure is prohibitedndash In the extremely rare circumstances in which
management concludes that bull compliance with a requirement in a
standard or an interpretation would be so misleading that
bull it would conflict with the objective of financial statements set out in the Framework
bull but the relevant regulatory framework prohibits departure from the requirement the entity shall to the maximum extent possible reduce the perceived misleading aspects of compliance by disclosing helliphellip
a) Fair presentation and compliance with IFRSs
copy 2005-07 Nelson 42
3 Overall Consideration
ndash by disclosinga) the title of the standard or interpretation in
question the nature of the requirement and the reason why management has concluded that complying with that requirement is so misleading in the circumstances that it conflicts with the objective of financial statements set out in the Framework and
b) for each period presented the adjustments to each item in the financial statements that management has concluded would be necessary to give a fair presentation
a) Fair presentation and compliance with IFRSsbull Departure but such departure is prohibited
22
copy 2005-07 Nelson 43
3 Overall Consideration
bull When assessing whether complying with a specific requirement in a standard or an interpretation would be so misleading that it would conflict with the objective of financial statements set out in the Frameworkndash management considers
a) why the objective of financial statements is not achieved in the particular circumstances and
b) how the entityrsquos circumstances differ from those of other entities that comply with the requirement ndash If other entities in similar circumstances comply with the
requirement raquo there is a rebuttable presumption that the entityrsquos compliance
with the requirement would not be so misleading that it would conflict with the objective of financial statements set out in the Framework
a) Fair presentation and compliance with IFRSs
copy 2005-07 Nelson 44
3 Overall ConsiderationCaseCase
Howrsquos about this Howrsquos about this
However 2005 Final Results Announcementdisclosed that bull provision for deferred tax was finally made
with regard to revaluation of the HK investment properties (total HK$22 billion) at 2005 year-end
However However 2005 Final Results Announcement2005 Final Results Announcementdisclosed that disclosed that bullbull provision for deferred tax was finally made provision for deferred tax was finally made
with regard to revaluation of the HK with regard to revaluation of the HK investment properties (total HK$22 billion) at investment properties (total HK$22 billion) at 2005 year2005 year--endend
23
copy 2005-07 Nelson 45
b) Going Concern
3 Overall Consideration
bull When preparing financial statements management shall make an assessment of an entityrsquos ability to continue as a going concern
bull Financial statements shall be prepared on a going concern basisndash unless management either intends to liquidate the entity or to cease
trading or has no realistic alternative but to do so bull When management is aware in making its assessment of
material uncertainties related to events or conditions that may cast significant doubt upon the entityrsquos ability to continue as a going concern those uncertainties shall be disclosed
bull When financial statements are not prepared on a going concern basis that fact shall be disclosed together with the basis on which the financial statements are prepared and the reason why the entity is not regarded as a going concern
copy 2005-07 Nelson 46
c) Accrual Basis of Accounting
3 Overall Consideration
bull An entity shall prepare its financial statements except for cash flow information using the accrual basis of accounting
bull When the accrual basis of accounting is used items are recognised as assets liabilities equity income and expensesndash when they satisfy the definitions and recognition criteria for those
elements in the Framework
24
copy 2005-07 Nelson 47
3 Overall Consideration
bull The presentation and classification of items in the financial statements shall be retained from one period to the next unlessa) it is apparent
bull following a significant change in the nature of the entityrsquos operations (eg significant acquisition or disposal) or
bull a review of its financial statementsthat another presentation or classification would be more appropriatehaving regard to the criteria for the selection and application of accounting policies in IAS 8 or
b) a IFRS requires a change in presentation
d) Consistency of presentation
An entity changes the presentation of its financial statements only ifndash the changed presentation provides information that is reliable and is
more relevant to users of the financial statements andndash the revised structure is likely to continue so that comparability is not
impaired
An entity changes the presentation of its financial statements only ifndash the changed presentation provides information that is reliable and is
more relevant to users of the financial statements andndash the revised structure is likely to continue so that comparability is not
impaired
copy 2005-07 Nelson 48
3 Overall Consideration
bull Each material class of similar items shall bendash presented separately in the financial
statementsbull Items of a dissimilar nature or function shall be
ndash presented separately unless they are immaterial
bull Applying the concept of materiality means that a specific disclosure requirement in a IFRS neednot be satisfied if the information is not material
e) Materiality and Aggregation
What is the situation of recognition and measurement
What is the What is the situation of situation of recognition and recognition and measurementmeasurement
25
copy 2005-07 Nelson 49
3 Overall Consideration
bull What is materialndash Omissions or misstatements of items are
material if they could individually or collectively influence the economic decisions of users taken on the basis of the financial statements
ndash Materiality depends on the size and nature of the omission or misstatement judged in the surrounding circumstancesbull The size or nature of the item or a combination
of both could be the determining factor
e) Materiality and Aggregation
copy 2005-07 Nelson 50
3 Overall Consideration
bull Assets and liabilities and income and expenses shall not be offsetndash unless required or permitted by a IFRS
bull It is important that assets and liabilities and income and expenses are reported separatelyndash Measuring assets net of valuation allowances mdash
for example obsolescence allowances on inventories and doubtful debts allowances on receivables mdash is not offsetting
f) Offsetting
26
copy 2005-07 Nelson 51
3 Overall Consideration
bull During ordinary activities some transactions that do not generate revenue but are incidental to the main revenue-generating activitiesndash The results of such transactions are presented
when this presentation reflects the substance of the transaction or other event by netting any income with related expenses arising on the same transaction
f) Offsetting
copy 2005-07 Nelson 52
3 Overall Consideration
bull For examplea) gains and losses on the disposal of non-current
assets including investments and operating assets- are reported by deducting from the proceeds on
disposal the carrying amount of the asset and related selling expenses and
b) expenditure related to a provision that is- recognised in accordance with IAS 37 and - reimbursed under a contractual arrangement with
a third party (for example a supplierrsquos warranty agreement)
may be netted against the related reimbursement
f) Offsetting
ExampleExample
27
copy 2005-07 Nelson 53
3 Overall Consideration
bull Gains and losses arising from a group of similar transactions are reported on a net basisndash For example
bull foreign exchange gains and losses or bull gains and losses arising on financial instruments held for trading
bull Such gains and losses are however reported separately if they are material
bull Gains and losses arising from a group of similar transactions are reported on a net basisndash For example
bull foreign exchange gains and losses or bull gains and losses arising on financial instruments held for trading
bull Such gains and losses are however reported separately if they are material
Can foreign exchange gains and losses be offset
ExampleExample
copy 2005-07 Nelson 54
3 Overall Consideration
bull Except when a IFRS permits or requires otherwise ndash comparative information shall be disclosed in
respect of the previous period for all amountsreported in the financial statements
bull When the presentation or classification of items in the financial statements is amended ndash comparative amounts shall be reclassified unless
the reclassification is impracticable
g) Comparative information
28
copy 2005-07 Nelson 55
Amended requirementsAmended requirements
3 Overall Consideration
bull When comparative amounts are reclassified an entity shall disclosea) the nature of the reclassificationb) the amount of each item or class of items that is
reclassified andc) the reason for the reclassification
g) Comparative information
bull In the pastonly the reason for and a description of the nature of materialreclassifications should be disclosedExemption for disclosure of comparative information for the reconciliation of movements in fixed assets is also removed
bull In the pastonly the reason for and a description of the nature of materialreclassifications should be disclosedExemption for disclosure of comparative information for the reconciliation of movements in fixed assets is also removed
copy 2005-07 Nelson 56
3 Overall Consideration
Melco Development Limited (新濠國際發展有限公司)Notes to the financial statements for year ended 31122005ndash Because HKAS 32 requires retrospective application comparative
figures for 2004 have been restated (see Note 2A for the financial impact)
CaseCase
29
copy 2005-07 Nelson 57
3 Overall Consideration
Galaxy Entertainment Group LimitedNotes to the financial statements (ye 31122005)ndash All changes in the accounting policies require
retrospective application except HKAS 39 and HKFRS 2 for which transitional provisions are applied
ndash As a result the 2004 comparative figures have also been restated or amended in accordance with the relevant requirements
ndash The effects of all the changes in accounting policies are summarised in notes (b) and (c) below
CaseCase
copy 2005-07 Nelson 58
bull Identification of the financial statementsbull Reporting periodbull Balance sheet
1 CurrentNon-current distinction2 Current assets3 Current liabilities4 Information to be presented on the face of the balance sheet5 Information to be presented either on the face of the balance sheet or in
the notesbull Income statement
1 Profit or loss for the period2 Information to be presented on the face of the income statement3 Information to be presented either on the face of the income statement or
in the notesbull Statement of changes in equitybull Cash flow statementbull Notes
4 Structure and Content
30
copy 2005-07 Nelson 59
Identification of Financial Statements
bull The financial statements shall be identified clearly and distinguished from other information in the same published document
bull The following information shall be displayed prominently and repeated when it is necessary for a proper understanding of the information presented
a) the name of the reporting entity or other means of identification and any change in that information from the preceding balance sheet date
b) whether the financial statements cover the individual entity or a group of entities
c) the balance sheet date or the period covered by the financial statements whichever is appropriate to that component of the financial statements
d) the presentation currency as defined in HKAS 21 The Effects of Changes in Foreign Exchange Rates and
e) the level of rounding used in presenting amounts in the financial statements
copy 2005-07 Nelson 60
Identification of Financial Statements
bull Can the units of the presentation currency be rounded to thousands or millions
bull Financial statements are often made more understandableby presenting information in thousands or millions of units of the presentation currency
bull This is acceptable as long asndash the level of rounding in presentation is disclosed and ndash material information is not omitted
bull Financial statements are often made more understandableby presenting information in thousands or millions of units of the presentation currency
bull This is acceptable as long asndash the level of rounding in presentation is disclosed and ndash material information is not omitted
ExampleExample
31
copy 2005-07 Nelson 61
Reporting Period
bull Financial statements shall be presented at least annually
bull When an entityrsquos balance sheet date changes and the annual financial statements are presented for a period longer or shorter than one year an entity shall disclose in addition to the period covered by the financial statementsa) the reason for using a longer or shorter period andb) the fact that comparative amounts for the income
statement statement of changes in equity cash flow statement and related notes are not entirely comparable
copy 2005-07 Nelson 62
Reporting Period
bull Can a set of financial statements cover 52-week instead of a year
bull Normally financial statements are consistently prepared covering a one-year period
bull However for practical reasons some entities prefer to report for example for a 52-week period
bull IAS 1 does not preclude this practice because the resulting financial statements are unlikely to be materially different from those that would be presented for one year
bull Normally financial statements are consistently prepared covering a one-year period
bull However for practical reasons some entities prefer to report for example for a 52-week period
bull IAS 1 does not preclude this practice because the resulting financial statements are unlikely to be materially different from those that would be presented for one year
ExampleExample
32
copy 2005-07 Nelson 63
CurrentNon-current Distinction
bull An entity shall presentndash current and non-current assets andndash current and non-current liabilitiesas separate classifications on the face of its balance sheet
bull Except when a presentation based on liquidity provides informationndash If that information is reliable and is more relevantndash When that exception applies all assets and liabilities shall be
presented broadly in order of liquidity
copy 2005-07 Nelson 64
CurrentNon-current Distinction
bull Whichever method of presentation is adopted for each asset and liability line item that combines amounts expected to be recovered or settled a) no more than 12 months after the balance sheet date
andb) more than 12 months after the balance sheet date(ie combines both current and non-current)
an entity shall disclose the amount expected to be recovered or settled after more than 12 months
33
copy 2005-07 Nelson 65
New requirementsNew requirements
Current Assets
bull An asset shall be classified as current when it satisfies any of the following criteriaa) it is expected to be realised in or is intended for sale or
consumption in the entityrsquos normal operating cycle b) it is held primarily for the purpose of being tradedc) it is expected to be realised within 12 months after the balance
sheet date ord) it is cash or a cash equivalent
bull unless it is restricted from being exchanged or used to settle aliability for at least 12 months after the balance sheet date
bull All other assets shall be classified as non-current
Examplesbull Deposits pledged to bank (how long)bull Fixed deposits over 1 year maturity
Examplesbull Deposits pledged to bank (how long)bull Fixed deposits over 1 year maturity
What is itWhat is it
copy 2005-07 Nelson 66
Current Assets
bull What is operating cycle
bull The operating cycle of an entity is the time between ndash the acquisition of assets for processing and ndash their realisation in cash or cash equivalents
bull When the entityrsquos normal operating cycle is not clearly identifiable ndash its duration is assumed to be 12 months
bull The operating cycle of an entity is the time between ndash the acquisition of assets for processing and ndash their realisation in cash or cash equivalents
bull When the entityrsquos normal operating cycle is not clearly identifiable ndash its duration is assumed to be 12 months
ExampleExample
34
copy 2005-07 Nelson 67
Current Assets CaseCase
copy 2005-07 Nelson 68
Current Assets
bull Can a non-current asset reclassified if it fulfil the definition of current asset later
bull Assets classified as non-current in accordancewith IAS 1 shall not be reclassified as current assetsndash until they meet the criteria to be classified as held for sale in
accordance with IFRS 5bull Assets of a class that an entity would normally regard as non-
current that are acquired exclusively with a view to resale shall notbe classified as currentndash unless they meet the criteria to be classified as held for sale in
accordance with IFRS 5
bull Assets classified as non-current in accordancewith IAS 1 shall not be reclassified as current assetsndash until they meet the criteria to be classified as held for sale in
accordance with IFRS 5bull Assets of a class that an entity would normally regard as non-
current that are acquired exclusively with a view to resale shall notbe classified as currentndash unless they meet the criteria to be classified as held for sale in
accordance with IFRS 5
No non-current assets can be classified as current unless the criteria in IFRS 5 are fulfilled mainlybull Available for immediate salebull Highly probable to make the sale
35
copy 2005-07 Nelson 69
Is it currentIs it current
Current Assets
bull In its 2005 Interim Report full set of HKFRS was adopted and the report set out thatndash Available-for-sale financial assets are non-
derivatives that are eitherbull designated in this category orbull not classified in any of the other categories (ie
loans and receivables financial assets at fair value through profit or loss and held-to-maturity investments)
CaseCase
Similar in 2005 Annual Report
Similar in 2005 Annual Report
ndash They are included in non-current assetsbull unless management intends to dispose of the
investment within 12 months of the balance sheet date
copy 2005-07 Nelson 70
New requirementsNew requirements
Current Liabilities
bull A liability shall be classified as current when it satisfies any of the following criteriaa) it is expected to be settled in the entityrsquos normal operating cycleb) it is held primarily for the purpose of being tradedc) it is due to be settled within 12 months after the balance sheet
date ord) the entity does not have an unconditional right to defer settlement
of the liability for at least 12 months after the balance sheet date
bull All other liabilities shall be classified as non-current
ImplicationImplication
36
copy 2005-07 Nelson 71
Current Liabilities Revised rules on classifying a liability as current or non-currentbull A liability held for being traded rArr currentbull A financial liability due within 12 months after the BS date rArr current
ndash even if an agreement to refinance on a long-term basis is completed after the BS date (only disclosed as non-adjusting event)
bull If an entity has discretion to refinance rArr non-currentbull If an entity without discretion to refinance rArr current
bull A non-current financial liability is payable on demand with a breach on a condition of its loan agreement on or before the BS datendash If the lender agreed not to demand payment
bull after the BS date rArr current (only disclosed as non-adjusting event)
bull by the BS date rArr non-current
ImplicationImplication
copy 2005-07 Nelson 72
Current LiabilitiesCaseCase
Note 12 to Interim Report 2006bull Breach of loan covenants
bull As at 30 June 2006 in respect of certain bank loans with an aggregate carrying amount of HK$1529806000 the Group breached certain financial covenants of the banks loans
bull Since the lenders have not agreed to waive its right to demand immediate payment as at the balance sheet date the loans have been classified as current liabilities in these financial statements at 30 June 2006
37
copy 2005-07 Nelson 73
Current Assets and LiabilitiesExampleExample
Can the following be classified as current assetsbull 3-month fixed deposits pledged to a bank to secure
a mortgage loan of 5 yearsbull 2-year fixed deposits with a bank
Can the following be classified as current assetsbull 3-month fixed deposits pledged to a bank to secure
a mortgage loan of 5 yearsbull 2-year fixed deposits with a bank
Can the following be classified as non-current liabilitiesbull 5-year term loan matured after year end but renewed
for another 5 years after year end (before the issuanceof the financial statements)
bull 2-year term loan to be matured with 12 months and theentity has a right to renew for another 2 years
Can the following be classified as non-current liabilitiesbull 5-year term loan matured after year end but renewed
for another 5 years after year end (before the issuanceof the financial statements)
bull 2-year term loan to be matured with 12 months and theentity has a right to renew for another 2 years
timestimes
times
radic
copy 2005-07 Nelson 74
Balance Sheetbull As a minimum the face of the balance sheet shall
include line items that present the following amountsa) property plant and equipmentb) investment propertyc) intangible assetsd) financial assets (excl amounts shown under (e) (h) and (I))e) investments accounted for using the equity methodf) biological assetsg) inventoriesh) trade and other receivablesi) cash and cash equivalentsj) trade and other payablesk) provisionsl) financial liabilities (excl amounts shown under (j) and (k))m) liabilities and assets for current tax as defined in HKAS 12 Income Taxesn) deferred tax liabilities and deferred tax assets as defined in HKAS 12o) minority interest presented within equity andp) issued capital and reserves attributable to equity holders of the parent
38
copy 2005-07 Nelson 75
Balance Sheetbull The face of the balance sheet shall also include line
items that present the following amountsa) The total of assets classified as held for sale and
assets included in disposal groups classified as held for sale in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations and
b) Liabilities included in disposal groups classified as held for sale in accordance with IFRS 5
copy 2005-07 Nelson 76
Balance Sheetbull Additional line items headings and subtotals shall
be presented on the face of the balance sheet when such presentation is relevant to an understanding of the entityrsquos financial position
bull When an entity presents current and non-current assets and current and non-current liabilities as separate classifications on the face of its balance sheet ndash it shall not classify deferred tax assets
(liabilities) as current assets (liabilities)
39
copy 2005-07 Nelson 77
Balance Sheet
bull The use of different measurement bases for different classes of assets suggests that their nature or function differs and therefore that they should be presented as separate line itemsndash For example different classes of property plant and
equipment can be carried atbull Cost orbull Revalued amountsin accordance with IAS 16 PPE
In the past it use ldquomay needrdquoIn the past it use ldquomay needrdquo
copy 2005-07 Nelson 78
Balance Sheet
Galaxy Entertainment Group LimitedConsolidated balance sheet as at 31122005
CaseCase
40
copy 2005-07 Nelson 79
Balance Sheet
Melco Development Limited (新濠國際發展有限公司)Consolidated balance sheet as at 31122005
CaseCase
copy 2005-07 Nelson 80
Income Statement Minimum requirements on the face of the income statementbull As a minimum the face of the income statement shall include line items
that present the following amounts for the perioda) revenueb) finance costsc) share of the profit or loss of associates and joint ventures accounted
for using the equity methodd) pre-tax gain or loss recognised on the disposal of assets or
settlement of liabilities attributable to discontinuing operationse) tax expense andf) profit or loss
41
copy 2005-07 Nelson 81
Income Statement bull The following items shall be disclosed on the face of the income
statement as allocations of profit or loss for the perioda) Profit or loss attributable to minority interest andb) Profit or loss attributable to equity holders of the parent
A similar requirement has been added for the statement of changes in equity and such allocated amounts are not to be presented as items of income or expense
copy 2005-07 Nelson 82
Income Statement
Melco Dev LtdConsolidated income statementas at 31122005
CaseCase
42
copy 2005-07 Nelson 83
Income Statement bull Not require to disclose the results of operating
activities as a line item on the face of the incomestatement
bull An entity shall not present any items of income and expense as extraordinary items either onthe face of the income statements or in the notes
Entities canrsquot use itEntities canrsquot use it
Entities can still show itEntities can still show it
copy 2005-07 Nelson 84
Income Statement Either on the face of the income statement or in the notesbull An entity shall present an analysis of expenses using a classification
based on eitherbull the nature of expenses orbull their function within the entity
whichever provides information that is reliable and more relevant
bull Entities classifying expenses by function shall disclose additional information on the nature of expenses includingbull depreciation and amortisation expense and bull employee benefits expense
43
copy 2005-07 Nelson 85
Income StatementCaseCase
Nature or FunctionNature or Nature or FunctionFunction
copy 2005-07 Nelson 86
Statement of Changes in Equity bull An entity shall present a statement of changes in equity showing on the
face of the statementa) profit or loss for the period b) each item of income and expense for the period that as required by
IFRSs is recognised directly in equity and the total of these itemsc) total income and expense for the period (calculated as the sum of (a) and
(b)) showing separately the total amounts attributablebull to equity holders of the parent andbull to minority interest and
d) for each component of equity the effects of changes in accounting policies and corrections of errors recognised in accordance with IAS 8
Any ChangeAny Change
A revised requirementbull A statement of changes in equity that comprises only these items
shall be titled a statement of recognised income and expenses
A revised requirementbull A statement of changes in equity that comprises only these items
shall be titled a statement of recognised income and expenses
44
copy 2005-07 Nelson 87
Statement of Changes in Equity bull An entity shall also present either on the face of the
statement of changes in equity or in the notesa) the amounts of transactions with equity holders acting in
their capacity as equity holders showing separately distributions to equity holders
b) the balance of retained earnings (ie accumulated profit or loss) at the beginning of the period and at the balance sheet date and the changes during the period and
c) a reconciliation between the carrying amount of each class of contributed equity and each reserve at the beginning and the end of the period separately disclosing each change
copy 2005-07 Nelson 88
Statement of Changes in Equity
Consolidated SCE as at 31122005
CaseCase
45
copy 2005-07 Nelson 89
Notes Structure (an entity is required to disclose the following)
bull The notes shalla) present information about the basis of preparation of the financial statements
and the specific accounting policies usedb) disclose the information required by HKFRSs that is not presented on the
face of the balance sheet income statement statement of changes in equity or cash flow statement and
c) provide additional information that is not presented on the face of the balance sheet income statement statement of changes in equity or cash flow statement but is relevant to an understanding of any of them
bull Notes shall as far as practicable be presented in a systematic manner bull Each item on the face of the balance sheet income statement statement
of changes in equity and cash flow statement shall be cross-referencedto any related information in the notes
copy 2005-07 Nelson 90
Notes Disclosures (an entity is required to disclose the following)
bull Disclosure of accounting policiesAn entity shall disclose in the summary of significant accounting policiesa) the measurement basis (or bases) used in preparing the financial
statements andb) the other accounting policies used that are relevant to an understanding of
the financial statements
46
copy 2005-07 Nelson 91
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)ndash The financial statements have been prepared in
accordance with Hong Kong Financial Reporting Standards (lsquolsquoHKFRSrsquorsquo) issued by the Hong Kong Institute of Certified Public Accountants bull under the historical cost convention as modified by the
revaluation of investment properties available-for-sale financial assets derivative financial instruments and other investments which are carried at fair values helliphellip
ndash The principal accounting policies applied in the preparation of these financial statements are set out below These policies have been consistently applied to all the years presented except for those stated in note 2(a) above
copy 2005-07 Nelson 92
Notes Disclosures (an entity is required to disclose the following)
bull Disclosure of accounting policiesndash The judgements apart from those involving estimations management has
madebull in the process of applying the entityrsquos accounting policies that have the
most significant effect on the amounts recognised in the financial statements (in the summary of significant accounting policies or other notes)
Examples ndash Management makes judgements in determininga) whether financial assets are held-to-maturity investmentsb) when substantially all the significant risks and rewards of
ownership of financial assets and lease assets are transferred to other entities
c) whether in substance particular sales of goods are financing arrangements and therefore do not give rise to revenue and
d) whether the substance of the relationship between the entity and a special purpose entity indicates that the special purpose entity is controlled by the entity
Examples ndash Management makes judgements in determininga) whether financial assets are held-to-maturity investmentsb) when substantially all the significant risks and rewards of
ownership of financial assets and lease assets are transferred to other entities
c) whether in substance particular sales of goods are financing arrangements and therefore do not give rise to revenue and
d) whether the substance of the relationship between the entity and a special purpose entity indicates that the special purpose entity is controlled by the entity
47
copy 2005-07 Nelson 93
Notes Disclosures (an entity is required to disclose the following)
bull Key sources of estimation uncertaintyndash Information about the key assumptions concerning the future and
other key sources of estimation uncertainty at the balance sheet datebull that have a significant risk of causing a material adjustment to the
carrying amounts of assets and liabilities within the next financial yearndash In respect of those assets and liabilities the notes shall include details of
a) their nature andb) their carrying amount as at the balance sheet date
Examples ndash in the absence of recently observed market prices used to measure the following assets and liabilities future-oriented estimates are necessary to measurebull the recoverable amount of classes of PPEbull the effect of technological obsolescence on inventories
Estimates involve assumptions about such items asbull the risk adjustment to cash flows or discount rates usedbull future changes in salaries and in prices affecting other costs
Examples ndash in the absence of recently observed market prices used to measure the following assets and liabilities future-oriented estimates are necessary to measurebull the recoverable amount of classes of PPEbull the effect of technological obsolescence on inventories
Estimates involve assumptions about such items asbull the risk adjustment to cash flows or discount rates usedbull future changes in salaries and in prices affecting other costs
copy 2005-07 Nelson 94
Notes
Esprit Holdings LimitedEsprit Holdings Limitedbull Critical Accounting Estimates and Judgements
ndash Estimates and judgements are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonableunder the circumstances
ndash Critical accounting estimates and assumptionsbull The Group makes estimates and assumptions concerning
the future The resulting accounting estimates will by definition seldom equal the related actual results
bull The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below helliphellip (including (1) useful life and impairment of trademarks and (2) income taxes)
CaseCase
48
copy 2005-07 Nelson 95
Notes
Melco Development Limited (新濠國際發展有限公司)Notes to the financial statements for the year ended 31122005ndash The key assumptions concerning the future and other key sources
of estimation uncertainty at the balance sheet date that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below helliphellip(The issues discussed includebull Allowances for inventories bull Estimated impairment of goodwill Income taxes)
CaseCase
copy 2005-07 Nelson 96
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)ndash Estimates and judgements used in preparing the
financial statements are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonable under the circumstances
ndash The Group makes estimates and assumptionsconcerning the future
ndash The resulting accounting estimates will by definition seldom equal the related actual results
ndash The estimates and assumptions that have a significant effect on the carrying amounts of assets and liabilities are discussed below hellip (including impairment of goodwill impairment of gaming
licence Useful lives of property plant and equipment fair value of investment properties hellip)
49
copy 2005-07 Nelson 97
Notes Disclosures (an entity is required to disclose the following)
bull Other disclosuresAn entity shall disclose in the notesa) the amount of dividends proposed or declared before the
financial statements were authorised for issue but not recognised as a distribution to equity holders during the period and the related amount per share(HK incorporated companies are required to show the aggregate amount which is recommended for distribution by way of dividend under a separate heading(s) in their balance sheet (HK Co Ord 10th Sch para 9(1)(e)) and
b) the amount of any cumulative preference dividends not recognised
copy 2005-07 Nelson 98
Notes Disclosures (an entity is required to disclose the following)
An entity shall disclose the following if not disclosedelsewhere in information published with the financial statementsa) the domicile and legal form of the entity
its country of incorporation andthe address of its registered office(or principal place of business if different from the registered office)
b) a description of the nature of the entityrsquos operations and its principal activities and
c) the name of the parent and the ultimate parent of the group
ldquoshall discloserdquo now instead of ldquoencouraged to discloserdquo
ldquoshall discloserdquo now instead of ldquoencouraged to discloserdquo
bull Other disclosures
Any specialAny special
50
copy 2005-07 Nelson 99
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)bull The principal activities of Galaxy Entertainment Group
Ltd (the lsquolsquoCompanyrsquorsquo) (formerly known as K WahConstruction Materials Ltd) and its subsidiaries (together the lsquolsquoGrouprsquorsquo) are tondash operate in casino games of chance or games of other forms
in Macau (and) manufacture sale and distribution of construction materials in HK Macau and Mainland China
bull The Company is ndash a limited liability company incorporated in Hong Kong and ndash has its listing on the Main Board of The Stock Exchange of
Hong Kong Limitedbull The address of its registered office and its principal place
of business is Room 1606 16th Floor Hutchison House 10 Harcourt Road Central HK
copy 2005-07 Nelson 100
Effective Date
bull An entity shall apply IAS 1 for annual periods beginning on or after 1 Jan 2005
ndash Earlier application is encouragedndash If an entity applies IAS 1 for an earlier period it shall
disclose this factbull For the amendments relating to the Statement of
Changes in Equityndash An entity shall apply it for annual periods beginning on
or after 1 Jan 2006ndash If an entity applies the amendments to IAS 19
Employee Benefits ndash Actuarial Gains and Losses Group Plans and Disclosures for an earlier period that amendment shall be applied for that earlier period
51
copy 2005-07 Nelson 101
Todayrsquos Agenda
Capital Disclosures (Amendments to IAS 1)
Capital Disclosures (Amendments to IAS 1)
copy 2005-07 Nelson 102
Capital Disclosures ndash For 2007
52
copy 2005-07 Nelson 103
Capital Disclosures
What is capital Is it helliphellip
CapitalCapital AssetsAssets LiabilitiesLiabilities= ndash
bull IAS 1BC47 considers ldquowhether an entity can have a view of capital that differs from what IFRSs define as equityrdquo
bull It further clarifies that although for the purposes of this disclosure capital would often equate with equity as defined in IFRSsndash it might also include or exclude some components
bull It also noted that the capital disclosure in IAS 1 is intended to give entities the opportunity to describendash how they view the components of capital they manage if this is
different from what IFRSs define as equity helliphellip
copy 2005-07 Nelson 104
EquityEquityEquity AssetsAssets LiabilitiesLiabilities= ndash
Capital Disclosures
Based on the Framework amp IFRSs the accounting equation should be
CapitalCapital AssetsAssets LiabilitiesLiabilities= ndash
bull An entityrsquos capital may be part of its equity plus part of its liabilities depending on how it manage ldquoits capitalrdquo helliphellip
53
copy 2005-07 Nelson 105
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowinga) qualitative information about its objectives policies and processes for
managing capital including (but not limited to)i) a description of what it manages as capitalii) when an entity is subject to externally imposed capital requirements
the nature of those requirements and how those requirements are incorporated into the management of capital and
iii) how it is meeting its objectives for managing capital
bull To comply with the capital disclosures the entity discloses thefollowinga) qualitative information about its objectives policies and processes for
managing capital including (but not limited to)i) a description of what it manages as capitalii) when an entity is subject to externally imposed capital requirements
the nature of those requirements and how those requirements are incorporated into the management of capital and
iii) how it is meeting its objectives for managing capital
copy 2005-07 Nelson 106
Capital Disclosures
Example disclosurebull The Grouprsquos objectives when managing capital are
ndash to safeguard the entityrsquos ability to continue as a going concern
bull so that it can continue to provide returns for shareholders and benefits for other stakeholders and
ndash to provide an adequate return to shareholders by pricing products and services commensurately with the level of risk
bull The Group sets the amount of capital in proportion to risk
ExampleExample
ObjectivesObjectives
54
copy 2005-07 Nelson 107
Capital Disclosures
bull The Group manages the capital structure and makes adjustments to it in the light ofndash changes in economic conditions and ndash the risk characteristics of the underlying assets
bull In order to maintain or adjust the capital structure the Group mayndash adjust the amount of dividends paid to shareholders ndash return capital to shareholders ndash issue new shares or ndash sell assets to reduce debt
ExampleExample
Example disclosure
HowHow
copy 2005-07 Nelson 108
Capital Disclosures
bull Consistently with others in the industry the Group monitors capital on the basis of ndash the debt-to-adjusted capital ratio
bull This ratio is calculated as net debt divide adjusted capital
ExampleExample
Example disclosure
HowHow
bull Net debt is calculated as ndash Total debt (as shown in the
balance sheet)ndash Less cash amp cash equivalents
bull Net debt is calculated as ndash Total debt (as shown in the
balance sheet)ndash Less cash amp cash equivalents
bull Adjusted capital ndash comprises all components of
equity (ie share capital share premium minority interest retained earnings and revaluation reserve) ndash other than amounts
recognised in equity relating to cash flow hedges and
ndash includes some forms of subordinated debt
bull Adjusted capital ndash comprises all components of
equity (ie share capital share premium minority interest retained earnings and revaluation reserve) ndash other than amounts
recognised in equity relating to cash flow hedges and
ndash includes some forms of subordinated debt
55
copy 2005-07 Nelson 109
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowing
bull To comply with the capital disclosures the entity discloses thefollowingb) summary quantitative data about what it manages as capital
Some entities regard some financial liabilities (eg some forms of subordinated debt) as part of capitalOther entities regard capital as excluding some components of equity (eg components arising from cash flow hedges)
c) any changes in (a) and (b) from the previous period
copy 2005-07 Nelson 110
Capital Disclosures
Example disclosure (continued from previous example)
ExampleExample
bull During 20X4 the Grouprsquos strategy which was unchanged from 20X3 was to maintain the debt-to-adjusted capital ratio at the lower end of the range 61 to 71 in order to secure access to finance at a reasonable cost by maintaining a BB credit rating The debt-to-adjusted capital ratios at 31 December 20X4 and at 31 December 20X3 were as follows
3112X4 ($rsquoM) 3112X3 ($rsquoM) Total debt 1000 1100 Less cash and cash equivalents (90) (150)Net debt 910 950
Total equity 110 105 Add subordinated debt instruments 38 38 Less amounts recognised in equity
relating to cash flow hedges (10) (5)Adjusted capital 138 138
Debt-to-adjusted capital ratio 66 69
56
copy 2005-07 Nelson 111
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowing
bull To comply with the capital disclosures the entity discloses thefollowingd) whether during the period it complied with any externally imposed capital
requirements to which it is subjecte) when the entity has not complied with such externally imposed capital
requirements the consequences of such non-complianceThese disclosures shall be based on the information provided internally to the entityrsquos key management personnel
copy 2005-07 Nelson 112
Capital DisclosuresExampleExample
Example disclosurebull Entity A filed its quarterly regulatory capital return for
30 September 20X7 on 20 October 20X7 bull At that date Entity Arsquos regulatory capital was below
the capital requirement imposed by Regulator B by $1 million
bull As a result Entity A was required to submit a plan to the regulator indicating how it would increase its regulatory capital to the amount required
bull Entity A submitted a plan that entailed selling part of its unquoted equities portfolio with a carrying amount of $115 million in the fourth quarter of 20X7
bull In the fourth quarter of 20X7 Entity A sold its fixed interest investment portfolio for $126 million and met its regulatory capital requirement
For example SFC or banks
For example SFC or banks
57
copy 2005-07 Nelson 113
Capital DisclosuresCaseCase
bull Early adopted capital disclosure in 2005 and itsannual report states that (extract only)ndash The Grouprsquos objectives when managing capital are
bull To safeguard the Grouprsquos ability to continue as a going concern so that it continues to provide returns for shareholders and benefits for other stakeholders
bull To support the Grouprsquos stability and growth andbull To provide capital for the purpose of strengthening the
Grouprsquos risk management capability
copy 2005-07 Nelson 114
Capital DisclosuresCaseCase
ndash The Group actively and regularly reviews and manages its capital structure to ensure optimal capital structure and shareholder returns taking into consideration the future capital requirements of the Group and capital efficiency helliphellip
ndash The Group adopts a dividend policy helliphellip while retaining 10 per cent of the profit as capital of the Group for future use
ndash The Group has set aside $1500 million of retained earnings for the purpose of strengthening the risk management regime of the clearing houses and supporting their roles as central counterparties
ndash As in prior years the Group monitors capital by reviewing the level of capital that is at the disposal of the Group (ldquoadjusted capitalrdquo) Adjusted capital comprises all components of shareholdersrsquo equity other than the hedging reserve relating to cash flow hedges designated reserves and investment revaluation reserve helliphellip
bull Early adopted capital disclosure in 2005 and itsannual report states that (extract only)
58
copy 2005-07 Nelson 115
Capital Disclosures ndash Transition
bull An entity shall apply the requirements of capital disclosure for
ndash annual periods beginning on or after 1 January 2007
bull Early application is encouraged
copy 2005-07 Nelson 116
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk
59
copy 2005-07 Nelson 117
QampA SessionQampA SessionQampA Session
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk
5
copy 2005-07 Nelson 9
Objective of Financial Statements
ObjectiveObjective
Process of communicationProcess of communicationProcess of communication
Companyrsquos activities Accounting User
perception
copy 2005-07 Nelson 10
Objective of Financial Statements
ObjectiveObjective
Process of communicationProcess of communicationProcess of communication
Companyrsquos activities
FinancialReporting
User perception
IAS 1 states thatbull 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
bull Similar to the objective stated in the Framework
6
copy 2005-07 Nelson 11
Objective AssumptionsUnderlying Assumptions includebull Accrual Basis
ndash In order to meet their objectives financial statements are prepared on the accrual basis of accounting
ndash Under this basisbull the effects of transactions and other events are recognised when they
occur (and not as cash or its equivalent is received or paid) andbull they are recorded in the accounting records and reported in the
financial statements of the periods to which they relate bull Going Concern
ndash The financial statements are normally prepared on the assumption that an entity is a going concern and will continue in operation for the foreseeable future
ndash Hence it is assumed that the entity has neither the intention nor the need to liquidate or curtail materially the scale of its operations if such an intention or need exists the financial statements may have to be prepared on a different basis and if so the basis used is disclosed
copy 2005-07 Nelson 12
Qualitative Characteristics
Objective Qualitative Characteristics
Qualitative Characteristics
Primary qualitative characteristicsof financial statements
bull Relating to content- Relevance (Predictive value Confirmatory value Interrelated)
- Reliability (Faithful representation Substance over form NeutralityPrudence and Completeness)
bull Relating to presentation- Comparability (Consistency and Disclosure)
- Understandability (Usersrsquo ability Aggregation and Classification)
7
copy 2005-07 Nelson 13
Qualitative Characteristics
Objective Qualitative Characteristics
Qualitative Characteristics
Primary qualitative characteristicsof financial statements
bull Relating to content- Relevance- Reliability
bull Relating to presentation- Comparability- Understandability
Management Decision
Management Decision
Financial reportingFinancial Financial reportingreporting
copy 2005-07 Nelson 14
Qualitative Characteristics
Emerging International PracticesEmerging International Practicesbullbull Financial reporting framework clearly definedFinancial reporting framework clearly definedbullbull Definition of assets and liabilities clearly establishedDefinition of assets and liabilities clearly establishedbullbull Beginning to adopt fair value model (instead of only historical Beginning to adopt fair value model (instead of only historical
cost)cost)bullbull Discussing convergence in certain practicesDiscussing convergence in certain practicesbullbull From IASC to IASB (International Accounting Standard Board)From IASC to IASB (International Accounting Standard Board)bullbull From IAS to IFRS (International Financial Reporting From IAS to IFRS (International Financial Reporting
Standards) Standards) helliphelliphelliphellip
8
copy 2005-07 Nelson 15
All aims atAll aims atRelevanceRelevanceReliabilityReliabilityComparabilityComparabilityUnderstandabilityUnderstandability
Qualitative Characteristics
Management Decision
Management Decision
Financial reportingFinancial Financial reportingreporting
copy 2005-07 Nelson 16
Elements of Financial Statements
Objective Qualitative Characteristics ElementsElements
Asset
Liability
Equity
Income
Expenses
Financial Position (in balance sheet)
Financial Performance (in income statement)
bull a resource controlled by the enterprise as a result of past eventsand from which future economic benefits are expected to flow tothe enterprise
bull a present obligation of the enterprise arising from past eventsthe settlement of which is expected to result in an outflow fromthe enterprise of resources embodying economic benefits
bull the residual interest in the assets of the enterprise after deducting all its liabilities
bull increases in economic benefits during a period in the form ofndash inflows or enhancements of assets orndash decreases of liabilities that result in increases in equityndash other than those relating to contributions from equity participants
bull decreases in economic benefits during a period in the form ofndash outflows or depletions of assets orndash incurrences of liabilities that result in decreases in equityndash other than those relating to distributions to equity participants
Balance Sheet Approach
9
copy 2005-07 Nelson 17
Elements of Financial Statements
Objective Qualitative Characteristics ElementsElements
Asset
Liability
Equity
Income
Expenses
Financial Position (in balance sheet)
Financial Performance (in income statement)
bull a resource controlled by the enterprise as a result of past eventsand from which future economic benefits are expected to flow tothe enterprise
bull a present obligation of the enterprise arising from past eventsthe settlement of which is expected to result in an outflow fromthe enterprise of resources embodying economic benefits
bull the residual interest in the assets of the enterprise after deducting all its liabilities
bull increases in economic benefits during a period in the form ofndash inflows or enhancements of assets orndash decreases of liabilities that result in increases in equityndash other than those relating to contributions from equity participants
bull decreases in economic benefits during a period in the form ofndash outflows or depletions of assets orndash incurrences of liabilities that result in decreases in equityndash other than those relating to distributions to equity participants
DefinitionDefinition
Balance Sheet Approach
copy 2005-07 Nelson 18
Elements of Financial Statements
Objective Qualitative Characteristics ElementsElements
DefinitionDefinition
RecognitionRecognition
MeasurementMeasurement
Presentation and disclosurePresentation and disclosure
IFRS ApproachIFRS Approach
10
copy 2005-07 Nelson 19
Elements of Financial Statements
Objective Qualitative Characteristics ElementsElements
IFRS ApproachIFRS Approach
Presentation and disclosurePresentation and disclosure
Frameworkgives a general overview
DefinitionDefinition
RecognitionRecognition
MeasurementMeasurement
copy 2005-07 Nelson 20
Definition
Criteria for recognition ndash an item that meets the definition of an element should be recognized if1 it is probable that any future economic benefit
associated with the item will flow to or from the enterprise and
2 the item has a cost or value that can be measured with reliability
Criteria for recognition ndash an item that meets the definition of an element should be recognized if1 it is probable that any future economic benefit
associated with the item will flow to or from the enterprise and
2 the item has a cost or value that can be measured with reliability
Recognition is the process of incorporating in the balance sheet or income statement an item that1 meets the Definition of an element and2 satisfies the Criteria for Recognition
Recognition is the process of incorporating in the balance sheet or income statement an item that1 meets the Definition of an element and2 satisfies the Criteria for Recognition
Elements of Financial Statements
Objective Qualitative Characteristics ElementsElements
RecognitionRecognition
11
copy 2005-07 Nelson 21
Elements of Financial Statements
Objective Qualitative Characteristics ElementsElements
Recognition
Definition
Historical cost
Current cost
Realisable (settlement) value
Present value
Historical cost
Current cost
Realisable (settlement) value
Present value
MeasurementMeasurement
Fair value less cost to sell
Value in use
copy 2005-07 Nelson 22
Concept of CapitalFinancial concept of capitalbull is adopted by most enterprises in
preparing their financial statementsbull Under it such as invested money or
invested purchasing power capital is synonymous with the net assets or equity of the enterprise
Physical concept of capitalbull Under it such as operating capability
capital is regarded as the productive capacity of the enterprise based on
bull For example units of output per day
Capital and Capital Maintenance
Objective Qualitative Characteristics Elements Concepts of
CapitalConcepts of
Capital
Concept of Capital MaintenanceFinancial concept maintenancebull Under this concept a profit is
earned only ifbull the financial (or money) amount of
the net assets at the end of the period
bull exceeds the financial (or money) amount of net assets at the beginning of the period
bull after excluding any distributions to and contributions from owners during the period
bull Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power
12
copy 2005-07 Nelson 23
Concept of CapitalFinancial concept of capitalbull is adopted by most enterprises in
preparing their financial statementsbull Under it such as invested money or
invested purchasing power capital is synonymous with the net assets or equity of the enterprise
Physical concept of capitalbull Under it such as operating capability
capital is regarded as the productive capacity of the enterprise based on
bull For example units of output per day
Capital and Capital Maintenance
Objective Qualitative Characteristics Elements Concepts of
CapitalConcepts of
Capital
Concept of Capital MaintenancePhysical concept maintenancebull Under this concept a profit is
earned only ifbull the physical productive capacity (or
operating capability) of the enterprise (or the resources or funds needed to achieve that capacity) at the end of the period
bull exceeds the physical productive capacity at the beginning of the period
bull after excluding any distributions to and contributions from owners during the period
copy 2005-07 Nelson 24
Summary of IFRSs
International Financial Reporting Standards arebull Standards and Interpretations issued and endorsed by the
International Accounting Standard Board and comprisendash International Financial Reporting Standards (IFRSs)ndash International Accounting Standards (IASs) andndash Interpretations
bull IASs (International Accounting Standards) ndash Totally 31 sets
bull IFRSs (International Financial Reporting Standards) ndash Totally 8 sets(up to 4 February 2007)
More are coming helliphellipMore are coming helliphellip
13
copy 2005-07 Nelson 25
Key Points
IFRSs set outbull Recognitionbull Measurementbull Presentation and
disclosure requirements
Main changesbull Changes in recognition
and measurementbull Changes in presentation
and disclosure
bull Less Choicesbull Towards
Fair Value Model
bullbull Less ChoicesLess Choicesbullbull TowardsTowards
Fair Value ModelFair Value Model
bull More and clearer presentation and disclosure
bullbull More and clearer More and clearer presentation and presentation and disclosuredisclosure
bull Aim at enhancing the information for usersrsquo decision making
bullbull Aim at enhancing Aim at enhancing the information the information for usersrsquo for usersrsquo decision makingdecision making
eg market valuevalue by appraisal helliphellip
Inter alia one more change helliphellip
copy 2005-07 Nelson 26
Todayrsquos Agenda
Presentation of Financial Statements (IAS 1)
Presentation of Financial Statements (IAS 1)
14
copy 2005-07 Nelson 27
Presentation of Financial Statements(IAS 1)
copy 2005-07 Nelson 28
Presentation of Financial Statements (IAS 1)
1 Purpose of financial statements2 Components of financial statements3 Overall considerations4 Structure and content
15
copy 2005-07 Nelson 29
1 Purpose of Financial Statements
bull To provide information aboutndash financial positionndash financial performance
andndash cash flows of an entity
That is useful to a wide range of users in making economic decisions
bull To also show the results of managementrsquos stewardship of the resources entrusted to it
bull To meet this objective financial statements provide information about the entityrsquosndash Assetsndash Liabilitiesndash Equityndash Income and expenses
including gains and lossesndash Other changes in equityndash Cash flows
Thus we have helliphellip
copy 2005-07 Nelson 30
2 Components of Financial Statements
A complete set of financial statements comprisesa) a balance sheetb) an income statementc) a statement of changes in equity showing either
i) all changes in equity orii) changes in equity other than those arising from transactions with
equity holders acting in their capacity as equity holdersd) a cash flow statement ande) notes comprising a summary of significant accounting policies and
other explanatory notes
another nameanother name
16
copy 2005-07 Nelson 31
3 Overall Consideration
a) Fair presentation and compliance with IFRSsb) Going concernc) Accrual basis of accountingd) Consistency of presentatione) Materiality and aggregationf) Offsettingg) Comparative information
copy 2005-07 Nelson 32
3 Overall Consideration
bull Financial statements shall present fairly of the financial position financial performance and cash flows of an entity
ndash Fair presentation requires the faithful representation of the effects of transactions other events and conditions in accordance with
bull the definitions and recognition criteria for assets liabilities income and expenses set out in the Framework
ndash The application of IFRSs with additional disclosure when necessary is presumed to result in financial statements that give a true and fair view
a) Fair presentation and compliance with IFRSs
No such precisely statement before
17
copy 2005-07 Nelson 33
3 Overall Consideration
bull Statement of compliancendash An entity whose financial statements comply
with IFRSs shall make an explicit and unreserved statement of such compliance in the notes
ndash Financial statements shall not be described as complying with IFRSsbull unless they comply with all the
requirements of IFRSsndash In virtually all circumstances a fair
presentation is achieved by bull compliance with applicable IFRSs
a) Fair presentation and compliance with IFRSs
copy 2005-07 Nelson 34
3 Overall Consideration
Melco Development Limited (新濠國際發展有限公司)Notes to the financial statements for year ended 31122005ndash The consolidated financial statements have been prepared in
accordance with HKFRSsndash In addition the consolidated financial statements include applicable
disclosures required by the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited and by the Companies Ordinance
CaseCase
18
copy 2005-07 Nelson 35
3 Overall Consideration
bull A fair presentation also requires an entitya) to select and apply accounting policies in accordance
with IAS 8b) to present information including accounting policies
in a manner that provides relevant reliable comparable and understandable information
c) to provide additional disclosuresndash when compliance with the specific requirements in
IFRSs is insufficient to enable users to understand the impact of particular transactions other events and conditions on the entityrsquos financial position and financial performance
bull Inappropriate accounting policies are not rectified eitherndash by disclosure of the accounting policies used orndash by notes or explanatory material
a) Fair presentation and compliance with IFRSs
copy 2005-07 Nelson 36
3 Overall Consideration
bull Departure from Standard or Interpretation (Simplified)ndash In the extremely rare circumstances in which
management concludes thatbull compliance with a requirement in a standard or an
interpretation would be so misleading thatbull it would conflict with the objective of financial
statements set out in the Frameworkthe entity shall depart from that requirement if the relevant regulatory framework requires or otherwise does not prohibit such a departure
a) Fair presentation and compliance with IFRSs
19
copy 2005-07 Nelson 37
3 Overall Consideration
bull Departure from Standard or Interpretation (Simplified)
a) Fair presentation and compliance with IFRSs
ndash Then the following disclosure is requireda) management has concluded that the financial
statements give a true and fair viewb) that it has complied with applicable standards and
interpretations except that it has departed from a particular requirement
c) the title of the standard or interpretation from which the entity has departed the nature of the departure the reason why that treatment would be so misleading and the treatment adopted and
d) for each period presented the financial impact of the departure on each item in the financial statements that would have been reported in complying with the requirement
copy 2005-07 Nelson 38
3 Overall Consideration
Interim Report 2005 clearly stated thatInterim Report 2005 clearly stated that
CaseCase
bull The directors consider it inappropriate for the company to adopt two particular aspects of the newrevised HKFRSs as these would result in the financial statements in the view of the directors eitherbull not reflecting the commercial substance of the business orbull being subject to significant potential short-term volatility as
explained below helliphellip
20
copy 2005-07 Nelson 39
3 Overall ConsiderationCaseCase
bull HKAS 40 ldquoInvestment propertyrdquo requires an assessment of the fair value of investment properties
bull The group intends to follow the same accounting treatment as adopted in 2004 which is to value such investment properties on an annual basis
bull Accordingly the investment properties were not revalued at 30 June 2005 since the directors consider that such change of practice could introduce a significant element of short-term volatility into the income statement in respect of assets which are being held on a long-term basis by the group helliphellip
bull It is not practicable to estimate the financial effect of this non-compliance as no interim valuation of the properties has been conducted
Interim Report 2005 clearly stated thatInterim Report 2005 clearly stated that
At year-end revaluation would still be conductedAt year-end revaluation would still be conducted
copy 2005-07 Nelson 40
3 Overall ConsiderationCaseCase
bull HKAS 12 ldquoIncome Taxesrdquo together with HKAS-INT 21 ldquoIncome Taxes ndashRecovery of Revalued Non-Depreciable Assetsrdquo requires deferred taxation to be recognised on any revaluation movements on investment propertiesbull It is further provided that any such deferred tax liability should be calculated
at the profits tax rate in the case of assets which the management has no definite intention to sell
bull The company has not made such provision in respect of its HK investment properties since the directors consider that such provision would result in the financial statements not reflecting the commercial substance of the businessbull since should any such sale eventuate any gain would be regarded as capital
in nature and would not be subject to any tax in HKbull Should this aspect of HKAS 12 have been adopted deferred tax liabilities
amounting to HK$2008 million on the revaluation surpluses arising from revaluation of HK investment properties would have been provided
(estimate - over 12 of the net assets at 30 June 2005)
Interim Report 2005 clearly stated thatInterim Report 2005 clearly stated that
21
copy 2005-07 Nelson 41
3 Overall Consideration
bull Departure but such departure is prohibitedndash In the extremely rare circumstances in which
management concludes that bull compliance with a requirement in a
standard or an interpretation would be so misleading that
bull it would conflict with the objective of financial statements set out in the Framework
bull but the relevant regulatory framework prohibits departure from the requirement the entity shall to the maximum extent possible reduce the perceived misleading aspects of compliance by disclosing helliphellip
a) Fair presentation and compliance with IFRSs
copy 2005-07 Nelson 42
3 Overall Consideration
ndash by disclosinga) the title of the standard or interpretation in
question the nature of the requirement and the reason why management has concluded that complying with that requirement is so misleading in the circumstances that it conflicts with the objective of financial statements set out in the Framework and
b) for each period presented the adjustments to each item in the financial statements that management has concluded would be necessary to give a fair presentation
a) Fair presentation and compliance with IFRSsbull Departure but such departure is prohibited
22
copy 2005-07 Nelson 43
3 Overall Consideration
bull When assessing whether complying with a specific requirement in a standard or an interpretation would be so misleading that it would conflict with the objective of financial statements set out in the Frameworkndash management considers
a) why the objective of financial statements is not achieved in the particular circumstances and
b) how the entityrsquos circumstances differ from those of other entities that comply with the requirement ndash If other entities in similar circumstances comply with the
requirement raquo there is a rebuttable presumption that the entityrsquos compliance
with the requirement would not be so misleading that it would conflict with the objective of financial statements set out in the Framework
a) Fair presentation and compliance with IFRSs
copy 2005-07 Nelson 44
3 Overall ConsiderationCaseCase
Howrsquos about this Howrsquos about this
However 2005 Final Results Announcementdisclosed that bull provision for deferred tax was finally made
with regard to revaluation of the HK investment properties (total HK$22 billion) at 2005 year-end
However However 2005 Final Results Announcement2005 Final Results Announcementdisclosed that disclosed that bullbull provision for deferred tax was finally made provision for deferred tax was finally made
with regard to revaluation of the HK with regard to revaluation of the HK investment properties (total HK$22 billion) at investment properties (total HK$22 billion) at 2005 year2005 year--endend
23
copy 2005-07 Nelson 45
b) Going Concern
3 Overall Consideration
bull When preparing financial statements management shall make an assessment of an entityrsquos ability to continue as a going concern
bull Financial statements shall be prepared on a going concern basisndash unless management either intends to liquidate the entity or to cease
trading or has no realistic alternative but to do so bull When management is aware in making its assessment of
material uncertainties related to events or conditions that may cast significant doubt upon the entityrsquos ability to continue as a going concern those uncertainties shall be disclosed
bull When financial statements are not prepared on a going concern basis that fact shall be disclosed together with the basis on which the financial statements are prepared and the reason why the entity is not regarded as a going concern
copy 2005-07 Nelson 46
c) Accrual Basis of Accounting
3 Overall Consideration
bull An entity shall prepare its financial statements except for cash flow information using the accrual basis of accounting
bull When the accrual basis of accounting is used items are recognised as assets liabilities equity income and expensesndash when they satisfy the definitions and recognition criteria for those
elements in the Framework
24
copy 2005-07 Nelson 47
3 Overall Consideration
bull The presentation and classification of items in the financial statements shall be retained from one period to the next unlessa) it is apparent
bull following a significant change in the nature of the entityrsquos operations (eg significant acquisition or disposal) or
bull a review of its financial statementsthat another presentation or classification would be more appropriatehaving regard to the criteria for the selection and application of accounting policies in IAS 8 or
b) a IFRS requires a change in presentation
d) Consistency of presentation
An entity changes the presentation of its financial statements only ifndash the changed presentation provides information that is reliable and is
more relevant to users of the financial statements andndash the revised structure is likely to continue so that comparability is not
impaired
An entity changes the presentation of its financial statements only ifndash the changed presentation provides information that is reliable and is
more relevant to users of the financial statements andndash the revised structure is likely to continue so that comparability is not
impaired
copy 2005-07 Nelson 48
3 Overall Consideration
bull Each material class of similar items shall bendash presented separately in the financial
statementsbull Items of a dissimilar nature or function shall be
ndash presented separately unless they are immaterial
bull Applying the concept of materiality means that a specific disclosure requirement in a IFRS neednot be satisfied if the information is not material
e) Materiality and Aggregation
What is the situation of recognition and measurement
What is the What is the situation of situation of recognition and recognition and measurementmeasurement
25
copy 2005-07 Nelson 49
3 Overall Consideration
bull What is materialndash Omissions or misstatements of items are
material if they could individually or collectively influence the economic decisions of users taken on the basis of the financial statements
ndash Materiality depends on the size and nature of the omission or misstatement judged in the surrounding circumstancesbull The size or nature of the item or a combination
of both could be the determining factor
e) Materiality and Aggregation
copy 2005-07 Nelson 50
3 Overall Consideration
bull Assets and liabilities and income and expenses shall not be offsetndash unless required or permitted by a IFRS
bull It is important that assets and liabilities and income and expenses are reported separatelyndash Measuring assets net of valuation allowances mdash
for example obsolescence allowances on inventories and doubtful debts allowances on receivables mdash is not offsetting
f) Offsetting
26
copy 2005-07 Nelson 51
3 Overall Consideration
bull During ordinary activities some transactions that do not generate revenue but are incidental to the main revenue-generating activitiesndash The results of such transactions are presented
when this presentation reflects the substance of the transaction or other event by netting any income with related expenses arising on the same transaction
f) Offsetting
copy 2005-07 Nelson 52
3 Overall Consideration
bull For examplea) gains and losses on the disposal of non-current
assets including investments and operating assets- are reported by deducting from the proceeds on
disposal the carrying amount of the asset and related selling expenses and
b) expenditure related to a provision that is- recognised in accordance with IAS 37 and - reimbursed under a contractual arrangement with
a third party (for example a supplierrsquos warranty agreement)
may be netted against the related reimbursement
f) Offsetting
ExampleExample
27
copy 2005-07 Nelson 53
3 Overall Consideration
bull Gains and losses arising from a group of similar transactions are reported on a net basisndash For example
bull foreign exchange gains and losses or bull gains and losses arising on financial instruments held for trading
bull Such gains and losses are however reported separately if they are material
bull Gains and losses arising from a group of similar transactions are reported on a net basisndash For example
bull foreign exchange gains and losses or bull gains and losses arising on financial instruments held for trading
bull Such gains and losses are however reported separately if they are material
Can foreign exchange gains and losses be offset
ExampleExample
copy 2005-07 Nelson 54
3 Overall Consideration
bull Except when a IFRS permits or requires otherwise ndash comparative information shall be disclosed in
respect of the previous period for all amountsreported in the financial statements
bull When the presentation or classification of items in the financial statements is amended ndash comparative amounts shall be reclassified unless
the reclassification is impracticable
g) Comparative information
28
copy 2005-07 Nelson 55
Amended requirementsAmended requirements
3 Overall Consideration
bull When comparative amounts are reclassified an entity shall disclosea) the nature of the reclassificationb) the amount of each item or class of items that is
reclassified andc) the reason for the reclassification
g) Comparative information
bull In the pastonly the reason for and a description of the nature of materialreclassifications should be disclosedExemption for disclosure of comparative information for the reconciliation of movements in fixed assets is also removed
bull In the pastonly the reason for and a description of the nature of materialreclassifications should be disclosedExemption for disclosure of comparative information for the reconciliation of movements in fixed assets is also removed
copy 2005-07 Nelson 56
3 Overall Consideration
Melco Development Limited (新濠國際發展有限公司)Notes to the financial statements for year ended 31122005ndash Because HKAS 32 requires retrospective application comparative
figures for 2004 have been restated (see Note 2A for the financial impact)
CaseCase
29
copy 2005-07 Nelson 57
3 Overall Consideration
Galaxy Entertainment Group LimitedNotes to the financial statements (ye 31122005)ndash All changes in the accounting policies require
retrospective application except HKAS 39 and HKFRS 2 for which transitional provisions are applied
ndash As a result the 2004 comparative figures have also been restated or amended in accordance with the relevant requirements
ndash The effects of all the changes in accounting policies are summarised in notes (b) and (c) below
CaseCase
copy 2005-07 Nelson 58
bull Identification of the financial statementsbull Reporting periodbull Balance sheet
1 CurrentNon-current distinction2 Current assets3 Current liabilities4 Information to be presented on the face of the balance sheet5 Information to be presented either on the face of the balance sheet or in
the notesbull Income statement
1 Profit or loss for the period2 Information to be presented on the face of the income statement3 Information to be presented either on the face of the income statement or
in the notesbull Statement of changes in equitybull Cash flow statementbull Notes
4 Structure and Content
30
copy 2005-07 Nelson 59
Identification of Financial Statements
bull The financial statements shall be identified clearly and distinguished from other information in the same published document
bull The following information shall be displayed prominently and repeated when it is necessary for a proper understanding of the information presented
a) the name of the reporting entity or other means of identification and any change in that information from the preceding balance sheet date
b) whether the financial statements cover the individual entity or a group of entities
c) the balance sheet date or the period covered by the financial statements whichever is appropriate to that component of the financial statements
d) the presentation currency as defined in HKAS 21 The Effects of Changes in Foreign Exchange Rates and
e) the level of rounding used in presenting amounts in the financial statements
copy 2005-07 Nelson 60
Identification of Financial Statements
bull Can the units of the presentation currency be rounded to thousands or millions
bull Financial statements are often made more understandableby presenting information in thousands or millions of units of the presentation currency
bull This is acceptable as long asndash the level of rounding in presentation is disclosed and ndash material information is not omitted
bull Financial statements are often made more understandableby presenting information in thousands or millions of units of the presentation currency
bull This is acceptable as long asndash the level of rounding in presentation is disclosed and ndash material information is not omitted
ExampleExample
31
copy 2005-07 Nelson 61
Reporting Period
bull Financial statements shall be presented at least annually
bull When an entityrsquos balance sheet date changes and the annual financial statements are presented for a period longer or shorter than one year an entity shall disclose in addition to the period covered by the financial statementsa) the reason for using a longer or shorter period andb) the fact that comparative amounts for the income
statement statement of changes in equity cash flow statement and related notes are not entirely comparable
copy 2005-07 Nelson 62
Reporting Period
bull Can a set of financial statements cover 52-week instead of a year
bull Normally financial statements are consistently prepared covering a one-year period
bull However for practical reasons some entities prefer to report for example for a 52-week period
bull IAS 1 does not preclude this practice because the resulting financial statements are unlikely to be materially different from those that would be presented for one year
bull Normally financial statements are consistently prepared covering a one-year period
bull However for practical reasons some entities prefer to report for example for a 52-week period
bull IAS 1 does not preclude this practice because the resulting financial statements are unlikely to be materially different from those that would be presented for one year
ExampleExample
32
copy 2005-07 Nelson 63
CurrentNon-current Distinction
bull An entity shall presentndash current and non-current assets andndash current and non-current liabilitiesas separate classifications on the face of its balance sheet
bull Except when a presentation based on liquidity provides informationndash If that information is reliable and is more relevantndash When that exception applies all assets and liabilities shall be
presented broadly in order of liquidity
copy 2005-07 Nelson 64
CurrentNon-current Distinction
bull Whichever method of presentation is adopted for each asset and liability line item that combines amounts expected to be recovered or settled a) no more than 12 months after the balance sheet date
andb) more than 12 months after the balance sheet date(ie combines both current and non-current)
an entity shall disclose the amount expected to be recovered or settled after more than 12 months
33
copy 2005-07 Nelson 65
New requirementsNew requirements
Current Assets
bull An asset shall be classified as current when it satisfies any of the following criteriaa) it is expected to be realised in or is intended for sale or
consumption in the entityrsquos normal operating cycle b) it is held primarily for the purpose of being tradedc) it is expected to be realised within 12 months after the balance
sheet date ord) it is cash or a cash equivalent
bull unless it is restricted from being exchanged or used to settle aliability for at least 12 months after the balance sheet date
bull All other assets shall be classified as non-current
Examplesbull Deposits pledged to bank (how long)bull Fixed deposits over 1 year maturity
Examplesbull Deposits pledged to bank (how long)bull Fixed deposits over 1 year maturity
What is itWhat is it
copy 2005-07 Nelson 66
Current Assets
bull What is operating cycle
bull The operating cycle of an entity is the time between ndash the acquisition of assets for processing and ndash their realisation in cash or cash equivalents
bull When the entityrsquos normal operating cycle is not clearly identifiable ndash its duration is assumed to be 12 months
bull The operating cycle of an entity is the time between ndash the acquisition of assets for processing and ndash their realisation in cash or cash equivalents
bull When the entityrsquos normal operating cycle is not clearly identifiable ndash its duration is assumed to be 12 months
ExampleExample
34
copy 2005-07 Nelson 67
Current Assets CaseCase
copy 2005-07 Nelson 68
Current Assets
bull Can a non-current asset reclassified if it fulfil the definition of current asset later
bull Assets classified as non-current in accordancewith IAS 1 shall not be reclassified as current assetsndash until they meet the criteria to be classified as held for sale in
accordance with IFRS 5bull Assets of a class that an entity would normally regard as non-
current that are acquired exclusively with a view to resale shall notbe classified as currentndash unless they meet the criteria to be classified as held for sale in
accordance with IFRS 5
bull Assets classified as non-current in accordancewith IAS 1 shall not be reclassified as current assetsndash until they meet the criteria to be classified as held for sale in
accordance with IFRS 5bull Assets of a class that an entity would normally regard as non-
current that are acquired exclusively with a view to resale shall notbe classified as currentndash unless they meet the criteria to be classified as held for sale in
accordance with IFRS 5
No non-current assets can be classified as current unless the criteria in IFRS 5 are fulfilled mainlybull Available for immediate salebull Highly probable to make the sale
35
copy 2005-07 Nelson 69
Is it currentIs it current
Current Assets
bull In its 2005 Interim Report full set of HKFRS was adopted and the report set out thatndash Available-for-sale financial assets are non-
derivatives that are eitherbull designated in this category orbull not classified in any of the other categories (ie
loans and receivables financial assets at fair value through profit or loss and held-to-maturity investments)
CaseCase
Similar in 2005 Annual Report
Similar in 2005 Annual Report
ndash They are included in non-current assetsbull unless management intends to dispose of the
investment within 12 months of the balance sheet date
copy 2005-07 Nelson 70
New requirementsNew requirements
Current Liabilities
bull A liability shall be classified as current when it satisfies any of the following criteriaa) it is expected to be settled in the entityrsquos normal operating cycleb) it is held primarily for the purpose of being tradedc) it is due to be settled within 12 months after the balance sheet
date ord) the entity does not have an unconditional right to defer settlement
of the liability for at least 12 months after the balance sheet date
bull All other liabilities shall be classified as non-current
ImplicationImplication
36
copy 2005-07 Nelson 71
Current Liabilities Revised rules on classifying a liability as current or non-currentbull A liability held for being traded rArr currentbull A financial liability due within 12 months after the BS date rArr current
ndash even if an agreement to refinance on a long-term basis is completed after the BS date (only disclosed as non-adjusting event)
bull If an entity has discretion to refinance rArr non-currentbull If an entity without discretion to refinance rArr current
bull A non-current financial liability is payable on demand with a breach on a condition of its loan agreement on or before the BS datendash If the lender agreed not to demand payment
bull after the BS date rArr current (only disclosed as non-adjusting event)
bull by the BS date rArr non-current
ImplicationImplication
copy 2005-07 Nelson 72
Current LiabilitiesCaseCase
Note 12 to Interim Report 2006bull Breach of loan covenants
bull As at 30 June 2006 in respect of certain bank loans with an aggregate carrying amount of HK$1529806000 the Group breached certain financial covenants of the banks loans
bull Since the lenders have not agreed to waive its right to demand immediate payment as at the balance sheet date the loans have been classified as current liabilities in these financial statements at 30 June 2006
37
copy 2005-07 Nelson 73
Current Assets and LiabilitiesExampleExample
Can the following be classified as current assetsbull 3-month fixed deposits pledged to a bank to secure
a mortgage loan of 5 yearsbull 2-year fixed deposits with a bank
Can the following be classified as current assetsbull 3-month fixed deposits pledged to a bank to secure
a mortgage loan of 5 yearsbull 2-year fixed deposits with a bank
Can the following be classified as non-current liabilitiesbull 5-year term loan matured after year end but renewed
for another 5 years after year end (before the issuanceof the financial statements)
bull 2-year term loan to be matured with 12 months and theentity has a right to renew for another 2 years
Can the following be classified as non-current liabilitiesbull 5-year term loan matured after year end but renewed
for another 5 years after year end (before the issuanceof the financial statements)
bull 2-year term loan to be matured with 12 months and theentity has a right to renew for another 2 years
timestimes
times
radic
copy 2005-07 Nelson 74
Balance Sheetbull As a minimum the face of the balance sheet shall
include line items that present the following amountsa) property plant and equipmentb) investment propertyc) intangible assetsd) financial assets (excl amounts shown under (e) (h) and (I))e) investments accounted for using the equity methodf) biological assetsg) inventoriesh) trade and other receivablesi) cash and cash equivalentsj) trade and other payablesk) provisionsl) financial liabilities (excl amounts shown under (j) and (k))m) liabilities and assets for current tax as defined in HKAS 12 Income Taxesn) deferred tax liabilities and deferred tax assets as defined in HKAS 12o) minority interest presented within equity andp) issued capital and reserves attributable to equity holders of the parent
38
copy 2005-07 Nelson 75
Balance Sheetbull The face of the balance sheet shall also include line
items that present the following amountsa) The total of assets classified as held for sale and
assets included in disposal groups classified as held for sale in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations and
b) Liabilities included in disposal groups classified as held for sale in accordance with IFRS 5
copy 2005-07 Nelson 76
Balance Sheetbull Additional line items headings and subtotals shall
be presented on the face of the balance sheet when such presentation is relevant to an understanding of the entityrsquos financial position
bull When an entity presents current and non-current assets and current and non-current liabilities as separate classifications on the face of its balance sheet ndash it shall not classify deferred tax assets
(liabilities) as current assets (liabilities)
39
copy 2005-07 Nelson 77
Balance Sheet
bull The use of different measurement bases for different classes of assets suggests that their nature or function differs and therefore that they should be presented as separate line itemsndash For example different classes of property plant and
equipment can be carried atbull Cost orbull Revalued amountsin accordance with IAS 16 PPE
In the past it use ldquomay needrdquoIn the past it use ldquomay needrdquo
copy 2005-07 Nelson 78
Balance Sheet
Galaxy Entertainment Group LimitedConsolidated balance sheet as at 31122005
CaseCase
40
copy 2005-07 Nelson 79
Balance Sheet
Melco Development Limited (新濠國際發展有限公司)Consolidated balance sheet as at 31122005
CaseCase
copy 2005-07 Nelson 80
Income Statement Minimum requirements on the face of the income statementbull As a minimum the face of the income statement shall include line items
that present the following amounts for the perioda) revenueb) finance costsc) share of the profit or loss of associates and joint ventures accounted
for using the equity methodd) pre-tax gain or loss recognised on the disposal of assets or
settlement of liabilities attributable to discontinuing operationse) tax expense andf) profit or loss
41
copy 2005-07 Nelson 81
Income Statement bull The following items shall be disclosed on the face of the income
statement as allocations of profit or loss for the perioda) Profit or loss attributable to minority interest andb) Profit or loss attributable to equity holders of the parent
A similar requirement has been added for the statement of changes in equity and such allocated amounts are not to be presented as items of income or expense
copy 2005-07 Nelson 82
Income Statement
Melco Dev LtdConsolidated income statementas at 31122005
CaseCase
42
copy 2005-07 Nelson 83
Income Statement bull Not require to disclose the results of operating
activities as a line item on the face of the incomestatement
bull An entity shall not present any items of income and expense as extraordinary items either onthe face of the income statements or in the notes
Entities canrsquot use itEntities canrsquot use it
Entities can still show itEntities can still show it
copy 2005-07 Nelson 84
Income Statement Either on the face of the income statement or in the notesbull An entity shall present an analysis of expenses using a classification
based on eitherbull the nature of expenses orbull their function within the entity
whichever provides information that is reliable and more relevant
bull Entities classifying expenses by function shall disclose additional information on the nature of expenses includingbull depreciation and amortisation expense and bull employee benefits expense
43
copy 2005-07 Nelson 85
Income StatementCaseCase
Nature or FunctionNature or Nature or FunctionFunction
copy 2005-07 Nelson 86
Statement of Changes in Equity bull An entity shall present a statement of changes in equity showing on the
face of the statementa) profit or loss for the period b) each item of income and expense for the period that as required by
IFRSs is recognised directly in equity and the total of these itemsc) total income and expense for the period (calculated as the sum of (a) and
(b)) showing separately the total amounts attributablebull to equity holders of the parent andbull to minority interest and
d) for each component of equity the effects of changes in accounting policies and corrections of errors recognised in accordance with IAS 8
Any ChangeAny Change
A revised requirementbull A statement of changes in equity that comprises only these items
shall be titled a statement of recognised income and expenses
A revised requirementbull A statement of changes in equity that comprises only these items
shall be titled a statement of recognised income and expenses
44
copy 2005-07 Nelson 87
Statement of Changes in Equity bull An entity shall also present either on the face of the
statement of changes in equity or in the notesa) the amounts of transactions with equity holders acting in
their capacity as equity holders showing separately distributions to equity holders
b) the balance of retained earnings (ie accumulated profit or loss) at the beginning of the period and at the balance sheet date and the changes during the period and
c) a reconciliation between the carrying amount of each class of contributed equity and each reserve at the beginning and the end of the period separately disclosing each change
copy 2005-07 Nelson 88
Statement of Changes in Equity
Consolidated SCE as at 31122005
CaseCase
45
copy 2005-07 Nelson 89
Notes Structure (an entity is required to disclose the following)
bull The notes shalla) present information about the basis of preparation of the financial statements
and the specific accounting policies usedb) disclose the information required by HKFRSs that is not presented on the
face of the balance sheet income statement statement of changes in equity or cash flow statement and
c) provide additional information that is not presented on the face of the balance sheet income statement statement of changes in equity or cash flow statement but is relevant to an understanding of any of them
bull Notes shall as far as practicable be presented in a systematic manner bull Each item on the face of the balance sheet income statement statement
of changes in equity and cash flow statement shall be cross-referencedto any related information in the notes
copy 2005-07 Nelson 90
Notes Disclosures (an entity is required to disclose the following)
bull Disclosure of accounting policiesAn entity shall disclose in the summary of significant accounting policiesa) the measurement basis (or bases) used in preparing the financial
statements andb) the other accounting policies used that are relevant to an understanding of
the financial statements
46
copy 2005-07 Nelson 91
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)ndash The financial statements have been prepared in
accordance with Hong Kong Financial Reporting Standards (lsquolsquoHKFRSrsquorsquo) issued by the Hong Kong Institute of Certified Public Accountants bull under the historical cost convention as modified by the
revaluation of investment properties available-for-sale financial assets derivative financial instruments and other investments which are carried at fair values helliphellip
ndash The principal accounting policies applied in the preparation of these financial statements are set out below These policies have been consistently applied to all the years presented except for those stated in note 2(a) above
copy 2005-07 Nelson 92
Notes Disclosures (an entity is required to disclose the following)
bull Disclosure of accounting policiesndash The judgements apart from those involving estimations management has
madebull in the process of applying the entityrsquos accounting policies that have the
most significant effect on the amounts recognised in the financial statements (in the summary of significant accounting policies or other notes)
Examples ndash Management makes judgements in determininga) whether financial assets are held-to-maturity investmentsb) when substantially all the significant risks and rewards of
ownership of financial assets and lease assets are transferred to other entities
c) whether in substance particular sales of goods are financing arrangements and therefore do not give rise to revenue and
d) whether the substance of the relationship between the entity and a special purpose entity indicates that the special purpose entity is controlled by the entity
Examples ndash Management makes judgements in determininga) whether financial assets are held-to-maturity investmentsb) when substantially all the significant risks and rewards of
ownership of financial assets and lease assets are transferred to other entities
c) whether in substance particular sales of goods are financing arrangements and therefore do not give rise to revenue and
d) whether the substance of the relationship between the entity and a special purpose entity indicates that the special purpose entity is controlled by the entity
47
copy 2005-07 Nelson 93
Notes Disclosures (an entity is required to disclose the following)
bull Key sources of estimation uncertaintyndash Information about the key assumptions concerning the future and
other key sources of estimation uncertainty at the balance sheet datebull that have a significant risk of causing a material adjustment to the
carrying amounts of assets and liabilities within the next financial yearndash In respect of those assets and liabilities the notes shall include details of
a) their nature andb) their carrying amount as at the balance sheet date
Examples ndash in the absence of recently observed market prices used to measure the following assets and liabilities future-oriented estimates are necessary to measurebull the recoverable amount of classes of PPEbull the effect of technological obsolescence on inventories
Estimates involve assumptions about such items asbull the risk adjustment to cash flows or discount rates usedbull future changes in salaries and in prices affecting other costs
Examples ndash in the absence of recently observed market prices used to measure the following assets and liabilities future-oriented estimates are necessary to measurebull the recoverable amount of classes of PPEbull the effect of technological obsolescence on inventories
Estimates involve assumptions about such items asbull the risk adjustment to cash flows or discount rates usedbull future changes in salaries and in prices affecting other costs
copy 2005-07 Nelson 94
Notes
Esprit Holdings LimitedEsprit Holdings Limitedbull Critical Accounting Estimates and Judgements
ndash Estimates and judgements are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonableunder the circumstances
ndash Critical accounting estimates and assumptionsbull The Group makes estimates and assumptions concerning
the future The resulting accounting estimates will by definition seldom equal the related actual results
bull The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below helliphellip (including (1) useful life and impairment of trademarks and (2) income taxes)
CaseCase
48
copy 2005-07 Nelson 95
Notes
Melco Development Limited (新濠國際發展有限公司)Notes to the financial statements for the year ended 31122005ndash The key assumptions concerning the future and other key sources
of estimation uncertainty at the balance sheet date that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below helliphellip(The issues discussed includebull Allowances for inventories bull Estimated impairment of goodwill Income taxes)
CaseCase
copy 2005-07 Nelson 96
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)ndash Estimates and judgements used in preparing the
financial statements are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonable under the circumstances
ndash The Group makes estimates and assumptionsconcerning the future
ndash The resulting accounting estimates will by definition seldom equal the related actual results
ndash The estimates and assumptions that have a significant effect on the carrying amounts of assets and liabilities are discussed below hellip (including impairment of goodwill impairment of gaming
licence Useful lives of property plant and equipment fair value of investment properties hellip)
49
copy 2005-07 Nelson 97
Notes Disclosures (an entity is required to disclose the following)
bull Other disclosuresAn entity shall disclose in the notesa) the amount of dividends proposed or declared before the
financial statements were authorised for issue but not recognised as a distribution to equity holders during the period and the related amount per share(HK incorporated companies are required to show the aggregate amount which is recommended for distribution by way of dividend under a separate heading(s) in their balance sheet (HK Co Ord 10th Sch para 9(1)(e)) and
b) the amount of any cumulative preference dividends not recognised
copy 2005-07 Nelson 98
Notes Disclosures (an entity is required to disclose the following)
An entity shall disclose the following if not disclosedelsewhere in information published with the financial statementsa) the domicile and legal form of the entity
its country of incorporation andthe address of its registered office(or principal place of business if different from the registered office)
b) a description of the nature of the entityrsquos operations and its principal activities and
c) the name of the parent and the ultimate parent of the group
ldquoshall discloserdquo now instead of ldquoencouraged to discloserdquo
ldquoshall discloserdquo now instead of ldquoencouraged to discloserdquo
bull Other disclosures
Any specialAny special
50
copy 2005-07 Nelson 99
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)bull The principal activities of Galaxy Entertainment Group
Ltd (the lsquolsquoCompanyrsquorsquo) (formerly known as K WahConstruction Materials Ltd) and its subsidiaries (together the lsquolsquoGrouprsquorsquo) are tondash operate in casino games of chance or games of other forms
in Macau (and) manufacture sale and distribution of construction materials in HK Macau and Mainland China
bull The Company is ndash a limited liability company incorporated in Hong Kong and ndash has its listing on the Main Board of The Stock Exchange of
Hong Kong Limitedbull The address of its registered office and its principal place
of business is Room 1606 16th Floor Hutchison House 10 Harcourt Road Central HK
copy 2005-07 Nelson 100
Effective Date
bull An entity shall apply IAS 1 for annual periods beginning on or after 1 Jan 2005
ndash Earlier application is encouragedndash If an entity applies IAS 1 for an earlier period it shall
disclose this factbull For the amendments relating to the Statement of
Changes in Equityndash An entity shall apply it for annual periods beginning on
or after 1 Jan 2006ndash If an entity applies the amendments to IAS 19
Employee Benefits ndash Actuarial Gains and Losses Group Plans and Disclosures for an earlier period that amendment shall be applied for that earlier period
51
copy 2005-07 Nelson 101
Todayrsquos Agenda
Capital Disclosures (Amendments to IAS 1)
Capital Disclosures (Amendments to IAS 1)
copy 2005-07 Nelson 102
Capital Disclosures ndash For 2007
52
copy 2005-07 Nelson 103
Capital Disclosures
What is capital Is it helliphellip
CapitalCapital AssetsAssets LiabilitiesLiabilities= ndash
bull IAS 1BC47 considers ldquowhether an entity can have a view of capital that differs from what IFRSs define as equityrdquo
bull It further clarifies that although for the purposes of this disclosure capital would often equate with equity as defined in IFRSsndash it might also include or exclude some components
bull It also noted that the capital disclosure in IAS 1 is intended to give entities the opportunity to describendash how they view the components of capital they manage if this is
different from what IFRSs define as equity helliphellip
copy 2005-07 Nelson 104
EquityEquityEquity AssetsAssets LiabilitiesLiabilities= ndash
Capital Disclosures
Based on the Framework amp IFRSs the accounting equation should be
CapitalCapital AssetsAssets LiabilitiesLiabilities= ndash
bull An entityrsquos capital may be part of its equity plus part of its liabilities depending on how it manage ldquoits capitalrdquo helliphellip
53
copy 2005-07 Nelson 105
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowinga) qualitative information about its objectives policies and processes for
managing capital including (but not limited to)i) a description of what it manages as capitalii) when an entity is subject to externally imposed capital requirements
the nature of those requirements and how those requirements are incorporated into the management of capital and
iii) how it is meeting its objectives for managing capital
bull To comply with the capital disclosures the entity discloses thefollowinga) qualitative information about its objectives policies and processes for
managing capital including (but not limited to)i) a description of what it manages as capitalii) when an entity is subject to externally imposed capital requirements
the nature of those requirements and how those requirements are incorporated into the management of capital and
iii) how it is meeting its objectives for managing capital
copy 2005-07 Nelson 106
Capital Disclosures
Example disclosurebull The Grouprsquos objectives when managing capital are
ndash to safeguard the entityrsquos ability to continue as a going concern
bull so that it can continue to provide returns for shareholders and benefits for other stakeholders and
ndash to provide an adequate return to shareholders by pricing products and services commensurately with the level of risk
bull The Group sets the amount of capital in proportion to risk
ExampleExample
ObjectivesObjectives
54
copy 2005-07 Nelson 107
Capital Disclosures
bull The Group manages the capital structure and makes adjustments to it in the light ofndash changes in economic conditions and ndash the risk characteristics of the underlying assets
bull In order to maintain or adjust the capital structure the Group mayndash adjust the amount of dividends paid to shareholders ndash return capital to shareholders ndash issue new shares or ndash sell assets to reduce debt
ExampleExample
Example disclosure
HowHow
copy 2005-07 Nelson 108
Capital Disclosures
bull Consistently with others in the industry the Group monitors capital on the basis of ndash the debt-to-adjusted capital ratio
bull This ratio is calculated as net debt divide adjusted capital
ExampleExample
Example disclosure
HowHow
bull Net debt is calculated as ndash Total debt (as shown in the
balance sheet)ndash Less cash amp cash equivalents
bull Net debt is calculated as ndash Total debt (as shown in the
balance sheet)ndash Less cash amp cash equivalents
bull Adjusted capital ndash comprises all components of
equity (ie share capital share premium minority interest retained earnings and revaluation reserve) ndash other than amounts
recognised in equity relating to cash flow hedges and
ndash includes some forms of subordinated debt
bull Adjusted capital ndash comprises all components of
equity (ie share capital share premium minority interest retained earnings and revaluation reserve) ndash other than amounts
recognised in equity relating to cash flow hedges and
ndash includes some forms of subordinated debt
55
copy 2005-07 Nelson 109
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowing
bull To comply with the capital disclosures the entity discloses thefollowingb) summary quantitative data about what it manages as capital
Some entities regard some financial liabilities (eg some forms of subordinated debt) as part of capitalOther entities regard capital as excluding some components of equity (eg components arising from cash flow hedges)
c) any changes in (a) and (b) from the previous period
copy 2005-07 Nelson 110
Capital Disclosures
Example disclosure (continued from previous example)
ExampleExample
bull During 20X4 the Grouprsquos strategy which was unchanged from 20X3 was to maintain the debt-to-adjusted capital ratio at the lower end of the range 61 to 71 in order to secure access to finance at a reasonable cost by maintaining a BB credit rating The debt-to-adjusted capital ratios at 31 December 20X4 and at 31 December 20X3 were as follows
3112X4 ($rsquoM) 3112X3 ($rsquoM) Total debt 1000 1100 Less cash and cash equivalents (90) (150)Net debt 910 950
Total equity 110 105 Add subordinated debt instruments 38 38 Less amounts recognised in equity
relating to cash flow hedges (10) (5)Adjusted capital 138 138
Debt-to-adjusted capital ratio 66 69
56
copy 2005-07 Nelson 111
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowing
bull To comply with the capital disclosures the entity discloses thefollowingd) whether during the period it complied with any externally imposed capital
requirements to which it is subjecte) when the entity has not complied with such externally imposed capital
requirements the consequences of such non-complianceThese disclosures shall be based on the information provided internally to the entityrsquos key management personnel
copy 2005-07 Nelson 112
Capital DisclosuresExampleExample
Example disclosurebull Entity A filed its quarterly regulatory capital return for
30 September 20X7 on 20 October 20X7 bull At that date Entity Arsquos regulatory capital was below
the capital requirement imposed by Regulator B by $1 million
bull As a result Entity A was required to submit a plan to the regulator indicating how it would increase its regulatory capital to the amount required
bull Entity A submitted a plan that entailed selling part of its unquoted equities portfolio with a carrying amount of $115 million in the fourth quarter of 20X7
bull In the fourth quarter of 20X7 Entity A sold its fixed interest investment portfolio for $126 million and met its regulatory capital requirement
For example SFC or banks
For example SFC or banks
57
copy 2005-07 Nelson 113
Capital DisclosuresCaseCase
bull Early adopted capital disclosure in 2005 and itsannual report states that (extract only)ndash The Grouprsquos objectives when managing capital are
bull To safeguard the Grouprsquos ability to continue as a going concern so that it continues to provide returns for shareholders and benefits for other stakeholders
bull To support the Grouprsquos stability and growth andbull To provide capital for the purpose of strengthening the
Grouprsquos risk management capability
copy 2005-07 Nelson 114
Capital DisclosuresCaseCase
ndash The Group actively and regularly reviews and manages its capital structure to ensure optimal capital structure and shareholder returns taking into consideration the future capital requirements of the Group and capital efficiency helliphellip
ndash The Group adopts a dividend policy helliphellip while retaining 10 per cent of the profit as capital of the Group for future use
ndash The Group has set aside $1500 million of retained earnings for the purpose of strengthening the risk management regime of the clearing houses and supporting their roles as central counterparties
ndash As in prior years the Group monitors capital by reviewing the level of capital that is at the disposal of the Group (ldquoadjusted capitalrdquo) Adjusted capital comprises all components of shareholdersrsquo equity other than the hedging reserve relating to cash flow hedges designated reserves and investment revaluation reserve helliphellip
bull Early adopted capital disclosure in 2005 and itsannual report states that (extract only)
58
copy 2005-07 Nelson 115
Capital Disclosures ndash Transition
bull An entity shall apply the requirements of capital disclosure for
ndash annual periods beginning on or after 1 January 2007
bull Early application is encouraged
copy 2005-07 Nelson 116
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk
59
copy 2005-07 Nelson 117
QampA SessionQampA SessionQampA Session
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk
6
copy 2005-07 Nelson 11
Objective AssumptionsUnderlying Assumptions includebull Accrual Basis
ndash In order to meet their objectives financial statements are prepared on the accrual basis of accounting
ndash Under this basisbull the effects of transactions and other events are recognised when they
occur (and not as cash or its equivalent is received or paid) andbull they are recorded in the accounting records and reported in the
financial statements of the periods to which they relate bull Going Concern
ndash The financial statements are normally prepared on the assumption that an entity is a going concern and will continue in operation for the foreseeable future
ndash Hence it is assumed that the entity has neither the intention nor the need to liquidate or curtail materially the scale of its operations if such an intention or need exists the financial statements may have to be prepared on a different basis and if so the basis used is disclosed
copy 2005-07 Nelson 12
Qualitative Characteristics
Objective Qualitative Characteristics
Qualitative Characteristics
Primary qualitative characteristicsof financial statements
bull Relating to content- Relevance (Predictive value Confirmatory value Interrelated)
- Reliability (Faithful representation Substance over form NeutralityPrudence and Completeness)
bull Relating to presentation- Comparability (Consistency and Disclosure)
- Understandability (Usersrsquo ability Aggregation and Classification)
7
copy 2005-07 Nelson 13
Qualitative Characteristics
Objective Qualitative Characteristics
Qualitative Characteristics
Primary qualitative characteristicsof financial statements
bull Relating to content- Relevance- Reliability
bull Relating to presentation- Comparability- Understandability
Management Decision
Management Decision
Financial reportingFinancial Financial reportingreporting
copy 2005-07 Nelson 14
Qualitative Characteristics
Emerging International PracticesEmerging International Practicesbullbull Financial reporting framework clearly definedFinancial reporting framework clearly definedbullbull Definition of assets and liabilities clearly establishedDefinition of assets and liabilities clearly establishedbullbull Beginning to adopt fair value model (instead of only historical Beginning to adopt fair value model (instead of only historical
cost)cost)bullbull Discussing convergence in certain practicesDiscussing convergence in certain practicesbullbull From IASC to IASB (International Accounting Standard Board)From IASC to IASB (International Accounting Standard Board)bullbull From IAS to IFRS (International Financial Reporting From IAS to IFRS (International Financial Reporting
Standards) Standards) helliphelliphelliphellip
8
copy 2005-07 Nelson 15
All aims atAll aims atRelevanceRelevanceReliabilityReliabilityComparabilityComparabilityUnderstandabilityUnderstandability
Qualitative Characteristics
Management Decision
Management Decision
Financial reportingFinancial Financial reportingreporting
copy 2005-07 Nelson 16
Elements of Financial Statements
Objective Qualitative Characteristics ElementsElements
Asset
Liability
Equity
Income
Expenses
Financial Position (in balance sheet)
Financial Performance (in income statement)
bull a resource controlled by the enterprise as a result of past eventsand from which future economic benefits are expected to flow tothe enterprise
bull a present obligation of the enterprise arising from past eventsthe settlement of which is expected to result in an outflow fromthe enterprise of resources embodying economic benefits
bull the residual interest in the assets of the enterprise after deducting all its liabilities
bull increases in economic benefits during a period in the form ofndash inflows or enhancements of assets orndash decreases of liabilities that result in increases in equityndash other than those relating to contributions from equity participants
bull decreases in economic benefits during a period in the form ofndash outflows or depletions of assets orndash incurrences of liabilities that result in decreases in equityndash other than those relating to distributions to equity participants
Balance Sheet Approach
9
copy 2005-07 Nelson 17
Elements of Financial Statements
Objective Qualitative Characteristics ElementsElements
Asset
Liability
Equity
Income
Expenses
Financial Position (in balance sheet)
Financial Performance (in income statement)
bull a resource controlled by the enterprise as a result of past eventsand from which future economic benefits are expected to flow tothe enterprise
bull a present obligation of the enterprise arising from past eventsthe settlement of which is expected to result in an outflow fromthe enterprise of resources embodying economic benefits
bull the residual interest in the assets of the enterprise after deducting all its liabilities
bull increases in economic benefits during a period in the form ofndash inflows or enhancements of assets orndash decreases of liabilities that result in increases in equityndash other than those relating to contributions from equity participants
bull decreases in economic benefits during a period in the form ofndash outflows or depletions of assets orndash incurrences of liabilities that result in decreases in equityndash other than those relating to distributions to equity participants
DefinitionDefinition
Balance Sheet Approach
copy 2005-07 Nelson 18
Elements of Financial Statements
Objective Qualitative Characteristics ElementsElements
DefinitionDefinition
RecognitionRecognition
MeasurementMeasurement
Presentation and disclosurePresentation and disclosure
IFRS ApproachIFRS Approach
10
copy 2005-07 Nelson 19
Elements of Financial Statements
Objective Qualitative Characteristics ElementsElements
IFRS ApproachIFRS Approach
Presentation and disclosurePresentation and disclosure
Frameworkgives a general overview
DefinitionDefinition
RecognitionRecognition
MeasurementMeasurement
copy 2005-07 Nelson 20
Definition
Criteria for recognition ndash an item that meets the definition of an element should be recognized if1 it is probable that any future economic benefit
associated with the item will flow to or from the enterprise and
2 the item has a cost or value that can be measured with reliability
Criteria for recognition ndash an item that meets the definition of an element should be recognized if1 it is probable that any future economic benefit
associated with the item will flow to or from the enterprise and
2 the item has a cost or value that can be measured with reliability
Recognition is the process of incorporating in the balance sheet or income statement an item that1 meets the Definition of an element and2 satisfies the Criteria for Recognition
Recognition is the process of incorporating in the balance sheet or income statement an item that1 meets the Definition of an element and2 satisfies the Criteria for Recognition
Elements of Financial Statements
Objective Qualitative Characteristics ElementsElements
RecognitionRecognition
11
copy 2005-07 Nelson 21
Elements of Financial Statements
Objective Qualitative Characteristics ElementsElements
Recognition
Definition
Historical cost
Current cost
Realisable (settlement) value
Present value
Historical cost
Current cost
Realisable (settlement) value
Present value
MeasurementMeasurement
Fair value less cost to sell
Value in use
copy 2005-07 Nelson 22
Concept of CapitalFinancial concept of capitalbull is adopted by most enterprises in
preparing their financial statementsbull Under it such as invested money or
invested purchasing power capital is synonymous with the net assets or equity of the enterprise
Physical concept of capitalbull Under it such as operating capability
capital is regarded as the productive capacity of the enterprise based on
bull For example units of output per day
Capital and Capital Maintenance
Objective Qualitative Characteristics Elements Concepts of
CapitalConcepts of
Capital
Concept of Capital MaintenanceFinancial concept maintenancebull Under this concept a profit is
earned only ifbull the financial (or money) amount of
the net assets at the end of the period
bull exceeds the financial (or money) amount of net assets at the beginning of the period
bull after excluding any distributions to and contributions from owners during the period
bull Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power
12
copy 2005-07 Nelson 23
Concept of CapitalFinancial concept of capitalbull is adopted by most enterprises in
preparing their financial statementsbull Under it such as invested money or
invested purchasing power capital is synonymous with the net assets or equity of the enterprise
Physical concept of capitalbull Under it such as operating capability
capital is regarded as the productive capacity of the enterprise based on
bull For example units of output per day
Capital and Capital Maintenance
Objective Qualitative Characteristics Elements Concepts of
CapitalConcepts of
Capital
Concept of Capital MaintenancePhysical concept maintenancebull Under this concept a profit is
earned only ifbull the physical productive capacity (or
operating capability) of the enterprise (or the resources or funds needed to achieve that capacity) at the end of the period
bull exceeds the physical productive capacity at the beginning of the period
bull after excluding any distributions to and contributions from owners during the period
copy 2005-07 Nelson 24
Summary of IFRSs
International Financial Reporting Standards arebull Standards and Interpretations issued and endorsed by the
International Accounting Standard Board and comprisendash International Financial Reporting Standards (IFRSs)ndash International Accounting Standards (IASs) andndash Interpretations
bull IASs (International Accounting Standards) ndash Totally 31 sets
bull IFRSs (International Financial Reporting Standards) ndash Totally 8 sets(up to 4 February 2007)
More are coming helliphellipMore are coming helliphellip
13
copy 2005-07 Nelson 25
Key Points
IFRSs set outbull Recognitionbull Measurementbull Presentation and
disclosure requirements
Main changesbull Changes in recognition
and measurementbull Changes in presentation
and disclosure
bull Less Choicesbull Towards
Fair Value Model
bullbull Less ChoicesLess Choicesbullbull TowardsTowards
Fair Value ModelFair Value Model
bull More and clearer presentation and disclosure
bullbull More and clearer More and clearer presentation and presentation and disclosuredisclosure
bull Aim at enhancing the information for usersrsquo decision making
bullbull Aim at enhancing Aim at enhancing the information the information for usersrsquo for usersrsquo decision makingdecision making
eg market valuevalue by appraisal helliphellip
Inter alia one more change helliphellip
copy 2005-07 Nelson 26
Todayrsquos Agenda
Presentation of Financial Statements (IAS 1)
Presentation of Financial Statements (IAS 1)
14
copy 2005-07 Nelson 27
Presentation of Financial Statements(IAS 1)
copy 2005-07 Nelson 28
Presentation of Financial Statements (IAS 1)
1 Purpose of financial statements2 Components of financial statements3 Overall considerations4 Structure and content
15
copy 2005-07 Nelson 29
1 Purpose of Financial Statements
bull To provide information aboutndash financial positionndash financial performance
andndash cash flows of an entity
That is useful to a wide range of users in making economic decisions
bull To also show the results of managementrsquos stewardship of the resources entrusted to it
bull To meet this objective financial statements provide information about the entityrsquosndash Assetsndash Liabilitiesndash Equityndash Income and expenses
including gains and lossesndash Other changes in equityndash Cash flows
Thus we have helliphellip
copy 2005-07 Nelson 30
2 Components of Financial Statements
A complete set of financial statements comprisesa) a balance sheetb) an income statementc) a statement of changes in equity showing either
i) all changes in equity orii) changes in equity other than those arising from transactions with
equity holders acting in their capacity as equity holdersd) a cash flow statement ande) notes comprising a summary of significant accounting policies and
other explanatory notes
another nameanother name
16
copy 2005-07 Nelson 31
3 Overall Consideration
a) Fair presentation and compliance with IFRSsb) Going concernc) Accrual basis of accountingd) Consistency of presentatione) Materiality and aggregationf) Offsettingg) Comparative information
copy 2005-07 Nelson 32
3 Overall Consideration
bull Financial statements shall present fairly of the financial position financial performance and cash flows of an entity
ndash Fair presentation requires the faithful representation of the effects of transactions other events and conditions in accordance with
bull the definitions and recognition criteria for assets liabilities income and expenses set out in the Framework
ndash The application of IFRSs with additional disclosure when necessary is presumed to result in financial statements that give a true and fair view
a) Fair presentation and compliance with IFRSs
No such precisely statement before
17
copy 2005-07 Nelson 33
3 Overall Consideration
bull Statement of compliancendash An entity whose financial statements comply
with IFRSs shall make an explicit and unreserved statement of such compliance in the notes
ndash Financial statements shall not be described as complying with IFRSsbull unless they comply with all the
requirements of IFRSsndash In virtually all circumstances a fair
presentation is achieved by bull compliance with applicable IFRSs
a) Fair presentation and compliance with IFRSs
copy 2005-07 Nelson 34
3 Overall Consideration
Melco Development Limited (新濠國際發展有限公司)Notes to the financial statements for year ended 31122005ndash The consolidated financial statements have been prepared in
accordance with HKFRSsndash In addition the consolidated financial statements include applicable
disclosures required by the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited and by the Companies Ordinance
CaseCase
18
copy 2005-07 Nelson 35
3 Overall Consideration
bull A fair presentation also requires an entitya) to select and apply accounting policies in accordance
with IAS 8b) to present information including accounting policies
in a manner that provides relevant reliable comparable and understandable information
c) to provide additional disclosuresndash when compliance with the specific requirements in
IFRSs is insufficient to enable users to understand the impact of particular transactions other events and conditions on the entityrsquos financial position and financial performance
bull Inappropriate accounting policies are not rectified eitherndash by disclosure of the accounting policies used orndash by notes or explanatory material
a) Fair presentation and compliance with IFRSs
copy 2005-07 Nelson 36
3 Overall Consideration
bull Departure from Standard or Interpretation (Simplified)ndash In the extremely rare circumstances in which
management concludes thatbull compliance with a requirement in a standard or an
interpretation would be so misleading thatbull it would conflict with the objective of financial
statements set out in the Frameworkthe entity shall depart from that requirement if the relevant regulatory framework requires or otherwise does not prohibit such a departure
a) Fair presentation and compliance with IFRSs
19
copy 2005-07 Nelson 37
3 Overall Consideration
bull Departure from Standard or Interpretation (Simplified)
a) Fair presentation and compliance with IFRSs
ndash Then the following disclosure is requireda) management has concluded that the financial
statements give a true and fair viewb) that it has complied with applicable standards and
interpretations except that it has departed from a particular requirement
c) the title of the standard or interpretation from which the entity has departed the nature of the departure the reason why that treatment would be so misleading and the treatment adopted and
d) for each period presented the financial impact of the departure on each item in the financial statements that would have been reported in complying with the requirement
copy 2005-07 Nelson 38
3 Overall Consideration
Interim Report 2005 clearly stated thatInterim Report 2005 clearly stated that
CaseCase
bull The directors consider it inappropriate for the company to adopt two particular aspects of the newrevised HKFRSs as these would result in the financial statements in the view of the directors eitherbull not reflecting the commercial substance of the business orbull being subject to significant potential short-term volatility as
explained below helliphellip
20
copy 2005-07 Nelson 39
3 Overall ConsiderationCaseCase
bull HKAS 40 ldquoInvestment propertyrdquo requires an assessment of the fair value of investment properties
bull The group intends to follow the same accounting treatment as adopted in 2004 which is to value such investment properties on an annual basis
bull Accordingly the investment properties were not revalued at 30 June 2005 since the directors consider that such change of practice could introduce a significant element of short-term volatility into the income statement in respect of assets which are being held on a long-term basis by the group helliphellip
bull It is not practicable to estimate the financial effect of this non-compliance as no interim valuation of the properties has been conducted
Interim Report 2005 clearly stated thatInterim Report 2005 clearly stated that
At year-end revaluation would still be conductedAt year-end revaluation would still be conducted
copy 2005-07 Nelson 40
3 Overall ConsiderationCaseCase
bull HKAS 12 ldquoIncome Taxesrdquo together with HKAS-INT 21 ldquoIncome Taxes ndashRecovery of Revalued Non-Depreciable Assetsrdquo requires deferred taxation to be recognised on any revaluation movements on investment propertiesbull It is further provided that any such deferred tax liability should be calculated
at the profits tax rate in the case of assets which the management has no definite intention to sell
bull The company has not made such provision in respect of its HK investment properties since the directors consider that such provision would result in the financial statements not reflecting the commercial substance of the businessbull since should any such sale eventuate any gain would be regarded as capital
in nature and would not be subject to any tax in HKbull Should this aspect of HKAS 12 have been adopted deferred tax liabilities
amounting to HK$2008 million on the revaluation surpluses arising from revaluation of HK investment properties would have been provided
(estimate - over 12 of the net assets at 30 June 2005)
Interim Report 2005 clearly stated thatInterim Report 2005 clearly stated that
21
copy 2005-07 Nelson 41
3 Overall Consideration
bull Departure but such departure is prohibitedndash In the extremely rare circumstances in which
management concludes that bull compliance with a requirement in a
standard or an interpretation would be so misleading that
bull it would conflict with the objective of financial statements set out in the Framework
bull but the relevant regulatory framework prohibits departure from the requirement the entity shall to the maximum extent possible reduce the perceived misleading aspects of compliance by disclosing helliphellip
a) Fair presentation and compliance with IFRSs
copy 2005-07 Nelson 42
3 Overall Consideration
ndash by disclosinga) the title of the standard or interpretation in
question the nature of the requirement and the reason why management has concluded that complying with that requirement is so misleading in the circumstances that it conflicts with the objective of financial statements set out in the Framework and
b) for each period presented the adjustments to each item in the financial statements that management has concluded would be necessary to give a fair presentation
a) Fair presentation and compliance with IFRSsbull Departure but such departure is prohibited
22
copy 2005-07 Nelson 43
3 Overall Consideration
bull When assessing whether complying with a specific requirement in a standard or an interpretation would be so misleading that it would conflict with the objective of financial statements set out in the Frameworkndash management considers
a) why the objective of financial statements is not achieved in the particular circumstances and
b) how the entityrsquos circumstances differ from those of other entities that comply with the requirement ndash If other entities in similar circumstances comply with the
requirement raquo there is a rebuttable presumption that the entityrsquos compliance
with the requirement would not be so misleading that it would conflict with the objective of financial statements set out in the Framework
a) Fair presentation and compliance with IFRSs
copy 2005-07 Nelson 44
3 Overall ConsiderationCaseCase
Howrsquos about this Howrsquos about this
However 2005 Final Results Announcementdisclosed that bull provision for deferred tax was finally made
with regard to revaluation of the HK investment properties (total HK$22 billion) at 2005 year-end
However However 2005 Final Results Announcement2005 Final Results Announcementdisclosed that disclosed that bullbull provision for deferred tax was finally made provision for deferred tax was finally made
with regard to revaluation of the HK with regard to revaluation of the HK investment properties (total HK$22 billion) at investment properties (total HK$22 billion) at 2005 year2005 year--endend
23
copy 2005-07 Nelson 45
b) Going Concern
3 Overall Consideration
bull When preparing financial statements management shall make an assessment of an entityrsquos ability to continue as a going concern
bull Financial statements shall be prepared on a going concern basisndash unless management either intends to liquidate the entity or to cease
trading or has no realistic alternative but to do so bull When management is aware in making its assessment of
material uncertainties related to events or conditions that may cast significant doubt upon the entityrsquos ability to continue as a going concern those uncertainties shall be disclosed
bull When financial statements are not prepared on a going concern basis that fact shall be disclosed together with the basis on which the financial statements are prepared and the reason why the entity is not regarded as a going concern
copy 2005-07 Nelson 46
c) Accrual Basis of Accounting
3 Overall Consideration
bull An entity shall prepare its financial statements except for cash flow information using the accrual basis of accounting
bull When the accrual basis of accounting is used items are recognised as assets liabilities equity income and expensesndash when they satisfy the definitions and recognition criteria for those
elements in the Framework
24
copy 2005-07 Nelson 47
3 Overall Consideration
bull The presentation and classification of items in the financial statements shall be retained from one period to the next unlessa) it is apparent
bull following a significant change in the nature of the entityrsquos operations (eg significant acquisition or disposal) or
bull a review of its financial statementsthat another presentation or classification would be more appropriatehaving regard to the criteria for the selection and application of accounting policies in IAS 8 or
b) a IFRS requires a change in presentation
d) Consistency of presentation
An entity changes the presentation of its financial statements only ifndash the changed presentation provides information that is reliable and is
more relevant to users of the financial statements andndash the revised structure is likely to continue so that comparability is not
impaired
An entity changes the presentation of its financial statements only ifndash the changed presentation provides information that is reliable and is
more relevant to users of the financial statements andndash the revised structure is likely to continue so that comparability is not
impaired
copy 2005-07 Nelson 48
3 Overall Consideration
bull Each material class of similar items shall bendash presented separately in the financial
statementsbull Items of a dissimilar nature or function shall be
ndash presented separately unless they are immaterial
bull Applying the concept of materiality means that a specific disclosure requirement in a IFRS neednot be satisfied if the information is not material
e) Materiality and Aggregation
What is the situation of recognition and measurement
What is the What is the situation of situation of recognition and recognition and measurementmeasurement
25
copy 2005-07 Nelson 49
3 Overall Consideration
bull What is materialndash Omissions or misstatements of items are
material if they could individually or collectively influence the economic decisions of users taken on the basis of the financial statements
ndash Materiality depends on the size and nature of the omission or misstatement judged in the surrounding circumstancesbull The size or nature of the item or a combination
of both could be the determining factor
e) Materiality and Aggregation
copy 2005-07 Nelson 50
3 Overall Consideration
bull Assets and liabilities and income and expenses shall not be offsetndash unless required or permitted by a IFRS
bull It is important that assets and liabilities and income and expenses are reported separatelyndash Measuring assets net of valuation allowances mdash
for example obsolescence allowances on inventories and doubtful debts allowances on receivables mdash is not offsetting
f) Offsetting
26
copy 2005-07 Nelson 51
3 Overall Consideration
bull During ordinary activities some transactions that do not generate revenue but are incidental to the main revenue-generating activitiesndash The results of such transactions are presented
when this presentation reflects the substance of the transaction or other event by netting any income with related expenses arising on the same transaction
f) Offsetting
copy 2005-07 Nelson 52
3 Overall Consideration
bull For examplea) gains and losses on the disposal of non-current
assets including investments and operating assets- are reported by deducting from the proceeds on
disposal the carrying amount of the asset and related selling expenses and
b) expenditure related to a provision that is- recognised in accordance with IAS 37 and - reimbursed under a contractual arrangement with
a third party (for example a supplierrsquos warranty agreement)
may be netted against the related reimbursement
f) Offsetting
ExampleExample
27
copy 2005-07 Nelson 53
3 Overall Consideration
bull Gains and losses arising from a group of similar transactions are reported on a net basisndash For example
bull foreign exchange gains and losses or bull gains and losses arising on financial instruments held for trading
bull Such gains and losses are however reported separately if they are material
bull Gains and losses arising from a group of similar transactions are reported on a net basisndash For example
bull foreign exchange gains and losses or bull gains and losses arising on financial instruments held for trading
bull Such gains and losses are however reported separately if they are material
Can foreign exchange gains and losses be offset
ExampleExample
copy 2005-07 Nelson 54
3 Overall Consideration
bull Except when a IFRS permits or requires otherwise ndash comparative information shall be disclosed in
respect of the previous period for all amountsreported in the financial statements
bull When the presentation or classification of items in the financial statements is amended ndash comparative amounts shall be reclassified unless
the reclassification is impracticable
g) Comparative information
28
copy 2005-07 Nelson 55
Amended requirementsAmended requirements
3 Overall Consideration
bull When comparative amounts are reclassified an entity shall disclosea) the nature of the reclassificationb) the amount of each item or class of items that is
reclassified andc) the reason for the reclassification
g) Comparative information
bull In the pastonly the reason for and a description of the nature of materialreclassifications should be disclosedExemption for disclosure of comparative information for the reconciliation of movements in fixed assets is also removed
bull In the pastonly the reason for and a description of the nature of materialreclassifications should be disclosedExemption for disclosure of comparative information for the reconciliation of movements in fixed assets is also removed
copy 2005-07 Nelson 56
3 Overall Consideration
Melco Development Limited (新濠國際發展有限公司)Notes to the financial statements for year ended 31122005ndash Because HKAS 32 requires retrospective application comparative
figures for 2004 have been restated (see Note 2A for the financial impact)
CaseCase
29
copy 2005-07 Nelson 57
3 Overall Consideration
Galaxy Entertainment Group LimitedNotes to the financial statements (ye 31122005)ndash All changes in the accounting policies require
retrospective application except HKAS 39 and HKFRS 2 for which transitional provisions are applied
ndash As a result the 2004 comparative figures have also been restated or amended in accordance with the relevant requirements
ndash The effects of all the changes in accounting policies are summarised in notes (b) and (c) below
CaseCase
copy 2005-07 Nelson 58
bull Identification of the financial statementsbull Reporting periodbull Balance sheet
1 CurrentNon-current distinction2 Current assets3 Current liabilities4 Information to be presented on the face of the balance sheet5 Information to be presented either on the face of the balance sheet or in
the notesbull Income statement
1 Profit or loss for the period2 Information to be presented on the face of the income statement3 Information to be presented either on the face of the income statement or
in the notesbull Statement of changes in equitybull Cash flow statementbull Notes
4 Structure and Content
30
copy 2005-07 Nelson 59
Identification of Financial Statements
bull The financial statements shall be identified clearly and distinguished from other information in the same published document
bull The following information shall be displayed prominently and repeated when it is necessary for a proper understanding of the information presented
a) the name of the reporting entity or other means of identification and any change in that information from the preceding balance sheet date
b) whether the financial statements cover the individual entity or a group of entities
c) the balance sheet date or the period covered by the financial statements whichever is appropriate to that component of the financial statements
d) the presentation currency as defined in HKAS 21 The Effects of Changes in Foreign Exchange Rates and
e) the level of rounding used in presenting amounts in the financial statements
copy 2005-07 Nelson 60
Identification of Financial Statements
bull Can the units of the presentation currency be rounded to thousands or millions
bull Financial statements are often made more understandableby presenting information in thousands or millions of units of the presentation currency
bull This is acceptable as long asndash the level of rounding in presentation is disclosed and ndash material information is not omitted
bull Financial statements are often made more understandableby presenting information in thousands or millions of units of the presentation currency
bull This is acceptable as long asndash the level of rounding in presentation is disclosed and ndash material information is not omitted
ExampleExample
31
copy 2005-07 Nelson 61
Reporting Period
bull Financial statements shall be presented at least annually
bull When an entityrsquos balance sheet date changes and the annual financial statements are presented for a period longer or shorter than one year an entity shall disclose in addition to the period covered by the financial statementsa) the reason for using a longer or shorter period andb) the fact that comparative amounts for the income
statement statement of changes in equity cash flow statement and related notes are not entirely comparable
copy 2005-07 Nelson 62
Reporting Period
bull Can a set of financial statements cover 52-week instead of a year
bull Normally financial statements are consistently prepared covering a one-year period
bull However for practical reasons some entities prefer to report for example for a 52-week period
bull IAS 1 does not preclude this practice because the resulting financial statements are unlikely to be materially different from those that would be presented for one year
bull Normally financial statements are consistently prepared covering a one-year period
bull However for practical reasons some entities prefer to report for example for a 52-week period
bull IAS 1 does not preclude this practice because the resulting financial statements are unlikely to be materially different from those that would be presented for one year
ExampleExample
32
copy 2005-07 Nelson 63
CurrentNon-current Distinction
bull An entity shall presentndash current and non-current assets andndash current and non-current liabilitiesas separate classifications on the face of its balance sheet
bull Except when a presentation based on liquidity provides informationndash If that information is reliable and is more relevantndash When that exception applies all assets and liabilities shall be
presented broadly in order of liquidity
copy 2005-07 Nelson 64
CurrentNon-current Distinction
bull Whichever method of presentation is adopted for each asset and liability line item that combines amounts expected to be recovered or settled a) no more than 12 months after the balance sheet date
andb) more than 12 months after the balance sheet date(ie combines both current and non-current)
an entity shall disclose the amount expected to be recovered or settled after more than 12 months
33
copy 2005-07 Nelson 65
New requirementsNew requirements
Current Assets
bull An asset shall be classified as current when it satisfies any of the following criteriaa) it is expected to be realised in or is intended for sale or
consumption in the entityrsquos normal operating cycle b) it is held primarily for the purpose of being tradedc) it is expected to be realised within 12 months after the balance
sheet date ord) it is cash or a cash equivalent
bull unless it is restricted from being exchanged or used to settle aliability for at least 12 months after the balance sheet date
bull All other assets shall be classified as non-current
Examplesbull Deposits pledged to bank (how long)bull Fixed deposits over 1 year maturity
Examplesbull Deposits pledged to bank (how long)bull Fixed deposits over 1 year maturity
What is itWhat is it
copy 2005-07 Nelson 66
Current Assets
bull What is operating cycle
bull The operating cycle of an entity is the time between ndash the acquisition of assets for processing and ndash their realisation in cash or cash equivalents
bull When the entityrsquos normal operating cycle is not clearly identifiable ndash its duration is assumed to be 12 months
bull The operating cycle of an entity is the time between ndash the acquisition of assets for processing and ndash their realisation in cash or cash equivalents
bull When the entityrsquos normal operating cycle is not clearly identifiable ndash its duration is assumed to be 12 months
ExampleExample
34
copy 2005-07 Nelson 67
Current Assets CaseCase
copy 2005-07 Nelson 68
Current Assets
bull Can a non-current asset reclassified if it fulfil the definition of current asset later
bull Assets classified as non-current in accordancewith IAS 1 shall not be reclassified as current assetsndash until they meet the criteria to be classified as held for sale in
accordance with IFRS 5bull Assets of a class that an entity would normally regard as non-
current that are acquired exclusively with a view to resale shall notbe classified as currentndash unless they meet the criteria to be classified as held for sale in
accordance with IFRS 5
bull Assets classified as non-current in accordancewith IAS 1 shall not be reclassified as current assetsndash until they meet the criteria to be classified as held for sale in
accordance with IFRS 5bull Assets of a class that an entity would normally regard as non-
current that are acquired exclusively with a view to resale shall notbe classified as currentndash unless they meet the criteria to be classified as held for sale in
accordance with IFRS 5
No non-current assets can be classified as current unless the criteria in IFRS 5 are fulfilled mainlybull Available for immediate salebull Highly probable to make the sale
35
copy 2005-07 Nelson 69
Is it currentIs it current
Current Assets
bull In its 2005 Interim Report full set of HKFRS was adopted and the report set out thatndash Available-for-sale financial assets are non-
derivatives that are eitherbull designated in this category orbull not classified in any of the other categories (ie
loans and receivables financial assets at fair value through profit or loss and held-to-maturity investments)
CaseCase
Similar in 2005 Annual Report
Similar in 2005 Annual Report
ndash They are included in non-current assetsbull unless management intends to dispose of the
investment within 12 months of the balance sheet date
copy 2005-07 Nelson 70
New requirementsNew requirements
Current Liabilities
bull A liability shall be classified as current when it satisfies any of the following criteriaa) it is expected to be settled in the entityrsquos normal operating cycleb) it is held primarily for the purpose of being tradedc) it is due to be settled within 12 months after the balance sheet
date ord) the entity does not have an unconditional right to defer settlement
of the liability for at least 12 months after the balance sheet date
bull All other liabilities shall be classified as non-current
ImplicationImplication
36
copy 2005-07 Nelson 71
Current Liabilities Revised rules on classifying a liability as current or non-currentbull A liability held for being traded rArr currentbull A financial liability due within 12 months after the BS date rArr current
ndash even if an agreement to refinance on a long-term basis is completed after the BS date (only disclosed as non-adjusting event)
bull If an entity has discretion to refinance rArr non-currentbull If an entity without discretion to refinance rArr current
bull A non-current financial liability is payable on demand with a breach on a condition of its loan agreement on or before the BS datendash If the lender agreed not to demand payment
bull after the BS date rArr current (only disclosed as non-adjusting event)
bull by the BS date rArr non-current
ImplicationImplication
copy 2005-07 Nelson 72
Current LiabilitiesCaseCase
Note 12 to Interim Report 2006bull Breach of loan covenants
bull As at 30 June 2006 in respect of certain bank loans with an aggregate carrying amount of HK$1529806000 the Group breached certain financial covenants of the banks loans
bull Since the lenders have not agreed to waive its right to demand immediate payment as at the balance sheet date the loans have been classified as current liabilities in these financial statements at 30 June 2006
37
copy 2005-07 Nelson 73
Current Assets and LiabilitiesExampleExample
Can the following be classified as current assetsbull 3-month fixed deposits pledged to a bank to secure
a mortgage loan of 5 yearsbull 2-year fixed deposits with a bank
Can the following be classified as current assetsbull 3-month fixed deposits pledged to a bank to secure
a mortgage loan of 5 yearsbull 2-year fixed deposits with a bank
Can the following be classified as non-current liabilitiesbull 5-year term loan matured after year end but renewed
for another 5 years after year end (before the issuanceof the financial statements)
bull 2-year term loan to be matured with 12 months and theentity has a right to renew for another 2 years
Can the following be classified as non-current liabilitiesbull 5-year term loan matured after year end but renewed
for another 5 years after year end (before the issuanceof the financial statements)
bull 2-year term loan to be matured with 12 months and theentity has a right to renew for another 2 years
timestimes
times
radic
copy 2005-07 Nelson 74
Balance Sheetbull As a minimum the face of the balance sheet shall
include line items that present the following amountsa) property plant and equipmentb) investment propertyc) intangible assetsd) financial assets (excl amounts shown under (e) (h) and (I))e) investments accounted for using the equity methodf) biological assetsg) inventoriesh) trade and other receivablesi) cash and cash equivalentsj) trade and other payablesk) provisionsl) financial liabilities (excl amounts shown under (j) and (k))m) liabilities and assets for current tax as defined in HKAS 12 Income Taxesn) deferred tax liabilities and deferred tax assets as defined in HKAS 12o) minority interest presented within equity andp) issued capital and reserves attributable to equity holders of the parent
38
copy 2005-07 Nelson 75
Balance Sheetbull The face of the balance sheet shall also include line
items that present the following amountsa) The total of assets classified as held for sale and
assets included in disposal groups classified as held for sale in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations and
b) Liabilities included in disposal groups classified as held for sale in accordance with IFRS 5
copy 2005-07 Nelson 76
Balance Sheetbull Additional line items headings and subtotals shall
be presented on the face of the balance sheet when such presentation is relevant to an understanding of the entityrsquos financial position
bull When an entity presents current and non-current assets and current and non-current liabilities as separate classifications on the face of its balance sheet ndash it shall not classify deferred tax assets
(liabilities) as current assets (liabilities)
39
copy 2005-07 Nelson 77
Balance Sheet
bull The use of different measurement bases for different classes of assets suggests that their nature or function differs and therefore that they should be presented as separate line itemsndash For example different classes of property plant and
equipment can be carried atbull Cost orbull Revalued amountsin accordance with IAS 16 PPE
In the past it use ldquomay needrdquoIn the past it use ldquomay needrdquo
copy 2005-07 Nelson 78
Balance Sheet
Galaxy Entertainment Group LimitedConsolidated balance sheet as at 31122005
CaseCase
40
copy 2005-07 Nelson 79
Balance Sheet
Melco Development Limited (新濠國際發展有限公司)Consolidated balance sheet as at 31122005
CaseCase
copy 2005-07 Nelson 80
Income Statement Minimum requirements on the face of the income statementbull As a minimum the face of the income statement shall include line items
that present the following amounts for the perioda) revenueb) finance costsc) share of the profit or loss of associates and joint ventures accounted
for using the equity methodd) pre-tax gain or loss recognised on the disposal of assets or
settlement of liabilities attributable to discontinuing operationse) tax expense andf) profit or loss
41
copy 2005-07 Nelson 81
Income Statement bull The following items shall be disclosed on the face of the income
statement as allocations of profit or loss for the perioda) Profit or loss attributable to minority interest andb) Profit or loss attributable to equity holders of the parent
A similar requirement has been added for the statement of changes in equity and such allocated amounts are not to be presented as items of income or expense
copy 2005-07 Nelson 82
Income Statement
Melco Dev LtdConsolidated income statementas at 31122005
CaseCase
42
copy 2005-07 Nelson 83
Income Statement bull Not require to disclose the results of operating
activities as a line item on the face of the incomestatement
bull An entity shall not present any items of income and expense as extraordinary items either onthe face of the income statements or in the notes
Entities canrsquot use itEntities canrsquot use it
Entities can still show itEntities can still show it
copy 2005-07 Nelson 84
Income Statement Either on the face of the income statement or in the notesbull An entity shall present an analysis of expenses using a classification
based on eitherbull the nature of expenses orbull their function within the entity
whichever provides information that is reliable and more relevant
bull Entities classifying expenses by function shall disclose additional information on the nature of expenses includingbull depreciation and amortisation expense and bull employee benefits expense
43
copy 2005-07 Nelson 85
Income StatementCaseCase
Nature or FunctionNature or Nature or FunctionFunction
copy 2005-07 Nelson 86
Statement of Changes in Equity bull An entity shall present a statement of changes in equity showing on the
face of the statementa) profit or loss for the period b) each item of income and expense for the period that as required by
IFRSs is recognised directly in equity and the total of these itemsc) total income and expense for the period (calculated as the sum of (a) and
(b)) showing separately the total amounts attributablebull to equity holders of the parent andbull to minority interest and
d) for each component of equity the effects of changes in accounting policies and corrections of errors recognised in accordance with IAS 8
Any ChangeAny Change
A revised requirementbull A statement of changes in equity that comprises only these items
shall be titled a statement of recognised income and expenses
A revised requirementbull A statement of changes in equity that comprises only these items
shall be titled a statement of recognised income and expenses
44
copy 2005-07 Nelson 87
Statement of Changes in Equity bull An entity shall also present either on the face of the
statement of changes in equity or in the notesa) the amounts of transactions with equity holders acting in
their capacity as equity holders showing separately distributions to equity holders
b) the balance of retained earnings (ie accumulated profit or loss) at the beginning of the period and at the balance sheet date and the changes during the period and
c) a reconciliation between the carrying amount of each class of contributed equity and each reserve at the beginning and the end of the period separately disclosing each change
copy 2005-07 Nelson 88
Statement of Changes in Equity
Consolidated SCE as at 31122005
CaseCase
45
copy 2005-07 Nelson 89
Notes Structure (an entity is required to disclose the following)
bull The notes shalla) present information about the basis of preparation of the financial statements
and the specific accounting policies usedb) disclose the information required by HKFRSs that is not presented on the
face of the balance sheet income statement statement of changes in equity or cash flow statement and
c) provide additional information that is not presented on the face of the balance sheet income statement statement of changes in equity or cash flow statement but is relevant to an understanding of any of them
bull Notes shall as far as practicable be presented in a systematic manner bull Each item on the face of the balance sheet income statement statement
of changes in equity and cash flow statement shall be cross-referencedto any related information in the notes
copy 2005-07 Nelson 90
Notes Disclosures (an entity is required to disclose the following)
bull Disclosure of accounting policiesAn entity shall disclose in the summary of significant accounting policiesa) the measurement basis (or bases) used in preparing the financial
statements andb) the other accounting policies used that are relevant to an understanding of
the financial statements
46
copy 2005-07 Nelson 91
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)ndash The financial statements have been prepared in
accordance with Hong Kong Financial Reporting Standards (lsquolsquoHKFRSrsquorsquo) issued by the Hong Kong Institute of Certified Public Accountants bull under the historical cost convention as modified by the
revaluation of investment properties available-for-sale financial assets derivative financial instruments and other investments which are carried at fair values helliphellip
ndash The principal accounting policies applied in the preparation of these financial statements are set out below These policies have been consistently applied to all the years presented except for those stated in note 2(a) above
copy 2005-07 Nelson 92
Notes Disclosures (an entity is required to disclose the following)
bull Disclosure of accounting policiesndash The judgements apart from those involving estimations management has
madebull in the process of applying the entityrsquos accounting policies that have the
most significant effect on the amounts recognised in the financial statements (in the summary of significant accounting policies or other notes)
Examples ndash Management makes judgements in determininga) whether financial assets are held-to-maturity investmentsb) when substantially all the significant risks and rewards of
ownership of financial assets and lease assets are transferred to other entities
c) whether in substance particular sales of goods are financing arrangements and therefore do not give rise to revenue and
d) whether the substance of the relationship between the entity and a special purpose entity indicates that the special purpose entity is controlled by the entity
Examples ndash Management makes judgements in determininga) whether financial assets are held-to-maturity investmentsb) when substantially all the significant risks and rewards of
ownership of financial assets and lease assets are transferred to other entities
c) whether in substance particular sales of goods are financing arrangements and therefore do not give rise to revenue and
d) whether the substance of the relationship between the entity and a special purpose entity indicates that the special purpose entity is controlled by the entity
47
copy 2005-07 Nelson 93
Notes Disclosures (an entity is required to disclose the following)
bull Key sources of estimation uncertaintyndash Information about the key assumptions concerning the future and
other key sources of estimation uncertainty at the balance sheet datebull that have a significant risk of causing a material adjustment to the
carrying amounts of assets and liabilities within the next financial yearndash In respect of those assets and liabilities the notes shall include details of
a) their nature andb) their carrying amount as at the balance sheet date
Examples ndash in the absence of recently observed market prices used to measure the following assets and liabilities future-oriented estimates are necessary to measurebull the recoverable amount of classes of PPEbull the effect of technological obsolescence on inventories
Estimates involve assumptions about such items asbull the risk adjustment to cash flows or discount rates usedbull future changes in salaries and in prices affecting other costs
Examples ndash in the absence of recently observed market prices used to measure the following assets and liabilities future-oriented estimates are necessary to measurebull the recoverable amount of classes of PPEbull the effect of technological obsolescence on inventories
Estimates involve assumptions about such items asbull the risk adjustment to cash flows or discount rates usedbull future changes in salaries and in prices affecting other costs
copy 2005-07 Nelson 94
Notes
Esprit Holdings LimitedEsprit Holdings Limitedbull Critical Accounting Estimates and Judgements
ndash Estimates and judgements are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonableunder the circumstances
ndash Critical accounting estimates and assumptionsbull The Group makes estimates and assumptions concerning
the future The resulting accounting estimates will by definition seldom equal the related actual results
bull The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below helliphellip (including (1) useful life and impairment of trademarks and (2) income taxes)
CaseCase
48
copy 2005-07 Nelson 95
Notes
Melco Development Limited (新濠國際發展有限公司)Notes to the financial statements for the year ended 31122005ndash The key assumptions concerning the future and other key sources
of estimation uncertainty at the balance sheet date that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below helliphellip(The issues discussed includebull Allowances for inventories bull Estimated impairment of goodwill Income taxes)
CaseCase
copy 2005-07 Nelson 96
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)ndash Estimates and judgements used in preparing the
financial statements are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonable under the circumstances
ndash The Group makes estimates and assumptionsconcerning the future
ndash The resulting accounting estimates will by definition seldom equal the related actual results
ndash The estimates and assumptions that have a significant effect on the carrying amounts of assets and liabilities are discussed below hellip (including impairment of goodwill impairment of gaming
licence Useful lives of property plant and equipment fair value of investment properties hellip)
49
copy 2005-07 Nelson 97
Notes Disclosures (an entity is required to disclose the following)
bull Other disclosuresAn entity shall disclose in the notesa) the amount of dividends proposed or declared before the
financial statements were authorised for issue but not recognised as a distribution to equity holders during the period and the related amount per share(HK incorporated companies are required to show the aggregate amount which is recommended for distribution by way of dividend under a separate heading(s) in their balance sheet (HK Co Ord 10th Sch para 9(1)(e)) and
b) the amount of any cumulative preference dividends not recognised
copy 2005-07 Nelson 98
Notes Disclosures (an entity is required to disclose the following)
An entity shall disclose the following if not disclosedelsewhere in information published with the financial statementsa) the domicile and legal form of the entity
its country of incorporation andthe address of its registered office(or principal place of business if different from the registered office)
b) a description of the nature of the entityrsquos operations and its principal activities and
c) the name of the parent and the ultimate parent of the group
ldquoshall discloserdquo now instead of ldquoencouraged to discloserdquo
ldquoshall discloserdquo now instead of ldquoencouraged to discloserdquo
bull Other disclosures
Any specialAny special
50
copy 2005-07 Nelson 99
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)bull The principal activities of Galaxy Entertainment Group
Ltd (the lsquolsquoCompanyrsquorsquo) (formerly known as K WahConstruction Materials Ltd) and its subsidiaries (together the lsquolsquoGrouprsquorsquo) are tondash operate in casino games of chance or games of other forms
in Macau (and) manufacture sale and distribution of construction materials in HK Macau and Mainland China
bull The Company is ndash a limited liability company incorporated in Hong Kong and ndash has its listing on the Main Board of The Stock Exchange of
Hong Kong Limitedbull The address of its registered office and its principal place
of business is Room 1606 16th Floor Hutchison House 10 Harcourt Road Central HK
copy 2005-07 Nelson 100
Effective Date
bull An entity shall apply IAS 1 for annual periods beginning on or after 1 Jan 2005
ndash Earlier application is encouragedndash If an entity applies IAS 1 for an earlier period it shall
disclose this factbull For the amendments relating to the Statement of
Changes in Equityndash An entity shall apply it for annual periods beginning on
or after 1 Jan 2006ndash If an entity applies the amendments to IAS 19
Employee Benefits ndash Actuarial Gains and Losses Group Plans and Disclosures for an earlier period that amendment shall be applied for that earlier period
51
copy 2005-07 Nelson 101
Todayrsquos Agenda
Capital Disclosures (Amendments to IAS 1)
Capital Disclosures (Amendments to IAS 1)
copy 2005-07 Nelson 102
Capital Disclosures ndash For 2007
52
copy 2005-07 Nelson 103
Capital Disclosures
What is capital Is it helliphellip
CapitalCapital AssetsAssets LiabilitiesLiabilities= ndash
bull IAS 1BC47 considers ldquowhether an entity can have a view of capital that differs from what IFRSs define as equityrdquo
bull It further clarifies that although for the purposes of this disclosure capital would often equate with equity as defined in IFRSsndash it might also include or exclude some components
bull It also noted that the capital disclosure in IAS 1 is intended to give entities the opportunity to describendash how they view the components of capital they manage if this is
different from what IFRSs define as equity helliphellip
copy 2005-07 Nelson 104
EquityEquityEquity AssetsAssets LiabilitiesLiabilities= ndash
Capital Disclosures
Based on the Framework amp IFRSs the accounting equation should be
CapitalCapital AssetsAssets LiabilitiesLiabilities= ndash
bull An entityrsquos capital may be part of its equity plus part of its liabilities depending on how it manage ldquoits capitalrdquo helliphellip
53
copy 2005-07 Nelson 105
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowinga) qualitative information about its objectives policies and processes for
managing capital including (but not limited to)i) a description of what it manages as capitalii) when an entity is subject to externally imposed capital requirements
the nature of those requirements and how those requirements are incorporated into the management of capital and
iii) how it is meeting its objectives for managing capital
bull To comply with the capital disclosures the entity discloses thefollowinga) qualitative information about its objectives policies and processes for
managing capital including (but not limited to)i) a description of what it manages as capitalii) when an entity is subject to externally imposed capital requirements
the nature of those requirements and how those requirements are incorporated into the management of capital and
iii) how it is meeting its objectives for managing capital
copy 2005-07 Nelson 106
Capital Disclosures
Example disclosurebull The Grouprsquos objectives when managing capital are
ndash to safeguard the entityrsquos ability to continue as a going concern
bull so that it can continue to provide returns for shareholders and benefits for other stakeholders and
ndash to provide an adequate return to shareholders by pricing products and services commensurately with the level of risk
bull The Group sets the amount of capital in proportion to risk
ExampleExample
ObjectivesObjectives
54
copy 2005-07 Nelson 107
Capital Disclosures
bull The Group manages the capital structure and makes adjustments to it in the light ofndash changes in economic conditions and ndash the risk characteristics of the underlying assets
bull In order to maintain or adjust the capital structure the Group mayndash adjust the amount of dividends paid to shareholders ndash return capital to shareholders ndash issue new shares or ndash sell assets to reduce debt
ExampleExample
Example disclosure
HowHow
copy 2005-07 Nelson 108
Capital Disclosures
bull Consistently with others in the industry the Group monitors capital on the basis of ndash the debt-to-adjusted capital ratio
bull This ratio is calculated as net debt divide adjusted capital
ExampleExample
Example disclosure
HowHow
bull Net debt is calculated as ndash Total debt (as shown in the
balance sheet)ndash Less cash amp cash equivalents
bull Net debt is calculated as ndash Total debt (as shown in the
balance sheet)ndash Less cash amp cash equivalents
bull Adjusted capital ndash comprises all components of
equity (ie share capital share premium minority interest retained earnings and revaluation reserve) ndash other than amounts
recognised in equity relating to cash flow hedges and
ndash includes some forms of subordinated debt
bull Adjusted capital ndash comprises all components of
equity (ie share capital share premium minority interest retained earnings and revaluation reserve) ndash other than amounts
recognised in equity relating to cash flow hedges and
ndash includes some forms of subordinated debt
55
copy 2005-07 Nelson 109
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowing
bull To comply with the capital disclosures the entity discloses thefollowingb) summary quantitative data about what it manages as capital
Some entities regard some financial liabilities (eg some forms of subordinated debt) as part of capitalOther entities regard capital as excluding some components of equity (eg components arising from cash flow hedges)
c) any changes in (a) and (b) from the previous period
copy 2005-07 Nelson 110
Capital Disclosures
Example disclosure (continued from previous example)
ExampleExample
bull During 20X4 the Grouprsquos strategy which was unchanged from 20X3 was to maintain the debt-to-adjusted capital ratio at the lower end of the range 61 to 71 in order to secure access to finance at a reasonable cost by maintaining a BB credit rating The debt-to-adjusted capital ratios at 31 December 20X4 and at 31 December 20X3 were as follows
3112X4 ($rsquoM) 3112X3 ($rsquoM) Total debt 1000 1100 Less cash and cash equivalents (90) (150)Net debt 910 950
Total equity 110 105 Add subordinated debt instruments 38 38 Less amounts recognised in equity
relating to cash flow hedges (10) (5)Adjusted capital 138 138
Debt-to-adjusted capital ratio 66 69
56
copy 2005-07 Nelson 111
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowing
bull To comply with the capital disclosures the entity discloses thefollowingd) whether during the period it complied with any externally imposed capital
requirements to which it is subjecte) when the entity has not complied with such externally imposed capital
requirements the consequences of such non-complianceThese disclosures shall be based on the information provided internally to the entityrsquos key management personnel
copy 2005-07 Nelson 112
Capital DisclosuresExampleExample
Example disclosurebull Entity A filed its quarterly regulatory capital return for
30 September 20X7 on 20 October 20X7 bull At that date Entity Arsquos regulatory capital was below
the capital requirement imposed by Regulator B by $1 million
bull As a result Entity A was required to submit a plan to the regulator indicating how it would increase its regulatory capital to the amount required
bull Entity A submitted a plan that entailed selling part of its unquoted equities portfolio with a carrying amount of $115 million in the fourth quarter of 20X7
bull In the fourth quarter of 20X7 Entity A sold its fixed interest investment portfolio for $126 million and met its regulatory capital requirement
For example SFC or banks
For example SFC or banks
57
copy 2005-07 Nelson 113
Capital DisclosuresCaseCase
bull Early adopted capital disclosure in 2005 and itsannual report states that (extract only)ndash The Grouprsquos objectives when managing capital are
bull To safeguard the Grouprsquos ability to continue as a going concern so that it continues to provide returns for shareholders and benefits for other stakeholders
bull To support the Grouprsquos stability and growth andbull To provide capital for the purpose of strengthening the
Grouprsquos risk management capability
copy 2005-07 Nelson 114
Capital DisclosuresCaseCase
ndash The Group actively and regularly reviews and manages its capital structure to ensure optimal capital structure and shareholder returns taking into consideration the future capital requirements of the Group and capital efficiency helliphellip
ndash The Group adopts a dividend policy helliphellip while retaining 10 per cent of the profit as capital of the Group for future use
ndash The Group has set aside $1500 million of retained earnings for the purpose of strengthening the risk management regime of the clearing houses and supporting their roles as central counterparties
ndash As in prior years the Group monitors capital by reviewing the level of capital that is at the disposal of the Group (ldquoadjusted capitalrdquo) Adjusted capital comprises all components of shareholdersrsquo equity other than the hedging reserve relating to cash flow hedges designated reserves and investment revaluation reserve helliphellip
bull Early adopted capital disclosure in 2005 and itsannual report states that (extract only)
58
copy 2005-07 Nelson 115
Capital Disclosures ndash Transition
bull An entity shall apply the requirements of capital disclosure for
ndash annual periods beginning on or after 1 January 2007
bull Early application is encouraged
copy 2005-07 Nelson 116
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk
59
copy 2005-07 Nelson 117
QampA SessionQampA SessionQampA Session
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk
7
copy 2005-07 Nelson 13
Qualitative Characteristics
Objective Qualitative Characteristics
Qualitative Characteristics
Primary qualitative characteristicsof financial statements
bull Relating to content- Relevance- Reliability
bull Relating to presentation- Comparability- Understandability
Management Decision
Management Decision
Financial reportingFinancial Financial reportingreporting
copy 2005-07 Nelson 14
Qualitative Characteristics
Emerging International PracticesEmerging International Practicesbullbull Financial reporting framework clearly definedFinancial reporting framework clearly definedbullbull Definition of assets and liabilities clearly establishedDefinition of assets and liabilities clearly establishedbullbull Beginning to adopt fair value model (instead of only historical Beginning to adopt fair value model (instead of only historical
cost)cost)bullbull Discussing convergence in certain practicesDiscussing convergence in certain practicesbullbull From IASC to IASB (International Accounting Standard Board)From IASC to IASB (International Accounting Standard Board)bullbull From IAS to IFRS (International Financial Reporting From IAS to IFRS (International Financial Reporting
Standards) Standards) helliphelliphelliphellip
8
copy 2005-07 Nelson 15
All aims atAll aims atRelevanceRelevanceReliabilityReliabilityComparabilityComparabilityUnderstandabilityUnderstandability
Qualitative Characteristics
Management Decision
Management Decision
Financial reportingFinancial Financial reportingreporting
copy 2005-07 Nelson 16
Elements of Financial Statements
Objective Qualitative Characteristics ElementsElements
Asset
Liability
Equity
Income
Expenses
Financial Position (in balance sheet)
Financial Performance (in income statement)
bull a resource controlled by the enterprise as a result of past eventsand from which future economic benefits are expected to flow tothe enterprise
bull a present obligation of the enterprise arising from past eventsthe settlement of which is expected to result in an outflow fromthe enterprise of resources embodying economic benefits
bull the residual interest in the assets of the enterprise after deducting all its liabilities
bull increases in economic benefits during a period in the form ofndash inflows or enhancements of assets orndash decreases of liabilities that result in increases in equityndash other than those relating to contributions from equity participants
bull decreases in economic benefits during a period in the form ofndash outflows or depletions of assets orndash incurrences of liabilities that result in decreases in equityndash other than those relating to distributions to equity participants
Balance Sheet Approach
9
copy 2005-07 Nelson 17
Elements of Financial Statements
Objective Qualitative Characteristics ElementsElements
Asset
Liability
Equity
Income
Expenses
Financial Position (in balance sheet)
Financial Performance (in income statement)
bull a resource controlled by the enterprise as a result of past eventsand from which future economic benefits are expected to flow tothe enterprise
bull a present obligation of the enterprise arising from past eventsthe settlement of which is expected to result in an outflow fromthe enterprise of resources embodying economic benefits
bull the residual interest in the assets of the enterprise after deducting all its liabilities
bull increases in economic benefits during a period in the form ofndash inflows or enhancements of assets orndash decreases of liabilities that result in increases in equityndash other than those relating to contributions from equity participants
bull decreases in economic benefits during a period in the form ofndash outflows or depletions of assets orndash incurrences of liabilities that result in decreases in equityndash other than those relating to distributions to equity participants
DefinitionDefinition
Balance Sheet Approach
copy 2005-07 Nelson 18
Elements of Financial Statements
Objective Qualitative Characteristics ElementsElements
DefinitionDefinition
RecognitionRecognition
MeasurementMeasurement
Presentation and disclosurePresentation and disclosure
IFRS ApproachIFRS Approach
10
copy 2005-07 Nelson 19
Elements of Financial Statements
Objective Qualitative Characteristics ElementsElements
IFRS ApproachIFRS Approach
Presentation and disclosurePresentation and disclosure
Frameworkgives a general overview
DefinitionDefinition
RecognitionRecognition
MeasurementMeasurement
copy 2005-07 Nelson 20
Definition
Criteria for recognition ndash an item that meets the definition of an element should be recognized if1 it is probable that any future economic benefit
associated with the item will flow to or from the enterprise and
2 the item has a cost or value that can be measured with reliability
Criteria for recognition ndash an item that meets the definition of an element should be recognized if1 it is probable that any future economic benefit
associated with the item will flow to or from the enterprise and
2 the item has a cost or value that can be measured with reliability
Recognition is the process of incorporating in the balance sheet or income statement an item that1 meets the Definition of an element and2 satisfies the Criteria for Recognition
Recognition is the process of incorporating in the balance sheet or income statement an item that1 meets the Definition of an element and2 satisfies the Criteria for Recognition
Elements of Financial Statements
Objective Qualitative Characteristics ElementsElements
RecognitionRecognition
11
copy 2005-07 Nelson 21
Elements of Financial Statements
Objective Qualitative Characteristics ElementsElements
Recognition
Definition
Historical cost
Current cost
Realisable (settlement) value
Present value
Historical cost
Current cost
Realisable (settlement) value
Present value
MeasurementMeasurement
Fair value less cost to sell
Value in use
copy 2005-07 Nelson 22
Concept of CapitalFinancial concept of capitalbull is adopted by most enterprises in
preparing their financial statementsbull Under it such as invested money or
invested purchasing power capital is synonymous with the net assets or equity of the enterprise
Physical concept of capitalbull Under it such as operating capability
capital is regarded as the productive capacity of the enterprise based on
bull For example units of output per day
Capital and Capital Maintenance
Objective Qualitative Characteristics Elements Concepts of
CapitalConcepts of
Capital
Concept of Capital MaintenanceFinancial concept maintenancebull Under this concept a profit is
earned only ifbull the financial (or money) amount of
the net assets at the end of the period
bull exceeds the financial (or money) amount of net assets at the beginning of the period
bull after excluding any distributions to and contributions from owners during the period
bull Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power
12
copy 2005-07 Nelson 23
Concept of CapitalFinancial concept of capitalbull is adopted by most enterprises in
preparing their financial statementsbull Under it such as invested money or
invested purchasing power capital is synonymous with the net assets or equity of the enterprise
Physical concept of capitalbull Under it such as operating capability
capital is regarded as the productive capacity of the enterprise based on
bull For example units of output per day
Capital and Capital Maintenance
Objective Qualitative Characteristics Elements Concepts of
CapitalConcepts of
Capital
Concept of Capital MaintenancePhysical concept maintenancebull Under this concept a profit is
earned only ifbull the physical productive capacity (or
operating capability) of the enterprise (or the resources or funds needed to achieve that capacity) at the end of the period
bull exceeds the physical productive capacity at the beginning of the period
bull after excluding any distributions to and contributions from owners during the period
copy 2005-07 Nelson 24
Summary of IFRSs
International Financial Reporting Standards arebull Standards and Interpretations issued and endorsed by the
International Accounting Standard Board and comprisendash International Financial Reporting Standards (IFRSs)ndash International Accounting Standards (IASs) andndash Interpretations
bull IASs (International Accounting Standards) ndash Totally 31 sets
bull IFRSs (International Financial Reporting Standards) ndash Totally 8 sets(up to 4 February 2007)
More are coming helliphellipMore are coming helliphellip
13
copy 2005-07 Nelson 25
Key Points
IFRSs set outbull Recognitionbull Measurementbull Presentation and
disclosure requirements
Main changesbull Changes in recognition
and measurementbull Changes in presentation
and disclosure
bull Less Choicesbull Towards
Fair Value Model
bullbull Less ChoicesLess Choicesbullbull TowardsTowards
Fair Value ModelFair Value Model
bull More and clearer presentation and disclosure
bullbull More and clearer More and clearer presentation and presentation and disclosuredisclosure
bull Aim at enhancing the information for usersrsquo decision making
bullbull Aim at enhancing Aim at enhancing the information the information for usersrsquo for usersrsquo decision makingdecision making
eg market valuevalue by appraisal helliphellip
Inter alia one more change helliphellip
copy 2005-07 Nelson 26
Todayrsquos Agenda
Presentation of Financial Statements (IAS 1)
Presentation of Financial Statements (IAS 1)
14
copy 2005-07 Nelson 27
Presentation of Financial Statements(IAS 1)
copy 2005-07 Nelson 28
Presentation of Financial Statements (IAS 1)
1 Purpose of financial statements2 Components of financial statements3 Overall considerations4 Structure and content
15
copy 2005-07 Nelson 29
1 Purpose of Financial Statements
bull To provide information aboutndash financial positionndash financial performance
andndash cash flows of an entity
That is useful to a wide range of users in making economic decisions
bull To also show the results of managementrsquos stewardship of the resources entrusted to it
bull To meet this objective financial statements provide information about the entityrsquosndash Assetsndash Liabilitiesndash Equityndash Income and expenses
including gains and lossesndash Other changes in equityndash Cash flows
Thus we have helliphellip
copy 2005-07 Nelson 30
2 Components of Financial Statements
A complete set of financial statements comprisesa) a balance sheetb) an income statementc) a statement of changes in equity showing either
i) all changes in equity orii) changes in equity other than those arising from transactions with
equity holders acting in their capacity as equity holdersd) a cash flow statement ande) notes comprising a summary of significant accounting policies and
other explanatory notes
another nameanother name
16
copy 2005-07 Nelson 31
3 Overall Consideration
a) Fair presentation and compliance with IFRSsb) Going concernc) Accrual basis of accountingd) Consistency of presentatione) Materiality and aggregationf) Offsettingg) Comparative information
copy 2005-07 Nelson 32
3 Overall Consideration
bull Financial statements shall present fairly of the financial position financial performance and cash flows of an entity
ndash Fair presentation requires the faithful representation of the effects of transactions other events and conditions in accordance with
bull the definitions and recognition criteria for assets liabilities income and expenses set out in the Framework
ndash The application of IFRSs with additional disclosure when necessary is presumed to result in financial statements that give a true and fair view
a) Fair presentation and compliance with IFRSs
No such precisely statement before
17
copy 2005-07 Nelson 33
3 Overall Consideration
bull Statement of compliancendash An entity whose financial statements comply
with IFRSs shall make an explicit and unreserved statement of such compliance in the notes
ndash Financial statements shall not be described as complying with IFRSsbull unless they comply with all the
requirements of IFRSsndash In virtually all circumstances a fair
presentation is achieved by bull compliance with applicable IFRSs
a) Fair presentation and compliance with IFRSs
copy 2005-07 Nelson 34
3 Overall Consideration
Melco Development Limited (新濠國際發展有限公司)Notes to the financial statements for year ended 31122005ndash The consolidated financial statements have been prepared in
accordance with HKFRSsndash In addition the consolidated financial statements include applicable
disclosures required by the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited and by the Companies Ordinance
CaseCase
18
copy 2005-07 Nelson 35
3 Overall Consideration
bull A fair presentation also requires an entitya) to select and apply accounting policies in accordance
with IAS 8b) to present information including accounting policies
in a manner that provides relevant reliable comparable and understandable information
c) to provide additional disclosuresndash when compliance with the specific requirements in
IFRSs is insufficient to enable users to understand the impact of particular transactions other events and conditions on the entityrsquos financial position and financial performance
bull Inappropriate accounting policies are not rectified eitherndash by disclosure of the accounting policies used orndash by notes or explanatory material
a) Fair presentation and compliance with IFRSs
copy 2005-07 Nelson 36
3 Overall Consideration
bull Departure from Standard or Interpretation (Simplified)ndash In the extremely rare circumstances in which
management concludes thatbull compliance with a requirement in a standard or an
interpretation would be so misleading thatbull it would conflict with the objective of financial
statements set out in the Frameworkthe entity shall depart from that requirement if the relevant regulatory framework requires or otherwise does not prohibit such a departure
a) Fair presentation and compliance with IFRSs
19
copy 2005-07 Nelson 37
3 Overall Consideration
bull Departure from Standard or Interpretation (Simplified)
a) Fair presentation and compliance with IFRSs
ndash Then the following disclosure is requireda) management has concluded that the financial
statements give a true and fair viewb) that it has complied with applicable standards and
interpretations except that it has departed from a particular requirement
c) the title of the standard or interpretation from which the entity has departed the nature of the departure the reason why that treatment would be so misleading and the treatment adopted and
d) for each period presented the financial impact of the departure on each item in the financial statements that would have been reported in complying with the requirement
copy 2005-07 Nelson 38
3 Overall Consideration
Interim Report 2005 clearly stated thatInterim Report 2005 clearly stated that
CaseCase
bull The directors consider it inappropriate for the company to adopt two particular aspects of the newrevised HKFRSs as these would result in the financial statements in the view of the directors eitherbull not reflecting the commercial substance of the business orbull being subject to significant potential short-term volatility as
explained below helliphellip
20
copy 2005-07 Nelson 39
3 Overall ConsiderationCaseCase
bull HKAS 40 ldquoInvestment propertyrdquo requires an assessment of the fair value of investment properties
bull The group intends to follow the same accounting treatment as adopted in 2004 which is to value such investment properties on an annual basis
bull Accordingly the investment properties were not revalued at 30 June 2005 since the directors consider that such change of practice could introduce a significant element of short-term volatility into the income statement in respect of assets which are being held on a long-term basis by the group helliphellip
bull It is not practicable to estimate the financial effect of this non-compliance as no interim valuation of the properties has been conducted
Interim Report 2005 clearly stated thatInterim Report 2005 clearly stated that
At year-end revaluation would still be conductedAt year-end revaluation would still be conducted
copy 2005-07 Nelson 40
3 Overall ConsiderationCaseCase
bull HKAS 12 ldquoIncome Taxesrdquo together with HKAS-INT 21 ldquoIncome Taxes ndashRecovery of Revalued Non-Depreciable Assetsrdquo requires deferred taxation to be recognised on any revaluation movements on investment propertiesbull It is further provided that any such deferred tax liability should be calculated
at the profits tax rate in the case of assets which the management has no definite intention to sell
bull The company has not made such provision in respect of its HK investment properties since the directors consider that such provision would result in the financial statements not reflecting the commercial substance of the businessbull since should any such sale eventuate any gain would be regarded as capital
in nature and would not be subject to any tax in HKbull Should this aspect of HKAS 12 have been adopted deferred tax liabilities
amounting to HK$2008 million on the revaluation surpluses arising from revaluation of HK investment properties would have been provided
(estimate - over 12 of the net assets at 30 June 2005)
Interim Report 2005 clearly stated thatInterim Report 2005 clearly stated that
21
copy 2005-07 Nelson 41
3 Overall Consideration
bull Departure but such departure is prohibitedndash In the extremely rare circumstances in which
management concludes that bull compliance with a requirement in a
standard or an interpretation would be so misleading that
bull it would conflict with the objective of financial statements set out in the Framework
bull but the relevant regulatory framework prohibits departure from the requirement the entity shall to the maximum extent possible reduce the perceived misleading aspects of compliance by disclosing helliphellip
a) Fair presentation and compliance with IFRSs
copy 2005-07 Nelson 42
3 Overall Consideration
ndash by disclosinga) the title of the standard or interpretation in
question the nature of the requirement and the reason why management has concluded that complying with that requirement is so misleading in the circumstances that it conflicts with the objective of financial statements set out in the Framework and
b) for each period presented the adjustments to each item in the financial statements that management has concluded would be necessary to give a fair presentation
a) Fair presentation and compliance with IFRSsbull Departure but such departure is prohibited
22
copy 2005-07 Nelson 43
3 Overall Consideration
bull When assessing whether complying with a specific requirement in a standard or an interpretation would be so misleading that it would conflict with the objective of financial statements set out in the Frameworkndash management considers
a) why the objective of financial statements is not achieved in the particular circumstances and
b) how the entityrsquos circumstances differ from those of other entities that comply with the requirement ndash If other entities in similar circumstances comply with the
requirement raquo there is a rebuttable presumption that the entityrsquos compliance
with the requirement would not be so misleading that it would conflict with the objective of financial statements set out in the Framework
a) Fair presentation and compliance with IFRSs
copy 2005-07 Nelson 44
3 Overall ConsiderationCaseCase
Howrsquos about this Howrsquos about this
However 2005 Final Results Announcementdisclosed that bull provision for deferred tax was finally made
with regard to revaluation of the HK investment properties (total HK$22 billion) at 2005 year-end
However However 2005 Final Results Announcement2005 Final Results Announcementdisclosed that disclosed that bullbull provision for deferred tax was finally made provision for deferred tax was finally made
with regard to revaluation of the HK with regard to revaluation of the HK investment properties (total HK$22 billion) at investment properties (total HK$22 billion) at 2005 year2005 year--endend
23
copy 2005-07 Nelson 45
b) Going Concern
3 Overall Consideration
bull When preparing financial statements management shall make an assessment of an entityrsquos ability to continue as a going concern
bull Financial statements shall be prepared on a going concern basisndash unless management either intends to liquidate the entity or to cease
trading or has no realistic alternative but to do so bull When management is aware in making its assessment of
material uncertainties related to events or conditions that may cast significant doubt upon the entityrsquos ability to continue as a going concern those uncertainties shall be disclosed
bull When financial statements are not prepared on a going concern basis that fact shall be disclosed together with the basis on which the financial statements are prepared and the reason why the entity is not regarded as a going concern
copy 2005-07 Nelson 46
c) Accrual Basis of Accounting
3 Overall Consideration
bull An entity shall prepare its financial statements except for cash flow information using the accrual basis of accounting
bull When the accrual basis of accounting is used items are recognised as assets liabilities equity income and expensesndash when they satisfy the definitions and recognition criteria for those
elements in the Framework
24
copy 2005-07 Nelson 47
3 Overall Consideration
bull The presentation and classification of items in the financial statements shall be retained from one period to the next unlessa) it is apparent
bull following a significant change in the nature of the entityrsquos operations (eg significant acquisition or disposal) or
bull a review of its financial statementsthat another presentation or classification would be more appropriatehaving regard to the criteria for the selection and application of accounting policies in IAS 8 or
b) a IFRS requires a change in presentation
d) Consistency of presentation
An entity changes the presentation of its financial statements only ifndash the changed presentation provides information that is reliable and is
more relevant to users of the financial statements andndash the revised structure is likely to continue so that comparability is not
impaired
An entity changes the presentation of its financial statements only ifndash the changed presentation provides information that is reliable and is
more relevant to users of the financial statements andndash the revised structure is likely to continue so that comparability is not
impaired
copy 2005-07 Nelson 48
3 Overall Consideration
bull Each material class of similar items shall bendash presented separately in the financial
statementsbull Items of a dissimilar nature or function shall be
ndash presented separately unless they are immaterial
bull Applying the concept of materiality means that a specific disclosure requirement in a IFRS neednot be satisfied if the information is not material
e) Materiality and Aggregation
What is the situation of recognition and measurement
What is the What is the situation of situation of recognition and recognition and measurementmeasurement
25
copy 2005-07 Nelson 49
3 Overall Consideration
bull What is materialndash Omissions or misstatements of items are
material if they could individually or collectively influence the economic decisions of users taken on the basis of the financial statements
ndash Materiality depends on the size and nature of the omission or misstatement judged in the surrounding circumstancesbull The size or nature of the item or a combination
of both could be the determining factor
e) Materiality and Aggregation
copy 2005-07 Nelson 50
3 Overall Consideration
bull Assets and liabilities and income and expenses shall not be offsetndash unless required or permitted by a IFRS
bull It is important that assets and liabilities and income and expenses are reported separatelyndash Measuring assets net of valuation allowances mdash
for example obsolescence allowances on inventories and doubtful debts allowances on receivables mdash is not offsetting
f) Offsetting
26
copy 2005-07 Nelson 51
3 Overall Consideration
bull During ordinary activities some transactions that do not generate revenue but are incidental to the main revenue-generating activitiesndash The results of such transactions are presented
when this presentation reflects the substance of the transaction or other event by netting any income with related expenses arising on the same transaction
f) Offsetting
copy 2005-07 Nelson 52
3 Overall Consideration
bull For examplea) gains and losses on the disposal of non-current
assets including investments and operating assets- are reported by deducting from the proceeds on
disposal the carrying amount of the asset and related selling expenses and
b) expenditure related to a provision that is- recognised in accordance with IAS 37 and - reimbursed under a contractual arrangement with
a third party (for example a supplierrsquos warranty agreement)
may be netted against the related reimbursement
f) Offsetting
ExampleExample
27
copy 2005-07 Nelson 53
3 Overall Consideration
bull Gains and losses arising from a group of similar transactions are reported on a net basisndash For example
bull foreign exchange gains and losses or bull gains and losses arising on financial instruments held for trading
bull Such gains and losses are however reported separately if they are material
bull Gains and losses arising from a group of similar transactions are reported on a net basisndash For example
bull foreign exchange gains and losses or bull gains and losses arising on financial instruments held for trading
bull Such gains and losses are however reported separately if they are material
Can foreign exchange gains and losses be offset
ExampleExample
copy 2005-07 Nelson 54
3 Overall Consideration
bull Except when a IFRS permits or requires otherwise ndash comparative information shall be disclosed in
respect of the previous period for all amountsreported in the financial statements
bull When the presentation or classification of items in the financial statements is amended ndash comparative amounts shall be reclassified unless
the reclassification is impracticable
g) Comparative information
28
copy 2005-07 Nelson 55
Amended requirementsAmended requirements
3 Overall Consideration
bull When comparative amounts are reclassified an entity shall disclosea) the nature of the reclassificationb) the amount of each item or class of items that is
reclassified andc) the reason for the reclassification
g) Comparative information
bull In the pastonly the reason for and a description of the nature of materialreclassifications should be disclosedExemption for disclosure of comparative information for the reconciliation of movements in fixed assets is also removed
bull In the pastonly the reason for and a description of the nature of materialreclassifications should be disclosedExemption for disclosure of comparative information for the reconciliation of movements in fixed assets is also removed
copy 2005-07 Nelson 56
3 Overall Consideration
Melco Development Limited (新濠國際發展有限公司)Notes to the financial statements for year ended 31122005ndash Because HKAS 32 requires retrospective application comparative
figures for 2004 have been restated (see Note 2A for the financial impact)
CaseCase
29
copy 2005-07 Nelson 57
3 Overall Consideration
Galaxy Entertainment Group LimitedNotes to the financial statements (ye 31122005)ndash All changes in the accounting policies require
retrospective application except HKAS 39 and HKFRS 2 for which transitional provisions are applied
ndash As a result the 2004 comparative figures have also been restated or amended in accordance with the relevant requirements
ndash The effects of all the changes in accounting policies are summarised in notes (b) and (c) below
CaseCase
copy 2005-07 Nelson 58
bull Identification of the financial statementsbull Reporting periodbull Balance sheet
1 CurrentNon-current distinction2 Current assets3 Current liabilities4 Information to be presented on the face of the balance sheet5 Information to be presented either on the face of the balance sheet or in
the notesbull Income statement
1 Profit or loss for the period2 Information to be presented on the face of the income statement3 Information to be presented either on the face of the income statement or
in the notesbull Statement of changes in equitybull Cash flow statementbull Notes
4 Structure and Content
30
copy 2005-07 Nelson 59
Identification of Financial Statements
bull The financial statements shall be identified clearly and distinguished from other information in the same published document
bull The following information shall be displayed prominently and repeated when it is necessary for a proper understanding of the information presented
a) the name of the reporting entity or other means of identification and any change in that information from the preceding balance sheet date
b) whether the financial statements cover the individual entity or a group of entities
c) the balance sheet date or the period covered by the financial statements whichever is appropriate to that component of the financial statements
d) the presentation currency as defined in HKAS 21 The Effects of Changes in Foreign Exchange Rates and
e) the level of rounding used in presenting amounts in the financial statements
copy 2005-07 Nelson 60
Identification of Financial Statements
bull Can the units of the presentation currency be rounded to thousands or millions
bull Financial statements are often made more understandableby presenting information in thousands or millions of units of the presentation currency
bull This is acceptable as long asndash the level of rounding in presentation is disclosed and ndash material information is not omitted
bull Financial statements are often made more understandableby presenting information in thousands or millions of units of the presentation currency
bull This is acceptable as long asndash the level of rounding in presentation is disclosed and ndash material information is not omitted
ExampleExample
31
copy 2005-07 Nelson 61
Reporting Period
bull Financial statements shall be presented at least annually
bull When an entityrsquos balance sheet date changes and the annual financial statements are presented for a period longer or shorter than one year an entity shall disclose in addition to the period covered by the financial statementsa) the reason for using a longer or shorter period andb) the fact that comparative amounts for the income
statement statement of changes in equity cash flow statement and related notes are not entirely comparable
copy 2005-07 Nelson 62
Reporting Period
bull Can a set of financial statements cover 52-week instead of a year
bull Normally financial statements are consistently prepared covering a one-year period
bull However for practical reasons some entities prefer to report for example for a 52-week period
bull IAS 1 does not preclude this practice because the resulting financial statements are unlikely to be materially different from those that would be presented for one year
bull Normally financial statements are consistently prepared covering a one-year period
bull However for practical reasons some entities prefer to report for example for a 52-week period
bull IAS 1 does not preclude this practice because the resulting financial statements are unlikely to be materially different from those that would be presented for one year
ExampleExample
32
copy 2005-07 Nelson 63
CurrentNon-current Distinction
bull An entity shall presentndash current and non-current assets andndash current and non-current liabilitiesas separate classifications on the face of its balance sheet
bull Except when a presentation based on liquidity provides informationndash If that information is reliable and is more relevantndash When that exception applies all assets and liabilities shall be
presented broadly in order of liquidity
copy 2005-07 Nelson 64
CurrentNon-current Distinction
bull Whichever method of presentation is adopted for each asset and liability line item that combines amounts expected to be recovered or settled a) no more than 12 months after the balance sheet date
andb) more than 12 months after the balance sheet date(ie combines both current and non-current)
an entity shall disclose the amount expected to be recovered or settled after more than 12 months
33
copy 2005-07 Nelson 65
New requirementsNew requirements
Current Assets
bull An asset shall be classified as current when it satisfies any of the following criteriaa) it is expected to be realised in or is intended for sale or
consumption in the entityrsquos normal operating cycle b) it is held primarily for the purpose of being tradedc) it is expected to be realised within 12 months after the balance
sheet date ord) it is cash or a cash equivalent
bull unless it is restricted from being exchanged or used to settle aliability for at least 12 months after the balance sheet date
bull All other assets shall be classified as non-current
Examplesbull Deposits pledged to bank (how long)bull Fixed deposits over 1 year maturity
Examplesbull Deposits pledged to bank (how long)bull Fixed deposits over 1 year maturity
What is itWhat is it
copy 2005-07 Nelson 66
Current Assets
bull What is operating cycle
bull The operating cycle of an entity is the time between ndash the acquisition of assets for processing and ndash their realisation in cash or cash equivalents
bull When the entityrsquos normal operating cycle is not clearly identifiable ndash its duration is assumed to be 12 months
bull The operating cycle of an entity is the time between ndash the acquisition of assets for processing and ndash their realisation in cash or cash equivalents
bull When the entityrsquos normal operating cycle is not clearly identifiable ndash its duration is assumed to be 12 months
ExampleExample
34
copy 2005-07 Nelson 67
Current Assets CaseCase
copy 2005-07 Nelson 68
Current Assets
bull Can a non-current asset reclassified if it fulfil the definition of current asset later
bull Assets classified as non-current in accordancewith IAS 1 shall not be reclassified as current assetsndash until they meet the criteria to be classified as held for sale in
accordance with IFRS 5bull Assets of a class that an entity would normally regard as non-
current that are acquired exclusively with a view to resale shall notbe classified as currentndash unless they meet the criteria to be classified as held for sale in
accordance with IFRS 5
bull Assets classified as non-current in accordancewith IAS 1 shall not be reclassified as current assetsndash until they meet the criteria to be classified as held for sale in
accordance with IFRS 5bull Assets of a class that an entity would normally regard as non-
current that are acquired exclusively with a view to resale shall notbe classified as currentndash unless they meet the criteria to be classified as held for sale in
accordance with IFRS 5
No non-current assets can be classified as current unless the criteria in IFRS 5 are fulfilled mainlybull Available for immediate salebull Highly probable to make the sale
35
copy 2005-07 Nelson 69
Is it currentIs it current
Current Assets
bull In its 2005 Interim Report full set of HKFRS was adopted and the report set out thatndash Available-for-sale financial assets are non-
derivatives that are eitherbull designated in this category orbull not classified in any of the other categories (ie
loans and receivables financial assets at fair value through profit or loss and held-to-maturity investments)
CaseCase
Similar in 2005 Annual Report
Similar in 2005 Annual Report
ndash They are included in non-current assetsbull unless management intends to dispose of the
investment within 12 months of the balance sheet date
copy 2005-07 Nelson 70
New requirementsNew requirements
Current Liabilities
bull A liability shall be classified as current when it satisfies any of the following criteriaa) it is expected to be settled in the entityrsquos normal operating cycleb) it is held primarily for the purpose of being tradedc) it is due to be settled within 12 months after the balance sheet
date ord) the entity does not have an unconditional right to defer settlement
of the liability for at least 12 months after the balance sheet date
bull All other liabilities shall be classified as non-current
ImplicationImplication
36
copy 2005-07 Nelson 71
Current Liabilities Revised rules on classifying a liability as current or non-currentbull A liability held for being traded rArr currentbull A financial liability due within 12 months after the BS date rArr current
ndash even if an agreement to refinance on a long-term basis is completed after the BS date (only disclosed as non-adjusting event)
bull If an entity has discretion to refinance rArr non-currentbull If an entity without discretion to refinance rArr current
bull A non-current financial liability is payable on demand with a breach on a condition of its loan agreement on or before the BS datendash If the lender agreed not to demand payment
bull after the BS date rArr current (only disclosed as non-adjusting event)
bull by the BS date rArr non-current
ImplicationImplication
copy 2005-07 Nelson 72
Current LiabilitiesCaseCase
Note 12 to Interim Report 2006bull Breach of loan covenants
bull As at 30 June 2006 in respect of certain bank loans with an aggregate carrying amount of HK$1529806000 the Group breached certain financial covenants of the banks loans
bull Since the lenders have not agreed to waive its right to demand immediate payment as at the balance sheet date the loans have been classified as current liabilities in these financial statements at 30 June 2006
37
copy 2005-07 Nelson 73
Current Assets and LiabilitiesExampleExample
Can the following be classified as current assetsbull 3-month fixed deposits pledged to a bank to secure
a mortgage loan of 5 yearsbull 2-year fixed deposits with a bank
Can the following be classified as current assetsbull 3-month fixed deposits pledged to a bank to secure
a mortgage loan of 5 yearsbull 2-year fixed deposits with a bank
Can the following be classified as non-current liabilitiesbull 5-year term loan matured after year end but renewed
for another 5 years after year end (before the issuanceof the financial statements)
bull 2-year term loan to be matured with 12 months and theentity has a right to renew for another 2 years
Can the following be classified as non-current liabilitiesbull 5-year term loan matured after year end but renewed
for another 5 years after year end (before the issuanceof the financial statements)
bull 2-year term loan to be matured with 12 months and theentity has a right to renew for another 2 years
timestimes
times
radic
copy 2005-07 Nelson 74
Balance Sheetbull As a minimum the face of the balance sheet shall
include line items that present the following amountsa) property plant and equipmentb) investment propertyc) intangible assetsd) financial assets (excl amounts shown under (e) (h) and (I))e) investments accounted for using the equity methodf) biological assetsg) inventoriesh) trade and other receivablesi) cash and cash equivalentsj) trade and other payablesk) provisionsl) financial liabilities (excl amounts shown under (j) and (k))m) liabilities and assets for current tax as defined in HKAS 12 Income Taxesn) deferred tax liabilities and deferred tax assets as defined in HKAS 12o) minority interest presented within equity andp) issued capital and reserves attributable to equity holders of the parent
38
copy 2005-07 Nelson 75
Balance Sheetbull The face of the balance sheet shall also include line
items that present the following amountsa) The total of assets classified as held for sale and
assets included in disposal groups classified as held for sale in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations and
b) Liabilities included in disposal groups classified as held for sale in accordance with IFRS 5
copy 2005-07 Nelson 76
Balance Sheetbull Additional line items headings and subtotals shall
be presented on the face of the balance sheet when such presentation is relevant to an understanding of the entityrsquos financial position
bull When an entity presents current and non-current assets and current and non-current liabilities as separate classifications on the face of its balance sheet ndash it shall not classify deferred tax assets
(liabilities) as current assets (liabilities)
39
copy 2005-07 Nelson 77
Balance Sheet
bull The use of different measurement bases for different classes of assets suggests that their nature or function differs and therefore that they should be presented as separate line itemsndash For example different classes of property plant and
equipment can be carried atbull Cost orbull Revalued amountsin accordance with IAS 16 PPE
In the past it use ldquomay needrdquoIn the past it use ldquomay needrdquo
copy 2005-07 Nelson 78
Balance Sheet
Galaxy Entertainment Group LimitedConsolidated balance sheet as at 31122005
CaseCase
40
copy 2005-07 Nelson 79
Balance Sheet
Melco Development Limited (新濠國際發展有限公司)Consolidated balance sheet as at 31122005
CaseCase
copy 2005-07 Nelson 80
Income Statement Minimum requirements on the face of the income statementbull As a minimum the face of the income statement shall include line items
that present the following amounts for the perioda) revenueb) finance costsc) share of the profit or loss of associates and joint ventures accounted
for using the equity methodd) pre-tax gain or loss recognised on the disposal of assets or
settlement of liabilities attributable to discontinuing operationse) tax expense andf) profit or loss
41
copy 2005-07 Nelson 81
Income Statement bull The following items shall be disclosed on the face of the income
statement as allocations of profit or loss for the perioda) Profit or loss attributable to minority interest andb) Profit or loss attributable to equity holders of the parent
A similar requirement has been added for the statement of changes in equity and such allocated amounts are not to be presented as items of income or expense
copy 2005-07 Nelson 82
Income Statement
Melco Dev LtdConsolidated income statementas at 31122005
CaseCase
42
copy 2005-07 Nelson 83
Income Statement bull Not require to disclose the results of operating
activities as a line item on the face of the incomestatement
bull An entity shall not present any items of income and expense as extraordinary items either onthe face of the income statements or in the notes
Entities canrsquot use itEntities canrsquot use it
Entities can still show itEntities can still show it
copy 2005-07 Nelson 84
Income Statement Either on the face of the income statement or in the notesbull An entity shall present an analysis of expenses using a classification
based on eitherbull the nature of expenses orbull their function within the entity
whichever provides information that is reliable and more relevant
bull Entities classifying expenses by function shall disclose additional information on the nature of expenses includingbull depreciation and amortisation expense and bull employee benefits expense
43
copy 2005-07 Nelson 85
Income StatementCaseCase
Nature or FunctionNature or Nature or FunctionFunction
copy 2005-07 Nelson 86
Statement of Changes in Equity bull An entity shall present a statement of changes in equity showing on the
face of the statementa) profit or loss for the period b) each item of income and expense for the period that as required by
IFRSs is recognised directly in equity and the total of these itemsc) total income and expense for the period (calculated as the sum of (a) and
(b)) showing separately the total amounts attributablebull to equity holders of the parent andbull to minority interest and
d) for each component of equity the effects of changes in accounting policies and corrections of errors recognised in accordance with IAS 8
Any ChangeAny Change
A revised requirementbull A statement of changes in equity that comprises only these items
shall be titled a statement of recognised income and expenses
A revised requirementbull A statement of changes in equity that comprises only these items
shall be titled a statement of recognised income and expenses
44
copy 2005-07 Nelson 87
Statement of Changes in Equity bull An entity shall also present either on the face of the
statement of changes in equity or in the notesa) the amounts of transactions with equity holders acting in
their capacity as equity holders showing separately distributions to equity holders
b) the balance of retained earnings (ie accumulated profit or loss) at the beginning of the period and at the balance sheet date and the changes during the period and
c) a reconciliation between the carrying amount of each class of contributed equity and each reserve at the beginning and the end of the period separately disclosing each change
copy 2005-07 Nelson 88
Statement of Changes in Equity
Consolidated SCE as at 31122005
CaseCase
45
copy 2005-07 Nelson 89
Notes Structure (an entity is required to disclose the following)
bull The notes shalla) present information about the basis of preparation of the financial statements
and the specific accounting policies usedb) disclose the information required by HKFRSs that is not presented on the
face of the balance sheet income statement statement of changes in equity or cash flow statement and
c) provide additional information that is not presented on the face of the balance sheet income statement statement of changes in equity or cash flow statement but is relevant to an understanding of any of them
bull Notes shall as far as practicable be presented in a systematic manner bull Each item on the face of the balance sheet income statement statement
of changes in equity and cash flow statement shall be cross-referencedto any related information in the notes
copy 2005-07 Nelson 90
Notes Disclosures (an entity is required to disclose the following)
bull Disclosure of accounting policiesAn entity shall disclose in the summary of significant accounting policiesa) the measurement basis (or bases) used in preparing the financial
statements andb) the other accounting policies used that are relevant to an understanding of
the financial statements
46
copy 2005-07 Nelson 91
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)ndash The financial statements have been prepared in
accordance with Hong Kong Financial Reporting Standards (lsquolsquoHKFRSrsquorsquo) issued by the Hong Kong Institute of Certified Public Accountants bull under the historical cost convention as modified by the
revaluation of investment properties available-for-sale financial assets derivative financial instruments and other investments which are carried at fair values helliphellip
ndash The principal accounting policies applied in the preparation of these financial statements are set out below These policies have been consistently applied to all the years presented except for those stated in note 2(a) above
copy 2005-07 Nelson 92
Notes Disclosures (an entity is required to disclose the following)
bull Disclosure of accounting policiesndash The judgements apart from those involving estimations management has
madebull in the process of applying the entityrsquos accounting policies that have the
most significant effect on the amounts recognised in the financial statements (in the summary of significant accounting policies or other notes)
Examples ndash Management makes judgements in determininga) whether financial assets are held-to-maturity investmentsb) when substantially all the significant risks and rewards of
ownership of financial assets and lease assets are transferred to other entities
c) whether in substance particular sales of goods are financing arrangements and therefore do not give rise to revenue and
d) whether the substance of the relationship between the entity and a special purpose entity indicates that the special purpose entity is controlled by the entity
Examples ndash Management makes judgements in determininga) whether financial assets are held-to-maturity investmentsb) when substantially all the significant risks and rewards of
ownership of financial assets and lease assets are transferred to other entities
c) whether in substance particular sales of goods are financing arrangements and therefore do not give rise to revenue and
d) whether the substance of the relationship between the entity and a special purpose entity indicates that the special purpose entity is controlled by the entity
47
copy 2005-07 Nelson 93
Notes Disclosures (an entity is required to disclose the following)
bull Key sources of estimation uncertaintyndash Information about the key assumptions concerning the future and
other key sources of estimation uncertainty at the balance sheet datebull that have a significant risk of causing a material adjustment to the
carrying amounts of assets and liabilities within the next financial yearndash In respect of those assets and liabilities the notes shall include details of
a) their nature andb) their carrying amount as at the balance sheet date
Examples ndash in the absence of recently observed market prices used to measure the following assets and liabilities future-oriented estimates are necessary to measurebull the recoverable amount of classes of PPEbull the effect of technological obsolescence on inventories
Estimates involve assumptions about such items asbull the risk adjustment to cash flows or discount rates usedbull future changes in salaries and in prices affecting other costs
Examples ndash in the absence of recently observed market prices used to measure the following assets and liabilities future-oriented estimates are necessary to measurebull the recoverable amount of classes of PPEbull the effect of technological obsolescence on inventories
Estimates involve assumptions about such items asbull the risk adjustment to cash flows or discount rates usedbull future changes in salaries and in prices affecting other costs
copy 2005-07 Nelson 94
Notes
Esprit Holdings LimitedEsprit Holdings Limitedbull Critical Accounting Estimates and Judgements
ndash Estimates and judgements are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonableunder the circumstances
ndash Critical accounting estimates and assumptionsbull The Group makes estimates and assumptions concerning
the future The resulting accounting estimates will by definition seldom equal the related actual results
bull The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below helliphellip (including (1) useful life and impairment of trademarks and (2) income taxes)
CaseCase
48
copy 2005-07 Nelson 95
Notes
Melco Development Limited (新濠國際發展有限公司)Notes to the financial statements for the year ended 31122005ndash The key assumptions concerning the future and other key sources
of estimation uncertainty at the balance sheet date that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below helliphellip(The issues discussed includebull Allowances for inventories bull Estimated impairment of goodwill Income taxes)
CaseCase
copy 2005-07 Nelson 96
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)ndash Estimates and judgements used in preparing the
financial statements are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonable under the circumstances
ndash The Group makes estimates and assumptionsconcerning the future
ndash The resulting accounting estimates will by definition seldom equal the related actual results
ndash The estimates and assumptions that have a significant effect on the carrying amounts of assets and liabilities are discussed below hellip (including impairment of goodwill impairment of gaming
licence Useful lives of property plant and equipment fair value of investment properties hellip)
49
copy 2005-07 Nelson 97
Notes Disclosures (an entity is required to disclose the following)
bull Other disclosuresAn entity shall disclose in the notesa) the amount of dividends proposed or declared before the
financial statements were authorised for issue but not recognised as a distribution to equity holders during the period and the related amount per share(HK incorporated companies are required to show the aggregate amount which is recommended for distribution by way of dividend under a separate heading(s) in their balance sheet (HK Co Ord 10th Sch para 9(1)(e)) and
b) the amount of any cumulative preference dividends not recognised
copy 2005-07 Nelson 98
Notes Disclosures (an entity is required to disclose the following)
An entity shall disclose the following if not disclosedelsewhere in information published with the financial statementsa) the domicile and legal form of the entity
its country of incorporation andthe address of its registered office(or principal place of business if different from the registered office)
b) a description of the nature of the entityrsquos operations and its principal activities and
c) the name of the parent and the ultimate parent of the group
ldquoshall discloserdquo now instead of ldquoencouraged to discloserdquo
ldquoshall discloserdquo now instead of ldquoencouraged to discloserdquo
bull Other disclosures
Any specialAny special
50
copy 2005-07 Nelson 99
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)bull The principal activities of Galaxy Entertainment Group
Ltd (the lsquolsquoCompanyrsquorsquo) (formerly known as K WahConstruction Materials Ltd) and its subsidiaries (together the lsquolsquoGrouprsquorsquo) are tondash operate in casino games of chance or games of other forms
in Macau (and) manufacture sale and distribution of construction materials in HK Macau and Mainland China
bull The Company is ndash a limited liability company incorporated in Hong Kong and ndash has its listing on the Main Board of The Stock Exchange of
Hong Kong Limitedbull The address of its registered office and its principal place
of business is Room 1606 16th Floor Hutchison House 10 Harcourt Road Central HK
copy 2005-07 Nelson 100
Effective Date
bull An entity shall apply IAS 1 for annual periods beginning on or after 1 Jan 2005
ndash Earlier application is encouragedndash If an entity applies IAS 1 for an earlier period it shall
disclose this factbull For the amendments relating to the Statement of
Changes in Equityndash An entity shall apply it for annual periods beginning on
or after 1 Jan 2006ndash If an entity applies the amendments to IAS 19
Employee Benefits ndash Actuarial Gains and Losses Group Plans and Disclosures for an earlier period that amendment shall be applied for that earlier period
51
copy 2005-07 Nelson 101
Todayrsquos Agenda
Capital Disclosures (Amendments to IAS 1)
Capital Disclosures (Amendments to IAS 1)
copy 2005-07 Nelson 102
Capital Disclosures ndash For 2007
52
copy 2005-07 Nelson 103
Capital Disclosures
What is capital Is it helliphellip
CapitalCapital AssetsAssets LiabilitiesLiabilities= ndash
bull IAS 1BC47 considers ldquowhether an entity can have a view of capital that differs from what IFRSs define as equityrdquo
bull It further clarifies that although for the purposes of this disclosure capital would often equate with equity as defined in IFRSsndash it might also include or exclude some components
bull It also noted that the capital disclosure in IAS 1 is intended to give entities the opportunity to describendash how they view the components of capital they manage if this is
different from what IFRSs define as equity helliphellip
copy 2005-07 Nelson 104
EquityEquityEquity AssetsAssets LiabilitiesLiabilities= ndash
Capital Disclosures
Based on the Framework amp IFRSs the accounting equation should be
CapitalCapital AssetsAssets LiabilitiesLiabilities= ndash
bull An entityrsquos capital may be part of its equity plus part of its liabilities depending on how it manage ldquoits capitalrdquo helliphellip
53
copy 2005-07 Nelson 105
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowinga) qualitative information about its objectives policies and processes for
managing capital including (but not limited to)i) a description of what it manages as capitalii) when an entity is subject to externally imposed capital requirements
the nature of those requirements and how those requirements are incorporated into the management of capital and
iii) how it is meeting its objectives for managing capital
bull To comply with the capital disclosures the entity discloses thefollowinga) qualitative information about its objectives policies and processes for
managing capital including (but not limited to)i) a description of what it manages as capitalii) when an entity is subject to externally imposed capital requirements
the nature of those requirements and how those requirements are incorporated into the management of capital and
iii) how it is meeting its objectives for managing capital
copy 2005-07 Nelson 106
Capital Disclosures
Example disclosurebull The Grouprsquos objectives when managing capital are
ndash to safeguard the entityrsquos ability to continue as a going concern
bull so that it can continue to provide returns for shareholders and benefits for other stakeholders and
ndash to provide an adequate return to shareholders by pricing products and services commensurately with the level of risk
bull The Group sets the amount of capital in proportion to risk
ExampleExample
ObjectivesObjectives
54
copy 2005-07 Nelson 107
Capital Disclosures
bull The Group manages the capital structure and makes adjustments to it in the light ofndash changes in economic conditions and ndash the risk characteristics of the underlying assets
bull In order to maintain or adjust the capital structure the Group mayndash adjust the amount of dividends paid to shareholders ndash return capital to shareholders ndash issue new shares or ndash sell assets to reduce debt
ExampleExample
Example disclosure
HowHow
copy 2005-07 Nelson 108
Capital Disclosures
bull Consistently with others in the industry the Group monitors capital on the basis of ndash the debt-to-adjusted capital ratio
bull This ratio is calculated as net debt divide adjusted capital
ExampleExample
Example disclosure
HowHow
bull Net debt is calculated as ndash Total debt (as shown in the
balance sheet)ndash Less cash amp cash equivalents
bull Net debt is calculated as ndash Total debt (as shown in the
balance sheet)ndash Less cash amp cash equivalents
bull Adjusted capital ndash comprises all components of
equity (ie share capital share premium minority interest retained earnings and revaluation reserve) ndash other than amounts
recognised in equity relating to cash flow hedges and
ndash includes some forms of subordinated debt
bull Adjusted capital ndash comprises all components of
equity (ie share capital share premium minority interest retained earnings and revaluation reserve) ndash other than amounts
recognised in equity relating to cash flow hedges and
ndash includes some forms of subordinated debt
55
copy 2005-07 Nelson 109
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowing
bull To comply with the capital disclosures the entity discloses thefollowingb) summary quantitative data about what it manages as capital
Some entities regard some financial liabilities (eg some forms of subordinated debt) as part of capitalOther entities regard capital as excluding some components of equity (eg components arising from cash flow hedges)
c) any changes in (a) and (b) from the previous period
copy 2005-07 Nelson 110
Capital Disclosures
Example disclosure (continued from previous example)
ExampleExample
bull During 20X4 the Grouprsquos strategy which was unchanged from 20X3 was to maintain the debt-to-adjusted capital ratio at the lower end of the range 61 to 71 in order to secure access to finance at a reasonable cost by maintaining a BB credit rating The debt-to-adjusted capital ratios at 31 December 20X4 and at 31 December 20X3 were as follows
3112X4 ($rsquoM) 3112X3 ($rsquoM) Total debt 1000 1100 Less cash and cash equivalents (90) (150)Net debt 910 950
Total equity 110 105 Add subordinated debt instruments 38 38 Less amounts recognised in equity
relating to cash flow hedges (10) (5)Adjusted capital 138 138
Debt-to-adjusted capital ratio 66 69
56
copy 2005-07 Nelson 111
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowing
bull To comply with the capital disclosures the entity discloses thefollowingd) whether during the period it complied with any externally imposed capital
requirements to which it is subjecte) when the entity has not complied with such externally imposed capital
requirements the consequences of such non-complianceThese disclosures shall be based on the information provided internally to the entityrsquos key management personnel
copy 2005-07 Nelson 112
Capital DisclosuresExampleExample
Example disclosurebull Entity A filed its quarterly regulatory capital return for
30 September 20X7 on 20 October 20X7 bull At that date Entity Arsquos regulatory capital was below
the capital requirement imposed by Regulator B by $1 million
bull As a result Entity A was required to submit a plan to the regulator indicating how it would increase its regulatory capital to the amount required
bull Entity A submitted a plan that entailed selling part of its unquoted equities portfolio with a carrying amount of $115 million in the fourth quarter of 20X7
bull In the fourth quarter of 20X7 Entity A sold its fixed interest investment portfolio for $126 million and met its regulatory capital requirement
For example SFC or banks
For example SFC or banks
57
copy 2005-07 Nelson 113
Capital DisclosuresCaseCase
bull Early adopted capital disclosure in 2005 and itsannual report states that (extract only)ndash The Grouprsquos objectives when managing capital are
bull To safeguard the Grouprsquos ability to continue as a going concern so that it continues to provide returns for shareholders and benefits for other stakeholders
bull To support the Grouprsquos stability and growth andbull To provide capital for the purpose of strengthening the
Grouprsquos risk management capability
copy 2005-07 Nelson 114
Capital DisclosuresCaseCase
ndash The Group actively and regularly reviews and manages its capital structure to ensure optimal capital structure and shareholder returns taking into consideration the future capital requirements of the Group and capital efficiency helliphellip
ndash The Group adopts a dividend policy helliphellip while retaining 10 per cent of the profit as capital of the Group for future use
ndash The Group has set aside $1500 million of retained earnings for the purpose of strengthening the risk management regime of the clearing houses and supporting their roles as central counterparties
ndash As in prior years the Group monitors capital by reviewing the level of capital that is at the disposal of the Group (ldquoadjusted capitalrdquo) Adjusted capital comprises all components of shareholdersrsquo equity other than the hedging reserve relating to cash flow hedges designated reserves and investment revaluation reserve helliphellip
bull Early adopted capital disclosure in 2005 and itsannual report states that (extract only)
58
copy 2005-07 Nelson 115
Capital Disclosures ndash Transition
bull An entity shall apply the requirements of capital disclosure for
ndash annual periods beginning on or after 1 January 2007
bull Early application is encouraged
copy 2005-07 Nelson 116
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk
59
copy 2005-07 Nelson 117
QampA SessionQampA SessionQampA Session
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk
8
copy 2005-07 Nelson 15
All aims atAll aims atRelevanceRelevanceReliabilityReliabilityComparabilityComparabilityUnderstandabilityUnderstandability
Qualitative Characteristics
Management Decision
Management Decision
Financial reportingFinancial Financial reportingreporting
copy 2005-07 Nelson 16
Elements of Financial Statements
Objective Qualitative Characteristics ElementsElements
Asset
Liability
Equity
Income
Expenses
Financial Position (in balance sheet)
Financial Performance (in income statement)
bull a resource controlled by the enterprise as a result of past eventsand from which future economic benefits are expected to flow tothe enterprise
bull a present obligation of the enterprise arising from past eventsthe settlement of which is expected to result in an outflow fromthe enterprise of resources embodying economic benefits
bull the residual interest in the assets of the enterprise after deducting all its liabilities
bull increases in economic benefits during a period in the form ofndash inflows or enhancements of assets orndash decreases of liabilities that result in increases in equityndash other than those relating to contributions from equity participants
bull decreases in economic benefits during a period in the form ofndash outflows or depletions of assets orndash incurrences of liabilities that result in decreases in equityndash other than those relating to distributions to equity participants
Balance Sheet Approach
9
copy 2005-07 Nelson 17
Elements of Financial Statements
Objective Qualitative Characteristics ElementsElements
Asset
Liability
Equity
Income
Expenses
Financial Position (in balance sheet)
Financial Performance (in income statement)
bull a resource controlled by the enterprise as a result of past eventsand from which future economic benefits are expected to flow tothe enterprise
bull a present obligation of the enterprise arising from past eventsthe settlement of which is expected to result in an outflow fromthe enterprise of resources embodying economic benefits
bull the residual interest in the assets of the enterprise after deducting all its liabilities
bull increases in economic benefits during a period in the form ofndash inflows or enhancements of assets orndash decreases of liabilities that result in increases in equityndash other than those relating to contributions from equity participants
bull decreases in economic benefits during a period in the form ofndash outflows or depletions of assets orndash incurrences of liabilities that result in decreases in equityndash other than those relating to distributions to equity participants
DefinitionDefinition
Balance Sheet Approach
copy 2005-07 Nelson 18
Elements of Financial Statements
Objective Qualitative Characteristics ElementsElements
DefinitionDefinition
RecognitionRecognition
MeasurementMeasurement
Presentation and disclosurePresentation and disclosure
IFRS ApproachIFRS Approach
10
copy 2005-07 Nelson 19
Elements of Financial Statements
Objective Qualitative Characteristics ElementsElements
IFRS ApproachIFRS Approach
Presentation and disclosurePresentation and disclosure
Frameworkgives a general overview
DefinitionDefinition
RecognitionRecognition
MeasurementMeasurement
copy 2005-07 Nelson 20
Definition
Criteria for recognition ndash an item that meets the definition of an element should be recognized if1 it is probable that any future economic benefit
associated with the item will flow to or from the enterprise and
2 the item has a cost or value that can be measured with reliability
Criteria for recognition ndash an item that meets the definition of an element should be recognized if1 it is probable that any future economic benefit
associated with the item will flow to or from the enterprise and
2 the item has a cost or value that can be measured with reliability
Recognition is the process of incorporating in the balance sheet or income statement an item that1 meets the Definition of an element and2 satisfies the Criteria for Recognition
Recognition is the process of incorporating in the balance sheet or income statement an item that1 meets the Definition of an element and2 satisfies the Criteria for Recognition
Elements of Financial Statements
Objective Qualitative Characteristics ElementsElements
RecognitionRecognition
11
copy 2005-07 Nelson 21
Elements of Financial Statements
Objective Qualitative Characteristics ElementsElements
Recognition
Definition
Historical cost
Current cost
Realisable (settlement) value
Present value
Historical cost
Current cost
Realisable (settlement) value
Present value
MeasurementMeasurement
Fair value less cost to sell
Value in use
copy 2005-07 Nelson 22
Concept of CapitalFinancial concept of capitalbull is adopted by most enterprises in
preparing their financial statementsbull Under it such as invested money or
invested purchasing power capital is synonymous with the net assets or equity of the enterprise
Physical concept of capitalbull Under it such as operating capability
capital is regarded as the productive capacity of the enterprise based on
bull For example units of output per day
Capital and Capital Maintenance
Objective Qualitative Characteristics Elements Concepts of
CapitalConcepts of
Capital
Concept of Capital MaintenanceFinancial concept maintenancebull Under this concept a profit is
earned only ifbull the financial (or money) amount of
the net assets at the end of the period
bull exceeds the financial (or money) amount of net assets at the beginning of the period
bull after excluding any distributions to and contributions from owners during the period
bull Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power
12
copy 2005-07 Nelson 23
Concept of CapitalFinancial concept of capitalbull is adopted by most enterprises in
preparing their financial statementsbull Under it such as invested money or
invested purchasing power capital is synonymous with the net assets or equity of the enterprise
Physical concept of capitalbull Under it such as operating capability
capital is regarded as the productive capacity of the enterprise based on
bull For example units of output per day
Capital and Capital Maintenance
Objective Qualitative Characteristics Elements Concepts of
CapitalConcepts of
Capital
Concept of Capital MaintenancePhysical concept maintenancebull Under this concept a profit is
earned only ifbull the physical productive capacity (or
operating capability) of the enterprise (or the resources or funds needed to achieve that capacity) at the end of the period
bull exceeds the physical productive capacity at the beginning of the period
bull after excluding any distributions to and contributions from owners during the period
copy 2005-07 Nelson 24
Summary of IFRSs
International Financial Reporting Standards arebull Standards and Interpretations issued and endorsed by the
International Accounting Standard Board and comprisendash International Financial Reporting Standards (IFRSs)ndash International Accounting Standards (IASs) andndash Interpretations
bull IASs (International Accounting Standards) ndash Totally 31 sets
bull IFRSs (International Financial Reporting Standards) ndash Totally 8 sets(up to 4 February 2007)
More are coming helliphellipMore are coming helliphellip
13
copy 2005-07 Nelson 25
Key Points
IFRSs set outbull Recognitionbull Measurementbull Presentation and
disclosure requirements
Main changesbull Changes in recognition
and measurementbull Changes in presentation
and disclosure
bull Less Choicesbull Towards
Fair Value Model
bullbull Less ChoicesLess Choicesbullbull TowardsTowards
Fair Value ModelFair Value Model
bull More and clearer presentation and disclosure
bullbull More and clearer More and clearer presentation and presentation and disclosuredisclosure
bull Aim at enhancing the information for usersrsquo decision making
bullbull Aim at enhancing Aim at enhancing the information the information for usersrsquo for usersrsquo decision makingdecision making
eg market valuevalue by appraisal helliphellip
Inter alia one more change helliphellip
copy 2005-07 Nelson 26
Todayrsquos Agenda
Presentation of Financial Statements (IAS 1)
Presentation of Financial Statements (IAS 1)
14
copy 2005-07 Nelson 27
Presentation of Financial Statements(IAS 1)
copy 2005-07 Nelson 28
Presentation of Financial Statements (IAS 1)
1 Purpose of financial statements2 Components of financial statements3 Overall considerations4 Structure and content
15
copy 2005-07 Nelson 29
1 Purpose of Financial Statements
bull To provide information aboutndash financial positionndash financial performance
andndash cash flows of an entity
That is useful to a wide range of users in making economic decisions
bull To also show the results of managementrsquos stewardship of the resources entrusted to it
bull To meet this objective financial statements provide information about the entityrsquosndash Assetsndash Liabilitiesndash Equityndash Income and expenses
including gains and lossesndash Other changes in equityndash Cash flows
Thus we have helliphellip
copy 2005-07 Nelson 30
2 Components of Financial Statements
A complete set of financial statements comprisesa) a balance sheetb) an income statementc) a statement of changes in equity showing either
i) all changes in equity orii) changes in equity other than those arising from transactions with
equity holders acting in their capacity as equity holdersd) a cash flow statement ande) notes comprising a summary of significant accounting policies and
other explanatory notes
another nameanother name
16
copy 2005-07 Nelson 31
3 Overall Consideration
a) Fair presentation and compliance with IFRSsb) Going concernc) Accrual basis of accountingd) Consistency of presentatione) Materiality and aggregationf) Offsettingg) Comparative information
copy 2005-07 Nelson 32
3 Overall Consideration
bull Financial statements shall present fairly of the financial position financial performance and cash flows of an entity
ndash Fair presentation requires the faithful representation of the effects of transactions other events and conditions in accordance with
bull the definitions and recognition criteria for assets liabilities income and expenses set out in the Framework
ndash The application of IFRSs with additional disclosure when necessary is presumed to result in financial statements that give a true and fair view
a) Fair presentation and compliance with IFRSs
No such precisely statement before
17
copy 2005-07 Nelson 33
3 Overall Consideration
bull Statement of compliancendash An entity whose financial statements comply
with IFRSs shall make an explicit and unreserved statement of such compliance in the notes
ndash Financial statements shall not be described as complying with IFRSsbull unless they comply with all the
requirements of IFRSsndash In virtually all circumstances a fair
presentation is achieved by bull compliance with applicable IFRSs
a) Fair presentation and compliance with IFRSs
copy 2005-07 Nelson 34
3 Overall Consideration
Melco Development Limited (新濠國際發展有限公司)Notes to the financial statements for year ended 31122005ndash The consolidated financial statements have been prepared in
accordance with HKFRSsndash In addition the consolidated financial statements include applicable
disclosures required by the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited and by the Companies Ordinance
CaseCase
18
copy 2005-07 Nelson 35
3 Overall Consideration
bull A fair presentation also requires an entitya) to select and apply accounting policies in accordance
with IAS 8b) to present information including accounting policies
in a manner that provides relevant reliable comparable and understandable information
c) to provide additional disclosuresndash when compliance with the specific requirements in
IFRSs is insufficient to enable users to understand the impact of particular transactions other events and conditions on the entityrsquos financial position and financial performance
bull Inappropriate accounting policies are not rectified eitherndash by disclosure of the accounting policies used orndash by notes or explanatory material
a) Fair presentation and compliance with IFRSs
copy 2005-07 Nelson 36
3 Overall Consideration
bull Departure from Standard or Interpretation (Simplified)ndash In the extremely rare circumstances in which
management concludes thatbull compliance with a requirement in a standard or an
interpretation would be so misleading thatbull it would conflict with the objective of financial
statements set out in the Frameworkthe entity shall depart from that requirement if the relevant regulatory framework requires or otherwise does not prohibit such a departure
a) Fair presentation and compliance with IFRSs
19
copy 2005-07 Nelson 37
3 Overall Consideration
bull Departure from Standard or Interpretation (Simplified)
a) Fair presentation and compliance with IFRSs
ndash Then the following disclosure is requireda) management has concluded that the financial
statements give a true and fair viewb) that it has complied with applicable standards and
interpretations except that it has departed from a particular requirement
c) the title of the standard or interpretation from which the entity has departed the nature of the departure the reason why that treatment would be so misleading and the treatment adopted and
d) for each period presented the financial impact of the departure on each item in the financial statements that would have been reported in complying with the requirement
copy 2005-07 Nelson 38
3 Overall Consideration
Interim Report 2005 clearly stated thatInterim Report 2005 clearly stated that
CaseCase
bull The directors consider it inappropriate for the company to adopt two particular aspects of the newrevised HKFRSs as these would result in the financial statements in the view of the directors eitherbull not reflecting the commercial substance of the business orbull being subject to significant potential short-term volatility as
explained below helliphellip
20
copy 2005-07 Nelson 39
3 Overall ConsiderationCaseCase
bull HKAS 40 ldquoInvestment propertyrdquo requires an assessment of the fair value of investment properties
bull The group intends to follow the same accounting treatment as adopted in 2004 which is to value such investment properties on an annual basis
bull Accordingly the investment properties were not revalued at 30 June 2005 since the directors consider that such change of practice could introduce a significant element of short-term volatility into the income statement in respect of assets which are being held on a long-term basis by the group helliphellip
bull It is not practicable to estimate the financial effect of this non-compliance as no interim valuation of the properties has been conducted
Interim Report 2005 clearly stated thatInterim Report 2005 clearly stated that
At year-end revaluation would still be conductedAt year-end revaluation would still be conducted
copy 2005-07 Nelson 40
3 Overall ConsiderationCaseCase
bull HKAS 12 ldquoIncome Taxesrdquo together with HKAS-INT 21 ldquoIncome Taxes ndashRecovery of Revalued Non-Depreciable Assetsrdquo requires deferred taxation to be recognised on any revaluation movements on investment propertiesbull It is further provided that any such deferred tax liability should be calculated
at the profits tax rate in the case of assets which the management has no definite intention to sell
bull The company has not made such provision in respect of its HK investment properties since the directors consider that such provision would result in the financial statements not reflecting the commercial substance of the businessbull since should any such sale eventuate any gain would be regarded as capital
in nature and would not be subject to any tax in HKbull Should this aspect of HKAS 12 have been adopted deferred tax liabilities
amounting to HK$2008 million on the revaluation surpluses arising from revaluation of HK investment properties would have been provided
(estimate - over 12 of the net assets at 30 June 2005)
Interim Report 2005 clearly stated thatInterim Report 2005 clearly stated that
21
copy 2005-07 Nelson 41
3 Overall Consideration
bull Departure but such departure is prohibitedndash In the extremely rare circumstances in which
management concludes that bull compliance with a requirement in a
standard or an interpretation would be so misleading that
bull it would conflict with the objective of financial statements set out in the Framework
bull but the relevant regulatory framework prohibits departure from the requirement the entity shall to the maximum extent possible reduce the perceived misleading aspects of compliance by disclosing helliphellip
a) Fair presentation and compliance with IFRSs
copy 2005-07 Nelson 42
3 Overall Consideration
ndash by disclosinga) the title of the standard or interpretation in
question the nature of the requirement and the reason why management has concluded that complying with that requirement is so misleading in the circumstances that it conflicts with the objective of financial statements set out in the Framework and
b) for each period presented the adjustments to each item in the financial statements that management has concluded would be necessary to give a fair presentation
a) Fair presentation and compliance with IFRSsbull Departure but such departure is prohibited
22
copy 2005-07 Nelson 43
3 Overall Consideration
bull When assessing whether complying with a specific requirement in a standard or an interpretation would be so misleading that it would conflict with the objective of financial statements set out in the Frameworkndash management considers
a) why the objective of financial statements is not achieved in the particular circumstances and
b) how the entityrsquos circumstances differ from those of other entities that comply with the requirement ndash If other entities in similar circumstances comply with the
requirement raquo there is a rebuttable presumption that the entityrsquos compliance
with the requirement would not be so misleading that it would conflict with the objective of financial statements set out in the Framework
a) Fair presentation and compliance with IFRSs
copy 2005-07 Nelson 44
3 Overall ConsiderationCaseCase
Howrsquos about this Howrsquos about this
However 2005 Final Results Announcementdisclosed that bull provision for deferred tax was finally made
with regard to revaluation of the HK investment properties (total HK$22 billion) at 2005 year-end
However However 2005 Final Results Announcement2005 Final Results Announcementdisclosed that disclosed that bullbull provision for deferred tax was finally made provision for deferred tax was finally made
with regard to revaluation of the HK with regard to revaluation of the HK investment properties (total HK$22 billion) at investment properties (total HK$22 billion) at 2005 year2005 year--endend
23
copy 2005-07 Nelson 45
b) Going Concern
3 Overall Consideration
bull When preparing financial statements management shall make an assessment of an entityrsquos ability to continue as a going concern
bull Financial statements shall be prepared on a going concern basisndash unless management either intends to liquidate the entity or to cease
trading or has no realistic alternative but to do so bull When management is aware in making its assessment of
material uncertainties related to events or conditions that may cast significant doubt upon the entityrsquos ability to continue as a going concern those uncertainties shall be disclosed
bull When financial statements are not prepared on a going concern basis that fact shall be disclosed together with the basis on which the financial statements are prepared and the reason why the entity is not regarded as a going concern
copy 2005-07 Nelson 46
c) Accrual Basis of Accounting
3 Overall Consideration
bull An entity shall prepare its financial statements except for cash flow information using the accrual basis of accounting
bull When the accrual basis of accounting is used items are recognised as assets liabilities equity income and expensesndash when they satisfy the definitions and recognition criteria for those
elements in the Framework
24
copy 2005-07 Nelson 47
3 Overall Consideration
bull The presentation and classification of items in the financial statements shall be retained from one period to the next unlessa) it is apparent
bull following a significant change in the nature of the entityrsquos operations (eg significant acquisition or disposal) or
bull a review of its financial statementsthat another presentation or classification would be more appropriatehaving regard to the criteria for the selection and application of accounting policies in IAS 8 or
b) a IFRS requires a change in presentation
d) Consistency of presentation
An entity changes the presentation of its financial statements only ifndash the changed presentation provides information that is reliable and is
more relevant to users of the financial statements andndash the revised structure is likely to continue so that comparability is not
impaired
An entity changes the presentation of its financial statements only ifndash the changed presentation provides information that is reliable and is
more relevant to users of the financial statements andndash the revised structure is likely to continue so that comparability is not
impaired
copy 2005-07 Nelson 48
3 Overall Consideration
bull Each material class of similar items shall bendash presented separately in the financial
statementsbull Items of a dissimilar nature or function shall be
ndash presented separately unless they are immaterial
bull Applying the concept of materiality means that a specific disclosure requirement in a IFRS neednot be satisfied if the information is not material
e) Materiality and Aggregation
What is the situation of recognition and measurement
What is the What is the situation of situation of recognition and recognition and measurementmeasurement
25
copy 2005-07 Nelson 49
3 Overall Consideration
bull What is materialndash Omissions or misstatements of items are
material if they could individually or collectively influence the economic decisions of users taken on the basis of the financial statements
ndash Materiality depends on the size and nature of the omission or misstatement judged in the surrounding circumstancesbull The size or nature of the item or a combination
of both could be the determining factor
e) Materiality and Aggregation
copy 2005-07 Nelson 50
3 Overall Consideration
bull Assets and liabilities and income and expenses shall not be offsetndash unless required or permitted by a IFRS
bull It is important that assets and liabilities and income and expenses are reported separatelyndash Measuring assets net of valuation allowances mdash
for example obsolescence allowances on inventories and doubtful debts allowances on receivables mdash is not offsetting
f) Offsetting
26
copy 2005-07 Nelson 51
3 Overall Consideration
bull During ordinary activities some transactions that do not generate revenue but are incidental to the main revenue-generating activitiesndash The results of such transactions are presented
when this presentation reflects the substance of the transaction or other event by netting any income with related expenses arising on the same transaction
f) Offsetting
copy 2005-07 Nelson 52
3 Overall Consideration
bull For examplea) gains and losses on the disposal of non-current
assets including investments and operating assets- are reported by deducting from the proceeds on
disposal the carrying amount of the asset and related selling expenses and
b) expenditure related to a provision that is- recognised in accordance with IAS 37 and - reimbursed under a contractual arrangement with
a third party (for example a supplierrsquos warranty agreement)
may be netted against the related reimbursement
f) Offsetting
ExampleExample
27
copy 2005-07 Nelson 53
3 Overall Consideration
bull Gains and losses arising from a group of similar transactions are reported on a net basisndash For example
bull foreign exchange gains and losses or bull gains and losses arising on financial instruments held for trading
bull Such gains and losses are however reported separately if they are material
bull Gains and losses arising from a group of similar transactions are reported on a net basisndash For example
bull foreign exchange gains and losses or bull gains and losses arising on financial instruments held for trading
bull Such gains and losses are however reported separately if they are material
Can foreign exchange gains and losses be offset
ExampleExample
copy 2005-07 Nelson 54
3 Overall Consideration
bull Except when a IFRS permits or requires otherwise ndash comparative information shall be disclosed in
respect of the previous period for all amountsreported in the financial statements
bull When the presentation or classification of items in the financial statements is amended ndash comparative amounts shall be reclassified unless
the reclassification is impracticable
g) Comparative information
28
copy 2005-07 Nelson 55
Amended requirementsAmended requirements
3 Overall Consideration
bull When comparative amounts are reclassified an entity shall disclosea) the nature of the reclassificationb) the amount of each item or class of items that is
reclassified andc) the reason for the reclassification
g) Comparative information
bull In the pastonly the reason for and a description of the nature of materialreclassifications should be disclosedExemption for disclosure of comparative information for the reconciliation of movements in fixed assets is also removed
bull In the pastonly the reason for and a description of the nature of materialreclassifications should be disclosedExemption for disclosure of comparative information for the reconciliation of movements in fixed assets is also removed
copy 2005-07 Nelson 56
3 Overall Consideration
Melco Development Limited (新濠國際發展有限公司)Notes to the financial statements for year ended 31122005ndash Because HKAS 32 requires retrospective application comparative
figures for 2004 have been restated (see Note 2A for the financial impact)
CaseCase
29
copy 2005-07 Nelson 57
3 Overall Consideration
Galaxy Entertainment Group LimitedNotes to the financial statements (ye 31122005)ndash All changes in the accounting policies require
retrospective application except HKAS 39 and HKFRS 2 for which transitional provisions are applied
ndash As a result the 2004 comparative figures have also been restated or amended in accordance with the relevant requirements
ndash The effects of all the changes in accounting policies are summarised in notes (b) and (c) below
CaseCase
copy 2005-07 Nelson 58
bull Identification of the financial statementsbull Reporting periodbull Balance sheet
1 CurrentNon-current distinction2 Current assets3 Current liabilities4 Information to be presented on the face of the balance sheet5 Information to be presented either on the face of the balance sheet or in
the notesbull Income statement
1 Profit or loss for the period2 Information to be presented on the face of the income statement3 Information to be presented either on the face of the income statement or
in the notesbull Statement of changes in equitybull Cash flow statementbull Notes
4 Structure and Content
30
copy 2005-07 Nelson 59
Identification of Financial Statements
bull The financial statements shall be identified clearly and distinguished from other information in the same published document
bull The following information shall be displayed prominently and repeated when it is necessary for a proper understanding of the information presented
a) the name of the reporting entity or other means of identification and any change in that information from the preceding balance sheet date
b) whether the financial statements cover the individual entity or a group of entities
c) the balance sheet date or the period covered by the financial statements whichever is appropriate to that component of the financial statements
d) the presentation currency as defined in HKAS 21 The Effects of Changes in Foreign Exchange Rates and
e) the level of rounding used in presenting amounts in the financial statements
copy 2005-07 Nelson 60
Identification of Financial Statements
bull Can the units of the presentation currency be rounded to thousands or millions
bull Financial statements are often made more understandableby presenting information in thousands or millions of units of the presentation currency
bull This is acceptable as long asndash the level of rounding in presentation is disclosed and ndash material information is not omitted
bull Financial statements are often made more understandableby presenting information in thousands or millions of units of the presentation currency
bull This is acceptable as long asndash the level of rounding in presentation is disclosed and ndash material information is not omitted
ExampleExample
31
copy 2005-07 Nelson 61
Reporting Period
bull Financial statements shall be presented at least annually
bull When an entityrsquos balance sheet date changes and the annual financial statements are presented for a period longer or shorter than one year an entity shall disclose in addition to the period covered by the financial statementsa) the reason for using a longer or shorter period andb) the fact that comparative amounts for the income
statement statement of changes in equity cash flow statement and related notes are not entirely comparable
copy 2005-07 Nelson 62
Reporting Period
bull Can a set of financial statements cover 52-week instead of a year
bull Normally financial statements are consistently prepared covering a one-year period
bull However for practical reasons some entities prefer to report for example for a 52-week period
bull IAS 1 does not preclude this practice because the resulting financial statements are unlikely to be materially different from those that would be presented for one year
bull Normally financial statements are consistently prepared covering a one-year period
bull However for practical reasons some entities prefer to report for example for a 52-week period
bull IAS 1 does not preclude this practice because the resulting financial statements are unlikely to be materially different from those that would be presented for one year
ExampleExample
32
copy 2005-07 Nelson 63
CurrentNon-current Distinction
bull An entity shall presentndash current and non-current assets andndash current and non-current liabilitiesas separate classifications on the face of its balance sheet
bull Except when a presentation based on liquidity provides informationndash If that information is reliable and is more relevantndash When that exception applies all assets and liabilities shall be
presented broadly in order of liquidity
copy 2005-07 Nelson 64
CurrentNon-current Distinction
bull Whichever method of presentation is adopted for each asset and liability line item that combines amounts expected to be recovered or settled a) no more than 12 months after the balance sheet date
andb) more than 12 months after the balance sheet date(ie combines both current and non-current)
an entity shall disclose the amount expected to be recovered or settled after more than 12 months
33
copy 2005-07 Nelson 65
New requirementsNew requirements
Current Assets
bull An asset shall be classified as current when it satisfies any of the following criteriaa) it is expected to be realised in or is intended for sale or
consumption in the entityrsquos normal operating cycle b) it is held primarily for the purpose of being tradedc) it is expected to be realised within 12 months after the balance
sheet date ord) it is cash or a cash equivalent
bull unless it is restricted from being exchanged or used to settle aliability for at least 12 months after the balance sheet date
bull All other assets shall be classified as non-current
Examplesbull Deposits pledged to bank (how long)bull Fixed deposits over 1 year maturity
Examplesbull Deposits pledged to bank (how long)bull Fixed deposits over 1 year maturity
What is itWhat is it
copy 2005-07 Nelson 66
Current Assets
bull What is operating cycle
bull The operating cycle of an entity is the time between ndash the acquisition of assets for processing and ndash their realisation in cash or cash equivalents
bull When the entityrsquos normal operating cycle is not clearly identifiable ndash its duration is assumed to be 12 months
bull The operating cycle of an entity is the time between ndash the acquisition of assets for processing and ndash their realisation in cash or cash equivalents
bull When the entityrsquos normal operating cycle is not clearly identifiable ndash its duration is assumed to be 12 months
ExampleExample
34
copy 2005-07 Nelson 67
Current Assets CaseCase
copy 2005-07 Nelson 68
Current Assets
bull Can a non-current asset reclassified if it fulfil the definition of current asset later
bull Assets classified as non-current in accordancewith IAS 1 shall not be reclassified as current assetsndash until they meet the criteria to be classified as held for sale in
accordance with IFRS 5bull Assets of a class that an entity would normally regard as non-
current that are acquired exclusively with a view to resale shall notbe classified as currentndash unless they meet the criteria to be classified as held for sale in
accordance with IFRS 5
bull Assets classified as non-current in accordancewith IAS 1 shall not be reclassified as current assetsndash until they meet the criteria to be classified as held for sale in
accordance with IFRS 5bull Assets of a class that an entity would normally regard as non-
current that are acquired exclusively with a view to resale shall notbe classified as currentndash unless they meet the criteria to be classified as held for sale in
accordance with IFRS 5
No non-current assets can be classified as current unless the criteria in IFRS 5 are fulfilled mainlybull Available for immediate salebull Highly probable to make the sale
35
copy 2005-07 Nelson 69
Is it currentIs it current
Current Assets
bull In its 2005 Interim Report full set of HKFRS was adopted and the report set out thatndash Available-for-sale financial assets are non-
derivatives that are eitherbull designated in this category orbull not classified in any of the other categories (ie
loans and receivables financial assets at fair value through profit or loss and held-to-maturity investments)
CaseCase
Similar in 2005 Annual Report
Similar in 2005 Annual Report
ndash They are included in non-current assetsbull unless management intends to dispose of the
investment within 12 months of the balance sheet date
copy 2005-07 Nelson 70
New requirementsNew requirements
Current Liabilities
bull A liability shall be classified as current when it satisfies any of the following criteriaa) it is expected to be settled in the entityrsquos normal operating cycleb) it is held primarily for the purpose of being tradedc) it is due to be settled within 12 months after the balance sheet
date ord) the entity does not have an unconditional right to defer settlement
of the liability for at least 12 months after the balance sheet date
bull All other liabilities shall be classified as non-current
ImplicationImplication
36
copy 2005-07 Nelson 71
Current Liabilities Revised rules on classifying a liability as current or non-currentbull A liability held for being traded rArr currentbull A financial liability due within 12 months after the BS date rArr current
ndash even if an agreement to refinance on a long-term basis is completed after the BS date (only disclosed as non-adjusting event)
bull If an entity has discretion to refinance rArr non-currentbull If an entity without discretion to refinance rArr current
bull A non-current financial liability is payable on demand with a breach on a condition of its loan agreement on or before the BS datendash If the lender agreed not to demand payment
bull after the BS date rArr current (only disclosed as non-adjusting event)
bull by the BS date rArr non-current
ImplicationImplication
copy 2005-07 Nelson 72
Current LiabilitiesCaseCase
Note 12 to Interim Report 2006bull Breach of loan covenants
bull As at 30 June 2006 in respect of certain bank loans with an aggregate carrying amount of HK$1529806000 the Group breached certain financial covenants of the banks loans
bull Since the lenders have not agreed to waive its right to demand immediate payment as at the balance sheet date the loans have been classified as current liabilities in these financial statements at 30 June 2006
37
copy 2005-07 Nelson 73
Current Assets and LiabilitiesExampleExample
Can the following be classified as current assetsbull 3-month fixed deposits pledged to a bank to secure
a mortgage loan of 5 yearsbull 2-year fixed deposits with a bank
Can the following be classified as current assetsbull 3-month fixed deposits pledged to a bank to secure
a mortgage loan of 5 yearsbull 2-year fixed deposits with a bank
Can the following be classified as non-current liabilitiesbull 5-year term loan matured after year end but renewed
for another 5 years after year end (before the issuanceof the financial statements)
bull 2-year term loan to be matured with 12 months and theentity has a right to renew for another 2 years
Can the following be classified as non-current liabilitiesbull 5-year term loan matured after year end but renewed
for another 5 years after year end (before the issuanceof the financial statements)
bull 2-year term loan to be matured with 12 months and theentity has a right to renew for another 2 years
timestimes
times
radic
copy 2005-07 Nelson 74
Balance Sheetbull As a minimum the face of the balance sheet shall
include line items that present the following amountsa) property plant and equipmentb) investment propertyc) intangible assetsd) financial assets (excl amounts shown under (e) (h) and (I))e) investments accounted for using the equity methodf) biological assetsg) inventoriesh) trade and other receivablesi) cash and cash equivalentsj) trade and other payablesk) provisionsl) financial liabilities (excl amounts shown under (j) and (k))m) liabilities and assets for current tax as defined in HKAS 12 Income Taxesn) deferred tax liabilities and deferred tax assets as defined in HKAS 12o) minority interest presented within equity andp) issued capital and reserves attributable to equity holders of the parent
38
copy 2005-07 Nelson 75
Balance Sheetbull The face of the balance sheet shall also include line
items that present the following amountsa) The total of assets classified as held for sale and
assets included in disposal groups classified as held for sale in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations and
b) Liabilities included in disposal groups classified as held for sale in accordance with IFRS 5
copy 2005-07 Nelson 76
Balance Sheetbull Additional line items headings and subtotals shall
be presented on the face of the balance sheet when such presentation is relevant to an understanding of the entityrsquos financial position
bull When an entity presents current and non-current assets and current and non-current liabilities as separate classifications on the face of its balance sheet ndash it shall not classify deferred tax assets
(liabilities) as current assets (liabilities)
39
copy 2005-07 Nelson 77
Balance Sheet
bull The use of different measurement bases for different classes of assets suggests that their nature or function differs and therefore that they should be presented as separate line itemsndash For example different classes of property plant and
equipment can be carried atbull Cost orbull Revalued amountsin accordance with IAS 16 PPE
In the past it use ldquomay needrdquoIn the past it use ldquomay needrdquo
copy 2005-07 Nelson 78
Balance Sheet
Galaxy Entertainment Group LimitedConsolidated balance sheet as at 31122005
CaseCase
40
copy 2005-07 Nelson 79
Balance Sheet
Melco Development Limited (新濠國際發展有限公司)Consolidated balance sheet as at 31122005
CaseCase
copy 2005-07 Nelson 80
Income Statement Minimum requirements on the face of the income statementbull As a minimum the face of the income statement shall include line items
that present the following amounts for the perioda) revenueb) finance costsc) share of the profit or loss of associates and joint ventures accounted
for using the equity methodd) pre-tax gain or loss recognised on the disposal of assets or
settlement of liabilities attributable to discontinuing operationse) tax expense andf) profit or loss
41
copy 2005-07 Nelson 81
Income Statement bull The following items shall be disclosed on the face of the income
statement as allocations of profit or loss for the perioda) Profit or loss attributable to minority interest andb) Profit or loss attributable to equity holders of the parent
A similar requirement has been added for the statement of changes in equity and such allocated amounts are not to be presented as items of income or expense
copy 2005-07 Nelson 82
Income Statement
Melco Dev LtdConsolidated income statementas at 31122005
CaseCase
42
copy 2005-07 Nelson 83
Income Statement bull Not require to disclose the results of operating
activities as a line item on the face of the incomestatement
bull An entity shall not present any items of income and expense as extraordinary items either onthe face of the income statements or in the notes
Entities canrsquot use itEntities canrsquot use it
Entities can still show itEntities can still show it
copy 2005-07 Nelson 84
Income Statement Either on the face of the income statement or in the notesbull An entity shall present an analysis of expenses using a classification
based on eitherbull the nature of expenses orbull their function within the entity
whichever provides information that is reliable and more relevant
bull Entities classifying expenses by function shall disclose additional information on the nature of expenses includingbull depreciation and amortisation expense and bull employee benefits expense
43
copy 2005-07 Nelson 85
Income StatementCaseCase
Nature or FunctionNature or Nature or FunctionFunction
copy 2005-07 Nelson 86
Statement of Changes in Equity bull An entity shall present a statement of changes in equity showing on the
face of the statementa) profit or loss for the period b) each item of income and expense for the period that as required by
IFRSs is recognised directly in equity and the total of these itemsc) total income and expense for the period (calculated as the sum of (a) and
(b)) showing separately the total amounts attributablebull to equity holders of the parent andbull to minority interest and
d) for each component of equity the effects of changes in accounting policies and corrections of errors recognised in accordance with IAS 8
Any ChangeAny Change
A revised requirementbull A statement of changes in equity that comprises only these items
shall be titled a statement of recognised income and expenses
A revised requirementbull A statement of changes in equity that comprises only these items
shall be titled a statement of recognised income and expenses
44
copy 2005-07 Nelson 87
Statement of Changes in Equity bull An entity shall also present either on the face of the
statement of changes in equity or in the notesa) the amounts of transactions with equity holders acting in
their capacity as equity holders showing separately distributions to equity holders
b) the balance of retained earnings (ie accumulated profit or loss) at the beginning of the period and at the balance sheet date and the changes during the period and
c) a reconciliation between the carrying amount of each class of contributed equity and each reserve at the beginning and the end of the period separately disclosing each change
copy 2005-07 Nelson 88
Statement of Changes in Equity
Consolidated SCE as at 31122005
CaseCase
45
copy 2005-07 Nelson 89
Notes Structure (an entity is required to disclose the following)
bull The notes shalla) present information about the basis of preparation of the financial statements
and the specific accounting policies usedb) disclose the information required by HKFRSs that is not presented on the
face of the balance sheet income statement statement of changes in equity or cash flow statement and
c) provide additional information that is not presented on the face of the balance sheet income statement statement of changes in equity or cash flow statement but is relevant to an understanding of any of them
bull Notes shall as far as practicable be presented in a systematic manner bull Each item on the face of the balance sheet income statement statement
of changes in equity and cash flow statement shall be cross-referencedto any related information in the notes
copy 2005-07 Nelson 90
Notes Disclosures (an entity is required to disclose the following)
bull Disclosure of accounting policiesAn entity shall disclose in the summary of significant accounting policiesa) the measurement basis (or bases) used in preparing the financial
statements andb) the other accounting policies used that are relevant to an understanding of
the financial statements
46
copy 2005-07 Nelson 91
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)ndash The financial statements have been prepared in
accordance with Hong Kong Financial Reporting Standards (lsquolsquoHKFRSrsquorsquo) issued by the Hong Kong Institute of Certified Public Accountants bull under the historical cost convention as modified by the
revaluation of investment properties available-for-sale financial assets derivative financial instruments and other investments which are carried at fair values helliphellip
ndash The principal accounting policies applied in the preparation of these financial statements are set out below These policies have been consistently applied to all the years presented except for those stated in note 2(a) above
copy 2005-07 Nelson 92
Notes Disclosures (an entity is required to disclose the following)
bull Disclosure of accounting policiesndash The judgements apart from those involving estimations management has
madebull in the process of applying the entityrsquos accounting policies that have the
most significant effect on the amounts recognised in the financial statements (in the summary of significant accounting policies or other notes)
Examples ndash Management makes judgements in determininga) whether financial assets are held-to-maturity investmentsb) when substantially all the significant risks and rewards of
ownership of financial assets and lease assets are transferred to other entities
c) whether in substance particular sales of goods are financing arrangements and therefore do not give rise to revenue and
d) whether the substance of the relationship between the entity and a special purpose entity indicates that the special purpose entity is controlled by the entity
Examples ndash Management makes judgements in determininga) whether financial assets are held-to-maturity investmentsb) when substantially all the significant risks and rewards of
ownership of financial assets and lease assets are transferred to other entities
c) whether in substance particular sales of goods are financing arrangements and therefore do not give rise to revenue and
d) whether the substance of the relationship between the entity and a special purpose entity indicates that the special purpose entity is controlled by the entity
47
copy 2005-07 Nelson 93
Notes Disclosures (an entity is required to disclose the following)
bull Key sources of estimation uncertaintyndash Information about the key assumptions concerning the future and
other key sources of estimation uncertainty at the balance sheet datebull that have a significant risk of causing a material adjustment to the
carrying amounts of assets and liabilities within the next financial yearndash In respect of those assets and liabilities the notes shall include details of
a) their nature andb) their carrying amount as at the balance sheet date
Examples ndash in the absence of recently observed market prices used to measure the following assets and liabilities future-oriented estimates are necessary to measurebull the recoverable amount of classes of PPEbull the effect of technological obsolescence on inventories
Estimates involve assumptions about such items asbull the risk adjustment to cash flows or discount rates usedbull future changes in salaries and in prices affecting other costs
Examples ndash in the absence of recently observed market prices used to measure the following assets and liabilities future-oriented estimates are necessary to measurebull the recoverable amount of classes of PPEbull the effect of technological obsolescence on inventories
Estimates involve assumptions about such items asbull the risk adjustment to cash flows or discount rates usedbull future changes in salaries and in prices affecting other costs
copy 2005-07 Nelson 94
Notes
Esprit Holdings LimitedEsprit Holdings Limitedbull Critical Accounting Estimates and Judgements
ndash Estimates and judgements are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonableunder the circumstances
ndash Critical accounting estimates and assumptionsbull The Group makes estimates and assumptions concerning
the future The resulting accounting estimates will by definition seldom equal the related actual results
bull The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below helliphellip (including (1) useful life and impairment of trademarks and (2) income taxes)
CaseCase
48
copy 2005-07 Nelson 95
Notes
Melco Development Limited (新濠國際發展有限公司)Notes to the financial statements for the year ended 31122005ndash The key assumptions concerning the future and other key sources
of estimation uncertainty at the balance sheet date that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below helliphellip(The issues discussed includebull Allowances for inventories bull Estimated impairment of goodwill Income taxes)
CaseCase
copy 2005-07 Nelson 96
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)ndash Estimates and judgements used in preparing the
financial statements are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonable under the circumstances
ndash The Group makes estimates and assumptionsconcerning the future
ndash The resulting accounting estimates will by definition seldom equal the related actual results
ndash The estimates and assumptions that have a significant effect on the carrying amounts of assets and liabilities are discussed below hellip (including impairment of goodwill impairment of gaming
licence Useful lives of property plant and equipment fair value of investment properties hellip)
49
copy 2005-07 Nelson 97
Notes Disclosures (an entity is required to disclose the following)
bull Other disclosuresAn entity shall disclose in the notesa) the amount of dividends proposed or declared before the
financial statements were authorised for issue but not recognised as a distribution to equity holders during the period and the related amount per share(HK incorporated companies are required to show the aggregate amount which is recommended for distribution by way of dividend under a separate heading(s) in their balance sheet (HK Co Ord 10th Sch para 9(1)(e)) and
b) the amount of any cumulative preference dividends not recognised
copy 2005-07 Nelson 98
Notes Disclosures (an entity is required to disclose the following)
An entity shall disclose the following if not disclosedelsewhere in information published with the financial statementsa) the domicile and legal form of the entity
its country of incorporation andthe address of its registered office(or principal place of business if different from the registered office)
b) a description of the nature of the entityrsquos operations and its principal activities and
c) the name of the parent and the ultimate parent of the group
ldquoshall discloserdquo now instead of ldquoencouraged to discloserdquo
ldquoshall discloserdquo now instead of ldquoencouraged to discloserdquo
bull Other disclosures
Any specialAny special
50
copy 2005-07 Nelson 99
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)bull The principal activities of Galaxy Entertainment Group
Ltd (the lsquolsquoCompanyrsquorsquo) (formerly known as K WahConstruction Materials Ltd) and its subsidiaries (together the lsquolsquoGrouprsquorsquo) are tondash operate in casino games of chance or games of other forms
in Macau (and) manufacture sale and distribution of construction materials in HK Macau and Mainland China
bull The Company is ndash a limited liability company incorporated in Hong Kong and ndash has its listing on the Main Board of The Stock Exchange of
Hong Kong Limitedbull The address of its registered office and its principal place
of business is Room 1606 16th Floor Hutchison House 10 Harcourt Road Central HK
copy 2005-07 Nelson 100
Effective Date
bull An entity shall apply IAS 1 for annual periods beginning on or after 1 Jan 2005
ndash Earlier application is encouragedndash If an entity applies IAS 1 for an earlier period it shall
disclose this factbull For the amendments relating to the Statement of
Changes in Equityndash An entity shall apply it for annual periods beginning on
or after 1 Jan 2006ndash If an entity applies the amendments to IAS 19
Employee Benefits ndash Actuarial Gains and Losses Group Plans and Disclosures for an earlier period that amendment shall be applied for that earlier period
51
copy 2005-07 Nelson 101
Todayrsquos Agenda
Capital Disclosures (Amendments to IAS 1)
Capital Disclosures (Amendments to IAS 1)
copy 2005-07 Nelson 102
Capital Disclosures ndash For 2007
52
copy 2005-07 Nelson 103
Capital Disclosures
What is capital Is it helliphellip
CapitalCapital AssetsAssets LiabilitiesLiabilities= ndash
bull IAS 1BC47 considers ldquowhether an entity can have a view of capital that differs from what IFRSs define as equityrdquo
bull It further clarifies that although for the purposes of this disclosure capital would often equate with equity as defined in IFRSsndash it might also include or exclude some components
bull It also noted that the capital disclosure in IAS 1 is intended to give entities the opportunity to describendash how they view the components of capital they manage if this is
different from what IFRSs define as equity helliphellip
copy 2005-07 Nelson 104
EquityEquityEquity AssetsAssets LiabilitiesLiabilities= ndash
Capital Disclosures
Based on the Framework amp IFRSs the accounting equation should be
CapitalCapital AssetsAssets LiabilitiesLiabilities= ndash
bull An entityrsquos capital may be part of its equity plus part of its liabilities depending on how it manage ldquoits capitalrdquo helliphellip
53
copy 2005-07 Nelson 105
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowinga) qualitative information about its objectives policies and processes for
managing capital including (but not limited to)i) a description of what it manages as capitalii) when an entity is subject to externally imposed capital requirements
the nature of those requirements and how those requirements are incorporated into the management of capital and
iii) how it is meeting its objectives for managing capital
bull To comply with the capital disclosures the entity discloses thefollowinga) qualitative information about its objectives policies and processes for
managing capital including (but not limited to)i) a description of what it manages as capitalii) when an entity is subject to externally imposed capital requirements
the nature of those requirements and how those requirements are incorporated into the management of capital and
iii) how it is meeting its objectives for managing capital
copy 2005-07 Nelson 106
Capital Disclosures
Example disclosurebull The Grouprsquos objectives when managing capital are
ndash to safeguard the entityrsquos ability to continue as a going concern
bull so that it can continue to provide returns for shareholders and benefits for other stakeholders and
ndash to provide an adequate return to shareholders by pricing products and services commensurately with the level of risk
bull The Group sets the amount of capital in proportion to risk
ExampleExample
ObjectivesObjectives
54
copy 2005-07 Nelson 107
Capital Disclosures
bull The Group manages the capital structure and makes adjustments to it in the light ofndash changes in economic conditions and ndash the risk characteristics of the underlying assets
bull In order to maintain or adjust the capital structure the Group mayndash adjust the amount of dividends paid to shareholders ndash return capital to shareholders ndash issue new shares or ndash sell assets to reduce debt
ExampleExample
Example disclosure
HowHow
copy 2005-07 Nelson 108
Capital Disclosures
bull Consistently with others in the industry the Group monitors capital on the basis of ndash the debt-to-adjusted capital ratio
bull This ratio is calculated as net debt divide adjusted capital
ExampleExample
Example disclosure
HowHow
bull Net debt is calculated as ndash Total debt (as shown in the
balance sheet)ndash Less cash amp cash equivalents
bull Net debt is calculated as ndash Total debt (as shown in the
balance sheet)ndash Less cash amp cash equivalents
bull Adjusted capital ndash comprises all components of
equity (ie share capital share premium minority interest retained earnings and revaluation reserve) ndash other than amounts
recognised in equity relating to cash flow hedges and
ndash includes some forms of subordinated debt
bull Adjusted capital ndash comprises all components of
equity (ie share capital share premium minority interest retained earnings and revaluation reserve) ndash other than amounts
recognised in equity relating to cash flow hedges and
ndash includes some forms of subordinated debt
55
copy 2005-07 Nelson 109
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowing
bull To comply with the capital disclosures the entity discloses thefollowingb) summary quantitative data about what it manages as capital
Some entities regard some financial liabilities (eg some forms of subordinated debt) as part of capitalOther entities regard capital as excluding some components of equity (eg components arising from cash flow hedges)
c) any changes in (a) and (b) from the previous period
copy 2005-07 Nelson 110
Capital Disclosures
Example disclosure (continued from previous example)
ExampleExample
bull During 20X4 the Grouprsquos strategy which was unchanged from 20X3 was to maintain the debt-to-adjusted capital ratio at the lower end of the range 61 to 71 in order to secure access to finance at a reasonable cost by maintaining a BB credit rating The debt-to-adjusted capital ratios at 31 December 20X4 and at 31 December 20X3 were as follows
3112X4 ($rsquoM) 3112X3 ($rsquoM) Total debt 1000 1100 Less cash and cash equivalents (90) (150)Net debt 910 950
Total equity 110 105 Add subordinated debt instruments 38 38 Less amounts recognised in equity
relating to cash flow hedges (10) (5)Adjusted capital 138 138
Debt-to-adjusted capital ratio 66 69
56
copy 2005-07 Nelson 111
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowing
bull To comply with the capital disclosures the entity discloses thefollowingd) whether during the period it complied with any externally imposed capital
requirements to which it is subjecte) when the entity has not complied with such externally imposed capital
requirements the consequences of such non-complianceThese disclosures shall be based on the information provided internally to the entityrsquos key management personnel
copy 2005-07 Nelson 112
Capital DisclosuresExampleExample
Example disclosurebull Entity A filed its quarterly regulatory capital return for
30 September 20X7 on 20 October 20X7 bull At that date Entity Arsquos regulatory capital was below
the capital requirement imposed by Regulator B by $1 million
bull As a result Entity A was required to submit a plan to the regulator indicating how it would increase its regulatory capital to the amount required
bull Entity A submitted a plan that entailed selling part of its unquoted equities portfolio with a carrying amount of $115 million in the fourth quarter of 20X7
bull In the fourth quarter of 20X7 Entity A sold its fixed interest investment portfolio for $126 million and met its regulatory capital requirement
For example SFC or banks
For example SFC or banks
57
copy 2005-07 Nelson 113
Capital DisclosuresCaseCase
bull Early adopted capital disclosure in 2005 and itsannual report states that (extract only)ndash The Grouprsquos objectives when managing capital are
bull To safeguard the Grouprsquos ability to continue as a going concern so that it continues to provide returns for shareholders and benefits for other stakeholders
bull To support the Grouprsquos stability and growth andbull To provide capital for the purpose of strengthening the
Grouprsquos risk management capability
copy 2005-07 Nelson 114
Capital DisclosuresCaseCase
ndash The Group actively and regularly reviews and manages its capital structure to ensure optimal capital structure and shareholder returns taking into consideration the future capital requirements of the Group and capital efficiency helliphellip
ndash The Group adopts a dividend policy helliphellip while retaining 10 per cent of the profit as capital of the Group for future use
ndash The Group has set aside $1500 million of retained earnings for the purpose of strengthening the risk management regime of the clearing houses and supporting their roles as central counterparties
ndash As in prior years the Group monitors capital by reviewing the level of capital that is at the disposal of the Group (ldquoadjusted capitalrdquo) Adjusted capital comprises all components of shareholdersrsquo equity other than the hedging reserve relating to cash flow hedges designated reserves and investment revaluation reserve helliphellip
bull Early adopted capital disclosure in 2005 and itsannual report states that (extract only)
58
copy 2005-07 Nelson 115
Capital Disclosures ndash Transition
bull An entity shall apply the requirements of capital disclosure for
ndash annual periods beginning on or after 1 January 2007
bull Early application is encouraged
copy 2005-07 Nelson 116
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk
59
copy 2005-07 Nelson 117
QampA SessionQampA SessionQampA Session
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk
9
copy 2005-07 Nelson 17
Elements of Financial Statements
Objective Qualitative Characteristics ElementsElements
Asset
Liability
Equity
Income
Expenses
Financial Position (in balance sheet)
Financial Performance (in income statement)
bull a resource controlled by the enterprise as a result of past eventsand from which future economic benefits are expected to flow tothe enterprise
bull a present obligation of the enterprise arising from past eventsthe settlement of which is expected to result in an outflow fromthe enterprise of resources embodying economic benefits
bull the residual interest in the assets of the enterprise after deducting all its liabilities
bull increases in economic benefits during a period in the form ofndash inflows or enhancements of assets orndash decreases of liabilities that result in increases in equityndash other than those relating to contributions from equity participants
bull decreases in economic benefits during a period in the form ofndash outflows or depletions of assets orndash incurrences of liabilities that result in decreases in equityndash other than those relating to distributions to equity participants
DefinitionDefinition
Balance Sheet Approach
copy 2005-07 Nelson 18
Elements of Financial Statements
Objective Qualitative Characteristics ElementsElements
DefinitionDefinition
RecognitionRecognition
MeasurementMeasurement
Presentation and disclosurePresentation and disclosure
IFRS ApproachIFRS Approach
10
copy 2005-07 Nelson 19
Elements of Financial Statements
Objective Qualitative Characteristics ElementsElements
IFRS ApproachIFRS Approach
Presentation and disclosurePresentation and disclosure
Frameworkgives a general overview
DefinitionDefinition
RecognitionRecognition
MeasurementMeasurement
copy 2005-07 Nelson 20
Definition
Criteria for recognition ndash an item that meets the definition of an element should be recognized if1 it is probable that any future economic benefit
associated with the item will flow to or from the enterprise and
2 the item has a cost or value that can be measured with reliability
Criteria for recognition ndash an item that meets the definition of an element should be recognized if1 it is probable that any future economic benefit
associated with the item will flow to or from the enterprise and
2 the item has a cost or value that can be measured with reliability
Recognition is the process of incorporating in the balance sheet or income statement an item that1 meets the Definition of an element and2 satisfies the Criteria for Recognition
Recognition is the process of incorporating in the balance sheet or income statement an item that1 meets the Definition of an element and2 satisfies the Criteria for Recognition
Elements of Financial Statements
Objective Qualitative Characteristics ElementsElements
RecognitionRecognition
11
copy 2005-07 Nelson 21
Elements of Financial Statements
Objective Qualitative Characteristics ElementsElements
Recognition
Definition
Historical cost
Current cost
Realisable (settlement) value
Present value
Historical cost
Current cost
Realisable (settlement) value
Present value
MeasurementMeasurement
Fair value less cost to sell
Value in use
copy 2005-07 Nelson 22
Concept of CapitalFinancial concept of capitalbull is adopted by most enterprises in
preparing their financial statementsbull Under it such as invested money or
invested purchasing power capital is synonymous with the net assets or equity of the enterprise
Physical concept of capitalbull Under it such as operating capability
capital is regarded as the productive capacity of the enterprise based on
bull For example units of output per day
Capital and Capital Maintenance
Objective Qualitative Characteristics Elements Concepts of
CapitalConcepts of
Capital
Concept of Capital MaintenanceFinancial concept maintenancebull Under this concept a profit is
earned only ifbull the financial (or money) amount of
the net assets at the end of the period
bull exceeds the financial (or money) amount of net assets at the beginning of the period
bull after excluding any distributions to and contributions from owners during the period
bull Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power
12
copy 2005-07 Nelson 23
Concept of CapitalFinancial concept of capitalbull is adopted by most enterprises in
preparing their financial statementsbull Under it such as invested money or
invested purchasing power capital is synonymous with the net assets or equity of the enterprise
Physical concept of capitalbull Under it such as operating capability
capital is regarded as the productive capacity of the enterprise based on
bull For example units of output per day
Capital and Capital Maintenance
Objective Qualitative Characteristics Elements Concepts of
CapitalConcepts of
Capital
Concept of Capital MaintenancePhysical concept maintenancebull Under this concept a profit is
earned only ifbull the physical productive capacity (or
operating capability) of the enterprise (or the resources or funds needed to achieve that capacity) at the end of the period
bull exceeds the physical productive capacity at the beginning of the period
bull after excluding any distributions to and contributions from owners during the period
copy 2005-07 Nelson 24
Summary of IFRSs
International Financial Reporting Standards arebull Standards and Interpretations issued and endorsed by the
International Accounting Standard Board and comprisendash International Financial Reporting Standards (IFRSs)ndash International Accounting Standards (IASs) andndash Interpretations
bull IASs (International Accounting Standards) ndash Totally 31 sets
bull IFRSs (International Financial Reporting Standards) ndash Totally 8 sets(up to 4 February 2007)
More are coming helliphellipMore are coming helliphellip
13
copy 2005-07 Nelson 25
Key Points
IFRSs set outbull Recognitionbull Measurementbull Presentation and
disclosure requirements
Main changesbull Changes in recognition
and measurementbull Changes in presentation
and disclosure
bull Less Choicesbull Towards
Fair Value Model
bullbull Less ChoicesLess Choicesbullbull TowardsTowards
Fair Value ModelFair Value Model
bull More and clearer presentation and disclosure
bullbull More and clearer More and clearer presentation and presentation and disclosuredisclosure
bull Aim at enhancing the information for usersrsquo decision making
bullbull Aim at enhancing Aim at enhancing the information the information for usersrsquo for usersrsquo decision makingdecision making
eg market valuevalue by appraisal helliphellip
Inter alia one more change helliphellip
copy 2005-07 Nelson 26
Todayrsquos Agenda
Presentation of Financial Statements (IAS 1)
Presentation of Financial Statements (IAS 1)
14
copy 2005-07 Nelson 27
Presentation of Financial Statements(IAS 1)
copy 2005-07 Nelson 28
Presentation of Financial Statements (IAS 1)
1 Purpose of financial statements2 Components of financial statements3 Overall considerations4 Structure and content
15
copy 2005-07 Nelson 29
1 Purpose of Financial Statements
bull To provide information aboutndash financial positionndash financial performance
andndash cash flows of an entity
That is useful to a wide range of users in making economic decisions
bull To also show the results of managementrsquos stewardship of the resources entrusted to it
bull To meet this objective financial statements provide information about the entityrsquosndash Assetsndash Liabilitiesndash Equityndash Income and expenses
including gains and lossesndash Other changes in equityndash Cash flows
Thus we have helliphellip
copy 2005-07 Nelson 30
2 Components of Financial Statements
A complete set of financial statements comprisesa) a balance sheetb) an income statementc) a statement of changes in equity showing either
i) all changes in equity orii) changes in equity other than those arising from transactions with
equity holders acting in their capacity as equity holdersd) a cash flow statement ande) notes comprising a summary of significant accounting policies and
other explanatory notes
another nameanother name
16
copy 2005-07 Nelson 31
3 Overall Consideration
a) Fair presentation and compliance with IFRSsb) Going concernc) Accrual basis of accountingd) Consistency of presentatione) Materiality and aggregationf) Offsettingg) Comparative information
copy 2005-07 Nelson 32
3 Overall Consideration
bull Financial statements shall present fairly of the financial position financial performance and cash flows of an entity
ndash Fair presentation requires the faithful representation of the effects of transactions other events and conditions in accordance with
bull the definitions and recognition criteria for assets liabilities income and expenses set out in the Framework
ndash The application of IFRSs with additional disclosure when necessary is presumed to result in financial statements that give a true and fair view
a) Fair presentation and compliance with IFRSs
No such precisely statement before
17
copy 2005-07 Nelson 33
3 Overall Consideration
bull Statement of compliancendash An entity whose financial statements comply
with IFRSs shall make an explicit and unreserved statement of such compliance in the notes
ndash Financial statements shall not be described as complying with IFRSsbull unless they comply with all the
requirements of IFRSsndash In virtually all circumstances a fair
presentation is achieved by bull compliance with applicable IFRSs
a) Fair presentation and compliance with IFRSs
copy 2005-07 Nelson 34
3 Overall Consideration
Melco Development Limited (新濠國際發展有限公司)Notes to the financial statements for year ended 31122005ndash The consolidated financial statements have been prepared in
accordance with HKFRSsndash In addition the consolidated financial statements include applicable
disclosures required by the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited and by the Companies Ordinance
CaseCase
18
copy 2005-07 Nelson 35
3 Overall Consideration
bull A fair presentation also requires an entitya) to select and apply accounting policies in accordance
with IAS 8b) to present information including accounting policies
in a manner that provides relevant reliable comparable and understandable information
c) to provide additional disclosuresndash when compliance with the specific requirements in
IFRSs is insufficient to enable users to understand the impact of particular transactions other events and conditions on the entityrsquos financial position and financial performance
bull Inappropriate accounting policies are not rectified eitherndash by disclosure of the accounting policies used orndash by notes or explanatory material
a) Fair presentation and compliance with IFRSs
copy 2005-07 Nelson 36
3 Overall Consideration
bull Departure from Standard or Interpretation (Simplified)ndash In the extremely rare circumstances in which
management concludes thatbull compliance with a requirement in a standard or an
interpretation would be so misleading thatbull it would conflict with the objective of financial
statements set out in the Frameworkthe entity shall depart from that requirement if the relevant regulatory framework requires or otherwise does not prohibit such a departure
a) Fair presentation and compliance with IFRSs
19
copy 2005-07 Nelson 37
3 Overall Consideration
bull Departure from Standard or Interpretation (Simplified)
a) Fair presentation and compliance with IFRSs
ndash Then the following disclosure is requireda) management has concluded that the financial
statements give a true and fair viewb) that it has complied with applicable standards and
interpretations except that it has departed from a particular requirement
c) the title of the standard or interpretation from which the entity has departed the nature of the departure the reason why that treatment would be so misleading and the treatment adopted and
d) for each period presented the financial impact of the departure on each item in the financial statements that would have been reported in complying with the requirement
copy 2005-07 Nelson 38
3 Overall Consideration
Interim Report 2005 clearly stated thatInterim Report 2005 clearly stated that
CaseCase
bull The directors consider it inappropriate for the company to adopt two particular aspects of the newrevised HKFRSs as these would result in the financial statements in the view of the directors eitherbull not reflecting the commercial substance of the business orbull being subject to significant potential short-term volatility as
explained below helliphellip
20
copy 2005-07 Nelson 39
3 Overall ConsiderationCaseCase
bull HKAS 40 ldquoInvestment propertyrdquo requires an assessment of the fair value of investment properties
bull The group intends to follow the same accounting treatment as adopted in 2004 which is to value such investment properties on an annual basis
bull Accordingly the investment properties were not revalued at 30 June 2005 since the directors consider that such change of practice could introduce a significant element of short-term volatility into the income statement in respect of assets which are being held on a long-term basis by the group helliphellip
bull It is not practicable to estimate the financial effect of this non-compliance as no interim valuation of the properties has been conducted
Interim Report 2005 clearly stated thatInterim Report 2005 clearly stated that
At year-end revaluation would still be conductedAt year-end revaluation would still be conducted
copy 2005-07 Nelson 40
3 Overall ConsiderationCaseCase
bull HKAS 12 ldquoIncome Taxesrdquo together with HKAS-INT 21 ldquoIncome Taxes ndashRecovery of Revalued Non-Depreciable Assetsrdquo requires deferred taxation to be recognised on any revaluation movements on investment propertiesbull It is further provided that any such deferred tax liability should be calculated
at the profits tax rate in the case of assets which the management has no definite intention to sell
bull The company has not made such provision in respect of its HK investment properties since the directors consider that such provision would result in the financial statements not reflecting the commercial substance of the businessbull since should any such sale eventuate any gain would be regarded as capital
in nature and would not be subject to any tax in HKbull Should this aspect of HKAS 12 have been adopted deferred tax liabilities
amounting to HK$2008 million on the revaluation surpluses arising from revaluation of HK investment properties would have been provided
(estimate - over 12 of the net assets at 30 June 2005)
Interim Report 2005 clearly stated thatInterim Report 2005 clearly stated that
21
copy 2005-07 Nelson 41
3 Overall Consideration
bull Departure but such departure is prohibitedndash In the extremely rare circumstances in which
management concludes that bull compliance with a requirement in a
standard or an interpretation would be so misleading that
bull it would conflict with the objective of financial statements set out in the Framework
bull but the relevant regulatory framework prohibits departure from the requirement the entity shall to the maximum extent possible reduce the perceived misleading aspects of compliance by disclosing helliphellip
a) Fair presentation and compliance with IFRSs
copy 2005-07 Nelson 42
3 Overall Consideration
ndash by disclosinga) the title of the standard or interpretation in
question the nature of the requirement and the reason why management has concluded that complying with that requirement is so misleading in the circumstances that it conflicts with the objective of financial statements set out in the Framework and
b) for each period presented the adjustments to each item in the financial statements that management has concluded would be necessary to give a fair presentation
a) Fair presentation and compliance with IFRSsbull Departure but such departure is prohibited
22
copy 2005-07 Nelson 43
3 Overall Consideration
bull When assessing whether complying with a specific requirement in a standard or an interpretation would be so misleading that it would conflict with the objective of financial statements set out in the Frameworkndash management considers
a) why the objective of financial statements is not achieved in the particular circumstances and
b) how the entityrsquos circumstances differ from those of other entities that comply with the requirement ndash If other entities in similar circumstances comply with the
requirement raquo there is a rebuttable presumption that the entityrsquos compliance
with the requirement would not be so misleading that it would conflict with the objective of financial statements set out in the Framework
a) Fair presentation and compliance with IFRSs
copy 2005-07 Nelson 44
3 Overall ConsiderationCaseCase
Howrsquos about this Howrsquos about this
However 2005 Final Results Announcementdisclosed that bull provision for deferred tax was finally made
with regard to revaluation of the HK investment properties (total HK$22 billion) at 2005 year-end
However However 2005 Final Results Announcement2005 Final Results Announcementdisclosed that disclosed that bullbull provision for deferred tax was finally made provision for deferred tax was finally made
with regard to revaluation of the HK with regard to revaluation of the HK investment properties (total HK$22 billion) at investment properties (total HK$22 billion) at 2005 year2005 year--endend
23
copy 2005-07 Nelson 45
b) Going Concern
3 Overall Consideration
bull When preparing financial statements management shall make an assessment of an entityrsquos ability to continue as a going concern
bull Financial statements shall be prepared on a going concern basisndash unless management either intends to liquidate the entity or to cease
trading or has no realistic alternative but to do so bull When management is aware in making its assessment of
material uncertainties related to events or conditions that may cast significant doubt upon the entityrsquos ability to continue as a going concern those uncertainties shall be disclosed
bull When financial statements are not prepared on a going concern basis that fact shall be disclosed together with the basis on which the financial statements are prepared and the reason why the entity is not regarded as a going concern
copy 2005-07 Nelson 46
c) Accrual Basis of Accounting
3 Overall Consideration
bull An entity shall prepare its financial statements except for cash flow information using the accrual basis of accounting
bull When the accrual basis of accounting is used items are recognised as assets liabilities equity income and expensesndash when they satisfy the definitions and recognition criteria for those
elements in the Framework
24
copy 2005-07 Nelson 47
3 Overall Consideration
bull The presentation and classification of items in the financial statements shall be retained from one period to the next unlessa) it is apparent
bull following a significant change in the nature of the entityrsquos operations (eg significant acquisition or disposal) or
bull a review of its financial statementsthat another presentation or classification would be more appropriatehaving regard to the criteria for the selection and application of accounting policies in IAS 8 or
b) a IFRS requires a change in presentation
d) Consistency of presentation
An entity changes the presentation of its financial statements only ifndash the changed presentation provides information that is reliable and is
more relevant to users of the financial statements andndash the revised structure is likely to continue so that comparability is not
impaired
An entity changes the presentation of its financial statements only ifndash the changed presentation provides information that is reliable and is
more relevant to users of the financial statements andndash the revised structure is likely to continue so that comparability is not
impaired
copy 2005-07 Nelson 48
3 Overall Consideration
bull Each material class of similar items shall bendash presented separately in the financial
statementsbull Items of a dissimilar nature or function shall be
ndash presented separately unless they are immaterial
bull Applying the concept of materiality means that a specific disclosure requirement in a IFRS neednot be satisfied if the information is not material
e) Materiality and Aggregation
What is the situation of recognition and measurement
What is the What is the situation of situation of recognition and recognition and measurementmeasurement
25
copy 2005-07 Nelson 49
3 Overall Consideration
bull What is materialndash Omissions or misstatements of items are
material if they could individually or collectively influence the economic decisions of users taken on the basis of the financial statements
ndash Materiality depends on the size and nature of the omission or misstatement judged in the surrounding circumstancesbull The size or nature of the item or a combination
of both could be the determining factor
e) Materiality and Aggregation
copy 2005-07 Nelson 50
3 Overall Consideration
bull Assets and liabilities and income and expenses shall not be offsetndash unless required or permitted by a IFRS
bull It is important that assets and liabilities and income and expenses are reported separatelyndash Measuring assets net of valuation allowances mdash
for example obsolescence allowances on inventories and doubtful debts allowances on receivables mdash is not offsetting
f) Offsetting
26
copy 2005-07 Nelson 51
3 Overall Consideration
bull During ordinary activities some transactions that do not generate revenue but are incidental to the main revenue-generating activitiesndash The results of such transactions are presented
when this presentation reflects the substance of the transaction or other event by netting any income with related expenses arising on the same transaction
f) Offsetting
copy 2005-07 Nelson 52
3 Overall Consideration
bull For examplea) gains and losses on the disposal of non-current
assets including investments and operating assets- are reported by deducting from the proceeds on
disposal the carrying amount of the asset and related selling expenses and
b) expenditure related to a provision that is- recognised in accordance with IAS 37 and - reimbursed under a contractual arrangement with
a third party (for example a supplierrsquos warranty agreement)
may be netted against the related reimbursement
f) Offsetting
ExampleExample
27
copy 2005-07 Nelson 53
3 Overall Consideration
bull Gains and losses arising from a group of similar transactions are reported on a net basisndash For example
bull foreign exchange gains and losses or bull gains and losses arising on financial instruments held for trading
bull Such gains and losses are however reported separately if they are material
bull Gains and losses arising from a group of similar transactions are reported on a net basisndash For example
bull foreign exchange gains and losses or bull gains and losses arising on financial instruments held for trading
bull Such gains and losses are however reported separately if they are material
Can foreign exchange gains and losses be offset
ExampleExample
copy 2005-07 Nelson 54
3 Overall Consideration
bull Except when a IFRS permits or requires otherwise ndash comparative information shall be disclosed in
respect of the previous period for all amountsreported in the financial statements
bull When the presentation or classification of items in the financial statements is amended ndash comparative amounts shall be reclassified unless
the reclassification is impracticable
g) Comparative information
28
copy 2005-07 Nelson 55
Amended requirementsAmended requirements
3 Overall Consideration
bull When comparative amounts are reclassified an entity shall disclosea) the nature of the reclassificationb) the amount of each item or class of items that is
reclassified andc) the reason for the reclassification
g) Comparative information
bull In the pastonly the reason for and a description of the nature of materialreclassifications should be disclosedExemption for disclosure of comparative information for the reconciliation of movements in fixed assets is also removed
bull In the pastonly the reason for and a description of the nature of materialreclassifications should be disclosedExemption for disclosure of comparative information for the reconciliation of movements in fixed assets is also removed
copy 2005-07 Nelson 56
3 Overall Consideration
Melco Development Limited (新濠國際發展有限公司)Notes to the financial statements for year ended 31122005ndash Because HKAS 32 requires retrospective application comparative
figures for 2004 have been restated (see Note 2A for the financial impact)
CaseCase
29
copy 2005-07 Nelson 57
3 Overall Consideration
Galaxy Entertainment Group LimitedNotes to the financial statements (ye 31122005)ndash All changes in the accounting policies require
retrospective application except HKAS 39 and HKFRS 2 for which transitional provisions are applied
ndash As a result the 2004 comparative figures have also been restated or amended in accordance with the relevant requirements
ndash The effects of all the changes in accounting policies are summarised in notes (b) and (c) below
CaseCase
copy 2005-07 Nelson 58
bull Identification of the financial statementsbull Reporting periodbull Balance sheet
1 CurrentNon-current distinction2 Current assets3 Current liabilities4 Information to be presented on the face of the balance sheet5 Information to be presented either on the face of the balance sheet or in
the notesbull Income statement
1 Profit or loss for the period2 Information to be presented on the face of the income statement3 Information to be presented either on the face of the income statement or
in the notesbull Statement of changes in equitybull Cash flow statementbull Notes
4 Structure and Content
30
copy 2005-07 Nelson 59
Identification of Financial Statements
bull The financial statements shall be identified clearly and distinguished from other information in the same published document
bull The following information shall be displayed prominently and repeated when it is necessary for a proper understanding of the information presented
a) the name of the reporting entity or other means of identification and any change in that information from the preceding balance sheet date
b) whether the financial statements cover the individual entity or a group of entities
c) the balance sheet date or the period covered by the financial statements whichever is appropriate to that component of the financial statements
d) the presentation currency as defined in HKAS 21 The Effects of Changes in Foreign Exchange Rates and
e) the level of rounding used in presenting amounts in the financial statements
copy 2005-07 Nelson 60
Identification of Financial Statements
bull Can the units of the presentation currency be rounded to thousands or millions
bull Financial statements are often made more understandableby presenting information in thousands or millions of units of the presentation currency
bull This is acceptable as long asndash the level of rounding in presentation is disclosed and ndash material information is not omitted
bull Financial statements are often made more understandableby presenting information in thousands or millions of units of the presentation currency
bull This is acceptable as long asndash the level of rounding in presentation is disclosed and ndash material information is not omitted
ExampleExample
31
copy 2005-07 Nelson 61
Reporting Period
bull Financial statements shall be presented at least annually
bull When an entityrsquos balance sheet date changes and the annual financial statements are presented for a period longer or shorter than one year an entity shall disclose in addition to the period covered by the financial statementsa) the reason for using a longer or shorter period andb) the fact that comparative amounts for the income
statement statement of changes in equity cash flow statement and related notes are not entirely comparable
copy 2005-07 Nelson 62
Reporting Period
bull Can a set of financial statements cover 52-week instead of a year
bull Normally financial statements are consistently prepared covering a one-year period
bull However for practical reasons some entities prefer to report for example for a 52-week period
bull IAS 1 does not preclude this practice because the resulting financial statements are unlikely to be materially different from those that would be presented for one year
bull Normally financial statements are consistently prepared covering a one-year period
bull However for practical reasons some entities prefer to report for example for a 52-week period
bull IAS 1 does not preclude this practice because the resulting financial statements are unlikely to be materially different from those that would be presented for one year
ExampleExample
32
copy 2005-07 Nelson 63
CurrentNon-current Distinction
bull An entity shall presentndash current and non-current assets andndash current and non-current liabilitiesas separate classifications on the face of its balance sheet
bull Except when a presentation based on liquidity provides informationndash If that information is reliable and is more relevantndash When that exception applies all assets and liabilities shall be
presented broadly in order of liquidity
copy 2005-07 Nelson 64
CurrentNon-current Distinction
bull Whichever method of presentation is adopted for each asset and liability line item that combines amounts expected to be recovered or settled a) no more than 12 months after the balance sheet date
andb) more than 12 months after the balance sheet date(ie combines both current and non-current)
an entity shall disclose the amount expected to be recovered or settled after more than 12 months
33
copy 2005-07 Nelson 65
New requirementsNew requirements
Current Assets
bull An asset shall be classified as current when it satisfies any of the following criteriaa) it is expected to be realised in or is intended for sale or
consumption in the entityrsquos normal operating cycle b) it is held primarily for the purpose of being tradedc) it is expected to be realised within 12 months after the balance
sheet date ord) it is cash or a cash equivalent
bull unless it is restricted from being exchanged or used to settle aliability for at least 12 months after the balance sheet date
bull All other assets shall be classified as non-current
Examplesbull Deposits pledged to bank (how long)bull Fixed deposits over 1 year maturity
Examplesbull Deposits pledged to bank (how long)bull Fixed deposits over 1 year maturity
What is itWhat is it
copy 2005-07 Nelson 66
Current Assets
bull What is operating cycle
bull The operating cycle of an entity is the time between ndash the acquisition of assets for processing and ndash their realisation in cash or cash equivalents
bull When the entityrsquos normal operating cycle is not clearly identifiable ndash its duration is assumed to be 12 months
bull The operating cycle of an entity is the time between ndash the acquisition of assets for processing and ndash their realisation in cash or cash equivalents
bull When the entityrsquos normal operating cycle is not clearly identifiable ndash its duration is assumed to be 12 months
ExampleExample
34
copy 2005-07 Nelson 67
Current Assets CaseCase
copy 2005-07 Nelson 68
Current Assets
bull Can a non-current asset reclassified if it fulfil the definition of current asset later
bull Assets classified as non-current in accordancewith IAS 1 shall not be reclassified as current assetsndash until they meet the criteria to be classified as held for sale in
accordance with IFRS 5bull Assets of a class that an entity would normally regard as non-
current that are acquired exclusively with a view to resale shall notbe classified as currentndash unless they meet the criteria to be classified as held for sale in
accordance with IFRS 5
bull Assets classified as non-current in accordancewith IAS 1 shall not be reclassified as current assetsndash until they meet the criteria to be classified as held for sale in
accordance with IFRS 5bull Assets of a class that an entity would normally regard as non-
current that are acquired exclusively with a view to resale shall notbe classified as currentndash unless they meet the criteria to be classified as held for sale in
accordance with IFRS 5
No non-current assets can be classified as current unless the criteria in IFRS 5 are fulfilled mainlybull Available for immediate salebull Highly probable to make the sale
35
copy 2005-07 Nelson 69
Is it currentIs it current
Current Assets
bull In its 2005 Interim Report full set of HKFRS was adopted and the report set out thatndash Available-for-sale financial assets are non-
derivatives that are eitherbull designated in this category orbull not classified in any of the other categories (ie
loans and receivables financial assets at fair value through profit or loss and held-to-maturity investments)
CaseCase
Similar in 2005 Annual Report
Similar in 2005 Annual Report
ndash They are included in non-current assetsbull unless management intends to dispose of the
investment within 12 months of the balance sheet date
copy 2005-07 Nelson 70
New requirementsNew requirements
Current Liabilities
bull A liability shall be classified as current when it satisfies any of the following criteriaa) it is expected to be settled in the entityrsquos normal operating cycleb) it is held primarily for the purpose of being tradedc) it is due to be settled within 12 months after the balance sheet
date ord) the entity does not have an unconditional right to defer settlement
of the liability for at least 12 months after the balance sheet date
bull All other liabilities shall be classified as non-current
ImplicationImplication
36
copy 2005-07 Nelson 71
Current Liabilities Revised rules on classifying a liability as current or non-currentbull A liability held for being traded rArr currentbull A financial liability due within 12 months after the BS date rArr current
ndash even if an agreement to refinance on a long-term basis is completed after the BS date (only disclosed as non-adjusting event)
bull If an entity has discretion to refinance rArr non-currentbull If an entity without discretion to refinance rArr current
bull A non-current financial liability is payable on demand with a breach on a condition of its loan agreement on or before the BS datendash If the lender agreed not to demand payment
bull after the BS date rArr current (only disclosed as non-adjusting event)
bull by the BS date rArr non-current
ImplicationImplication
copy 2005-07 Nelson 72
Current LiabilitiesCaseCase
Note 12 to Interim Report 2006bull Breach of loan covenants
bull As at 30 June 2006 in respect of certain bank loans with an aggregate carrying amount of HK$1529806000 the Group breached certain financial covenants of the banks loans
bull Since the lenders have not agreed to waive its right to demand immediate payment as at the balance sheet date the loans have been classified as current liabilities in these financial statements at 30 June 2006
37
copy 2005-07 Nelson 73
Current Assets and LiabilitiesExampleExample
Can the following be classified as current assetsbull 3-month fixed deposits pledged to a bank to secure
a mortgage loan of 5 yearsbull 2-year fixed deposits with a bank
Can the following be classified as current assetsbull 3-month fixed deposits pledged to a bank to secure
a mortgage loan of 5 yearsbull 2-year fixed deposits with a bank
Can the following be classified as non-current liabilitiesbull 5-year term loan matured after year end but renewed
for another 5 years after year end (before the issuanceof the financial statements)
bull 2-year term loan to be matured with 12 months and theentity has a right to renew for another 2 years
Can the following be classified as non-current liabilitiesbull 5-year term loan matured after year end but renewed
for another 5 years after year end (before the issuanceof the financial statements)
bull 2-year term loan to be matured with 12 months and theentity has a right to renew for another 2 years
timestimes
times
radic
copy 2005-07 Nelson 74
Balance Sheetbull As a minimum the face of the balance sheet shall
include line items that present the following amountsa) property plant and equipmentb) investment propertyc) intangible assetsd) financial assets (excl amounts shown under (e) (h) and (I))e) investments accounted for using the equity methodf) biological assetsg) inventoriesh) trade and other receivablesi) cash and cash equivalentsj) trade and other payablesk) provisionsl) financial liabilities (excl amounts shown under (j) and (k))m) liabilities and assets for current tax as defined in HKAS 12 Income Taxesn) deferred tax liabilities and deferred tax assets as defined in HKAS 12o) minority interest presented within equity andp) issued capital and reserves attributable to equity holders of the parent
38
copy 2005-07 Nelson 75
Balance Sheetbull The face of the balance sheet shall also include line
items that present the following amountsa) The total of assets classified as held for sale and
assets included in disposal groups classified as held for sale in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations and
b) Liabilities included in disposal groups classified as held for sale in accordance with IFRS 5
copy 2005-07 Nelson 76
Balance Sheetbull Additional line items headings and subtotals shall
be presented on the face of the balance sheet when such presentation is relevant to an understanding of the entityrsquos financial position
bull When an entity presents current and non-current assets and current and non-current liabilities as separate classifications on the face of its balance sheet ndash it shall not classify deferred tax assets
(liabilities) as current assets (liabilities)
39
copy 2005-07 Nelson 77
Balance Sheet
bull The use of different measurement bases for different classes of assets suggests that their nature or function differs and therefore that they should be presented as separate line itemsndash For example different classes of property plant and
equipment can be carried atbull Cost orbull Revalued amountsin accordance with IAS 16 PPE
In the past it use ldquomay needrdquoIn the past it use ldquomay needrdquo
copy 2005-07 Nelson 78
Balance Sheet
Galaxy Entertainment Group LimitedConsolidated balance sheet as at 31122005
CaseCase
40
copy 2005-07 Nelson 79
Balance Sheet
Melco Development Limited (新濠國際發展有限公司)Consolidated balance sheet as at 31122005
CaseCase
copy 2005-07 Nelson 80
Income Statement Minimum requirements on the face of the income statementbull As a minimum the face of the income statement shall include line items
that present the following amounts for the perioda) revenueb) finance costsc) share of the profit or loss of associates and joint ventures accounted
for using the equity methodd) pre-tax gain or loss recognised on the disposal of assets or
settlement of liabilities attributable to discontinuing operationse) tax expense andf) profit or loss
41
copy 2005-07 Nelson 81
Income Statement bull The following items shall be disclosed on the face of the income
statement as allocations of profit or loss for the perioda) Profit or loss attributable to minority interest andb) Profit or loss attributable to equity holders of the parent
A similar requirement has been added for the statement of changes in equity and such allocated amounts are not to be presented as items of income or expense
copy 2005-07 Nelson 82
Income Statement
Melco Dev LtdConsolidated income statementas at 31122005
CaseCase
42
copy 2005-07 Nelson 83
Income Statement bull Not require to disclose the results of operating
activities as a line item on the face of the incomestatement
bull An entity shall not present any items of income and expense as extraordinary items either onthe face of the income statements or in the notes
Entities canrsquot use itEntities canrsquot use it
Entities can still show itEntities can still show it
copy 2005-07 Nelson 84
Income Statement Either on the face of the income statement or in the notesbull An entity shall present an analysis of expenses using a classification
based on eitherbull the nature of expenses orbull their function within the entity
whichever provides information that is reliable and more relevant
bull Entities classifying expenses by function shall disclose additional information on the nature of expenses includingbull depreciation and amortisation expense and bull employee benefits expense
43
copy 2005-07 Nelson 85
Income StatementCaseCase
Nature or FunctionNature or Nature or FunctionFunction
copy 2005-07 Nelson 86
Statement of Changes in Equity bull An entity shall present a statement of changes in equity showing on the
face of the statementa) profit or loss for the period b) each item of income and expense for the period that as required by
IFRSs is recognised directly in equity and the total of these itemsc) total income and expense for the period (calculated as the sum of (a) and
(b)) showing separately the total amounts attributablebull to equity holders of the parent andbull to minority interest and
d) for each component of equity the effects of changes in accounting policies and corrections of errors recognised in accordance with IAS 8
Any ChangeAny Change
A revised requirementbull A statement of changes in equity that comprises only these items
shall be titled a statement of recognised income and expenses
A revised requirementbull A statement of changes in equity that comprises only these items
shall be titled a statement of recognised income and expenses
44
copy 2005-07 Nelson 87
Statement of Changes in Equity bull An entity shall also present either on the face of the
statement of changes in equity or in the notesa) the amounts of transactions with equity holders acting in
their capacity as equity holders showing separately distributions to equity holders
b) the balance of retained earnings (ie accumulated profit or loss) at the beginning of the period and at the balance sheet date and the changes during the period and
c) a reconciliation between the carrying amount of each class of contributed equity and each reserve at the beginning and the end of the period separately disclosing each change
copy 2005-07 Nelson 88
Statement of Changes in Equity
Consolidated SCE as at 31122005
CaseCase
45
copy 2005-07 Nelson 89
Notes Structure (an entity is required to disclose the following)
bull The notes shalla) present information about the basis of preparation of the financial statements
and the specific accounting policies usedb) disclose the information required by HKFRSs that is not presented on the
face of the balance sheet income statement statement of changes in equity or cash flow statement and
c) provide additional information that is not presented on the face of the balance sheet income statement statement of changes in equity or cash flow statement but is relevant to an understanding of any of them
bull Notes shall as far as practicable be presented in a systematic manner bull Each item on the face of the balance sheet income statement statement
of changes in equity and cash flow statement shall be cross-referencedto any related information in the notes
copy 2005-07 Nelson 90
Notes Disclosures (an entity is required to disclose the following)
bull Disclosure of accounting policiesAn entity shall disclose in the summary of significant accounting policiesa) the measurement basis (or bases) used in preparing the financial
statements andb) the other accounting policies used that are relevant to an understanding of
the financial statements
46
copy 2005-07 Nelson 91
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)ndash The financial statements have been prepared in
accordance with Hong Kong Financial Reporting Standards (lsquolsquoHKFRSrsquorsquo) issued by the Hong Kong Institute of Certified Public Accountants bull under the historical cost convention as modified by the
revaluation of investment properties available-for-sale financial assets derivative financial instruments and other investments which are carried at fair values helliphellip
ndash The principal accounting policies applied in the preparation of these financial statements are set out below These policies have been consistently applied to all the years presented except for those stated in note 2(a) above
copy 2005-07 Nelson 92
Notes Disclosures (an entity is required to disclose the following)
bull Disclosure of accounting policiesndash The judgements apart from those involving estimations management has
madebull in the process of applying the entityrsquos accounting policies that have the
most significant effect on the amounts recognised in the financial statements (in the summary of significant accounting policies or other notes)
Examples ndash Management makes judgements in determininga) whether financial assets are held-to-maturity investmentsb) when substantially all the significant risks and rewards of
ownership of financial assets and lease assets are transferred to other entities
c) whether in substance particular sales of goods are financing arrangements and therefore do not give rise to revenue and
d) whether the substance of the relationship between the entity and a special purpose entity indicates that the special purpose entity is controlled by the entity
Examples ndash Management makes judgements in determininga) whether financial assets are held-to-maturity investmentsb) when substantially all the significant risks and rewards of
ownership of financial assets and lease assets are transferred to other entities
c) whether in substance particular sales of goods are financing arrangements and therefore do not give rise to revenue and
d) whether the substance of the relationship between the entity and a special purpose entity indicates that the special purpose entity is controlled by the entity
47
copy 2005-07 Nelson 93
Notes Disclosures (an entity is required to disclose the following)
bull Key sources of estimation uncertaintyndash Information about the key assumptions concerning the future and
other key sources of estimation uncertainty at the balance sheet datebull that have a significant risk of causing a material adjustment to the
carrying amounts of assets and liabilities within the next financial yearndash In respect of those assets and liabilities the notes shall include details of
a) their nature andb) their carrying amount as at the balance sheet date
Examples ndash in the absence of recently observed market prices used to measure the following assets and liabilities future-oriented estimates are necessary to measurebull the recoverable amount of classes of PPEbull the effect of technological obsolescence on inventories
Estimates involve assumptions about such items asbull the risk adjustment to cash flows or discount rates usedbull future changes in salaries and in prices affecting other costs
Examples ndash in the absence of recently observed market prices used to measure the following assets and liabilities future-oriented estimates are necessary to measurebull the recoverable amount of classes of PPEbull the effect of technological obsolescence on inventories
Estimates involve assumptions about such items asbull the risk adjustment to cash flows or discount rates usedbull future changes in salaries and in prices affecting other costs
copy 2005-07 Nelson 94
Notes
Esprit Holdings LimitedEsprit Holdings Limitedbull Critical Accounting Estimates and Judgements
ndash Estimates and judgements are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonableunder the circumstances
ndash Critical accounting estimates and assumptionsbull The Group makes estimates and assumptions concerning
the future The resulting accounting estimates will by definition seldom equal the related actual results
bull The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below helliphellip (including (1) useful life and impairment of trademarks and (2) income taxes)
CaseCase
48
copy 2005-07 Nelson 95
Notes
Melco Development Limited (新濠國際發展有限公司)Notes to the financial statements for the year ended 31122005ndash The key assumptions concerning the future and other key sources
of estimation uncertainty at the balance sheet date that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below helliphellip(The issues discussed includebull Allowances for inventories bull Estimated impairment of goodwill Income taxes)
CaseCase
copy 2005-07 Nelson 96
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)ndash Estimates and judgements used in preparing the
financial statements are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonable under the circumstances
ndash The Group makes estimates and assumptionsconcerning the future
ndash The resulting accounting estimates will by definition seldom equal the related actual results
ndash The estimates and assumptions that have a significant effect on the carrying amounts of assets and liabilities are discussed below hellip (including impairment of goodwill impairment of gaming
licence Useful lives of property plant and equipment fair value of investment properties hellip)
49
copy 2005-07 Nelson 97
Notes Disclosures (an entity is required to disclose the following)
bull Other disclosuresAn entity shall disclose in the notesa) the amount of dividends proposed or declared before the
financial statements were authorised for issue but not recognised as a distribution to equity holders during the period and the related amount per share(HK incorporated companies are required to show the aggregate amount which is recommended for distribution by way of dividend under a separate heading(s) in their balance sheet (HK Co Ord 10th Sch para 9(1)(e)) and
b) the amount of any cumulative preference dividends not recognised
copy 2005-07 Nelson 98
Notes Disclosures (an entity is required to disclose the following)
An entity shall disclose the following if not disclosedelsewhere in information published with the financial statementsa) the domicile and legal form of the entity
its country of incorporation andthe address of its registered office(or principal place of business if different from the registered office)
b) a description of the nature of the entityrsquos operations and its principal activities and
c) the name of the parent and the ultimate parent of the group
ldquoshall discloserdquo now instead of ldquoencouraged to discloserdquo
ldquoshall discloserdquo now instead of ldquoencouraged to discloserdquo
bull Other disclosures
Any specialAny special
50
copy 2005-07 Nelson 99
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)bull The principal activities of Galaxy Entertainment Group
Ltd (the lsquolsquoCompanyrsquorsquo) (formerly known as K WahConstruction Materials Ltd) and its subsidiaries (together the lsquolsquoGrouprsquorsquo) are tondash operate in casino games of chance or games of other forms
in Macau (and) manufacture sale and distribution of construction materials in HK Macau and Mainland China
bull The Company is ndash a limited liability company incorporated in Hong Kong and ndash has its listing on the Main Board of The Stock Exchange of
Hong Kong Limitedbull The address of its registered office and its principal place
of business is Room 1606 16th Floor Hutchison House 10 Harcourt Road Central HK
copy 2005-07 Nelson 100
Effective Date
bull An entity shall apply IAS 1 for annual periods beginning on or after 1 Jan 2005
ndash Earlier application is encouragedndash If an entity applies IAS 1 for an earlier period it shall
disclose this factbull For the amendments relating to the Statement of
Changes in Equityndash An entity shall apply it for annual periods beginning on
or after 1 Jan 2006ndash If an entity applies the amendments to IAS 19
Employee Benefits ndash Actuarial Gains and Losses Group Plans and Disclosures for an earlier period that amendment shall be applied for that earlier period
51
copy 2005-07 Nelson 101
Todayrsquos Agenda
Capital Disclosures (Amendments to IAS 1)
Capital Disclosures (Amendments to IAS 1)
copy 2005-07 Nelson 102
Capital Disclosures ndash For 2007
52
copy 2005-07 Nelson 103
Capital Disclosures
What is capital Is it helliphellip
CapitalCapital AssetsAssets LiabilitiesLiabilities= ndash
bull IAS 1BC47 considers ldquowhether an entity can have a view of capital that differs from what IFRSs define as equityrdquo
bull It further clarifies that although for the purposes of this disclosure capital would often equate with equity as defined in IFRSsndash it might also include or exclude some components
bull It also noted that the capital disclosure in IAS 1 is intended to give entities the opportunity to describendash how they view the components of capital they manage if this is
different from what IFRSs define as equity helliphellip
copy 2005-07 Nelson 104
EquityEquityEquity AssetsAssets LiabilitiesLiabilities= ndash
Capital Disclosures
Based on the Framework amp IFRSs the accounting equation should be
CapitalCapital AssetsAssets LiabilitiesLiabilities= ndash
bull An entityrsquos capital may be part of its equity plus part of its liabilities depending on how it manage ldquoits capitalrdquo helliphellip
53
copy 2005-07 Nelson 105
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowinga) qualitative information about its objectives policies and processes for
managing capital including (but not limited to)i) a description of what it manages as capitalii) when an entity is subject to externally imposed capital requirements
the nature of those requirements and how those requirements are incorporated into the management of capital and
iii) how it is meeting its objectives for managing capital
bull To comply with the capital disclosures the entity discloses thefollowinga) qualitative information about its objectives policies and processes for
managing capital including (but not limited to)i) a description of what it manages as capitalii) when an entity is subject to externally imposed capital requirements
the nature of those requirements and how those requirements are incorporated into the management of capital and
iii) how it is meeting its objectives for managing capital
copy 2005-07 Nelson 106
Capital Disclosures
Example disclosurebull The Grouprsquos objectives when managing capital are
ndash to safeguard the entityrsquos ability to continue as a going concern
bull so that it can continue to provide returns for shareholders and benefits for other stakeholders and
ndash to provide an adequate return to shareholders by pricing products and services commensurately with the level of risk
bull The Group sets the amount of capital in proportion to risk
ExampleExample
ObjectivesObjectives
54
copy 2005-07 Nelson 107
Capital Disclosures
bull The Group manages the capital structure and makes adjustments to it in the light ofndash changes in economic conditions and ndash the risk characteristics of the underlying assets
bull In order to maintain or adjust the capital structure the Group mayndash adjust the amount of dividends paid to shareholders ndash return capital to shareholders ndash issue new shares or ndash sell assets to reduce debt
ExampleExample
Example disclosure
HowHow
copy 2005-07 Nelson 108
Capital Disclosures
bull Consistently with others in the industry the Group monitors capital on the basis of ndash the debt-to-adjusted capital ratio
bull This ratio is calculated as net debt divide adjusted capital
ExampleExample
Example disclosure
HowHow
bull Net debt is calculated as ndash Total debt (as shown in the
balance sheet)ndash Less cash amp cash equivalents
bull Net debt is calculated as ndash Total debt (as shown in the
balance sheet)ndash Less cash amp cash equivalents
bull Adjusted capital ndash comprises all components of
equity (ie share capital share premium minority interest retained earnings and revaluation reserve) ndash other than amounts
recognised in equity relating to cash flow hedges and
ndash includes some forms of subordinated debt
bull Adjusted capital ndash comprises all components of
equity (ie share capital share premium minority interest retained earnings and revaluation reserve) ndash other than amounts
recognised in equity relating to cash flow hedges and
ndash includes some forms of subordinated debt
55
copy 2005-07 Nelson 109
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowing
bull To comply with the capital disclosures the entity discloses thefollowingb) summary quantitative data about what it manages as capital
Some entities regard some financial liabilities (eg some forms of subordinated debt) as part of capitalOther entities regard capital as excluding some components of equity (eg components arising from cash flow hedges)
c) any changes in (a) and (b) from the previous period
copy 2005-07 Nelson 110
Capital Disclosures
Example disclosure (continued from previous example)
ExampleExample
bull During 20X4 the Grouprsquos strategy which was unchanged from 20X3 was to maintain the debt-to-adjusted capital ratio at the lower end of the range 61 to 71 in order to secure access to finance at a reasonable cost by maintaining a BB credit rating The debt-to-adjusted capital ratios at 31 December 20X4 and at 31 December 20X3 were as follows
3112X4 ($rsquoM) 3112X3 ($rsquoM) Total debt 1000 1100 Less cash and cash equivalents (90) (150)Net debt 910 950
Total equity 110 105 Add subordinated debt instruments 38 38 Less amounts recognised in equity
relating to cash flow hedges (10) (5)Adjusted capital 138 138
Debt-to-adjusted capital ratio 66 69
56
copy 2005-07 Nelson 111
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowing
bull To comply with the capital disclosures the entity discloses thefollowingd) whether during the period it complied with any externally imposed capital
requirements to which it is subjecte) when the entity has not complied with such externally imposed capital
requirements the consequences of such non-complianceThese disclosures shall be based on the information provided internally to the entityrsquos key management personnel
copy 2005-07 Nelson 112
Capital DisclosuresExampleExample
Example disclosurebull Entity A filed its quarterly regulatory capital return for
30 September 20X7 on 20 October 20X7 bull At that date Entity Arsquos regulatory capital was below
the capital requirement imposed by Regulator B by $1 million
bull As a result Entity A was required to submit a plan to the regulator indicating how it would increase its regulatory capital to the amount required
bull Entity A submitted a plan that entailed selling part of its unquoted equities portfolio with a carrying amount of $115 million in the fourth quarter of 20X7
bull In the fourth quarter of 20X7 Entity A sold its fixed interest investment portfolio for $126 million and met its regulatory capital requirement
For example SFC or banks
For example SFC or banks
57
copy 2005-07 Nelson 113
Capital DisclosuresCaseCase
bull Early adopted capital disclosure in 2005 and itsannual report states that (extract only)ndash The Grouprsquos objectives when managing capital are
bull To safeguard the Grouprsquos ability to continue as a going concern so that it continues to provide returns for shareholders and benefits for other stakeholders
bull To support the Grouprsquos stability and growth andbull To provide capital for the purpose of strengthening the
Grouprsquos risk management capability
copy 2005-07 Nelson 114
Capital DisclosuresCaseCase
ndash The Group actively and regularly reviews and manages its capital structure to ensure optimal capital structure and shareholder returns taking into consideration the future capital requirements of the Group and capital efficiency helliphellip
ndash The Group adopts a dividend policy helliphellip while retaining 10 per cent of the profit as capital of the Group for future use
ndash The Group has set aside $1500 million of retained earnings for the purpose of strengthening the risk management regime of the clearing houses and supporting their roles as central counterparties
ndash As in prior years the Group monitors capital by reviewing the level of capital that is at the disposal of the Group (ldquoadjusted capitalrdquo) Adjusted capital comprises all components of shareholdersrsquo equity other than the hedging reserve relating to cash flow hedges designated reserves and investment revaluation reserve helliphellip
bull Early adopted capital disclosure in 2005 and itsannual report states that (extract only)
58
copy 2005-07 Nelson 115
Capital Disclosures ndash Transition
bull An entity shall apply the requirements of capital disclosure for
ndash annual periods beginning on or after 1 January 2007
bull Early application is encouraged
copy 2005-07 Nelson 116
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk
59
copy 2005-07 Nelson 117
QampA SessionQampA SessionQampA Session
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk
10
copy 2005-07 Nelson 19
Elements of Financial Statements
Objective Qualitative Characteristics ElementsElements
IFRS ApproachIFRS Approach
Presentation and disclosurePresentation and disclosure
Frameworkgives a general overview
DefinitionDefinition
RecognitionRecognition
MeasurementMeasurement
copy 2005-07 Nelson 20
Definition
Criteria for recognition ndash an item that meets the definition of an element should be recognized if1 it is probable that any future economic benefit
associated with the item will flow to or from the enterprise and
2 the item has a cost or value that can be measured with reliability
Criteria for recognition ndash an item that meets the definition of an element should be recognized if1 it is probable that any future economic benefit
associated with the item will flow to or from the enterprise and
2 the item has a cost or value that can be measured with reliability
Recognition is the process of incorporating in the balance sheet or income statement an item that1 meets the Definition of an element and2 satisfies the Criteria for Recognition
Recognition is the process of incorporating in the balance sheet or income statement an item that1 meets the Definition of an element and2 satisfies the Criteria for Recognition
Elements of Financial Statements
Objective Qualitative Characteristics ElementsElements
RecognitionRecognition
11
copy 2005-07 Nelson 21
Elements of Financial Statements
Objective Qualitative Characteristics ElementsElements
Recognition
Definition
Historical cost
Current cost
Realisable (settlement) value
Present value
Historical cost
Current cost
Realisable (settlement) value
Present value
MeasurementMeasurement
Fair value less cost to sell
Value in use
copy 2005-07 Nelson 22
Concept of CapitalFinancial concept of capitalbull is adopted by most enterprises in
preparing their financial statementsbull Under it such as invested money or
invested purchasing power capital is synonymous with the net assets or equity of the enterprise
Physical concept of capitalbull Under it such as operating capability
capital is regarded as the productive capacity of the enterprise based on
bull For example units of output per day
Capital and Capital Maintenance
Objective Qualitative Characteristics Elements Concepts of
CapitalConcepts of
Capital
Concept of Capital MaintenanceFinancial concept maintenancebull Under this concept a profit is
earned only ifbull the financial (or money) amount of
the net assets at the end of the period
bull exceeds the financial (or money) amount of net assets at the beginning of the period
bull after excluding any distributions to and contributions from owners during the period
bull Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power
12
copy 2005-07 Nelson 23
Concept of CapitalFinancial concept of capitalbull is adopted by most enterprises in
preparing their financial statementsbull Under it such as invested money or
invested purchasing power capital is synonymous with the net assets or equity of the enterprise
Physical concept of capitalbull Under it such as operating capability
capital is regarded as the productive capacity of the enterprise based on
bull For example units of output per day
Capital and Capital Maintenance
Objective Qualitative Characteristics Elements Concepts of
CapitalConcepts of
Capital
Concept of Capital MaintenancePhysical concept maintenancebull Under this concept a profit is
earned only ifbull the physical productive capacity (or
operating capability) of the enterprise (or the resources or funds needed to achieve that capacity) at the end of the period
bull exceeds the physical productive capacity at the beginning of the period
bull after excluding any distributions to and contributions from owners during the period
copy 2005-07 Nelson 24
Summary of IFRSs
International Financial Reporting Standards arebull Standards and Interpretations issued and endorsed by the
International Accounting Standard Board and comprisendash International Financial Reporting Standards (IFRSs)ndash International Accounting Standards (IASs) andndash Interpretations
bull IASs (International Accounting Standards) ndash Totally 31 sets
bull IFRSs (International Financial Reporting Standards) ndash Totally 8 sets(up to 4 February 2007)
More are coming helliphellipMore are coming helliphellip
13
copy 2005-07 Nelson 25
Key Points
IFRSs set outbull Recognitionbull Measurementbull Presentation and
disclosure requirements
Main changesbull Changes in recognition
and measurementbull Changes in presentation
and disclosure
bull Less Choicesbull Towards
Fair Value Model
bullbull Less ChoicesLess Choicesbullbull TowardsTowards
Fair Value ModelFair Value Model
bull More and clearer presentation and disclosure
bullbull More and clearer More and clearer presentation and presentation and disclosuredisclosure
bull Aim at enhancing the information for usersrsquo decision making
bullbull Aim at enhancing Aim at enhancing the information the information for usersrsquo for usersrsquo decision makingdecision making
eg market valuevalue by appraisal helliphellip
Inter alia one more change helliphellip
copy 2005-07 Nelson 26
Todayrsquos Agenda
Presentation of Financial Statements (IAS 1)
Presentation of Financial Statements (IAS 1)
14
copy 2005-07 Nelson 27
Presentation of Financial Statements(IAS 1)
copy 2005-07 Nelson 28
Presentation of Financial Statements (IAS 1)
1 Purpose of financial statements2 Components of financial statements3 Overall considerations4 Structure and content
15
copy 2005-07 Nelson 29
1 Purpose of Financial Statements
bull To provide information aboutndash financial positionndash financial performance
andndash cash flows of an entity
That is useful to a wide range of users in making economic decisions
bull To also show the results of managementrsquos stewardship of the resources entrusted to it
bull To meet this objective financial statements provide information about the entityrsquosndash Assetsndash Liabilitiesndash Equityndash Income and expenses
including gains and lossesndash Other changes in equityndash Cash flows
Thus we have helliphellip
copy 2005-07 Nelson 30
2 Components of Financial Statements
A complete set of financial statements comprisesa) a balance sheetb) an income statementc) a statement of changes in equity showing either
i) all changes in equity orii) changes in equity other than those arising from transactions with
equity holders acting in their capacity as equity holdersd) a cash flow statement ande) notes comprising a summary of significant accounting policies and
other explanatory notes
another nameanother name
16
copy 2005-07 Nelson 31
3 Overall Consideration
a) Fair presentation and compliance with IFRSsb) Going concernc) Accrual basis of accountingd) Consistency of presentatione) Materiality and aggregationf) Offsettingg) Comparative information
copy 2005-07 Nelson 32
3 Overall Consideration
bull Financial statements shall present fairly of the financial position financial performance and cash flows of an entity
ndash Fair presentation requires the faithful representation of the effects of transactions other events and conditions in accordance with
bull the definitions and recognition criteria for assets liabilities income and expenses set out in the Framework
ndash The application of IFRSs with additional disclosure when necessary is presumed to result in financial statements that give a true and fair view
a) Fair presentation and compliance with IFRSs
No such precisely statement before
17
copy 2005-07 Nelson 33
3 Overall Consideration
bull Statement of compliancendash An entity whose financial statements comply
with IFRSs shall make an explicit and unreserved statement of such compliance in the notes
ndash Financial statements shall not be described as complying with IFRSsbull unless they comply with all the
requirements of IFRSsndash In virtually all circumstances a fair
presentation is achieved by bull compliance with applicable IFRSs
a) Fair presentation and compliance with IFRSs
copy 2005-07 Nelson 34
3 Overall Consideration
Melco Development Limited (新濠國際發展有限公司)Notes to the financial statements for year ended 31122005ndash The consolidated financial statements have been prepared in
accordance with HKFRSsndash In addition the consolidated financial statements include applicable
disclosures required by the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited and by the Companies Ordinance
CaseCase
18
copy 2005-07 Nelson 35
3 Overall Consideration
bull A fair presentation also requires an entitya) to select and apply accounting policies in accordance
with IAS 8b) to present information including accounting policies
in a manner that provides relevant reliable comparable and understandable information
c) to provide additional disclosuresndash when compliance with the specific requirements in
IFRSs is insufficient to enable users to understand the impact of particular transactions other events and conditions on the entityrsquos financial position and financial performance
bull Inappropriate accounting policies are not rectified eitherndash by disclosure of the accounting policies used orndash by notes or explanatory material
a) Fair presentation and compliance with IFRSs
copy 2005-07 Nelson 36
3 Overall Consideration
bull Departure from Standard or Interpretation (Simplified)ndash In the extremely rare circumstances in which
management concludes thatbull compliance with a requirement in a standard or an
interpretation would be so misleading thatbull it would conflict with the objective of financial
statements set out in the Frameworkthe entity shall depart from that requirement if the relevant regulatory framework requires or otherwise does not prohibit such a departure
a) Fair presentation and compliance with IFRSs
19
copy 2005-07 Nelson 37
3 Overall Consideration
bull Departure from Standard or Interpretation (Simplified)
a) Fair presentation and compliance with IFRSs
ndash Then the following disclosure is requireda) management has concluded that the financial
statements give a true and fair viewb) that it has complied with applicable standards and
interpretations except that it has departed from a particular requirement
c) the title of the standard or interpretation from which the entity has departed the nature of the departure the reason why that treatment would be so misleading and the treatment adopted and
d) for each period presented the financial impact of the departure on each item in the financial statements that would have been reported in complying with the requirement
copy 2005-07 Nelson 38
3 Overall Consideration
Interim Report 2005 clearly stated thatInterim Report 2005 clearly stated that
CaseCase
bull The directors consider it inappropriate for the company to adopt two particular aspects of the newrevised HKFRSs as these would result in the financial statements in the view of the directors eitherbull not reflecting the commercial substance of the business orbull being subject to significant potential short-term volatility as
explained below helliphellip
20
copy 2005-07 Nelson 39
3 Overall ConsiderationCaseCase
bull HKAS 40 ldquoInvestment propertyrdquo requires an assessment of the fair value of investment properties
bull The group intends to follow the same accounting treatment as adopted in 2004 which is to value such investment properties on an annual basis
bull Accordingly the investment properties were not revalued at 30 June 2005 since the directors consider that such change of practice could introduce a significant element of short-term volatility into the income statement in respect of assets which are being held on a long-term basis by the group helliphellip
bull It is not practicable to estimate the financial effect of this non-compliance as no interim valuation of the properties has been conducted
Interim Report 2005 clearly stated thatInterim Report 2005 clearly stated that
At year-end revaluation would still be conductedAt year-end revaluation would still be conducted
copy 2005-07 Nelson 40
3 Overall ConsiderationCaseCase
bull HKAS 12 ldquoIncome Taxesrdquo together with HKAS-INT 21 ldquoIncome Taxes ndashRecovery of Revalued Non-Depreciable Assetsrdquo requires deferred taxation to be recognised on any revaluation movements on investment propertiesbull It is further provided that any such deferred tax liability should be calculated
at the profits tax rate in the case of assets which the management has no definite intention to sell
bull The company has not made such provision in respect of its HK investment properties since the directors consider that such provision would result in the financial statements not reflecting the commercial substance of the businessbull since should any such sale eventuate any gain would be regarded as capital
in nature and would not be subject to any tax in HKbull Should this aspect of HKAS 12 have been adopted deferred tax liabilities
amounting to HK$2008 million on the revaluation surpluses arising from revaluation of HK investment properties would have been provided
(estimate - over 12 of the net assets at 30 June 2005)
Interim Report 2005 clearly stated thatInterim Report 2005 clearly stated that
21
copy 2005-07 Nelson 41
3 Overall Consideration
bull Departure but such departure is prohibitedndash In the extremely rare circumstances in which
management concludes that bull compliance with a requirement in a
standard or an interpretation would be so misleading that
bull it would conflict with the objective of financial statements set out in the Framework
bull but the relevant regulatory framework prohibits departure from the requirement the entity shall to the maximum extent possible reduce the perceived misleading aspects of compliance by disclosing helliphellip
a) Fair presentation and compliance with IFRSs
copy 2005-07 Nelson 42
3 Overall Consideration
ndash by disclosinga) the title of the standard or interpretation in
question the nature of the requirement and the reason why management has concluded that complying with that requirement is so misleading in the circumstances that it conflicts with the objective of financial statements set out in the Framework and
b) for each period presented the adjustments to each item in the financial statements that management has concluded would be necessary to give a fair presentation
a) Fair presentation and compliance with IFRSsbull Departure but such departure is prohibited
22
copy 2005-07 Nelson 43
3 Overall Consideration
bull When assessing whether complying with a specific requirement in a standard or an interpretation would be so misleading that it would conflict with the objective of financial statements set out in the Frameworkndash management considers
a) why the objective of financial statements is not achieved in the particular circumstances and
b) how the entityrsquos circumstances differ from those of other entities that comply with the requirement ndash If other entities in similar circumstances comply with the
requirement raquo there is a rebuttable presumption that the entityrsquos compliance
with the requirement would not be so misleading that it would conflict with the objective of financial statements set out in the Framework
a) Fair presentation and compliance with IFRSs
copy 2005-07 Nelson 44
3 Overall ConsiderationCaseCase
Howrsquos about this Howrsquos about this
However 2005 Final Results Announcementdisclosed that bull provision for deferred tax was finally made
with regard to revaluation of the HK investment properties (total HK$22 billion) at 2005 year-end
However However 2005 Final Results Announcement2005 Final Results Announcementdisclosed that disclosed that bullbull provision for deferred tax was finally made provision for deferred tax was finally made
with regard to revaluation of the HK with regard to revaluation of the HK investment properties (total HK$22 billion) at investment properties (total HK$22 billion) at 2005 year2005 year--endend
23
copy 2005-07 Nelson 45
b) Going Concern
3 Overall Consideration
bull When preparing financial statements management shall make an assessment of an entityrsquos ability to continue as a going concern
bull Financial statements shall be prepared on a going concern basisndash unless management either intends to liquidate the entity or to cease
trading or has no realistic alternative but to do so bull When management is aware in making its assessment of
material uncertainties related to events or conditions that may cast significant doubt upon the entityrsquos ability to continue as a going concern those uncertainties shall be disclosed
bull When financial statements are not prepared on a going concern basis that fact shall be disclosed together with the basis on which the financial statements are prepared and the reason why the entity is not regarded as a going concern
copy 2005-07 Nelson 46
c) Accrual Basis of Accounting
3 Overall Consideration
bull An entity shall prepare its financial statements except for cash flow information using the accrual basis of accounting
bull When the accrual basis of accounting is used items are recognised as assets liabilities equity income and expensesndash when they satisfy the definitions and recognition criteria for those
elements in the Framework
24
copy 2005-07 Nelson 47
3 Overall Consideration
bull The presentation and classification of items in the financial statements shall be retained from one period to the next unlessa) it is apparent
bull following a significant change in the nature of the entityrsquos operations (eg significant acquisition or disposal) or
bull a review of its financial statementsthat another presentation or classification would be more appropriatehaving regard to the criteria for the selection and application of accounting policies in IAS 8 or
b) a IFRS requires a change in presentation
d) Consistency of presentation
An entity changes the presentation of its financial statements only ifndash the changed presentation provides information that is reliable and is
more relevant to users of the financial statements andndash the revised structure is likely to continue so that comparability is not
impaired
An entity changes the presentation of its financial statements only ifndash the changed presentation provides information that is reliable and is
more relevant to users of the financial statements andndash the revised structure is likely to continue so that comparability is not
impaired
copy 2005-07 Nelson 48
3 Overall Consideration
bull Each material class of similar items shall bendash presented separately in the financial
statementsbull Items of a dissimilar nature or function shall be
ndash presented separately unless they are immaterial
bull Applying the concept of materiality means that a specific disclosure requirement in a IFRS neednot be satisfied if the information is not material
e) Materiality and Aggregation
What is the situation of recognition and measurement
What is the What is the situation of situation of recognition and recognition and measurementmeasurement
25
copy 2005-07 Nelson 49
3 Overall Consideration
bull What is materialndash Omissions or misstatements of items are
material if they could individually or collectively influence the economic decisions of users taken on the basis of the financial statements
ndash Materiality depends on the size and nature of the omission or misstatement judged in the surrounding circumstancesbull The size or nature of the item or a combination
of both could be the determining factor
e) Materiality and Aggregation
copy 2005-07 Nelson 50
3 Overall Consideration
bull Assets and liabilities and income and expenses shall not be offsetndash unless required or permitted by a IFRS
bull It is important that assets and liabilities and income and expenses are reported separatelyndash Measuring assets net of valuation allowances mdash
for example obsolescence allowances on inventories and doubtful debts allowances on receivables mdash is not offsetting
f) Offsetting
26
copy 2005-07 Nelson 51
3 Overall Consideration
bull During ordinary activities some transactions that do not generate revenue but are incidental to the main revenue-generating activitiesndash The results of such transactions are presented
when this presentation reflects the substance of the transaction or other event by netting any income with related expenses arising on the same transaction
f) Offsetting
copy 2005-07 Nelson 52
3 Overall Consideration
bull For examplea) gains and losses on the disposal of non-current
assets including investments and operating assets- are reported by deducting from the proceeds on
disposal the carrying amount of the asset and related selling expenses and
b) expenditure related to a provision that is- recognised in accordance with IAS 37 and - reimbursed under a contractual arrangement with
a third party (for example a supplierrsquos warranty agreement)
may be netted against the related reimbursement
f) Offsetting
ExampleExample
27
copy 2005-07 Nelson 53
3 Overall Consideration
bull Gains and losses arising from a group of similar transactions are reported on a net basisndash For example
bull foreign exchange gains and losses or bull gains and losses arising on financial instruments held for trading
bull Such gains and losses are however reported separately if they are material
bull Gains and losses arising from a group of similar transactions are reported on a net basisndash For example
bull foreign exchange gains and losses or bull gains and losses arising on financial instruments held for trading
bull Such gains and losses are however reported separately if they are material
Can foreign exchange gains and losses be offset
ExampleExample
copy 2005-07 Nelson 54
3 Overall Consideration
bull Except when a IFRS permits or requires otherwise ndash comparative information shall be disclosed in
respect of the previous period for all amountsreported in the financial statements
bull When the presentation or classification of items in the financial statements is amended ndash comparative amounts shall be reclassified unless
the reclassification is impracticable
g) Comparative information
28
copy 2005-07 Nelson 55
Amended requirementsAmended requirements
3 Overall Consideration
bull When comparative amounts are reclassified an entity shall disclosea) the nature of the reclassificationb) the amount of each item or class of items that is
reclassified andc) the reason for the reclassification
g) Comparative information
bull In the pastonly the reason for and a description of the nature of materialreclassifications should be disclosedExemption for disclosure of comparative information for the reconciliation of movements in fixed assets is also removed
bull In the pastonly the reason for and a description of the nature of materialreclassifications should be disclosedExemption for disclosure of comparative information for the reconciliation of movements in fixed assets is also removed
copy 2005-07 Nelson 56
3 Overall Consideration
Melco Development Limited (新濠國際發展有限公司)Notes to the financial statements for year ended 31122005ndash Because HKAS 32 requires retrospective application comparative
figures for 2004 have been restated (see Note 2A for the financial impact)
CaseCase
29
copy 2005-07 Nelson 57
3 Overall Consideration
Galaxy Entertainment Group LimitedNotes to the financial statements (ye 31122005)ndash All changes in the accounting policies require
retrospective application except HKAS 39 and HKFRS 2 for which transitional provisions are applied
ndash As a result the 2004 comparative figures have also been restated or amended in accordance with the relevant requirements
ndash The effects of all the changes in accounting policies are summarised in notes (b) and (c) below
CaseCase
copy 2005-07 Nelson 58
bull Identification of the financial statementsbull Reporting periodbull Balance sheet
1 CurrentNon-current distinction2 Current assets3 Current liabilities4 Information to be presented on the face of the balance sheet5 Information to be presented either on the face of the balance sheet or in
the notesbull Income statement
1 Profit or loss for the period2 Information to be presented on the face of the income statement3 Information to be presented either on the face of the income statement or
in the notesbull Statement of changes in equitybull Cash flow statementbull Notes
4 Structure and Content
30
copy 2005-07 Nelson 59
Identification of Financial Statements
bull The financial statements shall be identified clearly and distinguished from other information in the same published document
bull The following information shall be displayed prominently and repeated when it is necessary for a proper understanding of the information presented
a) the name of the reporting entity or other means of identification and any change in that information from the preceding balance sheet date
b) whether the financial statements cover the individual entity or a group of entities
c) the balance sheet date or the period covered by the financial statements whichever is appropriate to that component of the financial statements
d) the presentation currency as defined in HKAS 21 The Effects of Changes in Foreign Exchange Rates and
e) the level of rounding used in presenting amounts in the financial statements
copy 2005-07 Nelson 60
Identification of Financial Statements
bull Can the units of the presentation currency be rounded to thousands or millions
bull Financial statements are often made more understandableby presenting information in thousands or millions of units of the presentation currency
bull This is acceptable as long asndash the level of rounding in presentation is disclosed and ndash material information is not omitted
bull Financial statements are often made more understandableby presenting information in thousands or millions of units of the presentation currency
bull This is acceptable as long asndash the level of rounding in presentation is disclosed and ndash material information is not omitted
ExampleExample
31
copy 2005-07 Nelson 61
Reporting Period
bull Financial statements shall be presented at least annually
bull When an entityrsquos balance sheet date changes and the annual financial statements are presented for a period longer or shorter than one year an entity shall disclose in addition to the period covered by the financial statementsa) the reason for using a longer or shorter period andb) the fact that comparative amounts for the income
statement statement of changes in equity cash flow statement and related notes are not entirely comparable
copy 2005-07 Nelson 62
Reporting Period
bull Can a set of financial statements cover 52-week instead of a year
bull Normally financial statements are consistently prepared covering a one-year period
bull However for practical reasons some entities prefer to report for example for a 52-week period
bull IAS 1 does not preclude this practice because the resulting financial statements are unlikely to be materially different from those that would be presented for one year
bull Normally financial statements are consistently prepared covering a one-year period
bull However for practical reasons some entities prefer to report for example for a 52-week period
bull IAS 1 does not preclude this practice because the resulting financial statements are unlikely to be materially different from those that would be presented for one year
ExampleExample
32
copy 2005-07 Nelson 63
CurrentNon-current Distinction
bull An entity shall presentndash current and non-current assets andndash current and non-current liabilitiesas separate classifications on the face of its balance sheet
bull Except when a presentation based on liquidity provides informationndash If that information is reliable and is more relevantndash When that exception applies all assets and liabilities shall be
presented broadly in order of liquidity
copy 2005-07 Nelson 64
CurrentNon-current Distinction
bull Whichever method of presentation is adopted for each asset and liability line item that combines amounts expected to be recovered or settled a) no more than 12 months after the balance sheet date
andb) more than 12 months after the balance sheet date(ie combines both current and non-current)
an entity shall disclose the amount expected to be recovered or settled after more than 12 months
33
copy 2005-07 Nelson 65
New requirementsNew requirements
Current Assets
bull An asset shall be classified as current when it satisfies any of the following criteriaa) it is expected to be realised in or is intended for sale or
consumption in the entityrsquos normal operating cycle b) it is held primarily for the purpose of being tradedc) it is expected to be realised within 12 months after the balance
sheet date ord) it is cash or a cash equivalent
bull unless it is restricted from being exchanged or used to settle aliability for at least 12 months after the balance sheet date
bull All other assets shall be classified as non-current
Examplesbull Deposits pledged to bank (how long)bull Fixed deposits over 1 year maturity
Examplesbull Deposits pledged to bank (how long)bull Fixed deposits over 1 year maturity
What is itWhat is it
copy 2005-07 Nelson 66
Current Assets
bull What is operating cycle
bull The operating cycle of an entity is the time between ndash the acquisition of assets for processing and ndash their realisation in cash or cash equivalents
bull When the entityrsquos normal operating cycle is not clearly identifiable ndash its duration is assumed to be 12 months
bull The operating cycle of an entity is the time between ndash the acquisition of assets for processing and ndash their realisation in cash or cash equivalents
bull When the entityrsquos normal operating cycle is not clearly identifiable ndash its duration is assumed to be 12 months
ExampleExample
34
copy 2005-07 Nelson 67
Current Assets CaseCase
copy 2005-07 Nelson 68
Current Assets
bull Can a non-current asset reclassified if it fulfil the definition of current asset later
bull Assets classified as non-current in accordancewith IAS 1 shall not be reclassified as current assetsndash until they meet the criteria to be classified as held for sale in
accordance with IFRS 5bull Assets of a class that an entity would normally regard as non-
current that are acquired exclusively with a view to resale shall notbe classified as currentndash unless they meet the criteria to be classified as held for sale in
accordance with IFRS 5
bull Assets classified as non-current in accordancewith IAS 1 shall not be reclassified as current assetsndash until they meet the criteria to be classified as held for sale in
accordance with IFRS 5bull Assets of a class that an entity would normally regard as non-
current that are acquired exclusively with a view to resale shall notbe classified as currentndash unless they meet the criteria to be classified as held for sale in
accordance with IFRS 5
No non-current assets can be classified as current unless the criteria in IFRS 5 are fulfilled mainlybull Available for immediate salebull Highly probable to make the sale
35
copy 2005-07 Nelson 69
Is it currentIs it current
Current Assets
bull In its 2005 Interim Report full set of HKFRS was adopted and the report set out thatndash Available-for-sale financial assets are non-
derivatives that are eitherbull designated in this category orbull not classified in any of the other categories (ie
loans and receivables financial assets at fair value through profit or loss and held-to-maturity investments)
CaseCase
Similar in 2005 Annual Report
Similar in 2005 Annual Report
ndash They are included in non-current assetsbull unless management intends to dispose of the
investment within 12 months of the balance sheet date
copy 2005-07 Nelson 70
New requirementsNew requirements
Current Liabilities
bull A liability shall be classified as current when it satisfies any of the following criteriaa) it is expected to be settled in the entityrsquos normal operating cycleb) it is held primarily for the purpose of being tradedc) it is due to be settled within 12 months after the balance sheet
date ord) the entity does not have an unconditional right to defer settlement
of the liability for at least 12 months after the balance sheet date
bull All other liabilities shall be classified as non-current
ImplicationImplication
36
copy 2005-07 Nelson 71
Current Liabilities Revised rules on classifying a liability as current or non-currentbull A liability held for being traded rArr currentbull A financial liability due within 12 months after the BS date rArr current
ndash even if an agreement to refinance on a long-term basis is completed after the BS date (only disclosed as non-adjusting event)
bull If an entity has discretion to refinance rArr non-currentbull If an entity without discretion to refinance rArr current
bull A non-current financial liability is payable on demand with a breach on a condition of its loan agreement on or before the BS datendash If the lender agreed not to demand payment
bull after the BS date rArr current (only disclosed as non-adjusting event)
bull by the BS date rArr non-current
ImplicationImplication
copy 2005-07 Nelson 72
Current LiabilitiesCaseCase
Note 12 to Interim Report 2006bull Breach of loan covenants
bull As at 30 June 2006 in respect of certain bank loans with an aggregate carrying amount of HK$1529806000 the Group breached certain financial covenants of the banks loans
bull Since the lenders have not agreed to waive its right to demand immediate payment as at the balance sheet date the loans have been classified as current liabilities in these financial statements at 30 June 2006
37
copy 2005-07 Nelson 73
Current Assets and LiabilitiesExampleExample
Can the following be classified as current assetsbull 3-month fixed deposits pledged to a bank to secure
a mortgage loan of 5 yearsbull 2-year fixed deposits with a bank
Can the following be classified as current assetsbull 3-month fixed deposits pledged to a bank to secure
a mortgage loan of 5 yearsbull 2-year fixed deposits with a bank
Can the following be classified as non-current liabilitiesbull 5-year term loan matured after year end but renewed
for another 5 years after year end (before the issuanceof the financial statements)
bull 2-year term loan to be matured with 12 months and theentity has a right to renew for another 2 years
Can the following be classified as non-current liabilitiesbull 5-year term loan matured after year end but renewed
for another 5 years after year end (before the issuanceof the financial statements)
bull 2-year term loan to be matured with 12 months and theentity has a right to renew for another 2 years
timestimes
times
radic
copy 2005-07 Nelson 74
Balance Sheetbull As a minimum the face of the balance sheet shall
include line items that present the following amountsa) property plant and equipmentb) investment propertyc) intangible assetsd) financial assets (excl amounts shown under (e) (h) and (I))e) investments accounted for using the equity methodf) biological assetsg) inventoriesh) trade and other receivablesi) cash and cash equivalentsj) trade and other payablesk) provisionsl) financial liabilities (excl amounts shown under (j) and (k))m) liabilities and assets for current tax as defined in HKAS 12 Income Taxesn) deferred tax liabilities and deferred tax assets as defined in HKAS 12o) minority interest presented within equity andp) issued capital and reserves attributable to equity holders of the parent
38
copy 2005-07 Nelson 75
Balance Sheetbull The face of the balance sheet shall also include line
items that present the following amountsa) The total of assets classified as held for sale and
assets included in disposal groups classified as held for sale in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations and
b) Liabilities included in disposal groups classified as held for sale in accordance with IFRS 5
copy 2005-07 Nelson 76
Balance Sheetbull Additional line items headings and subtotals shall
be presented on the face of the balance sheet when such presentation is relevant to an understanding of the entityrsquos financial position
bull When an entity presents current and non-current assets and current and non-current liabilities as separate classifications on the face of its balance sheet ndash it shall not classify deferred tax assets
(liabilities) as current assets (liabilities)
39
copy 2005-07 Nelson 77
Balance Sheet
bull The use of different measurement bases for different classes of assets suggests that their nature or function differs and therefore that they should be presented as separate line itemsndash For example different classes of property plant and
equipment can be carried atbull Cost orbull Revalued amountsin accordance with IAS 16 PPE
In the past it use ldquomay needrdquoIn the past it use ldquomay needrdquo
copy 2005-07 Nelson 78
Balance Sheet
Galaxy Entertainment Group LimitedConsolidated balance sheet as at 31122005
CaseCase
40
copy 2005-07 Nelson 79
Balance Sheet
Melco Development Limited (新濠國際發展有限公司)Consolidated balance sheet as at 31122005
CaseCase
copy 2005-07 Nelson 80
Income Statement Minimum requirements on the face of the income statementbull As a minimum the face of the income statement shall include line items
that present the following amounts for the perioda) revenueb) finance costsc) share of the profit or loss of associates and joint ventures accounted
for using the equity methodd) pre-tax gain or loss recognised on the disposal of assets or
settlement of liabilities attributable to discontinuing operationse) tax expense andf) profit or loss
41
copy 2005-07 Nelson 81
Income Statement bull The following items shall be disclosed on the face of the income
statement as allocations of profit or loss for the perioda) Profit or loss attributable to minority interest andb) Profit or loss attributable to equity holders of the parent
A similar requirement has been added for the statement of changes in equity and such allocated amounts are not to be presented as items of income or expense
copy 2005-07 Nelson 82
Income Statement
Melco Dev LtdConsolidated income statementas at 31122005
CaseCase
42
copy 2005-07 Nelson 83
Income Statement bull Not require to disclose the results of operating
activities as a line item on the face of the incomestatement
bull An entity shall not present any items of income and expense as extraordinary items either onthe face of the income statements or in the notes
Entities canrsquot use itEntities canrsquot use it
Entities can still show itEntities can still show it
copy 2005-07 Nelson 84
Income Statement Either on the face of the income statement or in the notesbull An entity shall present an analysis of expenses using a classification
based on eitherbull the nature of expenses orbull their function within the entity
whichever provides information that is reliable and more relevant
bull Entities classifying expenses by function shall disclose additional information on the nature of expenses includingbull depreciation and amortisation expense and bull employee benefits expense
43
copy 2005-07 Nelson 85
Income StatementCaseCase
Nature or FunctionNature or Nature or FunctionFunction
copy 2005-07 Nelson 86
Statement of Changes in Equity bull An entity shall present a statement of changes in equity showing on the
face of the statementa) profit or loss for the period b) each item of income and expense for the period that as required by
IFRSs is recognised directly in equity and the total of these itemsc) total income and expense for the period (calculated as the sum of (a) and
(b)) showing separately the total amounts attributablebull to equity holders of the parent andbull to minority interest and
d) for each component of equity the effects of changes in accounting policies and corrections of errors recognised in accordance with IAS 8
Any ChangeAny Change
A revised requirementbull A statement of changes in equity that comprises only these items
shall be titled a statement of recognised income and expenses
A revised requirementbull A statement of changes in equity that comprises only these items
shall be titled a statement of recognised income and expenses
44
copy 2005-07 Nelson 87
Statement of Changes in Equity bull An entity shall also present either on the face of the
statement of changes in equity or in the notesa) the amounts of transactions with equity holders acting in
their capacity as equity holders showing separately distributions to equity holders
b) the balance of retained earnings (ie accumulated profit or loss) at the beginning of the period and at the balance sheet date and the changes during the period and
c) a reconciliation between the carrying amount of each class of contributed equity and each reserve at the beginning and the end of the period separately disclosing each change
copy 2005-07 Nelson 88
Statement of Changes in Equity
Consolidated SCE as at 31122005
CaseCase
45
copy 2005-07 Nelson 89
Notes Structure (an entity is required to disclose the following)
bull The notes shalla) present information about the basis of preparation of the financial statements
and the specific accounting policies usedb) disclose the information required by HKFRSs that is not presented on the
face of the balance sheet income statement statement of changes in equity or cash flow statement and
c) provide additional information that is not presented on the face of the balance sheet income statement statement of changes in equity or cash flow statement but is relevant to an understanding of any of them
bull Notes shall as far as practicable be presented in a systematic manner bull Each item on the face of the balance sheet income statement statement
of changes in equity and cash flow statement shall be cross-referencedto any related information in the notes
copy 2005-07 Nelson 90
Notes Disclosures (an entity is required to disclose the following)
bull Disclosure of accounting policiesAn entity shall disclose in the summary of significant accounting policiesa) the measurement basis (or bases) used in preparing the financial
statements andb) the other accounting policies used that are relevant to an understanding of
the financial statements
46
copy 2005-07 Nelson 91
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)ndash The financial statements have been prepared in
accordance with Hong Kong Financial Reporting Standards (lsquolsquoHKFRSrsquorsquo) issued by the Hong Kong Institute of Certified Public Accountants bull under the historical cost convention as modified by the
revaluation of investment properties available-for-sale financial assets derivative financial instruments and other investments which are carried at fair values helliphellip
ndash The principal accounting policies applied in the preparation of these financial statements are set out below These policies have been consistently applied to all the years presented except for those stated in note 2(a) above
copy 2005-07 Nelson 92
Notes Disclosures (an entity is required to disclose the following)
bull Disclosure of accounting policiesndash The judgements apart from those involving estimations management has
madebull in the process of applying the entityrsquos accounting policies that have the
most significant effect on the amounts recognised in the financial statements (in the summary of significant accounting policies or other notes)
Examples ndash Management makes judgements in determininga) whether financial assets are held-to-maturity investmentsb) when substantially all the significant risks and rewards of
ownership of financial assets and lease assets are transferred to other entities
c) whether in substance particular sales of goods are financing arrangements and therefore do not give rise to revenue and
d) whether the substance of the relationship between the entity and a special purpose entity indicates that the special purpose entity is controlled by the entity
Examples ndash Management makes judgements in determininga) whether financial assets are held-to-maturity investmentsb) when substantially all the significant risks and rewards of
ownership of financial assets and lease assets are transferred to other entities
c) whether in substance particular sales of goods are financing arrangements and therefore do not give rise to revenue and
d) whether the substance of the relationship between the entity and a special purpose entity indicates that the special purpose entity is controlled by the entity
47
copy 2005-07 Nelson 93
Notes Disclosures (an entity is required to disclose the following)
bull Key sources of estimation uncertaintyndash Information about the key assumptions concerning the future and
other key sources of estimation uncertainty at the balance sheet datebull that have a significant risk of causing a material adjustment to the
carrying amounts of assets and liabilities within the next financial yearndash In respect of those assets and liabilities the notes shall include details of
a) their nature andb) their carrying amount as at the balance sheet date
Examples ndash in the absence of recently observed market prices used to measure the following assets and liabilities future-oriented estimates are necessary to measurebull the recoverable amount of classes of PPEbull the effect of technological obsolescence on inventories
Estimates involve assumptions about such items asbull the risk adjustment to cash flows or discount rates usedbull future changes in salaries and in prices affecting other costs
Examples ndash in the absence of recently observed market prices used to measure the following assets and liabilities future-oriented estimates are necessary to measurebull the recoverable amount of classes of PPEbull the effect of technological obsolescence on inventories
Estimates involve assumptions about such items asbull the risk adjustment to cash flows or discount rates usedbull future changes in salaries and in prices affecting other costs
copy 2005-07 Nelson 94
Notes
Esprit Holdings LimitedEsprit Holdings Limitedbull Critical Accounting Estimates and Judgements
ndash Estimates and judgements are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonableunder the circumstances
ndash Critical accounting estimates and assumptionsbull The Group makes estimates and assumptions concerning
the future The resulting accounting estimates will by definition seldom equal the related actual results
bull The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below helliphellip (including (1) useful life and impairment of trademarks and (2) income taxes)
CaseCase
48
copy 2005-07 Nelson 95
Notes
Melco Development Limited (新濠國際發展有限公司)Notes to the financial statements for the year ended 31122005ndash The key assumptions concerning the future and other key sources
of estimation uncertainty at the balance sheet date that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below helliphellip(The issues discussed includebull Allowances for inventories bull Estimated impairment of goodwill Income taxes)
CaseCase
copy 2005-07 Nelson 96
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)ndash Estimates and judgements used in preparing the
financial statements are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonable under the circumstances
ndash The Group makes estimates and assumptionsconcerning the future
ndash The resulting accounting estimates will by definition seldom equal the related actual results
ndash The estimates and assumptions that have a significant effect on the carrying amounts of assets and liabilities are discussed below hellip (including impairment of goodwill impairment of gaming
licence Useful lives of property plant and equipment fair value of investment properties hellip)
49
copy 2005-07 Nelson 97
Notes Disclosures (an entity is required to disclose the following)
bull Other disclosuresAn entity shall disclose in the notesa) the amount of dividends proposed or declared before the
financial statements were authorised for issue but not recognised as a distribution to equity holders during the period and the related amount per share(HK incorporated companies are required to show the aggregate amount which is recommended for distribution by way of dividend under a separate heading(s) in their balance sheet (HK Co Ord 10th Sch para 9(1)(e)) and
b) the amount of any cumulative preference dividends not recognised
copy 2005-07 Nelson 98
Notes Disclosures (an entity is required to disclose the following)
An entity shall disclose the following if not disclosedelsewhere in information published with the financial statementsa) the domicile and legal form of the entity
its country of incorporation andthe address of its registered office(or principal place of business if different from the registered office)
b) a description of the nature of the entityrsquos operations and its principal activities and
c) the name of the parent and the ultimate parent of the group
ldquoshall discloserdquo now instead of ldquoencouraged to discloserdquo
ldquoshall discloserdquo now instead of ldquoencouraged to discloserdquo
bull Other disclosures
Any specialAny special
50
copy 2005-07 Nelson 99
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)bull The principal activities of Galaxy Entertainment Group
Ltd (the lsquolsquoCompanyrsquorsquo) (formerly known as K WahConstruction Materials Ltd) and its subsidiaries (together the lsquolsquoGrouprsquorsquo) are tondash operate in casino games of chance or games of other forms
in Macau (and) manufacture sale and distribution of construction materials in HK Macau and Mainland China
bull The Company is ndash a limited liability company incorporated in Hong Kong and ndash has its listing on the Main Board of The Stock Exchange of
Hong Kong Limitedbull The address of its registered office and its principal place
of business is Room 1606 16th Floor Hutchison House 10 Harcourt Road Central HK
copy 2005-07 Nelson 100
Effective Date
bull An entity shall apply IAS 1 for annual periods beginning on or after 1 Jan 2005
ndash Earlier application is encouragedndash If an entity applies IAS 1 for an earlier period it shall
disclose this factbull For the amendments relating to the Statement of
Changes in Equityndash An entity shall apply it for annual periods beginning on
or after 1 Jan 2006ndash If an entity applies the amendments to IAS 19
Employee Benefits ndash Actuarial Gains and Losses Group Plans and Disclosures for an earlier period that amendment shall be applied for that earlier period
51
copy 2005-07 Nelson 101
Todayrsquos Agenda
Capital Disclosures (Amendments to IAS 1)
Capital Disclosures (Amendments to IAS 1)
copy 2005-07 Nelson 102
Capital Disclosures ndash For 2007
52
copy 2005-07 Nelson 103
Capital Disclosures
What is capital Is it helliphellip
CapitalCapital AssetsAssets LiabilitiesLiabilities= ndash
bull IAS 1BC47 considers ldquowhether an entity can have a view of capital that differs from what IFRSs define as equityrdquo
bull It further clarifies that although for the purposes of this disclosure capital would often equate with equity as defined in IFRSsndash it might also include or exclude some components
bull It also noted that the capital disclosure in IAS 1 is intended to give entities the opportunity to describendash how they view the components of capital they manage if this is
different from what IFRSs define as equity helliphellip
copy 2005-07 Nelson 104
EquityEquityEquity AssetsAssets LiabilitiesLiabilities= ndash
Capital Disclosures
Based on the Framework amp IFRSs the accounting equation should be
CapitalCapital AssetsAssets LiabilitiesLiabilities= ndash
bull An entityrsquos capital may be part of its equity plus part of its liabilities depending on how it manage ldquoits capitalrdquo helliphellip
53
copy 2005-07 Nelson 105
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowinga) qualitative information about its objectives policies and processes for
managing capital including (but not limited to)i) a description of what it manages as capitalii) when an entity is subject to externally imposed capital requirements
the nature of those requirements and how those requirements are incorporated into the management of capital and
iii) how it is meeting its objectives for managing capital
bull To comply with the capital disclosures the entity discloses thefollowinga) qualitative information about its objectives policies and processes for
managing capital including (but not limited to)i) a description of what it manages as capitalii) when an entity is subject to externally imposed capital requirements
the nature of those requirements and how those requirements are incorporated into the management of capital and
iii) how it is meeting its objectives for managing capital
copy 2005-07 Nelson 106
Capital Disclosures
Example disclosurebull The Grouprsquos objectives when managing capital are
ndash to safeguard the entityrsquos ability to continue as a going concern
bull so that it can continue to provide returns for shareholders and benefits for other stakeholders and
ndash to provide an adequate return to shareholders by pricing products and services commensurately with the level of risk
bull The Group sets the amount of capital in proportion to risk
ExampleExample
ObjectivesObjectives
54
copy 2005-07 Nelson 107
Capital Disclosures
bull The Group manages the capital structure and makes adjustments to it in the light ofndash changes in economic conditions and ndash the risk characteristics of the underlying assets
bull In order to maintain or adjust the capital structure the Group mayndash adjust the amount of dividends paid to shareholders ndash return capital to shareholders ndash issue new shares or ndash sell assets to reduce debt
ExampleExample
Example disclosure
HowHow
copy 2005-07 Nelson 108
Capital Disclosures
bull Consistently with others in the industry the Group monitors capital on the basis of ndash the debt-to-adjusted capital ratio
bull This ratio is calculated as net debt divide adjusted capital
ExampleExample
Example disclosure
HowHow
bull Net debt is calculated as ndash Total debt (as shown in the
balance sheet)ndash Less cash amp cash equivalents
bull Net debt is calculated as ndash Total debt (as shown in the
balance sheet)ndash Less cash amp cash equivalents
bull Adjusted capital ndash comprises all components of
equity (ie share capital share premium minority interest retained earnings and revaluation reserve) ndash other than amounts
recognised in equity relating to cash flow hedges and
ndash includes some forms of subordinated debt
bull Adjusted capital ndash comprises all components of
equity (ie share capital share premium minority interest retained earnings and revaluation reserve) ndash other than amounts
recognised in equity relating to cash flow hedges and
ndash includes some forms of subordinated debt
55
copy 2005-07 Nelson 109
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowing
bull To comply with the capital disclosures the entity discloses thefollowingb) summary quantitative data about what it manages as capital
Some entities regard some financial liabilities (eg some forms of subordinated debt) as part of capitalOther entities regard capital as excluding some components of equity (eg components arising from cash flow hedges)
c) any changes in (a) and (b) from the previous period
copy 2005-07 Nelson 110
Capital Disclosures
Example disclosure (continued from previous example)
ExampleExample
bull During 20X4 the Grouprsquos strategy which was unchanged from 20X3 was to maintain the debt-to-adjusted capital ratio at the lower end of the range 61 to 71 in order to secure access to finance at a reasonable cost by maintaining a BB credit rating The debt-to-adjusted capital ratios at 31 December 20X4 and at 31 December 20X3 were as follows
3112X4 ($rsquoM) 3112X3 ($rsquoM) Total debt 1000 1100 Less cash and cash equivalents (90) (150)Net debt 910 950
Total equity 110 105 Add subordinated debt instruments 38 38 Less amounts recognised in equity
relating to cash flow hedges (10) (5)Adjusted capital 138 138
Debt-to-adjusted capital ratio 66 69
56
copy 2005-07 Nelson 111
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowing
bull To comply with the capital disclosures the entity discloses thefollowingd) whether during the period it complied with any externally imposed capital
requirements to which it is subjecte) when the entity has not complied with such externally imposed capital
requirements the consequences of such non-complianceThese disclosures shall be based on the information provided internally to the entityrsquos key management personnel
copy 2005-07 Nelson 112
Capital DisclosuresExampleExample
Example disclosurebull Entity A filed its quarterly regulatory capital return for
30 September 20X7 on 20 October 20X7 bull At that date Entity Arsquos regulatory capital was below
the capital requirement imposed by Regulator B by $1 million
bull As a result Entity A was required to submit a plan to the regulator indicating how it would increase its regulatory capital to the amount required
bull Entity A submitted a plan that entailed selling part of its unquoted equities portfolio with a carrying amount of $115 million in the fourth quarter of 20X7
bull In the fourth quarter of 20X7 Entity A sold its fixed interest investment portfolio for $126 million and met its regulatory capital requirement
For example SFC or banks
For example SFC or banks
57
copy 2005-07 Nelson 113
Capital DisclosuresCaseCase
bull Early adopted capital disclosure in 2005 and itsannual report states that (extract only)ndash The Grouprsquos objectives when managing capital are
bull To safeguard the Grouprsquos ability to continue as a going concern so that it continues to provide returns for shareholders and benefits for other stakeholders
bull To support the Grouprsquos stability and growth andbull To provide capital for the purpose of strengthening the
Grouprsquos risk management capability
copy 2005-07 Nelson 114
Capital DisclosuresCaseCase
ndash The Group actively and regularly reviews and manages its capital structure to ensure optimal capital structure and shareholder returns taking into consideration the future capital requirements of the Group and capital efficiency helliphellip
ndash The Group adopts a dividend policy helliphellip while retaining 10 per cent of the profit as capital of the Group for future use
ndash The Group has set aside $1500 million of retained earnings for the purpose of strengthening the risk management regime of the clearing houses and supporting their roles as central counterparties
ndash As in prior years the Group monitors capital by reviewing the level of capital that is at the disposal of the Group (ldquoadjusted capitalrdquo) Adjusted capital comprises all components of shareholdersrsquo equity other than the hedging reserve relating to cash flow hedges designated reserves and investment revaluation reserve helliphellip
bull Early adopted capital disclosure in 2005 and itsannual report states that (extract only)
58
copy 2005-07 Nelson 115
Capital Disclosures ndash Transition
bull An entity shall apply the requirements of capital disclosure for
ndash annual periods beginning on or after 1 January 2007
bull Early application is encouraged
copy 2005-07 Nelson 116
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk
59
copy 2005-07 Nelson 117
QampA SessionQampA SessionQampA Session
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk
11
copy 2005-07 Nelson 21
Elements of Financial Statements
Objective Qualitative Characteristics ElementsElements
Recognition
Definition
Historical cost
Current cost
Realisable (settlement) value
Present value
Historical cost
Current cost
Realisable (settlement) value
Present value
MeasurementMeasurement
Fair value less cost to sell
Value in use
copy 2005-07 Nelson 22
Concept of CapitalFinancial concept of capitalbull is adopted by most enterprises in
preparing their financial statementsbull Under it such as invested money or
invested purchasing power capital is synonymous with the net assets or equity of the enterprise
Physical concept of capitalbull Under it such as operating capability
capital is regarded as the productive capacity of the enterprise based on
bull For example units of output per day
Capital and Capital Maintenance
Objective Qualitative Characteristics Elements Concepts of
CapitalConcepts of
Capital
Concept of Capital MaintenanceFinancial concept maintenancebull Under this concept a profit is
earned only ifbull the financial (or money) amount of
the net assets at the end of the period
bull exceeds the financial (or money) amount of net assets at the beginning of the period
bull after excluding any distributions to and contributions from owners during the period
bull Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power
12
copy 2005-07 Nelson 23
Concept of CapitalFinancial concept of capitalbull is adopted by most enterprises in
preparing their financial statementsbull Under it such as invested money or
invested purchasing power capital is synonymous with the net assets or equity of the enterprise
Physical concept of capitalbull Under it such as operating capability
capital is regarded as the productive capacity of the enterprise based on
bull For example units of output per day
Capital and Capital Maintenance
Objective Qualitative Characteristics Elements Concepts of
CapitalConcepts of
Capital
Concept of Capital MaintenancePhysical concept maintenancebull Under this concept a profit is
earned only ifbull the physical productive capacity (or
operating capability) of the enterprise (or the resources or funds needed to achieve that capacity) at the end of the period
bull exceeds the physical productive capacity at the beginning of the period
bull after excluding any distributions to and contributions from owners during the period
copy 2005-07 Nelson 24
Summary of IFRSs
International Financial Reporting Standards arebull Standards and Interpretations issued and endorsed by the
International Accounting Standard Board and comprisendash International Financial Reporting Standards (IFRSs)ndash International Accounting Standards (IASs) andndash Interpretations
bull IASs (International Accounting Standards) ndash Totally 31 sets
bull IFRSs (International Financial Reporting Standards) ndash Totally 8 sets(up to 4 February 2007)
More are coming helliphellipMore are coming helliphellip
13
copy 2005-07 Nelson 25
Key Points
IFRSs set outbull Recognitionbull Measurementbull Presentation and
disclosure requirements
Main changesbull Changes in recognition
and measurementbull Changes in presentation
and disclosure
bull Less Choicesbull Towards
Fair Value Model
bullbull Less ChoicesLess Choicesbullbull TowardsTowards
Fair Value ModelFair Value Model
bull More and clearer presentation and disclosure
bullbull More and clearer More and clearer presentation and presentation and disclosuredisclosure
bull Aim at enhancing the information for usersrsquo decision making
bullbull Aim at enhancing Aim at enhancing the information the information for usersrsquo for usersrsquo decision makingdecision making
eg market valuevalue by appraisal helliphellip
Inter alia one more change helliphellip
copy 2005-07 Nelson 26
Todayrsquos Agenda
Presentation of Financial Statements (IAS 1)
Presentation of Financial Statements (IAS 1)
14
copy 2005-07 Nelson 27
Presentation of Financial Statements(IAS 1)
copy 2005-07 Nelson 28
Presentation of Financial Statements (IAS 1)
1 Purpose of financial statements2 Components of financial statements3 Overall considerations4 Structure and content
15
copy 2005-07 Nelson 29
1 Purpose of Financial Statements
bull To provide information aboutndash financial positionndash financial performance
andndash cash flows of an entity
That is useful to a wide range of users in making economic decisions
bull To also show the results of managementrsquos stewardship of the resources entrusted to it
bull To meet this objective financial statements provide information about the entityrsquosndash Assetsndash Liabilitiesndash Equityndash Income and expenses
including gains and lossesndash Other changes in equityndash Cash flows
Thus we have helliphellip
copy 2005-07 Nelson 30
2 Components of Financial Statements
A complete set of financial statements comprisesa) a balance sheetb) an income statementc) a statement of changes in equity showing either
i) all changes in equity orii) changes in equity other than those arising from transactions with
equity holders acting in their capacity as equity holdersd) a cash flow statement ande) notes comprising a summary of significant accounting policies and
other explanatory notes
another nameanother name
16
copy 2005-07 Nelson 31
3 Overall Consideration
a) Fair presentation and compliance with IFRSsb) Going concernc) Accrual basis of accountingd) Consistency of presentatione) Materiality and aggregationf) Offsettingg) Comparative information
copy 2005-07 Nelson 32
3 Overall Consideration
bull Financial statements shall present fairly of the financial position financial performance and cash flows of an entity
ndash Fair presentation requires the faithful representation of the effects of transactions other events and conditions in accordance with
bull the definitions and recognition criteria for assets liabilities income and expenses set out in the Framework
ndash The application of IFRSs with additional disclosure when necessary is presumed to result in financial statements that give a true and fair view
a) Fair presentation and compliance with IFRSs
No such precisely statement before
17
copy 2005-07 Nelson 33
3 Overall Consideration
bull Statement of compliancendash An entity whose financial statements comply
with IFRSs shall make an explicit and unreserved statement of such compliance in the notes
ndash Financial statements shall not be described as complying with IFRSsbull unless they comply with all the
requirements of IFRSsndash In virtually all circumstances a fair
presentation is achieved by bull compliance with applicable IFRSs
a) Fair presentation and compliance with IFRSs
copy 2005-07 Nelson 34
3 Overall Consideration
Melco Development Limited (新濠國際發展有限公司)Notes to the financial statements for year ended 31122005ndash The consolidated financial statements have been prepared in
accordance with HKFRSsndash In addition the consolidated financial statements include applicable
disclosures required by the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited and by the Companies Ordinance
CaseCase
18
copy 2005-07 Nelson 35
3 Overall Consideration
bull A fair presentation also requires an entitya) to select and apply accounting policies in accordance
with IAS 8b) to present information including accounting policies
in a manner that provides relevant reliable comparable and understandable information
c) to provide additional disclosuresndash when compliance with the specific requirements in
IFRSs is insufficient to enable users to understand the impact of particular transactions other events and conditions on the entityrsquos financial position and financial performance
bull Inappropriate accounting policies are not rectified eitherndash by disclosure of the accounting policies used orndash by notes or explanatory material
a) Fair presentation and compliance with IFRSs
copy 2005-07 Nelson 36
3 Overall Consideration
bull Departure from Standard or Interpretation (Simplified)ndash In the extremely rare circumstances in which
management concludes thatbull compliance with a requirement in a standard or an
interpretation would be so misleading thatbull it would conflict with the objective of financial
statements set out in the Frameworkthe entity shall depart from that requirement if the relevant regulatory framework requires or otherwise does not prohibit such a departure
a) Fair presentation and compliance with IFRSs
19
copy 2005-07 Nelson 37
3 Overall Consideration
bull Departure from Standard or Interpretation (Simplified)
a) Fair presentation and compliance with IFRSs
ndash Then the following disclosure is requireda) management has concluded that the financial
statements give a true and fair viewb) that it has complied with applicable standards and
interpretations except that it has departed from a particular requirement
c) the title of the standard or interpretation from which the entity has departed the nature of the departure the reason why that treatment would be so misleading and the treatment adopted and
d) for each period presented the financial impact of the departure on each item in the financial statements that would have been reported in complying with the requirement
copy 2005-07 Nelson 38
3 Overall Consideration
Interim Report 2005 clearly stated thatInterim Report 2005 clearly stated that
CaseCase
bull The directors consider it inappropriate for the company to adopt two particular aspects of the newrevised HKFRSs as these would result in the financial statements in the view of the directors eitherbull not reflecting the commercial substance of the business orbull being subject to significant potential short-term volatility as
explained below helliphellip
20
copy 2005-07 Nelson 39
3 Overall ConsiderationCaseCase
bull HKAS 40 ldquoInvestment propertyrdquo requires an assessment of the fair value of investment properties
bull The group intends to follow the same accounting treatment as adopted in 2004 which is to value such investment properties on an annual basis
bull Accordingly the investment properties were not revalued at 30 June 2005 since the directors consider that such change of practice could introduce a significant element of short-term volatility into the income statement in respect of assets which are being held on a long-term basis by the group helliphellip
bull It is not practicable to estimate the financial effect of this non-compliance as no interim valuation of the properties has been conducted
Interim Report 2005 clearly stated thatInterim Report 2005 clearly stated that
At year-end revaluation would still be conductedAt year-end revaluation would still be conducted
copy 2005-07 Nelson 40
3 Overall ConsiderationCaseCase
bull HKAS 12 ldquoIncome Taxesrdquo together with HKAS-INT 21 ldquoIncome Taxes ndashRecovery of Revalued Non-Depreciable Assetsrdquo requires deferred taxation to be recognised on any revaluation movements on investment propertiesbull It is further provided that any such deferred tax liability should be calculated
at the profits tax rate in the case of assets which the management has no definite intention to sell
bull The company has not made such provision in respect of its HK investment properties since the directors consider that such provision would result in the financial statements not reflecting the commercial substance of the businessbull since should any such sale eventuate any gain would be regarded as capital
in nature and would not be subject to any tax in HKbull Should this aspect of HKAS 12 have been adopted deferred tax liabilities
amounting to HK$2008 million on the revaluation surpluses arising from revaluation of HK investment properties would have been provided
(estimate - over 12 of the net assets at 30 June 2005)
Interim Report 2005 clearly stated thatInterim Report 2005 clearly stated that
21
copy 2005-07 Nelson 41
3 Overall Consideration
bull Departure but such departure is prohibitedndash In the extremely rare circumstances in which
management concludes that bull compliance with a requirement in a
standard or an interpretation would be so misleading that
bull it would conflict with the objective of financial statements set out in the Framework
bull but the relevant regulatory framework prohibits departure from the requirement the entity shall to the maximum extent possible reduce the perceived misleading aspects of compliance by disclosing helliphellip
a) Fair presentation and compliance with IFRSs
copy 2005-07 Nelson 42
3 Overall Consideration
ndash by disclosinga) the title of the standard or interpretation in
question the nature of the requirement and the reason why management has concluded that complying with that requirement is so misleading in the circumstances that it conflicts with the objective of financial statements set out in the Framework and
b) for each period presented the adjustments to each item in the financial statements that management has concluded would be necessary to give a fair presentation
a) Fair presentation and compliance with IFRSsbull Departure but such departure is prohibited
22
copy 2005-07 Nelson 43
3 Overall Consideration
bull When assessing whether complying with a specific requirement in a standard or an interpretation would be so misleading that it would conflict with the objective of financial statements set out in the Frameworkndash management considers
a) why the objective of financial statements is not achieved in the particular circumstances and
b) how the entityrsquos circumstances differ from those of other entities that comply with the requirement ndash If other entities in similar circumstances comply with the
requirement raquo there is a rebuttable presumption that the entityrsquos compliance
with the requirement would not be so misleading that it would conflict with the objective of financial statements set out in the Framework
a) Fair presentation and compliance with IFRSs
copy 2005-07 Nelson 44
3 Overall ConsiderationCaseCase
Howrsquos about this Howrsquos about this
However 2005 Final Results Announcementdisclosed that bull provision for deferred tax was finally made
with regard to revaluation of the HK investment properties (total HK$22 billion) at 2005 year-end
However However 2005 Final Results Announcement2005 Final Results Announcementdisclosed that disclosed that bullbull provision for deferred tax was finally made provision for deferred tax was finally made
with regard to revaluation of the HK with regard to revaluation of the HK investment properties (total HK$22 billion) at investment properties (total HK$22 billion) at 2005 year2005 year--endend
23
copy 2005-07 Nelson 45
b) Going Concern
3 Overall Consideration
bull When preparing financial statements management shall make an assessment of an entityrsquos ability to continue as a going concern
bull Financial statements shall be prepared on a going concern basisndash unless management either intends to liquidate the entity or to cease
trading or has no realistic alternative but to do so bull When management is aware in making its assessment of
material uncertainties related to events or conditions that may cast significant doubt upon the entityrsquos ability to continue as a going concern those uncertainties shall be disclosed
bull When financial statements are not prepared on a going concern basis that fact shall be disclosed together with the basis on which the financial statements are prepared and the reason why the entity is not regarded as a going concern
copy 2005-07 Nelson 46
c) Accrual Basis of Accounting
3 Overall Consideration
bull An entity shall prepare its financial statements except for cash flow information using the accrual basis of accounting
bull When the accrual basis of accounting is used items are recognised as assets liabilities equity income and expensesndash when they satisfy the definitions and recognition criteria for those
elements in the Framework
24
copy 2005-07 Nelson 47
3 Overall Consideration
bull The presentation and classification of items in the financial statements shall be retained from one period to the next unlessa) it is apparent
bull following a significant change in the nature of the entityrsquos operations (eg significant acquisition or disposal) or
bull a review of its financial statementsthat another presentation or classification would be more appropriatehaving regard to the criteria for the selection and application of accounting policies in IAS 8 or
b) a IFRS requires a change in presentation
d) Consistency of presentation
An entity changes the presentation of its financial statements only ifndash the changed presentation provides information that is reliable and is
more relevant to users of the financial statements andndash the revised structure is likely to continue so that comparability is not
impaired
An entity changes the presentation of its financial statements only ifndash the changed presentation provides information that is reliable and is
more relevant to users of the financial statements andndash the revised structure is likely to continue so that comparability is not
impaired
copy 2005-07 Nelson 48
3 Overall Consideration
bull Each material class of similar items shall bendash presented separately in the financial
statementsbull Items of a dissimilar nature or function shall be
ndash presented separately unless they are immaterial
bull Applying the concept of materiality means that a specific disclosure requirement in a IFRS neednot be satisfied if the information is not material
e) Materiality and Aggregation
What is the situation of recognition and measurement
What is the What is the situation of situation of recognition and recognition and measurementmeasurement
25
copy 2005-07 Nelson 49
3 Overall Consideration
bull What is materialndash Omissions or misstatements of items are
material if they could individually or collectively influence the economic decisions of users taken on the basis of the financial statements
ndash Materiality depends on the size and nature of the omission or misstatement judged in the surrounding circumstancesbull The size or nature of the item or a combination
of both could be the determining factor
e) Materiality and Aggregation
copy 2005-07 Nelson 50
3 Overall Consideration
bull Assets and liabilities and income and expenses shall not be offsetndash unless required or permitted by a IFRS
bull It is important that assets and liabilities and income and expenses are reported separatelyndash Measuring assets net of valuation allowances mdash
for example obsolescence allowances on inventories and doubtful debts allowances on receivables mdash is not offsetting
f) Offsetting
26
copy 2005-07 Nelson 51
3 Overall Consideration
bull During ordinary activities some transactions that do not generate revenue but are incidental to the main revenue-generating activitiesndash The results of such transactions are presented
when this presentation reflects the substance of the transaction or other event by netting any income with related expenses arising on the same transaction
f) Offsetting
copy 2005-07 Nelson 52
3 Overall Consideration
bull For examplea) gains and losses on the disposal of non-current
assets including investments and operating assets- are reported by deducting from the proceeds on
disposal the carrying amount of the asset and related selling expenses and
b) expenditure related to a provision that is- recognised in accordance with IAS 37 and - reimbursed under a contractual arrangement with
a third party (for example a supplierrsquos warranty agreement)
may be netted against the related reimbursement
f) Offsetting
ExampleExample
27
copy 2005-07 Nelson 53
3 Overall Consideration
bull Gains and losses arising from a group of similar transactions are reported on a net basisndash For example
bull foreign exchange gains and losses or bull gains and losses arising on financial instruments held for trading
bull Such gains and losses are however reported separately if they are material
bull Gains and losses arising from a group of similar transactions are reported on a net basisndash For example
bull foreign exchange gains and losses or bull gains and losses arising on financial instruments held for trading
bull Such gains and losses are however reported separately if they are material
Can foreign exchange gains and losses be offset
ExampleExample
copy 2005-07 Nelson 54
3 Overall Consideration
bull Except when a IFRS permits or requires otherwise ndash comparative information shall be disclosed in
respect of the previous period for all amountsreported in the financial statements
bull When the presentation or classification of items in the financial statements is amended ndash comparative amounts shall be reclassified unless
the reclassification is impracticable
g) Comparative information
28
copy 2005-07 Nelson 55
Amended requirementsAmended requirements
3 Overall Consideration
bull When comparative amounts are reclassified an entity shall disclosea) the nature of the reclassificationb) the amount of each item or class of items that is
reclassified andc) the reason for the reclassification
g) Comparative information
bull In the pastonly the reason for and a description of the nature of materialreclassifications should be disclosedExemption for disclosure of comparative information for the reconciliation of movements in fixed assets is also removed
bull In the pastonly the reason for and a description of the nature of materialreclassifications should be disclosedExemption for disclosure of comparative information for the reconciliation of movements in fixed assets is also removed
copy 2005-07 Nelson 56
3 Overall Consideration
Melco Development Limited (新濠國際發展有限公司)Notes to the financial statements for year ended 31122005ndash Because HKAS 32 requires retrospective application comparative
figures for 2004 have been restated (see Note 2A for the financial impact)
CaseCase
29
copy 2005-07 Nelson 57
3 Overall Consideration
Galaxy Entertainment Group LimitedNotes to the financial statements (ye 31122005)ndash All changes in the accounting policies require
retrospective application except HKAS 39 and HKFRS 2 for which transitional provisions are applied
ndash As a result the 2004 comparative figures have also been restated or amended in accordance with the relevant requirements
ndash The effects of all the changes in accounting policies are summarised in notes (b) and (c) below
CaseCase
copy 2005-07 Nelson 58
bull Identification of the financial statementsbull Reporting periodbull Balance sheet
1 CurrentNon-current distinction2 Current assets3 Current liabilities4 Information to be presented on the face of the balance sheet5 Information to be presented either on the face of the balance sheet or in
the notesbull Income statement
1 Profit or loss for the period2 Information to be presented on the face of the income statement3 Information to be presented either on the face of the income statement or
in the notesbull Statement of changes in equitybull Cash flow statementbull Notes
4 Structure and Content
30
copy 2005-07 Nelson 59
Identification of Financial Statements
bull The financial statements shall be identified clearly and distinguished from other information in the same published document
bull The following information shall be displayed prominently and repeated when it is necessary for a proper understanding of the information presented
a) the name of the reporting entity or other means of identification and any change in that information from the preceding balance sheet date
b) whether the financial statements cover the individual entity or a group of entities
c) the balance sheet date or the period covered by the financial statements whichever is appropriate to that component of the financial statements
d) the presentation currency as defined in HKAS 21 The Effects of Changes in Foreign Exchange Rates and
e) the level of rounding used in presenting amounts in the financial statements
copy 2005-07 Nelson 60
Identification of Financial Statements
bull Can the units of the presentation currency be rounded to thousands or millions
bull Financial statements are often made more understandableby presenting information in thousands or millions of units of the presentation currency
bull This is acceptable as long asndash the level of rounding in presentation is disclosed and ndash material information is not omitted
bull Financial statements are often made more understandableby presenting information in thousands or millions of units of the presentation currency
bull This is acceptable as long asndash the level of rounding in presentation is disclosed and ndash material information is not omitted
ExampleExample
31
copy 2005-07 Nelson 61
Reporting Period
bull Financial statements shall be presented at least annually
bull When an entityrsquos balance sheet date changes and the annual financial statements are presented for a period longer or shorter than one year an entity shall disclose in addition to the period covered by the financial statementsa) the reason for using a longer or shorter period andb) the fact that comparative amounts for the income
statement statement of changes in equity cash flow statement and related notes are not entirely comparable
copy 2005-07 Nelson 62
Reporting Period
bull Can a set of financial statements cover 52-week instead of a year
bull Normally financial statements are consistently prepared covering a one-year period
bull However for practical reasons some entities prefer to report for example for a 52-week period
bull IAS 1 does not preclude this practice because the resulting financial statements are unlikely to be materially different from those that would be presented for one year
bull Normally financial statements are consistently prepared covering a one-year period
bull However for practical reasons some entities prefer to report for example for a 52-week period
bull IAS 1 does not preclude this practice because the resulting financial statements are unlikely to be materially different from those that would be presented for one year
ExampleExample
32
copy 2005-07 Nelson 63
CurrentNon-current Distinction
bull An entity shall presentndash current and non-current assets andndash current and non-current liabilitiesas separate classifications on the face of its balance sheet
bull Except when a presentation based on liquidity provides informationndash If that information is reliable and is more relevantndash When that exception applies all assets and liabilities shall be
presented broadly in order of liquidity
copy 2005-07 Nelson 64
CurrentNon-current Distinction
bull Whichever method of presentation is adopted for each asset and liability line item that combines amounts expected to be recovered or settled a) no more than 12 months after the balance sheet date
andb) more than 12 months after the balance sheet date(ie combines both current and non-current)
an entity shall disclose the amount expected to be recovered or settled after more than 12 months
33
copy 2005-07 Nelson 65
New requirementsNew requirements
Current Assets
bull An asset shall be classified as current when it satisfies any of the following criteriaa) it is expected to be realised in or is intended for sale or
consumption in the entityrsquos normal operating cycle b) it is held primarily for the purpose of being tradedc) it is expected to be realised within 12 months after the balance
sheet date ord) it is cash or a cash equivalent
bull unless it is restricted from being exchanged or used to settle aliability for at least 12 months after the balance sheet date
bull All other assets shall be classified as non-current
Examplesbull Deposits pledged to bank (how long)bull Fixed deposits over 1 year maturity
Examplesbull Deposits pledged to bank (how long)bull Fixed deposits over 1 year maturity
What is itWhat is it
copy 2005-07 Nelson 66
Current Assets
bull What is operating cycle
bull The operating cycle of an entity is the time between ndash the acquisition of assets for processing and ndash their realisation in cash or cash equivalents
bull When the entityrsquos normal operating cycle is not clearly identifiable ndash its duration is assumed to be 12 months
bull The operating cycle of an entity is the time between ndash the acquisition of assets for processing and ndash their realisation in cash or cash equivalents
bull When the entityrsquos normal operating cycle is not clearly identifiable ndash its duration is assumed to be 12 months
ExampleExample
34
copy 2005-07 Nelson 67
Current Assets CaseCase
copy 2005-07 Nelson 68
Current Assets
bull Can a non-current asset reclassified if it fulfil the definition of current asset later
bull Assets classified as non-current in accordancewith IAS 1 shall not be reclassified as current assetsndash until they meet the criteria to be classified as held for sale in
accordance with IFRS 5bull Assets of a class that an entity would normally regard as non-
current that are acquired exclusively with a view to resale shall notbe classified as currentndash unless they meet the criteria to be classified as held for sale in
accordance with IFRS 5
bull Assets classified as non-current in accordancewith IAS 1 shall not be reclassified as current assetsndash until they meet the criteria to be classified as held for sale in
accordance with IFRS 5bull Assets of a class that an entity would normally regard as non-
current that are acquired exclusively with a view to resale shall notbe classified as currentndash unless they meet the criteria to be classified as held for sale in
accordance with IFRS 5
No non-current assets can be classified as current unless the criteria in IFRS 5 are fulfilled mainlybull Available for immediate salebull Highly probable to make the sale
35
copy 2005-07 Nelson 69
Is it currentIs it current
Current Assets
bull In its 2005 Interim Report full set of HKFRS was adopted and the report set out thatndash Available-for-sale financial assets are non-
derivatives that are eitherbull designated in this category orbull not classified in any of the other categories (ie
loans and receivables financial assets at fair value through profit or loss and held-to-maturity investments)
CaseCase
Similar in 2005 Annual Report
Similar in 2005 Annual Report
ndash They are included in non-current assetsbull unless management intends to dispose of the
investment within 12 months of the balance sheet date
copy 2005-07 Nelson 70
New requirementsNew requirements
Current Liabilities
bull A liability shall be classified as current when it satisfies any of the following criteriaa) it is expected to be settled in the entityrsquos normal operating cycleb) it is held primarily for the purpose of being tradedc) it is due to be settled within 12 months after the balance sheet
date ord) the entity does not have an unconditional right to defer settlement
of the liability for at least 12 months after the balance sheet date
bull All other liabilities shall be classified as non-current
ImplicationImplication
36
copy 2005-07 Nelson 71
Current Liabilities Revised rules on classifying a liability as current or non-currentbull A liability held for being traded rArr currentbull A financial liability due within 12 months after the BS date rArr current
ndash even if an agreement to refinance on a long-term basis is completed after the BS date (only disclosed as non-adjusting event)
bull If an entity has discretion to refinance rArr non-currentbull If an entity without discretion to refinance rArr current
bull A non-current financial liability is payable on demand with a breach on a condition of its loan agreement on or before the BS datendash If the lender agreed not to demand payment
bull after the BS date rArr current (only disclosed as non-adjusting event)
bull by the BS date rArr non-current
ImplicationImplication
copy 2005-07 Nelson 72
Current LiabilitiesCaseCase
Note 12 to Interim Report 2006bull Breach of loan covenants
bull As at 30 June 2006 in respect of certain bank loans with an aggregate carrying amount of HK$1529806000 the Group breached certain financial covenants of the banks loans
bull Since the lenders have not agreed to waive its right to demand immediate payment as at the balance sheet date the loans have been classified as current liabilities in these financial statements at 30 June 2006
37
copy 2005-07 Nelson 73
Current Assets and LiabilitiesExampleExample
Can the following be classified as current assetsbull 3-month fixed deposits pledged to a bank to secure
a mortgage loan of 5 yearsbull 2-year fixed deposits with a bank
Can the following be classified as current assetsbull 3-month fixed deposits pledged to a bank to secure
a mortgage loan of 5 yearsbull 2-year fixed deposits with a bank
Can the following be classified as non-current liabilitiesbull 5-year term loan matured after year end but renewed
for another 5 years after year end (before the issuanceof the financial statements)
bull 2-year term loan to be matured with 12 months and theentity has a right to renew for another 2 years
Can the following be classified as non-current liabilitiesbull 5-year term loan matured after year end but renewed
for another 5 years after year end (before the issuanceof the financial statements)
bull 2-year term loan to be matured with 12 months and theentity has a right to renew for another 2 years
timestimes
times
radic
copy 2005-07 Nelson 74
Balance Sheetbull As a minimum the face of the balance sheet shall
include line items that present the following amountsa) property plant and equipmentb) investment propertyc) intangible assetsd) financial assets (excl amounts shown under (e) (h) and (I))e) investments accounted for using the equity methodf) biological assetsg) inventoriesh) trade and other receivablesi) cash and cash equivalentsj) trade and other payablesk) provisionsl) financial liabilities (excl amounts shown under (j) and (k))m) liabilities and assets for current tax as defined in HKAS 12 Income Taxesn) deferred tax liabilities and deferred tax assets as defined in HKAS 12o) minority interest presented within equity andp) issued capital and reserves attributable to equity holders of the parent
38
copy 2005-07 Nelson 75
Balance Sheetbull The face of the balance sheet shall also include line
items that present the following amountsa) The total of assets classified as held for sale and
assets included in disposal groups classified as held for sale in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations and
b) Liabilities included in disposal groups classified as held for sale in accordance with IFRS 5
copy 2005-07 Nelson 76
Balance Sheetbull Additional line items headings and subtotals shall
be presented on the face of the balance sheet when such presentation is relevant to an understanding of the entityrsquos financial position
bull When an entity presents current and non-current assets and current and non-current liabilities as separate classifications on the face of its balance sheet ndash it shall not classify deferred tax assets
(liabilities) as current assets (liabilities)
39
copy 2005-07 Nelson 77
Balance Sheet
bull The use of different measurement bases for different classes of assets suggests that their nature or function differs and therefore that they should be presented as separate line itemsndash For example different classes of property plant and
equipment can be carried atbull Cost orbull Revalued amountsin accordance with IAS 16 PPE
In the past it use ldquomay needrdquoIn the past it use ldquomay needrdquo
copy 2005-07 Nelson 78
Balance Sheet
Galaxy Entertainment Group LimitedConsolidated balance sheet as at 31122005
CaseCase
40
copy 2005-07 Nelson 79
Balance Sheet
Melco Development Limited (新濠國際發展有限公司)Consolidated balance sheet as at 31122005
CaseCase
copy 2005-07 Nelson 80
Income Statement Minimum requirements on the face of the income statementbull As a minimum the face of the income statement shall include line items
that present the following amounts for the perioda) revenueb) finance costsc) share of the profit or loss of associates and joint ventures accounted
for using the equity methodd) pre-tax gain or loss recognised on the disposal of assets or
settlement of liabilities attributable to discontinuing operationse) tax expense andf) profit or loss
41
copy 2005-07 Nelson 81
Income Statement bull The following items shall be disclosed on the face of the income
statement as allocations of profit or loss for the perioda) Profit or loss attributable to minority interest andb) Profit or loss attributable to equity holders of the parent
A similar requirement has been added for the statement of changes in equity and such allocated amounts are not to be presented as items of income or expense
copy 2005-07 Nelson 82
Income Statement
Melco Dev LtdConsolidated income statementas at 31122005
CaseCase
42
copy 2005-07 Nelson 83
Income Statement bull Not require to disclose the results of operating
activities as a line item on the face of the incomestatement
bull An entity shall not present any items of income and expense as extraordinary items either onthe face of the income statements or in the notes
Entities canrsquot use itEntities canrsquot use it
Entities can still show itEntities can still show it
copy 2005-07 Nelson 84
Income Statement Either on the face of the income statement or in the notesbull An entity shall present an analysis of expenses using a classification
based on eitherbull the nature of expenses orbull their function within the entity
whichever provides information that is reliable and more relevant
bull Entities classifying expenses by function shall disclose additional information on the nature of expenses includingbull depreciation and amortisation expense and bull employee benefits expense
43
copy 2005-07 Nelson 85
Income StatementCaseCase
Nature or FunctionNature or Nature or FunctionFunction
copy 2005-07 Nelson 86
Statement of Changes in Equity bull An entity shall present a statement of changes in equity showing on the
face of the statementa) profit or loss for the period b) each item of income and expense for the period that as required by
IFRSs is recognised directly in equity and the total of these itemsc) total income and expense for the period (calculated as the sum of (a) and
(b)) showing separately the total amounts attributablebull to equity holders of the parent andbull to minority interest and
d) for each component of equity the effects of changes in accounting policies and corrections of errors recognised in accordance with IAS 8
Any ChangeAny Change
A revised requirementbull A statement of changes in equity that comprises only these items
shall be titled a statement of recognised income and expenses
A revised requirementbull A statement of changes in equity that comprises only these items
shall be titled a statement of recognised income and expenses
44
copy 2005-07 Nelson 87
Statement of Changes in Equity bull An entity shall also present either on the face of the
statement of changes in equity or in the notesa) the amounts of transactions with equity holders acting in
their capacity as equity holders showing separately distributions to equity holders
b) the balance of retained earnings (ie accumulated profit or loss) at the beginning of the period and at the balance sheet date and the changes during the period and
c) a reconciliation between the carrying amount of each class of contributed equity and each reserve at the beginning and the end of the period separately disclosing each change
copy 2005-07 Nelson 88
Statement of Changes in Equity
Consolidated SCE as at 31122005
CaseCase
45
copy 2005-07 Nelson 89
Notes Structure (an entity is required to disclose the following)
bull The notes shalla) present information about the basis of preparation of the financial statements
and the specific accounting policies usedb) disclose the information required by HKFRSs that is not presented on the
face of the balance sheet income statement statement of changes in equity or cash flow statement and
c) provide additional information that is not presented on the face of the balance sheet income statement statement of changes in equity or cash flow statement but is relevant to an understanding of any of them
bull Notes shall as far as practicable be presented in a systematic manner bull Each item on the face of the balance sheet income statement statement
of changes in equity and cash flow statement shall be cross-referencedto any related information in the notes
copy 2005-07 Nelson 90
Notes Disclosures (an entity is required to disclose the following)
bull Disclosure of accounting policiesAn entity shall disclose in the summary of significant accounting policiesa) the measurement basis (or bases) used in preparing the financial
statements andb) the other accounting policies used that are relevant to an understanding of
the financial statements
46
copy 2005-07 Nelson 91
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)ndash The financial statements have been prepared in
accordance with Hong Kong Financial Reporting Standards (lsquolsquoHKFRSrsquorsquo) issued by the Hong Kong Institute of Certified Public Accountants bull under the historical cost convention as modified by the
revaluation of investment properties available-for-sale financial assets derivative financial instruments and other investments which are carried at fair values helliphellip
ndash The principal accounting policies applied in the preparation of these financial statements are set out below These policies have been consistently applied to all the years presented except for those stated in note 2(a) above
copy 2005-07 Nelson 92
Notes Disclosures (an entity is required to disclose the following)
bull Disclosure of accounting policiesndash The judgements apart from those involving estimations management has
madebull in the process of applying the entityrsquos accounting policies that have the
most significant effect on the amounts recognised in the financial statements (in the summary of significant accounting policies or other notes)
Examples ndash Management makes judgements in determininga) whether financial assets are held-to-maturity investmentsb) when substantially all the significant risks and rewards of
ownership of financial assets and lease assets are transferred to other entities
c) whether in substance particular sales of goods are financing arrangements and therefore do not give rise to revenue and
d) whether the substance of the relationship between the entity and a special purpose entity indicates that the special purpose entity is controlled by the entity
Examples ndash Management makes judgements in determininga) whether financial assets are held-to-maturity investmentsb) when substantially all the significant risks and rewards of
ownership of financial assets and lease assets are transferred to other entities
c) whether in substance particular sales of goods are financing arrangements and therefore do not give rise to revenue and
d) whether the substance of the relationship between the entity and a special purpose entity indicates that the special purpose entity is controlled by the entity
47
copy 2005-07 Nelson 93
Notes Disclosures (an entity is required to disclose the following)
bull Key sources of estimation uncertaintyndash Information about the key assumptions concerning the future and
other key sources of estimation uncertainty at the balance sheet datebull that have a significant risk of causing a material adjustment to the
carrying amounts of assets and liabilities within the next financial yearndash In respect of those assets and liabilities the notes shall include details of
a) their nature andb) their carrying amount as at the balance sheet date
Examples ndash in the absence of recently observed market prices used to measure the following assets and liabilities future-oriented estimates are necessary to measurebull the recoverable amount of classes of PPEbull the effect of technological obsolescence on inventories
Estimates involve assumptions about such items asbull the risk adjustment to cash flows or discount rates usedbull future changes in salaries and in prices affecting other costs
Examples ndash in the absence of recently observed market prices used to measure the following assets and liabilities future-oriented estimates are necessary to measurebull the recoverable amount of classes of PPEbull the effect of technological obsolescence on inventories
Estimates involve assumptions about such items asbull the risk adjustment to cash flows or discount rates usedbull future changes in salaries and in prices affecting other costs
copy 2005-07 Nelson 94
Notes
Esprit Holdings LimitedEsprit Holdings Limitedbull Critical Accounting Estimates and Judgements
ndash Estimates and judgements are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonableunder the circumstances
ndash Critical accounting estimates and assumptionsbull The Group makes estimates and assumptions concerning
the future The resulting accounting estimates will by definition seldom equal the related actual results
bull The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below helliphellip (including (1) useful life and impairment of trademarks and (2) income taxes)
CaseCase
48
copy 2005-07 Nelson 95
Notes
Melco Development Limited (新濠國際發展有限公司)Notes to the financial statements for the year ended 31122005ndash The key assumptions concerning the future and other key sources
of estimation uncertainty at the balance sheet date that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below helliphellip(The issues discussed includebull Allowances for inventories bull Estimated impairment of goodwill Income taxes)
CaseCase
copy 2005-07 Nelson 96
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)ndash Estimates and judgements used in preparing the
financial statements are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonable under the circumstances
ndash The Group makes estimates and assumptionsconcerning the future
ndash The resulting accounting estimates will by definition seldom equal the related actual results
ndash The estimates and assumptions that have a significant effect on the carrying amounts of assets and liabilities are discussed below hellip (including impairment of goodwill impairment of gaming
licence Useful lives of property plant and equipment fair value of investment properties hellip)
49
copy 2005-07 Nelson 97
Notes Disclosures (an entity is required to disclose the following)
bull Other disclosuresAn entity shall disclose in the notesa) the amount of dividends proposed or declared before the
financial statements were authorised for issue but not recognised as a distribution to equity holders during the period and the related amount per share(HK incorporated companies are required to show the aggregate amount which is recommended for distribution by way of dividend under a separate heading(s) in their balance sheet (HK Co Ord 10th Sch para 9(1)(e)) and
b) the amount of any cumulative preference dividends not recognised
copy 2005-07 Nelson 98
Notes Disclosures (an entity is required to disclose the following)
An entity shall disclose the following if not disclosedelsewhere in information published with the financial statementsa) the domicile and legal form of the entity
its country of incorporation andthe address of its registered office(or principal place of business if different from the registered office)
b) a description of the nature of the entityrsquos operations and its principal activities and
c) the name of the parent and the ultimate parent of the group
ldquoshall discloserdquo now instead of ldquoencouraged to discloserdquo
ldquoshall discloserdquo now instead of ldquoencouraged to discloserdquo
bull Other disclosures
Any specialAny special
50
copy 2005-07 Nelson 99
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)bull The principal activities of Galaxy Entertainment Group
Ltd (the lsquolsquoCompanyrsquorsquo) (formerly known as K WahConstruction Materials Ltd) and its subsidiaries (together the lsquolsquoGrouprsquorsquo) are tondash operate in casino games of chance or games of other forms
in Macau (and) manufacture sale and distribution of construction materials in HK Macau and Mainland China
bull The Company is ndash a limited liability company incorporated in Hong Kong and ndash has its listing on the Main Board of The Stock Exchange of
Hong Kong Limitedbull The address of its registered office and its principal place
of business is Room 1606 16th Floor Hutchison House 10 Harcourt Road Central HK
copy 2005-07 Nelson 100
Effective Date
bull An entity shall apply IAS 1 for annual periods beginning on or after 1 Jan 2005
ndash Earlier application is encouragedndash If an entity applies IAS 1 for an earlier period it shall
disclose this factbull For the amendments relating to the Statement of
Changes in Equityndash An entity shall apply it for annual periods beginning on
or after 1 Jan 2006ndash If an entity applies the amendments to IAS 19
Employee Benefits ndash Actuarial Gains and Losses Group Plans and Disclosures for an earlier period that amendment shall be applied for that earlier period
51
copy 2005-07 Nelson 101
Todayrsquos Agenda
Capital Disclosures (Amendments to IAS 1)
Capital Disclosures (Amendments to IAS 1)
copy 2005-07 Nelson 102
Capital Disclosures ndash For 2007
52
copy 2005-07 Nelson 103
Capital Disclosures
What is capital Is it helliphellip
CapitalCapital AssetsAssets LiabilitiesLiabilities= ndash
bull IAS 1BC47 considers ldquowhether an entity can have a view of capital that differs from what IFRSs define as equityrdquo
bull It further clarifies that although for the purposes of this disclosure capital would often equate with equity as defined in IFRSsndash it might also include or exclude some components
bull It also noted that the capital disclosure in IAS 1 is intended to give entities the opportunity to describendash how they view the components of capital they manage if this is
different from what IFRSs define as equity helliphellip
copy 2005-07 Nelson 104
EquityEquityEquity AssetsAssets LiabilitiesLiabilities= ndash
Capital Disclosures
Based on the Framework amp IFRSs the accounting equation should be
CapitalCapital AssetsAssets LiabilitiesLiabilities= ndash
bull An entityrsquos capital may be part of its equity plus part of its liabilities depending on how it manage ldquoits capitalrdquo helliphellip
53
copy 2005-07 Nelson 105
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowinga) qualitative information about its objectives policies and processes for
managing capital including (but not limited to)i) a description of what it manages as capitalii) when an entity is subject to externally imposed capital requirements
the nature of those requirements and how those requirements are incorporated into the management of capital and
iii) how it is meeting its objectives for managing capital
bull To comply with the capital disclosures the entity discloses thefollowinga) qualitative information about its objectives policies and processes for
managing capital including (but not limited to)i) a description of what it manages as capitalii) when an entity is subject to externally imposed capital requirements
the nature of those requirements and how those requirements are incorporated into the management of capital and
iii) how it is meeting its objectives for managing capital
copy 2005-07 Nelson 106
Capital Disclosures
Example disclosurebull The Grouprsquos objectives when managing capital are
ndash to safeguard the entityrsquos ability to continue as a going concern
bull so that it can continue to provide returns for shareholders and benefits for other stakeholders and
ndash to provide an adequate return to shareholders by pricing products and services commensurately with the level of risk
bull The Group sets the amount of capital in proportion to risk
ExampleExample
ObjectivesObjectives
54
copy 2005-07 Nelson 107
Capital Disclosures
bull The Group manages the capital structure and makes adjustments to it in the light ofndash changes in economic conditions and ndash the risk characteristics of the underlying assets
bull In order to maintain or adjust the capital structure the Group mayndash adjust the amount of dividends paid to shareholders ndash return capital to shareholders ndash issue new shares or ndash sell assets to reduce debt
ExampleExample
Example disclosure
HowHow
copy 2005-07 Nelson 108
Capital Disclosures
bull Consistently with others in the industry the Group monitors capital on the basis of ndash the debt-to-adjusted capital ratio
bull This ratio is calculated as net debt divide adjusted capital
ExampleExample
Example disclosure
HowHow
bull Net debt is calculated as ndash Total debt (as shown in the
balance sheet)ndash Less cash amp cash equivalents
bull Net debt is calculated as ndash Total debt (as shown in the
balance sheet)ndash Less cash amp cash equivalents
bull Adjusted capital ndash comprises all components of
equity (ie share capital share premium minority interest retained earnings and revaluation reserve) ndash other than amounts
recognised in equity relating to cash flow hedges and
ndash includes some forms of subordinated debt
bull Adjusted capital ndash comprises all components of
equity (ie share capital share premium minority interest retained earnings and revaluation reserve) ndash other than amounts
recognised in equity relating to cash flow hedges and
ndash includes some forms of subordinated debt
55
copy 2005-07 Nelson 109
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowing
bull To comply with the capital disclosures the entity discloses thefollowingb) summary quantitative data about what it manages as capital
Some entities regard some financial liabilities (eg some forms of subordinated debt) as part of capitalOther entities regard capital as excluding some components of equity (eg components arising from cash flow hedges)
c) any changes in (a) and (b) from the previous period
copy 2005-07 Nelson 110
Capital Disclosures
Example disclosure (continued from previous example)
ExampleExample
bull During 20X4 the Grouprsquos strategy which was unchanged from 20X3 was to maintain the debt-to-adjusted capital ratio at the lower end of the range 61 to 71 in order to secure access to finance at a reasonable cost by maintaining a BB credit rating The debt-to-adjusted capital ratios at 31 December 20X4 and at 31 December 20X3 were as follows
3112X4 ($rsquoM) 3112X3 ($rsquoM) Total debt 1000 1100 Less cash and cash equivalents (90) (150)Net debt 910 950
Total equity 110 105 Add subordinated debt instruments 38 38 Less amounts recognised in equity
relating to cash flow hedges (10) (5)Adjusted capital 138 138
Debt-to-adjusted capital ratio 66 69
56
copy 2005-07 Nelson 111
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowing
bull To comply with the capital disclosures the entity discloses thefollowingd) whether during the period it complied with any externally imposed capital
requirements to which it is subjecte) when the entity has not complied with such externally imposed capital
requirements the consequences of such non-complianceThese disclosures shall be based on the information provided internally to the entityrsquos key management personnel
copy 2005-07 Nelson 112
Capital DisclosuresExampleExample
Example disclosurebull Entity A filed its quarterly regulatory capital return for
30 September 20X7 on 20 October 20X7 bull At that date Entity Arsquos regulatory capital was below
the capital requirement imposed by Regulator B by $1 million
bull As a result Entity A was required to submit a plan to the regulator indicating how it would increase its regulatory capital to the amount required
bull Entity A submitted a plan that entailed selling part of its unquoted equities portfolio with a carrying amount of $115 million in the fourth quarter of 20X7
bull In the fourth quarter of 20X7 Entity A sold its fixed interest investment portfolio for $126 million and met its regulatory capital requirement
For example SFC or banks
For example SFC or banks
57
copy 2005-07 Nelson 113
Capital DisclosuresCaseCase
bull Early adopted capital disclosure in 2005 and itsannual report states that (extract only)ndash The Grouprsquos objectives when managing capital are
bull To safeguard the Grouprsquos ability to continue as a going concern so that it continues to provide returns for shareholders and benefits for other stakeholders
bull To support the Grouprsquos stability and growth andbull To provide capital for the purpose of strengthening the
Grouprsquos risk management capability
copy 2005-07 Nelson 114
Capital DisclosuresCaseCase
ndash The Group actively and regularly reviews and manages its capital structure to ensure optimal capital structure and shareholder returns taking into consideration the future capital requirements of the Group and capital efficiency helliphellip
ndash The Group adopts a dividend policy helliphellip while retaining 10 per cent of the profit as capital of the Group for future use
ndash The Group has set aside $1500 million of retained earnings for the purpose of strengthening the risk management regime of the clearing houses and supporting their roles as central counterparties
ndash As in prior years the Group monitors capital by reviewing the level of capital that is at the disposal of the Group (ldquoadjusted capitalrdquo) Adjusted capital comprises all components of shareholdersrsquo equity other than the hedging reserve relating to cash flow hedges designated reserves and investment revaluation reserve helliphellip
bull Early adopted capital disclosure in 2005 and itsannual report states that (extract only)
58
copy 2005-07 Nelson 115
Capital Disclosures ndash Transition
bull An entity shall apply the requirements of capital disclosure for
ndash annual periods beginning on or after 1 January 2007
bull Early application is encouraged
copy 2005-07 Nelson 116
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk
59
copy 2005-07 Nelson 117
QampA SessionQampA SessionQampA Session
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk
12
copy 2005-07 Nelson 23
Concept of CapitalFinancial concept of capitalbull is adopted by most enterprises in
preparing their financial statementsbull Under it such as invested money or
invested purchasing power capital is synonymous with the net assets or equity of the enterprise
Physical concept of capitalbull Under it such as operating capability
capital is regarded as the productive capacity of the enterprise based on
bull For example units of output per day
Capital and Capital Maintenance
Objective Qualitative Characteristics Elements Concepts of
CapitalConcepts of
Capital
Concept of Capital MaintenancePhysical concept maintenancebull Under this concept a profit is
earned only ifbull the physical productive capacity (or
operating capability) of the enterprise (or the resources or funds needed to achieve that capacity) at the end of the period
bull exceeds the physical productive capacity at the beginning of the period
bull after excluding any distributions to and contributions from owners during the period
copy 2005-07 Nelson 24
Summary of IFRSs
International Financial Reporting Standards arebull Standards and Interpretations issued and endorsed by the
International Accounting Standard Board and comprisendash International Financial Reporting Standards (IFRSs)ndash International Accounting Standards (IASs) andndash Interpretations
bull IASs (International Accounting Standards) ndash Totally 31 sets
bull IFRSs (International Financial Reporting Standards) ndash Totally 8 sets(up to 4 February 2007)
More are coming helliphellipMore are coming helliphellip
13
copy 2005-07 Nelson 25
Key Points
IFRSs set outbull Recognitionbull Measurementbull Presentation and
disclosure requirements
Main changesbull Changes in recognition
and measurementbull Changes in presentation
and disclosure
bull Less Choicesbull Towards
Fair Value Model
bullbull Less ChoicesLess Choicesbullbull TowardsTowards
Fair Value ModelFair Value Model
bull More and clearer presentation and disclosure
bullbull More and clearer More and clearer presentation and presentation and disclosuredisclosure
bull Aim at enhancing the information for usersrsquo decision making
bullbull Aim at enhancing Aim at enhancing the information the information for usersrsquo for usersrsquo decision makingdecision making
eg market valuevalue by appraisal helliphellip
Inter alia one more change helliphellip
copy 2005-07 Nelson 26
Todayrsquos Agenda
Presentation of Financial Statements (IAS 1)
Presentation of Financial Statements (IAS 1)
14
copy 2005-07 Nelson 27
Presentation of Financial Statements(IAS 1)
copy 2005-07 Nelson 28
Presentation of Financial Statements (IAS 1)
1 Purpose of financial statements2 Components of financial statements3 Overall considerations4 Structure and content
15
copy 2005-07 Nelson 29
1 Purpose of Financial Statements
bull To provide information aboutndash financial positionndash financial performance
andndash cash flows of an entity
That is useful to a wide range of users in making economic decisions
bull To also show the results of managementrsquos stewardship of the resources entrusted to it
bull To meet this objective financial statements provide information about the entityrsquosndash Assetsndash Liabilitiesndash Equityndash Income and expenses
including gains and lossesndash Other changes in equityndash Cash flows
Thus we have helliphellip
copy 2005-07 Nelson 30
2 Components of Financial Statements
A complete set of financial statements comprisesa) a balance sheetb) an income statementc) a statement of changes in equity showing either
i) all changes in equity orii) changes in equity other than those arising from transactions with
equity holders acting in their capacity as equity holdersd) a cash flow statement ande) notes comprising a summary of significant accounting policies and
other explanatory notes
another nameanother name
16
copy 2005-07 Nelson 31
3 Overall Consideration
a) Fair presentation and compliance with IFRSsb) Going concernc) Accrual basis of accountingd) Consistency of presentatione) Materiality and aggregationf) Offsettingg) Comparative information
copy 2005-07 Nelson 32
3 Overall Consideration
bull Financial statements shall present fairly of the financial position financial performance and cash flows of an entity
ndash Fair presentation requires the faithful representation of the effects of transactions other events and conditions in accordance with
bull the definitions and recognition criteria for assets liabilities income and expenses set out in the Framework
ndash The application of IFRSs with additional disclosure when necessary is presumed to result in financial statements that give a true and fair view
a) Fair presentation and compliance with IFRSs
No such precisely statement before
17
copy 2005-07 Nelson 33
3 Overall Consideration
bull Statement of compliancendash An entity whose financial statements comply
with IFRSs shall make an explicit and unreserved statement of such compliance in the notes
ndash Financial statements shall not be described as complying with IFRSsbull unless they comply with all the
requirements of IFRSsndash In virtually all circumstances a fair
presentation is achieved by bull compliance with applicable IFRSs
a) Fair presentation and compliance with IFRSs
copy 2005-07 Nelson 34
3 Overall Consideration
Melco Development Limited (新濠國際發展有限公司)Notes to the financial statements for year ended 31122005ndash The consolidated financial statements have been prepared in
accordance with HKFRSsndash In addition the consolidated financial statements include applicable
disclosures required by the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited and by the Companies Ordinance
CaseCase
18
copy 2005-07 Nelson 35
3 Overall Consideration
bull A fair presentation also requires an entitya) to select and apply accounting policies in accordance
with IAS 8b) to present information including accounting policies
in a manner that provides relevant reliable comparable and understandable information
c) to provide additional disclosuresndash when compliance with the specific requirements in
IFRSs is insufficient to enable users to understand the impact of particular transactions other events and conditions on the entityrsquos financial position and financial performance
bull Inappropriate accounting policies are not rectified eitherndash by disclosure of the accounting policies used orndash by notes or explanatory material
a) Fair presentation and compliance with IFRSs
copy 2005-07 Nelson 36
3 Overall Consideration
bull Departure from Standard or Interpretation (Simplified)ndash In the extremely rare circumstances in which
management concludes thatbull compliance with a requirement in a standard or an
interpretation would be so misleading thatbull it would conflict with the objective of financial
statements set out in the Frameworkthe entity shall depart from that requirement if the relevant regulatory framework requires or otherwise does not prohibit such a departure
a) Fair presentation and compliance with IFRSs
19
copy 2005-07 Nelson 37
3 Overall Consideration
bull Departure from Standard or Interpretation (Simplified)
a) Fair presentation and compliance with IFRSs
ndash Then the following disclosure is requireda) management has concluded that the financial
statements give a true and fair viewb) that it has complied with applicable standards and
interpretations except that it has departed from a particular requirement
c) the title of the standard or interpretation from which the entity has departed the nature of the departure the reason why that treatment would be so misleading and the treatment adopted and
d) for each period presented the financial impact of the departure on each item in the financial statements that would have been reported in complying with the requirement
copy 2005-07 Nelson 38
3 Overall Consideration
Interim Report 2005 clearly stated thatInterim Report 2005 clearly stated that
CaseCase
bull The directors consider it inappropriate for the company to adopt two particular aspects of the newrevised HKFRSs as these would result in the financial statements in the view of the directors eitherbull not reflecting the commercial substance of the business orbull being subject to significant potential short-term volatility as
explained below helliphellip
20
copy 2005-07 Nelson 39
3 Overall ConsiderationCaseCase
bull HKAS 40 ldquoInvestment propertyrdquo requires an assessment of the fair value of investment properties
bull The group intends to follow the same accounting treatment as adopted in 2004 which is to value such investment properties on an annual basis
bull Accordingly the investment properties were not revalued at 30 June 2005 since the directors consider that such change of practice could introduce a significant element of short-term volatility into the income statement in respect of assets which are being held on a long-term basis by the group helliphellip
bull It is not practicable to estimate the financial effect of this non-compliance as no interim valuation of the properties has been conducted
Interim Report 2005 clearly stated thatInterim Report 2005 clearly stated that
At year-end revaluation would still be conductedAt year-end revaluation would still be conducted
copy 2005-07 Nelson 40
3 Overall ConsiderationCaseCase
bull HKAS 12 ldquoIncome Taxesrdquo together with HKAS-INT 21 ldquoIncome Taxes ndashRecovery of Revalued Non-Depreciable Assetsrdquo requires deferred taxation to be recognised on any revaluation movements on investment propertiesbull It is further provided that any such deferred tax liability should be calculated
at the profits tax rate in the case of assets which the management has no definite intention to sell
bull The company has not made such provision in respect of its HK investment properties since the directors consider that such provision would result in the financial statements not reflecting the commercial substance of the businessbull since should any such sale eventuate any gain would be regarded as capital
in nature and would not be subject to any tax in HKbull Should this aspect of HKAS 12 have been adopted deferred tax liabilities
amounting to HK$2008 million on the revaluation surpluses arising from revaluation of HK investment properties would have been provided
(estimate - over 12 of the net assets at 30 June 2005)
Interim Report 2005 clearly stated thatInterim Report 2005 clearly stated that
21
copy 2005-07 Nelson 41
3 Overall Consideration
bull Departure but such departure is prohibitedndash In the extremely rare circumstances in which
management concludes that bull compliance with a requirement in a
standard or an interpretation would be so misleading that
bull it would conflict with the objective of financial statements set out in the Framework
bull but the relevant regulatory framework prohibits departure from the requirement the entity shall to the maximum extent possible reduce the perceived misleading aspects of compliance by disclosing helliphellip
a) Fair presentation and compliance with IFRSs
copy 2005-07 Nelson 42
3 Overall Consideration
ndash by disclosinga) the title of the standard or interpretation in
question the nature of the requirement and the reason why management has concluded that complying with that requirement is so misleading in the circumstances that it conflicts with the objective of financial statements set out in the Framework and
b) for each period presented the adjustments to each item in the financial statements that management has concluded would be necessary to give a fair presentation
a) Fair presentation and compliance with IFRSsbull Departure but such departure is prohibited
22
copy 2005-07 Nelson 43
3 Overall Consideration
bull When assessing whether complying with a specific requirement in a standard or an interpretation would be so misleading that it would conflict with the objective of financial statements set out in the Frameworkndash management considers
a) why the objective of financial statements is not achieved in the particular circumstances and
b) how the entityrsquos circumstances differ from those of other entities that comply with the requirement ndash If other entities in similar circumstances comply with the
requirement raquo there is a rebuttable presumption that the entityrsquos compliance
with the requirement would not be so misleading that it would conflict with the objective of financial statements set out in the Framework
a) Fair presentation and compliance with IFRSs
copy 2005-07 Nelson 44
3 Overall ConsiderationCaseCase
Howrsquos about this Howrsquos about this
However 2005 Final Results Announcementdisclosed that bull provision for deferred tax was finally made
with regard to revaluation of the HK investment properties (total HK$22 billion) at 2005 year-end
However However 2005 Final Results Announcement2005 Final Results Announcementdisclosed that disclosed that bullbull provision for deferred tax was finally made provision for deferred tax was finally made
with regard to revaluation of the HK with regard to revaluation of the HK investment properties (total HK$22 billion) at investment properties (total HK$22 billion) at 2005 year2005 year--endend
23
copy 2005-07 Nelson 45
b) Going Concern
3 Overall Consideration
bull When preparing financial statements management shall make an assessment of an entityrsquos ability to continue as a going concern
bull Financial statements shall be prepared on a going concern basisndash unless management either intends to liquidate the entity or to cease
trading or has no realistic alternative but to do so bull When management is aware in making its assessment of
material uncertainties related to events or conditions that may cast significant doubt upon the entityrsquos ability to continue as a going concern those uncertainties shall be disclosed
bull When financial statements are not prepared on a going concern basis that fact shall be disclosed together with the basis on which the financial statements are prepared and the reason why the entity is not regarded as a going concern
copy 2005-07 Nelson 46
c) Accrual Basis of Accounting
3 Overall Consideration
bull An entity shall prepare its financial statements except for cash flow information using the accrual basis of accounting
bull When the accrual basis of accounting is used items are recognised as assets liabilities equity income and expensesndash when they satisfy the definitions and recognition criteria for those
elements in the Framework
24
copy 2005-07 Nelson 47
3 Overall Consideration
bull The presentation and classification of items in the financial statements shall be retained from one period to the next unlessa) it is apparent
bull following a significant change in the nature of the entityrsquos operations (eg significant acquisition or disposal) or
bull a review of its financial statementsthat another presentation or classification would be more appropriatehaving regard to the criteria for the selection and application of accounting policies in IAS 8 or
b) a IFRS requires a change in presentation
d) Consistency of presentation
An entity changes the presentation of its financial statements only ifndash the changed presentation provides information that is reliable and is
more relevant to users of the financial statements andndash the revised structure is likely to continue so that comparability is not
impaired
An entity changes the presentation of its financial statements only ifndash the changed presentation provides information that is reliable and is
more relevant to users of the financial statements andndash the revised structure is likely to continue so that comparability is not
impaired
copy 2005-07 Nelson 48
3 Overall Consideration
bull Each material class of similar items shall bendash presented separately in the financial
statementsbull Items of a dissimilar nature or function shall be
ndash presented separately unless they are immaterial
bull Applying the concept of materiality means that a specific disclosure requirement in a IFRS neednot be satisfied if the information is not material
e) Materiality and Aggregation
What is the situation of recognition and measurement
What is the What is the situation of situation of recognition and recognition and measurementmeasurement
25
copy 2005-07 Nelson 49
3 Overall Consideration
bull What is materialndash Omissions or misstatements of items are
material if they could individually or collectively influence the economic decisions of users taken on the basis of the financial statements
ndash Materiality depends on the size and nature of the omission or misstatement judged in the surrounding circumstancesbull The size or nature of the item or a combination
of both could be the determining factor
e) Materiality and Aggregation
copy 2005-07 Nelson 50
3 Overall Consideration
bull Assets and liabilities and income and expenses shall not be offsetndash unless required or permitted by a IFRS
bull It is important that assets and liabilities and income and expenses are reported separatelyndash Measuring assets net of valuation allowances mdash
for example obsolescence allowances on inventories and doubtful debts allowances on receivables mdash is not offsetting
f) Offsetting
26
copy 2005-07 Nelson 51
3 Overall Consideration
bull During ordinary activities some transactions that do not generate revenue but are incidental to the main revenue-generating activitiesndash The results of such transactions are presented
when this presentation reflects the substance of the transaction or other event by netting any income with related expenses arising on the same transaction
f) Offsetting
copy 2005-07 Nelson 52
3 Overall Consideration
bull For examplea) gains and losses on the disposal of non-current
assets including investments and operating assets- are reported by deducting from the proceeds on
disposal the carrying amount of the asset and related selling expenses and
b) expenditure related to a provision that is- recognised in accordance with IAS 37 and - reimbursed under a contractual arrangement with
a third party (for example a supplierrsquos warranty agreement)
may be netted against the related reimbursement
f) Offsetting
ExampleExample
27
copy 2005-07 Nelson 53
3 Overall Consideration
bull Gains and losses arising from a group of similar transactions are reported on a net basisndash For example
bull foreign exchange gains and losses or bull gains and losses arising on financial instruments held for trading
bull Such gains and losses are however reported separately if they are material
bull Gains and losses arising from a group of similar transactions are reported on a net basisndash For example
bull foreign exchange gains and losses or bull gains and losses arising on financial instruments held for trading
bull Such gains and losses are however reported separately if they are material
Can foreign exchange gains and losses be offset
ExampleExample
copy 2005-07 Nelson 54
3 Overall Consideration
bull Except when a IFRS permits or requires otherwise ndash comparative information shall be disclosed in
respect of the previous period for all amountsreported in the financial statements
bull When the presentation or classification of items in the financial statements is amended ndash comparative amounts shall be reclassified unless
the reclassification is impracticable
g) Comparative information
28
copy 2005-07 Nelson 55
Amended requirementsAmended requirements
3 Overall Consideration
bull When comparative amounts are reclassified an entity shall disclosea) the nature of the reclassificationb) the amount of each item or class of items that is
reclassified andc) the reason for the reclassification
g) Comparative information
bull In the pastonly the reason for and a description of the nature of materialreclassifications should be disclosedExemption for disclosure of comparative information for the reconciliation of movements in fixed assets is also removed
bull In the pastonly the reason for and a description of the nature of materialreclassifications should be disclosedExemption for disclosure of comparative information for the reconciliation of movements in fixed assets is also removed
copy 2005-07 Nelson 56
3 Overall Consideration
Melco Development Limited (新濠國際發展有限公司)Notes to the financial statements for year ended 31122005ndash Because HKAS 32 requires retrospective application comparative
figures for 2004 have been restated (see Note 2A for the financial impact)
CaseCase
29
copy 2005-07 Nelson 57
3 Overall Consideration
Galaxy Entertainment Group LimitedNotes to the financial statements (ye 31122005)ndash All changes in the accounting policies require
retrospective application except HKAS 39 and HKFRS 2 for which transitional provisions are applied
ndash As a result the 2004 comparative figures have also been restated or amended in accordance with the relevant requirements
ndash The effects of all the changes in accounting policies are summarised in notes (b) and (c) below
CaseCase
copy 2005-07 Nelson 58
bull Identification of the financial statementsbull Reporting periodbull Balance sheet
1 CurrentNon-current distinction2 Current assets3 Current liabilities4 Information to be presented on the face of the balance sheet5 Information to be presented either on the face of the balance sheet or in
the notesbull Income statement
1 Profit or loss for the period2 Information to be presented on the face of the income statement3 Information to be presented either on the face of the income statement or
in the notesbull Statement of changes in equitybull Cash flow statementbull Notes
4 Structure and Content
30
copy 2005-07 Nelson 59
Identification of Financial Statements
bull The financial statements shall be identified clearly and distinguished from other information in the same published document
bull The following information shall be displayed prominently and repeated when it is necessary for a proper understanding of the information presented
a) the name of the reporting entity or other means of identification and any change in that information from the preceding balance sheet date
b) whether the financial statements cover the individual entity or a group of entities
c) the balance sheet date or the period covered by the financial statements whichever is appropriate to that component of the financial statements
d) the presentation currency as defined in HKAS 21 The Effects of Changes in Foreign Exchange Rates and
e) the level of rounding used in presenting amounts in the financial statements
copy 2005-07 Nelson 60
Identification of Financial Statements
bull Can the units of the presentation currency be rounded to thousands or millions
bull Financial statements are often made more understandableby presenting information in thousands or millions of units of the presentation currency
bull This is acceptable as long asndash the level of rounding in presentation is disclosed and ndash material information is not omitted
bull Financial statements are often made more understandableby presenting information in thousands or millions of units of the presentation currency
bull This is acceptable as long asndash the level of rounding in presentation is disclosed and ndash material information is not omitted
ExampleExample
31
copy 2005-07 Nelson 61
Reporting Period
bull Financial statements shall be presented at least annually
bull When an entityrsquos balance sheet date changes and the annual financial statements are presented for a period longer or shorter than one year an entity shall disclose in addition to the period covered by the financial statementsa) the reason for using a longer or shorter period andb) the fact that comparative amounts for the income
statement statement of changes in equity cash flow statement and related notes are not entirely comparable
copy 2005-07 Nelson 62
Reporting Period
bull Can a set of financial statements cover 52-week instead of a year
bull Normally financial statements are consistently prepared covering a one-year period
bull However for practical reasons some entities prefer to report for example for a 52-week period
bull IAS 1 does not preclude this practice because the resulting financial statements are unlikely to be materially different from those that would be presented for one year
bull Normally financial statements are consistently prepared covering a one-year period
bull However for practical reasons some entities prefer to report for example for a 52-week period
bull IAS 1 does not preclude this practice because the resulting financial statements are unlikely to be materially different from those that would be presented for one year
ExampleExample
32
copy 2005-07 Nelson 63
CurrentNon-current Distinction
bull An entity shall presentndash current and non-current assets andndash current and non-current liabilitiesas separate classifications on the face of its balance sheet
bull Except when a presentation based on liquidity provides informationndash If that information is reliable and is more relevantndash When that exception applies all assets and liabilities shall be
presented broadly in order of liquidity
copy 2005-07 Nelson 64
CurrentNon-current Distinction
bull Whichever method of presentation is adopted for each asset and liability line item that combines amounts expected to be recovered or settled a) no more than 12 months after the balance sheet date
andb) more than 12 months after the balance sheet date(ie combines both current and non-current)
an entity shall disclose the amount expected to be recovered or settled after more than 12 months
33
copy 2005-07 Nelson 65
New requirementsNew requirements
Current Assets
bull An asset shall be classified as current when it satisfies any of the following criteriaa) it is expected to be realised in or is intended for sale or
consumption in the entityrsquos normal operating cycle b) it is held primarily for the purpose of being tradedc) it is expected to be realised within 12 months after the balance
sheet date ord) it is cash or a cash equivalent
bull unless it is restricted from being exchanged or used to settle aliability for at least 12 months after the balance sheet date
bull All other assets shall be classified as non-current
Examplesbull Deposits pledged to bank (how long)bull Fixed deposits over 1 year maturity
Examplesbull Deposits pledged to bank (how long)bull Fixed deposits over 1 year maturity
What is itWhat is it
copy 2005-07 Nelson 66
Current Assets
bull What is operating cycle
bull The operating cycle of an entity is the time between ndash the acquisition of assets for processing and ndash their realisation in cash or cash equivalents
bull When the entityrsquos normal operating cycle is not clearly identifiable ndash its duration is assumed to be 12 months
bull The operating cycle of an entity is the time between ndash the acquisition of assets for processing and ndash their realisation in cash or cash equivalents
bull When the entityrsquos normal operating cycle is not clearly identifiable ndash its duration is assumed to be 12 months
ExampleExample
34
copy 2005-07 Nelson 67
Current Assets CaseCase
copy 2005-07 Nelson 68
Current Assets
bull Can a non-current asset reclassified if it fulfil the definition of current asset later
bull Assets classified as non-current in accordancewith IAS 1 shall not be reclassified as current assetsndash until they meet the criteria to be classified as held for sale in
accordance with IFRS 5bull Assets of a class that an entity would normally regard as non-
current that are acquired exclusively with a view to resale shall notbe classified as currentndash unless they meet the criteria to be classified as held for sale in
accordance with IFRS 5
bull Assets classified as non-current in accordancewith IAS 1 shall not be reclassified as current assetsndash until they meet the criteria to be classified as held for sale in
accordance with IFRS 5bull Assets of a class that an entity would normally regard as non-
current that are acquired exclusively with a view to resale shall notbe classified as currentndash unless they meet the criteria to be classified as held for sale in
accordance with IFRS 5
No non-current assets can be classified as current unless the criteria in IFRS 5 are fulfilled mainlybull Available for immediate salebull Highly probable to make the sale
35
copy 2005-07 Nelson 69
Is it currentIs it current
Current Assets
bull In its 2005 Interim Report full set of HKFRS was adopted and the report set out thatndash Available-for-sale financial assets are non-
derivatives that are eitherbull designated in this category orbull not classified in any of the other categories (ie
loans and receivables financial assets at fair value through profit or loss and held-to-maturity investments)
CaseCase
Similar in 2005 Annual Report
Similar in 2005 Annual Report
ndash They are included in non-current assetsbull unless management intends to dispose of the
investment within 12 months of the balance sheet date
copy 2005-07 Nelson 70
New requirementsNew requirements
Current Liabilities
bull A liability shall be classified as current when it satisfies any of the following criteriaa) it is expected to be settled in the entityrsquos normal operating cycleb) it is held primarily for the purpose of being tradedc) it is due to be settled within 12 months after the balance sheet
date ord) the entity does not have an unconditional right to defer settlement
of the liability for at least 12 months after the balance sheet date
bull All other liabilities shall be classified as non-current
ImplicationImplication
36
copy 2005-07 Nelson 71
Current Liabilities Revised rules on classifying a liability as current or non-currentbull A liability held for being traded rArr currentbull A financial liability due within 12 months after the BS date rArr current
ndash even if an agreement to refinance on a long-term basis is completed after the BS date (only disclosed as non-adjusting event)
bull If an entity has discretion to refinance rArr non-currentbull If an entity without discretion to refinance rArr current
bull A non-current financial liability is payable on demand with a breach on a condition of its loan agreement on or before the BS datendash If the lender agreed not to demand payment
bull after the BS date rArr current (only disclosed as non-adjusting event)
bull by the BS date rArr non-current
ImplicationImplication
copy 2005-07 Nelson 72
Current LiabilitiesCaseCase
Note 12 to Interim Report 2006bull Breach of loan covenants
bull As at 30 June 2006 in respect of certain bank loans with an aggregate carrying amount of HK$1529806000 the Group breached certain financial covenants of the banks loans
bull Since the lenders have not agreed to waive its right to demand immediate payment as at the balance sheet date the loans have been classified as current liabilities in these financial statements at 30 June 2006
37
copy 2005-07 Nelson 73
Current Assets and LiabilitiesExampleExample
Can the following be classified as current assetsbull 3-month fixed deposits pledged to a bank to secure
a mortgage loan of 5 yearsbull 2-year fixed deposits with a bank
Can the following be classified as current assetsbull 3-month fixed deposits pledged to a bank to secure
a mortgage loan of 5 yearsbull 2-year fixed deposits with a bank
Can the following be classified as non-current liabilitiesbull 5-year term loan matured after year end but renewed
for another 5 years after year end (before the issuanceof the financial statements)
bull 2-year term loan to be matured with 12 months and theentity has a right to renew for another 2 years
Can the following be classified as non-current liabilitiesbull 5-year term loan matured after year end but renewed
for another 5 years after year end (before the issuanceof the financial statements)
bull 2-year term loan to be matured with 12 months and theentity has a right to renew for another 2 years
timestimes
times
radic
copy 2005-07 Nelson 74
Balance Sheetbull As a minimum the face of the balance sheet shall
include line items that present the following amountsa) property plant and equipmentb) investment propertyc) intangible assetsd) financial assets (excl amounts shown under (e) (h) and (I))e) investments accounted for using the equity methodf) biological assetsg) inventoriesh) trade and other receivablesi) cash and cash equivalentsj) trade and other payablesk) provisionsl) financial liabilities (excl amounts shown under (j) and (k))m) liabilities and assets for current tax as defined in HKAS 12 Income Taxesn) deferred tax liabilities and deferred tax assets as defined in HKAS 12o) minority interest presented within equity andp) issued capital and reserves attributable to equity holders of the parent
38
copy 2005-07 Nelson 75
Balance Sheetbull The face of the balance sheet shall also include line
items that present the following amountsa) The total of assets classified as held for sale and
assets included in disposal groups classified as held for sale in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations and
b) Liabilities included in disposal groups classified as held for sale in accordance with IFRS 5
copy 2005-07 Nelson 76
Balance Sheetbull Additional line items headings and subtotals shall
be presented on the face of the balance sheet when such presentation is relevant to an understanding of the entityrsquos financial position
bull When an entity presents current and non-current assets and current and non-current liabilities as separate classifications on the face of its balance sheet ndash it shall not classify deferred tax assets
(liabilities) as current assets (liabilities)
39
copy 2005-07 Nelson 77
Balance Sheet
bull The use of different measurement bases for different classes of assets suggests that their nature or function differs and therefore that they should be presented as separate line itemsndash For example different classes of property plant and
equipment can be carried atbull Cost orbull Revalued amountsin accordance with IAS 16 PPE
In the past it use ldquomay needrdquoIn the past it use ldquomay needrdquo
copy 2005-07 Nelson 78
Balance Sheet
Galaxy Entertainment Group LimitedConsolidated balance sheet as at 31122005
CaseCase
40
copy 2005-07 Nelson 79
Balance Sheet
Melco Development Limited (新濠國際發展有限公司)Consolidated balance sheet as at 31122005
CaseCase
copy 2005-07 Nelson 80
Income Statement Minimum requirements on the face of the income statementbull As a minimum the face of the income statement shall include line items
that present the following amounts for the perioda) revenueb) finance costsc) share of the profit or loss of associates and joint ventures accounted
for using the equity methodd) pre-tax gain or loss recognised on the disposal of assets or
settlement of liabilities attributable to discontinuing operationse) tax expense andf) profit or loss
41
copy 2005-07 Nelson 81
Income Statement bull The following items shall be disclosed on the face of the income
statement as allocations of profit or loss for the perioda) Profit or loss attributable to minority interest andb) Profit or loss attributable to equity holders of the parent
A similar requirement has been added for the statement of changes in equity and such allocated amounts are not to be presented as items of income or expense
copy 2005-07 Nelson 82
Income Statement
Melco Dev LtdConsolidated income statementas at 31122005
CaseCase
42
copy 2005-07 Nelson 83
Income Statement bull Not require to disclose the results of operating
activities as a line item on the face of the incomestatement
bull An entity shall not present any items of income and expense as extraordinary items either onthe face of the income statements or in the notes
Entities canrsquot use itEntities canrsquot use it
Entities can still show itEntities can still show it
copy 2005-07 Nelson 84
Income Statement Either on the face of the income statement or in the notesbull An entity shall present an analysis of expenses using a classification
based on eitherbull the nature of expenses orbull their function within the entity
whichever provides information that is reliable and more relevant
bull Entities classifying expenses by function shall disclose additional information on the nature of expenses includingbull depreciation and amortisation expense and bull employee benefits expense
43
copy 2005-07 Nelson 85
Income StatementCaseCase
Nature or FunctionNature or Nature or FunctionFunction
copy 2005-07 Nelson 86
Statement of Changes in Equity bull An entity shall present a statement of changes in equity showing on the
face of the statementa) profit or loss for the period b) each item of income and expense for the period that as required by
IFRSs is recognised directly in equity and the total of these itemsc) total income and expense for the period (calculated as the sum of (a) and
(b)) showing separately the total amounts attributablebull to equity holders of the parent andbull to minority interest and
d) for each component of equity the effects of changes in accounting policies and corrections of errors recognised in accordance with IAS 8
Any ChangeAny Change
A revised requirementbull A statement of changes in equity that comprises only these items
shall be titled a statement of recognised income and expenses
A revised requirementbull A statement of changes in equity that comprises only these items
shall be titled a statement of recognised income and expenses
44
copy 2005-07 Nelson 87
Statement of Changes in Equity bull An entity shall also present either on the face of the
statement of changes in equity or in the notesa) the amounts of transactions with equity holders acting in
their capacity as equity holders showing separately distributions to equity holders
b) the balance of retained earnings (ie accumulated profit or loss) at the beginning of the period and at the balance sheet date and the changes during the period and
c) a reconciliation between the carrying amount of each class of contributed equity and each reserve at the beginning and the end of the period separately disclosing each change
copy 2005-07 Nelson 88
Statement of Changes in Equity
Consolidated SCE as at 31122005
CaseCase
45
copy 2005-07 Nelson 89
Notes Structure (an entity is required to disclose the following)
bull The notes shalla) present information about the basis of preparation of the financial statements
and the specific accounting policies usedb) disclose the information required by HKFRSs that is not presented on the
face of the balance sheet income statement statement of changes in equity or cash flow statement and
c) provide additional information that is not presented on the face of the balance sheet income statement statement of changes in equity or cash flow statement but is relevant to an understanding of any of them
bull Notes shall as far as practicable be presented in a systematic manner bull Each item on the face of the balance sheet income statement statement
of changes in equity and cash flow statement shall be cross-referencedto any related information in the notes
copy 2005-07 Nelson 90
Notes Disclosures (an entity is required to disclose the following)
bull Disclosure of accounting policiesAn entity shall disclose in the summary of significant accounting policiesa) the measurement basis (or bases) used in preparing the financial
statements andb) the other accounting policies used that are relevant to an understanding of
the financial statements
46
copy 2005-07 Nelson 91
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)ndash The financial statements have been prepared in
accordance with Hong Kong Financial Reporting Standards (lsquolsquoHKFRSrsquorsquo) issued by the Hong Kong Institute of Certified Public Accountants bull under the historical cost convention as modified by the
revaluation of investment properties available-for-sale financial assets derivative financial instruments and other investments which are carried at fair values helliphellip
ndash The principal accounting policies applied in the preparation of these financial statements are set out below These policies have been consistently applied to all the years presented except for those stated in note 2(a) above
copy 2005-07 Nelson 92
Notes Disclosures (an entity is required to disclose the following)
bull Disclosure of accounting policiesndash The judgements apart from those involving estimations management has
madebull in the process of applying the entityrsquos accounting policies that have the
most significant effect on the amounts recognised in the financial statements (in the summary of significant accounting policies or other notes)
Examples ndash Management makes judgements in determininga) whether financial assets are held-to-maturity investmentsb) when substantially all the significant risks and rewards of
ownership of financial assets and lease assets are transferred to other entities
c) whether in substance particular sales of goods are financing arrangements and therefore do not give rise to revenue and
d) whether the substance of the relationship between the entity and a special purpose entity indicates that the special purpose entity is controlled by the entity
Examples ndash Management makes judgements in determininga) whether financial assets are held-to-maturity investmentsb) when substantially all the significant risks and rewards of
ownership of financial assets and lease assets are transferred to other entities
c) whether in substance particular sales of goods are financing arrangements and therefore do not give rise to revenue and
d) whether the substance of the relationship between the entity and a special purpose entity indicates that the special purpose entity is controlled by the entity
47
copy 2005-07 Nelson 93
Notes Disclosures (an entity is required to disclose the following)
bull Key sources of estimation uncertaintyndash Information about the key assumptions concerning the future and
other key sources of estimation uncertainty at the balance sheet datebull that have a significant risk of causing a material adjustment to the
carrying amounts of assets and liabilities within the next financial yearndash In respect of those assets and liabilities the notes shall include details of
a) their nature andb) their carrying amount as at the balance sheet date
Examples ndash in the absence of recently observed market prices used to measure the following assets and liabilities future-oriented estimates are necessary to measurebull the recoverable amount of classes of PPEbull the effect of technological obsolescence on inventories
Estimates involve assumptions about such items asbull the risk adjustment to cash flows or discount rates usedbull future changes in salaries and in prices affecting other costs
Examples ndash in the absence of recently observed market prices used to measure the following assets and liabilities future-oriented estimates are necessary to measurebull the recoverable amount of classes of PPEbull the effect of technological obsolescence on inventories
Estimates involve assumptions about such items asbull the risk adjustment to cash flows or discount rates usedbull future changes in salaries and in prices affecting other costs
copy 2005-07 Nelson 94
Notes
Esprit Holdings LimitedEsprit Holdings Limitedbull Critical Accounting Estimates and Judgements
ndash Estimates and judgements are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonableunder the circumstances
ndash Critical accounting estimates and assumptionsbull The Group makes estimates and assumptions concerning
the future The resulting accounting estimates will by definition seldom equal the related actual results
bull The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below helliphellip (including (1) useful life and impairment of trademarks and (2) income taxes)
CaseCase
48
copy 2005-07 Nelson 95
Notes
Melco Development Limited (新濠國際發展有限公司)Notes to the financial statements for the year ended 31122005ndash The key assumptions concerning the future and other key sources
of estimation uncertainty at the balance sheet date that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below helliphellip(The issues discussed includebull Allowances for inventories bull Estimated impairment of goodwill Income taxes)
CaseCase
copy 2005-07 Nelson 96
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)ndash Estimates and judgements used in preparing the
financial statements are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonable under the circumstances
ndash The Group makes estimates and assumptionsconcerning the future
ndash The resulting accounting estimates will by definition seldom equal the related actual results
ndash The estimates and assumptions that have a significant effect on the carrying amounts of assets and liabilities are discussed below hellip (including impairment of goodwill impairment of gaming
licence Useful lives of property plant and equipment fair value of investment properties hellip)
49
copy 2005-07 Nelson 97
Notes Disclosures (an entity is required to disclose the following)
bull Other disclosuresAn entity shall disclose in the notesa) the amount of dividends proposed or declared before the
financial statements were authorised for issue but not recognised as a distribution to equity holders during the period and the related amount per share(HK incorporated companies are required to show the aggregate amount which is recommended for distribution by way of dividend under a separate heading(s) in their balance sheet (HK Co Ord 10th Sch para 9(1)(e)) and
b) the amount of any cumulative preference dividends not recognised
copy 2005-07 Nelson 98
Notes Disclosures (an entity is required to disclose the following)
An entity shall disclose the following if not disclosedelsewhere in information published with the financial statementsa) the domicile and legal form of the entity
its country of incorporation andthe address of its registered office(or principal place of business if different from the registered office)
b) a description of the nature of the entityrsquos operations and its principal activities and
c) the name of the parent and the ultimate parent of the group
ldquoshall discloserdquo now instead of ldquoencouraged to discloserdquo
ldquoshall discloserdquo now instead of ldquoencouraged to discloserdquo
bull Other disclosures
Any specialAny special
50
copy 2005-07 Nelson 99
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)bull The principal activities of Galaxy Entertainment Group
Ltd (the lsquolsquoCompanyrsquorsquo) (formerly known as K WahConstruction Materials Ltd) and its subsidiaries (together the lsquolsquoGrouprsquorsquo) are tondash operate in casino games of chance or games of other forms
in Macau (and) manufacture sale and distribution of construction materials in HK Macau and Mainland China
bull The Company is ndash a limited liability company incorporated in Hong Kong and ndash has its listing on the Main Board of The Stock Exchange of
Hong Kong Limitedbull The address of its registered office and its principal place
of business is Room 1606 16th Floor Hutchison House 10 Harcourt Road Central HK
copy 2005-07 Nelson 100
Effective Date
bull An entity shall apply IAS 1 for annual periods beginning on or after 1 Jan 2005
ndash Earlier application is encouragedndash If an entity applies IAS 1 for an earlier period it shall
disclose this factbull For the amendments relating to the Statement of
Changes in Equityndash An entity shall apply it for annual periods beginning on
or after 1 Jan 2006ndash If an entity applies the amendments to IAS 19
Employee Benefits ndash Actuarial Gains and Losses Group Plans and Disclosures for an earlier period that amendment shall be applied for that earlier period
51
copy 2005-07 Nelson 101
Todayrsquos Agenda
Capital Disclosures (Amendments to IAS 1)
Capital Disclosures (Amendments to IAS 1)
copy 2005-07 Nelson 102
Capital Disclosures ndash For 2007
52
copy 2005-07 Nelson 103
Capital Disclosures
What is capital Is it helliphellip
CapitalCapital AssetsAssets LiabilitiesLiabilities= ndash
bull IAS 1BC47 considers ldquowhether an entity can have a view of capital that differs from what IFRSs define as equityrdquo
bull It further clarifies that although for the purposes of this disclosure capital would often equate with equity as defined in IFRSsndash it might also include or exclude some components
bull It also noted that the capital disclosure in IAS 1 is intended to give entities the opportunity to describendash how they view the components of capital they manage if this is
different from what IFRSs define as equity helliphellip
copy 2005-07 Nelson 104
EquityEquityEquity AssetsAssets LiabilitiesLiabilities= ndash
Capital Disclosures
Based on the Framework amp IFRSs the accounting equation should be
CapitalCapital AssetsAssets LiabilitiesLiabilities= ndash
bull An entityrsquos capital may be part of its equity plus part of its liabilities depending on how it manage ldquoits capitalrdquo helliphellip
53
copy 2005-07 Nelson 105
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowinga) qualitative information about its objectives policies and processes for
managing capital including (but not limited to)i) a description of what it manages as capitalii) when an entity is subject to externally imposed capital requirements
the nature of those requirements and how those requirements are incorporated into the management of capital and
iii) how it is meeting its objectives for managing capital
bull To comply with the capital disclosures the entity discloses thefollowinga) qualitative information about its objectives policies and processes for
managing capital including (but not limited to)i) a description of what it manages as capitalii) when an entity is subject to externally imposed capital requirements
the nature of those requirements and how those requirements are incorporated into the management of capital and
iii) how it is meeting its objectives for managing capital
copy 2005-07 Nelson 106
Capital Disclosures
Example disclosurebull The Grouprsquos objectives when managing capital are
ndash to safeguard the entityrsquos ability to continue as a going concern
bull so that it can continue to provide returns for shareholders and benefits for other stakeholders and
ndash to provide an adequate return to shareholders by pricing products and services commensurately with the level of risk
bull The Group sets the amount of capital in proportion to risk
ExampleExample
ObjectivesObjectives
54
copy 2005-07 Nelson 107
Capital Disclosures
bull The Group manages the capital structure and makes adjustments to it in the light ofndash changes in economic conditions and ndash the risk characteristics of the underlying assets
bull In order to maintain or adjust the capital structure the Group mayndash adjust the amount of dividends paid to shareholders ndash return capital to shareholders ndash issue new shares or ndash sell assets to reduce debt
ExampleExample
Example disclosure
HowHow
copy 2005-07 Nelson 108
Capital Disclosures
bull Consistently with others in the industry the Group monitors capital on the basis of ndash the debt-to-adjusted capital ratio
bull This ratio is calculated as net debt divide adjusted capital
ExampleExample
Example disclosure
HowHow
bull Net debt is calculated as ndash Total debt (as shown in the
balance sheet)ndash Less cash amp cash equivalents
bull Net debt is calculated as ndash Total debt (as shown in the
balance sheet)ndash Less cash amp cash equivalents
bull Adjusted capital ndash comprises all components of
equity (ie share capital share premium minority interest retained earnings and revaluation reserve) ndash other than amounts
recognised in equity relating to cash flow hedges and
ndash includes some forms of subordinated debt
bull Adjusted capital ndash comprises all components of
equity (ie share capital share premium minority interest retained earnings and revaluation reserve) ndash other than amounts
recognised in equity relating to cash flow hedges and
ndash includes some forms of subordinated debt
55
copy 2005-07 Nelson 109
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowing
bull To comply with the capital disclosures the entity discloses thefollowingb) summary quantitative data about what it manages as capital
Some entities regard some financial liabilities (eg some forms of subordinated debt) as part of capitalOther entities regard capital as excluding some components of equity (eg components arising from cash flow hedges)
c) any changes in (a) and (b) from the previous period
copy 2005-07 Nelson 110
Capital Disclosures
Example disclosure (continued from previous example)
ExampleExample
bull During 20X4 the Grouprsquos strategy which was unchanged from 20X3 was to maintain the debt-to-adjusted capital ratio at the lower end of the range 61 to 71 in order to secure access to finance at a reasonable cost by maintaining a BB credit rating The debt-to-adjusted capital ratios at 31 December 20X4 and at 31 December 20X3 were as follows
3112X4 ($rsquoM) 3112X3 ($rsquoM) Total debt 1000 1100 Less cash and cash equivalents (90) (150)Net debt 910 950
Total equity 110 105 Add subordinated debt instruments 38 38 Less amounts recognised in equity
relating to cash flow hedges (10) (5)Adjusted capital 138 138
Debt-to-adjusted capital ratio 66 69
56
copy 2005-07 Nelson 111
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowing
bull To comply with the capital disclosures the entity discloses thefollowingd) whether during the period it complied with any externally imposed capital
requirements to which it is subjecte) when the entity has not complied with such externally imposed capital
requirements the consequences of such non-complianceThese disclosures shall be based on the information provided internally to the entityrsquos key management personnel
copy 2005-07 Nelson 112
Capital DisclosuresExampleExample
Example disclosurebull Entity A filed its quarterly regulatory capital return for
30 September 20X7 on 20 October 20X7 bull At that date Entity Arsquos regulatory capital was below
the capital requirement imposed by Regulator B by $1 million
bull As a result Entity A was required to submit a plan to the regulator indicating how it would increase its regulatory capital to the amount required
bull Entity A submitted a plan that entailed selling part of its unquoted equities portfolio with a carrying amount of $115 million in the fourth quarter of 20X7
bull In the fourth quarter of 20X7 Entity A sold its fixed interest investment portfolio for $126 million and met its regulatory capital requirement
For example SFC or banks
For example SFC or banks
57
copy 2005-07 Nelson 113
Capital DisclosuresCaseCase
bull Early adopted capital disclosure in 2005 and itsannual report states that (extract only)ndash The Grouprsquos objectives when managing capital are
bull To safeguard the Grouprsquos ability to continue as a going concern so that it continues to provide returns for shareholders and benefits for other stakeholders
bull To support the Grouprsquos stability and growth andbull To provide capital for the purpose of strengthening the
Grouprsquos risk management capability
copy 2005-07 Nelson 114
Capital DisclosuresCaseCase
ndash The Group actively and regularly reviews and manages its capital structure to ensure optimal capital structure and shareholder returns taking into consideration the future capital requirements of the Group and capital efficiency helliphellip
ndash The Group adopts a dividend policy helliphellip while retaining 10 per cent of the profit as capital of the Group for future use
ndash The Group has set aside $1500 million of retained earnings for the purpose of strengthening the risk management regime of the clearing houses and supporting their roles as central counterparties
ndash As in prior years the Group monitors capital by reviewing the level of capital that is at the disposal of the Group (ldquoadjusted capitalrdquo) Adjusted capital comprises all components of shareholdersrsquo equity other than the hedging reserve relating to cash flow hedges designated reserves and investment revaluation reserve helliphellip
bull Early adopted capital disclosure in 2005 and itsannual report states that (extract only)
58
copy 2005-07 Nelson 115
Capital Disclosures ndash Transition
bull An entity shall apply the requirements of capital disclosure for
ndash annual periods beginning on or after 1 January 2007
bull Early application is encouraged
copy 2005-07 Nelson 116
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk
59
copy 2005-07 Nelson 117
QampA SessionQampA SessionQampA Session
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk
13
copy 2005-07 Nelson 25
Key Points
IFRSs set outbull Recognitionbull Measurementbull Presentation and
disclosure requirements
Main changesbull Changes in recognition
and measurementbull Changes in presentation
and disclosure
bull Less Choicesbull Towards
Fair Value Model
bullbull Less ChoicesLess Choicesbullbull TowardsTowards
Fair Value ModelFair Value Model
bull More and clearer presentation and disclosure
bullbull More and clearer More and clearer presentation and presentation and disclosuredisclosure
bull Aim at enhancing the information for usersrsquo decision making
bullbull Aim at enhancing Aim at enhancing the information the information for usersrsquo for usersrsquo decision makingdecision making
eg market valuevalue by appraisal helliphellip
Inter alia one more change helliphellip
copy 2005-07 Nelson 26
Todayrsquos Agenda
Presentation of Financial Statements (IAS 1)
Presentation of Financial Statements (IAS 1)
14
copy 2005-07 Nelson 27
Presentation of Financial Statements(IAS 1)
copy 2005-07 Nelson 28
Presentation of Financial Statements (IAS 1)
1 Purpose of financial statements2 Components of financial statements3 Overall considerations4 Structure and content
15
copy 2005-07 Nelson 29
1 Purpose of Financial Statements
bull To provide information aboutndash financial positionndash financial performance
andndash cash flows of an entity
That is useful to a wide range of users in making economic decisions
bull To also show the results of managementrsquos stewardship of the resources entrusted to it
bull To meet this objective financial statements provide information about the entityrsquosndash Assetsndash Liabilitiesndash Equityndash Income and expenses
including gains and lossesndash Other changes in equityndash Cash flows
Thus we have helliphellip
copy 2005-07 Nelson 30
2 Components of Financial Statements
A complete set of financial statements comprisesa) a balance sheetb) an income statementc) a statement of changes in equity showing either
i) all changes in equity orii) changes in equity other than those arising from transactions with
equity holders acting in their capacity as equity holdersd) a cash flow statement ande) notes comprising a summary of significant accounting policies and
other explanatory notes
another nameanother name
16
copy 2005-07 Nelson 31
3 Overall Consideration
a) Fair presentation and compliance with IFRSsb) Going concernc) Accrual basis of accountingd) Consistency of presentatione) Materiality and aggregationf) Offsettingg) Comparative information
copy 2005-07 Nelson 32
3 Overall Consideration
bull Financial statements shall present fairly of the financial position financial performance and cash flows of an entity
ndash Fair presentation requires the faithful representation of the effects of transactions other events and conditions in accordance with
bull the definitions and recognition criteria for assets liabilities income and expenses set out in the Framework
ndash The application of IFRSs with additional disclosure when necessary is presumed to result in financial statements that give a true and fair view
a) Fair presentation and compliance with IFRSs
No such precisely statement before
17
copy 2005-07 Nelson 33
3 Overall Consideration
bull Statement of compliancendash An entity whose financial statements comply
with IFRSs shall make an explicit and unreserved statement of such compliance in the notes
ndash Financial statements shall not be described as complying with IFRSsbull unless they comply with all the
requirements of IFRSsndash In virtually all circumstances a fair
presentation is achieved by bull compliance with applicable IFRSs
a) Fair presentation and compliance with IFRSs
copy 2005-07 Nelson 34
3 Overall Consideration
Melco Development Limited (新濠國際發展有限公司)Notes to the financial statements for year ended 31122005ndash The consolidated financial statements have been prepared in
accordance with HKFRSsndash In addition the consolidated financial statements include applicable
disclosures required by the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited and by the Companies Ordinance
CaseCase
18
copy 2005-07 Nelson 35
3 Overall Consideration
bull A fair presentation also requires an entitya) to select and apply accounting policies in accordance
with IAS 8b) to present information including accounting policies
in a manner that provides relevant reliable comparable and understandable information
c) to provide additional disclosuresndash when compliance with the specific requirements in
IFRSs is insufficient to enable users to understand the impact of particular transactions other events and conditions on the entityrsquos financial position and financial performance
bull Inappropriate accounting policies are not rectified eitherndash by disclosure of the accounting policies used orndash by notes or explanatory material
a) Fair presentation and compliance with IFRSs
copy 2005-07 Nelson 36
3 Overall Consideration
bull Departure from Standard or Interpretation (Simplified)ndash In the extremely rare circumstances in which
management concludes thatbull compliance with a requirement in a standard or an
interpretation would be so misleading thatbull it would conflict with the objective of financial
statements set out in the Frameworkthe entity shall depart from that requirement if the relevant regulatory framework requires or otherwise does not prohibit such a departure
a) Fair presentation and compliance with IFRSs
19
copy 2005-07 Nelson 37
3 Overall Consideration
bull Departure from Standard or Interpretation (Simplified)
a) Fair presentation and compliance with IFRSs
ndash Then the following disclosure is requireda) management has concluded that the financial
statements give a true and fair viewb) that it has complied with applicable standards and
interpretations except that it has departed from a particular requirement
c) the title of the standard or interpretation from which the entity has departed the nature of the departure the reason why that treatment would be so misleading and the treatment adopted and
d) for each period presented the financial impact of the departure on each item in the financial statements that would have been reported in complying with the requirement
copy 2005-07 Nelson 38
3 Overall Consideration
Interim Report 2005 clearly stated thatInterim Report 2005 clearly stated that
CaseCase
bull The directors consider it inappropriate for the company to adopt two particular aspects of the newrevised HKFRSs as these would result in the financial statements in the view of the directors eitherbull not reflecting the commercial substance of the business orbull being subject to significant potential short-term volatility as
explained below helliphellip
20
copy 2005-07 Nelson 39
3 Overall ConsiderationCaseCase
bull HKAS 40 ldquoInvestment propertyrdquo requires an assessment of the fair value of investment properties
bull The group intends to follow the same accounting treatment as adopted in 2004 which is to value such investment properties on an annual basis
bull Accordingly the investment properties were not revalued at 30 June 2005 since the directors consider that such change of practice could introduce a significant element of short-term volatility into the income statement in respect of assets which are being held on a long-term basis by the group helliphellip
bull It is not practicable to estimate the financial effect of this non-compliance as no interim valuation of the properties has been conducted
Interim Report 2005 clearly stated thatInterim Report 2005 clearly stated that
At year-end revaluation would still be conductedAt year-end revaluation would still be conducted
copy 2005-07 Nelson 40
3 Overall ConsiderationCaseCase
bull HKAS 12 ldquoIncome Taxesrdquo together with HKAS-INT 21 ldquoIncome Taxes ndashRecovery of Revalued Non-Depreciable Assetsrdquo requires deferred taxation to be recognised on any revaluation movements on investment propertiesbull It is further provided that any such deferred tax liability should be calculated
at the profits tax rate in the case of assets which the management has no definite intention to sell
bull The company has not made such provision in respect of its HK investment properties since the directors consider that such provision would result in the financial statements not reflecting the commercial substance of the businessbull since should any such sale eventuate any gain would be regarded as capital
in nature and would not be subject to any tax in HKbull Should this aspect of HKAS 12 have been adopted deferred tax liabilities
amounting to HK$2008 million on the revaluation surpluses arising from revaluation of HK investment properties would have been provided
(estimate - over 12 of the net assets at 30 June 2005)
Interim Report 2005 clearly stated thatInterim Report 2005 clearly stated that
21
copy 2005-07 Nelson 41
3 Overall Consideration
bull Departure but such departure is prohibitedndash In the extremely rare circumstances in which
management concludes that bull compliance with a requirement in a
standard or an interpretation would be so misleading that
bull it would conflict with the objective of financial statements set out in the Framework
bull but the relevant regulatory framework prohibits departure from the requirement the entity shall to the maximum extent possible reduce the perceived misleading aspects of compliance by disclosing helliphellip
a) Fair presentation and compliance with IFRSs
copy 2005-07 Nelson 42
3 Overall Consideration
ndash by disclosinga) the title of the standard or interpretation in
question the nature of the requirement and the reason why management has concluded that complying with that requirement is so misleading in the circumstances that it conflicts with the objective of financial statements set out in the Framework and
b) for each period presented the adjustments to each item in the financial statements that management has concluded would be necessary to give a fair presentation
a) Fair presentation and compliance with IFRSsbull Departure but such departure is prohibited
22
copy 2005-07 Nelson 43
3 Overall Consideration
bull When assessing whether complying with a specific requirement in a standard or an interpretation would be so misleading that it would conflict with the objective of financial statements set out in the Frameworkndash management considers
a) why the objective of financial statements is not achieved in the particular circumstances and
b) how the entityrsquos circumstances differ from those of other entities that comply with the requirement ndash If other entities in similar circumstances comply with the
requirement raquo there is a rebuttable presumption that the entityrsquos compliance
with the requirement would not be so misleading that it would conflict with the objective of financial statements set out in the Framework
a) Fair presentation and compliance with IFRSs
copy 2005-07 Nelson 44
3 Overall ConsiderationCaseCase
Howrsquos about this Howrsquos about this
However 2005 Final Results Announcementdisclosed that bull provision for deferred tax was finally made
with regard to revaluation of the HK investment properties (total HK$22 billion) at 2005 year-end
However However 2005 Final Results Announcement2005 Final Results Announcementdisclosed that disclosed that bullbull provision for deferred tax was finally made provision for deferred tax was finally made
with regard to revaluation of the HK with regard to revaluation of the HK investment properties (total HK$22 billion) at investment properties (total HK$22 billion) at 2005 year2005 year--endend
23
copy 2005-07 Nelson 45
b) Going Concern
3 Overall Consideration
bull When preparing financial statements management shall make an assessment of an entityrsquos ability to continue as a going concern
bull Financial statements shall be prepared on a going concern basisndash unless management either intends to liquidate the entity or to cease
trading or has no realistic alternative but to do so bull When management is aware in making its assessment of
material uncertainties related to events or conditions that may cast significant doubt upon the entityrsquos ability to continue as a going concern those uncertainties shall be disclosed
bull When financial statements are not prepared on a going concern basis that fact shall be disclosed together with the basis on which the financial statements are prepared and the reason why the entity is not regarded as a going concern
copy 2005-07 Nelson 46
c) Accrual Basis of Accounting
3 Overall Consideration
bull An entity shall prepare its financial statements except for cash flow information using the accrual basis of accounting
bull When the accrual basis of accounting is used items are recognised as assets liabilities equity income and expensesndash when they satisfy the definitions and recognition criteria for those
elements in the Framework
24
copy 2005-07 Nelson 47
3 Overall Consideration
bull The presentation and classification of items in the financial statements shall be retained from one period to the next unlessa) it is apparent
bull following a significant change in the nature of the entityrsquos operations (eg significant acquisition or disposal) or
bull a review of its financial statementsthat another presentation or classification would be more appropriatehaving regard to the criteria for the selection and application of accounting policies in IAS 8 or
b) a IFRS requires a change in presentation
d) Consistency of presentation
An entity changes the presentation of its financial statements only ifndash the changed presentation provides information that is reliable and is
more relevant to users of the financial statements andndash the revised structure is likely to continue so that comparability is not
impaired
An entity changes the presentation of its financial statements only ifndash the changed presentation provides information that is reliable and is
more relevant to users of the financial statements andndash the revised structure is likely to continue so that comparability is not
impaired
copy 2005-07 Nelson 48
3 Overall Consideration
bull Each material class of similar items shall bendash presented separately in the financial
statementsbull Items of a dissimilar nature or function shall be
ndash presented separately unless they are immaterial
bull Applying the concept of materiality means that a specific disclosure requirement in a IFRS neednot be satisfied if the information is not material
e) Materiality and Aggregation
What is the situation of recognition and measurement
What is the What is the situation of situation of recognition and recognition and measurementmeasurement
25
copy 2005-07 Nelson 49
3 Overall Consideration
bull What is materialndash Omissions or misstatements of items are
material if they could individually or collectively influence the economic decisions of users taken on the basis of the financial statements
ndash Materiality depends on the size and nature of the omission or misstatement judged in the surrounding circumstancesbull The size or nature of the item or a combination
of both could be the determining factor
e) Materiality and Aggregation
copy 2005-07 Nelson 50
3 Overall Consideration
bull Assets and liabilities and income and expenses shall not be offsetndash unless required or permitted by a IFRS
bull It is important that assets and liabilities and income and expenses are reported separatelyndash Measuring assets net of valuation allowances mdash
for example obsolescence allowances on inventories and doubtful debts allowances on receivables mdash is not offsetting
f) Offsetting
26
copy 2005-07 Nelson 51
3 Overall Consideration
bull During ordinary activities some transactions that do not generate revenue but are incidental to the main revenue-generating activitiesndash The results of such transactions are presented
when this presentation reflects the substance of the transaction or other event by netting any income with related expenses arising on the same transaction
f) Offsetting
copy 2005-07 Nelson 52
3 Overall Consideration
bull For examplea) gains and losses on the disposal of non-current
assets including investments and operating assets- are reported by deducting from the proceeds on
disposal the carrying amount of the asset and related selling expenses and
b) expenditure related to a provision that is- recognised in accordance with IAS 37 and - reimbursed under a contractual arrangement with
a third party (for example a supplierrsquos warranty agreement)
may be netted against the related reimbursement
f) Offsetting
ExampleExample
27
copy 2005-07 Nelson 53
3 Overall Consideration
bull Gains and losses arising from a group of similar transactions are reported on a net basisndash For example
bull foreign exchange gains and losses or bull gains and losses arising on financial instruments held for trading
bull Such gains and losses are however reported separately if they are material
bull Gains and losses arising from a group of similar transactions are reported on a net basisndash For example
bull foreign exchange gains and losses or bull gains and losses arising on financial instruments held for trading
bull Such gains and losses are however reported separately if they are material
Can foreign exchange gains and losses be offset
ExampleExample
copy 2005-07 Nelson 54
3 Overall Consideration
bull Except when a IFRS permits or requires otherwise ndash comparative information shall be disclosed in
respect of the previous period for all amountsreported in the financial statements
bull When the presentation or classification of items in the financial statements is amended ndash comparative amounts shall be reclassified unless
the reclassification is impracticable
g) Comparative information
28
copy 2005-07 Nelson 55
Amended requirementsAmended requirements
3 Overall Consideration
bull When comparative amounts are reclassified an entity shall disclosea) the nature of the reclassificationb) the amount of each item or class of items that is
reclassified andc) the reason for the reclassification
g) Comparative information
bull In the pastonly the reason for and a description of the nature of materialreclassifications should be disclosedExemption for disclosure of comparative information for the reconciliation of movements in fixed assets is also removed
bull In the pastonly the reason for and a description of the nature of materialreclassifications should be disclosedExemption for disclosure of comparative information for the reconciliation of movements in fixed assets is also removed
copy 2005-07 Nelson 56
3 Overall Consideration
Melco Development Limited (新濠國際發展有限公司)Notes to the financial statements for year ended 31122005ndash Because HKAS 32 requires retrospective application comparative
figures for 2004 have been restated (see Note 2A for the financial impact)
CaseCase
29
copy 2005-07 Nelson 57
3 Overall Consideration
Galaxy Entertainment Group LimitedNotes to the financial statements (ye 31122005)ndash All changes in the accounting policies require
retrospective application except HKAS 39 and HKFRS 2 for which transitional provisions are applied
ndash As a result the 2004 comparative figures have also been restated or amended in accordance with the relevant requirements
ndash The effects of all the changes in accounting policies are summarised in notes (b) and (c) below
CaseCase
copy 2005-07 Nelson 58
bull Identification of the financial statementsbull Reporting periodbull Balance sheet
1 CurrentNon-current distinction2 Current assets3 Current liabilities4 Information to be presented on the face of the balance sheet5 Information to be presented either on the face of the balance sheet or in
the notesbull Income statement
1 Profit or loss for the period2 Information to be presented on the face of the income statement3 Information to be presented either on the face of the income statement or
in the notesbull Statement of changes in equitybull Cash flow statementbull Notes
4 Structure and Content
30
copy 2005-07 Nelson 59
Identification of Financial Statements
bull The financial statements shall be identified clearly and distinguished from other information in the same published document
bull The following information shall be displayed prominently and repeated when it is necessary for a proper understanding of the information presented
a) the name of the reporting entity or other means of identification and any change in that information from the preceding balance sheet date
b) whether the financial statements cover the individual entity or a group of entities
c) the balance sheet date or the period covered by the financial statements whichever is appropriate to that component of the financial statements
d) the presentation currency as defined in HKAS 21 The Effects of Changes in Foreign Exchange Rates and
e) the level of rounding used in presenting amounts in the financial statements
copy 2005-07 Nelson 60
Identification of Financial Statements
bull Can the units of the presentation currency be rounded to thousands or millions
bull Financial statements are often made more understandableby presenting information in thousands or millions of units of the presentation currency
bull This is acceptable as long asndash the level of rounding in presentation is disclosed and ndash material information is not omitted
bull Financial statements are often made more understandableby presenting information in thousands or millions of units of the presentation currency
bull This is acceptable as long asndash the level of rounding in presentation is disclosed and ndash material information is not omitted
ExampleExample
31
copy 2005-07 Nelson 61
Reporting Period
bull Financial statements shall be presented at least annually
bull When an entityrsquos balance sheet date changes and the annual financial statements are presented for a period longer or shorter than one year an entity shall disclose in addition to the period covered by the financial statementsa) the reason for using a longer or shorter period andb) the fact that comparative amounts for the income
statement statement of changes in equity cash flow statement and related notes are not entirely comparable
copy 2005-07 Nelson 62
Reporting Period
bull Can a set of financial statements cover 52-week instead of a year
bull Normally financial statements are consistently prepared covering a one-year period
bull However for practical reasons some entities prefer to report for example for a 52-week period
bull IAS 1 does not preclude this practice because the resulting financial statements are unlikely to be materially different from those that would be presented for one year
bull Normally financial statements are consistently prepared covering a one-year period
bull However for practical reasons some entities prefer to report for example for a 52-week period
bull IAS 1 does not preclude this practice because the resulting financial statements are unlikely to be materially different from those that would be presented for one year
ExampleExample
32
copy 2005-07 Nelson 63
CurrentNon-current Distinction
bull An entity shall presentndash current and non-current assets andndash current and non-current liabilitiesas separate classifications on the face of its balance sheet
bull Except when a presentation based on liquidity provides informationndash If that information is reliable and is more relevantndash When that exception applies all assets and liabilities shall be
presented broadly in order of liquidity
copy 2005-07 Nelson 64
CurrentNon-current Distinction
bull Whichever method of presentation is adopted for each asset and liability line item that combines amounts expected to be recovered or settled a) no more than 12 months after the balance sheet date
andb) more than 12 months after the balance sheet date(ie combines both current and non-current)
an entity shall disclose the amount expected to be recovered or settled after more than 12 months
33
copy 2005-07 Nelson 65
New requirementsNew requirements
Current Assets
bull An asset shall be classified as current when it satisfies any of the following criteriaa) it is expected to be realised in or is intended for sale or
consumption in the entityrsquos normal operating cycle b) it is held primarily for the purpose of being tradedc) it is expected to be realised within 12 months after the balance
sheet date ord) it is cash or a cash equivalent
bull unless it is restricted from being exchanged or used to settle aliability for at least 12 months after the balance sheet date
bull All other assets shall be classified as non-current
Examplesbull Deposits pledged to bank (how long)bull Fixed deposits over 1 year maturity
Examplesbull Deposits pledged to bank (how long)bull Fixed deposits over 1 year maturity
What is itWhat is it
copy 2005-07 Nelson 66
Current Assets
bull What is operating cycle
bull The operating cycle of an entity is the time between ndash the acquisition of assets for processing and ndash their realisation in cash or cash equivalents
bull When the entityrsquos normal operating cycle is not clearly identifiable ndash its duration is assumed to be 12 months
bull The operating cycle of an entity is the time between ndash the acquisition of assets for processing and ndash their realisation in cash or cash equivalents
bull When the entityrsquos normal operating cycle is not clearly identifiable ndash its duration is assumed to be 12 months
ExampleExample
34
copy 2005-07 Nelson 67
Current Assets CaseCase
copy 2005-07 Nelson 68
Current Assets
bull Can a non-current asset reclassified if it fulfil the definition of current asset later
bull Assets classified as non-current in accordancewith IAS 1 shall not be reclassified as current assetsndash until they meet the criteria to be classified as held for sale in
accordance with IFRS 5bull Assets of a class that an entity would normally regard as non-
current that are acquired exclusively with a view to resale shall notbe classified as currentndash unless they meet the criteria to be classified as held for sale in
accordance with IFRS 5
bull Assets classified as non-current in accordancewith IAS 1 shall not be reclassified as current assetsndash until they meet the criteria to be classified as held for sale in
accordance with IFRS 5bull Assets of a class that an entity would normally regard as non-
current that are acquired exclusively with a view to resale shall notbe classified as currentndash unless they meet the criteria to be classified as held for sale in
accordance with IFRS 5
No non-current assets can be classified as current unless the criteria in IFRS 5 are fulfilled mainlybull Available for immediate salebull Highly probable to make the sale
35
copy 2005-07 Nelson 69
Is it currentIs it current
Current Assets
bull In its 2005 Interim Report full set of HKFRS was adopted and the report set out thatndash Available-for-sale financial assets are non-
derivatives that are eitherbull designated in this category orbull not classified in any of the other categories (ie
loans and receivables financial assets at fair value through profit or loss and held-to-maturity investments)
CaseCase
Similar in 2005 Annual Report
Similar in 2005 Annual Report
ndash They are included in non-current assetsbull unless management intends to dispose of the
investment within 12 months of the balance sheet date
copy 2005-07 Nelson 70
New requirementsNew requirements
Current Liabilities
bull A liability shall be classified as current when it satisfies any of the following criteriaa) it is expected to be settled in the entityrsquos normal operating cycleb) it is held primarily for the purpose of being tradedc) it is due to be settled within 12 months after the balance sheet
date ord) the entity does not have an unconditional right to defer settlement
of the liability for at least 12 months after the balance sheet date
bull All other liabilities shall be classified as non-current
ImplicationImplication
36
copy 2005-07 Nelson 71
Current Liabilities Revised rules on classifying a liability as current or non-currentbull A liability held for being traded rArr currentbull A financial liability due within 12 months after the BS date rArr current
ndash even if an agreement to refinance on a long-term basis is completed after the BS date (only disclosed as non-adjusting event)
bull If an entity has discretion to refinance rArr non-currentbull If an entity without discretion to refinance rArr current
bull A non-current financial liability is payable on demand with a breach on a condition of its loan agreement on or before the BS datendash If the lender agreed not to demand payment
bull after the BS date rArr current (only disclosed as non-adjusting event)
bull by the BS date rArr non-current
ImplicationImplication
copy 2005-07 Nelson 72
Current LiabilitiesCaseCase
Note 12 to Interim Report 2006bull Breach of loan covenants
bull As at 30 June 2006 in respect of certain bank loans with an aggregate carrying amount of HK$1529806000 the Group breached certain financial covenants of the banks loans
bull Since the lenders have not agreed to waive its right to demand immediate payment as at the balance sheet date the loans have been classified as current liabilities in these financial statements at 30 June 2006
37
copy 2005-07 Nelson 73
Current Assets and LiabilitiesExampleExample
Can the following be classified as current assetsbull 3-month fixed deposits pledged to a bank to secure
a mortgage loan of 5 yearsbull 2-year fixed deposits with a bank
Can the following be classified as current assetsbull 3-month fixed deposits pledged to a bank to secure
a mortgage loan of 5 yearsbull 2-year fixed deposits with a bank
Can the following be classified as non-current liabilitiesbull 5-year term loan matured after year end but renewed
for another 5 years after year end (before the issuanceof the financial statements)
bull 2-year term loan to be matured with 12 months and theentity has a right to renew for another 2 years
Can the following be classified as non-current liabilitiesbull 5-year term loan matured after year end but renewed
for another 5 years after year end (before the issuanceof the financial statements)
bull 2-year term loan to be matured with 12 months and theentity has a right to renew for another 2 years
timestimes
times
radic
copy 2005-07 Nelson 74
Balance Sheetbull As a minimum the face of the balance sheet shall
include line items that present the following amountsa) property plant and equipmentb) investment propertyc) intangible assetsd) financial assets (excl amounts shown under (e) (h) and (I))e) investments accounted for using the equity methodf) biological assetsg) inventoriesh) trade and other receivablesi) cash and cash equivalentsj) trade and other payablesk) provisionsl) financial liabilities (excl amounts shown under (j) and (k))m) liabilities and assets for current tax as defined in HKAS 12 Income Taxesn) deferred tax liabilities and deferred tax assets as defined in HKAS 12o) minority interest presented within equity andp) issued capital and reserves attributable to equity holders of the parent
38
copy 2005-07 Nelson 75
Balance Sheetbull The face of the balance sheet shall also include line
items that present the following amountsa) The total of assets classified as held for sale and
assets included in disposal groups classified as held for sale in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations and
b) Liabilities included in disposal groups classified as held for sale in accordance with IFRS 5
copy 2005-07 Nelson 76
Balance Sheetbull Additional line items headings and subtotals shall
be presented on the face of the balance sheet when such presentation is relevant to an understanding of the entityrsquos financial position
bull When an entity presents current and non-current assets and current and non-current liabilities as separate classifications on the face of its balance sheet ndash it shall not classify deferred tax assets
(liabilities) as current assets (liabilities)
39
copy 2005-07 Nelson 77
Balance Sheet
bull The use of different measurement bases for different classes of assets suggests that their nature or function differs and therefore that they should be presented as separate line itemsndash For example different classes of property plant and
equipment can be carried atbull Cost orbull Revalued amountsin accordance with IAS 16 PPE
In the past it use ldquomay needrdquoIn the past it use ldquomay needrdquo
copy 2005-07 Nelson 78
Balance Sheet
Galaxy Entertainment Group LimitedConsolidated balance sheet as at 31122005
CaseCase
40
copy 2005-07 Nelson 79
Balance Sheet
Melco Development Limited (新濠國際發展有限公司)Consolidated balance sheet as at 31122005
CaseCase
copy 2005-07 Nelson 80
Income Statement Minimum requirements on the face of the income statementbull As a minimum the face of the income statement shall include line items
that present the following amounts for the perioda) revenueb) finance costsc) share of the profit or loss of associates and joint ventures accounted
for using the equity methodd) pre-tax gain or loss recognised on the disposal of assets or
settlement of liabilities attributable to discontinuing operationse) tax expense andf) profit or loss
41
copy 2005-07 Nelson 81
Income Statement bull The following items shall be disclosed on the face of the income
statement as allocations of profit or loss for the perioda) Profit or loss attributable to minority interest andb) Profit or loss attributable to equity holders of the parent
A similar requirement has been added for the statement of changes in equity and such allocated amounts are not to be presented as items of income or expense
copy 2005-07 Nelson 82
Income Statement
Melco Dev LtdConsolidated income statementas at 31122005
CaseCase
42
copy 2005-07 Nelson 83
Income Statement bull Not require to disclose the results of operating
activities as a line item on the face of the incomestatement
bull An entity shall not present any items of income and expense as extraordinary items either onthe face of the income statements or in the notes
Entities canrsquot use itEntities canrsquot use it
Entities can still show itEntities can still show it
copy 2005-07 Nelson 84
Income Statement Either on the face of the income statement or in the notesbull An entity shall present an analysis of expenses using a classification
based on eitherbull the nature of expenses orbull their function within the entity
whichever provides information that is reliable and more relevant
bull Entities classifying expenses by function shall disclose additional information on the nature of expenses includingbull depreciation and amortisation expense and bull employee benefits expense
43
copy 2005-07 Nelson 85
Income StatementCaseCase
Nature or FunctionNature or Nature or FunctionFunction
copy 2005-07 Nelson 86
Statement of Changes in Equity bull An entity shall present a statement of changes in equity showing on the
face of the statementa) profit or loss for the period b) each item of income and expense for the period that as required by
IFRSs is recognised directly in equity and the total of these itemsc) total income and expense for the period (calculated as the sum of (a) and
(b)) showing separately the total amounts attributablebull to equity holders of the parent andbull to minority interest and
d) for each component of equity the effects of changes in accounting policies and corrections of errors recognised in accordance with IAS 8
Any ChangeAny Change
A revised requirementbull A statement of changes in equity that comprises only these items
shall be titled a statement of recognised income and expenses
A revised requirementbull A statement of changes in equity that comprises only these items
shall be titled a statement of recognised income and expenses
44
copy 2005-07 Nelson 87
Statement of Changes in Equity bull An entity shall also present either on the face of the
statement of changes in equity or in the notesa) the amounts of transactions with equity holders acting in
their capacity as equity holders showing separately distributions to equity holders
b) the balance of retained earnings (ie accumulated profit or loss) at the beginning of the period and at the balance sheet date and the changes during the period and
c) a reconciliation between the carrying amount of each class of contributed equity and each reserve at the beginning and the end of the period separately disclosing each change
copy 2005-07 Nelson 88
Statement of Changes in Equity
Consolidated SCE as at 31122005
CaseCase
45
copy 2005-07 Nelson 89
Notes Structure (an entity is required to disclose the following)
bull The notes shalla) present information about the basis of preparation of the financial statements
and the specific accounting policies usedb) disclose the information required by HKFRSs that is not presented on the
face of the balance sheet income statement statement of changes in equity or cash flow statement and
c) provide additional information that is not presented on the face of the balance sheet income statement statement of changes in equity or cash flow statement but is relevant to an understanding of any of them
bull Notes shall as far as practicable be presented in a systematic manner bull Each item on the face of the balance sheet income statement statement
of changes in equity and cash flow statement shall be cross-referencedto any related information in the notes
copy 2005-07 Nelson 90
Notes Disclosures (an entity is required to disclose the following)
bull Disclosure of accounting policiesAn entity shall disclose in the summary of significant accounting policiesa) the measurement basis (or bases) used in preparing the financial
statements andb) the other accounting policies used that are relevant to an understanding of
the financial statements
46
copy 2005-07 Nelson 91
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)ndash The financial statements have been prepared in
accordance with Hong Kong Financial Reporting Standards (lsquolsquoHKFRSrsquorsquo) issued by the Hong Kong Institute of Certified Public Accountants bull under the historical cost convention as modified by the
revaluation of investment properties available-for-sale financial assets derivative financial instruments and other investments which are carried at fair values helliphellip
ndash The principal accounting policies applied in the preparation of these financial statements are set out below These policies have been consistently applied to all the years presented except for those stated in note 2(a) above
copy 2005-07 Nelson 92
Notes Disclosures (an entity is required to disclose the following)
bull Disclosure of accounting policiesndash The judgements apart from those involving estimations management has
madebull in the process of applying the entityrsquos accounting policies that have the
most significant effect on the amounts recognised in the financial statements (in the summary of significant accounting policies or other notes)
Examples ndash Management makes judgements in determininga) whether financial assets are held-to-maturity investmentsb) when substantially all the significant risks and rewards of
ownership of financial assets and lease assets are transferred to other entities
c) whether in substance particular sales of goods are financing arrangements and therefore do not give rise to revenue and
d) whether the substance of the relationship between the entity and a special purpose entity indicates that the special purpose entity is controlled by the entity
Examples ndash Management makes judgements in determininga) whether financial assets are held-to-maturity investmentsb) when substantially all the significant risks and rewards of
ownership of financial assets and lease assets are transferred to other entities
c) whether in substance particular sales of goods are financing arrangements and therefore do not give rise to revenue and
d) whether the substance of the relationship between the entity and a special purpose entity indicates that the special purpose entity is controlled by the entity
47
copy 2005-07 Nelson 93
Notes Disclosures (an entity is required to disclose the following)
bull Key sources of estimation uncertaintyndash Information about the key assumptions concerning the future and
other key sources of estimation uncertainty at the balance sheet datebull that have a significant risk of causing a material adjustment to the
carrying amounts of assets and liabilities within the next financial yearndash In respect of those assets and liabilities the notes shall include details of
a) their nature andb) their carrying amount as at the balance sheet date
Examples ndash in the absence of recently observed market prices used to measure the following assets and liabilities future-oriented estimates are necessary to measurebull the recoverable amount of classes of PPEbull the effect of technological obsolescence on inventories
Estimates involve assumptions about such items asbull the risk adjustment to cash flows or discount rates usedbull future changes in salaries and in prices affecting other costs
Examples ndash in the absence of recently observed market prices used to measure the following assets and liabilities future-oriented estimates are necessary to measurebull the recoverable amount of classes of PPEbull the effect of technological obsolescence on inventories
Estimates involve assumptions about such items asbull the risk adjustment to cash flows or discount rates usedbull future changes in salaries and in prices affecting other costs
copy 2005-07 Nelson 94
Notes
Esprit Holdings LimitedEsprit Holdings Limitedbull Critical Accounting Estimates and Judgements
ndash Estimates and judgements are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonableunder the circumstances
ndash Critical accounting estimates and assumptionsbull The Group makes estimates and assumptions concerning
the future The resulting accounting estimates will by definition seldom equal the related actual results
bull The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below helliphellip (including (1) useful life and impairment of trademarks and (2) income taxes)
CaseCase
48
copy 2005-07 Nelson 95
Notes
Melco Development Limited (新濠國際發展有限公司)Notes to the financial statements for the year ended 31122005ndash The key assumptions concerning the future and other key sources
of estimation uncertainty at the balance sheet date that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below helliphellip(The issues discussed includebull Allowances for inventories bull Estimated impairment of goodwill Income taxes)
CaseCase
copy 2005-07 Nelson 96
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)ndash Estimates and judgements used in preparing the
financial statements are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonable under the circumstances
ndash The Group makes estimates and assumptionsconcerning the future
ndash The resulting accounting estimates will by definition seldom equal the related actual results
ndash The estimates and assumptions that have a significant effect on the carrying amounts of assets and liabilities are discussed below hellip (including impairment of goodwill impairment of gaming
licence Useful lives of property plant and equipment fair value of investment properties hellip)
49
copy 2005-07 Nelson 97
Notes Disclosures (an entity is required to disclose the following)
bull Other disclosuresAn entity shall disclose in the notesa) the amount of dividends proposed or declared before the
financial statements were authorised for issue but not recognised as a distribution to equity holders during the period and the related amount per share(HK incorporated companies are required to show the aggregate amount which is recommended for distribution by way of dividend under a separate heading(s) in their balance sheet (HK Co Ord 10th Sch para 9(1)(e)) and
b) the amount of any cumulative preference dividends not recognised
copy 2005-07 Nelson 98
Notes Disclosures (an entity is required to disclose the following)
An entity shall disclose the following if not disclosedelsewhere in information published with the financial statementsa) the domicile and legal form of the entity
its country of incorporation andthe address of its registered office(or principal place of business if different from the registered office)
b) a description of the nature of the entityrsquos operations and its principal activities and
c) the name of the parent and the ultimate parent of the group
ldquoshall discloserdquo now instead of ldquoencouraged to discloserdquo
ldquoshall discloserdquo now instead of ldquoencouraged to discloserdquo
bull Other disclosures
Any specialAny special
50
copy 2005-07 Nelson 99
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)bull The principal activities of Galaxy Entertainment Group
Ltd (the lsquolsquoCompanyrsquorsquo) (formerly known as K WahConstruction Materials Ltd) and its subsidiaries (together the lsquolsquoGrouprsquorsquo) are tondash operate in casino games of chance or games of other forms
in Macau (and) manufacture sale and distribution of construction materials in HK Macau and Mainland China
bull The Company is ndash a limited liability company incorporated in Hong Kong and ndash has its listing on the Main Board of The Stock Exchange of
Hong Kong Limitedbull The address of its registered office and its principal place
of business is Room 1606 16th Floor Hutchison House 10 Harcourt Road Central HK
copy 2005-07 Nelson 100
Effective Date
bull An entity shall apply IAS 1 for annual periods beginning on or after 1 Jan 2005
ndash Earlier application is encouragedndash If an entity applies IAS 1 for an earlier period it shall
disclose this factbull For the amendments relating to the Statement of
Changes in Equityndash An entity shall apply it for annual periods beginning on
or after 1 Jan 2006ndash If an entity applies the amendments to IAS 19
Employee Benefits ndash Actuarial Gains and Losses Group Plans and Disclosures for an earlier period that amendment shall be applied for that earlier period
51
copy 2005-07 Nelson 101
Todayrsquos Agenda
Capital Disclosures (Amendments to IAS 1)
Capital Disclosures (Amendments to IAS 1)
copy 2005-07 Nelson 102
Capital Disclosures ndash For 2007
52
copy 2005-07 Nelson 103
Capital Disclosures
What is capital Is it helliphellip
CapitalCapital AssetsAssets LiabilitiesLiabilities= ndash
bull IAS 1BC47 considers ldquowhether an entity can have a view of capital that differs from what IFRSs define as equityrdquo
bull It further clarifies that although for the purposes of this disclosure capital would often equate with equity as defined in IFRSsndash it might also include or exclude some components
bull It also noted that the capital disclosure in IAS 1 is intended to give entities the opportunity to describendash how they view the components of capital they manage if this is
different from what IFRSs define as equity helliphellip
copy 2005-07 Nelson 104
EquityEquityEquity AssetsAssets LiabilitiesLiabilities= ndash
Capital Disclosures
Based on the Framework amp IFRSs the accounting equation should be
CapitalCapital AssetsAssets LiabilitiesLiabilities= ndash
bull An entityrsquos capital may be part of its equity plus part of its liabilities depending on how it manage ldquoits capitalrdquo helliphellip
53
copy 2005-07 Nelson 105
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowinga) qualitative information about its objectives policies and processes for
managing capital including (but not limited to)i) a description of what it manages as capitalii) when an entity is subject to externally imposed capital requirements
the nature of those requirements and how those requirements are incorporated into the management of capital and
iii) how it is meeting its objectives for managing capital
bull To comply with the capital disclosures the entity discloses thefollowinga) qualitative information about its objectives policies and processes for
managing capital including (but not limited to)i) a description of what it manages as capitalii) when an entity is subject to externally imposed capital requirements
the nature of those requirements and how those requirements are incorporated into the management of capital and
iii) how it is meeting its objectives for managing capital
copy 2005-07 Nelson 106
Capital Disclosures
Example disclosurebull The Grouprsquos objectives when managing capital are
ndash to safeguard the entityrsquos ability to continue as a going concern
bull so that it can continue to provide returns for shareholders and benefits for other stakeholders and
ndash to provide an adequate return to shareholders by pricing products and services commensurately with the level of risk
bull The Group sets the amount of capital in proportion to risk
ExampleExample
ObjectivesObjectives
54
copy 2005-07 Nelson 107
Capital Disclosures
bull The Group manages the capital structure and makes adjustments to it in the light ofndash changes in economic conditions and ndash the risk characteristics of the underlying assets
bull In order to maintain or adjust the capital structure the Group mayndash adjust the amount of dividends paid to shareholders ndash return capital to shareholders ndash issue new shares or ndash sell assets to reduce debt
ExampleExample
Example disclosure
HowHow
copy 2005-07 Nelson 108
Capital Disclosures
bull Consistently with others in the industry the Group monitors capital on the basis of ndash the debt-to-adjusted capital ratio
bull This ratio is calculated as net debt divide adjusted capital
ExampleExample
Example disclosure
HowHow
bull Net debt is calculated as ndash Total debt (as shown in the
balance sheet)ndash Less cash amp cash equivalents
bull Net debt is calculated as ndash Total debt (as shown in the
balance sheet)ndash Less cash amp cash equivalents
bull Adjusted capital ndash comprises all components of
equity (ie share capital share premium minority interest retained earnings and revaluation reserve) ndash other than amounts
recognised in equity relating to cash flow hedges and
ndash includes some forms of subordinated debt
bull Adjusted capital ndash comprises all components of
equity (ie share capital share premium minority interest retained earnings and revaluation reserve) ndash other than amounts
recognised in equity relating to cash flow hedges and
ndash includes some forms of subordinated debt
55
copy 2005-07 Nelson 109
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowing
bull To comply with the capital disclosures the entity discloses thefollowingb) summary quantitative data about what it manages as capital
Some entities regard some financial liabilities (eg some forms of subordinated debt) as part of capitalOther entities regard capital as excluding some components of equity (eg components arising from cash flow hedges)
c) any changes in (a) and (b) from the previous period
copy 2005-07 Nelson 110
Capital Disclosures
Example disclosure (continued from previous example)
ExampleExample
bull During 20X4 the Grouprsquos strategy which was unchanged from 20X3 was to maintain the debt-to-adjusted capital ratio at the lower end of the range 61 to 71 in order to secure access to finance at a reasonable cost by maintaining a BB credit rating The debt-to-adjusted capital ratios at 31 December 20X4 and at 31 December 20X3 were as follows
3112X4 ($rsquoM) 3112X3 ($rsquoM) Total debt 1000 1100 Less cash and cash equivalents (90) (150)Net debt 910 950
Total equity 110 105 Add subordinated debt instruments 38 38 Less amounts recognised in equity
relating to cash flow hedges (10) (5)Adjusted capital 138 138
Debt-to-adjusted capital ratio 66 69
56
copy 2005-07 Nelson 111
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowing
bull To comply with the capital disclosures the entity discloses thefollowingd) whether during the period it complied with any externally imposed capital
requirements to which it is subjecte) when the entity has not complied with such externally imposed capital
requirements the consequences of such non-complianceThese disclosures shall be based on the information provided internally to the entityrsquos key management personnel
copy 2005-07 Nelson 112
Capital DisclosuresExampleExample
Example disclosurebull Entity A filed its quarterly regulatory capital return for
30 September 20X7 on 20 October 20X7 bull At that date Entity Arsquos regulatory capital was below
the capital requirement imposed by Regulator B by $1 million
bull As a result Entity A was required to submit a plan to the regulator indicating how it would increase its regulatory capital to the amount required
bull Entity A submitted a plan that entailed selling part of its unquoted equities portfolio with a carrying amount of $115 million in the fourth quarter of 20X7
bull In the fourth quarter of 20X7 Entity A sold its fixed interest investment portfolio for $126 million and met its regulatory capital requirement
For example SFC or banks
For example SFC or banks
57
copy 2005-07 Nelson 113
Capital DisclosuresCaseCase
bull Early adopted capital disclosure in 2005 and itsannual report states that (extract only)ndash The Grouprsquos objectives when managing capital are
bull To safeguard the Grouprsquos ability to continue as a going concern so that it continues to provide returns for shareholders and benefits for other stakeholders
bull To support the Grouprsquos stability and growth andbull To provide capital for the purpose of strengthening the
Grouprsquos risk management capability
copy 2005-07 Nelson 114
Capital DisclosuresCaseCase
ndash The Group actively and regularly reviews and manages its capital structure to ensure optimal capital structure and shareholder returns taking into consideration the future capital requirements of the Group and capital efficiency helliphellip
ndash The Group adopts a dividend policy helliphellip while retaining 10 per cent of the profit as capital of the Group for future use
ndash The Group has set aside $1500 million of retained earnings for the purpose of strengthening the risk management regime of the clearing houses and supporting their roles as central counterparties
ndash As in prior years the Group monitors capital by reviewing the level of capital that is at the disposal of the Group (ldquoadjusted capitalrdquo) Adjusted capital comprises all components of shareholdersrsquo equity other than the hedging reserve relating to cash flow hedges designated reserves and investment revaluation reserve helliphellip
bull Early adopted capital disclosure in 2005 and itsannual report states that (extract only)
58
copy 2005-07 Nelson 115
Capital Disclosures ndash Transition
bull An entity shall apply the requirements of capital disclosure for
ndash annual periods beginning on or after 1 January 2007
bull Early application is encouraged
copy 2005-07 Nelson 116
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk
59
copy 2005-07 Nelson 117
QampA SessionQampA SessionQampA Session
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk
14
copy 2005-07 Nelson 27
Presentation of Financial Statements(IAS 1)
copy 2005-07 Nelson 28
Presentation of Financial Statements (IAS 1)
1 Purpose of financial statements2 Components of financial statements3 Overall considerations4 Structure and content
15
copy 2005-07 Nelson 29
1 Purpose of Financial Statements
bull To provide information aboutndash financial positionndash financial performance
andndash cash flows of an entity
That is useful to a wide range of users in making economic decisions
bull To also show the results of managementrsquos stewardship of the resources entrusted to it
bull To meet this objective financial statements provide information about the entityrsquosndash Assetsndash Liabilitiesndash Equityndash Income and expenses
including gains and lossesndash Other changes in equityndash Cash flows
Thus we have helliphellip
copy 2005-07 Nelson 30
2 Components of Financial Statements
A complete set of financial statements comprisesa) a balance sheetb) an income statementc) a statement of changes in equity showing either
i) all changes in equity orii) changes in equity other than those arising from transactions with
equity holders acting in their capacity as equity holdersd) a cash flow statement ande) notes comprising a summary of significant accounting policies and
other explanatory notes
another nameanother name
16
copy 2005-07 Nelson 31
3 Overall Consideration
a) Fair presentation and compliance with IFRSsb) Going concernc) Accrual basis of accountingd) Consistency of presentatione) Materiality and aggregationf) Offsettingg) Comparative information
copy 2005-07 Nelson 32
3 Overall Consideration
bull Financial statements shall present fairly of the financial position financial performance and cash flows of an entity
ndash Fair presentation requires the faithful representation of the effects of transactions other events and conditions in accordance with
bull the definitions and recognition criteria for assets liabilities income and expenses set out in the Framework
ndash The application of IFRSs with additional disclosure when necessary is presumed to result in financial statements that give a true and fair view
a) Fair presentation and compliance with IFRSs
No such precisely statement before
17
copy 2005-07 Nelson 33
3 Overall Consideration
bull Statement of compliancendash An entity whose financial statements comply
with IFRSs shall make an explicit and unreserved statement of such compliance in the notes
ndash Financial statements shall not be described as complying with IFRSsbull unless they comply with all the
requirements of IFRSsndash In virtually all circumstances a fair
presentation is achieved by bull compliance with applicable IFRSs
a) Fair presentation and compliance with IFRSs
copy 2005-07 Nelson 34
3 Overall Consideration
Melco Development Limited (新濠國際發展有限公司)Notes to the financial statements for year ended 31122005ndash The consolidated financial statements have been prepared in
accordance with HKFRSsndash In addition the consolidated financial statements include applicable
disclosures required by the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited and by the Companies Ordinance
CaseCase
18
copy 2005-07 Nelson 35
3 Overall Consideration
bull A fair presentation also requires an entitya) to select and apply accounting policies in accordance
with IAS 8b) to present information including accounting policies
in a manner that provides relevant reliable comparable and understandable information
c) to provide additional disclosuresndash when compliance with the specific requirements in
IFRSs is insufficient to enable users to understand the impact of particular transactions other events and conditions on the entityrsquos financial position and financial performance
bull Inappropriate accounting policies are not rectified eitherndash by disclosure of the accounting policies used orndash by notes or explanatory material
a) Fair presentation and compliance with IFRSs
copy 2005-07 Nelson 36
3 Overall Consideration
bull Departure from Standard or Interpretation (Simplified)ndash In the extremely rare circumstances in which
management concludes thatbull compliance with a requirement in a standard or an
interpretation would be so misleading thatbull it would conflict with the objective of financial
statements set out in the Frameworkthe entity shall depart from that requirement if the relevant regulatory framework requires or otherwise does not prohibit such a departure
a) Fair presentation and compliance with IFRSs
19
copy 2005-07 Nelson 37
3 Overall Consideration
bull Departure from Standard or Interpretation (Simplified)
a) Fair presentation and compliance with IFRSs
ndash Then the following disclosure is requireda) management has concluded that the financial
statements give a true and fair viewb) that it has complied with applicable standards and
interpretations except that it has departed from a particular requirement
c) the title of the standard or interpretation from which the entity has departed the nature of the departure the reason why that treatment would be so misleading and the treatment adopted and
d) for each period presented the financial impact of the departure on each item in the financial statements that would have been reported in complying with the requirement
copy 2005-07 Nelson 38
3 Overall Consideration
Interim Report 2005 clearly stated thatInterim Report 2005 clearly stated that
CaseCase
bull The directors consider it inappropriate for the company to adopt two particular aspects of the newrevised HKFRSs as these would result in the financial statements in the view of the directors eitherbull not reflecting the commercial substance of the business orbull being subject to significant potential short-term volatility as
explained below helliphellip
20
copy 2005-07 Nelson 39
3 Overall ConsiderationCaseCase
bull HKAS 40 ldquoInvestment propertyrdquo requires an assessment of the fair value of investment properties
bull The group intends to follow the same accounting treatment as adopted in 2004 which is to value such investment properties on an annual basis
bull Accordingly the investment properties were not revalued at 30 June 2005 since the directors consider that such change of practice could introduce a significant element of short-term volatility into the income statement in respect of assets which are being held on a long-term basis by the group helliphellip
bull It is not practicable to estimate the financial effect of this non-compliance as no interim valuation of the properties has been conducted
Interim Report 2005 clearly stated thatInterim Report 2005 clearly stated that
At year-end revaluation would still be conductedAt year-end revaluation would still be conducted
copy 2005-07 Nelson 40
3 Overall ConsiderationCaseCase
bull HKAS 12 ldquoIncome Taxesrdquo together with HKAS-INT 21 ldquoIncome Taxes ndashRecovery of Revalued Non-Depreciable Assetsrdquo requires deferred taxation to be recognised on any revaluation movements on investment propertiesbull It is further provided that any such deferred tax liability should be calculated
at the profits tax rate in the case of assets which the management has no definite intention to sell
bull The company has not made such provision in respect of its HK investment properties since the directors consider that such provision would result in the financial statements not reflecting the commercial substance of the businessbull since should any such sale eventuate any gain would be regarded as capital
in nature and would not be subject to any tax in HKbull Should this aspect of HKAS 12 have been adopted deferred tax liabilities
amounting to HK$2008 million on the revaluation surpluses arising from revaluation of HK investment properties would have been provided
(estimate - over 12 of the net assets at 30 June 2005)
Interim Report 2005 clearly stated thatInterim Report 2005 clearly stated that
21
copy 2005-07 Nelson 41
3 Overall Consideration
bull Departure but such departure is prohibitedndash In the extremely rare circumstances in which
management concludes that bull compliance with a requirement in a
standard or an interpretation would be so misleading that
bull it would conflict with the objective of financial statements set out in the Framework
bull but the relevant regulatory framework prohibits departure from the requirement the entity shall to the maximum extent possible reduce the perceived misleading aspects of compliance by disclosing helliphellip
a) Fair presentation and compliance with IFRSs
copy 2005-07 Nelson 42
3 Overall Consideration
ndash by disclosinga) the title of the standard or interpretation in
question the nature of the requirement and the reason why management has concluded that complying with that requirement is so misleading in the circumstances that it conflicts with the objective of financial statements set out in the Framework and
b) for each period presented the adjustments to each item in the financial statements that management has concluded would be necessary to give a fair presentation
a) Fair presentation and compliance with IFRSsbull Departure but such departure is prohibited
22
copy 2005-07 Nelson 43
3 Overall Consideration
bull When assessing whether complying with a specific requirement in a standard or an interpretation would be so misleading that it would conflict with the objective of financial statements set out in the Frameworkndash management considers
a) why the objective of financial statements is not achieved in the particular circumstances and
b) how the entityrsquos circumstances differ from those of other entities that comply with the requirement ndash If other entities in similar circumstances comply with the
requirement raquo there is a rebuttable presumption that the entityrsquos compliance
with the requirement would not be so misleading that it would conflict with the objective of financial statements set out in the Framework
a) Fair presentation and compliance with IFRSs
copy 2005-07 Nelson 44
3 Overall ConsiderationCaseCase
Howrsquos about this Howrsquos about this
However 2005 Final Results Announcementdisclosed that bull provision for deferred tax was finally made
with regard to revaluation of the HK investment properties (total HK$22 billion) at 2005 year-end
However However 2005 Final Results Announcement2005 Final Results Announcementdisclosed that disclosed that bullbull provision for deferred tax was finally made provision for deferred tax was finally made
with regard to revaluation of the HK with regard to revaluation of the HK investment properties (total HK$22 billion) at investment properties (total HK$22 billion) at 2005 year2005 year--endend
23
copy 2005-07 Nelson 45
b) Going Concern
3 Overall Consideration
bull When preparing financial statements management shall make an assessment of an entityrsquos ability to continue as a going concern
bull Financial statements shall be prepared on a going concern basisndash unless management either intends to liquidate the entity or to cease
trading or has no realistic alternative but to do so bull When management is aware in making its assessment of
material uncertainties related to events or conditions that may cast significant doubt upon the entityrsquos ability to continue as a going concern those uncertainties shall be disclosed
bull When financial statements are not prepared on a going concern basis that fact shall be disclosed together with the basis on which the financial statements are prepared and the reason why the entity is not regarded as a going concern
copy 2005-07 Nelson 46
c) Accrual Basis of Accounting
3 Overall Consideration
bull An entity shall prepare its financial statements except for cash flow information using the accrual basis of accounting
bull When the accrual basis of accounting is used items are recognised as assets liabilities equity income and expensesndash when they satisfy the definitions and recognition criteria for those
elements in the Framework
24
copy 2005-07 Nelson 47
3 Overall Consideration
bull The presentation and classification of items in the financial statements shall be retained from one period to the next unlessa) it is apparent
bull following a significant change in the nature of the entityrsquos operations (eg significant acquisition or disposal) or
bull a review of its financial statementsthat another presentation or classification would be more appropriatehaving regard to the criteria for the selection and application of accounting policies in IAS 8 or
b) a IFRS requires a change in presentation
d) Consistency of presentation
An entity changes the presentation of its financial statements only ifndash the changed presentation provides information that is reliable and is
more relevant to users of the financial statements andndash the revised structure is likely to continue so that comparability is not
impaired
An entity changes the presentation of its financial statements only ifndash the changed presentation provides information that is reliable and is
more relevant to users of the financial statements andndash the revised structure is likely to continue so that comparability is not
impaired
copy 2005-07 Nelson 48
3 Overall Consideration
bull Each material class of similar items shall bendash presented separately in the financial
statementsbull Items of a dissimilar nature or function shall be
ndash presented separately unless they are immaterial
bull Applying the concept of materiality means that a specific disclosure requirement in a IFRS neednot be satisfied if the information is not material
e) Materiality and Aggregation
What is the situation of recognition and measurement
What is the What is the situation of situation of recognition and recognition and measurementmeasurement
25
copy 2005-07 Nelson 49
3 Overall Consideration
bull What is materialndash Omissions or misstatements of items are
material if they could individually or collectively influence the economic decisions of users taken on the basis of the financial statements
ndash Materiality depends on the size and nature of the omission or misstatement judged in the surrounding circumstancesbull The size or nature of the item or a combination
of both could be the determining factor
e) Materiality and Aggregation
copy 2005-07 Nelson 50
3 Overall Consideration
bull Assets and liabilities and income and expenses shall not be offsetndash unless required or permitted by a IFRS
bull It is important that assets and liabilities and income and expenses are reported separatelyndash Measuring assets net of valuation allowances mdash
for example obsolescence allowances on inventories and doubtful debts allowances on receivables mdash is not offsetting
f) Offsetting
26
copy 2005-07 Nelson 51
3 Overall Consideration
bull During ordinary activities some transactions that do not generate revenue but are incidental to the main revenue-generating activitiesndash The results of such transactions are presented
when this presentation reflects the substance of the transaction or other event by netting any income with related expenses arising on the same transaction
f) Offsetting
copy 2005-07 Nelson 52
3 Overall Consideration
bull For examplea) gains and losses on the disposal of non-current
assets including investments and operating assets- are reported by deducting from the proceeds on
disposal the carrying amount of the asset and related selling expenses and
b) expenditure related to a provision that is- recognised in accordance with IAS 37 and - reimbursed under a contractual arrangement with
a third party (for example a supplierrsquos warranty agreement)
may be netted against the related reimbursement
f) Offsetting
ExampleExample
27
copy 2005-07 Nelson 53
3 Overall Consideration
bull Gains and losses arising from a group of similar transactions are reported on a net basisndash For example
bull foreign exchange gains and losses or bull gains and losses arising on financial instruments held for trading
bull Such gains and losses are however reported separately if they are material
bull Gains and losses arising from a group of similar transactions are reported on a net basisndash For example
bull foreign exchange gains and losses or bull gains and losses arising on financial instruments held for trading
bull Such gains and losses are however reported separately if they are material
Can foreign exchange gains and losses be offset
ExampleExample
copy 2005-07 Nelson 54
3 Overall Consideration
bull Except when a IFRS permits or requires otherwise ndash comparative information shall be disclosed in
respect of the previous period for all amountsreported in the financial statements
bull When the presentation or classification of items in the financial statements is amended ndash comparative amounts shall be reclassified unless
the reclassification is impracticable
g) Comparative information
28
copy 2005-07 Nelson 55
Amended requirementsAmended requirements
3 Overall Consideration
bull When comparative amounts are reclassified an entity shall disclosea) the nature of the reclassificationb) the amount of each item or class of items that is
reclassified andc) the reason for the reclassification
g) Comparative information
bull In the pastonly the reason for and a description of the nature of materialreclassifications should be disclosedExemption for disclosure of comparative information for the reconciliation of movements in fixed assets is also removed
bull In the pastonly the reason for and a description of the nature of materialreclassifications should be disclosedExemption for disclosure of comparative information for the reconciliation of movements in fixed assets is also removed
copy 2005-07 Nelson 56
3 Overall Consideration
Melco Development Limited (新濠國際發展有限公司)Notes to the financial statements for year ended 31122005ndash Because HKAS 32 requires retrospective application comparative
figures for 2004 have been restated (see Note 2A for the financial impact)
CaseCase
29
copy 2005-07 Nelson 57
3 Overall Consideration
Galaxy Entertainment Group LimitedNotes to the financial statements (ye 31122005)ndash All changes in the accounting policies require
retrospective application except HKAS 39 and HKFRS 2 for which transitional provisions are applied
ndash As a result the 2004 comparative figures have also been restated or amended in accordance with the relevant requirements
ndash The effects of all the changes in accounting policies are summarised in notes (b) and (c) below
CaseCase
copy 2005-07 Nelson 58
bull Identification of the financial statementsbull Reporting periodbull Balance sheet
1 CurrentNon-current distinction2 Current assets3 Current liabilities4 Information to be presented on the face of the balance sheet5 Information to be presented either on the face of the balance sheet or in
the notesbull Income statement
1 Profit or loss for the period2 Information to be presented on the face of the income statement3 Information to be presented either on the face of the income statement or
in the notesbull Statement of changes in equitybull Cash flow statementbull Notes
4 Structure and Content
30
copy 2005-07 Nelson 59
Identification of Financial Statements
bull The financial statements shall be identified clearly and distinguished from other information in the same published document
bull The following information shall be displayed prominently and repeated when it is necessary for a proper understanding of the information presented
a) the name of the reporting entity or other means of identification and any change in that information from the preceding balance sheet date
b) whether the financial statements cover the individual entity or a group of entities
c) the balance sheet date or the period covered by the financial statements whichever is appropriate to that component of the financial statements
d) the presentation currency as defined in HKAS 21 The Effects of Changes in Foreign Exchange Rates and
e) the level of rounding used in presenting amounts in the financial statements
copy 2005-07 Nelson 60
Identification of Financial Statements
bull Can the units of the presentation currency be rounded to thousands or millions
bull Financial statements are often made more understandableby presenting information in thousands or millions of units of the presentation currency
bull This is acceptable as long asndash the level of rounding in presentation is disclosed and ndash material information is not omitted
bull Financial statements are often made more understandableby presenting information in thousands or millions of units of the presentation currency
bull This is acceptable as long asndash the level of rounding in presentation is disclosed and ndash material information is not omitted
ExampleExample
31
copy 2005-07 Nelson 61
Reporting Period
bull Financial statements shall be presented at least annually
bull When an entityrsquos balance sheet date changes and the annual financial statements are presented for a period longer or shorter than one year an entity shall disclose in addition to the period covered by the financial statementsa) the reason for using a longer or shorter period andb) the fact that comparative amounts for the income
statement statement of changes in equity cash flow statement and related notes are not entirely comparable
copy 2005-07 Nelson 62
Reporting Period
bull Can a set of financial statements cover 52-week instead of a year
bull Normally financial statements are consistently prepared covering a one-year period
bull However for practical reasons some entities prefer to report for example for a 52-week period
bull IAS 1 does not preclude this practice because the resulting financial statements are unlikely to be materially different from those that would be presented for one year
bull Normally financial statements are consistently prepared covering a one-year period
bull However for practical reasons some entities prefer to report for example for a 52-week period
bull IAS 1 does not preclude this practice because the resulting financial statements are unlikely to be materially different from those that would be presented for one year
ExampleExample
32
copy 2005-07 Nelson 63
CurrentNon-current Distinction
bull An entity shall presentndash current and non-current assets andndash current and non-current liabilitiesas separate classifications on the face of its balance sheet
bull Except when a presentation based on liquidity provides informationndash If that information is reliable and is more relevantndash When that exception applies all assets and liabilities shall be
presented broadly in order of liquidity
copy 2005-07 Nelson 64
CurrentNon-current Distinction
bull Whichever method of presentation is adopted for each asset and liability line item that combines amounts expected to be recovered or settled a) no more than 12 months after the balance sheet date
andb) more than 12 months after the balance sheet date(ie combines both current and non-current)
an entity shall disclose the amount expected to be recovered or settled after more than 12 months
33
copy 2005-07 Nelson 65
New requirementsNew requirements
Current Assets
bull An asset shall be classified as current when it satisfies any of the following criteriaa) it is expected to be realised in or is intended for sale or
consumption in the entityrsquos normal operating cycle b) it is held primarily for the purpose of being tradedc) it is expected to be realised within 12 months after the balance
sheet date ord) it is cash or a cash equivalent
bull unless it is restricted from being exchanged or used to settle aliability for at least 12 months after the balance sheet date
bull All other assets shall be classified as non-current
Examplesbull Deposits pledged to bank (how long)bull Fixed deposits over 1 year maturity
Examplesbull Deposits pledged to bank (how long)bull Fixed deposits over 1 year maturity
What is itWhat is it
copy 2005-07 Nelson 66
Current Assets
bull What is operating cycle
bull The operating cycle of an entity is the time between ndash the acquisition of assets for processing and ndash their realisation in cash or cash equivalents
bull When the entityrsquos normal operating cycle is not clearly identifiable ndash its duration is assumed to be 12 months
bull The operating cycle of an entity is the time between ndash the acquisition of assets for processing and ndash their realisation in cash or cash equivalents
bull When the entityrsquos normal operating cycle is not clearly identifiable ndash its duration is assumed to be 12 months
ExampleExample
34
copy 2005-07 Nelson 67
Current Assets CaseCase
copy 2005-07 Nelson 68
Current Assets
bull Can a non-current asset reclassified if it fulfil the definition of current asset later
bull Assets classified as non-current in accordancewith IAS 1 shall not be reclassified as current assetsndash until they meet the criteria to be classified as held for sale in
accordance with IFRS 5bull Assets of a class that an entity would normally regard as non-
current that are acquired exclusively with a view to resale shall notbe classified as currentndash unless they meet the criteria to be classified as held for sale in
accordance with IFRS 5
bull Assets classified as non-current in accordancewith IAS 1 shall not be reclassified as current assetsndash until they meet the criteria to be classified as held for sale in
accordance with IFRS 5bull Assets of a class that an entity would normally regard as non-
current that are acquired exclusively with a view to resale shall notbe classified as currentndash unless they meet the criteria to be classified as held for sale in
accordance with IFRS 5
No non-current assets can be classified as current unless the criteria in IFRS 5 are fulfilled mainlybull Available for immediate salebull Highly probable to make the sale
35
copy 2005-07 Nelson 69
Is it currentIs it current
Current Assets
bull In its 2005 Interim Report full set of HKFRS was adopted and the report set out thatndash Available-for-sale financial assets are non-
derivatives that are eitherbull designated in this category orbull not classified in any of the other categories (ie
loans and receivables financial assets at fair value through profit or loss and held-to-maturity investments)
CaseCase
Similar in 2005 Annual Report
Similar in 2005 Annual Report
ndash They are included in non-current assetsbull unless management intends to dispose of the
investment within 12 months of the balance sheet date
copy 2005-07 Nelson 70
New requirementsNew requirements
Current Liabilities
bull A liability shall be classified as current when it satisfies any of the following criteriaa) it is expected to be settled in the entityrsquos normal operating cycleb) it is held primarily for the purpose of being tradedc) it is due to be settled within 12 months after the balance sheet
date ord) the entity does not have an unconditional right to defer settlement
of the liability for at least 12 months after the balance sheet date
bull All other liabilities shall be classified as non-current
ImplicationImplication
36
copy 2005-07 Nelson 71
Current Liabilities Revised rules on classifying a liability as current or non-currentbull A liability held for being traded rArr currentbull A financial liability due within 12 months after the BS date rArr current
ndash even if an agreement to refinance on a long-term basis is completed after the BS date (only disclosed as non-adjusting event)
bull If an entity has discretion to refinance rArr non-currentbull If an entity without discretion to refinance rArr current
bull A non-current financial liability is payable on demand with a breach on a condition of its loan agreement on or before the BS datendash If the lender agreed not to demand payment
bull after the BS date rArr current (only disclosed as non-adjusting event)
bull by the BS date rArr non-current
ImplicationImplication
copy 2005-07 Nelson 72
Current LiabilitiesCaseCase
Note 12 to Interim Report 2006bull Breach of loan covenants
bull As at 30 June 2006 in respect of certain bank loans with an aggregate carrying amount of HK$1529806000 the Group breached certain financial covenants of the banks loans
bull Since the lenders have not agreed to waive its right to demand immediate payment as at the balance sheet date the loans have been classified as current liabilities in these financial statements at 30 June 2006
37
copy 2005-07 Nelson 73
Current Assets and LiabilitiesExampleExample
Can the following be classified as current assetsbull 3-month fixed deposits pledged to a bank to secure
a mortgage loan of 5 yearsbull 2-year fixed deposits with a bank
Can the following be classified as current assetsbull 3-month fixed deposits pledged to a bank to secure
a mortgage loan of 5 yearsbull 2-year fixed deposits with a bank
Can the following be classified as non-current liabilitiesbull 5-year term loan matured after year end but renewed
for another 5 years after year end (before the issuanceof the financial statements)
bull 2-year term loan to be matured with 12 months and theentity has a right to renew for another 2 years
Can the following be classified as non-current liabilitiesbull 5-year term loan matured after year end but renewed
for another 5 years after year end (before the issuanceof the financial statements)
bull 2-year term loan to be matured with 12 months and theentity has a right to renew for another 2 years
timestimes
times
radic
copy 2005-07 Nelson 74
Balance Sheetbull As a minimum the face of the balance sheet shall
include line items that present the following amountsa) property plant and equipmentb) investment propertyc) intangible assetsd) financial assets (excl amounts shown under (e) (h) and (I))e) investments accounted for using the equity methodf) biological assetsg) inventoriesh) trade and other receivablesi) cash and cash equivalentsj) trade and other payablesk) provisionsl) financial liabilities (excl amounts shown under (j) and (k))m) liabilities and assets for current tax as defined in HKAS 12 Income Taxesn) deferred tax liabilities and deferred tax assets as defined in HKAS 12o) minority interest presented within equity andp) issued capital and reserves attributable to equity holders of the parent
38
copy 2005-07 Nelson 75
Balance Sheetbull The face of the balance sheet shall also include line
items that present the following amountsa) The total of assets classified as held for sale and
assets included in disposal groups classified as held for sale in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations and
b) Liabilities included in disposal groups classified as held for sale in accordance with IFRS 5
copy 2005-07 Nelson 76
Balance Sheetbull Additional line items headings and subtotals shall
be presented on the face of the balance sheet when such presentation is relevant to an understanding of the entityrsquos financial position
bull When an entity presents current and non-current assets and current and non-current liabilities as separate classifications on the face of its balance sheet ndash it shall not classify deferred tax assets
(liabilities) as current assets (liabilities)
39
copy 2005-07 Nelson 77
Balance Sheet
bull The use of different measurement bases for different classes of assets suggests that their nature or function differs and therefore that they should be presented as separate line itemsndash For example different classes of property plant and
equipment can be carried atbull Cost orbull Revalued amountsin accordance with IAS 16 PPE
In the past it use ldquomay needrdquoIn the past it use ldquomay needrdquo
copy 2005-07 Nelson 78
Balance Sheet
Galaxy Entertainment Group LimitedConsolidated balance sheet as at 31122005
CaseCase
40
copy 2005-07 Nelson 79
Balance Sheet
Melco Development Limited (新濠國際發展有限公司)Consolidated balance sheet as at 31122005
CaseCase
copy 2005-07 Nelson 80
Income Statement Minimum requirements on the face of the income statementbull As a minimum the face of the income statement shall include line items
that present the following amounts for the perioda) revenueb) finance costsc) share of the profit or loss of associates and joint ventures accounted
for using the equity methodd) pre-tax gain or loss recognised on the disposal of assets or
settlement of liabilities attributable to discontinuing operationse) tax expense andf) profit or loss
41
copy 2005-07 Nelson 81
Income Statement bull The following items shall be disclosed on the face of the income
statement as allocations of profit or loss for the perioda) Profit or loss attributable to minority interest andb) Profit or loss attributable to equity holders of the parent
A similar requirement has been added for the statement of changes in equity and such allocated amounts are not to be presented as items of income or expense
copy 2005-07 Nelson 82
Income Statement
Melco Dev LtdConsolidated income statementas at 31122005
CaseCase
42
copy 2005-07 Nelson 83
Income Statement bull Not require to disclose the results of operating
activities as a line item on the face of the incomestatement
bull An entity shall not present any items of income and expense as extraordinary items either onthe face of the income statements or in the notes
Entities canrsquot use itEntities canrsquot use it
Entities can still show itEntities can still show it
copy 2005-07 Nelson 84
Income Statement Either on the face of the income statement or in the notesbull An entity shall present an analysis of expenses using a classification
based on eitherbull the nature of expenses orbull their function within the entity
whichever provides information that is reliable and more relevant
bull Entities classifying expenses by function shall disclose additional information on the nature of expenses includingbull depreciation and amortisation expense and bull employee benefits expense
43
copy 2005-07 Nelson 85
Income StatementCaseCase
Nature or FunctionNature or Nature or FunctionFunction
copy 2005-07 Nelson 86
Statement of Changes in Equity bull An entity shall present a statement of changes in equity showing on the
face of the statementa) profit or loss for the period b) each item of income and expense for the period that as required by
IFRSs is recognised directly in equity and the total of these itemsc) total income and expense for the period (calculated as the sum of (a) and
(b)) showing separately the total amounts attributablebull to equity holders of the parent andbull to minority interest and
d) for each component of equity the effects of changes in accounting policies and corrections of errors recognised in accordance with IAS 8
Any ChangeAny Change
A revised requirementbull A statement of changes in equity that comprises only these items
shall be titled a statement of recognised income and expenses
A revised requirementbull A statement of changes in equity that comprises only these items
shall be titled a statement of recognised income and expenses
44
copy 2005-07 Nelson 87
Statement of Changes in Equity bull An entity shall also present either on the face of the
statement of changes in equity or in the notesa) the amounts of transactions with equity holders acting in
their capacity as equity holders showing separately distributions to equity holders
b) the balance of retained earnings (ie accumulated profit or loss) at the beginning of the period and at the balance sheet date and the changes during the period and
c) a reconciliation between the carrying amount of each class of contributed equity and each reserve at the beginning and the end of the period separately disclosing each change
copy 2005-07 Nelson 88
Statement of Changes in Equity
Consolidated SCE as at 31122005
CaseCase
45
copy 2005-07 Nelson 89
Notes Structure (an entity is required to disclose the following)
bull The notes shalla) present information about the basis of preparation of the financial statements
and the specific accounting policies usedb) disclose the information required by HKFRSs that is not presented on the
face of the balance sheet income statement statement of changes in equity or cash flow statement and
c) provide additional information that is not presented on the face of the balance sheet income statement statement of changes in equity or cash flow statement but is relevant to an understanding of any of them
bull Notes shall as far as practicable be presented in a systematic manner bull Each item on the face of the balance sheet income statement statement
of changes in equity and cash flow statement shall be cross-referencedto any related information in the notes
copy 2005-07 Nelson 90
Notes Disclosures (an entity is required to disclose the following)
bull Disclosure of accounting policiesAn entity shall disclose in the summary of significant accounting policiesa) the measurement basis (or bases) used in preparing the financial
statements andb) the other accounting policies used that are relevant to an understanding of
the financial statements
46
copy 2005-07 Nelson 91
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)ndash The financial statements have been prepared in
accordance with Hong Kong Financial Reporting Standards (lsquolsquoHKFRSrsquorsquo) issued by the Hong Kong Institute of Certified Public Accountants bull under the historical cost convention as modified by the
revaluation of investment properties available-for-sale financial assets derivative financial instruments and other investments which are carried at fair values helliphellip
ndash The principal accounting policies applied in the preparation of these financial statements are set out below These policies have been consistently applied to all the years presented except for those stated in note 2(a) above
copy 2005-07 Nelson 92
Notes Disclosures (an entity is required to disclose the following)
bull Disclosure of accounting policiesndash The judgements apart from those involving estimations management has
madebull in the process of applying the entityrsquos accounting policies that have the
most significant effect on the amounts recognised in the financial statements (in the summary of significant accounting policies or other notes)
Examples ndash Management makes judgements in determininga) whether financial assets are held-to-maturity investmentsb) when substantially all the significant risks and rewards of
ownership of financial assets and lease assets are transferred to other entities
c) whether in substance particular sales of goods are financing arrangements and therefore do not give rise to revenue and
d) whether the substance of the relationship between the entity and a special purpose entity indicates that the special purpose entity is controlled by the entity
Examples ndash Management makes judgements in determininga) whether financial assets are held-to-maturity investmentsb) when substantially all the significant risks and rewards of
ownership of financial assets and lease assets are transferred to other entities
c) whether in substance particular sales of goods are financing arrangements and therefore do not give rise to revenue and
d) whether the substance of the relationship between the entity and a special purpose entity indicates that the special purpose entity is controlled by the entity
47
copy 2005-07 Nelson 93
Notes Disclosures (an entity is required to disclose the following)
bull Key sources of estimation uncertaintyndash Information about the key assumptions concerning the future and
other key sources of estimation uncertainty at the balance sheet datebull that have a significant risk of causing a material adjustment to the
carrying amounts of assets and liabilities within the next financial yearndash In respect of those assets and liabilities the notes shall include details of
a) their nature andb) their carrying amount as at the balance sheet date
Examples ndash in the absence of recently observed market prices used to measure the following assets and liabilities future-oriented estimates are necessary to measurebull the recoverable amount of classes of PPEbull the effect of technological obsolescence on inventories
Estimates involve assumptions about such items asbull the risk adjustment to cash flows or discount rates usedbull future changes in salaries and in prices affecting other costs
Examples ndash in the absence of recently observed market prices used to measure the following assets and liabilities future-oriented estimates are necessary to measurebull the recoverable amount of classes of PPEbull the effect of technological obsolescence on inventories
Estimates involve assumptions about such items asbull the risk adjustment to cash flows or discount rates usedbull future changes in salaries and in prices affecting other costs
copy 2005-07 Nelson 94
Notes
Esprit Holdings LimitedEsprit Holdings Limitedbull Critical Accounting Estimates and Judgements
ndash Estimates and judgements are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonableunder the circumstances
ndash Critical accounting estimates and assumptionsbull The Group makes estimates and assumptions concerning
the future The resulting accounting estimates will by definition seldom equal the related actual results
bull The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below helliphellip (including (1) useful life and impairment of trademarks and (2) income taxes)
CaseCase
48
copy 2005-07 Nelson 95
Notes
Melco Development Limited (新濠國際發展有限公司)Notes to the financial statements for the year ended 31122005ndash The key assumptions concerning the future and other key sources
of estimation uncertainty at the balance sheet date that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below helliphellip(The issues discussed includebull Allowances for inventories bull Estimated impairment of goodwill Income taxes)
CaseCase
copy 2005-07 Nelson 96
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)ndash Estimates and judgements used in preparing the
financial statements are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonable under the circumstances
ndash The Group makes estimates and assumptionsconcerning the future
ndash The resulting accounting estimates will by definition seldom equal the related actual results
ndash The estimates and assumptions that have a significant effect on the carrying amounts of assets and liabilities are discussed below hellip (including impairment of goodwill impairment of gaming
licence Useful lives of property plant and equipment fair value of investment properties hellip)
49
copy 2005-07 Nelson 97
Notes Disclosures (an entity is required to disclose the following)
bull Other disclosuresAn entity shall disclose in the notesa) the amount of dividends proposed or declared before the
financial statements were authorised for issue but not recognised as a distribution to equity holders during the period and the related amount per share(HK incorporated companies are required to show the aggregate amount which is recommended for distribution by way of dividend under a separate heading(s) in their balance sheet (HK Co Ord 10th Sch para 9(1)(e)) and
b) the amount of any cumulative preference dividends not recognised
copy 2005-07 Nelson 98
Notes Disclosures (an entity is required to disclose the following)
An entity shall disclose the following if not disclosedelsewhere in information published with the financial statementsa) the domicile and legal form of the entity
its country of incorporation andthe address of its registered office(or principal place of business if different from the registered office)
b) a description of the nature of the entityrsquos operations and its principal activities and
c) the name of the parent and the ultimate parent of the group
ldquoshall discloserdquo now instead of ldquoencouraged to discloserdquo
ldquoshall discloserdquo now instead of ldquoencouraged to discloserdquo
bull Other disclosures
Any specialAny special
50
copy 2005-07 Nelson 99
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)bull The principal activities of Galaxy Entertainment Group
Ltd (the lsquolsquoCompanyrsquorsquo) (formerly known as K WahConstruction Materials Ltd) and its subsidiaries (together the lsquolsquoGrouprsquorsquo) are tondash operate in casino games of chance or games of other forms
in Macau (and) manufacture sale and distribution of construction materials in HK Macau and Mainland China
bull The Company is ndash a limited liability company incorporated in Hong Kong and ndash has its listing on the Main Board of The Stock Exchange of
Hong Kong Limitedbull The address of its registered office and its principal place
of business is Room 1606 16th Floor Hutchison House 10 Harcourt Road Central HK
copy 2005-07 Nelson 100
Effective Date
bull An entity shall apply IAS 1 for annual periods beginning on or after 1 Jan 2005
ndash Earlier application is encouragedndash If an entity applies IAS 1 for an earlier period it shall
disclose this factbull For the amendments relating to the Statement of
Changes in Equityndash An entity shall apply it for annual periods beginning on
or after 1 Jan 2006ndash If an entity applies the amendments to IAS 19
Employee Benefits ndash Actuarial Gains and Losses Group Plans and Disclosures for an earlier period that amendment shall be applied for that earlier period
51
copy 2005-07 Nelson 101
Todayrsquos Agenda
Capital Disclosures (Amendments to IAS 1)
Capital Disclosures (Amendments to IAS 1)
copy 2005-07 Nelson 102
Capital Disclosures ndash For 2007
52
copy 2005-07 Nelson 103
Capital Disclosures
What is capital Is it helliphellip
CapitalCapital AssetsAssets LiabilitiesLiabilities= ndash
bull IAS 1BC47 considers ldquowhether an entity can have a view of capital that differs from what IFRSs define as equityrdquo
bull It further clarifies that although for the purposes of this disclosure capital would often equate with equity as defined in IFRSsndash it might also include or exclude some components
bull It also noted that the capital disclosure in IAS 1 is intended to give entities the opportunity to describendash how they view the components of capital they manage if this is
different from what IFRSs define as equity helliphellip
copy 2005-07 Nelson 104
EquityEquityEquity AssetsAssets LiabilitiesLiabilities= ndash
Capital Disclosures
Based on the Framework amp IFRSs the accounting equation should be
CapitalCapital AssetsAssets LiabilitiesLiabilities= ndash
bull An entityrsquos capital may be part of its equity plus part of its liabilities depending on how it manage ldquoits capitalrdquo helliphellip
53
copy 2005-07 Nelson 105
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowinga) qualitative information about its objectives policies and processes for
managing capital including (but not limited to)i) a description of what it manages as capitalii) when an entity is subject to externally imposed capital requirements
the nature of those requirements and how those requirements are incorporated into the management of capital and
iii) how it is meeting its objectives for managing capital
bull To comply with the capital disclosures the entity discloses thefollowinga) qualitative information about its objectives policies and processes for
managing capital including (but not limited to)i) a description of what it manages as capitalii) when an entity is subject to externally imposed capital requirements
the nature of those requirements and how those requirements are incorporated into the management of capital and
iii) how it is meeting its objectives for managing capital
copy 2005-07 Nelson 106
Capital Disclosures
Example disclosurebull The Grouprsquos objectives when managing capital are
ndash to safeguard the entityrsquos ability to continue as a going concern
bull so that it can continue to provide returns for shareholders and benefits for other stakeholders and
ndash to provide an adequate return to shareholders by pricing products and services commensurately with the level of risk
bull The Group sets the amount of capital in proportion to risk
ExampleExample
ObjectivesObjectives
54
copy 2005-07 Nelson 107
Capital Disclosures
bull The Group manages the capital structure and makes adjustments to it in the light ofndash changes in economic conditions and ndash the risk characteristics of the underlying assets
bull In order to maintain or adjust the capital structure the Group mayndash adjust the amount of dividends paid to shareholders ndash return capital to shareholders ndash issue new shares or ndash sell assets to reduce debt
ExampleExample
Example disclosure
HowHow
copy 2005-07 Nelson 108
Capital Disclosures
bull Consistently with others in the industry the Group monitors capital on the basis of ndash the debt-to-adjusted capital ratio
bull This ratio is calculated as net debt divide adjusted capital
ExampleExample
Example disclosure
HowHow
bull Net debt is calculated as ndash Total debt (as shown in the
balance sheet)ndash Less cash amp cash equivalents
bull Net debt is calculated as ndash Total debt (as shown in the
balance sheet)ndash Less cash amp cash equivalents
bull Adjusted capital ndash comprises all components of
equity (ie share capital share premium minority interest retained earnings and revaluation reserve) ndash other than amounts
recognised in equity relating to cash flow hedges and
ndash includes some forms of subordinated debt
bull Adjusted capital ndash comprises all components of
equity (ie share capital share premium minority interest retained earnings and revaluation reserve) ndash other than amounts
recognised in equity relating to cash flow hedges and
ndash includes some forms of subordinated debt
55
copy 2005-07 Nelson 109
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowing
bull To comply with the capital disclosures the entity discloses thefollowingb) summary quantitative data about what it manages as capital
Some entities regard some financial liabilities (eg some forms of subordinated debt) as part of capitalOther entities regard capital as excluding some components of equity (eg components arising from cash flow hedges)
c) any changes in (a) and (b) from the previous period
copy 2005-07 Nelson 110
Capital Disclosures
Example disclosure (continued from previous example)
ExampleExample
bull During 20X4 the Grouprsquos strategy which was unchanged from 20X3 was to maintain the debt-to-adjusted capital ratio at the lower end of the range 61 to 71 in order to secure access to finance at a reasonable cost by maintaining a BB credit rating The debt-to-adjusted capital ratios at 31 December 20X4 and at 31 December 20X3 were as follows
3112X4 ($rsquoM) 3112X3 ($rsquoM) Total debt 1000 1100 Less cash and cash equivalents (90) (150)Net debt 910 950
Total equity 110 105 Add subordinated debt instruments 38 38 Less amounts recognised in equity
relating to cash flow hedges (10) (5)Adjusted capital 138 138
Debt-to-adjusted capital ratio 66 69
56
copy 2005-07 Nelson 111
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowing
bull To comply with the capital disclosures the entity discloses thefollowingd) whether during the period it complied with any externally imposed capital
requirements to which it is subjecte) when the entity has not complied with such externally imposed capital
requirements the consequences of such non-complianceThese disclosures shall be based on the information provided internally to the entityrsquos key management personnel
copy 2005-07 Nelson 112
Capital DisclosuresExampleExample
Example disclosurebull Entity A filed its quarterly regulatory capital return for
30 September 20X7 on 20 October 20X7 bull At that date Entity Arsquos regulatory capital was below
the capital requirement imposed by Regulator B by $1 million
bull As a result Entity A was required to submit a plan to the regulator indicating how it would increase its regulatory capital to the amount required
bull Entity A submitted a plan that entailed selling part of its unquoted equities portfolio with a carrying amount of $115 million in the fourth quarter of 20X7
bull In the fourth quarter of 20X7 Entity A sold its fixed interest investment portfolio for $126 million and met its regulatory capital requirement
For example SFC or banks
For example SFC or banks
57
copy 2005-07 Nelson 113
Capital DisclosuresCaseCase
bull Early adopted capital disclosure in 2005 and itsannual report states that (extract only)ndash The Grouprsquos objectives when managing capital are
bull To safeguard the Grouprsquos ability to continue as a going concern so that it continues to provide returns for shareholders and benefits for other stakeholders
bull To support the Grouprsquos stability and growth andbull To provide capital for the purpose of strengthening the
Grouprsquos risk management capability
copy 2005-07 Nelson 114
Capital DisclosuresCaseCase
ndash The Group actively and regularly reviews and manages its capital structure to ensure optimal capital structure and shareholder returns taking into consideration the future capital requirements of the Group and capital efficiency helliphellip
ndash The Group adopts a dividend policy helliphellip while retaining 10 per cent of the profit as capital of the Group for future use
ndash The Group has set aside $1500 million of retained earnings for the purpose of strengthening the risk management regime of the clearing houses and supporting their roles as central counterparties
ndash As in prior years the Group monitors capital by reviewing the level of capital that is at the disposal of the Group (ldquoadjusted capitalrdquo) Adjusted capital comprises all components of shareholdersrsquo equity other than the hedging reserve relating to cash flow hedges designated reserves and investment revaluation reserve helliphellip
bull Early adopted capital disclosure in 2005 and itsannual report states that (extract only)
58
copy 2005-07 Nelson 115
Capital Disclosures ndash Transition
bull An entity shall apply the requirements of capital disclosure for
ndash annual periods beginning on or after 1 January 2007
bull Early application is encouraged
copy 2005-07 Nelson 116
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk
59
copy 2005-07 Nelson 117
QampA SessionQampA SessionQampA Session
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk
15
copy 2005-07 Nelson 29
1 Purpose of Financial Statements
bull To provide information aboutndash financial positionndash financial performance
andndash cash flows of an entity
That is useful to a wide range of users in making economic decisions
bull To also show the results of managementrsquos stewardship of the resources entrusted to it
bull To meet this objective financial statements provide information about the entityrsquosndash Assetsndash Liabilitiesndash Equityndash Income and expenses
including gains and lossesndash Other changes in equityndash Cash flows
Thus we have helliphellip
copy 2005-07 Nelson 30
2 Components of Financial Statements
A complete set of financial statements comprisesa) a balance sheetb) an income statementc) a statement of changes in equity showing either
i) all changes in equity orii) changes in equity other than those arising from transactions with
equity holders acting in their capacity as equity holdersd) a cash flow statement ande) notes comprising a summary of significant accounting policies and
other explanatory notes
another nameanother name
16
copy 2005-07 Nelson 31
3 Overall Consideration
a) Fair presentation and compliance with IFRSsb) Going concernc) Accrual basis of accountingd) Consistency of presentatione) Materiality and aggregationf) Offsettingg) Comparative information
copy 2005-07 Nelson 32
3 Overall Consideration
bull Financial statements shall present fairly of the financial position financial performance and cash flows of an entity
ndash Fair presentation requires the faithful representation of the effects of transactions other events and conditions in accordance with
bull the definitions and recognition criteria for assets liabilities income and expenses set out in the Framework
ndash The application of IFRSs with additional disclosure when necessary is presumed to result in financial statements that give a true and fair view
a) Fair presentation and compliance with IFRSs
No such precisely statement before
17
copy 2005-07 Nelson 33
3 Overall Consideration
bull Statement of compliancendash An entity whose financial statements comply
with IFRSs shall make an explicit and unreserved statement of such compliance in the notes
ndash Financial statements shall not be described as complying with IFRSsbull unless they comply with all the
requirements of IFRSsndash In virtually all circumstances a fair
presentation is achieved by bull compliance with applicable IFRSs
a) Fair presentation and compliance with IFRSs
copy 2005-07 Nelson 34
3 Overall Consideration
Melco Development Limited (新濠國際發展有限公司)Notes to the financial statements for year ended 31122005ndash The consolidated financial statements have been prepared in
accordance with HKFRSsndash In addition the consolidated financial statements include applicable
disclosures required by the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited and by the Companies Ordinance
CaseCase
18
copy 2005-07 Nelson 35
3 Overall Consideration
bull A fair presentation also requires an entitya) to select and apply accounting policies in accordance
with IAS 8b) to present information including accounting policies
in a manner that provides relevant reliable comparable and understandable information
c) to provide additional disclosuresndash when compliance with the specific requirements in
IFRSs is insufficient to enable users to understand the impact of particular transactions other events and conditions on the entityrsquos financial position and financial performance
bull Inappropriate accounting policies are not rectified eitherndash by disclosure of the accounting policies used orndash by notes or explanatory material
a) Fair presentation and compliance with IFRSs
copy 2005-07 Nelson 36
3 Overall Consideration
bull Departure from Standard or Interpretation (Simplified)ndash In the extremely rare circumstances in which
management concludes thatbull compliance with a requirement in a standard or an
interpretation would be so misleading thatbull it would conflict with the objective of financial
statements set out in the Frameworkthe entity shall depart from that requirement if the relevant regulatory framework requires or otherwise does not prohibit such a departure
a) Fair presentation and compliance with IFRSs
19
copy 2005-07 Nelson 37
3 Overall Consideration
bull Departure from Standard or Interpretation (Simplified)
a) Fair presentation and compliance with IFRSs
ndash Then the following disclosure is requireda) management has concluded that the financial
statements give a true and fair viewb) that it has complied with applicable standards and
interpretations except that it has departed from a particular requirement
c) the title of the standard or interpretation from which the entity has departed the nature of the departure the reason why that treatment would be so misleading and the treatment adopted and
d) for each period presented the financial impact of the departure on each item in the financial statements that would have been reported in complying with the requirement
copy 2005-07 Nelson 38
3 Overall Consideration
Interim Report 2005 clearly stated thatInterim Report 2005 clearly stated that
CaseCase
bull The directors consider it inappropriate for the company to adopt two particular aspects of the newrevised HKFRSs as these would result in the financial statements in the view of the directors eitherbull not reflecting the commercial substance of the business orbull being subject to significant potential short-term volatility as
explained below helliphellip
20
copy 2005-07 Nelson 39
3 Overall ConsiderationCaseCase
bull HKAS 40 ldquoInvestment propertyrdquo requires an assessment of the fair value of investment properties
bull The group intends to follow the same accounting treatment as adopted in 2004 which is to value such investment properties on an annual basis
bull Accordingly the investment properties were not revalued at 30 June 2005 since the directors consider that such change of practice could introduce a significant element of short-term volatility into the income statement in respect of assets which are being held on a long-term basis by the group helliphellip
bull It is not practicable to estimate the financial effect of this non-compliance as no interim valuation of the properties has been conducted
Interim Report 2005 clearly stated thatInterim Report 2005 clearly stated that
At year-end revaluation would still be conductedAt year-end revaluation would still be conducted
copy 2005-07 Nelson 40
3 Overall ConsiderationCaseCase
bull HKAS 12 ldquoIncome Taxesrdquo together with HKAS-INT 21 ldquoIncome Taxes ndashRecovery of Revalued Non-Depreciable Assetsrdquo requires deferred taxation to be recognised on any revaluation movements on investment propertiesbull It is further provided that any such deferred tax liability should be calculated
at the profits tax rate in the case of assets which the management has no definite intention to sell
bull The company has not made such provision in respect of its HK investment properties since the directors consider that such provision would result in the financial statements not reflecting the commercial substance of the businessbull since should any such sale eventuate any gain would be regarded as capital
in nature and would not be subject to any tax in HKbull Should this aspect of HKAS 12 have been adopted deferred tax liabilities
amounting to HK$2008 million on the revaluation surpluses arising from revaluation of HK investment properties would have been provided
(estimate - over 12 of the net assets at 30 June 2005)
Interim Report 2005 clearly stated thatInterim Report 2005 clearly stated that
21
copy 2005-07 Nelson 41
3 Overall Consideration
bull Departure but such departure is prohibitedndash In the extremely rare circumstances in which
management concludes that bull compliance with a requirement in a
standard or an interpretation would be so misleading that
bull it would conflict with the objective of financial statements set out in the Framework
bull but the relevant regulatory framework prohibits departure from the requirement the entity shall to the maximum extent possible reduce the perceived misleading aspects of compliance by disclosing helliphellip
a) Fair presentation and compliance with IFRSs
copy 2005-07 Nelson 42
3 Overall Consideration
ndash by disclosinga) the title of the standard or interpretation in
question the nature of the requirement and the reason why management has concluded that complying with that requirement is so misleading in the circumstances that it conflicts with the objective of financial statements set out in the Framework and
b) for each period presented the adjustments to each item in the financial statements that management has concluded would be necessary to give a fair presentation
a) Fair presentation and compliance with IFRSsbull Departure but such departure is prohibited
22
copy 2005-07 Nelson 43
3 Overall Consideration
bull When assessing whether complying with a specific requirement in a standard or an interpretation would be so misleading that it would conflict with the objective of financial statements set out in the Frameworkndash management considers
a) why the objective of financial statements is not achieved in the particular circumstances and
b) how the entityrsquos circumstances differ from those of other entities that comply with the requirement ndash If other entities in similar circumstances comply with the
requirement raquo there is a rebuttable presumption that the entityrsquos compliance
with the requirement would not be so misleading that it would conflict with the objective of financial statements set out in the Framework
a) Fair presentation and compliance with IFRSs
copy 2005-07 Nelson 44
3 Overall ConsiderationCaseCase
Howrsquos about this Howrsquos about this
However 2005 Final Results Announcementdisclosed that bull provision for deferred tax was finally made
with regard to revaluation of the HK investment properties (total HK$22 billion) at 2005 year-end
However However 2005 Final Results Announcement2005 Final Results Announcementdisclosed that disclosed that bullbull provision for deferred tax was finally made provision for deferred tax was finally made
with regard to revaluation of the HK with regard to revaluation of the HK investment properties (total HK$22 billion) at investment properties (total HK$22 billion) at 2005 year2005 year--endend
23
copy 2005-07 Nelson 45
b) Going Concern
3 Overall Consideration
bull When preparing financial statements management shall make an assessment of an entityrsquos ability to continue as a going concern
bull Financial statements shall be prepared on a going concern basisndash unless management either intends to liquidate the entity or to cease
trading or has no realistic alternative but to do so bull When management is aware in making its assessment of
material uncertainties related to events or conditions that may cast significant doubt upon the entityrsquos ability to continue as a going concern those uncertainties shall be disclosed
bull When financial statements are not prepared on a going concern basis that fact shall be disclosed together with the basis on which the financial statements are prepared and the reason why the entity is not regarded as a going concern
copy 2005-07 Nelson 46
c) Accrual Basis of Accounting
3 Overall Consideration
bull An entity shall prepare its financial statements except for cash flow information using the accrual basis of accounting
bull When the accrual basis of accounting is used items are recognised as assets liabilities equity income and expensesndash when they satisfy the definitions and recognition criteria for those
elements in the Framework
24
copy 2005-07 Nelson 47
3 Overall Consideration
bull The presentation and classification of items in the financial statements shall be retained from one period to the next unlessa) it is apparent
bull following a significant change in the nature of the entityrsquos operations (eg significant acquisition or disposal) or
bull a review of its financial statementsthat another presentation or classification would be more appropriatehaving regard to the criteria for the selection and application of accounting policies in IAS 8 or
b) a IFRS requires a change in presentation
d) Consistency of presentation
An entity changes the presentation of its financial statements only ifndash the changed presentation provides information that is reliable and is
more relevant to users of the financial statements andndash the revised structure is likely to continue so that comparability is not
impaired
An entity changes the presentation of its financial statements only ifndash the changed presentation provides information that is reliable and is
more relevant to users of the financial statements andndash the revised structure is likely to continue so that comparability is not
impaired
copy 2005-07 Nelson 48
3 Overall Consideration
bull Each material class of similar items shall bendash presented separately in the financial
statementsbull Items of a dissimilar nature or function shall be
ndash presented separately unless they are immaterial
bull Applying the concept of materiality means that a specific disclosure requirement in a IFRS neednot be satisfied if the information is not material
e) Materiality and Aggregation
What is the situation of recognition and measurement
What is the What is the situation of situation of recognition and recognition and measurementmeasurement
25
copy 2005-07 Nelson 49
3 Overall Consideration
bull What is materialndash Omissions or misstatements of items are
material if they could individually or collectively influence the economic decisions of users taken on the basis of the financial statements
ndash Materiality depends on the size and nature of the omission or misstatement judged in the surrounding circumstancesbull The size or nature of the item or a combination
of both could be the determining factor
e) Materiality and Aggregation
copy 2005-07 Nelson 50
3 Overall Consideration
bull Assets and liabilities and income and expenses shall not be offsetndash unless required or permitted by a IFRS
bull It is important that assets and liabilities and income and expenses are reported separatelyndash Measuring assets net of valuation allowances mdash
for example obsolescence allowances on inventories and doubtful debts allowances on receivables mdash is not offsetting
f) Offsetting
26
copy 2005-07 Nelson 51
3 Overall Consideration
bull During ordinary activities some transactions that do not generate revenue but are incidental to the main revenue-generating activitiesndash The results of such transactions are presented
when this presentation reflects the substance of the transaction or other event by netting any income with related expenses arising on the same transaction
f) Offsetting
copy 2005-07 Nelson 52
3 Overall Consideration
bull For examplea) gains and losses on the disposal of non-current
assets including investments and operating assets- are reported by deducting from the proceeds on
disposal the carrying amount of the asset and related selling expenses and
b) expenditure related to a provision that is- recognised in accordance with IAS 37 and - reimbursed under a contractual arrangement with
a third party (for example a supplierrsquos warranty agreement)
may be netted against the related reimbursement
f) Offsetting
ExampleExample
27
copy 2005-07 Nelson 53
3 Overall Consideration
bull Gains and losses arising from a group of similar transactions are reported on a net basisndash For example
bull foreign exchange gains and losses or bull gains and losses arising on financial instruments held for trading
bull Such gains and losses are however reported separately if they are material
bull Gains and losses arising from a group of similar transactions are reported on a net basisndash For example
bull foreign exchange gains and losses or bull gains and losses arising on financial instruments held for trading
bull Such gains and losses are however reported separately if they are material
Can foreign exchange gains and losses be offset
ExampleExample
copy 2005-07 Nelson 54
3 Overall Consideration
bull Except when a IFRS permits or requires otherwise ndash comparative information shall be disclosed in
respect of the previous period for all amountsreported in the financial statements
bull When the presentation or classification of items in the financial statements is amended ndash comparative amounts shall be reclassified unless
the reclassification is impracticable
g) Comparative information
28
copy 2005-07 Nelson 55
Amended requirementsAmended requirements
3 Overall Consideration
bull When comparative amounts are reclassified an entity shall disclosea) the nature of the reclassificationb) the amount of each item or class of items that is
reclassified andc) the reason for the reclassification
g) Comparative information
bull In the pastonly the reason for and a description of the nature of materialreclassifications should be disclosedExemption for disclosure of comparative information for the reconciliation of movements in fixed assets is also removed
bull In the pastonly the reason for and a description of the nature of materialreclassifications should be disclosedExemption for disclosure of comparative information for the reconciliation of movements in fixed assets is also removed
copy 2005-07 Nelson 56
3 Overall Consideration
Melco Development Limited (新濠國際發展有限公司)Notes to the financial statements for year ended 31122005ndash Because HKAS 32 requires retrospective application comparative
figures for 2004 have been restated (see Note 2A for the financial impact)
CaseCase
29
copy 2005-07 Nelson 57
3 Overall Consideration
Galaxy Entertainment Group LimitedNotes to the financial statements (ye 31122005)ndash All changes in the accounting policies require
retrospective application except HKAS 39 and HKFRS 2 for which transitional provisions are applied
ndash As a result the 2004 comparative figures have also been restated or amended in accordance with the relevant requirements
ndash The effects of all the changes in accounting policies are summarised in notes (b) and (c) below
CaseCase
copy 2005-07 Nelson 58
bull Identification of the financial statementsbull Reporting periodbull Balance sheet
1 CurrentNon-current distinction2 Current assets3 Current liabilities4 Information to be presented on the face of the balance sheet5 Information to be presented either on the face of the balance sheet or in
the notesbull Income statement
1 Profit or loss for the period2 Information to be presented on the face of the income statement3 Information to be presented either on the face of the income statement or
in the notesbull Statement of changes in equitybull Cash flow statementbull Notes
4 Structure and Content
30
copy 2005-07 Nelson 59
Identification of Financial Statements
bull The financial statements shall be identified clearly and distinguished from other information in the same published document
bull The following information shall be displayed prominently and repeated when it is necessary for a proper understanding of the information presented
a) the name of the reporting entity or other means of identification and any change in that information from the preceding balance sheet date
b) whether the financial statements cover the individual entity or a group of entities
c) the balance sheet date or the period covered by the financial statements whichever is appropriate to that component of the financial statements
d) the presentation currency as defined in HKAS 21 The Effects of Changes in Foreign Exchange Rates and
e) the level of rounding used in presenting amounts in the financial statements
copy 2005-07 Nelson 60
Identification of Financial Statements
bull Can the units of the presentation currency be rounded to thousands or millions
bull Financial statements are often made more understandableby presenting information in thousands or millions of units of the presentation currency
bull This is acceptable as long asndash the level of rounding in presentation is disclosed and ndash material information is not omitted
bull Financial statements are often made more understandableby presenting information in thousands or millions of units of the presentation currency
bull This is acceptable as long asndash the level of rounding in presentation is disclosed and ndash material information is not omitted
ExampleExample
31
copy 2005-07 Nelson 61
Reporting Period
bull Financial statements shall be presented at least annually
bull When an entityrsquos balance sheet date changes and the annual financial statements are presented for a period longer or shorter than one year an entity shall disclose in addition to the period covered by the financial statementsa) the reason for using a longer or shorter period andb) the fact that comparative amounts for the income
statement statement of changes in equity cash flow statement and related notes are not entirely comparable
copy 2005-07 Nelson 62
Reporting Period
bull Can a set of financial statements cover 52-week instead of a year
bull Normally financial statements are consistently prepared covering a one-year period
bull However for practical reasons some entities prefer to report for example for a 52-week period
bull IAS 1 does not preclude this practice because the resulting financial statements are unlikely to be materially different from those that would be presented for one year
bull Normally financial statements are consistently prepared covering a one-year period
bull However for practical reasons some entities prefer to report for example for a 52-week period
bull IAS 1 does not preclude this practice because the resulting financial statements are unlikely to be materially different from those that would be presented for one year
ExampleExample
32
copy 2005-07 Nelson 63
CurrentNon-current Distinction
bull An entity shall presentndash current and non-current assets andndash current and non-current liabilitiesas separate classifications on the face of its balance sheet
bull Except when a presentation based on liquidity provides informationndash If that information is reliable and is more relevantndash When that exception applies all assets and liabilities shall be
presented broadly in order of liquidity
copy 2005-07 Nelson 64
CurrentNon-current Distinction
bull Whichever method of presentation is adopted for each asset and liability line item that combines amounts expected to be recovered or settled a) no more than 12 months after the balance sheet date
andb) more than 12 months after the balance sheet date(ie combines both current and non-current)
an entity shall disclose the amount expected to be recovered or settled after more than 12 months
33
copy 2005-07 Nelson 65
New requirementsNew requirements
Current Assets
bull An asset shall be classified as current when it satisfies any of the following criteriaa) it is expected to be realised in or is intended for sale or
consumption in the entityrsquos normal operating cycle b) it is held primarily for the purpose of being tradedc) it is expected to be realised within 12 months after the balance
sheet date ord) it is cash or a cash equivalent
bull unless it is restricted from being exchanged or used to settle aliability for at least 12 months after the balance sheet date
bull All other assets shall be classified as non-current
Examplesbull Deposits pledged to bank (how long)bull Fixed deposits over 1 year maturity
Examplesbull Deposits pledged to bank (how long)bull Fixed deposits over 1 year maturity
What is itWhat is it
copy 2005-07 Nelson 66
Current Assets
bull What is operating cycle
bull The operating cycle of an entity is the time between ndash the acquisition of assets for processing and ndash their realisation in cash or cash equivalents
bull When the entityrsquos normal operating cycle is not clearly identifiable ndash its duration is assumed to be 12 months
bull The operating cycle of an entity is the time between ndash the acquisition of assets for processing and ndash their realisation in cash or cash equivalents
bull When the entityrsquos normal operating cycle is not clearly identifiable ndash its duration is assumed to be 12 months
ExampleExample
34
copy 2005-07 Nelson 67
Current Assets CaseCase
copy 2005-07 Nelson 68
Current Assets
bull Can a non-current asset reclassified if it fulfil the definition of current asset later
bull Assets classified as non-current in accordancewith IAS 1 shall not be reclassified as current assetsndash until they meet the criteria to be classified as held for sale in
accordance with IFRS 5bull Assets of a class that an entity would normally regard as non-
current that are acquired exclusively with a view to resale shall notbe classified as currentndash unless they meet the criteria to be classified as held for sale in
accordance with IFRS 5
bull Assets classified as non-current in accordancewith IAS 1 shall not be reclassified as current assetsndash until they meet the criteria to be classified as held for sale in
accordance with IFRS 5bull Assets of a class that an entity would normally regard as non-
current that are acquired exclusively with a view to resale shall notbe classified as currentndash unless they meet the criteria to be classified as held for sale in
accordance with IFRS 5
No non-current assets can be classified as current unless the criteria in IFRS 5 are fulfilled mainlybull Available for immediate salebull Highly probable to make the sale
35
copy 2005-07 Nelson 69
Is it currentIs it current
Current Assets
bull In its 2005 Interim Report full set of HKFRS was adopted and the report set out thatndash Available-for-sale financial assets are non-
derivatives that are eitherbull designated in this category orbull not classified in any of the other categories (ie
loans and receivables financial assets at fair value through profit or loss and held-to-maturity investments)
CaseCase
Similar in 2005 Annual Report
Similar in 2005 Annual Report
ndash They are included in non-current assetsbull unless management intends to dispose of the
investment within 12 months of the balance sheet date
copy 2005-07 Nelson 70
New requirementsNew requirements
Current Liabilities
bull A liability shall be classified as current when it satisfies any of the following criteriaa) it is expected to be settled in the entityrsquos normal operating cycleb) it is held primarily for the purpose of being tradedc) it is due to be settled within 12 months after the balance sheet
date ord) the entity does not have an unconditional right to defer settlement
of the liability for at least 12 months after the balance sheet date
bull All other liabilities shall be classified as non-current
ImplicationImplication
36
copy 2005-07 Nelson 71
Current Liabilities Revised rules on classifying a liability as current or non-currentbull A liability held for being traded rArr currentbull A financial liability due within 12 months after the BS date rArr current
ndash even if an agreement to refinance on a long-term basis is completed after the BS date (only disclosed as non-adjusting event)
bull If an entity has discretion to refinance rArr non-currentbull If an entity without discretion to refinance rArr current
bull A non-current financial liability is payable on demand with a breach on a condition of its loan agreement on or before the BS datendash If the lender agreed not to demand payment
bull after the BS date rArr current (only disclosed as non-adjusting event)
bull by the BS date rArr non-current
ImplicationImplication
copy 2005-07 Nelson 72
Current LiabilitiesCaseCase
Note 12 to Interim Report 2006bull Breach of loan covenants
bull As at 30 June 2006 in respect of certain bank loans with an aggregate carrying amount of HK$1529806000 the Group breached certain financial covenants of the banks loans
bull Since the lenders have not agreed to waive its right to demand immediate payment as at the balance sheet date the loans have been classified as current liabilities in these financial statements at 30 June 2006
37
copy 2005-07 Nelson 73
Current Assets and LiabilitiesExampleExample
Can the following be classified as current assetsbull 3-month fixed deposits pledged to a bank to secure
a mortgage loan of 5 yearsbull 2-year fixed deposits with a bank
Can the following be classified as current assetsbull 3-month fixed deposits pledged to a bank to secure
a mortgage loan of 5 yearsbull 2-year fixed deposits with a bank
Can the following be classified as non-current liabilitiesbull 5-year term loan matured after year end but renewed
for another 5 years after year end (before the issuanceof the financial statements)
bull 2-year term loan to be matured with 12 months and theentity has a right to renew for another 2 years
Can the following be classified as non-current liabilitiesbull 5-year term loan matured after year end but renewed
for another 5 years after year end (before the issuanceof the financial statements)
bull 2-year term loan to be matured with 12 months and theentity has a right to renew for another 2 years
timestimes
times
radic
copy 2005-07 Nelson 74
Balance Sheetbull As a minimum the face of the balance sheet shall
include line items that present the following amountsa) property plant and equipmentb) investment propertyc) intangible assetsd) financial assets (excl amounts shown under (e) (h) and (I))e) investments accounted for using the equity methodf) biological assetsg) inventoriesh) trade and other receivablesi) cash and cash equivalentsj) trade and other payablesk) provisionsl) financial liabilities (excl amounts shown under (j) and (k))m) liabilities and assets for current tax as defined in HKAS 12 Income Taxesn) deferred tax liabilities and deferred tax assets as defined in HKAS 12o) minority interest presented within equity andp) issued capital and reserves attributable to equity holders of the parent
38
copy 2005-07 Nelson 75
Balance Sheetbull The face of the balance sheet shall also include line
items that present the following amountsa) The total of assets classified as held for sale and
assets included in disposal groups classified as held for sale in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations and
b) Liabilities included in disposal groups classified as held for sale in accordance with IFRS 5
copy 2005-07 Nelson 76
Balance Sheetbull Additional line items headings and subtotals shall
be presented on the face of the balance sheet when such presentation is relevant to an understanding of the entityrsquos financial position
bull When an entity presents current and non-current assets and current and non-current liabilities as separate classifications on the face of its balance sheet ndash it shall not classify deferred tax assets
(liabilities) as current assets (liabilities)
39
copy 2005-07 Nelson 77
Balance Sheet
bull The use of different measurement bases for different classes of assets suggests that their nature or function differs and therefore that they should be presented as separate line itemsndash For example different classes of property plant and
equipment can be carried atbull Cost orbull Revalued amountsin accordance with IAS 16 PPE
In the past it use ldquomay needrdquoIn the past it use ldquomay needrdquo
copy 2005-07 Nelson 78
Balance Sheet
Galaxy Entertainment Group LimitedConsolidated balance sheet as at 31122005
CaseCase
40
copy 2005-07 Nelson 79
Balance Sheet
Melco Development Limited (新濠國際發展有限公司)Consolidated balance sheet as at 31122005
CaseCase
copy 2005-07 Nelson 80
Income Statement Minimum requirements on the face of the income statementbull As a minimum the face of the income statement shall include line items
that present the following amounts for the perioda) revenueb) finance costsc) share of the profit or loss of associates and joint ventures accounted
for using the equity methodd) pre-tax gain or loss recognised on the disposal of assets or
settlement of liabilities attributable to discontinuing operationse) tax expense andf) profit or loss
41
copy 2005-07 Nelson 81
Income Statement bull The following items shall be disclosed on the face of the income
statement as allocations of profit or loss for the perioda) Profit or loss attributable to minority interest andb) Profit or loss attributable to equity holders of the parent
A similar requirement has been added for the statement of changes in equity and such allocated amounts are not to be presented as items of income or expense
copy 2005-07 Nelson 82
Income Statement
Melco Dev LtdConsolidated income statementas at 31122005
CaseCase
42
copy 2005-07 Nelson 83
Income Statement bull Not require to disclose the results of operating
activities as a line item on the face of the incomestatement
bull An entity shall not present any items of income and expense as extraordinary items either onthe face of the income statements or in the notes
Entities canrsquot use itEntities canrsquot use it
Entities can still show itEntities can still show it
copy 2005-07 Nelson 84
Income Statement Either on the face of the income statement or in the notesbull An entity shall present an analysis of expenses using a classification
based on eitherbull the nature of expenses orbull their function within the entity
whichever provides information that is reliable and more relevant
bull Entities classifying expenses by function shall disclose additional information on the nature of expenses includingbull depreciation and amortisation expense and bull employee benefits expense
43
copy 2005-07 Nelson 85
Income StatementCaseCase
Nature or FunctionNature or Nature or FunctionFunction
copy 2005-07 Nelson 86
Statement of Changes in Equity bull An entity shall present a statement of changes in equity showing on the
face of the statementa) profit or loss for the period b) each item of income and expense for the period that as required by
IFRSs is recognised directly in equity and the total of these itemsc) total income and expense for the period (calculated as the sum of (a) and
(b)) showing separately the total amounts attributablebull to equity holders of the parent andbull to minority interest and
d) for each component of equity the effects of changes in accounting policies and corrections of errors recognised in accordance with IAS 8
Any ChangeAny Change
A revised requirementbull A statement of changes in equity that comprises only these items
shall be titled a statement of recognised income and expenses
A revised requirementbull A statement of changes in equity that comprises only these items
shall be titled a statement of recognised income and expenses
44
copy 2005-07 Nelson 87
Statement of Changes in Equity bull An entity shall also present either on the face of the
statement of changes in equity or in the notesa) the amounts of transactions with equity holders acting in
their capacity as equity holders showing separately distributions to equity holders
b) the balance of retained earnings (ie accumulated profit or loss) at the beginning of the period and at the balance sheet date and the changes during the period and
c) a reconciliation between the carrying amount of each class of contributed equity and each reserve at the beginning and the end of the period separately disclosing each change
copy 2005-07 Nelson 88
Statement of Changes in Equity
Consolidated SCE as at 31122005
CaseCase
45
copy 2005-07 Nelson 89
Notes Structure (an entity is required to disclose the following)
bull The notes shalla) present information about the basis of preparation of the financial statements
and the specific accounting policies usedb) disclose the information required by HKFRSs that is not presented on the
face of the balance sheet income statement statement of changes in equity or cash flow statement and
c) provide additional information that is not presented on the face of the balance sheet income statement statement of changes in equity or cash flow statement but is relevant to an understanding of any of them
bull Notes shall as far as practicable be presented in a systematic manner bull Each item on the face of the balance sheet income statement statement
of changes in equity and cash flow statement shall be cross-referencedto any related information in the notes
copy 2005-07 Nelson 90
Notes Disclosures (an entity is required to disclose the following)
bull Disclosure of accounting policiesAn entity shall disclose in the summary of significant accounting policiesa) the measurement basis (or bases) used in preparing the financial
statements andb) the other accounting policies used that are relevant to an understanding of
the financial statements
46
copy 2005-07 Nelson 91
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)ndash The financial statements have been prepared in
accordance with Hong Kong Financial Reporting Standards (lsquolsquoHKFRSrsquorsquo) issued by the Hong Kong Institute of Certified Public Accountants bull under the historical cost convention as modified by the
revaluation of investment properties available-for-sale financial assets derivative financial instruments and other investments which are carried at fair values helliphellip
ndash The principal accounting policies applied in the preparation of these financial statements are set out below These policies have been consistently applied to all the years presented except for those stated in note 2(a) above
copy 2005-07 Nelson 92
Notes Disclosures (an entity is required to disclose the following)
bull Disclosure of accounting policiesndash The judgements apart from those involving estimations management has
madebull in the process of applying the entityrsquos accounting policies that have the
most significant effect on the amounts recognised in the financial statements (in the summary of significant accounting policies or other notes)
Examples ndash Management makes judgements in determininga) whether financial assets are held-to-maturity investmentsb) when substantially all the significant risks and rewards of
ownership of financial assets and lease assets are transferred to other entities
c) whether in substance particular sales of goods are financing arrangements and therefore do not give rise to revenue and
d) whether the substance of the relationship between the entity and a special purpose entity indicates that the special purpose entity is controlled by the entity
Examples ndash Management makes judgements in determininga) whether financial assets are held-to-maturity investmentsb) when substantially all the significant risks and rewards of
ownership of financial assets and lease assets are transferred to other entities
c) whether in substance particular sales of goods are financing arrangements and therefore do not give rise to revenue and
d) whether the substance of the relationship between the entity and a special purpose entity indicates that the special purpose entity is controlled by the entity
47
copy 2005-07 Nelson 93
Notes Disclosures (an entity is required to disclose the following)
bull Key sources of estimation uncertaintyndash Information about the key assumptions concerning the future and
other key sources of estimation uncertainty at the balance sheet datebull that have a significant risk of causing a material adjustment to the
carrying amounts of assets and liabilities within the next financial yearndash In respect of those assets and liabilities the notes shall include details of
a) their nature andb) their carrying amount as at the balance sheet date
Examples ndash in the absence of recently observed market prices used to measure the following assets and liabilities future-oriented estimates are necessary to measurebull the recoverable amount of classes of PPEbull the effect of technological obsolescence on inventories
Estimates involve assumptions about such items asbull the risk adjustment to cash flows or discount rates usedbull future changes in salaries and in prices affecting other costs
Examples ndash in the absence of recently observed market prices used to measure the following assets and liabilities future-oriented estimates are necessary to measurebull the recoverable amount of classes of PPEbull the effect of technological obsolescence on inventories
Estimates involve assumptions about such items asbull the risk adjustment to cash flows or discount rates usedbull future changes in salaries and in prices affecting other costs
copy 2005-07 Nelson 94
Notes
Esprit Holdings LimitedEsprit Holdings Limitedbull Critical Accounting Estimates and Judgements
ndash Estimates and judgements are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonableunder the circumstances
ndash Critical accounting estimates and assumptionsbull The Group makes estimates and assumptions concerning
the future The resulting accounting estimates will by definition seldom equal the related actual results
bull The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below helliphellip (including (1) useful life and impairment of trademarks and (2) income taxes)
CaseCase
48
copy 2005-07 Nelson 95
Notes
Melco Development Limited (新濠國際發展有限公司)Notes to the financial statements for the year ended 31122005ndash The key assumptions concerning the future and other key sources
of estimation uncertainty at the balance sheet date that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below helliphellip(The issues discussed includebull Allowances for inventories bull Estimated impairment of goodwill Income taxes)
CaseCase
copy 2005-07 Nelson 96
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)ndash Estimates and judgements used in preparing the
financial statements are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonable under the circumstances
ndash The Group makes estimates and assumptionsconcerning the future
ndash The resulting accounting estimates will by definition seldom equal the related actual results
ndash The estimates and assumptions that have a significant effect on the carrying amounts of assets and liabilities are discussed below hellip (including impairment of goodwill impairment of gaming
licence Useful lives of property plant and equipment fair value of investment properties hellip)
49
copy 2005-07 Nelson 97
Notes Disclosures (an entity is required to disclose the following)
bull Other disclosuresAn entity shall disclose in the notesa) the amount of dividends proposed or declared before the
financial statements were authorised for issue but not recognised as a distribution to equity holders during the period and the related amount per share(HK incorporated companies are required to show the aggregate amount which is recommended for distribution by way of dividend under a separate heading(s) in their balance sheet (HK Co Ord 10th Sch para 9(1)(e)) and
b) the amount of any cumulative preference dividends not recognised
copy 2005-07 Nelson 98
Notes Disclosures (an entity is required to disclose the following)
An entity shall disclose the following if not disclosedelsewhere in information published with the financial statementsa) the domicile and legal form of the entity
its country of incorporation andthe address of its registered office(or principal place of business if different from the registered office)
b) a description of the nature of the entityrsquos operations and its principal activities and
c) the name of the parent and the ultimate parent of the group
ldquoshall discloserdquo now instead of ldquoencouraged to discloserdquo
ldquoshall discloserdquo now instead of ldquoencouraged to discloserdquo
bull Other disclosures
Any specialAny special
50
copy 2005-07 Nelson 99
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)bull The principal activities of Galaxy Entertainment Group
Ltd (the lsquolsquoCompanyrsquorsquo) (formerly known as K WahConstruction Materials Ltd) and its subsidiaries (together the lsquolsquoGrouprsquorsquo) are tondash operate in casino games of chance or games of other forms
in Macau (and) manufacture sale and distribution of construction materials in HK Macau and Mainland China
bull The Company is ndash a limited liability company incorporated in Hong Kong and ndash has its listing on the Main Board of The Stock Exchange of
Hong Kong Limitedbull The address of its registered office and its principal place
of business is Room 1606 16th Floor Hutchison House 10 Harcourt Road Central HK
copy 2005-07 Nelson 100
Effective Date
bull An entity shall apply IAS 1 for annual periods beginning on or after 1 Jan 2005
ndash Earlier application is encouragedndash If an entity applies IAS 1 for an earlier period it shall
disclose this factbull For the amendments relating to the Statement of
Changes in Equityndash An entity shall apply it for annual periods beginning on
or after 1 Jan 2006ndash If an entity applies the amendments to IAS 19
Employee Benefits ndash Actuarial Gains and Losses Group Plans and Disclosures for an earlier period that amendment shall be applied for that earlier period
51
copy 2005-07 Nelson 101
Todayrsquos Agenda
Capital Disclosures (Amendments to IAS 1)
Capital Disclosures (Amendments to IAS 1)
copy 2005-07 Nelson 102
Capital Disclosures ndash For 2007
52
copy 2005-07 Nelson 103
Capital Disclosures
What is capital Is it helliphellip
CapitalCapital AssetsAssets LiabilitiesLiabilities= ndash
bull IAS 1BC47 considers ldquowhether an entity can have a view of capital that differs from what IFRSs define as equityrdquo
bull It further clarifies that although for the purposes of this disclosure capital would often equate with equity as defined in IFRSsndash it might also include or exclude some components
bull It also noted that the capital disclosure in IAS 1 is intended to give entities the opportunity to describendash how they view the components of capital they manage if this is
different from what IFRSs define as equity helliphellip
copy 2005-07 Nelson 104
EquityEquityEquity AssetsAssets LiabilitiesLiabilities= ndash
Capital Disclosures
Based on the Framework amp IFRSs the accounting equation should be
CapitalCapital AssetsAssets LiabilitiesLiabilities= ndash
bull An entityrsquos capital may be part of its equity plus part of its liabilities depending on how it manage ldquoits capitalrdquo helliphellip
53
copy 2005-07 Nelson 105
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowinga) qualitative information about its objectives policies and processes for
managing capital including (but not limited to)i) a description of what it manages as capitalii) when an entity is subject to externally imposed capital requirements
the nature of those requirements and how those requirements are incorporated into the management of capital and
iii) how it is meeting its objectives for managing capital
bull To comply with the capital disclosures the entity discloses thefollowinga) qualitative information about its objectives policies and processes for
managing capital including (but not limited to)i) a description of what it manages as capitalii) when an entity is subject to externally imposed capital requirements
the nature of those requirements and how those requirements are incorporated into the management of capital and
iii) how it is meeting its objectives for managing capital
copy 2005-07 Nelson 106
Capital Disclosures
Example disclosurebull The Grouprsquos objectives when managing capital are
ndash to safeguard the entityrsquos ability to continue as a going concern
bull so that it can continue to provide returns for shareholders and benefits for other stakeholders and
ndash to provide an adequate return to shareholders by pricing products and services commensurately with the level of risk
bull The Group sets the amount of capital in proportion to risk
ExampleExample
ObjectivesObjectives
54
copy 2005-07 Nelson 107
Capital Disclosures
bull The Group manages the capital structure and makes adjustments to it in the light ofndash changes in economic conditions and ndash the risk characteristics of the underlying assets
bull In order to maintain or adjust the capital structure the Group mayndash adjust the amount of dividends paid to shareholders ndash return capital to shareholders ndash issue new shares or ndash sell assets to reduce debt
ExampleExample
Example disclosure
HowHow
copy 2005-07 Nelson 108
Capital Disclosures
bull Consistently with others in the industry the Group monitors capital on the basis of ndash the debt-to-adjusted capital ratio
bull This ratio is calculated as net debt divide adjusted capital
ExampleExample
Example disclosure
HowHow
bull Net debt is calculated as ndash Total debt (as shown in the
balance sheet)ndash Less cash amp cash equivalents
bull Net debt is calculated as ndash Total debt (as shown in the
balance sheet)ndash Less cash amp cash equivalents
bull Adjusted capital ndash comprises all components of
equity (ie share capital share premium minority interest retained earnings and revaluation reserve) ndash other than amounts
recognised in equity relating to cash flow hedges and
ndash includes some forms of subordinated debt
bull Adjusted capital ndash comprises all components of
equity (ie share capital share premium minority interest retained earnings and revaluation reserve) ndash other than amounts
recognised in equity relating to cash flow hedges and
ndash includes some forms of subordinated debt
55
copy 2005-07 Nelson 109
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowing
bull To comply with the capital disclosures the entity discloses thefollowingb) summary quantitative data about what it manages as capital
Some entities regard some financial liabilities (eg some forms of subordinated debt) as part of capitalOther entities regard capital as excluding some components of equity (eg components arising from cash flow hedges)
c) any changes in (a) and (b) from the previous period
copy 2005-07 Nelson 110
Capital Disclosures
Example disclosure (continued from previous example)
ExampleExample
bull During 20X4 the Grouprsquos strategy which was unchanged from 20X3 was to maintain the debt-to-adjusted capital ratio at the lower end of the range 61 to 71 in order to secure access to finance at a reasonable cost by maintaining a BB credit rating The debt-to-adjusted capital ratios at 31 December 20X4 and at 31 December 20X3 were as follows
3112X4 ($rsquoM) 3112X3 ($rsquoM) Total debt 1000 1100 Less cash and cash equivalents (90) (150)Net debt 910 950
Total equity 110 105 Add subordinated debt instruments 38 38 Less amounts recognised in equity
relating to cash flow hedges (10) (5)Adjusted capital 138 138
Debt-to-adjusted capital ratio 66 69
56
copy 2005-07 Nelson 111
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowing
bull To comply with the capital disclosures the entity discloses thefollowingd) whether during the period it complied with any externally imposed capital
requirements to which it is subjecte) when the entity has not complied with such externally imposed capital
requirements the consequences of such non-complianceThese disclosures shall be based on the information provided internally to the entityrsquos key management personnel
copy 2005-07 Nelson 112
Capital DisclosuresExampleExample
Example disclosurebull Entity A filed its quarterly regulatory capital return for
30 September 20X7 on 20 October 20X7 bull At that date Entity Arsquos regulatory capital was below
the capital requirement imposed by Regulator B by $1 million
bull As a result Entity A was required to submit a plan to the regulator indicating how it would increase its regulatory capital to the amount required
bull Entity A submitted a plan that entailed selling part of its unquoted equities portfolio with a carrying amount of $115 million in the fourth quarter of 20X7
bull In the fourth quarter of 20X7 Entity A sold its fixed interest investment portfolio for $126 million and met its regulatory capital requirement
For example SFC or banks
For example SFC or banks
57
copy 2005-07 Nelson 113
Capital DisclosuresCaseCase
bull Early adopted capital disclosure in 2005 and itsannual report states that (extract only)ndash The Grouprsquos objectives when managing capital are
bull To safeguard the Grouprsquos ability to continue as a going concern so that it continues to provide returns for shareholders and benefits for other stakeholders
bull To support the Grouprsquos stability and growth andbull To provide capital for the purpose of strengthening the
Grouprsquos risk management capability
copy 2005-07 Nelson 114
Capital DisclosuresCaseCase
ndash The Group actively and regularly reviews and manages its capital structure to ensure optimal capital structure and shareholder returns taking into consideration the future capital requirements of the Group and capital efficiency helliphellip
ndash The Group adopts a dividend policy helliphellip while retaining 10 per cent of the profit as capital of the Group for future use
ndash The Group has set aside $1500 million of retained earnings for the purpose of strengthening the risk management regime of the clearing houses and supporting their roles as central counterparties
ndash As in prior years the Group monitors capital by reviewing the level of capital that is at the disposal of the Group (ldquoadjusted capitalrdquo) Adjusted capital comprises all components of shareholdersrsquo equity other than the hedging reserve relating to cash flow hedges designated reserves and investment revaluation reserve helliphellip
bull Early adopted capital disclosure in 2005 and itsannual report states that (extract only)
58
copy 2005-07 Nelson 115
Capital Disclosures ndash Transition
bull An entity shall apply the requirements of capital disclosure for
ndash annual periods beginning on or after 1 January 2007
bull Early application is encouraged
copy 2005-07 Nelson 116
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk
59
copy 2005-07 Nelson 117
QampA SessionQampA SessionQampA Session
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk
16
copy 2005-07 Nelson 31
3 Overall Consideration
a) Fair presentation and compliance with IFRSsb) Going concernc) Accrual basis of accountingd) Consistency of presentatione) Materiality and aggregationf) Offsettingg) Comparative information
copy 2005-07 Nelson 32
3 Overall Consideration
bull Financial statements shall present fairly of the financial position financial performance and cash flows of an entity
ndash Fair presentation requires the faithful representation of the effects of transactions other events and conditions in accordance with
bull the definitions and recognition criteria for assets liabilities income and expenses set out in the Framework
ndash The application of IFRSs with additional disclosure when necessary is presumed to result in financial statements that give a true and fair view
a) Fair presentation and compliance with IFRSs
No such precisely statement before
17
copy 2005-07 Nelson 33
3 Overall Consideration
bull Statement of compliancendash An entity whose financial statements comply
with IFRSs shall make an explicit and unreserved statement of such compliance in the notes
ndash Financial statements shall not be described as complying with IFRSsbull unless they comply with all the
requirements of IFRSsndash In virtually all circumstances a fair
presentation is achieved by bull compliance with applicable IFRSs
a) Fair presentation and compliance with IFRSs
copy 2005-07 Nelson 34
3 Overall Consideration
Melco Development Limited (新濠國際發展有限公司)Notes to the financial statements for year ended 31122005ndash The consolidated financial statements have been prepared in
accordance with HKFRSsndash In addition the consolidated financial statements include applicable
disclosures required by the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited and by the Companies Ordinance
CaseCase
18
copy 2005-07 Nelson 35
3 Overall Consideration
bull A fair presentation also requires an entitya) to select and apply accounting policies in accordance
with IAS 8b) to present information including accounting policies
in a manner that provides relevant reliable comparable and understandable information
c) to provide additional disclosuresndash when compliance with the specific requirements in
IFRSs is insufficient to enable users to understand the impact of particular transactions other events and conditions on the entityrsquos financial position and financial performance
bull Inappropriate accounting policies are not rectified eitherndash by disclosure of the accounting policies used orndash by notes or explanatory material
a) Fair presentation and compliance with IFRSs
copy 2005-07 Nelson 36
3 Overall Consideration
bull Departure from Standard or Interpretation (Simplified)ndash In the extremely rare circumstances in which
management concludes thatbull compliance with a requirement in a standard or an
interpretation would be so misleading thatbull it would conflict with the objective of financial
statements set out in the Frameworkthe entity shall depart from that requirement if the relevant regulatory framework requires or otherwise does not prohibit such a departure
a) Fair presentation and compliance with IFRSs
19
copy 2005-07 Nelson 37
3 Overall Consideration
bull Departure from Standard or Interpretation (Simplified)
a) Fair presentation and compliance with IFRSs
ndash Then the following disclosure is requireda) management has concluded that the financial
statements give a true and fair viewb) that it has complied with applicable standards and
interpretations except that it has departed from a particular requirement
c) the title of the standard or interpretation from which the entity has departed the nature of the departure the reason why that treatment would be so misleading and the treatment adopted and
d) for each period presented the financial impact of the departure on each item in the financial statements that would have been reported in complying with the requirement
copy 2005-07 Nelson 38
3 Overall Consideration
Interim Report 2005 clearly stated thatInterim Report 2005 clearly stated that
CaseCase
bull The directors consider it inappropriate for the company to adopt two particular aspects of the newrevised HKFRSs as these would result in the financial statements in the view of the directors eitherbull not reflecting the commercial substance of the business orbull being subject to significant potential short-term volatility as
explained below helliphellip
20
copy 2005-07 Nelson 39
3 Overall ConsiderationCaseCase
bull HKAS 40 ldquoInvestment propertyrdquo requires an assessment of the fair value of investment properties
bull The group intends to follow the same accounting treatment as adopted in 2004 which is to value such investment properties on an annual basis
bull Accordingly the investment properties were not revalued at 30 June 2005 since the directors consider that such change of practice could introduce a significant element of short-term volatility into the income statement in respect of assets which are being held on a long-term basis by the group helliphellip
bull It is not practicable to estimate the financial effect of this non-compliance as no interim valuation of the properties has been conducted
Interim Report 2005 clearly stated thatInterim Report 2005 clearly stated that
At year-end revaluation would still be conductedAt year-end revaluation would still be conducted
copy 2005-07 Nelson 40
3 Overall ConsiderationCaseCase
bull HKAS 12 ldquoIncome Taxesrdquo together with HKAS-INT 21 ldquoIncome Taxes ndashRecovery of Revalued Non-Depreciable Assetsrdquo requires deferred taxation to be recognised on any revaluation movements on investment propertiesbull It is further provided that any such deferred tax liability should be calculated
at the profits tax rate in the case of assets which the management has no definite intention to sell
bull The company has not made such provision in respect of its HK investment properties since the directors consider that such provision would result in the financial statements not reflecting the commercial substance of the businessbull since should any such sale eventuate any gain would be regarded as capital
in nature and would not be subject to any tax in HKbull Should this aspect of HKAS 12 have been adopted deferred tax liabilities
amounting to HK$2008 million on the revaluation surpluses arising from revaluation of HK investment properties would have been provided
(estimate - over 12 of the net assets at 30 June 2005)
Interim Report 2005 clearly stated thatInterim Report 2005 clearly stated that
21
copy 2005-07 Nelson 41
3 Overall Consideration
bull Departure but such departure is prohibitedndash In the extremely rare circumstances in which
management concludes that bull compliance with a requirement in a
standard or an interpretation would be so misleading that
bull it would conflict with the objective of financial statements set out in the Framework
bull but the relevant regulatory framework prohibits departure from the requirement the entity shall to the maximum extent possible reduce the perceived misleading aspects of compliance by disclosing helliphellip
a) Fair presentation and compliance with IFRSs
copy 2005-07 Nelson 42
3 Overall Consideration
ndash by disclosinga) the title of the standard or interpretation in
question the nature of the requirement and the reason why management has concluded that complying with that requirement is so misleading in the circumstances that it conflicts with the objective of financial statements set out in the Framework and
b) for each period presented the adjustments to each item in the financial statements that management has concluded would be necessary to give a fair presentation
a) Fair presentation and compliance with IFRSsbull Departure but such departure is prohibited
22
copy 2005-07 Nelson 43
3 Overall Consideration
bull When assessing whether complying with a specific requirement in a standard or an interpretation would be so misleading that it would conflict with the objective of financial statements set out in the Frameworkndash management considers
a) why the objective of financial statements is not achieved in the particular circumstances and
b) how the entityrsquos circumstances differ from those of other entities that comply with the requirement ndash If other entities in similar circumstances comply with the
requirement raquo there is a rebuttable presumption that the entityrsquos compliance
with the requirement would not be so misleading that it would conflict with the objective of financial statements set out in the Framework
a) Fair presentation and compliance with IFRSs
copy 2005-07 Nelson 44
3 Overall ConsiderationCaseCase
Howrsquos about this Howrsquos about this
However 2005 Final Results Announcementdisclosed that bull provision for deferred tax was finally made
with regard to revaluation of the HK investment properties (total HK$22 billion) at 2005 year-end
However However 2005 Final Results Announcement2005 Final Results Announcementdisclosed that disclosed that bullbull provision for deferred tax was finally made provision for deferred tax was finally made
with regard to revaluation of the HK with regard to revaluation of the HK investment properties (total HK$22 billion) at investment properties (total HK$22 billion) at 2005 year2005 year--endend
23
copy 2005-07 Nelson 45
b) Going Concern
3 Overall Consideration
bull When preparing financial statements management shall make an assessment of an entityrsquos ability to continue as a going concern
bull Financial statements shall be prepared on a going concern basisndash unless management either intends to liquidate the entity or to cease
trading or has no realistic alternative but to do so bull When management is aware in making its assessment of
material uncertainties related to events or conditions that may cast significant doubt upon the entityrsquos ability to continue as a going concern those uncertainties shall be disclosed
bull When financial statements are not prepared on a going concern basis that fact shall be disclosed together with the basis on which the financial statements are prepared and the reason why the entity is not regarded as a going concern
copy 2005-07 Nelson 46
c) Accrual Basis of Accounting
3 Overall Consideration
bull An entity shall prepare its financial statements except for cash flow information using the accrual basis of accounting
bull When the accrual basis of accounting is used items are recognised as assets liabilities equity income and expensesndash when they satisfy the definitions and recognition criteria for those
elements in the Framework
24
copy 2005-07 Nelson 47
3 Overall Consideration
bull The presentation and classification of items in the financial statements shall be retained from one period to the next unlessa) it is apparent
bull following a significant change in the nature of the entityrsquos operations (eg significant acquisition or disposal) or
bull a review of its financial statementsthat another presentation or classification would be more appropriatehaving regard to the criteria for the selection and application of accounting policies in IAS 8 or
b) a IFRS requires a change in presentation
d) Consistency of presentation
An entity changes the presentation of its financial statements only ifndash the changed presentation provides information that is reliable and is
more relevant to users of the financial statements andndash the revised structure is likely to continue so that comparability is not
impaired
An entity changes the presentation of its financial statements only ifndash the changed presentation provides information that is reliable and is
more relevant to users of the financial statements andndash the revised structure is likely to continue so that comparability is not
impaired
copy 2005-07 Nelson 48
3 Overall Consideration
bull Each material class of similar items shall bendash presented separately in the financial
statementsbull Items of a dissimilar nature or function shall be
ndash presented separately unless they are immaterial
bull Applying the concept of materiality means that a specific disclosure requirement in a IFRS neednot be satisfied if the information is not material
e) Materiality and Aggregation
What is the situation of recognition and measurement
What is the What is the situation of situation of recognition and recognition and measurementmeasurement
25
copy 2005-07 Nelson 49
3 Overall Consideration
bull What is materialndash Omissions or misstatements of items are
material if they could individually or collectively influence the economic decisions of users taken on the basis of the financial statements
ndash Materiality depends on the size and nature of the omission or misstatement judged in the surrounding circumstancesbull The size or nature of the item or a combination
of both could be the determining factor
e) Materiality and Aggregation
copy 2005-07 Nelson 50
3 Overall Consideration
bull Assets and liabilities and income and expenses shall not be offsetndash unless required or permitted by a IFRS
bull It is important that assets and liabilities and income and expenses are reported separatelyndash Measuring assets net of valuation allowances mdash
for example obsolescence allowances on inventories and doubtful debts allowances on receivables mdash is not offsetting
f) Offsetting
26
copy 2005-07 Nelson 51
3 Overall Consideration
bull During ordinary activities some transactions that do not generate revenue but are incidental to the main revenue-generating activitiesndash The results of such transactions are presented
when this presentation reflects the substance of the transaction or other event by netting any income with related expenses arising on the same transaction
f) Offsetting
copy 2005-07 Nelson 52
3 Overall Consideration
bull For examplea) gains and losses on the disposal of non-current
assets including investments and operating assets- are reported by deducting from the proceeds on
disposal the carrying amount of the asset and related selling expenses and
b) expenditure related to a provision that is- recognised in accordance with IAS 37 and - reimbursed under a contractual arrangement with
a third party (for example a supplierrsquos warranty agreement)
may be netted against the related reimbursement
f) Offsetting
ExampleExample
27
copy 2005-07 Nelson 53
3 Overall Consideration
bull Gains and losses arising from a group of similar transactions are reported on a net basisndash For example
bull foreign exchange gains and losses or bull gains and losses arising on financial instruments held for trading
bull Such gains and losses are however reported separately if they are material
bull Gains and losses arising from a group of similar transactions are reported on a net basisndash For example
bull foreign exchange gains and losses or bull gains and losses arising on financial instruments held for trading
bull Such gains and losses are however reported separately if they are material
Can foreign exchange gains and losses be offset
ExampleExample
copy 2005-07 Nelson 54
3 Overall Consideration
bull Except when a IFRS permits or requires otherwise ndash comparative information shall be disclosed in
respect of the previous period for all amountsreported in the financial statements
bull When the presentation or classification of items in the financial statements is amended ndash comparative amounts shall be reclassified unless
the reclassification is impracticable
g) Comparative information
28
copy 2005-07 Nelson 55
Amended requirementsAmended requirements
3 Overall Consideration
bull When comparative amounts are reclassified an entity shall disclosea) the nature of the reclassificationb) the amount of each item or class of items that is
reclassified andc) the reason for the reclassification
g) Comparative information
bull In the pastonly the reason for and a description of the nature of materialreclassifications should be disclosedExemption for disclosure of comparative information for the reconciliation of movements in fixed assets is also removed
bull In the pastonly the reason for and a description of the nature of materialreclassifications should be disclosedExemption for disclosure of comparative information for the reconciliation of movements in fixed assets is also removed
copy 2005-07 Nelson 56
3 Overall Consideration
Melco Development Limited (新濠國際發展有限公司)Notes to the financial statements for year ended 31122005ndash Because HKAS 32 requires retrospective application comparative
figures for 2004 have been restated (see Note 2A for the financial impact)
CaseCase
29
copy 2005-07 Nelson 57
3 Overall Consideration
Galaxy Entertainment Group LimitedNotes to the financial statements (ye 31122005)ndash All changes in the accounting policies require
retrospective application except HKAS 39 and HKFRS 2 for which transitional provisions are applied
ndash As a result the 2004 comparative figures have also been restated or amended in accordance with the relevant requirements
ndash The effects of all the changes in accounting policies are summarised in notes (b) and (c) below
CaseCase
copy 2005-07 Nelson 58
bull Identification of the financial statementsbull Reporting periodbull Balance sheet
1 CurrentNon-current distinction2 Current assets3 Current liabilities4 Information to be presented on the face of the balance sheet5 Information to be presented either on the face of the balance sheet or in
the notesbull Income statement
1 Profit or loss for the period2 Information to be presented on the face of the income statement3 Information to be presented either on the face of the income statement or
in the notesbull Statement of changes in equitybull Cash flow statementbull Notes
4 Structure and Content
30
copy 2005-07 Nelson 59
Identification of Financial Statements
bull The financial statements shall be identified clearly and distinguished from other information in the same published document
bull The following information shall be displayed prominently and repeated when it is necessary for a proper understanding of the information presented
a) the name of the reporting entity or other means of identification and any change in that information from the preceding balance sheet date
b) whether the financial statements cover the individual entity or a group of entities
c) the balance sheet date or the period covered by the financial statements whichever is appropriate to that component of the financial statements
d) the presentation currency as defined in HKAS 21 The Effects of Changes in Foreign Exchange Rates and
e) the level of rounding used in presenting amounts in the financial statements
copy 2005-07 Nelson 60
Identification of Financial Statements
bull Can the units of the presentation currency be rounded to thousands or millions
bull Financial statements are often made more understandableby presenting information in thousands or millions of units of the presentation currency
bull This is acceptable as long asndash the level of rounding in presentation is disclosed and ndash material information is not omitted
bull Financial statements are often made more understandableby presenting information in thousands or millions of units of the presentation currency
bull This is acceptable as long asndash the level of rounding in presentation is disclosed and ndash material information is not omitted
ExampleExample
31
copy 2005-07 Nelson 61
Reporting Period
bull Financial statements shall be presented at least annually
bull When an entityrsquos balance sheet date changes and the annual financial statements are presented for a period longer or shorter than one year an entity shall disclose in addition to the period covered by the financial statementsa) the reason for using a longer or shorter period andb) the fact that comparative amounts for the income
statement statement of changes in equity cash flow statement and related notes are not entirely comparable
copy 2005-07 Nelson 62
Reporting Period
bull Can a set of financial statements cover 52-week instead of a year
bull Normally financial statements are consistently prepared covering a one-year period
bull However for practical reasons some entities prefer to report for example for a 52-week period
bull IAS 1 does not preclude this practice because the resulting financial statements are unlikely to be materially different from those that would be presented for one year
bull Normally financial statements are consistently prepared covering a one-year period
bull However for practical reasons some entities prefer to report for example for a 52-week period
bull IAS 1 does not preclude this practice because the resulting financial statements are unlikely to be materially different from those that would be presented for one year
ExampleExample
32
copy 2005-07 Nelson 63
CurrentNon-current Distinction
bull An entity shall presentndash current and non-current assets andndash current and non-current liabilitiesas separate classifications on the face of its balance sheet
bull Except when a presentation based on liquidity provides informationndash If that information is reliable and is more relevantndash When that exception applies all assets and liabilities shall be
presented broadly in order of liquidity
copy 2005-07 Nelson 64
CurrentNon-current Distinction
bull Whichever method of presentation is adopted for each asset and liability line item that combines amounts expected to be recovered or settled a) no more than 12 months after the balance sheet date
andb) more than 12 months after the balance sheet date(ie combines both current and non-current)
an entity shall disclose the amount expected to be recovered or settled after more than 12 months
33
copy 2005-07 Nelson 65
New requirementsNew requirements
Current Assets
bull An asset shall be classified as current when it satisfies any of the following criteriaa) it is expected to be realised in or is intended for sale or
consumption in the entityrsquos normal operating cycle b) it is held primarily for the purpose of being tradedc) it is expected to be realised within 12 months after the balance
sheet date ord) it is cash or a cash equivalent
bull unless it is restricted from being exchanged or used to settle aliability for at least 12 months after the balance sheet date
bull All other assets shall be classified as non-current
Examplesbull Deposits pledged to bank (how long)bull Fixed deposits over 1 year maturity
Examplesbull Deposits pledged to bank (how long)bull Fixed deposits over 1 year maturity
What is itWhat is it
copy 2005-07 Nelson 66
Current Assets
bull What is operating cycle
bull The operating cycle of an entity is the time between ndash the acquisition of assets for processing and ndash their realisation in cash or cash equivalents
bull When the entityrsquos normal operating cycle is not clearly identifiable ndash its duration is assumed to be 12 months
bull The operating cycle of an entity is the time between ndash the acquisition of assets for processing and ndash their realisation in cash or cash equivalents
bull When the entityrsquos normal operating cycle is not clearly identifiable ndash its duration is assumed to be 12 months
ExampleExample
34
copy 2005-07 Nelson 67
Current Assets CaseCase
copy 2005-07 Nelson 68
Current Assets
bull Can a non-current asset reclassified if it fulfil the definition of current asset later
bull Assets classified as non-current in accordancewith IAS 1 shall not be reclassified as current assetsndash until they meet the criteria to be classified as held for sale in
accordance with IFRS 5bull Assets of a class that an entity would normally regard as non-
current that are acquired exclusively with a view to resale shall notbe classified as currentndash unless they meet the criteria to be classified as held for sale in
accordance with IFRS 5
bull Assets classified as non-current in accordancewith IAS 1 shall not be reclassified as current assetsndash until they meet the criteria to be classified as held for sale in
accordance with IFRS 5bull Assets of a class that an entity would normally regard as non-
current that are acquired exclusively with a view to resale shall notbe classified as currentndash unless they meet the criteria to be classified as held for sale in
accordance with IFRS 5
No non-current assets can be classified as current unless the criteria in IFRS 5 are fulfilled mainlybull Available for immediate salebull Highly probable to make the sale
35
copy 2005-07 Nelson 69
Is it currentIs it current
Current Assets
bull In its 2005 Interim Report full set of HKFRS was adopted and the report set out thatndash Available-for-sale financial assets are non-
derivatives that are eitherbull designated in this category orbull not classified in any of the other categories (ie
loans and receivables financial assets at fair value through profit or loss and held-to-maturity investments)
CaseCase
Similar in 2005 Annual Report
Similar in 2005 Annual Report
ndash They are included in non-current assetsbull unless management intends to dispose of the
investment within 12 months of the balance sheet date
copy 2005-07 Nelson 70
New requirementsNew requirements
Current Liabilities
bull A liability shall be classified as current when it satisfies any of the following criteriaa) it is expected to be settled in the entityrsquos normal operating cycleb) it is held primarily for the purpose of being tradedc) it is due to be settled within 12 months after the balance sheet
date ord) the entity does not have an unconditional right to defer settlement
of the liability for at least 12 months after the balance sheet date
bull All other liabilities shall be classified as non-current
ImplicationImplication
36
copy 2005-07 Nelson 71
Current Liabilities Revised rules on classifying a liability as current or non-currentbull A liability held for being traded rArr currentbull A financial liability due within 12 months after the BS date rArr current
ndash even if an agreement to refinance on a long-term basis is completed after the BS date (only disclosed as non-adjusting event)
bull If an entity has discretion to refinance rArr non-currentbull If an entity without discretion to refinance rArr current
bull A non-current financial liability is payable on demand with a breach on a condition of its loan agreement on or before the BS datendash If the lender agreed not to demand payment
bull after the BS date rArr current (only disclosed as non-adjusting event)
bull by the BS date rArr non-current
ImplicationImplication
copy 2005-07 Nelson 72
Current LiabilitiesCaseCase
Note 12 to Interim Report 2006bull Breach of loan covenants
bull As at 30 June 2006 in respect of certain bank loans with an aggregate carrying amount of HK$1529806000 the Group breached certain financial covenants of the banks loans
bull Since the lenders have not agreed to waive its right to demand immediate payment as at the balance sheet date the loans have been classified as current liabilities in these financial statements at 30 June 2006
37
copy 2005-07 Nelson 73
Current Assets and LiabilitiesExampleExample
Can the following be classified as current assetsbull 3-month fixed deposits pledged to a bank to secure
a mortgage loan of 5 yearsbull 2-year fixed deposits with a bank
Can the following be classified as current assetsbull 3-month fixed deposits pledged to a bank to secure
a mortgage loan of 5 yearsbull 2-year fixed deposits with a bank
Can the following be classified as non-current liabilitiesbull 5-year term loan matured after year end but renewed
for another 5 years after year end (before the issuanceof the financial statements)
bull 2-year term loan to be matured with 12 months and theentity has a right to renew for another 2 years
Can the following be classified as non-current liabilitiesbull 5-year term loan matured after year end but renewed
for another 5 years after year end (before the issuanceof the financial statements)
bull 2-year term loan to be matured with 12 months and theentity has a right to renew for another 2 years
timestimes
times
radic
copy 2005-07 Nelson 74
Balance Sheetbull As a minimum the face of the balance sheet shall
include line items that present the following amountsa) property plant and equipmentb) investment propertyc) intangible assetsd) financial assets (excl amounts shown under (e) (h) and (I))e) investments accounted for using the equity methodf) biological assetsg) inventoriesh) trade and other receivablesi) cash and cash equivalentsj) trade and other payablesk) provisionsl) financial liabilities (excl amounts shown under (j) and (k))m) liabilities and assets for current tax as defined in HKAS 12 Income Taxesn) deferred tax liabilities and deferred tax assets as defined in HKAS 12o) minority interest presented within equity andp) issued capital and reserves attributable to equity holders of the parent
38
copy 2005-07 Nelson 75
Balance Sheetbull The face of the balance sheet shall also include line
items that present the following amountsa) The total of assets classified as held for sale and
assets included in disposal groups classified as held for sale in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations and
b) Liabilities included in disposal groups classified as held for sale in accordance with IFRS 5
copy 2005-07 Nelson 76
Balance Sheetbull Additional line items headings and subtotals shall
be presented on the face of the balance sheet when such presentation is relevant to an understanding of the entityrsquos financial position
bull When an entity presents current and non-current assets and current and non-current liabilities as separate classifications on the face of its balance sheet ndash it shall not classify deferred tax assets
(liabilities) as current assets (liabilities)
39
copy 2005-07 Nelson 77
Balance Sheet
bull The use of different measurement bases for different classes of assets suggests that their nature or function differs and therefore that they should be presented as separate line itemsndash For example different classes of property plant and
equipment can be carried atbull Cost orbull Revalued amountsin accordance with IAS 16 PPE
In the past it use ldquomay needrdquoIn the past it use ldquomay needrdquo
copy 2005-07 Nelson 78
Balance Sheet
Galaxy Entertainment Group LimitedConsolidated balance sheet as at 31122005
CaseCase
40
copy 2005-07 Nelson 79
Balance Sheet
Melco Development Limited (新濠國際發展有限公司)Consolidated balance sheet as at 31122005
CaseCase
copy 2005-07 Nelson 80
Income Statement Minimum requirements on the face of the income statementbull As a minimum the face of the income statement shall include line items
that present the following amounts for the perioda) revenueb) finance costsc) share of the profit or loss of associates and joint ventures accounted
for using the equity methodd) pre-tax gain or loss recognised on the disposal of assets or
settlement of liabilities attributable to discontinuing operationse) tax expense andf) profit or loss
41
copy 2005-07 Nelson 81
Income Statement bull The following items shall be disclosed on the face of the income
statement as allocations of profit or loss for the perioda) Profit or loss attributable to minority interest andb) Profit or loss attributable to equity holders of the parent
A similar requirement has been added for the statement of changes in equity and such allocated amounts are not to be presented as items of income or expense
copy 2005-07 Nelson 82
Income Statement
Melco Dev LtdConsolidated income statementas at 31122005
CaseCase
42
copy 2005-07 Nelson 83
Income Statement bull Not require to disclose the results of operating
activities as a line item on the face of the incomestatement
bull An entity shall not present any items of income and expense as extraordinary items either onthe face of the income statements or in the notes
Entities canrsquot use itEntities canrsquot use it
Entities can still show itEntities can still show it
copy 2005-07 Nelson 84
Income Statement Either on the face of the income statement or in the notesbull An entity shall present an analysis of expenses using a classification
based on eitherbull the nature of expenses orbull their function within the entity
whichever provides information that is reliable and more relevant
bull Entities classifying expenses by function shall disclose additional information on the nature of expenses includingbull depreciation and amortisation expense and bull employee benefits expense
43
copy 2005-07 Nelson 85
Income StatementCaseCase
Nature or FunctionNature or Nature or FunctionFunction
copy 2005-07 Nelson 86
Statement of Changes in Equity bull An entity shall present a statement of changes in equity showing on the
face of the statementa) profit or loss for the period b) each item of income and expense for the period that as required by
IFRSs is recognised directly in equity and the total of these itemsc) total income and expense for the period (calculated as the sum of (a) and
(b)) showing separately the total amounts attributablebull to equity holders of the parent andbull to minority interest and
d) for each component of equity the effects of changes in accounting policies and corrections of errors recognised in accordance with IAS 8
Any ChangeAny Change
A revised requirementbull A statement of changes in equity that comprises only these items
shall be titled a statement of recognised income and expenses
A revised requirementbull A statement of changes in equity that comprises only these items
shall be titled a statement of recognised income and expenses
44
copy 2005-07 Nelson 87
Statement of Changes in Equity bull An entity shall also present either on the face of the
statement of changes in equity or in the notesa) the amounts of transactions with equity holders acting in
their capacity as equity holders showing separately distributions to equity holders
b) the balance of retained earnings (ie accumulated profit or loss) at the beginning of the period and at the balance sheet date and the changes during the period and
c) a reconciliation between the carrying amount of each class of contributed equity and each reserve at the beginning and the end of the period separately disclosing each change
copy 2005-07 Nelson 88
Statement of Changes in Equity
Consolidated SCE as at 31122005
CaseCase
45
copy 2005-07 Nelson 89
Notes Structure (an entity is required to disclose the following)
bull The notes shalla) present information about the basis of preparation of the financial statements
and the specific accounting policies usedb) disclose the information required by HKFRSs that is not presented on the
face of the balance sheet income statement statement of changes in equity or cash flow statement and
c) provide additional information that is not presented on the face of the balance sheet income statement statement of changes in equity or cash flow statement but is relevant to an understanding of any of them
bull Notes shall as far as practicable be presented in a systematic manner bull Each item on the face of the balance sheet income statement statement
of changes in equity and cash flow statement shall be cross-referencedto any related information in the notes
copy 2005-07 Nelson 90
Notes Disclosures (an entity is required to disclose the following)
bull Disclosure of accounting policiesAn entity shall disclose in the summary of significant accounting policiesa) the measurement basis (or bases) used in preparing the financial
statements andb) the other accounting policies used that are relevant to an understanding of
the financial statements
46
copy 2005-07 Nelson 91
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)ndash The financial statements have been prepared in
accordance with Hong Kong Financial Reporting Standards (lsquolsquoHKFRSrsquorsquo) issued by the Hong Kong Institute of Certified Public Accountants bull under the historical cost convention as modified by the
revaluation of investment properties available-for-sale financial assets derivative financial instruments and other investments which are carried at fair values helliphellip
ndash The principal accounting policies applied in the preparation of these financial statements are set out below These policies have been consistently applied to all the years presented except for those stated in note 2(a) above
copy 2005-07 Nelson 92
Notes Disclosures (an entity is required to disclose the following)
bull Disclosure of accounting policiesndash The judgements apart from those involving estimations management has
madebull in the process of applying the entityrsquos accounting policies that have the
most significant effect on the amounts recognised in the financial statements (in the summary of significant accounting policies or other notes)
Examples ndash Management makes judgements in determininga) whether financial assets are held-to-maturity investmentsb) when substantially all the significant risks and rewards of
ownership of financial assets and lease assets are transferred to other entities
c) whether in substance particular sales of goods are financing arrangements and therefore do not give rise to revenue and
d) whether the substance of the relationship between the entity and a special purpose entity indicates that the special purpose entity is controlled by the entity
Examples ndash Management makes judgements in determininga) whether financial assets are held-to-maturity investmentsb) when substantially all the significant risks and rewards of
ownership of financial assets and lease assets are transferred to other entities
c) whether in substance particular sales of goods are financing arrangements and therefore do not give rise to revenue and
d) whether the substance of the relationship between the entity and a special purpose entity indicates that the special purpose entity is controlled by the entity
47
copy 2005-07 Nelson 93
Notes Disclosures (an entity is required to disclose the following)
bull Key sources of estimation uncertaintyndash Information about the key assumptions concerning the future and
other key sources of estimation uncertainty at the balance sheet datebull that have a significant risk of causing a material adjustment to the
carrying amounts of assets and liabilities within the next financial yearndash In respect of those assets and liabilities the notes shall include details of
a) their nature andb) their carrying amount as at the balance sheet date
Examples ndash in the absence of recently observed market prices used to measure the following assets and liabilities future-oriented estimates are necessary to measurebull the recoverable amount of classes of PPEbull the effect of technological obsolescence on inventories
Estimates involve assumptions about such items asbull the risk adjustment to cash flows or discount rates usedbull future changes in salaries and in prices affecting other costs
Examples ndash in the absence of recently observed market prices used to measure the following assets and liabilities future-oriented estimates are necessary to measurebull the recoverable amount of classes of PPEbull the effect of technological obsolescence on inventories
Estimates involve assumptions about such items asbull the risk adjustment to cash flows or discount rates usedbull future changes in salaries and in prices affecting other costs
copy 2005-07 Nelson 94
Notes
Esprit Holdings LimitedEsprit Holdings Limitedbull Critical Accounting Estimates and Judgements
ndash Estimates and judgements are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonableunder the circumstances
ndash Critical accounting estimates and assumptionsbull The Group makes estimates and assumptions concerning
the future The resulting accounting estimates will by definition seldom equal the related actual results
bull The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below helliphellip (including (1) useful life and impairment of trademarks and (2) income taxes)
CaseCase
48
copy 2005-07 Nelson 95
Notes
Melco Development Limited (新濠國際發展有限公司)Notes to the financial statements for the year ended 31122005ndash The key assumptions concerning the future and other key sources
of estimation uncertainty at the balance sheet date that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below helliphellip(The issues discussed includebull Allowances for inventories bull Estimated impairment of goodwill Income taxes)
CaseCase
copy 2005-07 Nelson 96
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)ndash Estimates and judgements used in preparing the
financial statements are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonable under the circumstances
ndash The Group makes estimates and assumptionsconcerning the future
ndash The resulting accounting estimates will by definition seldom equal the related actual results
ndash The estimates and assumptions that have a significant effect on the carrying amounts of assets and liabilities are discussed below hellip (including impairment of goodwill impairment of gaming
licence Useful lives of property plant and equipment fair value of investment properties hellip)
49
copy 2005-07 Nelson 97
Notes Disclosures (an entity is required to disclose the following)
bull Other disclosuresAn entity shall disclose in the notesa) the amount of dividends proposed or declared before the
financial statements were authorised for issue but not recognised as a distribution to equity holders during the period and the related amount per share(HK incorporated companies are required to show the aggregate amount which is recommended for distribution by way of dividend under a separate heading(s) in their balance sheet (HK Co Ord 10th Sch para 9(1)(e)) and
b) the amount of any cumulative preference dividends not recognised
copy 2005-07 Nelson 98
Notes Disclosures (an entity is required to disclose the following)
An entity shall disclose the following if not disclosedelsewhere in information published with the financial statementsa) the domicile and legal form of the entity
its country of incorporation andthe address of its registered office(or principal place of business if different from the registered office)
b) a description of the nature of the entityrsquos operations and its principal activities and
c) the name of the parent and the ultimate parent of the group
ldquoshall discloserdquo now instead of ldquoencouraged to discloserdquo
ldquoshall discloserdquo now instead of ldquoencouraged to discloserdquo
bull Other disclosures
Any specialAny special
50
copy 2005-07 Nelson 99
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)bull The principal activities of Galaxy Entertainment Group
Ltd (the lsquolsquoCompanyrsquorsquo) (formerly known as K WahConstruction Materials Ltd) and its subsidiaries (together the lsquolsquoGrouprsquorsquo) are tondash operate in casino games of chance or games of other forms
in Macau (and) manufacture sale and distribution of construction materials in HK Macau and Mainland China
bull The Company is ndash a limited liability company incorporated in Hong Kong and ndash has its listing on the Main Board of The Stock Exchange of
Hong Kong Limitedbull The address of its registered office and its principal place
of business is Room 1606 16th Floor Hutchison House 10 Harcourt Road Central HK
copy 2005-07 Nelson 100
Effective Date
bull An entity shall apply IAS 1 for annual periods beginning on or after 1 Jan 2005
ndash Earlier application is encouragedndash If an entity applies IAS 1 for an earlier period it shall
disclose this factbull For the amendments relating to the Statement of
Changes in Equityndash An entity shall apply it for annual periods beginning on
or after 1 Jan 2006ndash If an entity applies the amendments to IAS 19
Employee Benefits ndash Actuarial Gains and Losses Group Plans and Disclosures for an earlier period that amendment shall be applied for that earlier period
51
copy 2005-07 Nelson 101
Todayrsquos Agenda
Capital Disclosures (Amendments to IAS 1)
Capital Disclosures (Amendments to IAS 1)
copy 2005-07 Nelson 102
Capital Disclosures ndash For 2007
52
copy 2005-07 Nelson 103
Capital Disclosures
What is capital Is it helliphellip
CapitalCapital AssetsAssets LiabilitiesLiabilities= ndash
bull IAS 1BC47 considers ldquowhether an entity can have a view of capital that differs from what IFRSs define as equityrdquo
bull It further clarifies that although for the purposes of this disclosure capital would often equate with equity as defined in IFRSsndash it might also include or exclude some components
bull It also noted that the capital disclosure in IAS 1 is intended to give entities the opportunity to describendash how they view the components of capital they manage if this is
different from what IFRSs define as equity helliphellip
copy 2005-07 Nelson 104
EquityEquityEquity AssetsAssets LiabilitiesLiabilities= ndash
Capital Disclosures
Based on the Framework amp IFRSs the accounting equation should be
CapitalCapital AssetsAssets LiabilitiesLiabilities= ndash
bull An entityrsquos capital may be part of its equity plus part of its liabilities depending on how it manage ldquoits capitalrdquo helliphellip
53
copy 2005-07 Nelson 105
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowinga) qualitative information about its objectives policies and processes for
managing capital including (but not limited to)i) a description of what it manages as capitalii) when an entity is subject to externally imposed capital requirements
the nature of those requirements and how those requirements are incorporated into the management of capital and
iii) how it is meeting its objectives for managing capital
bull To comply with the capital disclosures the entity discloses thefollowinga) qualitative information about its objectives policies and processes for
managing capital including (but not limited to)i) a description of what it manages as capitalii) when an entity is subject to externally imposed capital requirements
the nature of those requirements and how those requirements are incorporated into the management of capital and
iii) how it is meeting its objectives for managing capital
copy 2005-07 Nelson 106
Capital Disclosures
Example disclosurebull The Grouprsquos objectives when managing capital are
ndash to safeguard the entityrsquos ability to continue as a going concern
bull so that it can continue to provide returns for shareholders and benefits for other stakeholders and
ndash to provide an adequate return to shareholders by pricing products and services commensurately with the level of risk
bull The Group sets the amount of capital in proportion to risk
ExampleExample
ObjectivesObjectives
54
copy 2005-07 Nelson 107
Capital Disclosures
bull The Group manages the capital structure and makes adjustments to it in the light ofndash changes in economic conditions and ndash the risk characteristics of the underlying assets
bull In order to maintain or adjust the capital structure the Group mayndash adjust the amount of dividends paid to shareholders ndash return capital to shareholders ndash issue new shares or ndash sell assets to reduce debt
ExampleExample
Example disclosure
HowHow
copy 2005-07 Nelson 108
Capital Disclosures
bull Consistently with others in the industry the Group monitors capital on the basis of ndash the debt-to-adjusted capital ratio
bull This ratio is calculated as net debt divide adjusted capital
ExampleExample
Example disclosure
HowHow
bull Net debt is calculated as ndash Total debt (as shown in the
balance sheet)ndash Less cash amp cash equivalents
bull Net debt is calculated as ndash Total debt (as shown in the
balance sheet)ndash Less cash amp cash equivalents
bull Adjusted capital ndash comprises all components of
equity (ie share capital share premium minority interest retained earnings and revaluation reserve) ndash other than amounts
recognised in equity relating to cash flow hedges and
ndash includes some forms of subordinated debt
bull Adjusted capital ndash comprises all components of
equity (ie share capital share premium minority interest retained earnings and revaluation reserve) ndash other than amounts
recognised in equity relating to cash flow hedges and
ndash includes some forms of subordinated debt
55
copy 2005-07 Nelson 109
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowing
bull To comply with the capital disclosures the entity discloses thefollowingb) summary quantitative data about what it manages as capital
Some entities regard some financial liabilities (eg some forms of subordinated debt) as part of capitalOther entities regard capital as excluding some components of equity (eg components arising from cash flow hedges)
c) any changes in (a) and (b) from the previous period
copy 2005-07 Nelson 110
Capital Disclosures
Example disclosure (continued from previous example)
ExampleExample
bull During 20X4 the Grouprsquos strategy which was unchanged from 20X3 was to maintain the debt-to-adjusted capital ratio at the lower end of the range 61 to 71 in order to secure access to finance at a reasonable cost by maintaining a BB credit rating The debt-to-adjusted capital ratios at 31 December 20X4 and at 31 December 20X3 were as follows
3112X4 ($rsquoM) 3112X3 ($rsquoM) Total debt 1000 1100 Less cash and cash equivalents (90) (150)Net debt 910 950
Total equity 110 105 Add subordinated debt instruments 38 38 Less amounts recognised in equity
relating to cash flow hedges (10) (5)Adjusted capital 138 138
Debt-to-adjusted capital ratio 66 69
56
copy 2005-07 Nelson 111
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowing
bull To comply with the capital disclosures the entity discloses thefollowingd) whether during the period it complied with any externally imposed capital
requirements to which it is subjecte) when the entity has not complied with such externally imposed capital
requirements the consequences of such non-complianceThese disclosures shall be based on the information provided internally to the entityrsquos key management personnel
copy 2005-07 Nelson 112
Capital DisclosuresExampleExample
Example disclosurebull Entity A filed its quarterly regulatory capital return for
30 September 20X7 on 20 October 20X7 bull At that date Entity Arsquos regulatory capital was below
the capital requirement imposed by Regulator B by $1 million
bull As a result Entity A was required to submit a plan to the regulator indicating how it would increase its regulatory capital to the amount required
bull Entity A submitted a plan that entailed selling part of its unquoted equities portfolio with a carrying amount of $115 million in the fourth quarter of 20X7
bull In the fourth quarter of 20X7 Entity A sold its fixed interest investment portfolio for $126 million and met its regulatory capital requirement
For example SFC or banks
For example SFC or banks
57
copy 2005-07 Nelson 113
Capital DisclosuresCaseCase
bull Early adopted capital disclosure in 2005 and itsannual report states that (extract only)ndash The Grouprsquos objectives when managing capital are
bull To safeguard the Grouprsquos ability to continue as a going concern so that it continues to provide returns for shareholders and benefits for other stakeholders
bull To support the Grouprsquos stability and growth andbull To provide capital for the purpose of strengthening the
Grouprsquos risk management capability
copy 2005-07 Nelson 114
Capital DisclosuresCaseCase
ndash The Group actively and regularly reviews and manages its capital structure to ensure optimal capital structure and shareholder returns taking into consideration the future capital requirements of the Group and capital efficiency helliphellip
ndash The Group adopts a dividend policy helliphellip while retaining 10 per cent of the profit as capital of the Group for future use
ndash The Group has set aside $1500 million of retained earnings for the purpose of strengthening the risk management regime of the clearing houses and supporting their roles as central counterparties
ndash As in prior years the Group monitors capital by reviewing the level of capital that is at the disposal of the Group (ldquoadjusted capitalrdquo) Adjusted capital comprises all components of shareholdersrsquo equity other than the hedging reserve relating to cash flow hedges designated reserves and investment revaluation reserve helliphellip
bull Early adopted capital disclosure in 2005 and itsannual report states that (extract only)
58
copy 2005-07 Nelson 115
Capital Disclosures ndash Transition
bull An entity shall apply the requirements of capital disclosure for
ndash annual periods beginning on or after 1 January 2007
bull Early application is encouraged
copy 2005-07 Nelson 116
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk
59
copy 2005-07 Nelson 117
QampA SessionQampA SessionQampA Session
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk
17
copy 2005-07 Nelson 33
3 Overall Consideration
bull Statement of compliancendash An entity whose financial statements comply
with IFRSs shall make an explicit and unreserved statement of such compliance in the notes
ndash Financial statements shall not be described as complying with IFRSsbull unless they comply with all the
requirements of IFRSsndash In virtually all circumstances a fair
presentation is achieved by bull compliance with applicable IFRSs
a) Fair presentation and compliance with IFRSs
copy 2005-07 Nelson 34
3 Overall Consideration
Melco Development Limited (新濠國際發展有限公司)Notes to the financial statements for year ended 31122005ndash The consolidated financial statements have been prepared in
accordance with HKFRSsndash In addition the consolidated financial statements include applicable
disclosures required by the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited and by the Companies Ordinance
CaseCase
18
copy 2005-07 Nelson 35
3 Overall Consideration
bull A fair presentation also requires an entitya) to select and apply accounting policies in accordance
with IAS 8b) to present information including accounting policies
in a manner that provides relevant reliable comparable and understandable information
c) to provide additional disclosuresndash when compliance with the specific requirements in
IFRSs is insufficient to enable users to understand the impact of particular transactions other events and conditions on the entityrsquos financial position and financial performance
bull Inappropriate accounting policies are not rectified eitherndash by disclosure of the accounting policies used orndash by notes or explanatory material
a) Fair presentation and compliance with IFRSs
copy 2005-07 Nelson 36
3 Overall Consideration
bull Departure from Standard or Interpretation (Simplified)ndash In the extremely rare circumstances in which
management concludes thatbull compliance with a requirement in a standard or an
interpretation would be so misleading thatbull it would conflict with the objective of financial
statements set out in the Frameworkthe entity shall depart from that requirement if the relevant regulatory framework requires or otherwise does not prohibit such a departure
a) Fair presentation and compliance with IFRSs
19
copy 2005-07 Nelson 37
3 Overall Consideration
bull Departure from Standard or Interpretation (Simplified)
a) Fair presentation and compliance with IFRSs
ndash Then the following disclosure is requireda) management has concluded that the financial
statements give a true and fair viewb) that it has complied with applicable standards and
interpretations except that it has departed from a particular requirement
c) the title of the standard or interpretation from which the entity has departed the nature of the departure the reason why that treatment would be so misleading and the treatment adopted and
d) for each period presented the financial impact of the departure on each item in the financial statements that would have been reported in complying with the requirement
copy 2005-07 Nelson 38
3 Overall Consideration
Interim Report 2005 clearly stated thatInterim Report 2005 clearly stated that
CaseCase
bull The directors consider it inappropriate for the company to adopt two particular aspects of the newrevised HKFRSs as these would result in the financial statements in the view of the directors eitherbull not reflecting the commercial substance of the business orbull being subject to significant potential short-term volatility as
explained below helliphellip
20
copy 2005-07 Nelson 39
3 Overall ConsiderationCaseCase
bull HKAS 40 ldquoInvestment propertyrdquo requires an assessment of the fair value of investment properties
bull The group intends to follow the same accounting treatment as adopted in 2004 which is to value such investment properties on an annual basis
bull Accordingly the investment properties were not revalued at 30 June 2005 since the directors consider that such change of practice could introduce a significant element of short-term volatility into the income statement in respect of assets which are being held on a long-term basis by the group helliphellip
bull It is not practicable to estimate the financial effect of this non-compliance as no interim valuation of the properties has been conducted
Interim Report 2005 clearly stated thatInterim Report 2005 clearly stated that
At year-end revaluation would still be conductedAt year-end revaluation would still be conducted
copy 2005-07 Nelson 40
3 Overall ConsiderationCaseCase
bull HKAS 12 ldquoIncome Taxesrdquo together with HKAS-INT 21 ldquoIncome Taxes ndashRecovery of Revalued Non-Depreciable Assetsrdquo requires deferred taxation to be recognised on any revaluation movements on investment propertiesbull It is further provided that any such deferred tax liability should be calculated
at the profits tax rate in the case of assets which the management has no definite intention to sell
bull The company has not made such provision in respect of its HK investment properties since the directors consider that such provision would result in the financial statements not reflecting the commercial substance of the businessbull since should any such sale eventuate any gain would be regarded as capital
in nature and would not be subject to any tax in HKbull Should this aspect of HKAS 12 have been adopted deferred tax liabilities
amounting to HK$2008 million on the revaluation surpluses arising from revaluation of HK investment properties would have been provided
(estimate - over 12 of the net assets at 30 June 2005)
Interim Report 2005 clearly stated thatInterim Report 2005 clearly stated that
21
copy 2005-07 Nelson 41
3 Overall Consideration
bull Departure but such departure is prohibitedndash In the extremely rare circumstances in which
management concludes that bull compliance with a requirement in a
standard or an interpretation would be so misleading that
bull it would conflict with the objective of financial statements set out in the Framework
bull but the relevant regulatory framework prohibits departure from the requirement the entity shall to the maximum extent possible reduce the perceived misleading aspects of compliance by disclosing helliphellip
a) Fair presentation and compliance with IFRSs
copy 2005-07 Nelson 42
3 Overall Consideration
ndash by disclosinga) the title of the standard or interpretation in
question the nature of the requirement and the reason why management has concluded that complying with that requirement is so misleading in the circumstances that it conflicts with the objective of financial statements set out in the Framework and
b) for each period presented the adjustments to each item in the financial statements that management has concluded would be necessary to give a fair presentation
a) Fair presentation and compliance with IFRSsbull Departure but such departure is prohibited
22
copy 2005-07 Nelson 43
3 Overall Consideration
bull When assessing whether complying with a specific requirement in a standard or an interpretation would be so misleading that it would conflict with the objective of financial statements set out in the Frameworkndash management considers
a) why the objective of financial statements is not achieved in the particular circumstances and
b) how the entityrsquos circumstances differ from those of other entities that comply with the requirement ndash If other entities in similar circumstances comply with the
requirement raquo there is a rebuttable presumption that the entityrsquos compliance
with the requirement would not be so misleading that it would conflict with the objective of financial statements set out in the Framework
a) Fair presentation and compliance with IFRSs
copy 2005-07 Nelson 44
3 Overall ConsiderationCaseCase
Howrsquos about this Howrsquos about this
However 2005 Final Results Announcementdisclosed that bull provision for deferred tax was finally made
with regard to revaluation of the HK investment properties (total HK$22 billion) at 2005 year-end
However However 2005 Final Results Announcement2005 Final Results Announcementdisclosed that disclosed that bullbull provision for deferred tax was finally made provision for deferred tax was finally made
with regard to revaluation of the HK with regard to revaluation of the HK investment properties (total HK$22 billion) at investment properties (total HK$22 billion) at 2005 year2005 year--endend
23
copy 2005-07 Nelson 45
b) Going Concern
3 Overall Consideration
bull When preparing financial statements management shall make an assessment of an entityrsquos ability to continue as a going concern
bull Financial statements shall be prepared on a going concern basisndash unless management either intends to liquidate the entity or to cease
trading or has no realistic alternative but to do so bull When management is aware in making its assessment of
material uncertainties related to events or conditions that may cast significant doubt upon the entityrsquos ability to continue as a going concern those uncertainties shall be disclosed
bull When financial statements are not prepared on a going concern basis that fact shall be disclosed together with the basis on which the financial statements are prepared and the reason why the entity is not regarded as a going concern
copy 2005-07 Nelson 46
c) Accrual Basis of Accounting
3 Overall Consideration
bull An entity shall prepare its financial statements except for cash flow information using the accrual basis of accounting
bull When the accrual basis of accounting is used items are recognised as assets liabilities equity income and expensesndash when they satisfy the definitions and recognition criteria for those
elements in the Framework
24
copy 2005-07 Nelson 47
3 Overall Consideration
bull The presentation and classification of items in the financial statements shall be retained from one period to the next unlessa) it is apparent
bull following a significant change in the nature of the entityrsquos operations (eg significant acquisition or disposal) or
bull a review of its financial statementsthat another presentation or classification would be more appropriatehaving regard to the criteria for the selection and application of accounting policies in IAS 8 or
b) a IFRS requires a change in presentation
d) Consistency of presentation
An entity changes the presentation of its financial statements only ifndash the changed presentation provides information that is reliable and is
more relevant to users of the financial statements andndash the revised structure is likely to continue so that comparability is not
impaired
An entity changes the presentation of its financial statements only ifndash the changed presentation provides information that is reliable and is
more relevant to users of the financial statements andndash the revised structure is likely to continue so that comparability is not
impaired
copy 2005-07 Nelson 48
3 Overall Consideration
bull Each material class of similar items shall bendash presented separately in the financial
statementsbull Items of a dissimilar nature or function shall be
ndash presented separately unless they are immaterial
bull Applying the concept of materiality means that a specific disclosure requirement in a IFRS neednot be satisfied if the information is not material
e) Materiality and Aggregation
What is the situation of recognition and measurement
What is the What is the situation of situation of recognition and recognition and measurementmeasurement
25
copy 2005-07 Nelson 49
3 Overall Consideration
bull What is materialndash Omissions or misstatements of items are
material if they could individually or collectively influence the economic decisions of users taken on the basis of the financial statements
ndash Materiality depends on the size and nature of the omission or misstatement judged in the surrounding circumstancesbull The size or nature of the item or a combination
of both could be the determining factor
e) Materiality and Aggregation
copy 2005-07 Nelson 50
3 Overall Consideration
bull Assets and liabilities and income and expenses shall not be offsetndash unless required or permitted by a IFRS
bull It is important that assets and liabilities and income and expenses are reported separatelyndash Measuring assets net of valuation allowances mdash
for example obsolescence allowances on inventories and doubtful debts allowances on receivables mdash is not offsetting
f) Offsetting
26
copy 2005-07 Nelson 51
3 Overall Consideration
bull During ordinary activities some transactions that do not generate revenue but are incidental to the main revenue-generating activitiesndash The results of such transactions are presented
when this presentation reflects the substance of the transaction or other event by netting any income with related expenses arising on the same transaction
f) Offsetting
copy 2005-07 Nelson 52
3 Overall Consideration
bull For examplea) gains and losses on the disposal of non-current
assets including investments and operating assets- are reported by deducting from the proceeds on
disposal the carrying amount of the asset and related selling expenses and
b) expenditure related to a provision that is- recognised in accordance with IAS 37 and - reimbursed under a contractual arrangement with
a third party (for example a supplierrsquos warranty agreement)
may be netted against the related reimbursement
f) Offsetting
ExampleExample
27
copy 2005-07 Nelson 53
3 Overall Consideration
bull Gains and losses arising from a group of similar transactions are reported on a net basisndash For example
bull foreign exchange gains and losses or bull gains and losses arising on financial instruments held for trading
bull Such gains and losses are however reported separately if they are material
bull Gains and losses arising from a group of similar transactions are reported on a net basisndash For example
bull foreign exchange gains and losses or bull gains and losses arising on financial instruments held for trading
bull Such gains and losses are however reported separately if they are material
Can foreign exchange gains and losses be offset
ExampleExample
copy 2005-07 Nelson 54
3 Overall Consideration
bull Except when a IFRS permits or requires otherwise ndash comparative information shall be disclosed in
respect of the previous period for all amountsreported in the financial statements
bull When the presentation or classification of items in the financial statements is amended ndash comparative amounts shall be reclassified unless
the reclassification is impracticable
g) Comparative information
28
copy 2005-07 Nelson 55
Amended requirementsAmended requirements
3 Overall Consideration
bull When comparative amounts are reclassified an entity shall disclosea) the nature of the reclassificationb) the amount of each item or class of items that is
reclassified andc) the reason for the reclassification
g) Comparative information
bull In the pastonly the reason for and a description of the nature of materialreclassifications should be disclosedExemption for disclosure of comparative information for the reconciliation of movements in fixed assets is also removed
bull In the pastonly the reason for and a description of the nature of materialreclassifications should be disclosedExemption for disclosure of comparative information for the reconciliation of movements in fixed assets is also removed
copy 2005-07 Nelson 56
3 Overall Consideration
Melco Development Limited (新濠國際發展有限公司)Notes to the financial statements for year ended 31122005ndash Because HKAS 32 requires retrospective application comparative
figures for 2004 have been restated (see Note 2A for the financial impact)
CaseCase
29
copy 2005-07 Nelson 57
3 Overall Consideration
Galaxy Entertainment Group LimitedNotes to the financial statements (ye 31122005)ndash All changes in the accounting policies require
retrospective application except HKAS 39 and HKFRS 2 for which transitional provisions are applied
ndash As a result the 2004 comparative figures have also been restated or amended in accordance with the relevant requirements
ndash The effects of all the changes in accounting policies are summarised in notes (b) and (c) below
CaseCase
copy 2005-07 Nelson 58
bull Identification of the financial statementsbull Reporting periodbull Balance sheet
1 CurrentNon-current distinction2 Current assets3 Current liabilities4 Information to be presented on the face of the balance sheet5 Information to be presented either on the face of the balance sheet or in
the notesbull Income statement
1 Profit or loss for the period2 Information to be presented on the face of the income statement3 Information to be presented either on the face of the income statement or
in the notesbull Statement of changes in equitybull Cash flow statementbull Notes
4 Structure and Content
30
copy 2005-07 Nelson 59
Identification of Financial Statements
bull The financial statements shall be identified clearly and distinguished from other information in the same published document
bull The following information shall be displayed prominently and repeated when it is necessary for a proper understanding of the information presented
a) the name of the reporting entity or other means of identification and any change in that information from the preceding balance sheet date
b) whether the financial statements cover the individual entity or a group of entities
c) the balance sheet date or the period covered by the financial statements whichever is appropriate to that component of the financial statements
d) the presentation currency as defined in HKAS 21 The Effects of Changes in Foreign Exchange Rates and
e) the level of rounding used in presenting amounts in the financial statements
copy 2005-07 Nelson 60
Identification of Financial Statements
bull Can the units of the presentation currency be rounded to thousands or millions
bull Financial statements are often made more understandableby presenting information in thousands or millions of units of the presentation currency
bull This is acceptable as long asndash the level of rounding in presentation is disclosed and ndash material information is not omitted
bull Financial statements are often made more understandableby presenting information in thousands or millions of units of the presentation currency
bull This is acceptable as long asndash the level of rounding in presentation is disclosed and ndash material information is not omitted
ExampleExample
31
copy 2005-07 Nelson 61
Reporting Period
bull Financial statements shall be presented at least annually
bull When an entityrsquos balance sheet date changes and the annual financial statements are presented for a period longer or shorter than one year an entity shall disclose in addition to the period covered by the financial statementsa) the reason for using a longer or shorter period andb) the fact that comparative amounts for the income
statement statement of changes in equity cash flow statement and related notes are not entirely comparable
copy 2005-07 Nelson 62
Reporting Period
bull Can a set of financial statements cover 52-week instead of a year
bull Normally financial statements are consistently prepared covering a one-year period
bull However for practical reasons some entities prefer to report for example for a 52-week period
bull IAS 1 does not preclude this practice because the resulting financial statements are unlikely to be materially different from those that would be presented for one year
bull Normally financial statements are consistently prepared covering a one-year period
bull However for practical reasons some entities prefer to report for example for a 52-week period
bull IAS 1 does not preclude this practice because the resulting financial statements are unlikely to be materially different from those that would be presented for one year
ExampleExample
32
copy 2005-07 Nelson 63
CurrentNon-current Distinction
bull An entity shall presentndash current and non-current assets andndash current and non-current liabilitiesas separate classifications on the face of its balance sheet
bull Except when a presentation based on liquidity provides informationndash If that information is reliable and is more relevantndash When that exception applies all assets and liabilities shall be
presented broadly in order of liquidity
copy 2005-07 Nelson 64
CurrentNon-current Distinction
bull Whichever method of presentation is adopted for each asset and liability line item that combines amounts expected to be recovered or settled a) no more than 12 months after the balance sheet date
andb) more than 12 months after the balance sheet date(ie combines both current and non-current)
an entity shall disclose the amount expected to be recovered or settled after more than 12 months
33
copy 2005-07 Nelson 65
New requirementsNew requirements
Current Assets
bull An asset shall be classified as current when it satisfies any of the following criteriaa) it is expected to be realised in or is intended for sale or
consumption in the entityrsquos normal operating cycle b) it is held primarily for the purpose of being tradedc) it is expected to be realised within 12 months after the balance
sheet date ord) it is cash or a cash equivalent
bull unless it is restricted from being exchanged or used to settle aliability for at least 12 months after the balance sheet date
bull All other assets shall be classified as non-current
Examplesbull Deposits pledged to bank (how long)bull Fixed deposits over 1 year maturity
Examplesbull Deposits pledged to bank (how long)bull Fixed deposits over 1 year maturity
What is itWhat is it
copy 2005-07 Nelson 66
Current Assets
bull What is operating cycle
bull The operating cycle of an entity is the time between ndash the acquisition of assets for processing and ndash their realisation in cash or cash equivalents
bull When the entityrsquos normal operating cycle is not clearly identifiable ndash its duration is assumed to be 12 months
bull The operating cycle of an entity is the time between ndash the acquisition of assets for processing and ndash their realisation in cash or cash equivalents
bull When the entityrsquos normal operating cycle is not clearly identifiable ndash its duration is assumed to be 12 months
ExampleExample
34
copy 2005-07 Nelson 67
Current Assets CaseCase
copy 2005-07 Nelson 68
Current Assets
bull Can a non-current asset reclassified if it fulfil the definition of current asset later
bull Assets classified as non-current in accordancewith IAS 1 shall not be reclassified as current assetsndash until they meet the criteria to be classified as held for sale in
accordance with IFRS 5bull Assets of a class that an entity would normally regard as non-
current that are acquired exclusively with a view to resale shall notbe classified as currentndash unless they meet the criteria to be classified as held for sale in
accordance with IFRS 5
bull Assets classified as non-current in accordancewith IAS 1 shall not be reclassified as current assetsndash until they meet the criteria to be classified as held for sale in
accordance with IFRS 5bull Assets of a class that an entity would normally regard as non-
current that are acquired exclusively with a view to resale shall notbe classified as currentndash unless they meet the criteria to be classified as held for sale in
accordance with IFRS 5
No non-current assets can be classified as current unless the criteria in IFRS 5 are fulfilled mainlybull Available for immediate salebull Highly probable to make the sale
35
copy 2005-07 Nelson 69
Is it currentIs it current
Current Assets
bull In its 2005 Interim Report full set of HKFRS was adopted and the report set out thatndash Available-for-sale financial assets are non-
derivatives that are eitherbull designated in this category orbull not classified in any of the other categories (ie
loans and receivables financial assets at fair value through profit or loss and held-to-maturity investments)
CaseCase
Similar in 2005 Annual Report
Similar in 2005 Annual Report
ndash They are included in non-current assetsbull unless management intends to dispose of the
investment within 12 months of the balance sheet date
copy 2005-07 Nelson 70
New requirementsNew requirements
Current Liabilities
bull A liability shall be classified as current when it satisfies any of the following criteriaa) it is expected to be settled in the entityrsquos normal operating cycleb) it is held primarily for the purpose of being tradedc) it is due to be settled within 12 months after the balance sheet
date ord) the entity does not have an unconditional right to defer settlement
of the liability for at least 12 months after the balance sheet date
bull All other liabilities shall be classified as non-current
ImplicationImplication
36
copy 2005-07 Nelson 71
Current Liabilities Revised rules on classifying a liability as current or non-currentbull A liability held for being traded rArr currentbull A financial liability due within 12 months after the BS date rArr current
ndash even if an agreement to refinance on a long-term basis is completed after the BS date (only disclosed as non-adjusting event)
bull If an entity has discretion to refinance rArr non-currentbull If an entity without discretion to refinance rArr current
bull A non-current financial liability is payable on demand with a breach on a condition of its loan agreement on or before the BS datendash If the lender agreed not to demand payment
bull after the BS date rArr current (only disclosed as non-adjusting event)
bull by the BS date rArr non-current
ImplicationImplication
copy 2005-07 Nelson 72
Current LiabilitiesCaseCase
Note 12 to Interim Report 2006bull Breach of loan covenants
bull As at 30 June 2006 in respect of certain bank loans with an aggregate carrying amount of HK$1529806000 the Group breached certain financial covenants of the banks loans
bull Since the lenders have not agreed to waive its right to demand immediate payment as at the balance sheet date the loans have been classified as current liabilities in these financial statements at 30 June 2006
37
copy 2005-07 Nelson 73
Current Assets and LiabilitiesExampleExample
Can the following be classified as current assetsbull 3-month fixed deposits pledged to a bank to secure
a mortgage loan of 5 yearsbull 2-year fixed deposits with a bank
Can the following be classified as current assetsbull 3-month fixed deposits pledged to a bank to secure
a mortgage loan of 5 yearsbull 2-year fixed deposits with a bank
Can the following be classified as non-current liabilitiesbull 5-year term loan matured after year end but renewed
for another 5 years after year end (before the issuanceof the financial statements)
bull 2-year term loan to be matured with 12 months and theentity has a right to renew for another 2 years
Can the following be classified as non-current liabilitiesbull 5-year term loan matured after year end but renewed
for another 5 years after year end (before the issuanceof the financial statements)
bull 2-year term loan to be matured with 12 months and theentity has a right to renew for another 2 years
timestimes
times
radic
copy 2005-07 Nelson 74
Balance Sheetbull As a minimum the face of the balance sheet shall
include line items that present the following amountsa) property plant and equipmentb) investment propertyc) intangible assetsd) financial assets (excl amounts shown under (e) (h) and (I))e) investments accounted for using the equity methodf) biological assetsg) inventoriesh) trade and other receivablesi) cash and cash equivalentsj) trade and other payablesk) provisionsl) financial liabilities (excl amounts shown under (j) and (k))m) liabilities and assets for current tax as defined in HKAS 12 Income Taxesn) deferred tax liabilities and deferred tax assets as defined in HKAS 12o) minority interest presented within equity andp) issued capital and reserves attributable to equity holders of the parent
38
copy 2005-07 Nelson 75
Balance Sheetbull The face of the balance sheet shall also include line
items that present the following amountsa) The total of assets classified as held for sale and
assets included in disposal groups classified as held for sale in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations and
b) Liabilities included in disposal groups classified as held for sale in accordance with IFRS 5
copy 2005-07 Nelson 76
Balance Sheetbull Additional line items headings and subtotals shall
be presented on the face of the balance sheet when such presentation is relevant to an understanding of the entityrsquos financial position
bull When an entity presents current and non-current assets and current and non-current liabilities as separate classifications on the face of its balance sheet ndash it shall not classify deferred tax assets
(liabilities) as current assets (liabilities)
39
copy 2005-07 Nelson 77
Balance Sheet
bull The use of different measurement bases for different classes of assets suggests that their nature or function differs and therefore that they should be presented as separate line itemsndash For example different classes of property plant and
equipment can be carried atbull Cost orbull Revalued amountsin accordance with IAS 16 PPE
In the past it use ldquomay needrdquoIn the past it use ldquomay needrdquo
copy 2005-07 Nelson 78
Balance Sheet
Galaxy Entertainment Group LimitedConsolidated balance sheet as at 31122005
CaseCase
40
copy 2005-07 Nelson 79
Balance Sheet
Melco Development Limited (新濠國際發展有限公司)Consolidated balance sheet as at 31122005
CaseCase
copy 2005-07 Nelson 80
Income Statement Minimum requirements on the face of the income statementbull As a minimum the face of the income statement shall include line items
that present the following amounts for the perioda) revenueb) finance costsc) share of the profit or loss of associates and joint ventures accounted
for using the equity methodd) pre-tax gain or loss recognised on the disposal of assets or
settlement of liabilities attributable to discontinuing operationse) tax expense andf) profit or loss
41
copy 2005-07 Nelson 81
Income Statement bull The following items shall be disclosed on the face of the income
statement as allocations of profit or loss for the perioda) Profit or loss attributable to minority interest andb) Profit or loss attributable to equity holders of the parent
A similar requirement has been added for the statement of changes in equity and such allocated amounts are not to be presented as items of income or expense
copy 2005-07 Nelson 82
Income Statement
Melco Dev LtdConsolidated income statementas at 31122005
CaseCase
42
copy 2005-07 Nelson 83
Income Statement bull Not require to disclose the results of operating
activities as a line item on the face of the incomestatement
bull An entity shall not present any items of income and expense as extraordinary items either onthe face of the income statements or in the notes
Entities canrsquot use itEntities canrsquot use it
Entities can still show itEntities can still show it
copy 2005-07 Nelson 84
Income Statement Either on the face of the income statement or in the notesbull An entity shall present an analysis of expenses using a classification
based on eitherbull the nature of expenses orbull their function within the entity
whichever provides information that is reliable and more relevant
bull Entities classifying expenses by function shall disclose additional information on the nature of expenses includingbull depreciation and amortisation expense and bull employee benefits expense
43
copy 2005-07 Nelson 85
Income StatementCaseCase
Nature or FunctionNature or Nature or FunctionFunction
copy 2005-07 Nelson 86
Statement of Changes in Equity bull An entity shall present a statement of changes in equity showing on the
face of the statementa) profit or loss for the period b) each item of income and expense for the period that as required by
IFRSs is recognised directly in equity and the total of these itemsc) total income and expense for the period (calculated as the sum of (a) and
(b)) showing separately the total amounts attributablebull to equity holders of the parent andbull to minority interest and
d) for each component of equity the effects of changes in accounting policies and corrections of errors recognised in accordance with IAS 8
Any ChangeAny Change
A revised requirementbull A statement of changes in equity that comprises only these items
shall be titled a statement of recognised income and expenses
A revised requirementbull A statement of changes in equity that comprises only these items
shall be titled a statement of recognised income and expenses
44
copy 2005-07 Nelson 87
Statement of Changes in Equity bull An entity shall also present either on the face of the
statement of changes in equity or in the notesa) the amounts of transactions with equity holders acting in
their capacity as equity holders showing separately distributions to equity holders
b) the balance of retained earnings (ie accumulated profit or loss) at the beginning of the period and at the balance sheet date and the changes during the period and
c) a reconciliation between the carrying amount of each class of contributed equity and each reserve at the beginning and the end of the period separately disclosing each change
copy 2005-07 Nelson 88
Statement of Changes in Equity
Consolidated SCE as at 31122005
CaseCase
45
copy 2005-07 Nelson 89
Notes Structure (an entity is required to disclose the following)
bull The notes shalla) present information about the basis of preparation of the financial statements
and the specific accounting policies usedb) disclose the information required by HKFRSs that is not presented on the
face of the balance sheet income statement statement of changes in equity or cash flow statement and
c) provide additional information that is not presented on the face of the balance sheet income statement statement of changes in equity or cash flow statement but is relevant to an understanding of any of them
bull Notes shall as far as practicable be presented in a systematic manner bull Each item on the face of the balance sheet income statement statement
of changes in equity and cash flow statement shall be cross-referencedto any related information in the notes
copy 2005-07 Nelson 90
Notes Disclosures (an entity is required to disclose the following)
bull Disclosure of accounting policiesAn entity shall disclose in the summary of significant accounting policiesa) the measurement basis (or bases) used in preparing the financial
statements andb) the other accounting policies used that are relevant to an understanding of
the financial statements
46
copy 2005-07 Nelson 91
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)ndash The financial statements have been prepared in
accordance with Hong Kong Financial Reporting Standards (lsquolsquoHKFRSrsquorsquo) issued by the Hong Kong Institute of Certified Public Accountants bull under the historical cost convention as modified by the
revaluation of investment properties available-for-sale financial assets derivative financial instruments and other investments which are carried at fair values helliphellip
ndash The principal accounting policies applied in the preparation of these financial statements are set out below These policies have been consistently applied to all the years presented except for those stated in note 2(a) above
copy 2005-07 Nelson 92
Notes Disclosures (an entity is required to disclose the following)
bull Disclosure of accounting policiesndash The judgements apart from those involving estimations management has
madebull in the process of applying the entityrsquos accounting policies that have the
most significant effect on the amounts recognised in the financial statements (in the summary of significant accounting policies or other notes)
Examples ndash Management makes judgements in determininga) whether financial assets are held-to-maturity investmentsb) when substantially all the significant risks and rewards of
ownership of financial assets and lease assets are transferred to other entities
c) whether in substance particular sales of goods are financing arrangements and therefore do not give rise to revenue and
d) whether the substance of the relationship between the entity and a special purpose entity indicates that the special purpose entity is controlled by the entity
Examples ndash Management makes judgements in determininga) whether financial assets are held-to-maturity investmentsb) when substantially all the significant risks and rewards of
ownership of financial assets and lease assets are transferred to other entities
c) whether in substance particular sales of goods are financing arrangements and therefore do not give rise to revenue and
d) whether the substance of the relationship between the entity and a special purpose entity indicates that the special purpose entity is controlled by the entity
47
copy 2005-07 Nelson 93
Notes Disclosures (an entity is required to disclose the following)
bull Key sources of estimation uncertaintyndash Information about the key assumptions concerning the future and
other key sources of estimation uncertainty at the balance sheet datebull that have a significant risk of causing a material adjustment to the
carrying amounts of assets and liabilities within the next financial yearndash In respect of those assets and liabilities the notes shall include details of
a) their nature andb) their carrying amount as at the balance sheet date
Examples ndash in the absence of recently observed market prices used to measure the following assets and liabilities future-oriented estimates are necessary to measurebull the recoverable amount of classes of PPEbull the effect of technological obsolescence on inventories
Estimates involve assumptions about such items asbull the risk adjustment to cash flows or discount rates usedbull future changes in salaries and in prices affecting other costs
Examples ndash in the absence of recently observed market prices used to measure the following assets and liabilities future-oriented estimates are necessary to measurebull the recoverable amount of classes of PPEbull the effect of technological obsolescence on inventories
Estimates involve assumptions about such items asbull the risk adjustment to cash flows or discount rates usedbull future changes in salaries and in prices affecting other costs
copy 2005-07 Nelson 94
Notes
Esprit Holdings LimitedEsprit Holdings Limitedbull Critical Accounting Estimates and Judgements
ndash Estimates and judgements are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonableunder the circumstances
ndash Critical accounting estimates and assumptionsbull The Group makes estimates and assumptions concerning
the future The resulting accounting estimates will by definition seldom equal the related actual results
bull The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below helliphellip (including (1) useful life and impairment of trademarks and (2) income taxes)
CaseCase
48
copy 2005-07 Nelson 95
Notes
Melco Development Limited (新濠國際發展有限公司)Notes to the financial statements for the year ended 31122005ndash The key assumptions concerning the future and other key sources
of estimation uncertainty at the balance sheet date that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below helliphellip(The issues discussed includebull Allowances for inventories bull Estimated impairment of goodwill Income taxes)
CaseCase
copy 2005-07 Nelson 96
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)ndash Estimates and judgements used in preparing the
financial statements are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonable under the circumstances
ndash The Group makes estimates and assumptionsconcerning the future
ndash The resulting accounting estimates will by definition seldom equal the related actual results
ndash The estimates and assumptions that have a significant effect on the carrying amounts of assets and liabilities are discussed below hellip (including impairment of goodwill impairment of gaming
licence Useful lives of property plant and equipment fair value of investment properties hellip)
49
copy 2005-07 Nelson 97
Notes Disclosures (an entity is required to disclose the following)
bull Other disclosuresAn entity shall disclose in the notesa) the amount of dividends proposed or declared before the
financial statements were authorised for issue but not recognised as a distribution to equity holders during the period and the related amount per share(HK incorporated companies are required to show the aggregate amount which is recommended for distribution by way of dividend under a separate heading(s) in their balance sheet (HK Co Ord 10th Sch para 9(1)(e)) and
b) the amount of any cumulative preference dividends not recognised
copy 2005-07 Nelson 98
Notes Disclosures (an entity is required to disclose the following)
An entity shall disclose the following if not disclosedelsewhere in information published with the financial statementsa) the domicile and legal form of the entity
its country of incorporation andthe address of its registered office(or principal place of business if different from the registered office)
b) a description of the nature of the entityrsquos operations and its principal activities and
c) the name of the parent and the ultimate parent of the group
ldquoshall discloserdquo now instead of ldquoencouraged to discloserdquo
ldquoshall discloserdquo now instead of ldquoencouraged to discloserdquo
bull Other disclosures
Any specialAny special
50
copy 2005-07 Nelson 99
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)bull The principal activities of Galaxy Entertainment Group
Ltd (the lsquolsquoCompanyrsquorsquo) (formerly known as K WahConstruction Materials Ltd) and its subsidiaries (together the lsquolsquoGrouprsquorsquo) are tondash operate in casino games of chance or games of other forms
in Macau (and) manufacture sale and distribution of construction materials in HK Macau and Mainland China
bull The Company is ndash a limited liability company incorporated in Hong Kong and ndash has its listing on the Main Board of The Stock Exchange of
Hong Kong Limitedbull The address of its registered office and its principal place
of business is Room 1606 16th Floor Hutchison House 10 Harcourt Road Central HK
copy 2005-07 Nelson 100
Effective Date
bull An entity shall apply IAS 1 for annual periods beginning on or after 1 Jan 2005
ndash Earlier application is encouragedndash If an entity applies IAS 1 for an earlier period it shall
disclose this factbull For the amendments relating to the Statement of
Changes in Equityndash An entity shall apply it for annual periods beginning on
or after 1 Jan 2006ndash If an entity applies the amendments to IAS 19
Employee Benefits ndash Actuarial Gains and Losses Group Plans and Disclosures for an earlier period that amendment shall be applied for that earlier period
51
copy 2005-07 Nelson 101
Todayrsquos Agenda
Capital Disclosures (Amendments to IAS 1)
Capital Disclosures (Amendments to IAS 1)
copy 2005-07 Nelson 102
Capital Disclosures ndash For 2007
52
copy 2005-07 Nelson 103
Capital Disclosures
What is capital Is it helliphellip
CapitalCapital AssetsAssets LiabilitiesLiabilities= ndash
bull IAS 1BC47 considers ldquowhether an entity can have a view of capital that differs from what IFRSs define as equityrdquo
bull It further clarifies that although for the purposes of this disclosure capital would often equate with equity as defined in IFRSsndash it might also include or exclude some components
bull It also noted that the capital disclosure in IAS 1 is intended to give entities the opportunity to describendash how they view the components of capital they manage if this is
different from what IFRSs define as equity helliphellip
copy 2005-07 Nelson 104
EquityEquityEquity AssetsAssets LiabilitiesLiabilities= ndash
Capital Disclosures
Based on the Framework amp IFRSs the accounting equation should be
CapitalCapital AssetsAssets LiabilitiesLiabilities= ndash
bull An entityrsquos capital may be part of its equity plus part of its liabilities depending on how it manage ldquoits capitalrdquo helliphellip
53
copy 2005-07 Nelson 105
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowinga) qualitative information about its objectives policies and processes for
managing capital including (but not limited to)i) a description of what it manages as capitalii) when an entity is subject to externally imposed capital requirements
the nature of those requirements and how those requirements are incorporated into the management of capital and
iii) how it is meeting its objectives for managing capital
bull To comply with the capital disclosures the entity discloses thefollowinga) qualitative information about its objectives policies and processes for
managing capital including (but not limited to)i) a description of what it manages as capitalii) when an entity is subject to externally imposed capital requirements
the nature of those requirements and how those requirements are incorporated into the management of capital and
iii) how it is meeting its objectives for managing capital
copy 2005-07 Nelson 106
Capital Disclosures
Example disclosurebull The Grouprsquos objectives when managing capital are
ndash to safeguard the entityrsquos ability to continue as a going concern
bull so that it can continue to provide returns for shareholders and benefits for other stakeholders and
ndash to provide an adequate return to shareholders by pricing products and services commensurately with the level of risk
bull The Group sets the amount of capital in proportion to risk
ExampleExample
ObjectivesObjectives
54
copy 2005-07 Nelson 107
Capital Disclosures
bull The Group manages the capital structure and makes adjustments to it in the light ofndash changes in economic conditions and ndash the risk characteristics of the underlying assets
bull In order to maintain or adjust the capital structure the Group mayndash adjust the amount of dividends paid to shareholders ndash return capital to shareholders ndash issue new shares or ndash sell assets to reduce debt
ExampleExample
Example disclosure
HowHow
copy 2005-07 Nelson 108
Capital Disclosures
bull Consistently with others in the industry the Group monitors capital on the basis of ndash the debt-to-adjusted capital ratio
bull This ratio is calculated as net debt divide adjusted capital
ExampleExample
Example disclosure
HowHow
bull Net debt is calculated as ndash Total debt (as shown in the
balance sheet)ndash Less cash amp cash equivalents
bull Net debt is calculated as ndash Total debt (as shown in the
balance sheet)ndash Less cash amp cash equivalents
bull Adjusted capital ndash comprises all components of
equity (ie share capital share premium minority interest retained earnings and revaluation reserve) ndash other than amounts
recognised in equity relating to cash flow hedges and
ndash includes some forms of subordinated debt
bull Adjusted capital ndash comprises all components of
equity (ie share capital share premium minority interest retained earnings and revaluation reserve) ndash other than amounts
recognised in equity relating to cash flow hedges and
ndash includes some forms of subordinated debt
55
copy 2005-07 Nelson 109
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowing
bull To comply with the capital disclosures the entity discloses thefollowingb) summary quantitative data about what it manages as capital
Some entities regard some financial liabilities (eg some forms of subordinated debt) as part of capitalOther entities regard capital as excluding some components of equity (eg components arising from cash flow hedges)
c) any changes in (a) and (b) from the previous period
copy 2005-07 Nelson 110
Capital Disclosures
Example disclosure (continued from previous example)
ExampleExample
bull During 20X4 the Grouprsquos strategy which was unchanged from 20X3 was to maintain the debt-to-adjusted capital ratio at the lower end of the range 61 to 71 in order to secure access to finance at a reasonable cost by maintaining a BB credit rating The debt-to-adjusted capital ratios at 31 December 20X4 and at 31 December 20X3 were as follows
3112X4 ($rsquoM) 3112X3 ($rsquoM) Total debt 1000 1100 Less cash and cash equivalents (90) (150)Net debt 910 950
Total equity 110 105 Add subordinated debt instruments 38 38 Less amounts recognised in equity
relating to cash flow hedges (10) (5)Adjusted capital 138 138
Debt-to-adjusted capital ratio 66 69
56
copy 2005-07 Nelson 111
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowing
bull To comply with the capital disclosures the entity discloses thefollowingd) whether during the period it complied with any externally imposed capital
requirements to which it is subjecte) when the entity has not complied with such externally imposed capital
requirements the consequences of such non-complianceThese disclosures shall be based on the information provided internally to the entityrsquos key management personnel
copy 2005-07 Nelson 112
Capital DisclosuresExampleExample
Example disclosurebull Entity A filed its quarterly regulatory capital return for
30 September 20X7 on 20 October 20X7 bull At that date Entity Arsquos regulatory capital was below
the capital requirement imposed by Regulator B by $1 million
bull As a result Entity A was required to submit a plan to the regulator indicating how it would increase its regulatory capital to the amount required
bull Entity A submitted a plan that entailed selling part of its unquoted equities portfolio with a carrying amount of $115 million in the fourth quarter of 20X7
bull In the fourth quarter of 20X7 Entity A sold its fixed interest investment portfolio for $126 million and met its regulatory capital requirement
For example SFC or banks
For example SFC or banks
57
copy 2005-07 Nelson 113
Capital DisclosuresCaseCase
bull Early adopted capital disclosure in 2005 and itsannual report states that (extract only)ndash The Grouprsquos objectives when managing capital are
bull To safeguard the Grouprsquos ability to continue as a going concern so that it continues to provide returns for shareholders and benefits for other stakeholders
bull To support the Grouprsquos stability and growth andbull To provide capital for the purpose of strengthening the
Grouprsquos risk management capability
copy 2005-07 Nelson 114
Capital DisclosuresCaseCase
ndash The Group actively and regularly reviews and manages its capital structure to ensure optimal capital structure and shareholder returns taking into consideration the future capital requirements of the Group and capital efficiency helliphellip
ndash The Group adopts a dividend policy helliphellip while retaining 10 per cent of the profit as capital of the Group for future use
ndash The Group has set aside $1500 million of retained earnings for the purpose of strengthening the risk management regime of the clearing houses and supporting their roles as central counterparties
ndash As in prior years the Group monitors capital by reviewing the level of capital that is at the disposal of the Group (ldquoadjusted capitalrdquo) Adjusted capital comprises all components of shareholdersrsquo equity other than the hedging reserve relating to cash flow hedges designated reserves and investment revaluation reserve helliphellip
bull Early adopted capital disclosure in 2005 and itsannual report states that (extract only)
58
copy 2005-07 Nelson 115
Capital Disclosures ndash Transition
bull An entity shall apply the requirements of capital disclosure for
ndash annual periods beginning on or after 1 January 2007
bull Early application is encouraged
copy 2005-07 Nelson 116
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk
59
copy 2005-07 Nelson 117
QampA SessionQampA SessionQampA Session
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk
18
copy 2005-07 Nelson 35
3 Overall Consideration
bull A fair presentation also requires an entitya) to select and apply accounting policies in accordance
with IAS 8b) to present information including accounting policies
in a manner that provides relevant reliable comparable and understandable information
c) to provide additional disclosuresndash when compliance with the specific requirements in
IFRSs is insufficient to enable users to understand the impact of particular transactions other events and conditions on the entityrsquos financial position and financial performance
bull Inappropriate accounting policies are not rectified eitherndash by disclosure of the accounting policies used orndash by notes or explanatory material
a) Fair presentation and compliance with IFRSs
copy 2005-07 Nelson 36
3 Overall Consideration
bull Departure from Standard or Interpretation (Simplified)ndash In the extremely rare circumstances in which
management concludes thatbull compliance with a requirement in a standard or an
interpretation would be so misleading thatbull it would conflict with the objective of financial
statements set out in the Frameworkthe entity shall depart from that requirement if the relevant regulatory framework requires or otherwise does not prohibit such a departure
a) Fair presentation and compliance with IFRSs
19
copy 2005-07 Nelson 37
3 Overall Consideration
bull Departure from Standard or Interpretation (Simplified)
a) Fair presentation and compliance with IFRSs
ndash Then the following disclosure is requireda) management has concluded that the financial
statements give a true and fair viewb) that it has complied with applicable standards and
interpretations except that it has departed from a particular requirement
c) the title of the standard or interpretation from which the entity has departed the nature of the departure the reason why that treatment would be so misleading and the treatment adopted and
d) for each period presented the financial impact of the departure on each item in the financial statements that would have been reported in complying with the requirement
copy 2005-07 Nelson 38
3 Overall Consideration
Interim Report 2005 clearly stated thatInterim Report 2005 clearly stated that
CaseCase
bull The directors consider it inappropriate for the company to adopt two particular aspects of the newrevised HKFRSs as these would result in the financial statements in the view of the directors eitherbull not reflecting the commercial substance of the business orbull being subject to significant potential short-term volatility as
explained below helliphellip
20
copy 2005-07 Nelson 39
3 Overall ConsiderationCaseCase
bull HKAS 40 ldquoInvestment propertyrdquo requires an assessment of the fair value of investment properties
bull The group intends to follow the same accounting treatment as adopted in 2004 which is to value such investment properties on an annual basis
bull Accordingly the investment properties were not revalued at 30 June 2005 since the directors consider that such change of practice could introduce a significant element of short-term volatility into the income statement in respect of assets which are being held on a long-term basis by the group helliphellip
bull It is not practicable to estimate the financial effect of this non-compliance as no interim valuation of the properties has been conducted
Interim Report 2005 clearly stated thatInterim Report 2005 clearly stated that
At year-end revaluation would still be conductedAt year-end revaluation would still be conducted
copy 2005-07 Nelson 40
3 Overall ConsiderationCaseCase
bull HKAS 12 ldquoIncome Taxesrdquo together with HKAS-INT 21 ldquoIncome Taxes ndashRecovery of Revalued Non-Depreciable Assetsrdquo requires deferred taxation to be recognised on any revaluation movements on investment propertiesbull It is further provided that any such deferred tax liability should be calculated
at the profits tax rate in the case of assets which the management has no definite intention to sell
bull The company has not made such provision in respect of its HK investment properties since the directors consider that such provision would result in the financial statements not reflecting the commercial substance of the businessbull since should any such sale eventuate any gain would be regarded as capital
in nature and would not be subject to any tax in HKbull Should this aspect of HKAS 12 have been adopted deferred tax liabilities
amounting to HK$2008 million on the revaluation surpluses arising from revaluation of HK investment properties would have been provided
(estimate - over 12 of the net assets at 30 June 2005)
Interim Report 2005 clearly stated thatInterim Report 2005 clearly stated that
21
copy 2005-07 Nelson 41
3 Overall Consideration
bull Departure but such departure is prohibitedndash In the extremely rare circumstances in which
management concludes that bull compliance with a requirement in a
standard or an interpretation would be so misleading that
bull it would conflict with the objective of financial statements set out in the Framework
bull but the relevant regulatory framework prohibits departure from the requirement the entity shall to the maximum extent possible reduce the perceived misleading aspects of compliance by disclosing helliphellip
a) Fair presentation and compliance with IFRSs
copy 2005-07 Nelson 42
3 Overall Consideration
ndash by disclosinga) the title of the standard or interpretation in
question the nature of the requirement and the reason why management has concluded that complying with that requirement is so misleading in the circumstances that it conflicts with the objective of financial statements set out in the Framework and
b) for each period presented the adjustments to each item in the financial statements that management has concluded would be necessary to give a fair presentation
a) Fair presentation and compliance with IFRSsbull Departure but such departure is prohibited
22
copy 2005-07 Nelson 43
3 Overall Consideration
bull When assessing whether complying with a specific requirement in a standard or an interpretation would be so misleading that it would conflict with the objective of financial statements set out in the Frameworkndash management considers
a) why the objective of financial statements is not achieved in the particular circumstances and
b) how the entityrsquos circumstances differ from those of other entities that comply with the requirement ndash If other entities in similar circumstances comply with the
requirement raquo there is a rebuttable presumption that the entityrsquos compliance
with the requirement would not be so misleading that it would conflict with the objective of financial statements set out in the Framework
a) Fair presentation and compliance with IFRSs
copy 2005-07 Nelson 44
3 Overall ConsiderationCaseCase
Howrsquos about this Howrsquos about this
However 2005 Final Results Announcementdisclosed that bull provision for deferred tax was finally made
with regard to revaluation of the HK investment properties (total HK$22 billion) at 2005 year-end
However However 2005 Final Results Announcement2005 Final Results Announcementdisclosed that disclosed that bullbull provision for deferred tax was finally made provision for deferred tax was finally made
with regard to revaluation of the HK with regard to revaluation of the HK investment properties (total HK$22 billion) at investment properties (total HK$22 billion) at 2005 year2005 year--endend
23
copy 2005-07 Nelson 45
b) Going Concern
3 Overall Consideration
bull When preparing financial statements management shall make an assessment of an entityrsquos ability to continue as a going concern
bull Financial statements shall be prepared on a going concern basisndash unless management either intends to liquidate the entity or to cease
trading or has no realistic alternative but to do so bull When management is aware in making its assessment of
material uncertainties related to events or conditions that may cast significant doubt upon the entityrsquos ability to continue as a going concern those uncertainties shall be disclosed
bull When financial statements are not prepared on a going concern basis that fact shall be disclosed together with the basis on which the financial statements are prepared and the reason why the entity is not regarded as a going concern
copy 2005-07 Nelson 46
c) Accrual Basis of Accounting
3 Overall Consideration
bull An entity shall prepare its financial statements except for cash flow information using the accrual basis of accounting
bull When the accrual basis of accounting is used items are recognised as assets liabilities equity income and expensesndash when they satisfy the definitions and recognition criteria for those
elements in the Framework
24
copy 2005-07 Nelson 47
3 Overall Consideration
bull The presentation and classification of items in the financial statements shall be retained from one period to the next unlessa) it is apparent
bull following a significant change in the nature of the entityrsquos operations (eg significant acquisition or disposal) or
bull a review of its financial statementsthat another presentation or classification would be more appropriatehaving regard to the criteria for the selection and application of accounting policies in IAS 8 or
b) a IFRS requires a change in presentation
d) Consistency of presentation
An entity changes the presentation of its financial statements only ifndash the changed presentation provides information that is reliable and is
more relevant to users of the financial statements andndash the revised structure is likely to continue so that comparability is not
impaired
An entity changes the presentation of its financial statements only ifndash the changed presentation provides information that is reliable and is
more relevant to users of the financial statements andndash the revised structure is likely to continue so that comparability is not
impaired
copy 2005-07 Nelson 48
3 Overall Consideration
bull Each material class of similar items shall bendash presented separately in the financial
statementsbull Items of a dissimilar nature or function shall be
ndash presented separately unless they are immaterial
bull Applying the concept of materiality means that a specific disclosure requirement in a IFRS neednot be satisfied if the information is not material
e) Materiality and Aggregation
What is the situation of recognition and measurement
What is the What is the situation of situation of recognition and recognition and measurementmeasurement
25
copy 2005-07 Nelson 49
3 Overall Consideration
bull What is materialndash Omissions or misstatements of items are
material if they could individually or collectively influence the economic decisions of users taken on the basis of the financial statements
ndash Materiality depends on the size and nature of the omission or misstatement judged in the surrounding circumstancesbull The size or nature of the item or a combination
of both could be the determining factor
e) Materiality and Aggregation
copy 2005-07 Nelson 50
3 Overall Consideration
bull Assets and liabilities and income and expenses shall not be offsetndash unless required or permitted by a IFRS
bull It is important that assets and liabilities and income and expenses are reported separatelyndash Measuring assets net of valuation allowances mdash
for example obsolescence allowances on inventories and doubtful debts allowances on receivables mdash is not offsetting
f) Offsetting
26
copy 2005-07 Nelson 51
3 Overall Consideration
bull During ordinary activities some transactions that do not generate revenue but are incidental to the main revenue-generating activitiesndash The results of such transactions are presented
when this presentation reflects the substance of the transaction or other event by netting any income with related expenses arising on the same transaction
f) Offsetting
copy 2005-07 Nelson 52
3 Overall Consideration
bull For examplea) gains and losses on the disposal of non-current
assets including investments and operating assets- are reported by deducting from the proceeds on
disposal the carrying amount of the asset and related selling expenses and
b) expenditure related to a provision that is- recognised in accordance with IAS 37 and - reimbursed under a contractual arrangement with
a third party (for example a supplierrsquos warranty agreement)
may be netted against the related reimbursement
f) Offsetting
ExampleExample
27
copy 2005-07 Nelson 53
3 Overall Consideration
bull Gains and losses arising from a group of similar transactions are reported on a net basisndash For example
bull foreign exchange gains and losses or bull gains and losses arising on financial instruments held for trading
bull Such gains and losses are however reported separately if they are material
bull Gains and losses arising from a group of similar transactions are reported on a net basisndash For example
bull foreign exchange gains and losses or bull gains and losses arising on financial instruments held for trading
bull Such gains and losses are however reported separately if they are material
Can foreign exchange gains and losses be offset
ExampleExample
copy 2005-07 Nelson 54
3 Overall Consideration
bull Except when a IFRS permits or requires otherwise ndash comparative information shall be disclosed in
respect of the previous period for all amountsreported in the financial statements
bull When the presentation or classification of items in the financial statements is amended ndash comparative amounts shall be reclassified unless
the reclassification is impracticable
g) Comparative information
28
copy 2005-07 Nelson 55
Amended requirementsAmended requirements
3 Overall Consideration
bull When comparative amounts are reclassified an entity shall disclosea) the nature of the reclassificationb) the amount of each item or class of items that is
reclassified andc) the reason for the reclassification
g) Comparative information
bull In the pastonly the reason for and a description of the nature of materialreclassifications should be disclosedExemption for disclosure of comparative information for the reconciliation of movements in fixed assets is also removed
bull In the pastonly the reason for and a description of the nature of materialreclassifications should be disclosedExemption for disclosure of comparative information for the reconciliation of movements in fixed assets is also removed
copy 2005-07 Nelson 56
3 Overall Consideration
Melco Development Limited (新濠國際發展有限公司)Notes to the financial statements for year ended 31122005ndash Because HKAS 32 requires retrospective application comparative
figures for 2004 have been restated (see Note 2A for the financial impact)
CaseCase
29
copy 2005-07 Nelson 57
3 Overall Consideration
Galaxy Entertainment Group LimitedNotes to the financial statements (ye 31122005)ndash All changes in the accounting policies require
retrospective application except HKAS 39 and HKFRS 2 for which transitional provisions are applied
ndash As a result the 2004 comparative figures have also been restated or amended in accordance with the relevant requirements
ndash The effects of all the changes in accounting policies are summarised in notes (b) and (c) below
CaseCase
copy 2005-07 Nelson 58
bull Identification of the financial statementsbull Reporting periodbull Balance sheet
1 CurrentNon-current distinction2 Current assets3 Current liabilities4 Information to be presented on the face of the balance sheet5 Information to be presented either on the face of the balance sheet or in
the notesbull Income statement
1 Profit or loss for the period2 Information to be presented on the face of the income statement3 Information to be presented either on the face of the income statement or
in the notesbull Statement of changes in equitybull Cash flow statementbull Notes
4 Structure and Content
30
copy 2005-07 Nelson 59
Identification of Financial Statements
bull The financial statements shall be identified clearly and distinguished from other information in the same published document
bull The following information shall be displayed prominently and repeated when it is necessary for a proper understanding of the information presented
a) the name of the reporting entity or other means of identification and any change in that information from the preceding balance sheet date
b) whether the financial statements cover the individual entity or a group of entities
c) the balance sheet date or the period covered by the financial statements whichever is appropriate to that component of the financial statements
d) the presentation currency as defined in HKAS 21 The Effects of Changes in Foreign Exchange Rates and
e) the level of rounding used in presenting amounts in the financial statements
copy 2005-07 Nelson 60
Identification of Financial Statements
bull Can the units of the presentation currency be rounded to thousands or millions
bull Financial statements are often made more understandableby presenting information in thousands or millions of units of the presentation currency
bull This is acceptable as long asndash the level of rounding in presentation is disclosed and ndash material information is not omitted
bull Financial statements are often made more understandableby presenting information in thousands or millions of units of the presentation currency
bull This is acceptable as long asndash the level of rounding in presentation is disclosed and ndash material information is not omitted
ExampleExample
31
copy 2005-07 Nelson 61
Reporting Period
bull Financial statements shall be presented at least annually
bull When an entityrsquos balance sheet date changes and the annual financial statements are presented for a period longer or shorter than one year an entity shall disclose in addition to the period covered by the financial statementsa) the reason for using a longer or shorter period andb) the fact that comparative amounts for the income
statement statement of changes in equity cash flow statement and related notes are not entirely comparable
copy 2005-07 Nelson 62
Reporting Period
bull Can a set of financial statements cover 52-week instead of a year
bull Normally financial statements are consistently prepared covering a one-year period
bull However for practical reasons some entities prefer to report for example for a 52-week period
bull IAS 1 does not preclude this practice because the resulting financial statements are unlikely to be materially different from those that would be presented for one year
bull Normally financial statements are consistently prepared covering a one-year period
bull However for practical reasons some entities prefer to report for example for a 52-week period
bull IAS 1 does not preclude this practice because the resulting financial statements are unlikely to be materially different from those that would be presented for one year
ExampleExample
32
copy 2005-07 Nelson 63
CurrentNon-current Distinction
bull An entity shall presentndash current and non-current assets andndash current and non-current liabilitiesas separate classifications on the face of its balance sheet
bull Except when a presentation based on liquidity provides informationndash If that information is reliable and is more relevantndash When that exception applies all assets and liabilities shall be
presented broadly in order of liquidity
copy 2005-07 Nelson 64
CurrentNon-current Distinction
bull Whichever method of presentation is adopted for each asset and liability line item that combines amounts expected to be recovered or settled a) no more than 12 months after the balance sheet date
andb) more than 12 months after the balance sheet date(ie combines both current and non-current)
an entity shall disclose the amount expected to be recovered or settled after more than 12 months
33
copy 2005-07 Nelson 65
New requirementsNew requirements
Current Assets
bull An asset shall be classified as current when it satisfies any of the following criteriaa) it is expected to be realised in or is intended for sale or
consumption in the entityrsquos normal operating cycle b) it is held primarily for the purpose of being tradedc) it is expected to be realised within 12 months after the balance
sheet date ord) it is cash or a cash equivalent
bull unless it is restricted from being exchanged or used to settle aliability for at least 12 months after the balance sheet date
bull All other assets shall be classified as non-current
Examplesbull Deposits pledged to bank (how long)bull Fixed deposits over 1 year maturity
Examplesbull Deposits pledged to bank (how long)bull Fixed deposits over 1 year maturity
What is itWhat is it
copy 2005-07 Nelson 66
Current Assets
bull What is operating cycle
bull The operating cycle of an entity is the time between ndash the acquisition of assets for processing and ndash their realisation in cash or cash equivalents
bull When the entityrsquos normal operating cycle is not clearly identifiable ndash its duration is assumed to be 12 months
bull The operating cycle of an entity is the time between ndash the acquisition of assets for processing and ndash their realisation in cash or cash equivalents
bull When the entityrsquos normal operating cycle is not clearly identifiable ndash its duration is assumed to be 12 months
ExampleExample
34
copy 2005-07 Nelson 67
Current Assets CaseCase
copy 2005-07 Nelson 68
Current Assets
bull Can a non-current asset reclassified if it fulfil the definition of current asset later
bull Assets classified as non-current in accordancewith IAS 1 shall not be reclassified as current assetsndash until they meet the criteria to be classified as held for sale in
accordance with IFRS 5bull Assets of a class that an entity would normally regard as non-
current that are acquired exclusively with a view to resale shall notbe classified as currentndash unless they meet the criteria to be classified as held for sale in
accordance with IFRS 5
bull Assets classified as non-current in accordancewith IAS 1 shall not be reclassified as current assetsndash until they meet the criteria to be classified as held for sale in
accordance with IFRS 5bull Assets of a class that an entity would normally regard as non-
current that are acquired exclusively with a view to resale shall notbe classified as currentndash unless they meet the criteria to be classified as held for sale in
accordance with IFRS 5
No non-current assets can be classified as current unless the criteria in IFRS 5 are fulfilled mainlybull Available for immediate salebull Highly probable to make the sale
35
copy 2005-07 Nelson 69
Is it currentIs it current
Current Assets
bull In its 2005 Interim Report full set of HKFRS was adopted and the report set out thatndash Available-for-sale financial assets are non-
derivatives that are eitherbull designated in this category orbull not classified in any of the other categories (ie
loans and receivables financial assets at fair value through profit or loss and held-to-maturity investments)
CaseCase
Similar in 2005 Annual Report
Similar in 2005 Annual Report
ndash They are included in non-current assetsbull unless management intends to dispose of the
investment within 12 months of the balance sheet date
copy 2005-07 Nelson 70
New requirementsNew requirements
Current Liabilities
bull A liability shall be classified as current when it satisfies any of the following criteriaa) it is expected to be settled in the entityrsquos normal operating cycleb) it is held primarily for the purpose of being tradedc) it is due to be settled within 12 months after the balance sheet
date ord) the entity does not have an unconditional right to defer settlement
of the liability for at least 12 months after the balance sheet date
bull All other liabilities shall be classified as non-current
ImplicationImplication
36
copy 2005-07 Nelson 71
Current Liabilities Revised rules on classifying a liability as current or non-currentbull A liability held for being traded rArr currentbull A financial liability due within 12 months after the BS date rArr current
ndash even if an agreement to refinance on a long-term basis is completed after the BS date (only disclosed as non-adjusting event)
bull If an entity has discretion to refinance rArr non-currentbull If an entity without discretion to refinance rArr current
bull A non-current financial liability is payable on demand with a breach on a condition of its loan agreement on or before the BS datendash If the lender agreed not to demand payment
bull after the BS date rArr current (only disclosed as non-adjusting event)
bull by the BS date rArr non-current
ImplicationImplication
copy 2005-07 Nelson 72
Current LiabilitiesCaseCase
Note 12 to Interim Report 2006bull Breach of loan covenants
bull As at 30 June 2006 in respect of certain bank loans with an aggregate carrying amount of HK$1529806000 the Group breached certain financial covenants of the banks loans
bull Since the lenders have not agreed to waive its right to demand immediate payment as at the balance sheet date the loans have been classified as current liabilities in these financial statements at 30 June 2006
37
copy 2005-07 Nelson 73
Current Assets and LiabilitiesExampleExample
Can the following be classified as current assetsbull 3-month fixed deposits pledged to a bank to secure
a mortgage loan of 5 yearsbull 2-year fixed deposits with a bank
Can the following be classified as current assetsbull 3-month fixed deposits pledged to a bank to secure
a mortgage loan of 5 yearsbull 2-year fixed deposits with a bank
Can the following be classified as non-current liabilitiesbull 5-year term loan matured after year end but renewed
for another 5 years after year end (before the issuanceof the financial statements)
bull 2-year term loan to be matured with 12 months and theentity has a right to renew for another 2 years
Can the following be classified as non-current liabilitiesbull 5-year term loan matured after year end but renewed
for another 5 years after year end (before the issuanceof the financial statements)
bull 2-year term loan to be matured with 12 months and theentity has a right to renew for another 2 years
timestimes
times
radic
copy 2005-07 Nelson 74
Balance Sheetbull As a minimum the face of the balance sheet shall
include line items that present the following amountsa) property plant and equipmentb) investment propertyc) intangible assetsd) financial assets (excl amounts shown under (e) (h) and (I))e) investments accounted for using the equity methodf) biological assetsg) inventoriesh) trade and other receivablesi) cash and cash equivalentsj) trade and other payablesk) provisionsl) financial liabilities (excl amounts shown under (j) and (k))m) liabilities and assets for current tax as defined in HKAS 12 Income Taxesn) deferred tax liabilities and deferred tax assets as defined in HKAS 12o) minority interest presented within equity andp) issued capital and reserves attributable to equity holders of the parent
38
copy 2005-07 Nelson 75
Balance Sheetbull The face of the balance sheet shall also include line
items that present the following amountsa) The total of assets classified as held for sale and
assets included in disposal groups classified as held for sale in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations and
b) Liabilities included in disposal groups classified as held for sale in accordance with IFRS 5
copy 2005-07 Nelson 76
Balance Sheetbull Additional line items headings and subtotals shall
be presented on the face of the balance sheet when such presentation is relevant to an understanding of the entityrsquos financial position
bull When an entity presents current and non-current assets and current and non-current liabilities as separate classifications on the face of its balance sheet ndash it shall not classify deferred tax assets
(liabilities) as current assets (liabilities)
39
copy 2005-07 Nelson 77
Balance Sheet
bull The use of different measurement bases for different classes of assets suggests that their nature or function differs and therefore that they should be presented as separate line itemsndash For example different classes of property plant and
equipment can be carried atbull Cost orbull Revalued amountsin accordance with IAS 16 PPE
In the past it use ldquomay needrdquoIn the past it use ldquomay needrdquo
copy 2005-07 Nelson 78
Balance Sheet
Galaxy Entertainment Group LimitedConsolidated balance sheet as at 31122005
CaseCase
40
copy 2005-07 Nelson 79
Balance Sheet
Melco Development Limited (新濠國際發展有限公司)Consolidated balance sheet as at 31122005
CaseCase
copy 2005-07 Nelson 80
Income Statement Minimum requirements on the face of the income statementbull As a minimum the face of the income statement shall include line items
that present the following amounts for the perioda) revenueb) finance costsc) share of the profit or loss of associates and joint ventures accounted
for using the equity methodd) pre-tax gain or loss recognised on the disposal of assets or
settlement of liabilities attributable to discontinuing operationse) tax expense andf) profit or loss
41
copy 2005-07 Nelson 81
Income Statement bull The following items shall be disclosed on the face of the income
statement as allocations of profit or loss for the perioda) Profit or loss attributable to minority interest andb) Profit or loss attributable to equity holders of the parent
A similar requirement has been added for the statement of changes in equity and such allocated amounts are not to be presented as items of income or expense
copy 2005-07 Nelson 82
Income Statement
Melco Dev LtdConsolidated income statementas at 31122005
CaseCase
42
copy 2005-07 Nelson 83
Income Statement bull Not require to disclose the results of operating
activities as a line item on the face of the incomestatement
bull An entity shall not present any items of income and expense as extraordinary items either onthe face of the income statements or in the notes
Entities canrsquot use itEntities canrsquot use it
Entities can still show itEntities can still show it
copy 2005-07 Nelson 84
Income Statement Either on the face of the income statement or in the notesbull An entity shall present an analysis of expenses using a classification
based on eitherbull the nature of expenses orbull their function within the entity
whichever provides information that is reliable and more relevant
bull Entities classifying expenses by function shall disclose additional information on the nature of expenses includingbull depreciation and amortisation expense and bull employee benefits expense
43
copy 2005-07 Nelson 85
Income StatementCaseCase
Nature or FunctionNature or Nature or FunctionFunction
copy 2005-07 Nelson 86
Statement of Changes in Equity bull An entity shall present a statement of changes in equity showing on the
face of the statementa) profit or loss for the period b) each item of income and expense for the period that as required by
IFRSs is recognised directly in equity and the total of these itemsc) total income and expense for the period (calculated as the sum of (a) and
(b)) showing separately the total amounts attributablebull to equity holders of the parent andbull to minority interest and
d) for each component of equity the effects of changes in accounting policies and corrections of errors recognised in accordance with IAS 8
Any ChangeAny Change
A revised requirementbull A statement of changes in equity that comprises only these items
shall be titled a statement of recognised income and expenses
A revised requirementbull A statement of changes in equity that comprises only these items
shall be titled a statement of recognised income and expenses
44
copy 2005-07 Nelson 87
Statement of Changes in Equity bull An entity shall also present either on the face of the
statement of changes in equity or in the notesa) the amounts of transactions with equity holders acting in
their capacity as equity holders showing separately distributions to equity holders
b) the balance of retained earnings (ie accumulated profit or loss) at the beginning of the period and at the balance sheet date and the changes during the period and
c) a reconciliation between the carrying amount of each class of contributed equity and each reserve at the beginning and the end of the period separately disclosing each change
copy 2005-07 Nelson 88
Statement of Changes in Equity
Consolidated SCE as at 31122005
CaseCase
45
copy 2005-07 Nelson 89
Notes Structure (an entity is required to disclose the following)
bull The notes shalla) present information about the basis of preparation of the financial statements
and the specific accounting policies usedb) disclose the information required by HKFRSs that is not presented on the
face of the balance sheet income statement statement of changes in equity or cash flow statement and
c) provide additional information that is not presented on the face of the balance sheet income statement statement of changes in equity or cash flow statement but is relevant to an understanding of any of them
bull Notes shall as far as practicable be presented in a systematic manner bull Each item on the face of the balance sheet income statement statement
of changes in equity and cash flow statement shall be cross-referencedto any related information in the notes
copy 2005-07 Nelson 90
Notes Disclosures (an entity is required to disclose the following)
bull Disclosure of accounting policiesAn entity shall disclose in the summary of significant accounting policiesa) the measurement basis (or bases) used in preparing the financial
statements andb) the other accounting policies used that are relevant to an understanding of
the financial statements
46
copy 2005-07 Nelson 91
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)ndash The financial statements have been prepared in
accordance with Hong Kong Financial Reporting Standards (lsquolsquoHKFRSrsquorsquo) issued by the Hong Kong Institute of Certified Public Accountants bull under the historical cost convention as modified by the
revaluation of investment properties available-for-sale financial assets derivative financial instruments and other investments which are carried at fair values helliphellip
ndash The principal accounting policies applied in the preparation of these financial statements are set out below These policies have been consistently applied to all the years presented except for those stated in note 2(a) above
copy 2005-07 Nelson 92
Notes Disclosures (an entity is required to disclose the following)
bull Disclosure of accounting policiesndash The judgements apart from those involving estimations management has
madebull in the process of applying the entityrsquos accounting policies that have the
most significant effect on the amounts recognised in the financial statements (in the summary of significant accounting policies or other notes)
Examples ndash Management makes judgements in determininga) whether financial assets are held-to-maturity investmentsb) when substantially all the significant risks and rewards of
ownership of financial assets and lease assets are transferred to other entities
c) whether in substance particular sales of goods are financing arrangements and therefore do not give rise to revenue and
d) whether the substance of the relationship between the entity and a special purpose entity indicates that the special purpose entity is controlled by the entity
Examples ndash Management makes judgements in determininga) whether financial assets are held-to-maturity investmentsb) when substantially all the significant risks and rewards of
ownership of financial assets and lease assets are transferred to other entities
c) whether in substance particular sales of goods are financing arrangements and therefore do not give rise to revenue and
d) whether the substance of the relationship between the entity and a special purpose entity indicates that the special purpose entity is controlled by the entity
47
copy 2005-07 Nelson 93
Notes Disclosures (an entity is required to disclose the following)
bull Key sources of estimation uncertaintyndash Information about the key assumptions concerning the future and
other key sources of estimation uncertainty at the balance sheet datebull that have a significant risk of causing a material adjustment to the
carrying amounts of assets and liabilities within the next financial yearndash In respect of those assets and liabilities the notes shall include details of
a) their nature andb) their carrying amount as at the balance sheet date
Examples ndash in the absence of recently observed market prices used to measure the following assets and liabilities future-oriented estimates are necessary to measurebull the recoverable amount of classes of PPEbull the effect of technological obsolescence on inventories
Estimates involve assumptions about such items asbull the risk adjustment to cash flows or discount rates usedbull future changes in salaries and in prices affecting other costs
Examples ndash in the absence of recently observed market prices used to measure the following assets and liabilities future-oriented estimates are necessary to measurebull the recoverable amount of classes of PPEbull the effect of technological obsolescence on inventories
Estimates involve assumptions about such items asbull the risk adjustment to cash flows or discount rates usedbull future changes in salaries and in prices affecting other costs
copy 2005-07 Nelson 94
Notes
Esprit Holdings LimitedEsprit Holdings Limitedbull Critical Accounting Estimates and Judgements
ndash Estimates and judgements are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonableunder the circumstances
ndash Critical accounting estimates and assumptionsbull The Group makes estimates and assumptions concerning
the future The resulting accounting estimates will by definition seldom equal the related actual results
bull The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below helliphellip (including (1) useful life and impairment of trademarks and (2) income taxes)
CaseCase
48
copy 2005-07 Nelson 95
Notes
Melco Development Limited (新濠國際發展有限公司)Notes to the financial statements for the year ended 31122005ndash The key assumptions concerning the future and other key sources
of estimation uncertainty at the balance sheet date that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below helliphellip(The issues discussed includebull Allowances for inventories bull Estimated impairment of goodwill Income taxes)
CaseCase
copy 2005-07 Nelson 96
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)ndash Estimates and judgements used in preparing the
financial statements are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonable under the circumstances
ndash The Group makes estimates and assumptionsconcerning the future
ndash The resulting accounting estimates will by definition seldom equal the related actual results
ndash The estimates and assumptions that have a significant effect on the carrying amounts of assets and liabilities are discussed below hellip (including impairment of goodwill impairment of gaming
licence Useful lives of property plant and equipment fair value of investment properties hellip)
49
copy 2005-07 Nelson 97
Notes Disclosures (an entity is required to disclose the following)
bull Other disclosuresAn entity shall disclose in the notesa) the amount of dividends proposed or declared before the
financial statements were authorised for issue but not recognised as a distribution to equity holders during the period and the related amount per share(HK incorporated companies are required to show the aggregate amount which is recommended for distribution by way of dividend under a separate heading(s) in their balance sheet (HK Co Ord 10th Sch para 9(1)(e)) and
b) the amount of any cumulative preference dividends not recognised
copy 2005-07 Nelson 98
Notes Disclosures (an entity is required to disclose the following)
An entity shall disclose the following if not disclosedelsewhere in information published with the financial statementsa) the domicile and legal form of the entity
its country of incorporation andthe address of its registered office(or principal place of business if different from the registered office)
b) a description of the nature of the entityrsquos operations and its principal activities and
c) the name of the parent and the ultimate parent of the group
ldquoshall discloserdquo now instead of ldquoencouraged to discloserdquo
ldquoshall discloserdquo now instead of ldquoencouraged to discloserdquo
bull Other disclosures
Any specialAny special
50
copy 2005-07 Nelson 99
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)bull The principal activities of Galaxy Entertainment Group
Ltd (the lsquolsquoCompanyrsquorsquo) (formerly known as K WahConstruction Materials Ltd) and its subsidiaries (together the lsquolsquoGrouprsquorsquo) are tondash operate in casino games of chance or games of other forms
in Macau (and) manufacture sale and distribution of construction materials in HK Macau and Mainland China
bull The Company is ndash a limited liability company incorporated in Hong Kong and ndash has its listing on the Main Board of The Stock Exchange of
Hong Kong Limitedbull The address of its registered office and its principal place
of business is Room 1606 16th Floor Hutchison House 10 Harcourt Road Central HK
copy 2005-07 Nelson 100
Effective Date
bull An entity shall apply IAS 1 for annual periods beginning on or after 1 Jan 2005
ndash Earlier application is encouragedndash If an entity applies IAS 1 for an earlier period it shall
disclose this factbull For the amendments relating to the Statement of
Changes in Equityndash An entity shall apply it for annual periods beginning on
or after 1 Jan 2006ndash If an entity applies the amendments to IAS 19
Employee Benefits ndash Actuarial Gains and Losses Group Plans and Disclosures for an earlier period that amendment shall be applied for that earlier period
51
copy 2005-07 Nelson 101
Todayrsquos Agenda
Capital Disclosures (Amendments to IAS 1)
Capital Disclosures (Amendments to IAS 1)
copy 2005-07 Nelson 102
Capital Disclosures ndash For 2007
52
copy 2005-07 Nelson 103
Capital Disclosures
What is capital Is it helliphellip
CapitalCapital AssetsAssets LiabilitiesLiabilities= ndash
bull IAS 1BC47 considers ldquowhether an entity can have a view of capital that differs from what IFRSs define as equityrdquo
bull It further clarifies that although for the purposes of this disclosure capital would often equate with equity as defined in IFRSsndash it might also include or exclude some components
bull It also noted that the capital disclosure in IAS 1 is intended to give entities the opportunity to describendash how they view the components of capital they manage if this is
different from what IFRSs define as equity helliphellip
copy 2005-07 Nelson 104
EquityEquityEquity AssetsAssets LiabilitiesLiabilities= ndash
Capital Disclosures
Based on the Framework amp IFRSs the accounting equation should be
CapitalCapital AssetsAssets LiabilitiesLiabilities= ndash
bull An entityrsquos capital may be part of its equity plus part of its liabilities depending on how it manage ldquoits capitalrdquo helliphellip
53
copy 2005-07 Nelson 105
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowinga) qualitative information about its objectives policies and processes for
managing capital including (but not limited to)i) a description of what it manages as capitalii) when an entity is subject to externally imposed capital requirements
the nature of those requirements and how those requirements are incorporated into the management of capital and
iii) how it is meeting its objectives for managing capital
bull To comply with the capital disclosures the entity discloses thefollowinga) qualitative information about its objectives policies and processes for
managing capital including (but not limited to)i) a description of what it manages as capitalii) when an entity is subject to externally imposed capital requirements
the nature of those requirements and how those requirements are incorporated into the management of capital and
iii) how it is meeting its objectives for managing capital
copy 2005-07 Nelson 106
Capital Disclosures
Example disclosurebull The Grouprsquos objectives when managing capital are
ndash to safeguard the entityrsquos ability to continue as a going concern
bull so that it can continue to provide returns for shareholders and benefits for other stakeholders and
ndash to provide an adequate return to shareholders by pricing products and services commensurately with the level of risk
bull The Group sets the amount of capital in proportion to risk
ExampleExample
ObjectivesObjectives
54
copy 2005-07 Nelson 107
Capital Disclosures
bull The Group manages the capital structure and makes adjustments to it in the light ofndash changes in economic conditions and ndash the risk characteristics of the underlying assets
bull In order to maintain or adjust the capital structure the Group mayndash adjust the amount of dividends paid to shareholders ndash return capital to shareholders ndash issue new shares or ndash sell assets to reduce debt
ExampleExample
Example disclosure
HowHow
copy 2005-07 Nelson 108
Capital Disclosures
bull Consistently with others in the industry the Group monitors capital on the basis of ndash the debt-to-adjusted capital ratio
bull This ratio is calculated as net debt divide adjusted capital
ExampleExample
Example disclosure
HowHow
bull Net debt is calculated as ndash Total debt (as shown in the
balance sheet)ndash Less cash amp cash equivalents
bull Net debt is calculated as ndash Total debt (as shown in the
balance sheet)ndash Less cash amp cash equivalents
bull Adjusted capital ndash comprises all components of
equity (ie share capital share premium minority interest retained earnings and revaluation reserve) ndash other than amounts
recognised in equity relating to cash flow hedges and
ndash includes some forms of subordinated debt
bull Adjusted capital ndash comprises all components of
equity (ie share capital share premium minority interest retained earnings and revaluation reserve) ndash other than amounts
recognised in equity relating to cash flow hedges and
ndash includes some forms of subordinated debt
55
copy 2005-07 Nelson 109
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowing
bull To comply with the capital disclosures the entity discloses thefollowingb) summary quantitative data about what it manages as capital
Some entities regard some financial liabilities (eg some forms of subordinated debt) as part of capitalOther entities regard capital as excluding some components of equity (eg components arising from cash flow hedges)
c) any changes in (a) and (b) from the previous period
copy 2005-07 Nelson 110
Capital Disclosures
Example disclosure (continued from previous example)
ExampleExample
bull During 20X4 the Grouprsquos strategy which was unchanged from 20X3 was to maintain the debt-to-adjusted capital ratio at the lower end of the range 61 to 71 in order to secure access to finance at a reasonable cost by maintaining a BB credit rating The debt-to-adjusted capital ratios at 31 December 20X4 and at 31 December 20X3 were as follows
3112X4 ($rsquoM) 3112X3 ($rsquoM) Total debt 1000 1100 Less cash and cash equivalents (90) (150)Net debt 910 950
Total equity 110 105 Add subordinated debt instruments 38 38 Less amounts recognised in equity
relating to cash flow hedges (10) (5)Adjusted capital 138 138
Debt-to-adjusted capital ratio 66 69
56
copy 2005-07 Nelson 111
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowing
bull To comply with the capital disclosures the entity discloses thefollowingd) whether during the period it complied with any externally imposed capital
requirements to which it is subjecte) when the entity has not complied with such externally imposed capital
requirements the consequences of such non-complianceThese disclosures shall be based on the information provided internally to the entityrsquos key management personnel
copy 2005-07 Nelson 112
Capital DisclosuresExampleExample
Example disclosurebull Entity A filed its quarterly regulatory capital return for
30 September 20X7 on 20 October 20X7 bull At that date Entity Arsquos regulatory capital was below
the capital requirement imposed by Regulator B by $1 million
bull As a result Entity A was required to submit a plan to the regulator indicating how it would increase its regulatory capital to the amount required
bull Entity A submitted a plan that entailed selling part of its unquoted equities portfolio with a carrying amount of $115 million in the fourth quarter of 20X7
bull In the fourth quarter of 20X7 Entity A sold its fixed interest investment portfolio for $126 million and met its regulatory capital requirement
For example SFC or banks
For example SFC or banks
57
copy 2005-07 Nelson 113
Capital DisclosuresCaseCase
bull Early adopted capital disclosure in 2005 and itsannual report states that (extract only)ndash The Grouprsquos objectives when managing capital are
bull To safeguard the Grouprsquos ability to continue as a going concern so that it continues to provide returns for shareholders and benefits for other stakeholders
bull To support the Grouprsquos stability and growth andbull To provide capital for the purpose of strengthening the
Grouprsquos risk management capability
copy 2005-07 Nelson 114
Capital DisclosuresCaseCase
ndash The Group actively and regularly reviews and manages its capital structure to ensure optimal capital structure and shareholder returns taking into consideration the future capital requirements of the Group and capital efficiency helliphellip
ndash The Group adopts a dividend policy helliphellip while retaining 10 per cent of the profit as capital of the Group for future use
ndash The Group has set aside $1500 million of retained earnings for the purpose of strengthening the risk management regime of the clearing houses and supporting their roles as central counterparties
ndash As in prior years the Group monitors capital by reviewing the level of capital that is at the disposal of the Group (ldquoadjusted capitalrdquo) Adjusted capital comprises all components of shareholdersrsquo equity other than the hedging reserve relating to cash flow hedges designated reserves and investment revaluation reserve helliphellip
bull Early adopted capital disclosure in 2005 and itsannual report states that (extract only)
58
copy 2005-07 Nelson 115
Capital Disclosures ndash Transition
bull An entity shall apply the requirements of capital disclosure for
ndash annual periods beginning on or after 1 January 2007
bull Early application is encouraged
copy 2005-07 Nelson 116
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk
59
copy 2005-07 Nelson 117
QampA SessionQampA SessionQampA Session
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk
19
copy 2005-07 Nelson 37
3 Overall Consideration
bull Departure from Standard or Interpretation (Simplified)
a) Fair presentation and compliance with IFRSs
ndash Then the following disclosure is requireda) management has concluded that the financial
statements give a true and fair viewb) that it has complied with applicable standards and
interpretations except that it has departed from a particular requirement
c) the title of the standard or interpretation from which the entity has departed the nature of the departure the reason why that treatment would be so misleading and the treatment adopted and
d) for each period presented the financial impact of the departure on each item in the financial statements that would have been reported in complying with the requirement
copy 2005-07 Nelson 38
3 Overall Consideration
Interim Report 2005 clearly stated thatInterim Report 2005 clearly stated that
CaseCase
bull The directors consider it inappropriate for the company to adopt two particular aspects of the newrevised HKFRSs as these would result in the financial statements in the view of the directors eitherbull not reflecting the commercial substance of the business orbull being subject to significant potential short-term volatility as
explained below helliphellip
20
copy 2005-07 Nelson 39
3 Overall ConsiderationCaseCase
bull HKAS 40 ldquoInvestment propertyrdquo requires an assessment of the fair value of investment properties
bull The group intends to follow the same accounting treatment as adopted in 2004 which is to value such investment properties on an annual basis
bull Accordingly the investment properties were not revalued at 30 June 2005 since the directors consider that such change of practice could introduce a significant element of short-term volatility into the income statement in respect of assets which are being held on a long-term basis by the group helliphellip
bull It is not practicable to estimate the financial effect of this non-compliance as no interim valuation of the properties has been conducted
Interim Report 2005 clearly stated thatInterim Report 2005 clearly stated that
At year-end revaluation would still be conductedAt year-end revaluation would still be conducted
copy 2005-07 Nelson 40
3 Overall ConsiderationCaseCase
bull HKAS 12 ldquoIncome Taxesrdquo together with HKAS-INT 21 ldquoIncome Taxes ndashRecovery of Revalued Non-Depreciable Assetsrdquo requires deferred taxation to be recognised on any revaluation movements on investment propertiesbull It is further provided that any such deferred tax liability should be calculated
at the profits tax rate in the case of assets which the management has no definite intention to sell
bull The company has not made such provision in respect of its HK investment properties since the directors consider that such provision would result in the financial statements not reflecting the commercial substance of the businessbull since should any such sale eventuate any gain would be regarded as capital
in nature and would not be subject to any tax in HKbull Should this aspect of HKAS 12 have been adopted deferred tax liabilities
amounting to HK$2008 million on the revaluation surpluses arising from revaluation of HK investment properties would have been provided
(estimate - over 12 of the net assets at 30 June 2005)
Interim Report 2005 clearly stated thatInterim Report 2005 clearly stated that
21
copy 2005-07 Nelson 41
3 Overall Consideration
bull Departure but such departure is prohibitedndash In the extremely rare circumstances in which
management concludes that bull compliance with a requirement in a
standard or an interpretation would be so misleading that
bull it would conflict with the objective of financial statements set out in the Framework
bull but the relevant regulatory framework prohibits departure from the requirement the entity shall to the maximum extent possible reduce the perceived misleading aspects of compliance by disclosing helliphellip
a) Fair presentation and compliance with IFRSs
copy 2005-07 Nelson 42
3 Overall Consideration
ndash by disclosinga) the title of the standard or interpretation in
question the nature of the requirement and the reason why management has concluded that complying with that requirement is so misleading in the circumstances that it conflicts with the objective of financial statements set out in the Framework and
b) for each period presented the adjustments to each item in the financial statements that management has concluded would be necessary to give a fair presentation
a) Fair presentation and compliance with IFRSsbull Departure but such departure is prohibited
22
copy 2005-07 Nelson 43
3 Overall Consideration
bull When assessing whether complying with a specific requirement in a standard or an interpretation would be so misleading that it would conflict with the objective of financial statements set out in the Frameworkndash management considers
a) why the objective of financial statements is not achieved in the particular circumstances and
b) how the entityrsquos circumstances differ from those of other entities that comply with the requirement ndash If other entities in similar circumstances comply with the
requirement raquo there is a rebuttable presumption that the entityrsquos compliance
with the requirement would not be so misleading that it would conflict with the objective of financial statements set out in the Framework
a) Fair presentation and compliance with IFRSs
copy 2005-07 Nelson 44
3 Overall ConsiderationCaseCase
Howrsquos about this Howrsquos about this
However 2005 Final Results Announcementdisclosed that bull provision for deferred tax was finally made
with regard to revaluation of the HK investment properties (total HK$22 billion) at 2005 year-end
However However 2005 Final Results Announcement2005 Final Results Announcementdisclosed that disclosed that bullbull provision for deferred tax was finally made provision for deferred tax was finally made
with regard to revaluation of the HK with regard to revaluation of the HK investment properties (total HK$22 billion) at investment properties (total HK$22 billion) at 2005 year2005 year--endend
23
copy 2005-07 Nelson 45
b) Going Concern
3 Overall Consideration
bull When preparing financial statements management shall make an assessment of an entityrsquos ability to continue as a going concern
bull Financial statements shall be prepared on a going concern basisndash unless management either intends to liquidate the entity or to cease
trading or has no realistic alternative but to do so bull When management is aware in making its assessment of
material uncertainties related to events or conditions that may cast significant doubt upon the entityrsquos ability to continue as a going concern those uncertainties shall be disclosed
bull When financial statements are not prepared on a going concern basis that fact shall be disclosed together with the basis on which the financial statements are prepared and the reason why the entity is not regarded as a going concern
copy 2005-07 Nelson 46
c) Accrual Basis of Accounting
3 Overall Consideration
bull An entity shall prepare its financial statements except for cash flow information using the accrual basis of accounting
bull When the accrual basis of accounting is used items are recognised as assets liabilities equity income and expensesndash when they satisfy the definitions and recognition criteria for those
elements in the Framework
24
copy 2005-07 Nelson 47
3 Overall Consideration
bull The presentation and classification of items in the financial statements shall be retained from one period to the next unlessa) it is apparent
bull following a significant change in the nature of the entityrsquos operations (eg significant acquisition or disposal) or
bull a review of its financial statementsthat another presentation or classification would be more appropriatehaving regard to the criteria for the selection and application of accounting policies in IAS 8 or
b) a IFRS requires a change in presentation
d) Consistency of presentation
An entity changes the presentation of its financial statements only ifndash the changed presentation provides information that is reliable and is
more relevant to users of the financial statements andndash the revised structure is likely to continue so that comparability is not
impaired
An entity changes the presentation of its financial statements only ifndash the changed presentation provides information that is reliable and is
more relevant to users of the financial statements andndash the revised structure is likely to continue so that comparability is not
impaired
copy 2005-07 Nelson 48
3 Overall Consideration
bull Each material class of similar items shall bendash presented separately in the financial
statementsbull Items of a dissimilar nature or function shall be
ndash presented separately unless they are immaterial
bull Applying the concept of materiality means that a specific disclosure requirement in a IFRS neednot be satisfied if the information is not material
e) Materiality and Aggregation
What is the situation of recognition and measurement
What is the What is the situation of situation of recognition and recognition and measurementmeasurement
25
copy 2005-07 Nelson 49
3 Overall Consideration
bull What is materialndash Omissions or misstatements of items are
material if they could individually or collectively influence the economic decisions of users taken on the basis of the financial statements
ndash Materiality depends on the size and nature of the omission or misstatement judged in the surrounding circumstancesbull The size or nature of the item or a combination
of both could be the determining factor
e) Materiality and Aggregation
copy 2005-07 Nelson 50
3 Overall Consideration
bull Assets and liabilities and income and expenses shall not be offsetndash unless required or permitted by a IFRS
bull It is important that assets and liabilities and income and expenses are reported separatelyndash Measuring assets net of valuation allowances mdash
for example obsolescence allowances on inventories and doubtful debts allowances on receivables mdash is not offsetting
f) Offsetting
26
copy 2005-07 Nelson 51
3 Overall Consideration
bull During ordinary activities some transactions that do not generate revenue but are incidental to the main revenue-generating activitiesndash The results of such transactions are presented
when this presentation reflects the substance of the transaction or other event by netting any income with related expenses arising on the same transaction
f) Offsetting
copy 2005-07 Nelson 52
3 Overall Consideration
bull For examplea) gains and losses on the disposal of non-current
assets including investments and operating assets- are reported by deducting from the proceeds on
disposal the carrying amount of the asset and related selling expenses and
b) expenditure related to a provision that is- recognised in accordance with IAS 37 and - reimbursed under a contractual arrangement with
a third party (for example a supplierrsquos warranty agreement)
may be netted against the related reimbursement
f) Offsetting
ExampleExample
27
copy 2005-07 Nelson 53
3 Overall Consideration
bull Gains and losses arising from a group of similar transactions are reported on a net basisndash For example
bull foreign exchange gains and losses or bull gains and losses arising on financial instruments held for trading
bull Such gains and losses are however reported separately if they are material
bull Gains and losses arising from a group of similar transactions are reported on a net basisndash For example
bull foreign exchange gains and losses or bull gains and losses arising on financial instruments held for trading
bull Such gains and losses are however reported separately if they are material
Can foreign exchange gains and losses be offset
ExampleExample
copy 2005-07 Nelson 54
3 Overall Consideration
bull Except when a IFRS permits or requires otherwise ndash comparative information shall be disclosed in
respect of the previous period for all amountsreported in the financial statements
bull When the presentation or classification of items in the financial statements is amended ndash comparative amounts shall be reclassified unless
the reclassification is impracticable
g) Comparative information
28
copy 2005-07 Nelson 55
Amended requirementsAmended requirements
3 Overall Consideration
bull When comparative amounts are reclassified an entity shall disclosea) the nature of the reclassificationb) the amount of each item or class of items that is
reclassified andc) the reason for the reclassification
g) Comparative information
bull In the pastonly the reason for and a description of the nature of materialreclassifications should be disclosedExemption for disclosure of comparative information for the reconciliation of movements in fixed assets is also removed
bull In the pastonly the reason for and a description of the nature of materialreclassifications should be disclosedExemption for disclosure of comparative information for the reconciliation of movements in fixed assets is also removed
copy 2005-07 Nelson 56
3 Overall Consideration
Melco Development Limited (新濠國際發展有限公司)Notes to the financial statements for year ended 31122005ndash Because HKAS 32 requires retrospective application comparative
figures for 2004 have been restated (see Note 2A for the financial impact)
CaseCase
29
copy 2005-07 Nelson 57
3 Overall Consideration
Galaxy Entertainment Group LimitedNotes to the financial statements (ye 31122005)ndash All changes in the accounting policies require
retrospective application except HKAS 39 and HKFRS 2 for which transitional provisions are applied
ndash As a result the 2004 comparative figures have also been restated or amended in accordance with the relevant requirements
ndash The effects of all the changes in accounting policies are summarised in notes (b) and (c) below
CaseCase
copy 2005-07 Nelson 58
bull Identification of the financial statementsbull Reporting periodbull Balance sheet
1 CurrentNon-current distinction2 Current assets3 Current liabilities4 Information to be presented on the face of the balance sheet5 Information to be presented either on the face of the balance sheet or in
the notesbull Income statement
1 Profit or loss for the period2 Information to be presented on the face of the income statement3 Information to be presented either on the face of the income statement or
in the notesbull Statement of changes in equitybull Cash flow statementbull Notes
4 Structure and Content
30
copy 2005-07 Nelson 59
Identification of Financial Statements
bull The financial statements shall be identified clearly and distinguished from other information in the same published document
bull The following information shall be displayed prominently and repeated when it is necessary for a proper understanding of the information presented
a) the name of the reporting entity or other means of identification and any change in that information from the preceding balance sheet date
b) whether the financial statements cover the individual entity or a group of entities
c) the balance sheet date or the period covered by the financial statements whichever is appropriate to that component of the financial statements
d) the presentation currency as defined in HKAS 21 The Effects of Changes in Foreign Exchange Rates and
e) the level of rounding used in presenting amounts in the financial statements
copy 2005-07 Nelson 60
Identification of Financial Statements
bull Can the units of the presentation currency be rounded to thousands or millions
bull Financial statements are often made more understandableby presenting information in thousands or millions of units of the presentation currency
bull This is acceptable as long asndash the level of rounding in presentation is disclosed and ndash material information is not omitted
bull Financial statements are often made more understandableby presenting information in thousands or millions of units of the presentation currency
bull This is acceptable as long asndash the level of rounding in presentation is disclosed and ndash material information is not omitted
ExampleExample
31
copy 2005-07 Nelson 61
Reporting Period
bull Financial statements shall be presented at least annually
bull When an entityrsquos balance sheet date changes and the annual financial statements are presented for a period longer or shorter than one year an entity shall disclose in addition to the period covered by the financial statementsa) the reason for using a longer or shorter period andb) the fact that comparative amounts for the income
statement statement of changes in equity cash flow statement and related notes are not entirely comparable
copy 2005-07 Nelson 62
Reporting Period
bull Can a set of financial statements cover 52-week instead of a year
bull Normally financial statements are consistently prepared covering a one-year period
bull However for practical reasons some entities prefer to report for example for a 52-week period
bull IAS 1 does not preclude this practice because the resulting financial statements are unlikely to be materially different from those that would be presented for one year
bull Normally financial statements are consistently prepared covering a one-year period
bull However for practical reasons some entities prefer to report for example for a 52-week period
bull IAS 1 does not preclude this practice because the resulting financial statements are unlikely to be materially different from those that would be presented for one year
ExampleExample
32
copy 2005-07 Nelson 63
CurrentNon-current Distinction
bull An entity shall presentndash current and non-current assets andndash current and non-current liabilitiesas separate classifications on the face of its balance sheet
bull Except when a presentation based on liquidity provides informationndash If that information is reliable and is more relevantndash When that exception applies all assets and liabilities shall be
presented broadly in order of liquidity
copy 2005-07 Nelson 64
CurrentNon-current Distinction
bull Whichever method of presentation is adopted for each asset and liability line item that combines amounts expected to be recovered or settled a) no more than 12 months after the balance sheet date
andb) more than 12 months after the balance sheet date(ie combines both current and non-current)
an entity shall disclose the amount expected to be recovered or settled after more than 12 months
33
copy 2005-07 Nelson 65
New requirementsNew requirements
Current Assets
bull An asset shall be classified as current when it satisfies any of the following criteriaa) it is expected to be realised in or is intended for sale or
consumption in the entityrsquos normal operating cycle b) it is held primarily for the purpose of being tradedc) it is expected to be realised within 12 months after the balance
sheet date ord) it is cash or a cash equivalent
bull unless it is restricted from being exchanged or used to settle aliability for at least 12 months after the balance sheet date
bull All other assets shall be classified as non-current
Examplesbull Deposits pledged to bank (how long)bull Fixed deposits over 1 year maturity
Examplesbull Deposits pledged to bank (how long)bull Fixed deposits over 1 year maturity
What is itWhat is it
copy 2005-07 Nelson 66
Current Assets
bull What is operating cycle
bull The operating cycle of an entity is the time between ndash the acquisition of assets for processing and ndash their realisation in cash or cash equivalents
bull When the entityrsquos normal operating cycle is not clearly identifiable ndash its duration is assumed to be 12 months
bull The operating cycle of an entity is the time between ndash the acquisition of assets for processing and ndash their realisation in cash or cash equivalents
bull When the entityrsquos normal operating cycle is not clearly identifiable ndash its duration is assumed to be 12 months
ExampleExample
34
copy 2005-07 Nelson 67
Current Assets CaseCase
copy 2005-07 Nelson 68
Current Assets
bull Can a non-current asset reclassified if it fulfil the definition of current asset later
bull Assets classified as non-current in accordancewith IAS 1 shall not be reclassified as current assetsndash until they meet the criteria to be classified as held for sale in
accordance with IFRS 5bull Assets of a class that an entity would normally regard as non-
current that are acquired exclusively with a view to resale shall notbe classified as currentndash unless they meet the criteria to be classified as held for sale in
accordance with IFRS 5
bull Assets classified as non-current in accordancewith IAS 1 shall not be reclassified as current assetsndash until they meet the criteria to be classified as held for sale in
accordance with IFRS 5bull Assets of a class that an entity would normally regard as non-
current that are acquired exclusively with a view to resale shall notbe classified as currentndash unless they meet the criteria to be classified as held for sale in
accordance with IFRS 5
No non-current assets can be classified as current unless the criteria in IFRS 5 are fulfilled mainlybull Available for immediate salebull Highly probable to make the sale
35
copy 2005-07 Nelson 69
Is it currentIs it current
Current Assets
bull In its 2005 Interim Report full set of HKFRS was adopted and the report set out thatndash Available-for-sale financial assets are non-
derivatives that are eitherbull designated in this category orbull not classified in any of the other categories (ie
loans and receivables financial assets at fair value through profit or loss and held-to-maturity investments)
CaseCase
Similar in 2005 Annual Report
Similar in 2005 Annual Report
ndash They are included in non-current assetsbull unless management intends to dispose of the
investment within 12 months of the balance sheet date
copy 2005-07 Nelson 70
New requirementsNew requirements
Current Liabilities
bull A liability shall be classified as current when it satisfies any of the following criteriaa) it is expected to be settled in the entityrsquos normal operating cycleb) it is held primarily for the purpose of being tradedc) it is due to be settled within 12 months after the balance sheet
date ord) the entity does not have an unconditional right to defer settlement
of the liability for at least 12 months after the balance sheet date
bull All other liabilities shall be classified as non-current
ImplicationImplication
36
copy 2005-07 Nelson 71
Current Liabilities Revised rules on classifying a liability as current or non-currentbull A liability held for being traded rArr currentbull A financial liability due within 12 months after the BS date rArr current
ndash even if an agreement to refinance on a long-term basis is completed after the BS date (only disclosed as non-adjusting event)
bull If an entity has discretion to refinance rArr non-currentbull If an entity without discretion to refinance rArr current
bull A non-current financial liability is payable on demand with a breach on a condition of its loan agreement on or before the BS datendash If the lender agreed not to demand payment
bull after the BS date rArr current (only disclosed as non-adjusting event)
bull by the BS date rArr non-current
ImplicationImplication
copy 2005-07 Nelson 72
Current LiabilitiesCaseCase
Note 12 to Interim Report 2006bull Breach of loan covenants
bull As at 30 June 2006 in respect of certain bank loans with an aggregate carrying amount of HK$1529806000 the Group breached certain financial covenants of the banks loans
bull Since the lenders have not agreed to waive its right to demand immediate payment as at the balance sheet date the loans have been classified as current liabilities in these financial statements at 30 June 2006
37
copy 2005-07 Nelson 73
Current Assets and LiabilitiesExampleExample
Can the following be classified as current assetsbull 3-month fixed deposits pledged to a bank to secure
a mortgage loan of 5 yearsbull 2-year fixed deposits with a bank
Can the following be classified as current assetsbull 3-month fixed deposits pledged to a bank to secure
a mortgage loan of 5 yearsbull 2-year fixed deposits with a bank
Can the following be classified as non-current liabilitiesbull 5-year term loan matured after year end but renewed
for another 5 years after year end (before the issuanceof the financial statements)
bull 2-year term loan to be matured with 12 months and theentity has a right to renew for another 2 years
Can the following be classified as non-current liabilitiesbull 5-year term loan matured after year end but renewed
for another 5 years after year end (before the issuanceof the financial statements)
bull 2-year term loan to be matured with 12 months and theentity has a right to renew for another 2 years
timestimes
times
radic
copy 2005-07 Nelson 74
Balance Sheetbull As a minimum the face of the balance sheet shall
include line items that present the following amountsa) property plant and equipmentb) investment propertyc) intangible assetsd) financial assets (excl amounts shown under (e) (h) and (I))e) investments accounted for using the equity methodf) biological assetsg) inventoriesh) trade and other receivablesi) cash and cash equivalentsj) trade and other payablesk) provisionsl) financial liabilities (excl amounts shown under (j) and (k))m) liabilities and assets for current tax as defined in HKAS 12 Income Taxesn) deferred tax liabilities and deferred tax assets as defined in HKAS 12o) minority interest presented within equity andp) issued capital and reserves attributable to equity holders of the parent
38
copy 2005-07 Nelson 75
Balance Sheetbull The face of the balance sheet shall also include line
items that present the following amountsa) The total of assets classified as held for sale and
assets included in disposal groups classified as held for sale in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations and
b) Liabilities included in disposal groups classified as held for sale in accordance with IFRS 5
copy 2005-07 Nelson 76
Balance Sheetbull Additional line items headings and subtotals shall
be presented on the face of the balance sheet when such presentation is relevant to an understanding of the entityrsquos financial position
bull When an entity presents current and non-current assets and current and non-current liabilities as separate classifications on the face of its balance sheet ndash it shall not classify deferred tax assets
(liabilities) as current assets (liabilities)
39
copy 2005-07 Nelson 77
Balance Sheet
bull The use of different measurement bases for different classes of assets suggests that their nature or function differs and therefore that they should be presented as separate line itemsndash For example different classes of property plant and
equipment can be carried atbull Cost orbull Revalued amountsin accordance with IAS 16 PPE
In the past it use ldquomay needrdquoIn the past it use ldquomay needrdquo
copy 2005-07 Nelson 78
Balance Sheet
Galaxy Entertainment Group LimitedConsolidated balance sheet as at 31122005
CaseCase
40
copy 2005-07 Nelson 79
Balance Sheet
Melco Development Limited (新濠國際發展有限公司)Consolidated balance sheet as at 31122005
CaseCase
copy 2005-07 Nelson 80
Income Statement Minimum requirements on the face of the income statementbull As a minimum the face of the income statement shall include line items
that present the following amounts for the perioda) revenueb) finance costsc) share of the profit or loss of associates and joint ventures accounted
for using the equity methodd) pre-tax gain or loss recognised on the disposal of assets or
settlement of liabilities attributable to discontinuing operationse) tax expense andf) profit or loss
41
copy 2005-07 Nelson 81
Income Statement bull The following items shall be disclosed on the face of the income
statement as allocations of profit or loss for the perioda) Profit or loss attributable to minority interest andb) Profit or loss attributable to equity holders of the parent
A similar requirement has been added for the statement of changes in equity and such allocated amounts are not to be presented as items of income or expense
copy 2005-07 Nelson 82
Income Statement
Melco Dev LtdConsolidated income statementas at 31122005
CaseCase
42
copy 2005-07 Nelson 83
Income Statement bull Not require to disclose the results of operating
activities as a line item on the face of the incomestatement
bull An entity shall not present any items of income and expense as extraordinary items either onthe face of the income statements or in the notes
Entities canrsquot use itEntities canrsquot use it
Entities can still show itEntities can still show it
copy 2005-07 Nelson 84
Income Statement Either on the face of the income statement or in the notesbull An entity shall present an analysis of expenses using a classification
based on eitherbull the nature of expenses orbull their function within the entity
whichever provides information that is reliable and more relevant
bull Entities classifying expenses by function shall disclose additional information on the nature of expenses includingbull depreciation and amortisation expense and bull employee benefits expense
43
copy 2005-07 Nelson 85
Income StatementCaseCase
Nature or FunctionNature or Nature or FunctionFunction
copy 2005-07 Nelson 86
Statement of Changes in Equity bull An entity shall present a statement of changes in equity showing on the
face of the statementa) profit or loss for the period b) each item of income and expense for the period that as required by
IFRSs is recognised directly in equity and the total of these itemsc) total income and expense for the period (calculated as the sum of (a) and
(b)) showing separately the total amounts attributablebull to equity holders of the parent andbull to minority interest and
d) for each component of equity the effects of changes in accounting policies and corrections of errors recognised in accordance with IAS 8
Any ChangeAny Change
A revised requirementbull A statement of changes in equity that comprises only these items
shall be titled a statement of recognised income and expenses
A revised requirementbull A statement of changes in equity that comprises only these items
shall be titled a statement of recognised income and expenses
44
copy 2005-07 Nelson 87
Statement of Changes in Equity bull An entity shall also present either on the face of the
statement of changes in equity or in the notesa) the amounts of transactions with equity holders acting in
their capacity as equity holders showing separately distributions to equity holders
b) the balance of retained earnings (ie accumulated profit or loss) at the beginning of the period and at the balance sheet date and the changes during the period and
c) a reconciliation between the carrying amount of each class of contributed equity and each reserve at the beginning and the end of the period separately disclosing each change
copy 2005-07 Nelson 88
Statement of Changes in Equity
Consolidated SCE as at 31122005
CaseCase
45
copy 2005-07 Nelson 89
Notes Structure (an entity is required to disclose the following)
bull The notes shalla) present information about the basis of preparation of the financial statements
and the specific accounting policies usedb) disclose the information required by HKFRSs that is not presented on the
face of the balance sheet income statement statement of changes in equity or cash flow statement and
c) provide additional information that is not presented on the face of the balance sheet income statement statement of changes in equity or cash flow statement but is relevant to an understanding of any of them
bull Notes shall as far as practicable be presented in a systematic manner bull Each item on the face of the balance sheet income statement statement
of changes in equity and cash flow statement shall be cross-referencedto any related information in the notes
copy 2005-07 Nelson 90
Notes Disclosures (an entity is required to disclose the following)
bull Disclosure of accounting policiesAn entity shall disclose in the summary of significant accounting policiesa) the measurement basis (or bases) used in preparing the financial
statements andb) the other accounting policies used that are relevant to an understanding of
the financial statements
46
copy 2005-07 Nelson 91
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)ndash The financial statements have been prepared in
accordance with Hong Kong Financial Reporting Standards (lsquolsquoHKFRSrsquorsquo) issued by the Hong Kong Institute of Certified Public Accountants bull under the historical cost convention as modified by the
revaluation of investment properties available-for-sale financial assets derivative financial instruments and other investments which are carried at fair values helliphellip
ndash The principal accounting policies applied in the preparation of these financial statements are set out below These policies have been consistently applied to all the years presented except for those stated in note 2(a) above
copy 2005-07 Nelson 92
Notes Disclosures (an entity is required to disclose the following)
bull Disclosure of accounting policiesndash The judgements apart from those involving estimations management has
madebull in the process of applying the entityrsquos accounting policies that have the
most significant effect on the amounts recognised in the financial statements (in the summary of significant accounting policies or other notes)
Examples ndash Management makes judgements in determininga) whether financial assets are held-to-maturity investmentsb) when substantially all the significant risks and rewards of
ownership of financial assets and lease assets are transferred to other entities
c) whether in substance particular sales of goods are financing arrangements and therefore do not give rise to revenue and
d) whether the substance of the relationship between the entity and a special purpose entity indicates that the special purpose entity is controlled by the entity
Examples ndash Management makes judgements in determininga) whether financial assets are held-to-maturity investmentsb) when substantially all the significant risks and rewards of
ownership of financial assets and lease assets are transferred to other entities
c) whether in substance particular sales of goods are financing arrangements and therefore do not give rise to revenue and
d) whether the substance of the relationship between the entity and a special purpose entity indicates that the special purpose entity is controlled by the entity
47
copy 2005-07 Nelson 93
Notes Disclosures (an entity is required to disclose the following)
bull Key sources of estimation uncertaintyndash Information about the key assumptions concerning the future and
other key sources of estimation uncertainty at the balance sheet datebull that have a significant risk of causing a material adjustment to the
carrying amounts of assets and liabilities within the next financial yearndash In respect of those assets and liabilities the notes shall include details of
a) their nature andb) their carrying amount as at the balance sheet date
Examples ndash in the absence of recently observed market prices used to measure the following assets and liabilities future-oriented estimates are necessary to measurebull the recoverable amount of classes of PPEbull the effect of technological obsolescence on inventories
Estimates involve assumptions about such items asbull the risk adjustment to cash flows or discount rates usedbull future changes in salaries and in prices affecting other costs
Examples ndash in the absence of recently observed market prices used to measure the following assets and liabilities future-oriented estimates are necessary to measurebull the recoverable amount of classes of PPEbull the effect of technological obsolescence on inventories
Estimates involve assumptions about such items asbull the risk adjustment to cash flows or discount rates usedbull future changes in salaries and in prices affecting other costs
copy 2005-07 Nelson 94
Notes
Esprit Holdings LimitedEsprit Holdings Limitedbull Critical Accounting Estimates and Judgements
ndash Estimates and judgements are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonableunder the circumstances
ndash Critical accounting estimates and assumptionsbull The Group makes estimates and assumptions concerning
the future The resulting accounting estimates will by definition seldom equal the related actual results
bull The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below helliphellip (including (1) useful life and impairment of trademarks and (2) income taxes)
CaseCase
48
copy 2005-07 Nelson 95
Notes
Melco Development Limited (新濠國際發展有限公司)Notes to the financial statements for the year ended 31122005ndash The key assumptions concerning the future and other key sources
of estimation uncertainty at the balance sheet date that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below helliphellip(The issues discussed includebull Allowances for inventories bull Estimated impairment of goodwill Income taxes)
CaseCase
copy 2005-07 Nelson 96
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)ndash Estimates and judgements used in preparing the
financial statements are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonable under the circumstances
ndash The Group makes estimates and assumptionsconcerning the future
ndash The resulting accounting estimates will by definition seldom equal the related actual results
ndash The estimates and assumptions that have a significant effect on the carrying amounts of assets and liabilities are discussed below hellip (including impairment of goodwill impairment of gaming
licence Useful lives of property plant and equipment fair value of investment properties hellip)
49
copy 2005-07 Nelson 97
Notes Disclosures (an entity is required to disclose the following)
bull Other disclosuresAn entity shall disclose in the notesa) the amount of dividends proposed or declared before the
financial statements were authorised for issue but not recognised as a distribution to equity holders during the period and the related amount per share(HK incorporated companies are required to show the aggregate amount which is recommended for distribution by way of dividend under a separate heading(s) in their balance sheet (HK Co Ord 10th Sch para 9(1)(e)) and
b) the amount of any cumulative preference dividends not recognised
copy 2005-07 Nelson 98
Notes Disclosures (an entity is required to disclose the following)
An entity shall disclose the following if not disclosedelsewhere in information published with the financial statementsa) the domicile and legal form of the entity
its country of incorporation andthe address of its registered office(or principal place of business if different from the registered office)
b) a description of the nature of the entityrsquos operations and its principal activities and
c) the name of the parent and the ultimate parent of the group
ldquoshall discloserdquo now instead of ldquoencouraged to discloserdquo
ldquoshall discloserdquo now instead of ldquoencouraged to discloserdquo
bull Other disclosures
Any specialAny special
50
copy 2005-07 Nelson 99
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)bull The principal activities of Galaxy Entertainment Group
Ltd (the lsquolsquoCompanyrsquorsquo) (formerly known as K WahConstruction Materials Ltd) and its subsidiaries (together the lsquolsquoGrouprsquorsquo) are tondash operate in casino games of chance or games of other forms
in Macau (and) manufacture sale and distribution of construction materials in HK Macau and Mainland China
bull The Company is ndash a limited liability company incorporated in Hong Kong and ndash has its listing on the Main Board of The Stock Exchange of
Hong Kong Limitedbull The address of its registered office and its principal place
of business is Room 1606 16th Floor Hutchison House 10 Harcourt Road Central HK
copy 2005-07 Nelson 100
Effective Date
bull An entity shall apply IAS 1 for annual periods beginning on or after 1 Jan 2005
ndash Earlier application is encouragedndash If an entity applies IAS 1 for an earlier period it shall
disclose this factbull For the amendments relating to the Statement of
Changes in Equityndash An entity shall apply it for annual periods beginning on
or after 1 Jan 2006ndash If an entity applies the amendments to IAS 19
Employee Benefits ndash Actuarial Gains and Losses Group Plans and Disclosures for an earlier period that amendment shall be applied for that earlier period
51
copy 2005-07 Nelson 101
Todayrsquos Agenda
Capital Disclosures (Amendments to IAS 1)
Capital Disclosures (Amendments to IAS 1)
copy 2005-07 Nelson 102
Capital Disclosures ndash For 2007
52
copy 2005-07 Nelson 103
Capital Disclosures
What is capital Is it helliphellip
CapitalCapital AssetsAssets LiabilitiesLiabilities= ndash
bull IAS 1BC47 considers ldquowhether an entity can have a view of capital that differs from what IFRSs define as equityrdquo
bull It further clarifies that although for the purposes of this disclosure capital would often equate with equity as defined in IFRSsndash it might also include or exclude some components
bull It also noted that the capital disclosure in IAS 1 is intended to give entities the opportunity to describendash how they view the components of capital they manage if this is
different from what IFRSs define as equity helliphellip
copy 2005-07 Nelson 104
EquityEquityEquity AssetsAssets LiabilitiesLiabilities= ndash
Capital Disclosures
Based on the Framework amp IFRSs the accounting equation should be
CapitalCapital AssetsAssets LiabilitiesLiabilities= ndash
bull An entityrsquos capital may be part of its equity plus part of its liabilities depending on how it manage ldquoits capitalrdquo helliphellip
53
copy 2005-07 Nelson 105
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowinga) qualitative information about its objectives policies and processes for
managing capital including (but not limited to)i) a description of what it manages as capitalii) when an entity is subject to externally imposed capital requirements
the nature of those requirements and how those requirements are incorporated into the management of capital and
iii) how it is meeting its objectives for managing capital
bull To comply with the capital disclosures the entity discloses thefollowinga) qualitative information about its objectives policies and processes for
managing capital including (but not limited to)i) a description of what it manages as capitalii) when an entity is subject to externally imposed capital requirements
the nature of those requirements and how those requirements are incorporated into the management of capital and
iii) how it is meeting its objectives for managing capital
copy 2005-07 Nelson 106
Capital Disclosures
Example disclosurebull The Grouprsquos objectives when managing capital are
ndash to safeguard the entityrsquos ability to continue as a going concern
bull so that it can continue to provide returns for shareholders and benefits for other stakeholders and
ndash to provide an adequate return to shareholders by pricing products and services commensurately with the level of risk
bull The Group sets the amount of capital in proportion to risk
ExampleExample
ObjectivesObjectives
54
copy 2005-07 Nelson 107
Capital Disclosures
bull The Group manages the capital structure and makes adjustments to it in the light ofndash changes in economic conditions and ndash the risk characteristics of the underlying assets
bull In order to maintain or adjust the capital structure the Group mayndash adjust the amount of dividends paid to shareholders ndash return capital to shareholders ndash issue new shares or ndash sell assets to reduce debt
ExampleExample
Example disclosure
HowHow
copy 2005-07 Nelson 108
Capital Disclosures
bull Consistently with others in the industry the Group monitors capital on the basis of ndash the debt-to-adjusted capital ratio
bull This ratio is calculated as net debt divide adjusted capital
ExampleExample
Example disclosure
HowHow
bull Net debt is calculated as ndash Total debt (as shown in the
balance sheet)ndash Less cash amp cash equivalents
bull Net debt is calculated as ndash Total debt (as shown in the
balance sheet)ndash Less cash amp cash equivalents
bull Adjusted capital ndash comprises all components of
equity (ie share capital share premium minority interest retained earnings and revaluation reserve) ndash other than amounts
recognised in equity relating to cash flow hedges and
ndash includes some forms of subordinated debt
bull Adjusted capital ndash comprises all components of
equity (ie share capital share premium minority interest retained earnings and revaluation reserve) ndash other than amounts
recognised in equity relating to cash flow hedges and
ndash includes some forms of subordinated debt
55
copy 2005-07 Nelson 109
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowing
bull To comply with the capital disclosures the entity discloses thefollowingb) summary quantitative data about what it manages as capital
Some entities regard some financial liabilities (eg some forms of subordinated debt) as part of capitalOther entities regard capital as excluding some components of equity (eg components arising from cash flow hedges)
c) any changes in (a) and (b) from the previous period
copy 2005-07 Nelson 110
Capital Disclosures
Example disclosure (continued from previous example)
ExampleExample
bull During 20X4 the Grouprsquos strategy which was unchanged from 20X3 was to maintain the debt-to-adjusted capital ratio at the lower end of the range 61 to 71 in order to secure access to finance at a reasonable cost by maintaining a BB credit rating The debt-to-adjusted capital ratios at 31 December 20X4 and at 31 December 20X3 were as follows
3112X4 ($rsquoM) 3112X3 ($rsquoM) Total debt 1000 1100 Less cash and cash equivalents (90) (150)Net debt 910 950
Total equity 110 105 Add subordinated debt instruments 38 38 Less amounts recognised in equity
relating to cash flow hedges (10) (5)Adjusted capital 138 138
Debt-to-adjusted capital ratio 66 69
56
copy 2005-07 Nelson 111
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowing
bull To comply with the capital disclosures the entity discloses thefollowingd) whether during the period it complied with any externally imposed capital
requirements to which it is subjecte) when the entity has not complied with such externally imposed capital
requirements the consequences of such non-complianceThese disclosures shall be based on the information provided internally to the entityrsquos key management personnel
copy 2005-07 Nelson 112
Capital DisclosuresExampleExample
Example disclosurebull Entity A filed its quarterly regulatory capital return for
30 September 20X7 on 20 October 20X7 bull At that date Entity Arsquos regulatory capital was below
the capital requirement imposed by Regulator B by $1 million
bull As a result Entity A was required to submit a plan to the regulator indicating how it would increase its regulatory capital to the amount required
bull Entity A submitted a plan that entailed selling part of its unquoted equities portfolio with a carrying amount of $115 million in the fourth quarter of 20X7
bull In the fourth quarter of 20X7 Entity A sold its fixed interest investment portfolio for $126 million and met its regulatory capital requirement
For example SFC or banks
For example SFC or banks
57
copy 2005-07 Nelson 113
Capital DisclosuresCaseCase
bull Early adopted capital disclosure in 2005 and itsannual report states that (extract only)ndash The Grouprsquos objectives when managing capital are
bull To safeguard the Grouprsquos ability to continue as a going concern so that it continues to provide returns for shareholders and benefits for other stakeholders
bull To support the Grouprsquos stability and growth andbull To provide capital for the purpose of strengthening the
Grouprsquos risk management capability
copy 2005-07 Nelson 114
Capital DisclosuresCaseCase
ndash The Group actively and regularly reviews and manages its capital structure to ensure optimal capital structure and shareholder returns taking into consideration the future capital requirements of the Group and capital efficiency helliphellip
ndash The Group adopts a dividend policy helliphellip while retaining 10 per cent of the profit as capital of the Group for future use
ndash The Group has set aside $1500 million of retained earnings for the purpose of strengthening the risk management regime of the clearing houses and supporting their roles as central counterparties
ndash As in prior years the Group monitors capital by reviewing the level of capital that is at the disposal of the Group (ldquoadjusted capitalrdquo) Adjusted capital comprises all components of shareholdersrsquo equity other than the hedging reserve relating to cash flow hedges designated reserves and investment revaluation reserve helliphellip
bull Early adopted capital disclosure in 2005 and itsannual report states that (extract only)
58
copy 2005-07 Nelson 115
Capital Disclosures ndash Transition
bull An entity shall apply the requirements of capital disclosure for
ndash annual periods beginning on or after 1 January 2007
bull Early application is encouraged
copy 2005-07 Nelson 116
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk
59
copy 2005-07 Nelson 117
QampA SessionQampA SessionQampA Session
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk
20
copy 2005-07 Nelson 39
3 Overall ConsiderationCaseCase
bull HKAS 40 ldquoInvestment propertyrdquo requires an assessment of the fair value of investment properties
bull The group intends to follow the same accounting treatment as adopted in 2004 which is to value such investment properties on an annual basis
bull Accordingly the investment properties were not revalued at 30 June 2005 since the directors consider that such change of practice could introduce a significant element of short-term volatility into the income statement in respect of assets which are being held on a long-term basis by the group helliphellip
bull It is not practicable to estimate the financial effect of this non-compliance as no interim valuation of the properties has been conducted
Interim Report 2005 clearly stated thatInterim Report 2005 clearly stated that
At year-end revaluation would still be conductedAt year-end revaluation would still be conducted
copy 2005-07 Nelson 40
3 Overall ConsiderationCaseCase
bull HKAS 12 ldquoIncome Taxesrdquo together with HKAS-INT 21 ldquoIncome Taxes ndashRecovery of Revalued Non-Depreciable Assetsrdquo requires deferred taxation to be recognised on any revaluation movements on investment propertiesbull It is further provided that any such deferred tax liability should be calculated
at the profits tax rate in the case of assets which the management has no definite intention to sell
bull The company has not made such provision in respect of its HK investment properties since the directors consider that such provision would result in the financial statements not reflecting the commercial substance of the businessbull since should any such sale eventuate any gain would be regarded as capital
in nature and would not be subject to any tax in HKbull Should this aspect of HKAS 12 have been adopted deferred tax liabilities
amounting to HK$2008 million on the revaluation surpluses arising from revaluation of HK investment properties would have been provided
(estimate - over 12 of the net assets at 30 June 2005)
Interim Report 2005 clearly stated thatInterim Report 2005 clearly stated that
21
copy 2005-07 Nelson 41
3 Overall Consideration
bull Departure but such departure is prohibitedndash In the extremely rare circumstances in which
management concludes that bull compliance with a requirement in a
standard or an interpretation would be so misleading that
bull it would conflict with the objective of financial statements set out in the Framework
bull but the relevant regulatory framework prohibits departure from the requirement the entity shall to the maximum extent possible reduce the perceived misleading aspects of compliance by disclosing helliphellip
a) Fair presentation and compliance with IFRSs
copy 2005-07 Nelson 42
3 Overall Consideration
ndash by disclosinga) the title of the standard or interpretation in
question the nature of the requirement and the reason why management has concluded that complying with that requirement is so misleading in the circumstances that it conflicts with the objective of financial statements set out in the Framework and
b) for each period presented the adjustments to each item in the financial statements that management has concluded would be necessary to give a fair presentation
a) Fair presentation and compliance with IFRSsbull Departure but such departure is prohibited
22
copy 2005-07 Nelson 43
3 Overall Consideration
bull When assessing whether complying with a specific requirement in a standard or an interpretation would be so misleading that it would conflict with the objective of financial statements set out in the Frameworkndash management considers
a) why the objective of financial statements is not achieved in the particular circumstances and
b) how the entityrsquos circumstances differ from those of other entities that comply with the requirement ndash If other entities in similar circumstances comply with the
requirement raquo there is a rebuttable presumption that the entityrsquos compliance
with the requirement would not be so misleading that it would conflict with the objective of financial statements set out in the Framework
a) Fair presentation and compliance with IFRSs
copy 2005-07 Nelson 44
3 Overall ConsiderationCaseCase
Howrsquos about this Howrsquos about this
However 2005 Final Results Announcementdisclosed that bull provision for deferred tax was finally made
with regard to revaluation of the HK investment properties (total HK$22 billion) at 2005 year-end
However However 2005 Final Results Announcement2005 Final Results Announcementdisclosed that disclosed that bullbull provision for deferred tax was finally made provision for deferred tax was finally made
with regard to revaluation of the HK with regard to revaluation of the HK investment properties (total HK$22 billion) at investment properties (total HK$22 billion) at 2005 year2005 year--endend
23
copy 2005-07 Nelson 45
b) Going Concern
3 Overall Consideration
bull When preparing financial statements management shall make an assessment of an entityrsquos ability to continue as a going concern
bull Financial statements shall be prepared on a going concern basisndash unless management either intends to liquidate the entity or to cease
trading or has no realistic alternative but to do so bull When management is aware in making its assessment of
material uncertainties related to events or conditions that may cast significant doubt upon the entityrsquos ability to continue as a going concern those uncertainties shall be disclosed
bull When financial statements are not prepared on a going concern basis that fact shall be disclosed together with the basis on which the financial statements are prepared and the reason why the entity is not regarded as a going concern
copy 2005-07 Nelson 46
c) Accrual Basis of Accounting
3 Overall Consideration
bull An entity shall prepare its financial statements except for cash flow information using the accrual basis of accounting
bull When the accrual basis of accounting is used items are recognised as assets liabilities equity income and expensesndash when they satisfy the definitions and recognition criteria for those
elements in the Framework
24
copy 2005-07 Nelson 47
3 Overall Consideration
bull The presentation and classification of items in the financial statements shall be retained from one period to the next unlessa) it is apparent
bull following a significant change in the nature of the entityrsquos operations (eg significant acquisition or disposal) or
bull a review of its financial statementsthat another presentation or classification would be more appropriatehaving regard to the criteria for the selection and application of accounting policies in IAS 8 or
b) a IFRS requires a change in presentation
d) Consistency of presentation
An entity changes the presentation of its financial statements only ifndash the changed presentation provides information that is reliable and is
more relevant to users of the financial statements andndash the revised structure is likely to continue so that comparability is not
impaired
An entity changes the presentation of its financial statements only ifndash the changed presentation provides information that is reliable and is
more relevant to users of the financial statements andndash the revised structure is likely to continue so that comparability is not
impaired
copy 2005-07 Nelson 48
3 Overall Consideration
bull Each material class of similar items shall bendash presented separately in the financial
statementsbull Items of a dissimilar nature or function shall be
ndash presented separately unless they are immaterial
bull Applying the concept of materiality means that a specific disclosure requirement in a IFRS neednot be satisfied if the information is not material
e) Materiality and Aggregation
What is the situation of recognition and measurement
What is the What is the situation of situation of recognition and recognition and measurementmeasurement
25
copy 2005-07 Nelson 49
3 Overall Consideration
bull What is materialndash Omissions or misstatements of items are
material if they could individually or collectively influence the economic decisions of users taken on the basis of the financial statements
ndash Materiality depends on the size and nature of the omission or misstatement judged in the surrounding circumstancesbull The size or nature of the item or a combination
of both could be the determining factor
e) Materiality and Aggregation
copy 2005-07 Nelson 50
3 Overall Consideration
bull Assets and liabilities and income and expenses shall not be offsetndash unless required or permitted by a IFRS
bull It is important that assets and liabilities and income and expenses are reported separatelyndash Measuring assets net of valuation allowances mdash
for example obsolescence allowances on inventories and doubtful debts allowances on receivables mdash is not offsetting
f) Offsetting
26
copy 2005-07 Nelson 51
3 Overall Consideration
bull During ordinary activities some transactions that do not generate revenue but are incidental to the main revenue-generating activitiesndash The results of such transactions are presented
when this presentation reflects the substance of the transaction or other event by netting any income with related expenses arising on the same transaction
f) Offsetting
copy 2005-07 Nelson 52
3 Overall Consideration
bull For examplea) gains and losses on the disposal of non-current
assets including investments and operating assets- are reported by deducting from the proceeds on
disposal the carrying amount of the asset and related selling expenses and
b) expenditure related to a provision that is- recognised in accordance with IAS 37 and - reimbursed under a contractual arrangement with
a third party (for example a supplierrsquos warranty agreement)
may be netted against the related reimbursement
f) Offsetting
ExampleExample
27
copy 2005-07 Nelson 53
3 Overall Consideration
bull Gains and losses arising from a group of similar transactions are reported on a net basisndash For example
bull foreign exchange gains and losses or bull gains and losses arising on financial instruments held for trading
bull Such gains and losses are however reported separately if they are material
bull Gains and losses arising from a group of similar transactions are reported on a net basisndash For example
bull foreign exchange gains and losses or bull gains and losses arising on financial instruments held for trading
bull Such gains and losses are however reported separately if they are material
Can foreign exchange gains and losses be offset
ExampleExample
copy 2005-07 Nelson 54
3 Overall Consideration
bull Except when a IFRS permits or requires otherwise ndash comparative information shall be disclosed in
respect of the previous period for all amountsreported in the financial statements
bull When the presentation or classification of items in the financial statements is amended ndash comparative amounts shall be reclassified unless
the reclassification is impracticable
g) Comparative information
28
copy 2005-07 Nelson 55
Amended requirementsAmended requirements
3 Overall Consideration
bull When comparative amounts are reclassified an entity shall disclosea) the nature of the reclassificationb) the amount of each item or class of items that is
reclassified andc) the reason for the reclassification
g) Comparative information
bull In the pastonly the reason for and a description of the nature of materialreclassifications should be disclosedExemption for disclosure of comparative information for the reconciliation of movements in fixed assets is also removed
bull In the pastonly the reason for and a description of the nature of materialreclassifications should be disclosedExemption for disclosure of comparative information for the reconciliation of movements in fixed assets is also removed
copy 2005-07 Nelson 56
3 Overall Consideration
Melco Development Limited (新濠國際發展有限公司)Notes to the financial statements for year ended 31122005ndash Because HKAS 32 requires retrospective application comparative
figures for 2004 have been restated (see Note 2A for the financial impact)
CaseCase
29
copy 2005-07 Nelson 57
3 Overall Consideration
Galaxy Entertainment Group LimitedNotes to the financial statements (ye 31122005)ndash All changes in the accounting policies require
retrospective application except HKAS 39 and HKFRS 2 for which transitional provisions are applied
ndash As a result the 2004 comparative figures have also been restated or amended in accordance with the relevant requirements
ndash The effects of all the changes in accounting policies are summarised in notes (b) and (c) below
CaseCase
copy 2005-07 Nelson 58
bull Identification of the financial statementsbull Reporting periodbull Balance sheet
1 CurrentNon-current distinction2 Current assets3 Current liabilities4 Information to be presented on the face of the balance sheet5 Information to be presented either on the face of the balance sheet or in
the notesbull Income statement
1 Profit or loss for the period2 Information to be presented on the face of the income statement3 Information to be presented either on the face of the income statement or
in the notesbull Statement of changes in equitybull Cash flow statementbull Notes
4 Structure and Content
30
copy 2005-07 Nelson 59
Identification of Financial Statements
bull The financial statements shall be identified clearly and distinguished from other information in the same published document
bull The following information shall be displayed prominently and repeated when it is necessary for a proper understanding of the information presented
a) the name of the reporting entity or other means of identification and any change in that information from the preceding balance sheet date
b) whether the financial statements cover the individual entity or a group of entities
c) the balance sheet date or the period covered by the financial statements whichever is appropriate to that component of the financial statements
d) the presentation currency as defined in HKAS 21 The Effects of Changes in Foreign Exchange Rates and
e) the level of rounding used in presenting amounts in the financial statements
copy 2005-07 Nelson 60
Identification of Financial Statements
bull Can the units of the presentation currency be rounded to thousands or millions
bull Financial statements are often made more understandableby presenting information in thousands or millions of units of the presentation currency
bull This is acceptable as long asndash the level of rounding in presentation is disclosed and ndash material information is not omitted
bull Financial statements are often made more understandableby presenting information in thousands or millions of units of the presentation currency
bull This is acceptable as long asndash the level of rounding in presentation is disclosed and ndash material information is not omitted
ExampleExample
31
copy 2005-07 Nelson 61
Reporting Period
bull Financial statements shall be presented at least annually
bull When an entityrsquos balance sheet date changes and the annual financial statements are presented for a period longer or shorter than one year an entity shall disclose in addition to the period covered by the financial statementsa) the reason for using a longer or shorter period andb) the fact that comparative amounts for the income
statement statement of changes in equity cash flow statement and related notes are not entirely comparable
copy 2005-07 Nelson 62
Reporting Period
bull Can a set of financial statements cover 52-week instead of a year
bull Normally financial statements are consistently prepared covering a one-year period
bull However for practical reasons some entities prefer to report for example for a 52-week period
bull IAS 1 does not preclude this practice because the resulting financial statements are unlikely to be materially different from those that would be presented for one year
bull Normally financial statements are consistently prepared covering a one-year period
bull However for practical reasons some entities prefer to report for example for a 52-week period
bull IAS 1 does not preclude this practice because the resulting financial statements are unlikely to be materially different from those that would be presented for one year
ExampleExample
32
copy 2005-07 Nelson 63
CurrentNon-current Distinction
bull An entity shall presentndash current and non-current assets andndash current and non-current liabilitiesas separate classifications on the face of its balance sheet
bull Except when a presentation based on liquidity provides informationndash If that information is reliable and is more relevantndash When that exception applies all assets and liabilities shall be
presented broadly in order of liquidity
copy 2005-07 Nelson 64
CurrentNon-current Distinction
bull Whichever method of presentation is adopted for each asset and liability line item that combines amounts expected to be recovered or settled a) no more than 12 months after the balance sheet date
andb) more than 12 months after the balance sheet date(ie combines both current and non-current)
an entity shall disclose the amount expected to be recovered or settled after more than 12 months
33
copy 2005-07 Nelson 65
New requirementsNew requirements
Current Assets
bull An asset shall be classified as current when it satisfies any of the following criteriaa) it is expected to be realised in or is intended for sale or
consumption in the entityrsquos normal operating cycle b) it is held primarily for the purpose of being tradedc) it is expected to be realised within 12 months after the balance
sheet date ord) it is cash or a cash equivalent
bull unless it is restricted from being exchanged or used to settle aliability for at least 12 months after the balance sheet date
bull All other assets shall be classified as non-current
Examplesbull Deposits pledged to bank (how long)bull Fixed deposits over 1 year maturity
Examplesbull Deposits pledged to bank (how long)bull Fixed deposits over 1 year maturity
What is itWhat is it
copy 2005-07 Nelson 66
Current Assets
bull What is operating cycle
bull The operating cycle of an entity is the time between ndash the acquisition of assets for processing and ndash their realisation in cash or cash equivalents
bull When the entityrsquos normal operating cycle is not clearly identifiable ndash its duration is assumed to be 12 months
bull The operating cycle of an entity is the time between ndash the acquisition of assets for processing and ndash their realisation in cash or cash equivalents
bull When the entityrsquos normal operating cycle is not clearly identifiable ndash its duration is assumed to be 12 months
ExampleExample
34
copy 2005-07 Nelson 67
Current Assets CaseCase
copy 2005-07 Nelson 68
Current Assets
bull Can a non-current asset reclassified if it fulfil the definition of current asset later
bull Assets classified as non-current in accordancewith IAS 1 shall not be reclassified as current assetsndash until they meet the criteria to be classified as held for sale in
accordance with IFRS 5bull Assets of a class that an entity would normally regard as non-
current that are acquired exclusively with a view to resale shall notbe classified as currentndash unless they meet the criteria to be classified as held for sale in
accordance with IFRS 5
bull Assets classified as non-current in accordancewith IAS 1 shall not be reclassified as current assetsndash until they meet the criteria to be classified as held for sale in
accordance with IFRS 5bull Assets of a class that an entity would normally regard as non-
current that are acquired exclusively with a view to resale shall notbe classified as currentndash unless they meet the criteria to be classified as held for sale in
accordance with IFRS 5
No non-current assets can be classified as current unless the criteria in IFRS 5 are fulfilled mainlybull Available for immediate salebull Highly probable to make the sale
35
copy 2005-07 Nelson 69
Is it currentIs it current
Current Assets
bull In its 2005 Interim Report full set of HKFRS was adopted and the report set out thatndash Available-for-sale financial assets are non-
derivatives that are eitherbull designated in this category orbull not classified in any of the other categories (ie
loans and receivables financial assets at fair value through profit or loss and held-to-maturity investments)
CaseCase
Similar in 2005 Annual Report
Similar in 2005 Annual Report
ndash They are included in non-current assetsbull unless management intends to dispose of the
investment within 12 months of the balance sheet date
copy 2005-07 Nelson 70
New requirementsNew requirements
Current Liabilities
bull A liability shall be classified as current when it satisfies any of the following criteriaa) it is expected to be settled in the entityrsquos normal operating cycleb) it is held primarily for the purpose of being tradedc) it is due to be settled within 12 months after the balance sheet
date ord) the entity does not have an unconditional right to defer settlement
of the liability for at least 12 months after the balance sheet date
bull All other liabilities shall be classified as non-current
ImplicationImplication
36
copy 2005-07 Nelson 71
Current Liabilities Revised rules on classifying a liability as current or non-currentbull A liability held for being traded rArr currentbull A financial liability due within 12 months after the BS date rArr current
ndash even if an agreement to refinance on a long-term basis is completed after the BS date (only disclosed as non-adjusting event)
bull If an entity has discretion to refinance rArr non-currentbull If an entity without discretion to refinance rArr current
bull A non-current financial liability is payable on demand with a breach on a condition of its loan agreement on or before the BS datendash If the lender agreed not to demand payment
bull after the BS date rArr current (only disclosed as non-adjusting event)
bull by the BS date rArr non-current
ImplicationImplication
copy 2005-07 Nelson 72
Current LiabilitiesCaseCase
Note 12 to Interim Report 2006bull Breach of loan covenants
bull As at 30 June 2006 in respect of certain bank loans with an aggregate carrying amount of HK$1529806000 the Group breached certain financial covenants of the banks loans
bull Since the lenders have not agreed to waive its right to demand immediate payment as at the balance sheet date the loans have been classified as current liabilities in these financial statements at 30 June 2006
37
copy 2005-07 Nelson 73
Current Assets and LiabilitiesExampleExample
Can the following be classified as current assetsbull 3-month fixed deposits pledged to a bank to secure
a mortgage loan of 5 yearsbull 2-year fixed deposits with a bank
Can the following be classified as current assetsbull 3-month fixed deposits pledged to a bank to secure
a mortgage loan of 5 yearsbull 2-year fixed deposits with a bank
Can the following be classified as non-current liabilitiesbull 5-year term loan matured after year end but renewed
for another 5 years after year end (before the issuanceof the financial statements)
bull 2-year term loan to be matured with 12 months and theentity has a right to renew for another 2 years
Can the following be classified as non-current liabilitiesbull 5-year term loan matured after year end but renewed
for another 5 years after year end (before the issuanceof the financial statements)
bull 2-year term loan to be matured with 12 months and theentity has a right to renew for another 2 years
timestimes
times
radic
copy 2005-07 Nelson 74
Balance Sheetbull As a minimum the face of the balance sheet shall
include line items that present the following amountsa) property plant and equipmentb) investment propertyc) intangible assetsd) financial assets (excl amounts shown under (e) (h) and (I))e) investments accounted for using the equity methodf) biological assetsg) inventoriesh) trade and other receivablesi) cash and cash equivalentsj) trade and other payablesk) provisionsl) financial liabilities (excl amounts shown under (j) and (k))m) liabilities and assets for current tax as defined in HKAS 12 Income Taxesn) deferred tax liabilities and deferred tax assets as defined in HKAS 12o) minority interest presented within equity andp) issued capital and reserves attributable to equity holders of the parent
38
copy 2005-07 Nelson 75
Balance Sheetbull The face of the balance sheet shall also include line
items that present the following amountsa) The total of assets classified as held for sale and
assets included in disposal groups classified as held for sale in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations and
b) Liabilities included in disposal groups classified as held for sale in accordance with IFRS 5
copy 2005-07 Nelson 76
Balance Sheetbull Additional line items headings and subtotals shall
be presented on the face of the balance sheet when such presentation is relevant to an understanding of the entityrsquos financial position
bull When an entity presents current and non-current assets and current and non-current liabilities as separate classifications on the face of its balance sheet ndash it shall not classify deferred tax assets
(liabilities) as current assets (liabilities)
39
copy 2005-07 Nelson 77
Balance Sheet
bull The use of different measurement bases for different classes of assets suggests that their nature or function differs and therefore that they should be presented as separate line itemsndash For example different classes of property plant and
equipment can be carried atbull Cost orbull Revalued amountsin accordance with IAS 16 PPE
In the past it use ldquomay needrdquoIn the past it use ldquomay needrdquo
copy 2005-07 Nelson 78
Balance Sheet
Galaxy Entertainment Group LimitedConsolidated balance sheet as at 31122005
CaseCase
40
copy 2005-07 Nelson 79
Balance Sheet
Melco Development Limited (新濠國際發展有限公司)Consolidated balance sheet as at 31122005
CaseCase
copy 2005-07 Nelson 80
Income Statement Minimum requirements on the face of the income statementbull As a minimum the face of the income statement shall include line items
that present the following amounts for the perioda) revenueb) finance costsc) share of the profit or loss of associates and joint ventures accounted
for using the equity methodd) pre-tax gain or loss recognised on the disposal of assets or
settlement of liabilities attributable to discontinuing operationse) tax expense andf) profit or loss
41
copy 2005-07 Nelson 81
Income Statement bull The following items shall be disclosed on the face of the income
statement as allocations of profit or loss for the perioda) Profit or loss attributable to minority interest andb) Profit or loss attributable to equity holders of the parent
A similar requirement has been added for the statement of changes in equity and such allocated amounts are not to be presented as items of income or expense
copy 2005-07 Nelson 82
Income Statement
Melco Dev LtdConsolidated income statementas at 31122005
CaseCase
42
copy 2005-07 Nelson 83
Income Statement bull Not require to disclose the results of operating
activities as a line item on the face of the incomestatement
bull An entity shall not present any items of income and expense as extraordinary items either onthe face of the income statements or in the notes
Entities canrsquot use itEntities canrsquot use it
Entities can still show itEntities can still show it
copy 2005-07 Nelson 84
Income Statement Either on the face of the income statement or in the notesbull An entity shall present an analysis of expenses using a classification
based on eitherbull the nature of expenses orbull their function within the entity
whichever provides information that is reliable and more relevant
bull Entities classifying expenses by function shall disclose additional information on the nature of expenses includingbull depreciation and amortisation expense and bull employee benefits expense
43
copy 2005-07 Nelson 85
Income StatementCaseCase
Nature or FunctionNature or Nature or FunctionFunction
copy 2005-07 Nelson 86
Statement of Changes in Equity bull An entity shall present a statement of changes in equity showing on the
face of the statementa) profit or loss for the period b) each item of income and expense for the period that as required by
IFRSs is recognised directly in equity and the total of these itemsc) total income and expense for the period (calculated as the sum of (a) and
(b)) showing separately the total amounts attributablebull to equity holders of the parent andbull to minority interest and
d) for each component of equity the effects of changes in accounting policies and corrections of errors recognised in accordance with IAS 8
Any ChangeAny Change
A revised requirementbull A statement of changes in equity that comprises only these items
shall be titled a statement of recognised income and expenses
A revised requirementbull A statement of changes in equity that comprises only these items
shall be titled a statement of recognised income and expenses
44
copy 2005-07 Nelson 87
Statement of Changes in Equity bull An entity shall also present either on the face of the
statement of changes in equity or in the notesa) the amounts of transactions with equity holders acting in
their capacity as equity holders showing separately distributions to equity holders
b) the balance of retained earnings (ie accumulated profit or loss) at the beginning of the period and at the balance sheet date and the changes during the period and
c) a reconciliation between the carrying amount of each class of contributed equity and each reserve at the beginning and the end of the period separately disclosing each change
copy 2005-07 Nelson 88
Statement of Changes in Equity
Consolidated SCE as at 31122005
CaseCase
45
copy 2005-07 Nelson 89
Notes Structure (an entity is required to disclose the following)
bull The notes shalla) present information about the basis of preparation of the financial statements
and the specific accounting policies usedb) disclose the information required by HKFRSs that is not presented on the
face of the balance sheet income statement statement of changes in equity or cash flow statement and
c) provide additional information that is not presented on the face of the balance sheet income statement statement of changes in equity or cash flow statement but is relevant to an understanding of any of them
bull Notes shall as far as practicable be presented in a systematic manner bull Each item on the face of the balance sheet income statement statement
of changes in equity and cash flow statement shall be cross-referencedto any related information in the notes
copy 2005-07 Nelson 90
Notes Disclosures (an entity is required to disclose the following)
bull Disclosure of accounting policiesAn entity shall disclose in the summary of significant accounting policiesa) the measurement basis (or bases) used in preparing the financial
statements andb) the other accounting policies used that are relevant to an understanding of
the financial statements
46
copy 2005-07 Nelson 91
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)ndash The financial statements have been prepared in
accordance with Hong Kong Financial Reporting Standards (lsquolsquoHKFRSrsquorsquo) issued by the Hong Kong Institute of Certified Public Accountants bull under the historical cost convention as modified by the
revaluation of investment properties available-for-sale financial assets derivative financial instruments and other investments which are carried at fair values helliphellip
ndash The principal accounting policies applied in the preparation of these financial statements are set out below These policies have been consistently applied to all the years presented except for those stated in note 2(a) above
copy 2005-07 Nelson 92
Notes Disclosures (an entity is required to disclose the following)
bull Disclosure of accounting policiesndash The judgements apart from those involving estimations management has
madebull in the process of applying the entityrsquos accounting policies that have the
most significant effect on the amounts recognised in the financial statements (in the summary of significant accounting policies or other notes)
Examples ndash Management makes judgements in determininga) whether financial assets are held-to-maturity investmentsb) when substantially all the significant risks and rewards of
ownership of financial assets and lease assets are transferred to other entities
c) whether in substance particular sales of goods are financing arrangements and therefore do not give rise to revenue and
d) whether the substance of the relationship between the entity and a special purpose entity indicates that the special purpose entity is controlled by the entity
Examples ndash Management makes judgements in determininga) whether financial assets are held-to-maturity investmentsb) when substantially all the significant risks and rewards of
ownership of financial assets and lease assets are transferred to other entities
c) whether in substance particular sales of goods are financing arrangements and therefore do not give rise to revenue and
d) whether the substance of the relationship between the entity and a special purpose entity indicates that the special purpose entity is controlled by the entity
47
copy 2005-07 Nelson 93
Notes Disclosures (an entity is required to disclose the following)
bull Key sources of estimation uncertaintyndash Information about the key assumptions concerning the future and
other key sources of estimation uncertainty at the balance sheet datebull that have a significant risk of causing a material adjustment to the
carrying amounts of assets and liabilities within the next financial yearndash In respect of those assets and liabilities the notes shall include details of
a) their nature andb) their carrying amount as at the balance sheet date
Examples ndash in the absence of recently observed market prices used to measure the following assets and liabilities future-oriented estimates are necessary to measurebull the recoverable amount of classes of PPEbull the effect of technological obsolescence on inventories
Estimates involve assumptions about such items asbull the risk adjustment to cash flows or discount rates usedbull future changes in salaries and in prices affecting other costs
Examples ndash in the absence of recently observed market prices used to measure the following assets and liabilities future-oriented estimates are necessary to measurebull the recoverable amount of classes of PPEbull the effect of technological obsolescence on inventories
Estimates involve assumptions about such items asbull the risk adjustment to cash flows or discount rates usedbull future changes in salaries and in prices affecting other costs
copy 2005-07 Nelson 94
Notes
Esprit Holdings LimitedEsprit Holdings Limitedbull Critical Accounting Estimates and Judgements
ndash Estimates and judgements are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonableunder the circumstances
ndash Critical accounting estimates and assumptionsbull The Group makes estimates and assumptions concerning
the future The resulting accounting estimates will by definition seldom equal the related actual results
bull The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below helliphellip (including (1) useful life and impairment of trademarks and (2) income taxes)
CaseCase
48
copy 2005-07 Nelson 95
Notes
Melco Development Limited (新濠國際發展有限公司)Notes to the financial statements for the year ended 31122005ndash The key assumptions concerning the future and other key sources
of estimation uncertainty at the balance sheet date that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below helliphellip(The issues discussed includebull Allowances for inventories bull Estimated impairment of goodwill Income taxes)
CaseCase
copy 2005-07 Nelson 96
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)ndash Estimates and judgements used in preparing the
financial statements are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonable under the circumstances
ndash The Group makes estimates and assumptionsconcerning the future
ndash The resulting accounting estimates will by definition seldom equal the related actual results
ndash The estimates and assumptions that have a significant effect on the carrying amounts of assets and liabilities are discussed below hellip (including impairment of goodwill impairment of gaming
licence Useful lives of property plant and equipment fair value of investment properties hellip)
49
copy 2005-07 Nelson 97
Notes Disclosures (an entity is required to disclose the following)
bull Other disclosuresAn entity shall disclose in the notesa) the amount of dividends proposed or declared before the
financial statements were authorised for issue but not recognised as a distribution to equity holders during the period and the related amount per share(HK incorporated companies are required to show the aggregate amount which is recommended for distribution by way of dividend under a separate heading(s) in their balance sheet (HK Co Ord 10th Sch para 9(1)(e)) and
b) the amount of any cumulative preference dividends not recognised
copy 2005-07 Nelson 98
Notes Disclosures (an entity is required to disclose the following)
An entity shall disclose the following if not disclosedelsewhere in information published with the financial statementsa) the domicile and legal form of the entity
its country of incorporation andthe address of its registered office(or principal place of business if different from the registered office)
b) a description of the nature of the entityrsquos operations and its principal activities and
c) the name of the parent and the ultimate parent of the group
ldquoshall discloserdquo now instead of ldquoencouraged to discloserdquo
ldquoshall discloserdquo now instead of ldquoencouraged to discloserdquo
bull Other disclosures
Any specialAny special
50
copy 2005-07 Nelson 99
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)bull The principal activities of Galaxy Entertainment Group
Ltd (the lsquolsquoCompanyrsquorsquo) (formerly known as K WahConstruction Materials Ltd) and its subsidiaries (together the lsquolsquoGrouprsquorsquo) are tondash operate in casino games of chance or games of other forms
in Macau (and) manufacture sale and distribution of construction materials in HK Macau and Mainland China
bull The Company is ndash a limited liability company incorporated in Hong Kong and ndash has its listing on the Main Board of The Stock Exchange of
Hong Kong Limitedbull The address of its registered office and its principal place
of business is Room 1606 16th Floor Hutchison House 10 Harcourt Road Central HK
copy 2005-07 Nelson 100
Effective Date
bull An entity shall apply IAS 1 for annual periods beginning on or after 1 Jan 2005
ndash Earlier application is encouragedndash If an entity applies IAS 1 for an earlier period it shall
disclose this factbull For the amendments relating to the Statement of
Changes in Equityndash An entity shall apply it for annual periods beginning on
or after 1 Jan 2006ndash If an entity applies the amendments to IAS 19
Employee Benefits ndash Actuarial Gains and Losses Group Plans and Disclosures for an earlier period that amendment shall be applied for that earlier period
51
copy 2005-07 Nelson 101
Todayrsquos Agenda
Capital Disclosures (Amendments to IAS 1)
Capital Disclosures (Amendments to IAS 1)
copy 2005-07 Nelson 102
Capital Disclosures ndash For 2007
52
copy 2005-07 Nelson 103
Capital Disclosures
What is capital Is it helliphellip
CapitalCapital AssetsAssets LiabilitiesLiabilities= ndash
bull IAS 1BC47 considers ldquowhether an entity can have a view of capital that differs from what IFRSs define as equityrdquo
bull It further clarifies that although for the purposes of this disclosure capital would often equate with equity as defined in IFRSsndash it might also include or exclude some components
bull It also noted that the capital disclosure in IAS 1 is intended to give entities the opportunity to describendash how they view the components of capital they manage if this is
different from what IFRSs define as equity helliphellip
copy 2005-07 Nelson 104
EquityEquityEquity AssetsAssets LiabilitiesLiabilities= ndash
Capital Disclosures
Based on the Framework amp IFRSs the accounting equation should be
CapitalCapital AssetsAssets LiabilitiesLiabilities= ndash
bull An entityrsquos capital may be part of its equity plus part of its liabilities depending on how it manage ldquoits capitalrdquo helliphellip
53
copy 2005-07 Nelson 105
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowinga) qualitative information about its objectives policies and processes for
managing capital including (but not limited to)i) a description of what it manages as capitalii) when an entity is subject to externally imposed capital requirements
the nature of those requirements and how those requirements are incorporated into the management of capital and
iii) how it is meeting its objectives for managing capital
bull To comply with the capital disclosures the entity discloses thefollowinga) qualitative information about its objectives policies and processes for
managing capital including (but not limited to)i) a description of what it manages as capitalii) when an entity is subject to externally imposed capital requirements
the nature of those requirements and how those requirements are incorporated into the management of capital and
iii) how it is meeting its objectives for managing capital
copy 2005-07 Nelson 106
Capital Disclosures
Example disclosurebull The Grouprsquos objectives when managing capital are
ndash to safeguard the entityrsquos ability to continue as a going concern
bull so that it can continue to provide returns for shareholders and benefits for other stakeholders and
ndash to provide an adequate return to shareholders by pricing products and services commensurately with the level of risk
bull The Group sets the amount of capital in proportion to risk
ExampleExample
ObjectivesObjectives
54
copy 2005-07 Nelson 107
Capital Disclosures
bull The Group manages the capital structure and makes adjustments to it in the light ofndash changes in economic conditions and ndash the risk characteristics of the underlying assets
bull In order to maintain or adjust the capital structure the Group mayndash adjust the amount of dividends paid to shareholders ndash return capital to shareholders ndash issue new shares or ndash sell assets to reduce debt
ExampleExample
Example disclosure
HowHow
copy 2005-07 Nelson 108
Capital Disclosures
bull Consistently with others in the industry the Group monitors capital on the basis of ndash the debt-to-adjusted capital ratio
bull This ratio is calculated as net debt divide adjusted capital
ExampleExample
Example disclosure
HowHow
bull Net debt is calculated as ndash Total debt (as shown in the
balance sheet)ndash Less cash amp cash equivalents
bull Net debt is calculated as ndash Total debt (as shown in the
balance sheet)ndash Less cash amp cash equivalents
bull Adjusted capital ndash comprises all components of
equity (ie share capital share premium minority interest retained earnings and revaluation reserve) ndash other than amounts
recognised in equity relating to cash flow hedges and
ndash includes some forms of subordinated debt
bull Adjusted capital ndash comprises all components of
equity (ie share capital share premium minority interest retained earnings and revaluation reserve) ndash other than amounts
recognised in equity relating to cash flow hedges and
ndash includes some forms of subordinated debt
55
copy 2005-07 Nelson 109
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowing
bull To comply with the capital disclosures the entity discloses thefollowingb) summary quantitative data about what it manages as capital
Some entities regard some financial liabilities (eg some forms of subordinated debt) as part of capitalOther entities regard capital as excluding some components of equity (eg components arising from cash flow hedges)
c) any changes in (a) and (b) from the previous period
copy 2005-07 Nelson 110
Capital Disclosures
Example disclosure (continued from previous example)
ExampleExample
bull During 20X4 the Grouprsquos strategy which was unchanged from 20X3 was to maintain the debt-to-adjusted capital ratio at the lower end of the range 61 to 71 in order to secure access to finance at a reasonable cost by maintaining a BB credit rating The debt-to-adjusted capital ratios at 31 December 20X4 and at 31 December 20X3 were as follows
3112X4 ($rsquoM) 3112X3 ($rsquoM) Total debt 1000 1100 Less cash and cash equivalents (90) (150)Net debt 910 950
Total equity 110 105 Add subordinated debt instruments 38 38 Less amounts recognised in equity
relating to cash flow hedges (10) (5)Adjusted capital 138 138
Debt-to-adjusted capital ratio 66 69
56
copy 2005-07 Nelson 111
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowing
bull To comply with the capital disclosures the entity discloses thefollowingd) whether during the period it complied with any externally imposed capital
requirements to which it is subjecte) when the entity has not complied with such externally imposed capital
requirements the consequences of such non-complianceThese disclosures shall be based on the information provided internally to the entityrsquos key management personnel
copy 2005-07 Nelson 112
Capital DisclosuresExampleExample
Example disclosurebull Entity A filed its quarterly regulatory capital return for
30 September 20X7 on 20 October 20X7 bull At that date Entity Arsquos regulatory capital was below
the capital requirement imposed by Regulator B by $1 million
bull As a result Entity A was required to submit a plan to the regulator indicating how it would increase its regulatory capital to the amount required
bull Entity A submitted a plan that entailed selling part of its unquoted equities portfolio with a carrying amount of $115 million in the fourth quarter of 20X7
bull In the fourth quarter of 20X7 Entity A sold its fixed interest investment portfolio for $126 million and met its regulatory capital requirement
For example SFC or banks
For example SFC or banks
57
copy 2005-07 Nelson 113
Capital DisclosuresCaseCase
bull Early adopted capital disclosure in 2005 and itsannual report states that (extract only)ndash The Grouprsquos objectives when managing capital are
bull To safeguard the Grouprsquos ability to continue as a going concern so that it continues to provide returns for shareholders and benefits for other stakeholders
bull To support the Grouprsquos stability and growth andbull To provide capital for the purpose of strengthening the
Grouprsquos risk management capability
copy 2005-07 Nelson 114
Capital DisclosuresCaseCase
ndash The Group actively and regularly reviews and manages its capital structure to ensure optimal capital structure and shareholder returns taking into consideration the future capital requirements of the Group and capital efficiency helliphellip
ndash The Group adopts a dividend policy helliphellip while retaining 10 per cent of the profit as capital of the Group for future use
ndash The Group has set aside $1500 million of retained earnings for the purpose of strengthening the risk management regime of the clearing houses and supporting their roles as central counterparties
ndash As in prior years the Group monitors capital by reviewing the level of capital that is at the disposal of the Group (ldquoadjusted capitalrdquo) Adjusted capital comprises all components of shareholdersrsquo equity other than the hedging reserve relating to cash flow hedges designated reserves and investment revaluation reserve helliphellip
bull Early adopted capital disclosure in 2005 and itsannual report states that (extract only)
58
copy 2005-07 Nelson 115
Capital Disclosures ndash Transition
bull An entity shall apply the requirements of capital disclosure for
ndash annual periods beginning on or after 1 January 2007
bull Early application is encouraged
copy 2005-07 Nelson 116
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk
59
copy 2005-07 Nelson 117
QampA SessionQampA SessionQampA Session
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk
21
copy 2005-07 Nelson 41
3 Overall Consideration
bull Departure but such departure is prohibitedndash In the extremely rare circumstances in which
management concludes that bull compliance with a requirement in a
standard or an interpretation would be so misleading that
bull it would conflict with the objective of financial statements set out in the Framework
bull but the relevant regulatory framework prohibits departure from the requirement the entity shall to the maximum extent possible reduce the perceived misleading aspects of compliance by disclosing helliphellip
a) Fair presentation and compliance with IFRSs
copy 2005-07 Nelson 42
3 Overall Consideration
ndash by disclosinga) the title of the standard or interpretation in
question the nature of the requirement and the reason why management has concluded that complying with that requirement is so misleading in the circumstances that it conflicts with the objective of financial statements set out in the Framework and
b) for each period presented the adjustments to each item in the financial statements that management has concluded would be necessary to give a fair presentation
a) Fair presentation and compliance with IFRSsbull Departure but such departure is prohibited
22
copy 2005-07 Nelson 43
3 Overall Consideration
bull When assessing whether complying with a specific requirement in a standard or an interpretation would be so misleading that it would conflict with the objective of financial statements set out in the Frameworkndash management considers
a) why the objective of financial statements is not achieved in the particular circumstances and
b) how the entityrsquos circumstances differ from those of other entities that comply with the requirement ndash If other entities in similar circumstances comply with the
requirement raquo there is a rebuttable presumption that the entityrsquos compliance
with the requirement would not be so misleading that it would conflict with the objective of financial statements set out in the Framework
a) Fair presentation and compliance with IFRSs
copy 2005-07 Nelson 44
3 Overall ConsiderationCaseCase
Howrsquos about this Howrsquos about this
However 2005 Final Results Announcementdisclosed that bull provision for deferred tax was finally made
with regard to revaluation of the HK investment properties (total HK$22 billion) at 2005 year-end
However However 2005 Final Results Announcement2005 Final Results Announcementdisclosed that disclosed that bullbull provision for deferred tax was finally made provision for deferred tax was finally made
with regard to revaluation of the HK with regard to revaluation of the HK investment properties (total HK$22 billion) at investment properties (total HK$22 billion) at 2005 year2005 year--endend
23
copy 2005-07 Nelson 45
b) Going Concern
3 Overall Consideration
bull When preparing financial statements management shall make an assessment of an entityrsquos ability to continue as a going concern
bull Financial statements shall be prepared on a going concern basisndash unless management either intends to liquidate the entity or to cease
trading or has no realistic alternative but to do so bull When management is aware in making its assessment of
material uncertainties related to events or conditions that may cast significant doubt upon the entityrsquos ability to continue as a going concern those uncertainties shall be disclosed
bull When financial statements are not prepared on a going concern basis that fact shall be disclosed together with the basis on which the financial statements are prepared and the reason why the entity is not regarded as a going concern
copy 2005-07 Nelson 46
c) Accrual Basis of Accounting
3 Overall Consideration
bull An entity shall prepare its financial statements except for cash flow information using the accrual basis of accounting
bull When the accrual basis of accounting is used items are recognised as assets liabilities equity income and expensesndash when they satisfy the definitions and recognition criteria for those
elements in the Framework
24
copy 2005-07 Nelson 47
3 Overall Consideration
bull The presentation and classification of items in the financial statements shall be retained from one period to the next unlessa) it is apparent
bull following a significant change in the nature of the entityrsquos operations (eg significant acquisition or disposal) or
bull a review of its financial statementsthat another presentation or classification would be more appropriatehaving regard to the criteria for the selection and application of accounting policies in IAS 8 or
b) a IFRS requires a change in presentation
d) Consistency of presentation
An entity changes the presentation of its financial statements only ifndash the changed presentation provides information that is reliable and is
more relevant to users of the financial statements andndash the revised structure is likely to continue so that comparability is not
impaired
An entity changes the presentation of its financial statements only ifndash the changed presentation provides information that is reliable and is
more relevant to users of the financial statements andndash the revised structure is likely to continue so that comparability is not
impaired
copy 2005-07 Nelson 48
3 Overall Consideration
bull Each material class of similar items shall bendash presented separately in the financial
statementsbull Items of a dissimilar nature or function shall be
ndash presented separately unless they are immaterial
bull Applying the concept of materiality means that a specific disclosure requirement in a IFRS neednot be satisfied if the information is not material
e) Materiality and Aggregation
What is the situation of recognition and measurement
What is the What is the situation of situation of recognition and recognition and measurementmeasurement
25
copy 2005-07 Nelson 49
3 Overall Consideration
bull What is materialndash Omissions or misstatements of items are
material if they could individually or collectively influence the economic decisions of users taken on the basis of the financial statements
ndash Materiality depends on the size and nature of the omission or misstatement judged in the surrounding circumstancesbull The size or nature of the item or a combination
of both could be the determining factor
e) Materiality and Aggregation
copy 2005-07 Nelson 50
3 Overall Consideration
bull Assets and liabilities and income and expenses shall not be offsetndash unless required or permitted by a IFRS
bull It is important that assets and liabilities and income and expenses are reported separatelyndash Measuring assets net of valuation allowances mdash
for example obsolescence allowances on inventories and doubtful debts allowances on receivables mdash is not offsetting
f) Offsetting
26
copy 2005-07 Nelson 51
3 Overall Consideration
bull During ordinary activities some transactions that do not generate revenue but are incidental to the main revenue-generating activitiesndash The results of such transactions are presented
when this presentation reflects the substance of the transaction or other event by netting any income with related expenses arising on the same transaction
f) Offsetting
copy 2005-07 Nelson 52
3 Overall Consideration
bull For examplea) gains and losses on the disposal of non-current
assets including investments and operating assets- are reported by deducting from the proceeds on
disposal the carrying amount of the asset and related selling expenses and
b) expenditure related to a provision that is- recognised in accordance with IAS 37 and - reimbursed under a contractual arrangement with
a third party (for example a supplierrsquos warranty agreement)
may be netted against the related reimbursement
f) Offsetting
ExampleExample
27
copy 2005-07 Nelson 53
3 Overall Consideration
bull Gains and losses arising from a group of similar transactions are reported on a net basisndash For example
bull foreign exchange gains and losses or bull gains and losses arising on financial instruments held for trading
bull Such gains and losses are however reported separately if they are material
bull Gains and losses arising from a group of similar transactions are reported on a net basisndash For example
bull foreign exchange gains and losses or bull gains and losses arising on financial instruments held for trading
bull Such gains and losses are however reported separately if they are material
Can foreign exchange gains and losses be offset
ExampleExample
copy 2005-07 Nelson 54
3 Overall Consideration
bull Except when a IFRS permits or requires otherwise ndash comparative information shall be disclosed in
respect of the previous period for all amountsreported in the financial statements
bull When the presentation or classification of items in the financial statements is amended ndash comparative amounts shall be reclassified unless
the reclassification is impracticable
g) Comparative information
28
copy 2005-07 Nelson 55
Amended requirementsAmended requirements
3 Overall Consideration
bull When comparative amounts are reclassified an entity shall disclosea) the nature of the reclassificationb) the amount of each item or class of items that is
reclassified andc) the reason for the reclassification
g) Comparative information
bull In the pastonly the reason for and a description of the nature of materialreclassifications should be disclosedExemption for disclosure of comparative information for the reconciliation of movements in fixed assets is also removed
bull In the pastonly the reason for and a description of the nature of materialreclassifications should be disclosedExemption for disclosure of comparative information for the reconciliation of movements in fixed assets is also removed
copy 2005-07 Nelson 56
3 Overall Consideration
Melco Development Limited (新濠國際發展有限公司)Notes to the financial statements for year ended 31122005ndash Because HKAS 32 requires retrospective application comparative
figures for 2004 have been restated (see Note 2A for the financial impact)
CaseCase
29
copy 2005-07 Nelson 57
3 Overall Consideration
Galaxy Entertainment Group LimitedNotes to the financial statements (ye 31122005)ndash All changes in the accounting policies require
retrospective application except HKAS 39 and HKFRS 2 for which transitional provisions are applied
ndash As a result the 2004 comparative figures have also been restated or amended in accordance with the relevant requirements
ndash The effects of all the changes in accounting policies are summarised in notes (b) and (c) below
CaseCase
copy 2005-07 Nelson 58
bull Identification of the financial statementsbull Reporting periodbull Balance sheet
1 CurrentNon-current distinction2 Current assets3 Current liabilities4 Information to be presented on the face of the balance sheet5 Information to be presented either on the face of the balance sheet or in
the notesbull Income statement
1 Profit or loss for the period2 Information to be presented on the face of the income statement3 Information to be presented either on the face of the income statement or
in the notesbull Statement of changes in equitybull Cash flow statementbull Notes
4 Structure and Content
30
copy 2005-07 Nelson 59
Identification of Financial Statements
bull The financial statements shall be identified clearly and distinguished from other information in the same published document
bull The following information shall be displayed prominently and repeated when it is necessary for a proper understanding of the information presented
a) the name of the reporting entity or other means of identification and any change in that information from the preceding balance sheet date
b) whether the financial statements cover the individual entity or a group of entities
c) the balance sheet date or the period covered by the financial statements whichever is appropriate to that component of the financial statements
d) the presentation currency as defined in HKAS 21 The Effects of Changes in Foreign Exchange Rates and
e) the level of rounding used in presenting amounts in the financial statements
copy 2005-07 Nelson 60
Identification of Financial Statements
bull Can the units of the presentation currency be rounded to thousands or millions
bull Financial statements are often made more understandableby presenting information in thousands or millions of units of the presentation currency
bull This is acceptable as long asndash the level of rounding in presentation is disclosed and ndash material information is not omitted
bull Financial statements are often made more understandableby presenting information in thousands or millions of units of the presentation currency
bull This is acceptable as long asndash the level of rounding in presentation is disclosed and ndash material information is not omitted
ExampleExample
31
copy 2005-07 Nelson 61
Reporting Period
bull Financial statements shall be presented at least annually
bull When an entityrsquos balance sheet date changes and the annual financial statements are presented for a period longer or shorter than one year an entity shall disclose in addition to the period covered by the financial statementsa) the reason for using a longer or shorter period andb) the fact that comparative amounts for the income
statement statement of changes in equity cash flow statement and related notes are not entirely comparable
copy 2005-07 Nelson 62
Reporting Period
bull Can a set of financial statements cover 52-week instead of a year
bull Normally financial statements are consistently prepared covering a one-year period
bull However for practical reasons some entities prefer to report for example for a 52-week period
bull IAS 1 does not preclude this practice because the resulting financial statements are unlikely to be materially different from those that would be presented for one year
bull Normally financial statements are consistently prepared covering a one-year period
bull However for practical reasons some entities prefer to report for example for a 52-week period
bull IAS 1 does not preclude this practice because the resulting financial statements are unlikely to be materially different from those that would be presented for one year
ExampleExample
32
copy 2005-07 Nelson 63
CurrentNon-current Distinction
bull An entity shall presentndash current and non-current assets andndash current and non-current liabilitiesas separate classifications on the face of its balance sheet
bull Except when a presentation based on liquidity provides informationndash If that information is reliable and is more relevantndash When that exception applies all assets and liabilities shall be
presented broadly in order of liquidity
copy 2005-07 Nelson 64
CurrentNon-current Distinction
bull Whichever method of presentation is adopted for each asset and liability line item that combines amounts expected to be recovered or settled a) no more than 12 months after the balance sheet date
andb) more than 12 months after the balance sheet date(ie combines both current and non-current)
an entity shall disclose the amount expected to be recovered or settled after more than 12 months
33
copy 2005-07 Nelson 65
New requirementsNew requirements
Current Assets
bull An asset shall be classified as current when it satisfies any of the following criteriaa) it is expected to be realised in or is intended for sale or
consumption in the entityrsquos normal operating cycle b) it is held primarily for the purpose of being tradedc) it is expected to be realised within 12 months after the balance
sheet date ord) it is cash or a cash equivalent
bull unless it is restricted from being exchanged or used to settle aliability for at least 12 months after the balance sheet date
bull All other assets shall be classified as non-current
Examplesbull Deposits pledged to bank (how long)bull Fixed deposits over 1 year maturity
Examplesbull Deposits pledged to bank (how long)bull Fixed deposits over 1 year maturity
What is itWhat is it
copy 2005-07 Nelson 66
Current Assets
bull What is operating cycle
bull The operating cycle of an entity is the time between ndash the acquisition of assets for processing and ndash their realisation in cash or cash equivalents
bull When the entityrsquos normal operating cycle is not clearly identifiable ndash its duration is assumed to be 12 months
bull The operating cycle of an entity is the time between ndash the acquisition of assets for processing and ndash their realisation in cash or cash equivalents
bull When the entityrsquos normal operating cycle is not clearly identifiable ndash its duration is assumed to be 12 months
ExampleExample
34
copy 2005-07 Nelson 67
Current Assets CaseCase
copy 2005-07 Nelson 68
Current Assets
bull Can a non-current asset reclassified if it fulfil the definition of current asset later
bull Assets classified as non-current in accordancewith IAS 1 shall not be reclassified as current assetsndash until they meet the criteria to be classified as held for sale in
accordance with IFRS 5bull Assets of a class that an entity would normally regard as non-
current that are acquired exclusively with a view to resale shall notbe classified as currentndash unless they meet the criteria to be classified as held for sale in
accordance with IFRS 5
bull Assets classified as non-current in accordancewith IAS 1 shall not be reclassified as current assetsndash until they meet the criteria to be classified as held for sale in
accordance with IFRS 5bull Assets of a class that an entity would normally regard as non-
current that are acquired exclusively with a view to resale shall notbe classified as currentndash unless they meet the criteria to be classified as held for sale in
accordance with IFRS 5
No non-current assets can be classified as current unless the criteria in IFRS 5 are fulfilled mainlybull Available for immediate salebull Highly probable to make the sale
35
copy 2005-07 Nelson 69
Is it currentIs it current
Current Assets
bull In its 2005 Interim Report full set of HKFRS was adopted and the report set out thatndash Available-for-sale financial assets are non-
derivatives that are eitherbull designated in this category orbull not classified in any of the other categories (ie
loans and receivables financial assets at fair value through profit or loss and held-to-maturity investments)
CaseCase
Similar in 2005 Annual Report
Similar in 2005 Annual Report
ndash They are included in non-current assetsbull unless management intends to dispose of the
investment within 12 months of the balance sheet date
copy 2005-07 Nelson 70
New requirementsNew requirements
Current Liabilities
bull A liability shall be classified as current when it satisfies any of the following criteriaa) it is expected to be settled in the entityrsquos normal operating cycleb) it is held primarily for the purpose of being tradedc) it is due to be settled within 12 months after the balance sheet
date ord) the entity does not have an unconditional right to defer settlement
of the liability for at least 12 months after the balance sheet date
bull All other liabilities shall be classified as non-current
ImplicationImplication
36
copy 2005-07 Nelson 71
Current Liabilities Revised rules on classifying a liability as current or non-currentbull A liability held for being traded rArr currentbull A financial liability due within 12 months after the BS date rArr current
ndash even if an agreement to refinance on a long-term basis is completed after the BS date (only disclosed as non-adjusting event)
bull If an entity has discretion to refinance rArr non-currentbull If an entity without discretion to refinance rArr current
bull A non-current financial liability is payable on demand with a breach on a condition of its loan agreement on or before the BS datendash If the lender agreed not to demand payment
bull after the BS date rArr current (only disclosed as non-adjusting event)
bull by the BS date rArr non-current
ImplicationImplication
copy 2005-07 Nelson 72
Current LiabilitiesCaseCase
Note 12 to Interim Report 2006bull Breach of loan covenants
bull As at 30 June 2006 in respect of certain bank loans with an aggregate carrying amount of HK$1529806000 the Group breached certain financial covenants of the banks loans
bull Since the lenders have not agreed to waive its right to demand immediate payment as at the balance sheet date the loans have been classified as current liabilities in these financial statements at 30 June 2006
37
copy 2005-07 Nelson 73
Current Assets and LiabilitiesExampleExample
Can the following be classified as current assetsbull 3-month fixed deposits pledged to a bank to secure
a mortgage loan of 5 yearsbull 2-year fixed deposits with a bank
Can the following be classified as current assetsbull 3-month fixed deposits pledged to a bank to secure
a mortgage loan of 5 yearsbull 2-year fixed deposits with a bank
Can the following be classified as non-current liabilitiesbull 5-year term loan matured after year end but renewed
for another 5 years after year end (before the issuanceof the financial statements)
bull 2-year term loan to be matured with 12 months and theentity has a right to renew for another 2 years
Can the following be classified as non-current liabilitiesbull 5-year term loan matured after year end but renewed
for another 5 years after year end (before the issuanceof the financial statements)
bull 2-year term loan to be matured with 12 months and theentity has a right to renew for another 2 years
timestimes
times
radic
copy 2005-07 Nelson 74
Balance Sheetbull As a minimum the face of the balance sheet shall
include line items that present the following amountsa) property plant and equipmentb) investment propertyc) intangible assetsd) financial assets (excl amounts shown under (e) (h) and (I))e) investments accounted for using the equity methodf) biological assetsg) inventoriesh) trade and other receivablesi) cash and cash equivalentsj) trade and other payablesk) provisionsl) financial liabilities (excl amounts shown under (j) and (k))m) liabilities and assets for current tax as defined in HKAS 12 Income Taxesn) deferred tax liabilities and deferred tax assets as defined in HKAS 12o) minority interest presented within equity andp) issued capital and reserves attributable to equity holders of the parent
38
copy 2005-07 Nelson 75
Balance Sheetbull The face of the balance sheet shall also include line
items that present the following amountsa) The total of assets classified as held for sale and
assets included in disposal groups classified as held for sale in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations and
b) Liabilities included in disposal groups classified as held for sale in accordance with IFRS 5
copy 2005-07 Nelson 76
Balance Sheetbull Additional line items headings and subtotals shall
be presented on the face of the balance sheet when such presentation is relevant to an understanding of the entityrsquos financial position
bull When an entity presents current and non-current assets and current and non-current liabilities as separate classifications on the face of its balance sheet ndash it shall not classify deferred tax assets
(liabilities) as current assets (liabilities)
39
copy 2005-07 Nelson 77
Balance Sheet
bull The use of different measurement bases for different classes of assets suggests that their nature or function differs and therefore that they should be presented as separate line itemsndash For example different classes of property plant and
equipment can be carried atbull Cost orbull Revalued amountsin accordance with IAS 16 PPE
In the past it use ldquomay needrdquoIn the past it use ldquomay needrdquo
copy 2005-07 Nelson 78
Balance Sheet
Galaxy Entertainment Group LimitedConsolidated balance sheet as at 31122005
CaseCase
40
copy 2005-07 Nelson 79
Balance Sheet
Melco Development Limited (新濠國際發展有限公司)Consolidated balance sheet as at 31122005
CaseCase
copy 2005-07 Nelson 80
Income Statement Minimum requirements on the face of the income statementbull As a minimum the face of the income statement shall include line items
that present the following amounts for the perioda) revenueb) finance costsc) share of the profit or loss of associates and joint ventures accounted
for using the equity methodd) pre-tax gain or loss recognised on the disposal of assets or
settlement of liabilities attributable to discontinuing operationse) tax expense andf) profit or loss
41
copy 2005-07 Nelson 81
Income Statement bull The following items shall be disclosed on the face of the income
statement as allocations of profit or loss for the perioda) Profit or loss attributable to minority interest andb) Profit or loss attributable to equity holders of the parent
A similar requirement has been added for the statement of changes in equity and such allocated amounts are not to be presented as items of income or expense
copy 2005-07 Nelson 82
Income Statement
Melco Dev LtdConsolidated income statementas at 31122005
CaseCase
42
copy 2005-07 Nelson 83
Income Statement bull Not require to disclose the results of operating
activities as a line item on the face of the incomestatement
bull An entity shall not present any items of income and expense as extraordinary items either onthe face of the income statements or in the notes
Entities canrsquot use itEntities canrsquot use it
Entities can still show itEntities can still show it
copy 2005-07 Nelson 84
Income Statement Either on the face of the income statement or in the notesbull An entity shall present an analysis of expenses using a classification
based on eitherbull the nature of expenses orbull their function within the entity
whichever provides information that is reliable and more relevant
bull Entities classifying expenses by function shall disclose additional information on the nature of expenses includingbull depreciation and amortisation expense and bull employee benefits expense
43
copy 2005-07 Nelson 85
Income StatementCaseCase
Nature or FunctionNature or Nature or FunctionFunction
copy 2005-07 Nelson 86
Statement of Changes in Equity bull An entity shall present a statement of changes in equity showing on the
face of the statementa) profit or loss for the period b) each item of income and expense for the period that as required by
IFRSs is recognised directly in equity and the total of these itemsc) total income and expense for the period (calculated as the sum of (a) and
(b)) showing separately the total amounts attributablebull to equity holders of the parent andbull to minority interest and
d) for each component of equity the effects of changes in accounting policies and corrections of errors recognised in accordance with IAS 8
Any ChangeAny Change
A revised requirementbull A statement of changes in equity that comprises only these items
shall be titled a statement of recognised income and expenses
A revised requirementbull A statement of changes in equity that comprises only these items
shall be titled a statement of recognised income and expenses
44
copy 2005-07 Nelson 87
Statement of Changes in Equity bull An entity shall also present either on the face of the
statement of changes in equity or in the notesa) the amounts of transactions with equity holders acting in
their capacity as equity holders showing separately distributions to equity holders
b) the balance of retained earnings (ie accumulated profit or loss) at the beginning of the period and at the balance sheet date and the changes during the period and
c) a reconciliation between the carrying amount of each class of contributed equity and each reserve at the beginning and the end of the period separately disclosing each change
copy 2005-07 Nelson 88
Statement of Changes in Equity
Consolidated SCE as at 31122005
CaseCase
45
copy 2005-07 Nelson 89
Notes Structure (an entity is required to disclose the following)
bull The notes shalla) present information about the basis of preparation of the financial statements
and the specific accounting policies usedb) disclose the information required by HKFRSs that is not presented on the
face of the balance sheet income statement statement of changes in equity or cash flow statement and
c) provide additional information that is not presented on the face of the balance sheet income statement statement of changes in equity or cash flow statement but is relevant to an understanding of any of them
bull Notes shall as far as practicable be presented in a systematic manner bull Each item on the face of the balance sheet income statement statement
of changes in equity and cash flow statement shall be cross-referencedto any related information in the notes
copy 2005-07 Nelson 90
Notes Disclosures (an entity is required to disclose the following)
bull Disclosure of accounting policiesAn entity shall disclose in the summary of significant accounting policiesa) the measurement basis (or bases) used in preparing the financial
statements andb) the other accounting policies used that are relevant to an understanding of
the financial statements
46
copy 2005-07 Nelson 91
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)ndash The financial statements have been prepared in
accordance with Hong Kong Financial Reporting Standards (lsquolsquoHKFRSrsquorsquo) issued by the Hong Kong Institute of Certified Public Accountants bull under the historical cost convention as modified by the
revaluation of investment properties available-for-sale financial assets derivative financial instruments and other investments which are carried at fair values helliphellip
ndash The principal accounting policies applied in the preparation of these financial statements are set out below These policies have been consistently applied to all the years presented except for those stated in note 2(a) above
copy 2005-07 Nelson 92
Notes Disclosures (an entity is required to disclose the following)
bull Disclosure of accounting policiesndash The judgements apart from those involving estimations management has
madebull in the process of applying the entityrsquos accounting policies that have the
most significant effect on the amounts recognised in the financial statements (in the summary of significant accounting policies or other notes)
Examples ndash Management makes judgements in determininga) whether financial assets are held-to-maturity investmentsb) when substantially all the significant risks and rewards of
ownership of financial assets and lease assets are transferred to other entities
c) whether in substance particular sales of goods are financing arrangements and therefore do not give rise to revenue and
d) whether the substance of the relationship between the entity and a special purpose entity indicates that the special purpose entity is controlled by the entity
Examples ndash Management makes judgements in determininga) whether financial assets are held-to-maturity investmentsb) when substantially all the significant risks and rewards of
ownership of financial assets and lease assets are transferred to other entities
c) whether in substance particular sales of goods are financing arrangements and therefore do not give rise to revenue and
d) whether the substance of the relationship between the entity and a special purpose entity indicates that the special purpose entity is controlled by the entity
47
copy 2005-07 Nelson 93
Notes Disclosures (an entity is required to disclose the following)
bull Key sources of estimation uncertaintyndash Information about the key assumptions concerning the future and
other key sources of estimation uncertainty at the balance sheet datebull that have a significant risk of causing a material adjustment to the
carrying amounts of assets and liabilities within the next financial yearndash In respect of those assets and liabilities the notes shall include details of
a) their nature andb) their carrying amount as at the balance sheet date
Examples ndash in the absence of recently observed market prices used to measure the following assets and liabilities future-oriented estimates are necessary to measurebull the recoverable amount of classes of PPEbull the effect of technological obsolescence on inventories
Estimates involve assumptions about such items asbull the risk adjustment to cash flows or discount rates usedbull future changes in salaries and in prices affecting other costs
Examples ndash in the absence of recently observed market prices used to measure the following assets and liabilities future-oriented estimates are necessary to measurebull the recoverable amount of classes of PPEbull the effect of technological obsolescence on inventories
Estimates involve assumptions about such items asbull the risk adjustment to cash flows or discount rates usedbull future changes in salaries and in prices affecting other costs
copy 2005-07 Nelson 94
Notes
Esprit Holdings LimitedEsprit Holdings Limitedbull Critical Accounting Estimates and Judgements
ndash Estimates and judgements are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonableunder the circumstances
ndash Critical accounting estimates and assumptionsbull The Group makes estimates and assumptions concerning
the future The resulting accounting estimates will by definition seldom equal the related actual results
bull The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below helliphellip (including (1) useful life and impairment of trademarks and (2) income taxes)
CaseCase
48
copy 2005-07 Nelson 95
Notes
Melco Development Limited (新濠國際發展有限公司)Notes to the financial statements for the year ended 31122005ndash The key assumptions concerning the future and other key sources
of estimation uncertainty at the balance sheet date that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below helliphellip(The issues discussed includebull Allowances for inventories bull Estimated impairment of goodwill Income taxes)
CaseCase
copy 2005-07 Nelson 96
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)ndash Estimates and judgements used in preparing the
financial statements are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonable under the circumstances
ndash The Group makes estimates and assumptionsconcerning the future
ndash The resulting accounting estimates will by definition seldom equal the related actual results
ndash The estimates and assumptions that have a significant effect on the carrying amounts of assets and liabilities are discussed below hellip (including impairment of goodwill impairment of gaming
licence Useful lives of property plant and equipment fair value of investment properties hellip)
49
copy 2005-07 Nelson 97
Notes Disclosures (an entity is required to disclose the following)
bull Other disclosuresAn entity shall disclose in the notesa) the amount of dividends proposed or declared before the
financial statements were authorised for issue but not recognised as a distribution to equity holders during the period and the related amount per share(HK incorporated companies are required to show the aggregate amount which is recommended for distribution by way of dividend under a separate heading(s) in their balance sheet (HK Co Ord 10th Sch para 9(1)(e)) and
b) the amount of any cumulative preference dividends not recognised
copy 2005-07 Nelson 98
Notes Disclosures (an entity is required to disclose the following)
An entity shall disclose the following if not disclosedelsewhere in information published with the financial statementsa) the domicile and legal form of the entity
its country of incorporation andthe address of its registered office(or principal place of business if different from the registered office)
b) a description of the nature of the entityrsquos operations and its principal activities and
c) the name of the parent and the ultimate parent of the group
ldquoshall discloserdquo now instead of ldquoencouraged to discloserdquo
ldquoshall discloserdquo now instead of ldquoencouraged to discloserdquo
bull Other disclosures
Any specialAny special
50
copy 2005-07 Nelson 99
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)bull The principal activities of Galaxy Entertainment Group
Ltd (the lsquolsquoCompanyrsquorsquo) (formerly known as K WahConstruction Materials Ltd) and its subsidiaries (together the lsquolsquoGrouprsquorsquo) are tondash operate in casino games of chance or games of other forms
in Macau (and) manufacture sale and distribution of construction materials in HK Macau and Mainland China
bull The Company is ndash a limited liability company incorporated in Hong Kong and ndash has its listing on the Main Board of The Stock Exchange of
Hong Kong Limitedbull The address of its registered office and its principal place
of business is Room 1606 16th Floor Hutchison House 10 Harcourt Road Central HK
copy 2005-07 Nelson 100
Effective Date
bull An entity shall apply IAS 1 for annual periods beginning on or after 1 Jan 2005
ndash Earlier application is encouragedndash If an entity applies IAS 1 for an earlier period it shall
disclose this factbull For the amendments relating to the Statement of
Changes in Equityndash An entity shall apply it for annual periods beginning on
or after 1 Jan 2006ndash If an entity applies the amendments to IAS 19
Employee Benefits ndash Actuarial Gains and Losses Group Plans and Disclosures for an earlier period that amendment shall be applied for that earlier period
51
copy 2005-07 Nelson 101
Todayrsquos Agenda
Capital Disclosures (Amendments to IAS 1)
Capital Disclosures (Amendments to IAS 1)
copy 2005-07 Nelson 102
Capital Disclosures ndash For 2007
52
copy 2005-07 Nelson 103
Capital Disclosures
What is capital Is it helliphellip
CapitalCapital AssetsAssets LiabilitiesLiabilities= ndash
bull IAS 1BC47 considers ldquowhether an entity can have a view of capital that differs from what IFRSs define as equityrdquo
bull It further clarifies that although for the purposes of this disclosure capital would often equate with equity as defined in IFRSsndash it might also include or exclude some components
bull It also noted that the capital disclosure in IAS 1 is intended to give entities the opportunity to describendash how they view the components of capital they manage if this is
different from what IFRSs define as equity helliphellip
copy 2005-07 Nelson 104
EquityEquityEquity AssetsAssets LiabilitiesLiabilities= ndash
Capital Disclosures
Based on the Framework amp IFRSs the accounting equation should be
CapitalCapital AssetsAssets LiabilitiesLiabilities= ndash
bull An entityrsquos capital may be part of its equity plus part of its liabilities depending on how it manage ldquoits capitalrdquo helliphellip
53
copy 2005-07 Nelson 105
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowinga) qualitative information about its objectives policies and processes for
managing capital including (but not limited to)i) a description of what it manages as capitalii) when an entity is subject to externally imposed capital requirements
the nature of those requirements and how those requirements are incorporated into the management of capital and
iii) how it is meeting its objectives for managing capital
bull To comply with the capital disclosures the entity discloses thefollowinga) qualitative information about its objectives policies and processes for
managing capital including (but not limited to)i) a description of what it manages as capitalii) when an entity is subject to externally imposed capital requirements
the nature of those requirements and how those requirements are incorporated into the management of capital and
iii) how it is meeting its objectives for managing capital
copy 2005-07 Nelson 106
Capital Disclosures
Example disclosurebull The Grouprsquos objectives when managing capital are
ndash to safeguard the entityrsquos ability to continue as a going concern
bull so that it can continue to provide returns for shareholders and benefits for other stakeholders and
ndash to provide an adequate return to shareholders by pricing products and services commensurately with the level of risk
bull The Group sets the amount of capital in proportion to risk
ExampleExample
ObjectivesObjectives
54
copy 2005-07 Nelson 107
Capital Disclosures
bull The Group manages the capital structure and makes adjustments to it in the light ofndash changes in economic conditions and ndash the risk characteristics of the underlying assets
bull In order to maintain or adjust the capital structure the Group mayndash adjust the amount of dividends paid to shareholders ndash return capital to shareholders ndash issue new shares or ndash sell assets to reduce debt
ExampleExample
Example disclosure
HowHow
copy 2005-07 Nelson 108
Capital Disclosures
bull Consistently with others in the industry the Group monitors capital on the basis of ndash the debt-to-adjusted capital ratio
bull This ratio is calculated as net debt divide adjusted capital
ExampleExample
Example disclosure
HowHow
bull Net debt is calculated as ndash Total debt (as shown in the
balance sheet)ndash Less cash amp cash equivalents
bull Net debt is calculated as ndash Total debt (as shown in the
balance sheet)ndash Less cash amp cash equivalents
bull Adjusted capital ndash comprises all components of
equity (ie share capital share premium minority interest retained earnings and revaluation reserve) ndash other than amounts
recognised in equity relating to cash flow hedges and
ndash includes some forms of subordinated debt
bull Adjusted capital ndash comprises all components of
equity (ie share capital share premium minority interest retained earnings and revaluation reserve) ndash other than amounts
recognised in equity relating to cash flow hedges and
ndash includes some forms of subordinated debt
55
copy 2005-07 Nelson 109
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowing
bull To comply with the capital disclosures the entity discloses thefollowingb) summary quantitative data about what it manages as capital
Some entities regard some financial liabilities (eg some forms of subordinated debt) as part of capitalOther entities regard capital as excluding some components of equity (eg components arising from cash flow hedges)
c) any changes in (a) and (b) from the previous period
copy 2005-07 Nelson 110
Capital Disclosures
Example disclosure (continued from previous example)
ExampleExample
bull During 20X4 the Grouprsquos strategy which was unchanged from 20X3 was to maintain the debt-to-adjusted capital ratio at the lower end of the range 61 to 71 in order to secure access to finance at a reasonable cost by maintaining a BB credit rating The debt-to-adjusted capital ratios at 31 December 20X4 and at 31 December 20X3 were as follows
3112X4 ($rsquoM) 3112X3 ($rsquoM) Total debt 1000 1100 Less cash and cash equivalents (90) (150)Net debt 910 950
Total equity 110 105 Add subordinated debt instruments 38 38 Less amounts recognised in equity
relating to cash flow hedges (10) (5)Adjusted capital 138 138
Debt-to-adjusted capital ratio 66 69
56
copy 2005-07 Nelson 111
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowing
bull To comply with the capital disclosures the entity discloses thefollowingd) whether during the period it complied with any externally imposed capital
requirements to which it is subjecte) when the entity has not complied with such externally imposed capital
requirements the consequences of such non-complianceThese disclosures shall be based on the information provided internally to the entityrsquos key management personnel
copy 2005-07 Nelson 112
Capital DisclosuresExampleExample
Example disclosurebull Entity A filed its quarterly regulatory capital return for
30 September 20X7 on 20 October 20X7 bull At that date Entity Arsquos regulatory capital was below
the capital requirement imposed by Regulator B by $1 million
bull As a result Entity A was required to submit a plan to the regulator indicating how it would increase its regulatory capital to the amount required
bull Entity A submitted a plan that entailed selling part of its unquoted equities portfolio with a carrying amount of $115 million in the fourth quarter of 20X7
bull In the fourth quarter of 20X7 Entity A sold its fixed interest investment portfolio for $126 million and met its regulatory capital requirement
For example SFC or banks
For example SFC or banks
57
copy 2005-07 Nelson 113
Capital DisclosuresCaseCase
bull Early adopted capital disclosure in 2005 and itsannual report states that (extract only)ndash The Grouprsquos objectives when managing capital are
bull To safeguard the Grouprsquos ability to continue as a going concern so that it continues to provide returns for shareholders and benefits for other stakeholders
bull To support the Grouprsquos stability and growth andbull To provide capital for the purpose of strengthening the
Grouprsquos risk management capability
copy 2005-07 Nelson 114
Capital DisclosuresCaseCase
ndash The Group actively and regularly reviews and manages its capital structure to ensure optimal capital structure and shareholder returns taking into consideration the future capital requirements of the Group and capital efficiency helliphellip
ndash The Group adopts a dividend policy helliphellip while retaining 10 per cent of the profit as capital of the Group for future use
ndash The Group has set aside $1500 million of retained earnings for the purpose of strengthening the risk management regime of the clearing houses and supporting their roles as central counterparties
ndash As in prior years the Group monitors capital by reviewing the level of capital that is at the disposal of the Group (ldquoadjusted capitalrdquo) Adjusted capital comprises all components of shareholdersrsquo equity other than the hedging reserve relating to cash flow hedges designated reserves and investment revaluation reserve helliphellip
bull Early adopted capital disclosure in 2005 and itsannual report states that (extract only)
58
copy 2005-07 Nelson 115
Capital Disclosures ndash Transition
bull An entity shall apply the requirements of capital disclosure for
ndash annual periods beginning on or after 1 January 2007
bull Early application is encouraged
copy 2005-07 Nelson 116
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk
59
copy 2005-07 Nelson 117
QampA SessionQampA SessionQampA Session
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk
22
copy 2005-07 Nelson 43
3 Overall Consideration
bull When assessing whether complying with a specific requirement in a standard or an interpretation would be so misleading that it would conflict with the objective of financial statements set out in the Frameworkndash management considers
a) why the objective of financial statements is not achieved in the particular circumstances and
b) how the entityrsquos circumstances differ from those of other entities that comply with the requirement ndash If other entities in similar circumstances comply with the
requirement raquo there is a rebuttable presumption that the entityrsquos compliance
with the requirement would not be so misleading that it would conflict with the objective of financial statements set out in the Framework
a) Fair presentation and compliance with IFRSs
copy 2005-07 Nelson 44
3 Overall ConsiderationCaseCase
Howrsquos about this Howrsquos about this
However 2005 Final Results Announcementdisclosed that bull provision for deferred tax was finally made
with regard to revaluation of the HK investment properties (total HK$22 billion) at 2005 year-end
However However 2005 Final Results Announcement2005 Final Results Announcementdisclosed that disclosed that bullbull provision for deferred tax was finally made provision for deferred tax was finally made
with regard to revaluation of the HK with regard to revaluation of the HK investment properties (total HK$22 billion) at investment properties (total HK$22 billion) at 2005 year2005 year--endend
23
copy 2005-07 Nelson 45
b) Going Concern
3 Overall Consideration
bull When preparing financial statements management shall make an assessment of an entityrsquos ability to continue as a going concern
bull Financial statements shall be prepared on a going concern basisndash unless management either intends to liquidate the entity or to cease
trading or has no realistic alternative but to do so bull When management is aware in making its assessment of
material uncertainties related to events or conditions that may cast significant doubt upon the entityrsquos ability to continue as a going concern those uncertainties shall be disclosed
bull When financial statements are not prepared on a going concern basis that fact shall be disclosed together with the basis on which the financial statements are prepared and the reason why the entity is not regarded as a going concern
copy 2005-07 Nelson 46
c) Accrual Basis of Accounting
3 Overall Consideration
bull An entity shall prepare its financial statements except for cash flow information using the accrual basis of accounting
bull When the accrual basis of accounting is used items are recognised as assets liabilities equity income and expensesndash when they satisfy the definitions and recognition criteria for those
elements in the Framework
24
copy 2005-07 Nelson 47
3 Overall Consideration
bull The presentation and classification of items in the financial statements shall be retained from one period to the next unlessa) it is apparent
bull following a significant change in the nature of the entityrsquos operations (eg significant acquisition or disposal) or
bull a review of its financial statementsthat another presentation or classification would be more appropriatehaving regard to the criteria for the selection and application of accounting policies in IAS 8 or
b) a IFRS requires a change in presentation
d) Consistency of presentation
An entity changes the presentation of its financial statements only ifndash the changed presentation provides information that is reliable and is
more relevant to users of the financial statements andndash the revised structure is likely to continue so that comparability is not
impaired
An entity changes the presentation of its financial statements only ifndash the changed presentation provides information that is reliable and is
more relevant to users of the financial statements andndash the revised structure is likely to continue so that comparability is not
impaired
copy 2005-07 Nelson 48
3 Overall Consideration
bull Each material class of similar items shall bendash presented separately in the financial
statementsbull Items of a dissimilar nature or function shall be
ndash presented separately unless they are immaterial
bull Applying the concept of materiality means that a specific disclosure requirement in a IFRS neednot be satisfied if the information is not material
e) Materiality and Aggregation
What is the situation of recognition and measurement
What is the What is the situation of situation of recognition and recognition and measurementmeasurement
25
copy 2005-07 Nelson 49
3 Overall Consideration
bull What is materialndash Omissions or misstatements of items are
material if they could individually or collectively influence the economic decisions of users taken on the basis of the financial statements
ndash Materiality depends on the size and nature of the omission or misstatement judged in the surrounding circumstancesbull The size or nature of the item or a combination
of both could be the determining factor
e) Materiality and Aggregation
copy 2005-07 Nelson 50
3 Overall Consideration
bull Assets and liabilities and income and expenses shall not be offsetndash unless required or permitted by a IFRS
bull It is important that assets and liabilities and income and expenses are reported separatelyndash Measuring assets net of valuation allowances mdash
for example obsolescence allowances on inventories and doubtful debts allowances on receivables mdash is not offsetting
f) Offsetting
26
copy 2005-07 Nelson 51
3 Overall Consideration
bull During ordinary activities some transactions that do not generate revenue but are incidental to the main revenue-generating activitiesndash The results of such transactions are presented
when this presentation reflects the substance of the transaction or other event by netting any income with related expenses arising on the same transaction
f) Offsetting
copy 2005-07 Nelson 52
3 Overall Consideration
bull For examplea) gains and losses on the disposal of non-current
assets including investments and operating assets- are reported by deducting from the proceeds on
disposal the carrying amount of the asset and related selling expenses and
b) expenditure related to a provision that is- recognised in accordance with IAS 37 and - reimbursed under a contractual arrangement with
a third party (for example a supplierrsquos warranty agreement)
may be netted against the related reimbursement
f) Offsetting
ExampleExample
27
copy 2005-07 Nelson 53
3 Overall Consideration
bull Gains and losses arising from a group of similar transactions are reported on a net basisndash For example
bull foreign exchange gains and losses or bull gains and losses arising on financial instruments held for trading
bull Such gains and losses are however reported separately if they are material
bull Gains and losses arising from a group of similar transactions are reported on a net basisndash For example
bull foreign exchange gains and losses or bull gains and losses arising on financial instruments held for trading
bull Such gains and losses are however reported separately if they are material
Can foreign exchange gains and losses be offset
ExampleExample
copy 2005-07 Nelson 54
3 Overall Consideration
bull Except when a IFRS permits or requires otherwise ndash comparative information shall be disclosed in
respect of the previous period for all amountsreported in the financial statements
bull When the presentation or classification of items in the financial statements is amended ndash comparative amounts shall be reclassified unless
the reclassification is impracticable
g) Comparative information
28
copy 2005-07 Nelson 55
Amended requirementsAmended requirements
3 Overall Consideration
bull When comparative amounts are reclassified an entity shall disclosea) the nature of the reclassificationb) the amount of each item or class of items that is
reclassified andc) the reason for the reclassification
g) Comparative information
bull In the pastonly the reason for and a description of the nature of materialreclassifications should be disclosedExemption for disclosure of comparative information for the reconciliation of movements in fixed assets is also removed
bull In the pastonly the reason for and a description of the nature of materialreclassifications should be disclosedExemption for disclosure of comparative information for the reconciliation of movements in fixed assets is also removed
copy 2005-07 Nelson 56
3 Overall Consideration
Melco Development Limited (新濠國際發展有限公司)Notes to the financial statements for year ended 31122005ndash Because HKAS 32 requires retrospective application comparative
figures for 2004 have been restated (see Note 2A for the financial impact)
CaseCase
29
copy 2005-07 Nelson 57
3 Overall Consideration
Galaxy Entertainment Group LimitedNotes to the financial statements (ye 31122005)ndash All changes in the accounting policies require
retrospective application except HKAS 39 and HKFRS 2 for which transitional provisions are applied
ndash As a result the 2004 comparative figures have also been restated or amended in accordance with the relevant requirements
ndash The effects of all the changes in accounting policies are summarised in notes (b) and (c) below
CaseCase
copy 2005-07 Nelson 58
bull Identification of the financial statementsbull Reporting periodbull Balance sheet
1 CurrentNon-current distinction2 Current assets3 Current liabilities4 Information to be presented on the face of the balance sheet5 Information to be presented either on the face of the balance sheet or in
the notesbull Income statement
1 Profit or loss for the period2 Information to be presented on the face of the income statement3 Information to be presented either on the face of the income statement or
in the notesbull Statement of changes in equitybull Cash flow statementbull Notes
4 Structure and Content
30
copy 2005-07 Nelson 59
Identification of Financial Statements
bull The financial statements shall be identified clearly and distinguished from other information in the same published document
bull The following information shall be displayed prominently and repeated when it is necessary for a proper understanding of the information presented
a) the name of the reporting entity or other means of identification and any change in that information from the preceding balance sheet date
b) whether the financial statements cover the individual entity or a group of entities
c) the balance sheet date or the period covered by the financial statements whichever is appropriate to that component of the financial statements
d) the presentation currency as defined in HKAS 21 The Effects of Changes in Foreign Exchange Rates and
e) the level of rounding used in presenting amounts in the financial statements
copy 2005-07 Nelson 60
Identification of Financial Statements
bull Can the units of the presentation currency be rounded to thousands or millions
bull Financial statements are often made more understandableby presenting information in thousands or millions of units of the presentation currency
bull This is acceptable as long asndash the level of rounding in presentation is disclosed and ndash material information is not omitted
bull Financial statements are often made more understandableby presenting information in thousands or millions of units of the presentation currency
bull This is acceptable as long asndash the level of rounding in presentation is disclosed and ndash material information is not omitted
ExampleExample
31
copy 2005-07 Nelson 61
Reporting Period
bull Financial statements shall be presented at least annually
bull When an entityrsquos balance sheet date changes and the annual financial statements are presented for a period longer or shorter than one year an entity shall disclose in addition to the period covered by the financial statementsa) the reason for using a longer or shorter period andb) the fact that comparative amounts for the income
statement statement of changes in equity cash flow statement and related notes are not entirely comparable
copy 2005-07 Nelson 62
Reporting Period
bull Can a set of financial statements cover 52-week instead of a year
bull Normally financial statements are consistently prepared covering a one-year period
bull However for practical reasons some entities prefer to report for example for a 52-week period
bull IAS 1 does not preclude this practice because the resulting financial statements are unlikely to be materially different from those that would be presented for one year
bull Normally financial statements are consistently prepared covering a one-year period
bull However for practical reasons some entities prefer to report for example for a 52-week period
bull IAS 1 does not preclude this practice because the resulting financial statements are unlikely to be materially different from those that would be presented for one year
ExampleExample
32
copy 2005-07 Nelson 63
CurrentNon-current Distinction
bull An entity shall presentndash current and non-current assets andndash current and non-current liabilitiesas separate classifications on the face of its balance sheet
bull Except when a presentation based on liquidity provides informationndash If that information is reliable and is more relevantndash When that exception applies all assets and liabilities shall be
presented broadly in order of liquidity
copy 2005-07 Nelson 64
CurrentNon-current Distinction
bull Whichever method of presentation is adopted for each asset and liability line item that combines amounts expected to be recovered or settled a) no more than 12 months after the balance sheet date
andb) more than 12 months after the balance sheet date(ie combines both current and non-current)
an entity shall disclose the amount expected to be recovered or settled after more than 12 months
33
copy 2005-07 Nelson 65
New requirementsNew requirements
Current Assets
bull An asset shall be classified as current when it satisfies any of the following criteriaa) it is expected to be realised in or is intended for sale or
consumption in the entityrsquos normal operating cycle b) it is held primarily for the purpose of being tradedc) it is expected to be realised within 12 months after the balance
sheet date ord) it is cash or a cash equivalent
bull unless it is restricted from being exchanged or used to settle aliability for at least 12 months after the balance sheet date
bull All other assets shall be classified as non-current
Examplesbull Deposits pledged to bank (how long)bull Fixed deposits over 1 year maturity
Examplesbull Deposits pledged to bank (how long)bull Fixed deposits over 1 year maturity
What is itWhat is it
copy 2005-07 Nelson 66
Current Assets
bull What is operating cycle
bull The operating cycle of an entity is the time between ndash the acquisition of assets for processing and ndash their realisation in cash or cash equivalents
bull When the entityrsquos normal operating cycle is not clearly identifiable ndash its duration is assumed to be 12 months
bull The operating cycle of an entity is the time between ndash the acquisition of assets for processing and ndash their realisation in cash or cash equivalents
bull When the entityrsquos normal operating cycle is not clearly identifiable ndash its duration is assumed to be 12 months
ExampleExample
34
copy 2005-07 Nelson 67
Current Assets CaseCase
copy 2005-07 Nelson 68
Current Assets
bull Can a non-current asset reclassified if it fulfil the definition of current asset later
bull Assets classified as non-current in accordancewith IAS 1 shall not be reclassified as current assetsndash until they meet the criteria to be classified as held for sale in
accordance with IFRS 5bull Assets of a class that an entity would normally regard as non-
current that are acquired exclusively with a view to resale shall notbe classified as currentndash unless they meet the criteria to be classified as held for sale in
accordance with IFRS 5
bull Assets classified as non-current in accordancewith IAS 1 shall not be reclassified as current assetsndash until they meet the criteria to be classified as held for sale in
accordance with IFRS 5bull Assets of a class that an entity would normally regard as non-
current that are acquired exclusively with a view to resale shall notbe classified as currentndash unless they meet the criteria to be classified as held for sale in
accordance with IFRS 5
No non-current assets can be classified as current unless the criteria in IFRS 5 are fulfilled mainlybull Available for immediate salebull Highly probable to make the sale
35
copy 2005-07 Nelson 69
Is it currentIs it current
Current Assets
bull In its 2005 Interim Report full set of HKFRS was adopted and the report set out thatndash Available-for-sale financial assets are non-
derivatives that are eitherbull designated in this category orbull not classified in any of the other categories (ie
loans and receivables financial assets at fair value through profit or loss and held-to-maturity investments)
CaseCase
Similar in 2005 Annual Report
Similar in 2005 Annual Report
ndash They are included in non-current assetsbull unless management intends to dispose of the
investment within 12 months of the balance sheet date
copy 2005-07 Nelson 70
New requirementsNew requirements
Current Liabilities
bull A liability shall be classified as current when it satisfies any of the following criteriaa) it is expected to be settled in the entityrsquos normal operating cycleb) it is held primarily for the purpose of being tradedc) it is due to be settled within 12 months after the balance sheet
date ord) the entity does not have an unconditional right to defer settlement
of the liability for at least 12 months after the balance sheet date
bull All other liabilities shall be classified as non-current
ImplicationImplication
36
copy 2005-07 Nelson 71
Current Liabilities Revised rules on classifying a liability as current or non-currentbull A liability held for being traded rArr currentbull A financial liability due within 12 months after the BS date rArr current
ndash even if an agreement to refinance on a long-term basis is completed after the BS date (only disclosed as non-adjusting event)
bull If an entity has discretion to refinance rArr non-currentbull If an entity without discretion to refinance rArr current
bull A non-current financial liability is payable on demand with a breach on a condition of its loan agreement on or before the BS datendash If the lender agreed not to demand payment
bull after the BS date rArr current (only disclosed as non-adjusting event)
bull by the BS date rArr non-current
ImplicationImplication
copy 2005-07 Nelson 72
Current LiabilitiesCaseCase
Note 12 to Interim Report 2006bull Breach of loan covenants
bull As at 30 June 2006 in respect of certain bank loans with an aggregate carrying amount of HK$1529806000 the Group breached certain financial covenants of the banks loans
bull Since the lenders have not agreed to waive its right to demand immediate payment as at the balance sheet date the loans have been classified as current liabilities in these financial statements at 30 June 2006
37
copy 2005-07 Nelson 73
Current Assets and LiabilitiesExampleExample
Can the following be classified as current assetsbull 3-month fixed deposits pledged to a bank to secure
a mortgage loan of 5 yearsbull 2-year fixed deposits with a bank
Can the following be classified as current assetsbull 3-month fixed deposits pledged to a bank to secure
a mortgage loan of 5 yearsbull 2-year fixed deposits with a bank
Can the following be classified as non-current liabilitiesbull 5-year term loan matured after year end but renewed
for another 5 years after year end (before the issuanceof the financial statements)
bull 2-year term loan to be matured with 12 months and theentity has a right to renew for another 2 years
Can the following be classified as non-current liabilitiesbull 5-year term loan matured after year end but renewed
for another 5 years after year end (before the issuanceof the financial statements)
bull 2-year term loan to be matured with 12 months and theentity has a right to renew for another 2 years
timestimes
times
radic
copy 2005-07 Nelson 74
Balance Sheetbull As a minimum the face of the balance sheet shall
include line items that present the following amountsa) property plant and equipmentb) investment propertyc) intangible assetsd) financial assets (excl amounts shown under (e) (h) and (I))e) investments accounted for using the equity methodf) biological assetsg) inventoriesh) trade and other receivablesi) cash and cash equivalentsj) trade and other payablesk) provisionsl) financial liabilities (excl amounts shown under (j) and (k))m) liabilities and assets for current tax as defined in HKAS 12 Income Taxesn) deferred tax liabilities and deferred tax assets as defined in HKAS 12o) minority interest presented within equity andp) issued capital and reserves attributable to equity holders of the parent
38
copy 2005-07 Nelson 75
Balance Sheetbull The face of the balance sheet shall also include line
items that present the following amountsa) The total of assets classified as held for sale and
assets included in disposal groups classified as held for sale in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations and
b) Liabilities included in disposal groups classified as held for sale in accordance with IFRS 5
copy 2005-07 Nelson 76
Balance Sheetbull Additional line items headings and subtotals shall
be presented on the face of the balance sheet when such presentation is relevant to an understanding of the entityrsquos financial position
bull When an entity presents current and non-current assets and current and non-current liabilities as separate classifications on the face of its balance sheet ndash it shall not classify deferred tax assets
(liabilities) as current assets (liabilities)
39
copy 2005-07 Nelson 77
Balance Sheet
bull The use of different measurement bases for different classes of assets suggests that their nature or function differs and therefore that they should be presented as separate line itemsndash For example different classes of property plant and
equipment can be carried atbull Cost orbull Revalued amountsin accordance with IAS 16 PPE
In the past it use ldquomay needrdquoIn the past it use ldquomay needrdquo
copy 2005-07 Nelson 78
Balance Sheet
Galaxy Entertainment Group LimitedConsolidated balance sheet as at 31122005
CaseCase
40
copy 2005-07 Nelson 79
Balance Sheet
Melco Development Limited (新濠國際發展有限公司)Consolidated balance sheet as at 31122005
CaseCase
copy 2005-07 Nelson 80
Income Statement Minimum requirements on the face of the income statementbull As a minimum the face of the income statement shall include line items
that present the following amounts for the perioda) revenueb) finance costsc) share of the profit or loss of associates and joint ventures accounted
for using the equity methodd) pre-tax gain or loss recognised on the disposal of assets or
settlement of liabilities attributable to discontinuing operationse) tax expense andf) profit or loss
41
copy 2005-07 Nelson 81
Income Statement bull The following items shall be disclosed on the face of the income
statement as allocations of profit or loss for the perioda) Profit or loss attributable to minority interest andb) Profit or loss attributable to equity holders of the parent
A similar requirement has been added for the statement of changes in equity and such allocated amounts are not to be presented as items of income or expense
copy 2005-07 Nelson 82
Income Statement
Melco Dev LtdConsolidated income statementas at 31122005
CaseCase
42
copy 2005-07 Nelson 83
Income Statement bull Not require to disclose the results of operating
activities as a line item on the face of the incomestatement
bull An entity shall not present any items of income and expense as extraordinary items either onthe face of the income statements or in the notes
Entities canrsquot use itEntities canrsquot use it
Entities can still show itEntities can still show it
copy 2005-07 Nelson 84
Income Statement Either on the face of the income statement or in the notesbull An entity shall present an analysis of expenses using a classification
based on eitherbull the nature of expenses orbull their function within the entity
whichever provides information that is reliable and more relevant
bull Entities classifying expenses by function shall disclose additional information on the nature of expenses includingbull depreciation and amortisation expense and bull employee benefits expense
43
copy 2005-07 Nelson 85
Income StatementCaseCase
Nature or FunctionNature or Nature or FunctionFunction
copy 2005-07 Nelson 86
Statement of Changes in Equity bull An entity shall present a statement of changes in equity showing on the
face of the statementa) profit or loss for the period b) each item of income and expense for the period that as required by
IFRSs is recognised directly in equity and the total of these itemsc) total income and expense for the period (calculated as the sum of (a) and
(b)) showing separately the total amounts attributablebull to equity holders of the parent andbull to minority interest and
d) for each component of equity the effects of changes in accounting policies and corrections of errors recognised in accordance with IAS 8
Any ChangeAny Change
A revised requirementbull A statement of changes in equity that comprises only these items
shall be titled a statement of recognised income and expenses
A revised requirementbull A statement of changes in equity that comprises only these items
shall be titled a statement of recognised income and expenses
44
copy 2005-07 Nelson 87
Statement of Changes in Equity bull An entity shall also present either on the face of the
statement of changes in equity or in the notesa) the amounts of transactions with equity holders acting in
their capacity as equity holders showing separately distributions to equity holders
b) the balance of retained earnings (ie accumulated profit or loss) at the beginning of the period and at the balance sheet date and the changes during the period and
c) a reconciliation between the carrying amount of each class of contributed equity and each reserve at the beginning and the end of the period separately disclosing each change
copy 2005-07 Nelson 88
Statement of Changes in Equity
Consolidated SCE as at 31122005
CaseCase
45
copy 2005-07 Nelson 89
Notes Structure (an entity is required to disclose the following)
bull The notes shalla) present information about the basis of preparation of the financial statements
and the specific accounting policies usedb) disclose the information required by HKFRSs that is not presented on the
face of the balance sheet income statement statement of changes in equity or cash flow statement and
c) provide additional information that is not presented on the face of the balance sheet income statement statement of changes in equity or cash flow statement but is relevant to an understanding of any of them
bull Notes shall as far as practicable be presented in a systematic manner bull Each item on the face of the balance sheet income statement statement
of changes in equity and cash flow statement shall be cross-referencedto any related information in the notes
copy 2005-07 Nelson 90
Notes Disclosures (an entity is required to disclose the following)
bull Disclosure of accounting policiesAn entity shall disclose in the summary of significant accounting policiesa) the measurement basis (or bases) used in preparing the financial
statements andb) the other accounting policies used that are relevant to an understanding of
the financial statements
46
copy 2005-07 Nelson 91
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)ndash The financial statements have been prepared in
accordance with Hong Kong Financial Reporting Standards (lsquolsquoHKFRSrsquorsquo) issued by the Hong Kong Institute of Certified Public Accountants bull under the historical cost convention as modified by the
revaluation of investment properties available-for-sale financial assets derivative financial instruments and other investments which are carried at fair values helliphellip
ndash The principal accounting policies applied in the preparation of these financial statements are set out below These policies have been consistently applied to all the years presented except for those stated in note 2(a) above
copy 2005-07 Nelson 92
Notes Disclosures (an entity is required to disclose the following)
bull Disclosure of accounting policiesndash The judgements apart from those involving estimations management has
madebull in the process of applying the entityrsquos accounting policies that have the
most significant effect on the amounts recognised in the financial statements (in the summary of significant accounting policies or other notes)
Examples ndash Management makes judgements in determininga) whether financial assets are held-to-maturity investmentsb) when substantially all the significant risks and rewards of
ownership of financial assets and lease assets are transferred to other entities
c) whether in substance particular sales of goods are financing arrangements and therefore do not give rise to revenue and
d) whether the substance of the relationship between the entity and a special purpose entity indicates that the special purpose entity is controlled by the entity
Examples ndash Management makes judgements in determininga) whether financial assets are held-to-maturity investmentsb) when substantially all the significant risks and rewards of
ownership of financial assets and lease assets are transferred to other entities
c) whether in substance particular sales of goods are financing arrangements and therefore do not give rise to revenue and
d) whether the substance of the relationship between the entity and a special purpose entity indicates that the special purpose entity is controlled by the entity
47
copy 2005-07 Nelson 93
Notes Disclosures (an entity is required to disclose the following)
bull Key sources of estimation uncertaintyndash Information about the key assumptions concerning the future and
other key sources of estimation uncertainty at the balance sheet datebull that have a significant risk of causing a material adjustment to the
carrying amounts of assets and liabilities within the next financial yearndash In respect of those assets and liabilities the notes shall include details of
a) their nature andb) their carrying amount as at the balance sheet date
Examples ndash in the absence of recently observed market prices used to measure the following assets and liabilities future-oriented estimates are necessary to measurebull the recoverable amount of classes of PPEbull the effect of technological obsolescence on inventories
Estimates involve assumptions about such items asbull the risk adjustment to cash flows or discount rates usedbull future changes in salaries and in prices affecting other costs
Examples ndash in the absence of recently observed market prices used to measure the following assets and liabilities future-oriented estimates are necessary to measurebull the recoverable amount of classes of PPEbull the effect of technological obsolescence on inventories
Estimates involve assumptions about such items asbull the risk adjustment to cash flows or discount rates usedbull future changes in salaries and in prices affecting other costs
copy 2005-07 Nelson 94
Notes
Esprit Holdings LimitedEsprit Holdings Limitedbull Critical Accounting Estimates and Judgements
ndash Estimates and judgements are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonableunder the circumstances
ndash Critical accounting estimates and assumptionsbull The Group makes estimates and assumptions concerning
the future The resulting accounting estimates will by definition seldom equal the related actual results
bull The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below helliphellip (including (1) useful life and impairment of trademarks and (2) income taxes)
CaseCase
48
copy 2005-07 Nelson 95
Notes
Melco Development Limited (新濠國際發展有限公司)Notes to the financial statements for the year ended 31122005ndash The key assumptions concerning the future and other key sources
of estimation uncertainty at the balance sheet date that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below helliphellip(The issues discussed includebull Allowances for inventories bull Estimated impairment of goodwill Income taxes)
CaseCase
copy 2005-07 Nelson 96
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)ndash Estimates and judgements used in preparing the
financial statements are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonable under the circumstances
ndash The Group makes estimates and assumptionsconcerning the future
ndash The resulting accounting estimates will by definition seldom equal the related actual results
ndash The estimates and assumptions that have a significant effect on the carrying amounts of assets and liabilities are discussed below hellip (including impairment of goodwill impairment of gaming
licence Useful lives of property plant and equipment fair value of investment properties hellip)
49
copy 2005-07 Nelson 97
Notes Disclosures (an entity is required to disclose the following)
bull Other disclosuresAn entity shall disclose in the notesa) the amount of dividends proposed or declared before the
financial statements were authorised for issue but not recognised as a distribution to equity holders during the period and the related amount per share(HK incorporated companies are required to show the aggregate amount which is recommended for distribution by way of dividend under a separate heading(s) in their balance sheet (HK Co Ord 10th Sch para 9(1)(e)) and
b) the amount of any cumulative preference dividends not recognised
copy 2005-07 Nelson 98
Notes Disclosures (an entity is required to disclose the following)
An entity shall disclose the following if not disclosedelsewhere in information published with the financial statementsa) the domicile and legal form of the entity
its country of incorporation andthe address of its registered office(or principal place of business if different from the registered office)
b) a description of the nature of the entityrsquos operations and its principal activities and
c) the name of the parent and the ultimate parent of the group
ldquoshall discloserdquo now instead of ldquoencouraged to discloserdquo
ldquoshall discloserdquo now instead of ldquoencouraged to discloserdquo
bull Other disclosures
Any specialAny special
50
copy 2005-07 Nelson 99
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)bull The principal activities of Galaxy Entertainment Group
Ltd (the lsquolsquoCompanyrsquorsquo) (formerly known as K WahConstruction Materials Ltd) and its subsidiaries (together the lsquolsquoGrouprsquorsquo) are tondash operate in casino games of chance or games of other forms
in Macau (and) manufacture sale and distribution of construction materials in HK Macau and Mainland China
bull The Company is ndash a limited liability company incorporated in Hong Kong and ndash has its listing on the Main Board of The Stock Exchange of
Hong Kong Limitedbull The address of its registered office and its principal place
of business is Room 1606 16th Floor Hutchison House 10 Harcourt Road Central HK
copy 2005-07 Nelson 100
Effective Date
bull An entity shall apply IAS 1 for annual periods beginning on or after 1 Jan 2005
ndash Earlier application is encouragedndash If an entity applies IAS 1 for an earlier period it shall
disclose this factbull For the amendments relating to the Statement of
Changes in Equityndash An entity shall apply it for annual periods beginning on
or after 1 Jan 2006ndash If an entity applies the amendments to IAS 19
Employee Benefits ndash Actuarial Gains and Losses Group Plans and Disclosures for an earlier period that amendment shall be applied for that earlier period
51
copy 2005-07 Nelson 101
Todayrsquos Agenda
Capital Disclosures (Amendments to IAS 1)
Capital Disclosures (Amendments to IAS 1)
copy 2005-07 Nelson 102
Capital Disclosures ndash For 2007
52
copy 2005-07 Nelson 103
Capital Disclosures
What is capital Is it helliphellip
CapitalCapital AssetsAssets LiabilitiesLiabilities= ndash
bull IAS 1BC47 considers ldquowhether an entity can have a view of capital that differs from what IFRSs define as equityrdquo
bull It further clarifies that although for the purposes of this disclosure capital would often equate with equity as defined in IFRSsndash it might also include or exclude some components
bull It also noted that the capital disclosure in IAS 1 is intended to give entities the opportunity to describendash how they view the components of capital they manage if this is
different from what IFRSs define as equity helliphellip
copy 2005-07 Nelson 104
EquityEquityEquity AssetsAssets LiabilitiesLiabilities= ndash
Capital Disclosures
Based on the Framework amp IFRSs the accounting equation should be
CapitalCapital AssetsAssets LiabilitiesLiabilities= ndash
bull An entityrsquos capital may be part of its equity plus part of its liabilities depending on how it manage ldquoits capitalrdquo helliphellip
53
copy 2005-07 Nelson 105
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowinga) qualitative information about its objectives policies and processes for
managing capital including (but not limited to)i) a description of what it manages as capitalii) when an entity is subject to externally imposed capital requirements
the nature of those requirements and how those requirements are incorporated into the management of capital and
iii) how it is meeting its objectives for managing capital
bull To comply with the capital disclosures the entity discloses thefollowinga) qualitative information about its objectives policies and processes for
managing capital including (but not limited to)i) a description of what it manages as capitalii) when an entity is subject to externally imposed capital requirements
the nature of those requirements and how those requirements are incorporated into the management of capital and
iii) how it is meeting its objectives for managing capital
copy 2005-07 Nelson 106
Capital Disclosures
Example disclosurebull The Grouprsquos objectives when managing capital are
ndash to safeguard the entityrsquos ability to continue as a going concern
bull so that it can continue to provide returns for shareholders and benefits for other stakeholders and
ndash to provide an adequate return to shareholders by pricing products and services commensurately with the level of risk
bull The Group sets the amount of capital in proportion to risk
ExampleExample
ObjectivesObjectives
54
copy 2005-07 Nelson 107
Capital Disclosures
bull The Group manages the capital structure and makes adjustments to it in the light ofndash changes in economic conditions and ndash the risk characteristics of the underlying assets
bull In order to maintain or adjust the capital structure the Group mayndash adjust the amount of dividends paid to shareholders ndash return capital to shareholders ndash issue new shares or ndash sell assets to reduce debt
ExampleExample
Example disclosure
HowHow
copy 2005-07 Nelson 108
Capital Disclosures
bull Consistently with others in the industry the Group monitors capital on the basis of ndash the debt-to-adjusted capital ratio
bull This ratio is calculated as net debt divide adjusted capital
ExampleExample
Example disclosure
HowHow
bull Net debt is calculated as ndash Total debt (as shown in the
balance sheet)ndash Less cash amp cash equivalents
bull Net debt is calculated as ndash Total debt (as shown in the
balance sheet)ndash Less cash amp cash equivalents
bull Adjusted capital ndash comprises all components of
equity (ie share capital share premium minority interest retained earnings and revaluation reserve) ndash other than amounts
recognised in equity relating to cash flow hedges and
ndash includes some forms of subordinated debt
bull Adjusted capital ndash comprises all components of
equity (ie share capital share premium minority interest retained earnings and revaluation reserve) ndash other than amounts
recognised in equity relating to cash flow hedges and
ndash includes some forms of subordinated debt
55
copy 2005-07 Nelson 109
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowing
bull To comply with the capital disclosures the entity discloses thefollowingb) summary quantitative data about what it manages as capital
Some entities regard some financial liabilities (eg some forms of subordinated debt) as part of capitalOther entities regard capital as excluding some components of equity (eg components arising from cash flow hedges)
c) any changes in (a) and (b) from the previous period
copy 2005-07 Nelson 110
Capital Disclosures
Example disclosure (continued from previous example)
ExampleExample
bull During 20X4 the Grouprsquos strategy which was unchanged from 20X3 was to maintain the debt-to-adjusted capital ratio at the lower end of the range 61 to 71 in order to secure access to finance at a reasonable cost by maintaining a BB credit rating The debt-to-adjusted capital ratios at 31 December 20X4 and at 31 December 20X3 were as follows
3112X4 ($rsquoM) 3112X3 ($rsquoM) Total debt 1000 1100 Less cash and cash equivalents (90) (150)Net debt 910 950
Total equity 110 105 Add subordinated debt instruments 38 38 Less amounts recognised in equity
relating to cash flow hedges (10) (5)Adjusted capital 138 138
Debt-to-adjusted capital ratio 66 69
56
copy 2005-07 Nelson 111
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowing
bull To comply with the capital disclosures the entity discloses thefollowingd) whether during the period it complied with any externally imposed capital
requirements to which it is subjecte) when the entity has not complied with such externally imposed capital
requirements the consequences of such non-complianceThese disclosures shall be based on the information provided internally to the entityrsquos key management personnel
copy 2005-07 Nelson 112
Capital DisclosuresExampleExample
Example disclosurebull Entity A filed its quarterly regulatory capital return for
30 September 20X7 on 20 October 20X7 bull At that date Entity Arsquos regulatory capital was below
the capital requirement imposed by Regulator B by $1 million
bull As a result Entity A was required to submit a plan to the regulator indicating how it would increase its regulatory capital to the amount required
bull Entity A submitted a plan that entailed selling part of its unquoted equities portfolio with a carrying amount of $115 million in the fourth quarter of 20X7
bull In the fourth quarter of 20X7 Entity A sold its fixed interest investment portfolio for $126 million and met its regulatory capital requirement
For example SFC or banks
For example SFC or banks
57
copy 2005-07 Nelson 113
Capital DisclosuresCaseCase
bull Early adopted capital disclosure in 2005 and itsannual report states that (extract only)ndash The Grouprsquos objectives when managing capital are
bull To safeguard the Grouprsquos ability to continue as a going concern so that it continues to provide returns for shareholders and benefits for other stakeholders
bull To support the Grouprsquos stability and growth andbull To provide capital for the purpose of strengthening the
Grouprsquos risk management capability
copy 2005-07 Nelson 114
Capital DisclosuresCaseCase
ndash The Group actively and regularly reviews and manages its capital structure to ensure optimal capital structure and shareholder returns taking into consideration the future capital requirements of the Group and capital efficiency helliphellip
ndash The Group adopts a dividend policy helliphellip while retaining 10 per cent of the profit as capital of the Group for future use
ndash The Group has set aside $1500 million of retained earnings for the purpose of strengthening the risk management regime of the clearing houses and supporting their roles as central counterparties
ndash As in prior years the Group monitors capital by reviewing the level of capital that is at the disposal of the Group (ldquoadjusted capitalrdquo) Adjusted capital comprises all components of shareholdersrsquo equity other than the hedging reserve relating to cash flow hedges designated reserves and investment revaluation reserve helliphellip
bull Early adopted capital disclosure in 2005 and itsannual report states that (extract only)
58
copy 2005-07 Nelson 115
Capital Disclosures ndash Transition
bull An entity shall apply the requirements of capital disclosure for
ndash annual periods beginning on or after 1 January 2007
bull Early application is encouraged
copy 2005-07 Nelson 116
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk
59
copy 2005-07 Nelson 117
QampA SessionQampA SessionQampA Session
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk
23
copy 2005-07 Nelson 45
b) Going Concern
3 Overall Consideration
bull When preparing financial statements management shall make an assessment of an entityrsquos ability to continue as a going concern
bull Financial statements shall be prepared on a going concern basisndash unless management either intends to liquidate the entity or to cease
trading or has no realistic alternative but to do so bull When management is aware in making its assessment of
material uncertainties related to events or conditions that may cast significant doubt upon the entityrsquos ability to continue as a going concern those uncertainties shall be disclosed
bull When financial statements are not prepared on a going concern basis that fact shall be disclosed together with the basis on which the financial statements are prepared and the reason why the entity is not regarded as a going concern
copy 2005-07 Nelson 46
c) Accrual Basis of Accounting
3 Overall Consideration
bull An entity shall prepare its financial statements except for cash flow information using the accrual basis of accounting
bull When the accrual basis of accounting is used items are recognised as assets liabilities equity income and expensesndash when they satisfy the definitions and recognition criteria for those
elements in the Framework
24
copy 2005-07 Nelson 47
3 Overall Consideration
bull The presentation and classification of items in the financial statements shall be retained from one period to the next unlessa) it is apparent
bull following a significant change in the nature of the entityrsquos operations (eg significant acquisition or disposal) or
bull a review of its financial statementsthat another presentation or classification would be more appropriatehaving regard to the criteria for the selection and application of accounting policies in IAS 8 or
b) a IFRS requires a change in presentation
d) Consistency of presentation
An entity changes the presentation of its financial statements only ifndash the changed presentation provides information that is reliable and is
more relevant to users of the financial statements andndash the revised structure is likely to continue so that comparability is not
impaired
An entity changes the presentation of its financial statements only ifndash the changed presentation provides information that is reliable and is
more relevant to users of the financial statements andndash the revised structure is likely to continue so that comparability is not
impaired
copy 2005-07 Nelson 48
3 Overall Consideration
bull Each material class of similar items shall bendash presented separately in the financial
statementsbull Items of a dissimilar nature or function shall be
ndash presented separately unless they are immaterial
bull Applying the concept of materiality means that a specific disclosure requirement in a IFRS neednot be satisfied if the information is not material
e) Materiality and Aggregation
What is the situation of recognition and measurement
What is the What is the situation of situation of recognition and recognition and measurementmeasurement
25
copy 2005-07 Nelson 49
3 Overall Consideration
bull What is materialndash Omissions or misstatements of items are
material if they could individually or collectively influence the economic decisions of users taken on the basis of the financial statements
ndash Materiality depends on the size and nature of the omission or misstatement judged in the surrounding circumstancesbull The size or nature of the item or a combination
of both could be the determining factor
e) Materiality and Aggregation
copy 2005-07 Nelson 50
3 Overall Consideration
bull Assets and liabilities and income and expenses shall not be offsetndash unless required or permitted by a IFRS
bull It is important that assets and liabilities and income and expenses are reported separatelyndash Measuring assets net of valuation allowances mdash
for example obsolescence allowances on inventories and doubtful debts allowances on receivables mdash is not offsetting
f) Offsetting
26
copy 2005-07 Nelson 51
3 Overall Consideration
bull During ordinary activities some transactions that do not generate revenue but are incidental to the main revenue-generating activitiesndash The results of such transactions are presented
when this presentation reflects the substance of the transaction or other event by netting any income with related expenses arising on the same transaction
f) Offsetting
copy 2005-07 Nelson 52
3 Overall Consideration
bull For examplea) gains and losses on the disposal of non-current
assets including investments and operating assets- are reported by deducting from the proceeds on
disposal the carrying amount of the asset and related selling expenses and
b) expenditure related to a provision that is- recognised in accordance with IAS 37 and - reimbursed under a contractual arrangement with
a third party (for example a supplierrsquos warranty agreement)
may be netted against the related reimbursement
f) Offsetting
ExampleExample
27
copy 2005-07 Nelson 53
3 Overall Consideration
bull Gains and losses arising from a group of similar transactions are reported on a net basisndash For example
bull foreign exchange gains and losses or bull gains and losses arising on financial instruments held for trading
bull Such gains and losses are however reported separately if they are material
bull Gains and losses arising from a group of similar transactions are reported on a net basisndash For example
bull foreign exchange gains and losses or bull gains and losses arising on financial instruments held for trading
bull Such gains and losses are however reported separately if they are material
Can foreign exchange gains and losses be offset
ExampleExample
copy 2005-07 Nelson 54
3 Overall Consideration
bull Except when a IFRS permits or requires otherwise ndash comparative information shall be disclosed in
respect of the previous period for all amountsreported in the financial statements
bull When the presentation or classification of items in the financial statements is amended ndash comparative amounts shall be reclassified unless
the reclassification is impracticable
g) Comparative information
28
copy 2005-07 Nelson 55
Amended requirementsAmended requirements
3 Overall Consideration
bull When comparative amounts are reclassified an entity shall disclosea) the nature of the reclassificationb) the amount of each item or class of items that is
reclassified andc) the reason for the reclassification
g) Comparative information
bull In the pastonly the reason for and a description of the nature of materialreclassifications should be disclosedExemption for disclosure of comparative information for the reconciliation of movements in fixed assets is also removed
bull In the pastonly the reason for and a description of the nature of materialreclassifications should be disclosedExemption for disclosure of comparative information for the reconciliation of movements in fixed assets is also removed
copy 2005-07 Nelson 56
3 Overall Consideration
Melco Development Limited (新濠國際發展有限公司)Notes to the financial statements for year ended 31122005ndash Because HKAS 32 requires retrospective application comparative
figures for 2004 have been restated (see Note 2A for the financial impact)
CaseCase
29
copy 2005-07 Nelson 57
3 Overall Consideration
Galaxy Entertainment Group LimitedNotes to the financial statements (ye 31122005)ndash All changes in the accounting policies require
retrospective application except HKAS 39 and HKFRS 2 for which transitional provisions are applied
ndash As a result the 2004 comparative figures have also been restated or amended in accordance with the relevant requirements
ndash The effects of all the changes in accounting policies are summarised in notes (b) and (c) below
CaseCase
copy 2005-07 Nelson 58
bull Identification of the financial statementsbull Reporting periodbull Balance sheet
1 CurrentNon-current distinction2 Current assets3 Current liabilities4 Information to be presented on the face of the balance sheet5 Information to be presented either on the face of the balance sheet or in
the notesbull Income statement
1 Profit or loss for the period2 Information to be presented on the face of the income statement3 Information to be presented either on the face of the income statement or
in the notesbull Statement of changes in equitybull Cash flow statementbull Notes
4 Structure and Content
30
copy 2005-07 Nelson 59
Identification of Financial Statements
bull The financial statements shall be identified clearly and distinguished from other information in the same published document
bull The following information shall be displayed prominently and repeated when it is necessary for a proper understanding of the information presented
a) the name of the reporting entity or other means of identification and any change in that information from the preceding balance sheet date
b) whether the financial statements cover the individual entity or a group of entities
c) the balance sheet date or the period covered by the financial statements whichever is appropriate to that component of the financial statements
d) the presentation currency as defined in HKAS 21 The Effects of Changes in Foreign Exchange Rates and
e) the level of rounding used in presenting amounts in the financial statements
copy 2005-07 Nelson 60
Identification of Financial Statements
bull Can the units of the presentation currency be rounded to thousands or millions
bull Financial statements are often made more understandableby presenting information in thousands or millions of units of the presentation currency
bull This is acceptable as long asndash the level of rounding in presentation is disclosed and ndash material information is not omitted
bull Financial statements are often made more understandableby presenting information in thousands or millions of units of the presentation currency
bull This is acceptable as long asndash the level of rounding in presentation is disclosed and ndash material information is not omitted
ExampleExample
31
copy 2005-07 Nelson 61
Reporting Period
bull Financial statements shall be presented at least annually
bull When an entityrsquos balance sheet date changes and the annual financial statements are presented for a period longer or shorter than one year an entity shall disclose in addition to the period covered by the financial statementsa) the reason for using a longer or shorter period andb) the fact that comparative amounts for the income
statement statement of changes in equity cash flow statement and related notes are not entirely comparable
copy 2005-07 Nelson 62
Reporting Period
bull Can a set of financial statements cover 52-week instead of a year
bull Normally financial statements are consistently prepared covering a one-year period
bull However for practical reasons some entities prefer to report for example for a 52-week period
bull IAS 1 does not preclude this practice because the resulting financial statements are unlikely to be materially different from those that would be presented for one year
bull Normally financial statements are consistently prepared covering a one-year period
bull However for practical reasons some entities prefer to report for example for a 52-week period
bull IAS 1 does not preclude this practice because the resulting financial statements are unlikely to be materially different from those that would be presented for one year
ExampleExample
32
copy 2005-07 Nelson 63
CurrentNon-current Distinction
bull An entity shall presentndash current and non-current assets andndash current and non-current liabilitiesas separate classifications on the face of its balance sheet
bull Except when a presentation based on liquidity provides informationndash If that information is reliable and is more relevantndash When that exception applies all assets and liabilities shall be
presented broadly in order of liquidity
copy 2005-07 Nelson 64
CurrentNon-current Distinction
bull Whichever method of presentation is adopted for each asset and liability line item that combines amounts expected to be recovered or settled a) no more than 12 months after the balance sheet date
andb) more than 12 months after the balance sheet date(ie combines both current and non-current)
an entity shall disclose the amount expected to be recovered or settled after more than 12 months
33
copy 2005-07 Nelson 65
New requirementsNew requirements
Current Assets
bull An asset shall be classified as current when it satisfies any of the following criteriaa) it is expected to be realised in or is intended for sale or
consumption in the entityrsquos normal operating cycle b) it is held primarily for the purpose of being tradedc) it is expected to be realised within 12 months after the balance
sheet date ord) it is cash or a cash equivalent
bull unless it is restricted from being exchanged or used to settle aliability for at least 12 months after the balance sheet date
bull All other assets shall be classified as non-current
Examplesbull Deposits pledged to bank (how long)bull Fixed deposits over 1 year maturity
Examplesbull Deposits pledged to bank (how long)bull Fixed deposits over 1 year maturity
What is itWhat is it
copy 2005-07 Nelson 66
Current Assets
bull What is operating cycle
bull The operating cycle of an entity is the time between ndash the acquisition of assets for processing and ndash their realisation in cash or cash equivalents
bull When the entityrsquos normal operating cycle is not clearly identifiable ndash its duration is assumed to be 12 months
bull The operating cycle of an entity is the time between ndash the acquisition of assets for processing and ndash their realisation in cash or cash equivalents
bull When the entityrsquos normal operating cycle is not clearly identifiable ndash its duration is assumed to be 12 months
ExampleExample
34
copy 2005-07 Nelson 67
Current Assets CaseCase
copy 2005-07 Nelson 68
Current Assets
bull Can a non-current asset reclassified if it fulfil the definition of current asset later
bull Assets classified as non-current in accordancewith IAS 1 shall not be reclassified as current assetsndash until they meet the criteria to be classified as held for sale in
accordance with IFRS 5bull Assets of a class that an entity would normally regard as non-
current that are acquired exclusively with a view to resale shall notbe classified as currentndash unless they meet the criteria to be classified as held for sale in
accordance with IFRS 5
bull Assets classified as non-current in accordancewith IAS 1 shall not be reclassified as current assetsndash until they meet the criteria to be classified as held for sale in
accordance with IFRS 5bull Assets of a class that an entity would normally regard as non-
current that are acquired exclusively with a view to resale shall notbe classified as currentndash unless they meet the criteria to be classified as held for sale in
accordance with IFRS 5
No non-current assets can be classified as current unless the criteria in IFRS 5 are fulfilled mainlybull Available for immediate salebull Highly probable to make the sale
35
copy 2005-07 Nelson 69
Is it currentIs it current
Current Assets
bull In its 2005 Interim Report full set of HKFRS was adopted and the report set out thatndash Available-for-sale financial assets are non-
derivatives that are eitherbull designated in this category orbull not classified in any of the other categories (ie
loans and receivables financial assets at fair value through profit or loss and held-to-maturity investments)
CaseCase
Similar in 2005 Annual Report
Similar in 2005 Annual Report
ndash They are included in non-current assetsbull unless management intends to dispose of the
investment within 12 months of the balance sheet date
copy 2005-07 Nelson 70
New requirementsNew requirements
Current Liabilities
bull A liability shall be classified as current when it satisfies any of the following criteriaa) it is expected to be settled in the entityrsquos normal operating cycleb) it is held primarily for the purpose of being tradedc) it is due to be settled within 12 months after the balance sheet
date ord) the entity does not have an unconditional right to defer settlement
of the liability for at least 12 months after the balance sheet date
bull All other liabilities shall be classified as non-current
ImplicationImplication
36
copy 2005-07 Nelson 71
Current Liabilities Revised rules on classifying a liability as current or non-currentbull A liability held for being traded rArr currentbull A financial liability due within 12 months after the BS date rArr current
ndash even if an agreement to refinance on a long-term basis is completed after the BS date (only disclosed as non-adjusting event)
bull If an entity has discretion to refinance rArr non-currentbull If an entity without discretion to refinance rArr current
bull A non-current financial liability is payable on demand with a breach on a condition of its loan agreement on or before the BS datendash If the lender agreed not to demand payment
bull after the BS date rArr current (only disclosed as non-adjusting event)
bull by the BS date rArr non-current
ImplicationImplication
copy 2005-07 Nelson 72
Current LiabilitiesCaseCase
Note 12 to Interim Report 2006bull Breach of loan covenants
bull As at 30 June 2006 in respect of certain bank loans with an aggregate carrying amount of HK$1529806000 the Group breached certain financial covenants of the banks loans
bull Since the lenders have not agreed to waive its right to demand immediate payment as at the balance sheet date the loans have been classified as current liabilities in these financial statements at 30 June 2006
37
copy 2005-07 Nelson 73
Current Assets and LiabilitiesExampleExample
Can the following be classified as current assetsbull 3-month fixed deposits pledged to a bank to secure
a mortgage loan of 5 yearsbull 2-year fixed deposits with a bank
Can the following be classified as current assetsbull 3-month fixed deposits pledged to a bank to secure
a mortgage loan of 5 yearsbull 2-year fixed deposits with a bank
Can the following be classified as non-current liabilitiesbull 5-year term loan matured after year end but renewed
for another 5 years after year end (before the issuanceof the financial statements)
bull 2-year term loan to be matured with 12 months and theentity has a right to renew for another 2 years
Can the following be classified as non-current liabilitiesbull 5-year term loan matured after year end but renewed
for another 5 years after year end (before the issuanceof the financial statements)
bull 2-year term loan to be matured with 12 months and theentity has a right to renew for another 2 years
timestimes
times
radic
copy 2005-07 Nelson 74
Balance Sheetbull As a minimum the face of the balance sheet shall
include line items that present the following amountsa) property plant and equipmentb) investment propertyc) intangible assetsd) financial assets (excl amounts shown under (e) (h) and (I))e) investments accounted for using the equity methodf) biological assetsg) inventoriesh) trade and other receivablesi) cash and cash equivalentsj) trade and other payablesk) provisionsl) financial liabilities (excl amounts shown under (j) and (k))m) liabilities and assets for current tax as defined in HKAS 12 Income Taxesn) deferred tax liabilities and deferred tax assets as defined in HKAS 12o) minority interest presented within equity andp) issued capital and reserves attributable to equity holders of the parent
38
copy 2005-07 Nelson 75
Balance Sheetbull The face of the balance sheet shall also include line
items that present the following amountsa) The total of assets classified as held for sale and
assets included in disposal groups classified as held for sale in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations and
b) Liabilities included in disposal groups classified as held for sale in accordance with IFRS 5
copy 2005-07 Nelson 76
Balance Sheetbull Additional line items headings and subtotals shall
be presented on the face of the balance sheet when such presentation is relevant to an understanding of the entityrsquos financial position
bull When an entity presents current and non-current assets and current and non-current liabilities as separate classifications on the face of its balance sheet ndash it shall not classify deferred tax assets
(liabilities) as current assets (liabilities)
39
copy 2005-07 Nelson 77
Balance Sheet
bull The use of different measurement bases for different classes of assets suggests that their nature or function differs and therefore that they should be presented as separate line itemsndash For example different classes of property plant and
equipment can be carried atbull Cost orbull Revalued amountsin accordance with IAS 16 PPE
In the past it use ldquomay needrdquoIn the past it use ldquomay needrdquo
copy 2005-07 Nelson 78
Balance Sheet
Galaxy Entertainment Group LimitedConsolidated balance sheet as at 31122005
CaseCase
40
copy 2005-07 Nelson 79
Balance Sheet
Melco Development Limited (新濠國際發展有限公司)Consolidated balance sheet as at 31122005
CaseCase
copy 2005-07 Nelson 80
Income Statement Minimum requirements on the face of the income statementbull As a minimum the face of the income statement shall include line items
that present the following amounts for the perioda) revenueb) finance costsc) share of the profit or loss of associates and joint ventures accounted
for using the equity methodd) pre-tax gain or loss recognised on the disposal of assets or
settlement of liabilities attributable to discontinuing operationse) tax expense andf) profit or loss
41
copy 2005-07 Nelson 81
Income Statement bull The following items shall be disclosed on the face of the income
statement as allocations of profit or loss for the perioda) Profit or loss attributable to minority interest andb) Profit or loss attributable to equity holders of the parent
A similar requirement has been added for the statement of changes in equity and such allocated amounts are not to be presented as items of income or expense
copy 2005-07 Nelson 82
Income Statement
Melco Dev LtdConsolidated income statementas at 31122005
CaseCase
42
copy 2005-07 Nelson 83
Income Statement bull Not require to disclose the results of operating
activities as a line item on the face of the incomestatement
bull An entity shall not present any items of income and expense as extraordinary items either onthe face of the income statements or in the notes
Entities canrsquot use itEntities canrsquot use it
Entities can still show itEntities can still show it
copy 2005-07 Nelson 84
Income Statement Either on the face of the income statement or in the notesbull An entity shall present an analysis of expenses using a classification
based on eitherbull the nature of expenses orbull their function within the entity
whichever provides information that is reliable and more relevant
bull Entities classifying expenses by function shall disclose additional information on the nature of expenses includingbull depreciation and amortisation expense and bull employee benefits expense
43
copy 2005-07 Nelson 85
Income StatementCaseCase
Nature or FunctionNature or Nature or FunctionFunction
copy 2005-07 Nelson 86
Statement of Changes in Equity bull An entity shall present a statement of changes in equity showing on the
face of the statementa) profit or loss for the period b) each item of income and expense for the period that as required by
IFRSs is recognised directly in equity and the total of these itemsc) total income and expense for the period (calculated as the sum of (a) and
(b)) showing separately the total amounts attributablebull to equity holders of the parent andbull to minority interest and
d) for each component of equity the effects of changes in accounting policies and corrections of errors recognised in accordance with IAS 8
Any ChangeAny Change
A revised requirementbull A statement of changes in equity that comprises only these items
shall be titled a statement of recognised income and expenses
A revised requirementbull A statement of changes in equity that comprises only these items
shall be titled a statement of recognised income and expenses
44
copy 2005-07 Nelson 87
Statement of Changes in Equity bull An entity shall also present either on the face of the
statement of changes in equity or in the notesa) the amounts of transactions with equity holders acting in
their capacity as equity holders showing separately distributions to equity holders
b) the balance of retained earnings (ie accumulated profit or loss) at the beginning of the period and at the balance sheet date and the changes during the period and
c) a reconciliation between the carrying amount of each class of contributed equity and each reserve at the beginning and the end of the period separately disclosing each change
copy 2005-07 Nelson 88
Statement of Changes in Equity
Consolidated SCE as at 31122005
CaseCase
45
copy 2005-07 Nelson 89
Notes Structure (an entity is required to disclose the following)
bull The notes shalla) present information about the basis of preparation of the financial statements
and the specific accounting policies usedb) disclose the information required by HKFRSs that is not presented on the
face of the balance sheet income statement statement of changes in equity or cash flow statement and
c) provide additional information that is not presented on the face of the balance sheet income statement statement of changes in equity or cash flow statement but is relevant to an understanding of any of them
bull Notes shall as far as practicable be presented in a systematic manner bull Each item on the face of the balance sheet income statement statement
of changes in equity and cash flow statement shall be cross-referencedto any related information in the notes
copy 2005-07 Nelson 90
Notes Disclosures (an entity is required to disclose the following)
bull Disclosure of accounting policiesAn entity shall disclose in the summary of significant accounting policiesa) the measurement basis (or bases) used in preparing the financial
statements andb) the other accounting policies used that are relevant to an understanding of
the financial statements
46
copy 2005-07 Nelson 91
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)ndash The financial statements have been prepared in
accordance with Hong Kong Financial Reporting Standards (lsquolsquoHKFRSrsquorsquo) issued by the Hong Kong Institute of Certified Public Accountants bull under the historical cost convention as modified by the
revaluation of investment properties available-for-sale financial assets derivative financial instruments and other investments which are carried at fair values helliphellip
ndash The principal accounting policies applied in the preparation of these financial statements are set out below These policies have been consistently applied to all the years presented except for those stated in note 2(a) above
copy 2005-07 Nelson 92
Notes Disclosures (an entity is required to disclose the following)
bull Disclosure of accounting policiesndash The judgements apart from those involving estimations management has
madebull in the process of applying the entityrsquos accounting policies that have the
most significant effect on the amounts recognised in the financial statements (in the summary of significant accounting policies or other notes)
Examples ndash Management makes judgements in determininga) whether financial assets are held-to-maturity investmentsb) when substantially all the significant risks and rewards of
ownership of financial assets and lease assets are transferred to other entities
c) whether in substance particular sales of goods are financing arrangements and therefore do not give rise to revenue and
d) whether the substance of the relationship between the entity and a special purpose entity indicates that the special purpose entity is controlled by the entity
Examples ndash Management makes judgements in determininga) whether financial assets are held-to-maturity investmentsb) when substantially all the significant risks and rewards of
ownership of financial assets and lease assets are transferred to other entities
c) whether in substance particular sales of goods are financing arrangements and therefore do not give rise to revenue and
d) whether the substance of the relationship between the entity and a special purpose entity indicates that the special purpose entity is controlled by the entity
47
copy 2005-07 Nelson 93
Notes Disclosures (an entity is required to disclose the following)
bull Key sources of estimation uncertaintyndash Information about the key assumptions concerning the future and
other key sources of estimation uncertainty at the balance sheet datebull that have a significant risk of causing a material adjustment to the
carrying amounts of assets and liabilities within the next financial yearndash In respect of those assets and liabilities the notes shall include details of
a) their nature andb) their carrying amount as at the balance sheet date
Examples ndash in the absence of recently observed market prices used to measure the following assets and liabilities future-oriented estimates are necessary to measurebull the recoverable amount of classes of PPEbull the effect of technological obsolescence on inventories
Estimates involve assumptions about such items asbull the risk adjustment to cash flows or discount rates usedbull future changes in salaries and in prices affecting other costs
Examples ndash in the absence of recently observed market prices used to measure the following assets and liabilities future-oriented estimates are necessary to measurebull the recoverable amount of classes of PPEbull the effect of technological obsolescence on inventories
Estimates involve assumptions about such items asbull the risk adjustment to cash flows or discount rates usedbull future changes in salaries and in prices affecting other costs
copy 2005-07 Nelson 94
Notes
Esprit Holdings LimitedEsprit Holdings Limitedbull Critical Accounting Estimates and Judgements
ndash Estimates and judgements are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonableunder the circumstances
ndash Critical accounting estimates and assumptionsbull The Group makes estimates and assumptions concerning
the future The resulting accounting estimates will by definition seldom equal the related actual results
bull The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below helliphellip (including (1) useful life and impairment of trademarks and (2) income taxes)
CaseCase
48
copy 2005-07 Nelson 95
Notes
Melco Development Limited (新濠國際發展有限公司)Notes to the financial statements for the year ended 31122005ndash The key assumptions concerning the future and other key sources
of estimation uncertainty at the balance sheet date that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below helliphellip(The issues discussed includebull Allowances for inventories bull Estimated impairment of goodwill Income taxes)
CaseCase
copy 2005-07 Nelson 96
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)ndash Estimates and judgements used in preparing the
financial statements are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonable under the circumstances
ndash The Group makes estimates and assumptionsconcerning the future
ndash The resulting accounting estimates will by definition seldom equal the related actual results
ndash The estimates and assumptions that have a significant effect on the carrying amounts of assets and liabilities are discussed below hellip (including impairment of goodwill impairment of gaming
licence Useful lives of property plant and equipment fair value of investment properties hellip)
49
copy 2005-07 Nelson 97
Notes Disclosures (an entity is required to disclose the following)
bull Other disclosuresAn entity shall disclose in the notesa) the amount of dividends proposed or declared before the
financial statements were authorised for issue but not recognised as a distribution to equity holders during the period and the related amount per share(HK incorporated companies are required to show the aggregate amount which is recommended for distribution by way of dividend under a separate heading(s) in their balance sheet (HK Co Ord 10th Sch para 9(1)(e)) and
b) the amount of any cumulative preference dividends not recognised
copy 2005-07 Nelson 98
Notes Disclosures (an entity is required to disclose the following)
An entity shall disclose the following if not disclosedelsewhere in information published with the financial statementsa) the domicile and legal form of the entity
its country of incorporation andthe address of its registered office(or principal place of business if different from the registered office)
b) a description of the nature of the entityrsquos operations and its principal activities and
c) the name of the parent and the ultimate parent of the group
ldquoshall discloserdquo now instead of ldquoencouraged to discloserdquo
ldquoshall discloserdquo now instead of ldquoencouraged to discloserdquo
bull Other disclosures
Any specialAny special
50
copy 2005-07 Nelson 99
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)bull The principal activities of Galaxy Entertainment Group
Ltd (the lsquolsquoCompanyrsquorsquo) (formerly known as K WahConstruction Materials Ltd) and its subsidiaries (together the lsquolsquoGrouprsquorsquo) are tondash operate in casino games of chance or games of other forms
in Macau (and) manufacture sale and distribution of construction materials in HK Macau and Mainland China
bull The Company is ndash a limited liability company incorporated in Hong Kong and ndash has its listing on the Main Board of The Stock Exchange of
Hong Kong Limitedbull The address of its registered office and its principal place
of business is Room 1606 16th Floor Hutchison House 10 Harcourt Road Central HK
copy 2005-07 Nelson 100
Effective Date
bull An entity shall apply IAS 1 for annual periods beginning on or after 1 Jan 2005
ndash Earlier application is encouragedndash If an entity applies IAS 1 for an earlier period it shall
disclose this factbull For the amendments relating to the Statement of
Changes in Equityndash An entity shall apply it for annual periods beginning on
or after 1 Jan 2006ndash If an entity applies the amendments to IAS 19
Employee Benefits ndash Actuarial Gains and Losses Group Plans and Disclosures for an earlier period that amendment shall be applied for that earlier period
51
copy 2005-07 Nelson 101
Todayrsquos Agenda
Capital Disclosures (Amendments to IAS 1)
Capital Disclosures (Amendments to IAS 1)
copy 2005-07 Nelson 102
Capital Disclosures ndash For 2007
52
copy 2005-07 Nelson 103
Capital Disclosures
What is capital Is it helliphellip
CapitalCapital AssetsAssets LiabilitiesLiabilities= ndash
bull IAS 1BC47 considers ldquowhether an entity can have a view of capital that differs from what IFRSs define as equityrdquo
bull It further clarifies that although for the purposes of this disclosure capital would often equate with equity as defined in IFRSsndash it might also include or exclude some components
bull It also noted that the capital disclosure in IAS 1 is intended to give entities the opportunity to describendash how they view the components of capital they manage if this is
different from what IFRSs define as equity helliphellip
copy 2005-07 Nelson 104
EquityEquityEquity AssetsAssets LiabilitiesLiabilities= ndash
Capital Disclosures
Based on the Framework amp IFRSs the accounting equation should be
CapitalCapital AssetsAssets LiabilitiesLiabilities= ndash
bull An entityrsquos capital may be part of its equity plus part of its liabilities depending on how it manage ldquoits capitalrdquo helliphellip
53
copy 2005-07 Nelson 105
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowinga) qualitative information about its objectives policies and processes for
managing capital including (but not limited to)i) a description of what it manages as capitalii) when an entity is subject to externally imposed capital requirements
the nature of those requirements and how those requirements are incorporated into the management of capital and
iii) how it is meeting its objectives for managing capital
bull To comply with the capital disclosures the entity discloses thefollowinga) qualitative information about its objectives policies and processes for
managing capital including (but not limited to)i) a description of what it manages as capitalii) when an entity is subject to externally imposed capital requirements
the nature of those requirements and how those requirements are incorporated into the management of capital and
iii) how it is meeting its objectives for managing capital
copy 2005-07 Nelson 106
Capital Disclosures
Example disclosurebull The Grouprsquos objectives when managing capital are
ndash to safeguard the entityrsquos ability to continue as a going concern
bull so that it can continue to provide returns for shareholders and benefits for other stakeholders and
ndash to provide an adequate return to shareholders by pricing products and services commensurately with the level of risk
bull The Group sets the amount of capital in proportion to risk
ExampleExample
ObjectivesObjectives
54
copy 2005-07 Nelson 107
Capital Disclosures
bull The Group manages the capital structure and makes adjustments to it in the light ofndash changes in economic conditions and ndash the risk characteristics of the underlying assets
bull In order to maintain or adjust the capital structure the Group mayndash adjust the amount of dividends paid to shareholders ndash return capital to shareholders ndash issue new shares or ndash sell assets to reduce debt
ExampleExample
Example disclosure
HowHow
copy 2005-07 Nelson 108
Capital Disclosures
bull Consistently with others in the industry the Group monitors capital on the basis of ndash the debt-to-adjusted capital ratio
bull This ratio is calculated as net debt divide adjusted capital
ExampleExample
Example disclosure
HowHow
bull Net debt is calculated as ndash Total debt (as shown in the
balance sheet)ndash Less cash amp cash equivalents
bull Net debt is calculated as ndash Total debt (as shown in the
balance sheet)ndash Less cash amp cash equivalents
bull Adjusted capital ndash comprises all components of
equity (ie share capital share premium minority interest retained earnings and revaluation reserve) ndash other than amounts
recognised in equity relating to cash flow hedges and
ndash includes some forms of subordinated debt
bull Adjusted capital ndash comprises all components of
equity (ie share capital share premium minority interest retained earnings and revaluation reserve) ndash other than amounts
recognised in equity relating to cash flow hedges and
ndash includes some forms of subordinated debt
55
copy 2005-07 Nelson 109
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowing
bull To comply with the capital disclosures the entity discloses thefollowingb) summary quantitative data about what it manages as capital
Some entities regard some financial liabilities (eg some forms of subordinated debt) as part of capitalOther entities regard capital as excluding some components of equity (eg components arising from cash flow hedges)
c) any changes in (a) and (b) from the previous period
copy 2005-07 Nelson 110
Capital Disclosures
Example disclosure (continued from previous example)
ExampleExample
bull During 20X4 the Grouprsquos strategy which was unchanged from 20X3 was to maintain the debt-to-adjusted capital ratio at the lower end of the range 61 to 71 in order to secure access to finance at a reasonable cost by maintaining a BB credit rating The debt-to-adjusted capital ratios at 31 December 20X4 and at 31 December 20X3 were as follows
3112X4 ($rsquoM) 3112X3 ($rsquoM) Total debt 1000 1100 Less cash and cash equivalents (90) (150)Net debt 910 950
Total equity 110 105 Add subordinated debt instruments 38 38 Less amounts recognised in equity
relating to cash flow hedges (10) (5)Adjusted capital 138 138
Debt-to-adjusted capital ratio 66 69
56
copy 2005-07 Nelson 111
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowing
bull To comply with the capital disclosures the entity discloses thefollowingd) whether during the period it complied with any externally imposed capital
requirements to which it is subjecte) when the entity has not complied with such externally imposed capital
requirements the consequences of such non-complianceThese disclosures shall be based on the information provided internally to the entityrsquos key management personnel
copy 2005-07 Nelson 112
Capital DisclosuresExampleExample
Example disclosurebull Entity A filed its quarterly regulatory capital return for
30 September 20X7 on 20 October 20X7 bull At that date Entity Arsquos regulatory capital was below
the capital requirement imposed by Regulator B by $1 million
bull As a result Entity A was required to submit a plan to the regulator indicating how it would increase its regulatory capital to the amount required
bull Entity A submitted a plan that entailed selling part of its unquoted equities portfolio with a carrying amount of $115 million in the fourth quarter of 20X7
bull In the fourth quarter of 20X7 Entity A sold its fixed interest investment portfolio for $126 million and met its regulatory capital requirement
For example SFC or banks
For example SFC or banks
57
copy 2005-07 Nelson 113
Capital DisclosuresCaseCase
bull Early adopted capital disclosure in 2005 and itsannual report states that (extract only)ndash The Grouprsquos objectives when managing capital are
bull To safeguard the Grouprsquos ability to continue as a going concern so that it continues to provide returns for shareholders and benefits for other stakeholders
bull To support the Grouprsquos stability and growth andbull To provide capital for the purpose of strengthening the
Grouprsquos risk management capability
copy 2005-07 Nelson 114
Capital DisclosuresCaseCase
ndash The Group actively and regularly reviews and manages its capital structure to ensure optimal capital structure and shareholder returns taking into consideration the future capital requirements of the Group and capital efficiency helliphellip
ndash The Group adopts a dividend policy helliphellip while retaining 10 per cent of the profit as capital of the Group for future use
ndash The Group has set aside $1500 million of retained earnings for the purpose of strengthening the risk management regime of the clearing houses and supporting their roles as central counterparties
ndash As in prior years the Group monitors capital by reviewing the level of capital that is at the disposal of the Group (ldquoadjusted capitalrdquo) Adjusted capital comprises all components of shareholdersrsquo equity other than the hedging reserve relating to cash flow hedges designated reserves and investment revaluation reserve helliphellip
bull Early adopted capital disclosure in 2005 and itsannual report states that (extract only)
58
copy 2005-07 Nelson 115
Capital Disclosures ndash Transition
bull An entity shall apply the requirements of capital disclosure for
ndash annual periods beginning on or after 1 January 2007
bull Early application is encouraged
copy 2005-07 Nelson 116
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk
59
copy 2005-07 Nelson 117
QampA SessionQampA SessionQampA Session
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk
24
copy 2005-07 Nelson 47
3 Overall Consideration
bull The presentation and classification of items in the financial statements shall be retained from one period to the next unlessa) it is apparent
bull following a significant change in the nature of the entityrsquos operations (eg significant acquisition or disposal) or
bull a review of its financial statementsthat another presentation or classification would be more appropriatehaving regard to the criteria for the selection and application of accounting policies in IAS 8 or
b) a IFRS requires a change in presentation
d) Consistency of presentation
An entity changes the presentation of its financial statements only ifndash the changed presentation provides information that is reliable and is
more relevant to users of the financial statements andndash the revised structure is likely to continue so that comparability is not
impaired
An entity changes the presentation of its financial statements only ifndash the changed presentation provides information that is reliable and is
more relevant to users of the financial statements andndash the revised structure is likely to continue so that comparability is not
impaired
copy 2005-07 Nelson 48
3 Overall Consideration
bull Each material class of similar items shall bendash presented separately in the financial
statementsbull Items of a dissimilar nature or function shall be
ndash presented separately unless they are immaterial
bull Applying the concept of materiality means that a specific disclosure requirement in a IFRS neednot be satisfied if the information is not material
e) Materiality and Aggregation
What is the situation of recognition and measurement
What is the What is the situation of situation of recognition and recognition and measurementmeasurement
25
copy 2005-07 Nelson 49
3 Overall Consideration
bull What is materialndash Omissions or misstatements of items are
material if they could individually or collectively influence the economic decisions of users taken on the basis of the financial statements
ndash Materiality depends on the size and nature of the omission or misstatement judged in the surrounding circumstancesbull The size or nature of the item or a combination
of both could be the determining factor
e) Materiality and Aggregation
copy 2005-07 Nelson 50
3 Overall Consideration
bull Assets and liabilities and income and expenses shall not be offsetndash unless required or permitted by a IFRS
bull It is important that assets and liabilities and income and expenses are reported separatelyndash Measuring assets net of valuation allowances mdash
for example obsolescence allowances on inventories and doubtful debts allowances on receivables mdash is not offsetting
f) Offsetting
26
copy 2005-07 Nelson 51
3 Overall Consideration
bull During ordinary activities some transactions that do not generate revenue but are incidental to the main revenue-generating activitiesndash The results of such transactions are presented
when this presentation reflects the substance of the transaction or other event by netting any income with related expenses arising on the same transaction
f) Offsetting
copy 2005-07 Nelson 52
3 Overall Consideration
bull For examplea) gains and losses on the disposal of non-current
assets including investments and operating assets- are reported by deducting from the proceeds on
disposal the carrying amount of the asset and related selling expenses and
b) expenditure related to a provision that is- recognised in accordance with IAS 37 and - reimbursed under a contractual arrangement with
a third party (for example a supplierrsquos warranty agreement)
may be netted against the related reimbursement
f) Offsetting
ExampleExample
27
copy 2005-07 Nelson 53
3 Overall Consideration
bull Gains and losses arising from a group of similar transactions are reported on a net basisndash For example
bull foreign exchange gains and losses or bull gains and losses arising on financial instruments held for trading
bull Such gains and losses are however reported separately if they are material
bull Gains and losses arising from a group of similar transactions are reported on a net basisndash For example
bull foreign exchange gains and losses or bull gains and losses arising on financial instruments held for trading
bull Such gains and losses are however reported separately if they are material
Can foreign exchange gains and losses be offset
ExampleExample
copy 2005-07 Nelson 54
3 Overall Consideration
bull Except when a IFRS permits or requires otherwise ndash comparative information shall be disclosed in
respect of the previous period for all amountsreported in the financial statements
bull When the presentation or classification of items in the financial statements is amended ndash comparative amounts shall be reclassified unless
the reclassification is impracticable
g) Comparative information
28
copy 2005-07 Nelson 55
Amended requirementsAmended requirements
3 Overall Consideration
bull When comparative amounts are reclassified an entity shall disclosea) the nature of the reclassificationb) the amount of each item or class of items that is
reclassified andc) the reason for the reclassification
g) Comparative information
bull In the pastonly the reason for and a description of the nature of materialreclassifications should be disclosedExemption for disclosure of comparative information for the reconciliation of movements in fixed assets is also removed
bull In the pastonly the reason for and a description of the nature of materialreclassifications should be disclosedExemption for disclosure of comparative information for the reconciliation of movements in fixed assets is also removed
copy 2005-07 Nelson 56
3 Overall Consideration
Melco Development Limited (新濠國際發展有限公司)Notes to the financial statements for year ended 31122005ndash Because HKAS 32 requires retrospective application comparative
figures for 2004 have been restated (see Note 2A for the financial impact)
CaseCase
29
copy 2005-07 Nelson 57
3 Overall Consideration
Galaxy Entertainment Group LimitedNotes to the financial statements (ye 31122005)ndash All changes in the accounting policies require
retrospective application except HKAS 39 and HKFRS 2 for which transitional provisions are applied
ndash As a result the 2004 comparative figures have also been restated or amended in accordance with the relevant requirements
ndash The effects of all the changes in accounting policies are summarised in notes (b) and (c) below
CaseCase
copy 2005-07 Nelson 58
bull Identification of the financial statementsbull Reporting periodbull Balance sheet
1 CurrentNon-current distinction2 Current assets3 Current liabilities4 Information to be presented on the face of the balance sheet5 Information to be presented either on the face of the balance sheet or in
the notesbull Income statement
1 Profit or loss for the period2 Information to be presented on the face of the income statement3 Information to be presented either on the face of the income statement or
in the notesbull Statement of changes in equitybull Cash flow statementbull Notes
4 Structure and Content
30
copy 2005-07 Nelson 59
Identification of Financial Statements
bull The financial statements shall be identified clearly and distinguished from other information in the same published document
bull The following information shall be displayed prominently and repeated when it is necessary for a proper understanding of the information presented
a) the name of the reporting entity or other means of identification and any change in that information from the preceding balance sheet date
b) whether the financial statements cover the individual entity or a group of entities
c) the balance sheet date or the period covered by the financial statements whichever is appropriate to that component of the financial statements
d) the presentation currency as defined in HKAS 21 The Effects of Changes in Foreign Exchange Rates and
e) the level of rounding used in presenting amounts in the financial statements
copy 2005-07 Nelson 60
Identification of Financial Statements
bull Can the units of the presentation currency be rounded to thousands or millions
bull Financial statements are often made more understandableby presenting information in thousands or millions of units of the presentation currency
bull This is acceptable as long asndash the level of rounding in presentation is disclosed and ndash material information is not omitted
bull Financial statements are often made more understandableby presenting information in thousands or millions of units of the presentation currency
bull This is acceptable as long asndash the level of rounding in presentation is disclosed and ndash material information is not omitted
ExampleExample
31
copy 2005-07 Nelson 61
Reporting Period
bull Financial statements shall be presented at least annually
bull When an entityrsquos balance sheet date changes and the annual financial statements are presented for a period longer or shorter than one year an entity shall disclose in addition to the period covered by the financial statementsa) the reason for using a longer or shorter period andb) the fact that comparative amounts for the income
statement statement of changes in equity cash flow statement and related notes are not entirely comparable
copy 2005-07 Nelson 62
Reporting Period
bull Can a set of financial statements cover 52-week instead of a year
bull Normally financial statements are consistently prepared covering a one-year period
bull However for practical reasons some entities prefer to report for example for a 52-week period
bull IAS 1 does not preclude this practice because the resulting financial statements are unlikely to be materially different from those that would be presented for one year
bull Normally financial statements are consistently prepared covering a one-year period
bull However for practical reasons some entities prefer to report for example for a 52-week period
bull IAS 1 does not preclude this practice because the resulting financial statements are unlikely to be materially different from those that would be presented for one year
ExampleExample
32
copy 2005-07 Nelson 63
CurrentNon-current Distinction
bull An entity shall presentndash current and non-current assets andndash current and non-current liabilitiesas separate classifications on the face of its balance sheet
bull Except when a presentation based on liquidity provides informationndash If that information is reliable and is more relevantndash When that exception applies all assets and liabilities shall be
presented broadly in order of liquidity
copy 2005-07 Nelson 64
CurrentNon-current Distinction
bull Whichever method of presentation is adopted for each asset and liability line item that combines amounts expected to be recovered or settled a) no more than 12 months after the balance sheet date
andb) more than 12 months after the balance sheet date(ie combines both current and non-current)
an entity shall disclose the amount expected to be recovered or settled after more than 12 months
33
copy 2005-07 Nelson 65
New requirementsNew requirements
Current Assets
bull An asset shall be classified as current when it satisfies any of the following criteriaa) it is expected to be realised in or is intended for sale or
consumption in the entityrsquos normal operating cycle b) it is held primarily for the purpose of being tradedc) it is expected to be realised within 12 months after the balance
sheet date ord) it is cash or a cash equivalent
bull unless it is restricted from being exchanged or used to settle aliability for at least 12 months after the balance sheet date
bull All other assets shall be classified as non-current
Examplesbull Deposits pledged to bank (how long)bull Fixed deposits over 1 year maturity
Examplesbull Deposits pledged to bank (how long)bull Fixed deposits over 1 year maturity
What is itWhat is it
copy 2005-07 Nelson 66
Current Assets
bull What is operating cycle
bull The operating cycle of an entity is the time between ndash the acquisition of assets for processing and ndash their realisation in cash or cash equivalents
bull When the entityrsquos normal operating cycle is not clearly identifiable ndash its duration is assumed to be 12 months
bull The operating cycle of an entity is the time between ndash the acquisition of assets for processing and ndash their realisation in cash or cash equivalents
bull When the entityrsquos normal operating cycle is not clearly identifiable ndash its duration is assumed to be 12 months
ExampleExample
34
copy 2005-07 Nelson 67
Current Assets CaseCase
copy 2005-07 Nelson 68
Current Assets
bull Can a non-current asset reclassified if it fulfil the definition of current asset later
bull Assets classified as non-current in accordancewith IAS 1 shall not be reclassified as current assetsndash until they meet the criteria to be classified as held for sale in
accordance with IFRS 5bull Assets of a class that an entity would normally regard as non-
current that are acquired exclusively with a view to resale shall notbe classified as currentndash unless they meet the criteria to be classified as held for sale in
accordance with IFRS 5
bull Assets classified as non-current in accordancewith IAS 1 shall not be reclassified as current assetsndash until they meet the criteria to be classified as held for sale in
accordance with IFRS 5bull Assets of a class that an entity would normally regard as non-
current that are acquired exclusively with a view to resale shall notbe classified as currentndash unless they meet the criteria to be classified as held for sale in
accordance with IFRS 5
No non-current assets can be classified as current unless the criteria in IFRS 5 are fulfilled mainlybull Available for immediate salebull Highly probable to make the sale
35
copy 2005-07 Nelson 69
Is it currentIs it current
Current Assets
bull In its 2005 Interim Report full set of HKFRS was adopted and the report set out thatndash Available-for-sale financial assets are non-
derivatives that are eitherbull designated in this category orbull not classified in any of the other categories (ie
loans and receivables financial assets at fair value through profit or loss and held-to-maturity investments)
CaseCase
Similar in 2005 Annual Report
Similar in 2005 Annual Report
ndash They are included in non-current assetsbull unless management intends to dispose of the
investment within 12 months of the balance sheet date
copy 2005-07 Nelson 70
New requirementsNew requirements
Current Liabilities
bull A liability shall be classified as current when it satisfies any of the following criteriaa) it is expected to be settled in the entityrsquos normal operating cycleb) it is held primarily for the purpose of being tradedc) it is due to be settled within 12 months after the balance sheet
date ord) the entity does not have an unconditional right to defer settlement
of the liability for at least 12 months after the balance sheet date
bull All other liabilities shall be classified as non-current
ImplicationImplication
36
copy 2005-07 Nelson 71
Current Liabilities Revised rules on classifying a liability as current or non-currentbull A liability held for being traded rArr currentbull A financial liability due within 12 months after the BS date rArr current
ndash even if an agreement to refinance on a long-term basis is completed after the BS date (only disclosed as non-adjusting event)
bull If an entity has discretion to refinance rArr non-currentbull If an entity without discretion to refinance rArr current
bull A non-current financial liability is payable on demand with a breach on a condition of its loan agreement on or before the BS datendash If the lender agreed not to demand payment
bull after the BS date rArr current (only disclosed as non-adjusting event)
bull by the BS date rArr non-current
ImplicationImplication
copy 2005-07 Nelson 72
Current LiabilitiesCaseCase
Note 12 to Interim Report 2006bull Breach of loan covenants
bull As at 30 June 2006 in respect of certain bank loans with an aggregate carrying amount of HK$1529806000 the Group breached certain financial covenants of the banks loans
bull Since the lenders have not agreed to waive its right to demand immediate payment as at the balance sheet date the loans have been classified as current liabilities in these financial statements at 30 June 2006
37
copy 2005-07 Nelson 73
Current Assets and LiabilitiesExampleExample
Can the following be classified as current assetsbull 3-month fixed deposits pledged to a bank to secure
a mortgage loan of 5 yearsbull 2-year fixed deposits with a bank
Can the following be classified as current assetsbull 3-month fixed deposits pledged to a bank to secure
a mortgage loan of 5 yearsbull 2-year fixed deposits with a bank
Can the following be classified as non-current liabilitiesbull 5-year term loan matured after year end but renewed
for another 5 years after year end (before the issuanceof the financial statements)
bull 2-year term loan to be matured with 12 months and theentity has a right to renew for another 2 years
Can the following be classified as non-current liabilitiesbull 5-year term loan matured after year end but renewed
for another 5 years after year end (before the issuanceof the financial statements)
bull 2-year term loan to be matured with 12 months and theentity has a right to renew for another 2 years
timestimes
times
radic
copy 2005-07 Nelson 74
Balance Sheetbull As a minimum the face of the balance sheet shall
include line items that present the following amountsa) property plant and equipmentb) investment propertyc) intangible assetsd) financial assets (excl amounts shown under (e) (h) and (I))e) investments accounted for using the equity methodf) biological assetsg) inventoriesh) trade and other receivablesi) cash and cash equivalentsj) trade and other payablesk) provisionsl) financial liabilities (excl amounts shown under (j) and (k))m) liabilities and assets for current tax as defined in HKAS 12 Income Taxesn) deferred tax liabilities and deferred tax assets as defined in HKAS 12o) minority interest presented within equity andp) issued capital and reserves attributable to equity holders of the parent
38
copy 2005-07 Nelson 75
Balance Sheetbull The face of the balance sheet shall also include line
items that present the following amountsa) The total of assets classified as held for sale and
assets included in disposal groups classified as held for sale in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations and
b) Liabilities included in disposal groups classified as held for sale in accordance with IFRS 5
copy 2005-07 Nelson 76
Balance Sheetbull Additional line items headings and subtotals shall
be presented on the face of the balance sheet when such presentation is relevant to an understanding of the entityrsquos financial position
bull When an entity presents current and non-current assets and current and non-current liabilities as separate classifications on the face of its balance sheet ndash it shall not classify deferred tax assets
(liabilities) as current assets (liabilities)
39
copy 2005-07 Nelson 77
Balance Sheet
bull The use of different measurement bases for different classes of assets suggests that their nature or function differs and therefore that they should be presented as separate line itemsndash For example different classes of property plant and
equipment can be carried atbull Cost orbull Revalued amountsin accordance with IAS 16 PPE
In the past it use ldquomay needrdquoIn the past it use ldquomay needrdquo
copy 2005-07 Nelson 78
Balance Sheet
Galaxy Entertainment Group LimitedConsolidated balance sheet as at 31122005
CaseCase
40
copy 2005-07 Nelson 79
Balance Sheet
Melco Development Limited (新濠國際發展有限公司)Consolidated balance sheet as at 31122005
CaseCase
copy 2005-07 Nelson 80
Income Statement Minimum requirements on the face of the income statementbull As a minimum the face of the income statement shall include line items
that present the following amounts for the perioda) revenueb) finance costsc) share of the profit or loss of associates and joint ventures accounted
for using the equity methodd) pre-tax gain or loss recognised on the disposal of assets or
settlement of liabilities attributable to discontinuing operationse) tax expense andf) profit or loss
41
copy 2005-07 Nelson 81
Income Statement bull The following items shall be disclosed on the face of the income
statement as allocations of profit or loss for the perioda) Profit or loss attributable to minority interest andb) Profit or loss attributable to equity holders of the parent
A similar requirement has been added for the statement of changes in equity and such allocated amounts are not to be presented as items of income or expense
copy 2005-07 Nelson 82
Income Statement
Melco Dev LtdConsolidated income statementas at 31122005
CaseCase
42
copy 2005-07 Nelson 83
Income Statement bull Not require to disclose the results of operating
activities as a line item on the face of the incomestatement
bull An entity shall not present any items of income and expense as extraordinary items either onthe face of the income statements or in the notes
Entities canrsquot use itEntities canrsquot use it
Entities can still show itEntities can still show it
copy 2005-07 Nelson 84
Income Statement Either on the face of the income statement or in the notesbull An entity shall present an analysis of expenses using a classification
based on eitherbull the nature of expenses orbull their function within the entity
whichever provides information that is reliable and more relevant
bull Entities classifying expenses by function shall disclose additional information on the nature of expenses includingbull depreciation and amortisation expense and bull employee benefits expense
43
copy 2005-07 Nelson 85
Income StatementCaseCase
Nature or FunctionNature or Nature or FunctionFunction
copy 2005-07 Nelson 86
Statement of Changes in Equity bull An entity shall present a statement of changes in equity showing on the
face of the statementa) profit or loss for the period b) each item of income and expense for the period that as required by
IFRSs is recognised directly in equity and the total of these itemsc) total income and expense for the period (calculated as the sum of (a) and
(b)) showing separately the total amounts attributablebull to equity holders of the parent andbull to minority interest and
d) for each component of equity the effects of changes in accounting policies and corrections of errors recognised in accordance with IAS 8
Any ChangeAny Change
A revised requirementbull A statement of changes in equity that comprises only these items
shall be titled a statement of recognised income and expenses
A revised requirementbull A statement of changes in equity that comprises only these items
shall be titled a statement of recognised income and expenses
44
copy 2005-07 Nelson 87
Statement of Changes in Equity bull An entity shall also present either on the face of the
statement of changes in equity or in the notesa) the amounts of transactions with equity holders acting in
their capacity as equity holders showing separately distributions to equity holders
b) the balance of retained earnings (ie accumulated profit or loss) at the beginning of the period and at the balance sheet date and the changes during the period and
c) a reconciliation between the carrying amount of each class of contributed equity and each reserve at the beginning and the end of the period separately disclosing each change
copy 2005-07 Nelson 88
Statement of Changes in Equity
Consolidated SCE as at 31122005
CaseCase
45
copy 2005-07 Nelson 89
Notes Structure (an entity is required to disclose the following)
bull The notes shalla) present information about the basis of preparation of the financial statements
and the specific accounting policies usedb) disclose the information required by HKFRSs that is not presented on the
face of the balance sheet income statement statement of changes in equity or cash flow statement and
c) provide additional information that is not presented on the face of the balance sheet income statement statement of changes in equity or cash flow statement but is relevant to an understanding of any of them
bull Notes shall as far as practicable be presented in a systematic manner bull Each item on the face of the balance sheet income statement statement
of changes in equity and cash flow statement shall be cross-referencedto any related information in the notes
copy 2005-07 Nelson 90
Notes Disclosures (an entity is required to disclose the following)
bull Disclosure of accounting policiesAn entity shall disclose in the summary of significant accounting policiesa) the measurement basis (or bases) used in preparing the financial
statements andb) the other accounting policies used that are relevant to an understanding of
the financial statements
46
copy 2005-07 Nelson 91
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)ndash The financial statements have been prepared in
accordance with Hong Kong Financial Reporting Standards (lsquolsquoHKFRSrsquorsquo) issued by the Hong Kong Institute of Certified Public Accountants bull under the historical cost convention as modified by the
revaluation of investment properties available-for-sale financial assets derivative financial instruments and other investments which are carried at fair values helliphellip
ndash The principal accounting policies applied in the preparation of these financial statements are set out below These policies have been consistently applied to all the years presented except for those stated in note 2(a) above
copy 2005-07 Nelson 92
Notes Disclosures (an entity is required to disclose the following)
bull Disclosure of accounting policiesndash The judgements apart from those involving estimations management has
madebull in the process of applying the entityrsquos accounting policies that have the
most significant effect on the amounts recognised in the financial statements (in the summary of significant accounting policies or other notes)
Examples ndash Management makes judgements in determininga) whether financial assets are held-to-maturity investmentsb) when substantially all the significant risks and rewards of
ownership of financial assets and lease assets are transferred to other entities
c) whether in substance particular sales of goods are financing arrangements and therefore do not give rise to revenue and
d) whether the substance of the relationship between the entity and a special purpose entity indicates that the special purpose entity is controlled by the entity
Examples ndash Management makes judgements in determininga) whether financial assets are held-to-maturity investmentsb) when substantially all the significant risks and rewards of
ownership of financial assets and lease assets are transferred to other entities
c) whether in substance particular sales of goods are financing arrangements and therefore do not give rise to revenue and
d) whether the substance of the relationship between the entity and a special purpose entity indicates that the special purpose entity is controlled by the entity
47
copy 2005-07 Nelson 93
Notes Disclosures (an entity is required to disclose the following)
bull Key sources of estimation uncertaintyndash Information about the key assumptions concerning the future and
other key sources of estimation uncertainty at the balance sheet datebull that have a significant risk of causing a material adjustment to the
carrying amounts of assets and liabilities within the next financial yearndash In respect of those assets and liabilities the notes shall include details of
a) their nature andb) their carrying amount as at the balance sheet date
Examples ndash in the absence of recently observed market prices used to measure the following assets and liabilities future-oriented estimates are necessary to measurebull the recoverable amount of classes of PPEbull the effect of technological obsolescence on inventories
Estimates involve assumptions about such items asbull the risk adjustment to cash flows or discount rates usedbull future changes in salaries and in prices affecting other costs
Examples ndash in the absence of recently observed market prices used to measure the following assets and liabilities future-oriented estimates are necessary to measurebull the recoverable amount of classes of PPEbull the effect of technological obsolescence on inventories
Estimates involve assumptions about such items asbull the risk adjustment to cash flows or discount rates usedbull future changes in salaries and in prices affecting other costs
copy 2005-07 Nelson 94
Notes
Esprit Holdings LimitedEsprit Holdings Limitedbull Critical Accounting Estimates and Judgements
ndash Estimates and judgements are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonableunder the circumstances
ndash Critical accounting estimates and assumptionsbull The Group makes estimates and assumptions concerning
the future The resulting accounting estimates will by definition seldom equal the related actual results
bull The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below helliphellip (including (1) useful life and impairment of trademarks and (2) income taxes)
CaseCase
48
copy 2005-07 Nelson 95
Notes
Melco Development Limited (新濠國際發展有限公司)Notes to the financial statements for the year ended 31122005ndash The key assumptions concerning the future and other key sources
of estimation uncertainty at the balance sheet date that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below helliphellip(The issues discussed includebull Allowances for inventories bull Estimated impairment of goodwill Income taxes)
CaseCase
copy 2005-07 Nelson 96
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)ndash Estimates and judgements used in preparing the
financial statements are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonable under the circumstances
ndash The Group makes estimates and assumptionsconcerning the future
ndash The resulting accounting estimates will by definition seldom equal the related actual results
ndash The estimates and assumptions that have a significant effect on the carrying amounts of assets and liabilities are discussed below hellip (including impairment of goodwill impairment of gaming
licence Useful lives of property plant and equipment fair value of investment properties hellip)
49
copy 2005-07 Nelson 97
Notes Disclosures (an entity is required to disclose the following)
bull Other disclosuresAn entity shall disclose in the notesa) the amount of dividends proposed or declared before the
financial statements were authorised for issue but not recognised as a distribution to equity holders during the period and the related amount per share(HK incorporated companies are required to show the aggregate amount which is recommended for distribution by way of dividend under a separate heading(s) in their balance sheet (HK Co Ord 10th Sch para 9(1)(e)) and
b) the amount of any cumulative preference dividends not recognised
copy 2005-07 Nelson 98
Notes Disclosures (an entity is required to disclose the following)
An entity shall disclose the following if not disclosedelsewhere in information published with the financial statementsa) the domicile and legal form of the entity
its country of incorporation andthe address of its registered office(or principal place of business if different from the registered office)
b) a description of the nature of the entityrsquos operations and its principal activities and
c) the name of the parent and the ultimate parent of the group
ldquoshall discloserdquo now instead of ldquoencouraged to discloserdquo
ldquoshall discloserdquo now instead of ldquoencouraged to discloserdquo
bull Other disclosures
Any specialAny special
50
copy 2005-07 Nelson 99
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)bull The principal activities of Galaxy Entertainment Group
Ltd (the lsquolsquoCompanyrsquorsquo) (formerly known as K WahConstruction Materials Ltd) and its subsidiaries (together the lsquolsquoGrouprsquorsquo) are tondash operate in casino games of chance or games of other forms
in Macau (and) manufacture sale and distribution of construction materials in HK Macau and Mainland China
bull The Company is ndash a limited liability company incorporated in Hong Kong and ndash has its listing on the Main Board of The Stock Exchange of
Hong Kong Limitedbull The address of its registered office and its principal place
of business is Room 1606 16th Floor Hutchison House 10 Harcourt Road Central HK
copy 2005-07 Nelson 100
Effective Date
bull An entity shall apply IAS 1 for annual periods beginning on or after 1 Jan 2005
ndash Earlier application is encouragedndash If an entity applies IAS 1 for an earlier period it shall
disclose this factbull For the amendments relating to the Statement of
Changes in Equityndash An entity shall apply it for annual periods beginning on
or after 1 Jan 2006ndash If an entity applies the amendments to IAS 19
Employee Benefits ndash Actuarial Gains and Losses Group Plans and Disclosures for an earlier period that amendment shall be applied for that earlier period
51
copy 2005-07 Nelson 101
Todayrsquos Agenda
Capital Disclosures (Amendments to IAS 1)
Capital Disclosures (Amendments to IAS 1)
copy 2005-07 Nelson 102
Capital Disclosures ndash For 2007
52
copy 2005-07 Nelson 103
Capital Disclosures
What is capital Is it helliphellip
CapitalCapital AssetsAssets LiabilitiesLiabilities= ndash
bull IAS 1BC47 considers ldquowhether an entity can have a view of capital that differs from what IFRSs define as equityrdquo
bull It further clarifies that although for the purposes of this disclosure capital would often equate with equity as defined in IFRSsndash it might also include or exclude some components
bull It also noted that the capital disclosure in IAS 1 is intended to give entities the opportunity to describendash how they view the components of capital they manage if this is
different from what IFRSs define as equity helliphellip
copy 2005-07 Nelson 104
EquityEquityEquity AssetsAssets LiabilitiesLiabilities= ndash
Capital Disclosures
Based on the Framework amp IFRSs the accounting equation should be
CapitalCapital AssetsAssets LiabilitiesLiabilities= ndash
bull An entityrsquos capital may be part of its equity plus part of its liabilities depending on how it manage ldquoits capitalrdquo helliphellip
53
copy 2005-07 Nelson 105
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowinga) qualitative information about its objectives policies and processes for
managing capital including (but not limited to)i) a description of what it manages as capitalii) when an entity is subject to externally imposed capital requirements
the nature of those requirements and how those requirements are incorporated into the management of capital and
iii) how it is meeting its objectives for managing capital
bull To comply with the capital disclosures the entity discloses thefollowinga) qualitative information about its objectives policies and processes for
managing capital including (but not limited to)i) a description of what it manages as capitalii) when an entity is subject to externally imposed capital requirements
the nature of those requirements and how those requirements are incorporated into the management of capital and
iii) how it is meeting its objectives for managing capital
copy 2005-07 Nelson 106
Capital Disclosures
Example disclosurebull The Grouprsquos objectives when managing capital are
ndash to safeguard the entityrsquos ability to continue as a going concern
bull so that it can continue to provide returns for shareholders and benefits for other stakeholders and
ndash to provide an adequate return to shareholders by pricing products and services commensurately with the level of risk
bull The Group sets the amount of capital in proportion to risk
ExampleExample
ObjectivesObjectives
54
copy 2005-07 Nelson 107
Capital Disclosures
bull The Group manages the capital structure and makes adjustments to it in the light ofndash changes in economic conditions and ndash the risk characteristics of the underlying assets
bull In order to maintain or adjust the capital structure the Group mayndash adjust the amount of dividends paid to shareholders ndash return capital to shareholders ndash issue new shares or ndash sell assets to reduce debt
ExampleExample
Example disclosure
HowHow
copy 2005-07 Nelson 108
Capital Disclosures
bull Consistently with others in the industry the Group monitors capital on the basis of ndash the debt-to-adjusted capital ratio
bull This ratio is calculated as net debt divide adjusted capital
ExampleExample
Example disclosure
HowHow
bull Net debt is calculated as ndash Total debt (as shown in the
balance sheet)ndash Less cash amp cash equivalents
bull Net debt is calculated as ndash Total debt (as shown in the
balance sheet)ndash Less cash amp cash equivalents
bull Adjusted capital ndash comprises all components of
equity (ie share capital share premium minority interest retained earnings and revaluation reserve) ndash other than amounts
recognised in equity relating to cash flow hedges and
ndash includes some forms of subordinated debt
bull Adjusted capital ndash comprises all components of
equity (ie share capital share premium minority interest retained earnings and revaluation reserve) ndash other than amounts
recognised in equity relating to cash flow hedges and
ndash includes some forms of subordinated debt
55
copy 2005-07 Nelson 109
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowing
bull To comply with the capital disclosures the entity discloses thefollowingb) summary quantitative data about what it manages as capital
Some entities regard some financial liabilities (eg some forms of subordinated debt) as part of capitalOther entities regard capital as excluding some components of equity (eg components arising from cash flow hedges)
c) any changes in (a) and (b) from the previous period
copy 2005-07 Nelson 110
Capital Disclosures
Example disclosure (continued from previous example)
ExampleExample
bull During 20X4 the Grouprsquos strategy which was unchanged from 20X3 was to maintain the debt-to-adjusted capital ratio at the lower end of the range 61 to 71 in order to secure access to finance at a reasonable cost by maintaining a BB credit rating The debt-to-adjusted capital ratios at 31 December 20X4 and at 31 December 20X3 were as follows
3112X4 ($rsquoM) 3112X3 ($rsquoM) Total debt 1000 1100 Less cash and cash equivalents (90) (150)Net debt 910 950
Total equity 110 105 Add subordinated debt instruments 38 38 Less amounts recognised in equity
relating to cash flow hedges (10) (5)Adjusted capital 138 138
Debt-to-adjusted capital ratio 66 69
56
copy 2005-07 Nelson 111
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowing
bull To comply with the capital disclosures the entity discloses thefollowingd) whether during the period it complied with any externally imposed capital
requirements to which it is subjecte) when the entity has not complied with such externally imposed capital
requirements the consequences of such non-complianceThese disclosures shall be based on the information provided internally to the entityrsquos key management personnel
copy 2005-07 Nelson 112
Capital DisclosuresExampleExample
Example disclosurebull Entity A filed its quarterly regulatory capital return for
30 September 20X7 on 20 October 20X7 bull At that date Entity Arsquos regulatory capital was below
the capital requirement imposed by Regulator B by $1 million
bull As a result Entity A was required to submit a plan to the regulator indicating how it would increase its regulatory capital to the amount required
bull Entity A submitted a plan that entailed selling part of its unquoted equities portfolio with a carrying amount of $115 million in the fourth quarter of 20X7
bull In the fourth quarter of 20X7 Entity A sold its fixed interest investment portfolio for $126 million and met its regulatory capital requirement
For example SFC or banks
For example SFC or banks
57
copy 2005-07 Nelson 113
Capital DisclosuresCaseCase
bull Early adopted capital disclosure in 2005 and itsannual report states that (extract only)ndash The Grouprsquos objectives when managing capital are
bull To safeguard the Grouprsquos ability to continue as a going concern so that it continues to provide returns for shareholders and benefits for other stakeholders
bull To support the Grouprsquos stability and growth andbull To provide capital for the purpose of strengthening the
Grouprsquos risk management capability
copy 2005-07 Nelson 114
Capital DisclosuresCaseCase
ndash The Group actively and regularly reviews and manages its capital structure to ensure optimal capital structure and shareholder returns taking into consideration the future capital requirements of the Group and capital efficiency helliphellip
ndash The Group adopts a dividend policy helliphellip while retaining 10 per cent of the profit as capital of the Group for future use
ndash The Group has set aside $1500 million of retained earnings for the purpose of strengthening the risk management regime of the clearing houses and supporting their roles as central counterparties
ndash As in prior years the Group monitors capital by reviewing the level of capital that is at the disposal of the Group (ldquoadjusted capitalrdquo) Adjusted capital comprises all components of shareholdersrsquo equity other than the hedging reserve relating to cash flow hedges designated reserves and investment revaluation reserve helliphellip
bull Early adopted capital disclosure in 2005 and itsannual report states that (extract only)
58
copy 2005-07 Nelson 115
Capital Disclosures ndash Transition
bull An entity shall apply the requirements of capital disclosure for
ndash annual periods beginning on or after 1 January 2007
bull Early application is encouraged
copy 2005-07 Nelson 116
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk
59
copy 2005-07 Nelson 117
QampA SessionQampA SessionQampA Session
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk
25
copy 2005-07 Nelson 49
3 Overall Consideration
bull What is materialndash Omissions or misstatements of items are
material if they could individually or collectively influence the economic decisions of users taken on the basis of the financial statements
ndash Materiality depends on the size and nature of the omission or misstatement judged in the surrounding circumstancesbull The size or nature of the item or a combination
of both could be the determining factor
e) Materiality and Aggregation
copy 2005-07 Nelson 50
3 Overall Consideration
bull Assets and liabilities and income and expenses shall not be offsetndash unless required or permitted by a IFRS
bull It is important that assets and liabilities and income and expenses are reported separatelyndash Measuring assets net of valuation allowances mdash
for example obsolescence allowances on inventories and doubtful debts allowances on receivables mdash is not offsetting
f) Offsetting
26
copy 2005-07 Nelson 51
3 Overall Consideration
bull During ordinary activities some transactions that do not generate revenue but are incidental to the main revenue-generating activitiesndash The results of such transactions are presented
when this presentation reflects the substance of the transaction or other event by netting any income with related expenses arising on the same transaction
f) Offsetting
copy 2005-07 Nelson 52
3 Overall Consideration
bull For examplea) gains and losses on the disposal of non-current
assets including investments and operating assets- are reported by deducting from the proceeds on
disposal the carrying amount of the asset and related selling expenses and
b) expenditure related to a provision that is- recognised in accordance with IAS 37 and - reimbursed under a contractual arrangement with
a third party (for example a supplierrsquos warranty agreement)
may be netted against the related reimbursement
f) Offsetting
ExampleExample
27
copy 2005-07 Nelson 53
3 Overall Consideration
bull Gains and losses arising from a group of similar transactions are reported on a net basisndash For example
bull foreign exchange gains and losses or bull gains and losses arising on financial instruments held for trading
bull Such gains and losses are however reported separately if they are material
bull Gains and losses arising from a group of similar transactions are reported on a net basisndash For example
bull foreign exchange gains and losses or bull gains and losses arising on financial instruments held for trading
bull Such gains and losses are however reported separately if they are material
Can foreign exchange gains and losses be offset
ExampleExample
copy 2005-07 Nelson 54
3 Overall Consideration
bull Except when a IFRS permits or requires otherwise ndash comparative information shall be disclosed in
respect of the previous period for all amountsreported in the financial statements
bull When the presentation or classification of items in the financial statements is amended ndash comparative amounts shall be reclassified unless
the reclassification is impracticable
g) Comparative information
28
copy 2005-07 Nelson 55
Amended requirementsAmended requirements
3 Overall Consideration
bull When comparative amounts are reclassified an entity shall disclosea) the nature of the reclassificationb) the amount of each item or class of items that is
reclassified andc) the reason for the reclassification
g) Comparative information
bull In the pastonly the reason for and a description of the nature of materialreclassifications should be disclosedExemption for disclosure of comparative information for the reconciliation of movements in fixed assets is also removed
bull In the pastonly the reason for and a description of the nature of materialreclassifications should be disclosedExemption for disclosure of comparative information for the reconciliation of movements in fixed assets is also removed
copy 2005-07 Nelson 56
3 Overall Consideration
Melco Development Limited (新濠國際發展有限公司)Notes to the financial statements for year ended 31122005ndash Because HKAS 32 requires retrospective application comparative
figures for 2004 have been restated (see Note 2A for the financial impact)
CaseCase
29
copy 2005-07 Nelson 57
3 Overall Consideration
Galaxy Entertainment Group LimitedNotes to the financial statements (ye 31122005)ndash All changes in the accounting policies require
retrospective application except HKAS 39 and HKFRS 2 for which transitional provisions are applied
ndash As a result the 2004 comparative figures have also been restated or amended in accordance with the relevant requirements
ndash The effects of all the changes in accounting policies are summarised in notes (b) and (c) below
CaseCase
copy 2005-07 Nelson 58
bull Identification of the financial statementsbull Reporting periodbull Balance sheet
1 CurrentNon-current distinction2 Current assets3 Current liabilities4 Information to be presented on the face of the balance sheet5 Information to be presented either on the face of the balance sheet or in
the notesbull Income statement
1 Profit or loss for the period2 Information to be presented on the face of the income statement3 Information to be presented either on the face of the income statement or
in the notesbull Statement of changes in equitybull Cash flow statementbull Notes
4 Structure and Content
30
copy 2005-07 Nelson 59
Identification of Financial Statements
bull The financial statements shall be identified clearly and distinguished from other information in the same published document
bull The following information shall be displayed prominently and repeated when it is necessary for a proper understanding of the information presented
a) the name of the reporting entity or other means of identification and any change in that information from the preceding balance sheet date
b) whether the financial statements cover the individual entity or a group of entities
c) the balance sheet date or the period covered by the financial statements whichever is appropriate to that component of the financial statements
d) the presentation currency as defined in HKAS 21 The Effects of Changes in Foreign Exchange Rates and
e) the level of rounding used in presenting amounts in the financial statements
copy 2005-07 Nelson 60
Identification of Financial Statements
bull Can the units of the presentation currency be rounded to thousands or millions
bull Financial statements are often made more understandableby presenting information in thousands or millions of units of the presentation currency
bull This is acceptable as long asndash the level of rounding in presentation is disclosed and ndash material information is not omitted
bull Financial statements are often made more understandableby presenting information in thousands or millions of units of the presentation currency
bull This is acceptable as long asndash the level of rounding in presentation is disclosed and ndash material information is not omitted
ExampleExample
31
copy 2005-07 Nelson 61
Reporting Period
bull Financial statements shall be presented at least annually
bull When an entityrsquos balance sheet date changes and the annual financial statements are presented for a period longer or shorter than one year an entity shall disclose in addition to the period covered by the financial statementsa) the reason for using a longer or shorter period andb) the fact that comparative amounts for the income
statement statement of changes in equity cash flow statement and related notes are not entirely comparable
copy 2005-07 Nelson 62
Reporting Period
bull Can a set of financial statements cover 52-week instead of a year
bull Normally financial statements are consistently prepared covering a one-year period
bull However for practical reasons some entities prefer to report for example for a 52-week period
bull IAS 1 does not preclude this practice because the resulting financial statements are unlikely to be materially different from those that would be presented for one year
bull Normally financial statements are consistently prepared covering a one-year period
bull However for practical reasons some entities prefer to report for example for a 52-week period
bull IAS 1 does not preclude this practice because the resulting financial statements are unlikely to be materially different from those that would be presented for one year
ExampleExample
32
copy 2005-07 Nelson 63
CurrentNon-current Distinction
bull An entity shall presentndash current and non-current assets andndash current and non-current liabilitiesas separate classifications on the face of its balance sheet
bull Except when a presentation based on liquidity provides informationndash If that information is reliable and is more relevantndash When that exception applies all assets and liabilities shall be
presented broadly in order of liquidity
copy 2005-07 Nelson 64
CurrentNon-current Distinction
bull Whichever method of presentation is adopted for each asset and liability line item that combines amounts expected to be recovered or settled a) no more than 12 months after the balance sheet date
andb) more than 12 months after the balance sheet date(ie combines both current and non-current)
an entity shall disclose the amount expected to be recovered or settled after more than 12 months
33
copy 2005-07 Nelson 65
New requirementsNew requirements
Current Assets
bull An asset shall be classified as current when it satisfies any of the following criteriaa) it is expected to be realised in or is intended for sale or
consumption in the entityrsquos normal operating cycle b) it is held primarily for the purpose of being tradedc) it is expected to be realised within 12 months after the balance
sheet date ord) it is cash or a cash equivalent
bull unless it is restricted from being exchanged or used to settle aliability for at least 12 months after the balance sheet date
bull All other assets shall be classified as non-current
Examplesbull Deposits pledged to bank (how long)bull Fixed deposits over 1 year maturity
Examplesbull Deposits pledged to bank (how long)bull Fixed deposits over 1 year maturity
What is itWhat is it
copy 2005-07 Nelson 66
Current Assets
bull What is operating cycle
bull The operating cycle of an entity is the time between ndash the acquisition of assets for processing and ndash their realisation in cash or cash equivalents
bull When the entityrsquos normal operating cycle is not clearly identifiable ndash its duration is assumed to be 12 months
bull The operating cycle of an entity is the time between ndash the acquisition of assets for processing and ndash their realisation in cash or cash equivalents
bull When the entityrsquos normal operating cycle is not clearly identifiable ndash its duration is assumed to be 12 months
ExampleExample
34
copy 2005-07 Nelson 67
Current Assets CaseCase
copy 2005-07 Nelson 68
Current Assets
bull Can a non-current asset reclassified if it fulfil the definition of current asset later
bull Assets classified as non-current in accordancewith IAS 1 shall not be reclassified as current assetsndash until they meet the criteria to be classified as held for sale in
accordance with IFRS 5bull Assets of a class that an entity would normally regard as non-
current that are acquired exclusively with a view to resale shall notbe classified as currentndash unless they meet the criteria to be classified as held for sale in
accordance with IFRS 5
bull Assets classified as non-current in accordancewith IAS 1 shall not be reclassified as current assetsndash until they meet the criteria to be classified as held for sale in
accordance with IFRS 5bull Assets of a class that an entity would normally regard as non-
current that are acquired exclusively with a view to resale shall notbe classified as currentndash unless they meet the criteria to be classified as held for sale in
accordance with IFRS 5
No non-current assets can be classified as current unless the criteria in IFRS 5 are fulfilled mainlybull Available for immediate salebull Highly probable to make the sale
35
copy 2005-07 Nelson 69
Is it currentIs it current
Current Assets
bull In its 2005 Interim Report full set of HKFRS was adopted and the report set out thatndash Available-for-sale financial assets are non-
derivatives that are eitherbull designated in this category orbull not classified in any of the other categories (ie
loans and receivables financial assets at fair value through profit or loss and held-to-maturity investments)
CaseCase
Similar in 2005 Annual Report
Similar in 2005 Annual Report
ndash They are included in non-current assetsbull unless management intends to dispose of the
investment within 12 months of the balance sheet date
copy 2005-07 Nelson 70
New requirementsNew requirements
Current Liabilities
bull A liability shall be classified as current when it satisfies any of the following criteriaa) it is expected to be settled in the entityrsquos normal operating cycleb) it is held primarily for the purpose of being tradedc) it is due to be settled within 12 months after the balance sheet
date ord) the entity does not have an unconditional right to defer settlement
of the liability for at least 12 months after the balance sheet date
bull All other liabilities shall be classified as non-current
ImplicationImplication
36
copy 2005-07 Nelson 71
Current Liabilities Revised rules on classifying a liability as current or non-currentbull A liability held for being traded rArr currentbull A financial liability due within 12 months after the BS date rArr current
ndash even if an agreement to refinance on a long-term basis is completed after the BS date (only disclosed as non-adjusting event)
bull If an entity has discretion to refinance rArr non-currentbull If an entity without discretion to refinance rArr current
bull A non-current financial liability is payable on demand with a breach on a condition of its loan agreement on or before the BS datendash If the lender agreed not to demand payment
bull after the BS date rArr current (only disclosed as non-adjusting event)
bull by the BS date rArr non-current
ImplicationImplication
copy 2005-07 Nelson 72
Current LiabilitiesCaseCase
Note 12 to Interim Report 2006bull Breach of loan covenants
bull As at 30 June 2006 in respect of certain bank loans with an aggregate carrying amount of HK$1529806000 the Group breached certain financial covenants of the banks loans
bull Since the lenders have not agreed to waive its right to demand immediate payment as at the balance sheet date the loans have been classified as current liabilities in these financial statements at 30 June 2006
37
copy 2005-07 Nelson 73
Current Assets and LiabilitiesExampleExample
Can the following be classified as current assetsbull 3-month fixed deposits pledged to a bank to secure
a mortgage loan of 5 yearsbull 2-year fixed deposits with a bank
Can the following be classified as current assetsbull 3-month fixed deposits pledged to a bank to secure
a mortgage loan of 5 yearsbull 2-year fixed deposits with a bank
Can the following be classified as non-current liabilitiesbull 5-year term loan matured after year end but renewed
for another 5 years after year end (before the issuanceof the financial statements)
bull 2-year term loan to be matured with 12 months and theentity has a right to renew for another 2 years
Can the following be classified as non-current liabilitiesbull 5-year term loan matured after year end but renewed
for another 5 years after year end (before the issuanceof the financial statements)
bull 2-year term loan to be matured with 12 months and theentity has a right to renew for another 2 years
timestimes
times
radic
copy 2005-07 Nelson 74
Balance Sheetbull As a minimum the face of the balance sheet shall
include line items that present the following amountsa) property plant and equipmentb) investment propertyc) intangible assetsd) financial assets (excl amounts shown under (e) (h) and (I))e) investments accounted for using the equity methodf) biological assetsg) inventoriesh) trade and other receivablesi) cash and cash equivalentsj) trade and other payablesk) provisionsl) financial liabilities (excl amounts shown under (j) and (k))m) liabilities and assets for current tax as defined in HKAS 12 Income Taxesn) deferred tax liabilities and deferred tax assets as defined in HKAS 12o) minority interest presented within equity andp) issued capital and reserves attributable to equity holders of the parent
38
copy 2005-07 Nelson 75
Balance Sheetbull The face of the balance sheet shall also include line
items that present the following amountsa) The total of assets classified as held for sale and
assets included in disposal groups classified as held for sale in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations and
b) Liabilities included in disposal groups classified as held for sale in accordance with IFRS 5
copy 2005-07 Nelson 76
Balance Sheetbull Additional line items headings and subtotals shall
be presented on the face of the balance sheet when such presentation is relevant to an understanding of the entityrsquos financial position
bull When an entity presents current and non-current assets and current and non-current liabilities as separate classifications on the face of its balance sheet ndash it shall not classify deferred tax assets
(liabilities) as current assets (liabilities)
39
copy 2005-07 Nelson 77
Balance Sheet
bull The use of different measurement bases for different classes of assets suggests that their nature or function differs and therefore that they should be presented as separate line itemsndash For example different classes of property plant and
equipment can be carried atbull Cost orbull Revalued amountsin accordance with IAS 16 PPE
In the past it use ldquomay needrdquoIn the past it use ldquomay needrdquo
copy 2005-07 Nelson 78
Balance Sheet
Galaxy Entertainment Group LimitedConsolidated balance sheet as at 31122005
CaseCase
40
copy 2005-07 Nelson 79
Balance Sheet
Melco Development Limited (新濠國際發展有限公司)Consolidated balance sheet as at 31122005
CaseCase
copy 2005-07 Nelson 80
Income Statement Minimum requirements on the face of the income statementbull As a minimum the face of the income statement shall include line items
that present the following amounts for the perioda) revenueb) finance costsc) share of the profit or loss of associates and joint ventures accounted
for using the equity methodd) pre-tax gain or loss recognised on the disposal of assets or
settlement of liabilities attributable to discontinuing operationse) tax expense andf) profit or loss
41
copy 2005-07 Nelson 81
Income Statement bull The following items shall be disclosed on the face of the income
statement as allocations of profit or loss for the perioda) Profit or loss attributable to minority interest andb) Profit or loss attributable to equity holders of the parent
A similar requirement has been added for the statement of changes in equity and such allocated amounts are not to be presented as items of income or expense
copy 2005-07 Nelson 82
Income Statement
Melco Dev LtdConsolidated income statementas at 31122005
CaseCase
42
copy 2005-07 Nelson 83
Income Statement bull Not require to disclose the results of operating
activities as a line item on the face of the incomestatement
bull An entity shall not present any items of income and expense as extraordinary items either onthe face of the income statements or in the notes
Entities canrsquot use itEntities canrsquot use it
Entities can still show itEntities can still show it
copy 2005-07 Nelson 84
Income Statement Either on the face of the income statement or in the notesbull An entity shall present an analysis of expenses using a classification
based on eitherbull the nature of expenses orbull their function within the entity
whichever provides information that is reliable and more relevant
bull Entities classifying expenses by function shall disclose additional information on the nature of expenses includingbull depreciation and amortisation expense and bull employee benefits expense
43
copy 2005-07 Nelson 85
Income StatementCaseCase
Nature or FunctionNature or Nature or FunctionFunction
copy 2005-07 Nelson 86
Statement of Changes in Equity bull An entity shall present a statement of changes in equity showing on the
face of the statementa) profit or loss for the period b) each item of income and expense for the period that as required by
IFRSs is recognised directly in equity and the total of these itemsc) total income and expense for the period (calculated as the sum of (a) and
(b)) showing separately the total amounts attributablebull to equity holders of the parent andbull to minority interest and
d) for each component of equity the effects of changes in accounting policies and corrections of errors recognised in accordance with IAS 8
Any ChangeAny Change
A revised requirementbull A statement of changes in equity that comprises only these items
shall be titled a statement of recognised income and expenses
A revised requirementbull A statement of changes in equity that comprises only these items
shall be titled a statement of recognised income and expenses
44
copy 2005-07 Nelson 87
Statement of Changes in Equity bull An entity shall also present either on the face of the
statement of changes in equity or in the notesa) the amounts of transactions with equity holders acting in
their capacity as equity holders showing separately distributions to equity holders
b) the balance of retained earnings (ie accumulated profit or loss) at the beginning of the period and at the balance sheet date and the changes during the period and
c) a reconciliation between the carrying amount of each class of contributed equity and each reserve at the beginning and the end of the period separately disclosing each change
copy 2005-07 Nelson 88
Statement of Changes in Equity
Consolidated SCE as at 31122005
CaseCase
45
copy 2005-07 Nelson 89
Notes Structure (an entity is required to disclose the following)
bull The notes shalla) present information about the basis of preparation of the financial statements
and the specific accounting policies usedb) disclose the information required by HKFRSs that is not presented on the
face of the balance sheet income statement statement of changes in equity or cash flow statement and
c) provide additional information that is not presented on the face of the balance sheet income statement statement of changes in equity or cash flow statement but is relevant to an understanding of any of them
bull Notes shall as far as practicable be presented in a systematic manner bull Each item on the face of the balance sheet income statement statement
of changes in equity and cash flow statement shall be cross-referencedto any related information in the notes
copy 2005-07 Nelson 90
Notes Disclosures (an entity is required to disclose the following)
bull Disclosure of accounting policiesAn entity shall disclose in the summary of significant accounting policiesa) the measurement basis (or bases) used in preparing the financial
statements andb) the other accounting policies used that are relevant to an understanding of
the financial statements
46
copy 2005-07 Nelson 91
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)ndash The financial statements have been prepared in
accordance with Hong Kong Financial Reporting Standards (lsquolsquoHKFRSrsquorsquo) issued by the Hong Kong Institute of Certified Public Accountants bull under the historical cost convention as modified by the
revaluation of investment properties available-for-sale financial assets derivative financial instruments and other investments which are carried at fair values helliphellip
ndash The principal accounting policies applied in the preparation of these financial statements are set out below These policies have been consistently applied to all the years presented except for those stated in note 2(a) above
copy 2005-07 Nelson 92
Notes Disclosures (an entity is required to disclose the following)
bull Disclosure of accounting policiesndash The judgements apart from those involving estimations management has
madebull in the process of applying the entityrsquos accounting policies that have the
most significant effect on the amounts recognised in the financial statements (in the summary of significant accounting policies or other notes)
Examples ndash Management makes judgements in determininga) whether financial assets are held-to-maturity investmentsb) when substantially all the significant risks and rewards of
ownership of financial assets and lease assets are transferred to other entities
c) whether in substance particular sales of goods are financing arrangements and therefore do not give rise to revenue and
d) whether the substance of the relationship between the entity and a special purpose entity indicates that the special purpose entity is controlled by the entity
Examples ndash Management makes judgements in determininga) whether financial assets are held-to-maturity investmentsb) when substantially all the significant risks and rewards of
ownership of financial assets and lease assets are transferred to other entities
c) whether in substance particular sales of goods are financing arrangements and therefore do not give rise to revenue and
d) whether the substance of the relationship between the entity and a special purpose entity indicates that the special purpose entity is controlled by the entity
47
copy 2005-07 Nelson 93
Notes Disclosures (an entity is required to disclose the following)
bull Key sources of estimation uncertaintyndash Information about the key assumptions concerning the future and
other key sources of estimation uncertainty at the balance sheet datebull that have a significant risk of causing a material adjustment to the
carrying amounts of assets and liabilities within the next financial yearndash In respect of those assets and liabilities the notes shall include details of
a) their nature andb) their carrying amount as at the balance sheet date
Examples ndash in the absence of recently observed market prices used to measure the following assets and liabilities future-oriented estimates are necessary to measurebull the recoverable amount of classes of PPEbull the effect of technological obsolescence on inventories
Estimates involve assumptions about such items asbull the risk adjustment to cash flows or discount rates usedbull future changes in salaries and in prices affecting other costs
Examples ndash in the absence of recently observed market prices used to measure the following assets and liabilities future-oriented estimates are necessary to measurebull the recoverable amount of classes of PPEbull the effect of technological obsolescence on inventories
Estimates involve assumptions about such items asbull the risk adjustment to cash flows or discount rates usedbull future changes in salaries and in prices affecting other costs
copy 2005-07 Nelson 94
Notes
Esprit Holdings LimitedEsprit Holdings Limitedbull Critical Accounting Estimates and Judgements
ndash Estimates and judgements are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonableunder the circumstances
ndash Critical accounting estimates and assumptionsbull The Group makes estimates and assumptions concerning
the future The resulting accounting estimates will by definition seldom equal the related actual results
bull The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below helliphellip (including (1) useful life and impairment of trademarks and (2) income taxes)
CaseCase
48
copy 2005-07 Nelson 95
Notes
Melco Development Limited (新濠國際發展有限公司)Notes to the financial statements for the year ended 31122005ndash The key assumptions concerning the future and other key sources
of estimation uncertainty at the balance sheet date that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below helliphellip(The issues discussed includebull Allowances for inventories bull Estimated impairment of goodwill Income taxes)
CaseCase
copy 2005-07 Nelson 96
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)ndash Estimates and judgements used in preparing the
financial statements are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonable under the circumstances
ndash The Group makes estimates and assumptionsconcerning the future
ndash The resulting accounting estimates will by definition seldom equal the related actual results
ndash The estimates and assumptions that have a significant effect on the carrying amounts of assets and liabilities are discussed below hellip (including impairment of goodwill impairment of gaming
licence Useful lives of property plant and equipment fair value of investment properties hellip)
49
copy 2005-07 Nelson 97
Notes Disclosures (an entity is required to disclose the following)
bull Other disclosuresAn entity shall disclose in the notesa) the amount of dividends proposed or declared before the
financial statements were authorised for issue but not recognised as a distribution to equity holders during the period and the related amount per share(HK incorporated companies are required to show the aggregate amount which is recommended for distribution by way of dividend under a separate heading(s) in their balance sheet (HK Co Ord 10th Sch para 9(1)(e)) and
b) the amount of any cumulative preference dividends not recognised
copy 2005-07 Nelson 98
Notes Disclosures (an entity is required to disclose the following)
An entity shall disclose the following if not disclosedelsewhere in information published with the financial statementsa) the domicile and legal form of the entity
its country of incorporation andthe address of its registered office(or principal place of business if different from the registered office)
b) a description of the nature of the entityrsquos operations and its principal activities and
c) the name of the parent and the ultimate parent of the group
ldquoshall discloserdquo now instead of ldquoencouraged to discloserdquo
ldquoshall discloserdquo now instead of ldquoencouraged to discloserdquo
bull Other disclosures
Any specialAny special
50
copy 2005-07 Nelson 99
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)bull The principal activities of Galaxy Entertainment Group
Ltd (the lsquolsquoCompanyrsquorsquo) (formerly known as K WahConstruction Materials Ltd) and its subsidiaries (together the lsquolsquoGrouprsquorsquo) are tondash operate in casino games of chance or games of other forms
in Macau (and) manufacture sale and distribution of construction materials in HK Macau and Mainland China
bull The Company is ndash a limited liability company incorporated in Hong Kong and ndash has its listing on the Main Board of The Stock Exchange of
Hong Kong Limitedbull The address of its registered office and its principal place
of business is Room 1606 16th Floor Hutchison House 10 Harcourt Road Central HK
copy 2005-07 Nelson 100
Effective Date
bull An entity shall apply IAS 1 for annual periods beginning on or after 1 Jan 2005
ndash Earlier application is encouragedndash If an entity applies IAS 1 for an earlier period it shall
disclose this factbull For the amendments relating to the Statement of
Changes in Equityndash An entity shall apply it for annual periods beginning on
or after 1 Jan 2006ndash If an entity applies the amendments to IAS 19
Employee Benefits ndash Actuarial Gains and Losses Group Plans and Disclosures for an earlier period that amendment shall be applied for that earlier period
51
copy 2005-07 Nelson 101
Todayrsquos Agenda
Capital Disclosures (Amendments to IAS 1)
Capital Disclosures (Amendments to IAS 1)
copy 2005-07 Nelson 102
Capital Disclosures ndash For 2007
52
copy 2005-07 Nelson 103
Capital Disclosures
What is capital Is it helliphellip
CapitalCapital AssetsAssets LiabilitiesLiabilities= ndash
bull IAS 1BC47 considers ldquowhether an entity can have a view of capital that differs from what IFRSs define as equityrdquo
bull It further clarifies that although for the purposes of this disclosure capital would often equate with equity as defined in IFRSsndash it might also include or exclude some components
bull It also noted that the capital disclosure in IAS 1 is intended to give entities the opportunity to describendash how they view the components of capital they manage if this is
different from what IFRSs define as equity helliphellip
copy 2005-07 Nelson 104
EquityEquityEquity AssetsAssets LiabilitiesLiabilities= ndash
Capital Disclosures
Based on the Framework amp IFRSs the accounting equation should be
CapitalCapital AssetsAssets LiabilitiesLiabilities= ndash
bull An entityrsquos capital may be part of its equity plus part of its liabilities depending on how it manage ldquoits capitalrdquo helliphellip
53
copy 2005-07 Nelson 105
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowinga) qualitative information about its objectives policies and processes for
managing capital including (but not limited to)i) a description of what it manages as capitalii) when an entity is subject to externally imposed capital requirements
the nature of those requirements and how those requirements are incorporated into the management of capital and
iii) how it is meeting its objectives for managing capital
bull To comply with the capital disclosures the entity discloses thefollowinga) qualitative information about its objectives policies and processes for
managing capital including (but not limited to)i) a description of what it manages as capitalii) when an entity is subject to externally imposed capital requirements
the nature of those requirements and how those requirements are incorporated into the management of capital and
iii) how it is meeting its objectives for managing capital
copy 2005-07 Nelson 106
Capital Disclosures
Example disclosurebull The Grouprsquos objectives when managing capital are
ndash to safeguard the entityrsquos ability to continue as a going concern
bull so that it can continue to provide returns for shareholders and benefits for other stakeholders and
ndash to provide an adequate return to shareholders by pricing products and services commensurately with the level of risk
bull The Group sets the amount of capital in proportion to risk
ExampleExample
ObjectivesObjectives
54
copy 2005-07 Nelson 107
Capital Disclosures
bull The Group manages the capital structure and makes adjustments to it in the light ofndash changes in economic conditions and ndash the risk characteristics of the underlying assets
bull In order to maintain or adjust the capital structure the Group mayndash adjust the amount of dividends paid to shareholders ndash return capital to shareholders ndash issue new shares or ndash sell assets to reduce debt
ExampleExample
Example disclosure
HowHow
copy 2005-07 Nelson 108
Capital Disclosures
bull Consistently with others in the industry the Group monitors capital on the basis of ndash the debt-to-adjusted capital ratio
bull This ratio is calculated as net debt divide adjusted capital
ExampleExample
Example disclosure
HowHow
bull Net debt is calculated as ndash Total debt (as shown in the
balance sheet)ndash Less cash amp cash equivalents
bull Net debt is calculated as ndash Total debt (as shown in the
balance sheet)ndash Less cash amp cash equivalents
bull Adjusted capital ndash comprises all components of
equity (ie share capital share premium minority interest retained earnings and revaluation reserve) ndash other than amounts
recognised in equity relating to cash flow hedges and
ndash includes some forms of subordinated debt
bull Adjusted capital ndash comprises all components of
equity (ie share capital share premium minority interest retained earnings and revaluation reserve) ndash other than amounts
recognised in equity relating to cash flow hedges and
ndash includes some forms of subordinated debt
55
copy 2005-07 Nelson 109
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowing
bull To comply with the capital disclosures the entity discloses thefollowingb) summary quantitative data about what it manages as capital
Some entities regard some financial liabilities (eg some forms of subordinated debt) as part of capitalOther entities regard capital as excluding some components of equity (eg components arising from cash flow hedges)
c) any changes in (a) and (b) from the previous period
copy 2005-07 Nelson 110
Capital Disclosures
Example disclosure (continued from previous example)
ExampleExample
bull During 20X4 the Grouprsquos strategy which was unchanged from 20X3 was to maintain the debt-to-adjusted capital ratio at the lower end of the range 61 to 71 in order to secure access to finance at a reasonable cost by maintaining a BB credit rating The debt-to-adjusted capital ratios at 31 December 20X4 and at 31 December 20X3 were as follows
3112X4 ($rsquoM) 3112X3 ($rsquoM) Total debt 1000 1100 Less cash and cash equivalents (90) (150)Net debt 910 950
Total equity 110 105 Add subordinated debt instruments 38 38 Less amounts recognised in equity
relating to cash flow hedges (10) (5)Adjusted capital 138 138
Debt-to-adjusted capital ratio 66 69
56
copy 2005-07 Nelson 111
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowing
bull To comply with the capital disclosures the entity discloses thefollowingd) whether during the period it complied with any externally imposed capital
requirements to which it is subjecte) when the entity has not complied with such externally imposed capital
requirements the consequences of such non-complianceThese disclosures shall be based on the information provided internally to the entityrsquos key management personnel
copy 2005-07 Nelson 112
Capital DisclosuresExampleExample
Example disclosurebull Entity A filed its quarterly regulatory capital return for
30 September 20X7 on 20 October 20X7 bull At that date Entity Arsquos regulatory capital was below
the capital requirement imposed by Regulator B by $1 million
bull As a result Entity A was required to submit a plan to the regulator indicating how it would increase its regulatory capital to the amount required
bull Entity A submitted a plan that entailed selling part of its unquoted equities portfolio with a carrying amount of $115 million in the fourth quarter of 20X7
bull In the fourth quarter of 20X7 Entity A sold its fixed interest investment portfolio for $126 million and met its regulatory capital requirement
For example SFC or banks
For example SFC or banks
57
copy 2005-07 Nelson 113
Capital DisclosuresCaseCase
bull Early adopted capital disclosure in 2005 and itsannual report states that (extract only)ndash The Grouprsquos objectives when managing capital are
bull To safeguard the Grouprsquos ability to continue as a going concern so that it continues to provide returns for shareholders and benefits for other stakeholders
bull To support the Grouprsquos stability and growth andbull To provide capital for the purpose of strengthening the
Grouprsquos risk management capability
copy 2005-07 Nelson 114
Capital DisclosuresCaseCase
ndash The Group actively and regularly reviews and manages its capital structure to ensure optimal capital structure and shareholder returns taking into consideration the future capital requirements of the Group and capital efficiency helliphellip
ndash The Group adopts a dividend policy helliphellip while retaining 10 per cent of the profit as capital of the Group for future use
ndash The Group has set aside $1500 million of retained earnings for the purpose of strengthening the risk management regime of the clearing houses and supporting their roles as central counterparties
ndash As in prior years the Group monitors capital by reviewing the level of capital that is at the disposal of the Group (ldquoadjusted capitalrdquo) Adjusted capital comprises all components of shareholdersrsquo equity other than the hedging reserve relating to cash flow hedges designated reserves and investment revaluation reserve helliphellip
bull Early adopted capital disclosure in 2005 and itsannual report states that (extract only)
58
copy 2005-07 Nelson 115
Capital Disclosures ndash Transition
bull An entity shall apply the requirements of capital disclosure for
ndash annual periods beginning on or after 1 January 2007
bull Early application is encouraged
copy 2005-07 Nelson 116
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk
59
copy 2005-07 Nelson 117
QampA SessionQampA SessionQampA Session
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk
26
copy 2005-07 Nelson 51
3 Overall Consideration
bull During ordinary activities some transactions that do not generate revenue but are incidental to the main revenue-generating activitiesndash The results of such transactions are presented
when this presentation reflects the substance of the transaction or other event by netting any income with related expenses arising on the same transaction
f) Offsetting
copy 2005-07 Nelson 52
3 Overall Consideration
bull For examplea) gains and losses on the disposal of non-current
assets including investments and operating assets- are reported by deducting from the proceeds on
disposal the carrying amount of the asset and related selling expenses and
b) expenditure related to a provision that is- recognised in accordance with IAS 37 and - reimbursed under a contractual arrangement with
a third party (for example a supplierrsquos warranty agreement)
may be netted against the related reimbursement
f) Offsetting
ExampleExample
27
copy 2005-07 Nelson 53
3 Overall Consideration
bull Gains and losses arising from a group of similar transactions are reported on a net basisndash For example
bull foreign exchange gains and losses or bull gains and losses arising on financial instruments held for trading
bull Such gains and losses are however reported separately if they are material
bull Gains and losses arising from a group of similar transactions are reported on a net basisndash For example
bull foreign exchange gains and losses or bull gains and losses arising on financial instruments held for trading
bull Such gains and losses are however reported separately if they are material
Can foreign exchange gains and losses be offset
ExampleExample
copy 2005-07 Nelson 54
3 Overall Consideration
bull Except when a IFRS permits or requires otherwise ndash comparative information shall be disclosed in
respect of the previous period for all amountsreported in the financial statements
bull When the presentation or classification of items in the financial statements is amended ndash comparative amounts shall be reclassified unless
the reclassification is impracticable
g) Comparative information
28
copy 2005-07 Nelson 55
Amended requirementsAmended requirements
3 Overall Consideration
bull When comparative amounts are reclassified an entity shall disclosea) the nature of the reclassificationb) the amount of each item or class of items that is
reclassified andc) the reason for the reclassification
g) Comparative information
bull In the pastonly the reason for and a description of the nature of materialreclassifications should be disclosedExemption for disclosure of comparative information for the reconciliation of movements in fixed assets is also removed
bull In the pastonly the reason for and a description of the nature of materialreclassifications should be disclosedExemption for disclosure of comparative information for the reconciliation of movements in fixed assets is also removed
copy 2005-07 Nelson 56
3 Overall Consideration
Melco Development Limited (新濠國際發展有限公司)Notes to the financial statements for year ended 31122005ndash Because HKAS 32 requires retrospective application comparative
figures for 2004 have been restated (see Note 2A for the financial impact)
CaseCase
29
copy 2005-07 Nelson 57
3 Overall Consideration
Galaxy Entertainment Group LimitedNotes to the financial statements (ye 31122005)ndash All changes in the accounting policies require
retrospective application except HKAS 39 and HKFRS 2 for which transitional provisions are applied
ndash As a result the 2004 comparative figures have also been restated or amended in accordance with the relevant requirements
ndash The effects of all the changes in accounting policies are summarised in notes (b) and (c) below
CaseCase
copy 2005-07 Nelson 58
bull Identification of the financial statementsbull Reporting periodbull Balance sheet
1 CurrentNon-current distinction2 Current assets3 Current liabilities4 Information to be presented on the face of the balance sheet5 Information to be presented either on the face of the balance sheet or in
the notesbull Income statement
1 Profit or loss for the period2 Information to be presented on the face of the income statement3 Information to be presented either on the face of the income statement or
in the notesbull Statement of changes in equitybull Cash flow statementbull Notes
4 Structure and Content
30
copy 2005-07 Nelson 59
Identification of Financial Statements
bull The financial statements shall be identified clearly and distinguished from other information in the same published document
bull The following information shall be displayed prominently and repeated when it is necessary for a proper understanding of the information presented
a) the name of the reporting entity or other means of identification and any change in that information from the preceding balance sheet date
b) whether the financial statements cover the individual entity or a group of entities
c) the balance sheet date or the period covered by the financial statements whichever is appropriate to that component of the financial statements
d) the presentation currency as defined in HKAS 21 The Effects of Changes in Foreign Exchange Rates and
e) the level of rounding used in presenting amounts in the financial statements
copy 2005-07 Nelson 60
Identification of Financial Statements
bull Can the units of the presentation currency be rounded to thousands or millions
bull Financial statements are often made more understandableby presenting information in thousands or millions of units of the presentation currency
bull This is acceptable as long asndash the level of rounding in presentation is disclosed and ndash material information is not omitted
bull Financial statements are often made more understandableby presenting information in thousands or millions of units of the presentation currency
bull This is acceptable as long asndash the level of rounding in presentation is disclosed and ndash material information is not omitted
ExampleExample
31
copy 2005-07 Nelson 61
Reporting Period
bull Financial statements shall be presented at least annually
bull When an entityrsquos balance sheet date changes and the annual financial statements are presented for a period longer or shorter than one year an entity shall disclose in addition to the period covered by the financial statementsa) the reason for using a longer or shorter period andb) the fact that comparative amounts for the income
statement statement of changes in equity cash flow statement and related notes are not entirely comparable
copy 2005-07 Nelson 62
Reporting Period
bull Can a set of financial statements cover 52-week instead of a year
bull Normally financial statements are consistently prepared covering a one-year period
bull However for practical reasons some entities prefer to report for example for a 52-week period
bull IAS 1 does not preclude this practice because the resulting financial statements are unlikely to be materially different from those that would be presented for one year
bull Normally financial statements are consistently prepared covering a one-year period
bull However for practical reasons some entities prefer to report for example for a 52-week period
bull IAS 1 does not preclude this practice because the resulting financial statements are unlikely to be materially different from those that would be presented for one year
ExampleExample
32
copy 2005-07 Nelson 63
CurrentNon-current Distinction
bull An entity shall presentndash current and non-current assets andndash current and non-current liabilitiesas separate classifications on the face of its balance sheet
bull Except when a presentation based on liquidity provides informationndash If that information is reliable and is more relevantndash When that exception applies all assets and liabilities shall be
presented broadly in order of liquidity
copy 2005-07 Nelson 64
CurrentNon-current Distinction
bull Whichever method of presentation is adopted for each asset and liability line item that combines amounts expected to be recovered or settled a) no more than 12 months after the balance sheet date
andb) more than 12 months after the balance sheet date(ie combines both current and non-current)
an entity shall disclose the amount expected to be recovered or settled after more than 12 months
33
copy 2005-07 Nelson 65
New requirementsNew requirements
Current Assets
bull An asset shall be classified as current when it satisfies any of the following criteriaa) it is expected to be realised in or is intended for sale or
consumption in the entityrsquos normal operating cycle b) it is held primarily for the purpose of being tradedc) it is expected to be realised within 12 months after the balance
sheet date ord) it is cash or a cash equivalent
bull unless it is restricted from being exchanged or used to settle aliability for at least 12 months after the balance sheet date
bull All other assets shall be classified as non-current
Examplesbull Deposits pledged to bank (how long)bull Fixed deposits over 1 year maturity
Examplesbull Deposits pledged to bank (how long)bull Fixed deposits over 1 year maturity
What is itWhat is it
copy 2005-07 Nelson 66
Current Assets
bull What is operating cycle
bull The operating cycle of an entity is the time between ndash the acquisition of assets for processing and ndash their realisation in cash or cash equivalents
bull When the entityrsquos normal operating cycle is not clearly identifiable ndash its duration is assumed to be 12 months
bull The operating cycle of an entity is the time between ndash the acquisition of assets for processing and ndash their realisation in cash or cash equivalents
bull When the entityrsquos normal operating cycle is not clearly identifiable ndash its duration is assumed to be 12 months
ExampleExample
34
copy 2005-07 Nelson 67
Current Assets CaseCase
copy 2005-07 Nelson 68
Current Assets
bull Can a non-current asset reclassified if it fulfil the definition of current asset later
bull Assets classified as non-current in accordancewith IAS 1 shall not be reclassified as current assetsndash until they meet the criteria to be classified as held for sale in
accordance with IFRS 5bull Assets of a class that an entity would normally regard as non-
current that are acquired exclusively with a view to resale shall notbe classified as currentndash unless they meet the criteria to be classified as held for sale in
accordance with IFRS 5
bull Assets classified as non-current in accordancewith IAS 1 shall not be reclassified as current assetsndash until they meet the criteria to be classified as held for sale in
accordance with IFRS 5bull Assets of a class that an entity would normally regard as non-
current that are acquired exclusively with a view to resale shall notbe classified as currentndash unless they meet the criteria to be classified as held for sale in
accordance with IFRS 5
No non-current assets can be classified as current unless the criteria in IFRS 5 are fulfilled mainlybull Available for immediate salebull Highly probable to make the sale
35
copy 2005-07 Nelson 69
Is it currentIs it current
Current Assets
bull In its 2005 Interim Report full set of HKFRS was adopted and the report set out thatndash Available-for-sale financial assets are non-
derivatives that are eitherbull designated in this category orbull not classified in any of the other categories (ie
loans and receivables financial assets at fair value through profit or loss and held-to-maturity investments)
CaseCase
Similar in 2005 Annual Report
Similar in 2005 Annual Report
ndash They are included in non-current assetsbull unless management intends to dispose of the
investment within 12 months of the balance sheet date
copy 2005-07 Nelson 70
New requirementsNew requirements
Current Liabilities
bull A liability shall be classified as current when it satisfies any of the following criteriaa) it is expected to be settled in the entityrsquos normal operating cycleb) it is held primarily for the purpose of being tradedc) it is due to be settled within 12 months after the balance sheet
date ord) the entity does not have an unconditional right to defer settlement
of the liability for at least 12 months after the balance sheet date
bull All other liabilities shall be classified as non-current
ImplicationImplication
36
copy 2005-07 Nelson 71
Current Liabilities Revised rules on classifying a liability as current or non-currentbull A liability held for being traded rArr currentbull A financial liability due within 12 months after the BS date rArr current
ndash even if an agreement to refinance on a long-term basis is completed after the BS date (only disclosed as non-adjusting event)
bull If an entity has discretion to refinance rArr non-currentbull If an entity without discretion to refinance rArr current
bull A non-current financial liability is payable on demand with a breach on a condition of its loan agreement on or before the BS datendash If the lender agreed not to demand payment
bull after the BS date rArr current (only disclosed as non-adjusting event)
bull by the BS date rArr non-current
ImplicationImplication
copy 2005-07 Nelson 72
Current LiabilitiesCaseCase
Note 12 to Interim Report 2006bull Breach of loan covenants
bull As at 30 June 2006 in respect of certain bank loans with an aggregate carrying amount of HK$1529806000 the Group breached certain financial covenants of the banks loans
bull Since the lenders have not agreed to waive its right to demand immediate payment as at the balance sheet date the loans have been classified as current liabilities in these financial statements at 30 June 2006
37
copy 2005-07 Nelson 73
Current Assets and LiabilitiesExampleExample
Can the following be classified as current assetsbull 3-month fixed deposits pledged to a bank to secure
a mortgage loan of 5 yearsbull 2-year fixed deposits with a bank
Can the following be classified as current assetsbull 3-month fixed deposits pledged to a bank to secure
a mortgage loan of 5 yearsbull 2-year fixed deposits with a bank
Can the following be classified as non-current liabilitiesbull 5-year term loan matured after year end but renewed
for another 5 years after year end (before the issuanceof the financial statements)
bull 2-year term loan to be matured with 12 months and theentity has a right to renew for another 2 years
Can the following be classified as non-current liabilitiesbull 5-year term loan matured after year end but renewed
for another 5 years after year end (before the issuanceof the financial statements)
bull 2-year term loan to be matured with 12 months and theentity has a right to renew for another 2 years
timestimes
times
radic
copy 2005-07 Nelson 74
Balance Sheetbull As a minimum the face of the balance sheet shall
include line items that present the following amountsa) property plant and equipmentb) investment propertyc) intangible assetsd) financial assets (excl amounts shown under (e) (h) and (I))e) investments accounted for using the equity methodf) biological assetsg) inventoriesh) trade and other receivablesi) cash and cash equivalentsj) trade and other payablesk) provisionsl) financial liabilities (excl amounts shown under (j) and (k))m) liabilities and assets for current tax as defined in HKAS 12 Income Taxesn) deferred tax liabilities and deferred tax assets as defined in HKAS 12o) minority interest presented within equity andp) issued capital and reserves attributable to equity holders of the parent
38
copy 2005-07 Nelson 75
Balance Sheetbull The face of the balance sheet shall also include line
items that present the following amountsa) The total of assets classified as held for sale and
assets included in disposal groups classified as held for sale in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations and
b) Liabilities included in disposal groups classified as held for sale in accordance with IFRS 5
copy 2005-07 Nelson 76
Balance Sheetbull Additional line items headings and subtotals shall
be presented on the face of the balance sheet when such presentation is relevant to an understanding of the entityrsquos financial position
bull When an entity presents current and non-current assets and current and non-current liabilities as separate classifications on the face of its balance sheet ndash it shall not classify deferred tax assets
(liabilities) as current assets (liabilities)
39
copy 2005-07 Nelson 77
Balance Sheet
bull The use of different measurement bases for different classes of assets suggests that their nature or function differs and therefore that they should be presented as separate line itemsndash For example different classes of property plant and
equipment can be carried atbull Cost orbull Revalued amountsin accordance with IAS 16 PPE
In the past it use ldquomay needrdquoIn the past it use ldquomay needrdquo
copy 2005-07 Nelson 78
Balance Sheet
Galaxy Entertainment Group LimitedConsolidated balance sheet as at 31122005
CaseCase
40
copy 2005-07 Nelson 79
Balance Sheet
Melco Development Limited (新濠國際發展有限公司)Consolidated balance sheet as at 31122005
CaseCase
copy 2005-07 Nelson 80
Income Statement Minimum requirements on the face of the income statementbull As a minimum the face of the income statement shall include line items
that present the following amounts for the perioda) revenueb) finance costsc) share of the profit or loss of associates and joint ventures accounted
for using the equity methodd) pre-tax gain or loss recognised on the disposal of assets or
settlement of liabilities attributable to discontinuing operationse) tax expense andf) profit or loss
41
copy 2005-07 Nelson 81
Income Statement bull The following items shall be disclosed on the face of the income
statement as allocations of profit or loss for the perioda) Profit or loss attributable to minority interest andb) Profit or loss attributable to equity holders of the parent
A similar requirement has been added for the statement of changes in equity and such allocated amounts are not to be presented as items of income or expense
copy 2005-07 Nelson 82
Income Statement
Melco Dev LtdConsolidated income statementas at 31122005
CaseCase
42
copy 2005-07 Nelson 83
Income Statement bull Not require to disclose the results of operating
activities as a line item on the face of the incomestatement
bull An entity shall not present any items of income and expense as extraordinary items either onthe face of the income statements or in the notes
Entities canrsquot use itEntities canrsquot use it
Entities can still show itEntities can still show it
copy 2005-07 Nelson 84
Income Statement Either on the face of the income statement or in the notesbull An entity shall present an analysis of expenses using a classification
based on eitherbull the nature of expenses orbull their function within the entity
whichever provides information that is reliable and more relevant
bull Entities classifying expenses by function shall disclose additional information on the nature of expenses includingbull depreciation and amortisation expense and bull employee benefits expense
43
copy 2005-07 Nelson 85
Income StatementCaseCase
Nature or FunctionNature or Nature or FunctionFunction
copy 2005-07 Nelson 86
Statement of Changes in Equity bull An entity shall present a statement of changes in equity showing on the
face of the statementa) profit or loss for the period b) each item of income and expense for the period that as required by
IFRSs is recognised directly in equity and the total of these itemsc) total income and expense for the period (calculated as the sum of (a) and
(b)) showing separately the total amounts attributablebull to equity holders of the parent andbull to minority interest and
d) for each component of equity the effects of changes in accounting policies and corrections of errors recognised in accordance with IAS 8
Any ChangeAny Change
A revised requirementbull A statement of changes in equity that comprises only these items
shall be titled a statement of recognised income and expenses
A revised requirementbull A statement of changes in equity that comprises only these items
shall be titled a statement of recognised income and expenses
44
copy 2005-07 Nelson 87
Statement of Changes in Equity bull An entity shall also present either on the face of the
statement of changes in equity or in the notesa) the amounts of transactions with equity holders acting in
their capacity as equity holders showing separately distributions to equity holders
b) the balance of retained earnings (ie accumulated profit or loss) at the beginning of the period and at the balance sheet date and the changes during the period and
c) a reconciliation between the carrying amount of each class of contributed equity and each reserve at the beginning and the end of the period separately disclosing each change
copy 2005-07 Nelson 88
Statement of Changes in Equity
Consolidated SCE as at 31122005
CaseCase
45
copy 2005-07 Nelson 89
Notes Structure (an entity is required to disclose the following)
bull The notes shalla) present information about the basis of preparation of the financial statements
and the specific accounting policies usedb) disclose the information required by HKFRSs that is not presented on the
face of the balance sheet income statement statement of changes in equity or cash flow statement and
c) provide additional information that is not presented on the face of the balance sheet income statement statement of changes in equity or cash flow statement but is relevant to an understanding of any of them
bull Notes shall as far as practicable be presented in a systematic manner bull Each item on the face of the balance sheet income statement statement
of changes in equity and cash flow statement shall be cross-referencedto any related information in the notes
copy 2005-07 Nelson 90
Notes Disclosures (an entity is required to disclose the following)
bull Disclosure of accounting policiesAn entity shall disclose in the summary of significant accounting policiesa) the measurement basis (or bases) used in preparing the financial
statements andb) the other accounting policies used that are relevant to an understanding of
the financial statements
46
copy 2005-07 Nelson 91
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)ndash The financial statements have been prepared in
accordance with Hong Kong Financial Reporting Standards (lsquolsquoHKFRSrsquorsquo) issued by the Hong Kong Institute of Certified Public Accountants bull under the historical cost convention as modified by the
revaluation of investment properties available-for-sale financial assets derivative financial instruments and other investments which are carried at fair values helliphellip
ndash The principal accounting policies applied in the preparation of these financial statements are set out below These policies have been consistently applied to all the years presented except for those stated in note 2(a) above
copy 2005-07 Nelson 92
Notes Disclosures (an entity is required to disclose the following)
bull Disclosure of accounting policiesndash The judgements apart from those involving estimations management has
madebull in the process of applying the entityrsquos accounting policies that have the
most significant effect on the amounts recognised in the financial statements (in the summary of significant accounting policies or other notes)
Examples ndash Management makes judgements in determininga) whether financial assets are held-to-maturity investmentsb) when substantially all the significant risks and rewards of
ownership of financial assets and lease assets are transferred to other entities
c) whether in substance particular sales of goods are financing arrangements and therefore do not give rise to revenue and
d) whether the substance of the relationship between the entity and a special purpose entity indicates that the special purpose entity is controlled by the entity
Examples ndash Management makes judgements in determininga) whether financial assets are held-to-maturity investmentsb) when substantially all the significant risks and rewards of
ownership of financial assets and lease assets are transferred to other entities
c) whether in substance particular sales of goods are financing arrangements and therefore do not give rise to revenue and
d) whether the substance of the relationship between the entity and a special purpose entity indicates that the special purpose entity is controlled by the entity
47
copy 2005-07 Nelson 93
Notes Disclosures (an entity is required to disclose the following)
bull Key sources of estimation uncertaintyndash Information about the key assumptions concerning the future and
other key sources of estimation uncertainty at the balance sheet datebull that have a significant risk of causing a material adjustment to the
carrying amounts of assets and liabilities within the next financial yearndash In respect of those assets and liabilities the notes shall include details of
a) their nature andb) their carrying amount as at the balance sheet date
Examples ndash in the absence of recently observed market prices used to measure the following assets and liabilities future-oriented estimates are necessary to measurebull the recoverable amount of classes of PPEbull the effect of technological obsolescence on inventories
Estimates involve assumptions about such items asbull the risk adjustment to cash flows or discount rates usedbull future changes in salaries and in prices affecting other costs
Examples ndash in the absence of recently observed market prices used to measure the following assets and liabilities future-oriented estimates are necessary to measurebull the recoverable amount of classes of PPEbull the effect of technological obsolescence on inventories
Estimates involve assumptions about such items asbull the risk adjustment to cash flows or discount rates usedbull future changes in salaries and in prices affecting other costs
copy 2005-07 Nelson 94
Notes
Esprit Holdings LimitedEsprit Holdings Limitedbull Critical Accounting Estimates and Judgements
ndash Estimates and judgements are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonableunder the circumstances
ndash Critical accounting estimates and assumptionsbull The Group makes estimates and assumptions concerning
the future The resulting accounting estimates will by definition seldom equal the related actual results
bull The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below helliphellip (including (1) useful life and impairment of trademarks and (2) income taxes)
CaseCase
48
copy 2005-07 Nelson 95
Notes
Melco Development Limited (新濠國際發展有限公司)Notes to the financial statements for the year ended 31122005ndash The key assumptions concerning the future and other key sources
of estimation uncertainty at the balance sheet date that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below helliphellip(The issues discussed includebull Allowances for inventories bull Estimated impairment of goodwill Income taxes)
CaseCase
copy 2005-07 Nelson 96
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)ndash Estimates and judgements used in preparing the
financial statements are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonable under the circumstances
ndash The Group makes estimates and assumptionsconcerning the future
ndash The resulting accounting estimates will by definition seldom equal the related actual results
ndash The estimates and assumptions that have a significant effect on the carrying amounts of assets and liabilities are discussed below hellip (including impairment of goodwill impairment of gaming
licence Useful lives of property plant and equipment fair value of investment properties hellip)
49
copy 2005-07 Nelson 97
Notes Disclosures (an entity is required to disclose the following)
bull Other disclosuresAn entity shall disclose in the notesa) the amount of dividends proposed or declared before the
financial statements were authorised for issue but not recognised as a distribution to equity holders during the period and the related amount per share(HK incorporated companies are required to show the aggregate amount which is recommended for distribution by way of dividend under a separate heading(s) in their balance sheet (HK Co Ord 10th Sch para 9(1)(e)) and
b) the amount of any cumulative preference dividends not recognised
copy 2005-07 Nelson 98
Notes Disclosures (an entity is required to disclose the following)
An entity shall disclose the following if not disclosedelsewhere in information published with the financial statementsa) the domicile and legal form of the entity
its country of incorporation andthe address of its registered office(or principal place of business if different from the registered office)
b) a description of the nature of the entityrsquos operations and its principal activities and
c) the name of the parent and the ultimate parent of the group
ldquoshall discloserdquo now instead of ldquoencouraged to discloserdquo
ldquoshall discloserdquo now instead of ldquoencouraged to discloserdquo
bull Other disclosures
Any specialAny special
50
copy 2005-07 Nelson 99
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)bull The principal activities of Galaxy Entertainment Group
Ltd (the lsquolsquoCompanyrsquorsquo) (formerly known as K WahConstruction Materials Ltd) and its subsidiaries (together the lsquolsquoGrouprsquorsquo) are tondash operate in casino games of chance or games of other forms
in Macau (and) manufacture sale and distribution of construction materials in HK Macau and Mainland China
bull The Company is ndash a limited liability company incorporated in Hong Kong and ndash has its listing on the Main Board of The Stock Exchange of
Hong Kong Limitedbull The address of its registered office and its principal place
of business is Room 1606 16th Floor Hutchison House 10 Harcourt Road Central HK
copy 2005-07 Nelson 100
Effective Date
bull An entity shall apply IAS 1 for annual periods beginning on or after 1 Jan 2005
ndash Earlier application is encouragedndash If an entity applies IAS 1 for an earlier period it shall
disclose this factbull For the amendments relating to the Statement of
Changes in Equityndash An entity shall apply it for annual periods beginning on
or after 1 Jan 2006ndash If an entity applies the amendments to IAS 19
Employee Benefits ndash Actuarial Gains and Losses Group Plans and Disclosures for an earlier period that amendment shall be applied for that earlier period
51
copy 2005-07 Nelson 101
Todayrsquos Agenda
Capital Disclosures (Amendments to IAS 1)
Capital Disclosures (Amendments to IAS 1)
copy 2005-07 Nelson 102
Capital Disclosures ndash For 2007
52
copy 2005-07 Nelson 103
Capital Disclosures
What is capital Is it helliphellip
CapitalCapital AssetsAssets LiabilitiesLiabilities= ndash
bull IAS 1BC47 considers ldquowhether an entity can have a view of capital that differs from what IFRSs define as equityrdquo
bull It further clarifies that although for the purposes of this disclosure capital would often equate with equity as defined in IFRSsndash it might also include or exclude some components
bull It also noted that the capital disclosure in IAS 1 is intended to give entities the opportunity to describendash how they view the components of capital they manage if this is
different from what IFRSs define as equity helliphellip
copy 2005-07 Nelson 104
EquityEquityEquity AssetsAssets LiabilitiesLiabilities= ndash
Capital Disclosures
Based on the Framework amp IFRSs the accounting equation should be
CapitalCapital AssetsAssets LiabilitiesLiabilities= ndash
bull An entityrsquos capital may be part of its equity plus part of its liabilities depending on how it manage ldquoits capitalrdquo helliphellip
53
copy 2005-07 Nelson 105
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowinga) qualitative information about its objectives policies and processes for
managing capital including (but not limited to)i) a description of what it manages as capitalii) when an entity is subject to externally imposed capital requirements
the nature of those requirements and how those requirements are incorporated into the management of capital and
iii) how it is meeting its objectives for managing capital
bull To comply with the capital disclosures the entity discloses thefollowinga) qualitative information about its objectives policies and processes for
managing capital including (but not limited to)i) a description of what it manages as capitalii) when an entity is subject to externally imposed capital requirements
the nature of those requirements and how those requirements are incorporated into the management of capital and
iii) how it is meeting its objectives for managing capital
copy 2005-07 Nelson 106
Capital Disclosures
Example disclosurebull The Grouprsquos objectives when managing capital are
ndash to safeguard the entityrsquos ability to continue as a going concern
bull so that it can continue to provide returns for shareholders and benefits for other stakeholders and
ndash to provide an adequate return to shareholders by pricing products and services commensurately with the level of risk
bull The Group sets the amount of capital in proportion to risk
ExampleExample
ObjectivesObjectives
54
copy 2005-07 Nelson 107
Capital Disclosures
bull The Group manages the capital structure and makes adjustments to it in the light ofndash changes in economic conditions and ndash the risk characteristics of the underlying assets
bull In order to maintain or adjust the capital structure the Group mayndash adjust the amount of dividends paid to shareholders ndash return capital to shareholders ndash issue new shares or ndash sell assets to reduce debt
ExampleExample
Example disclosure
HowHow
copy 2005-07 Nelson 108
Capital Disclosures
bull Consistently with others in the industry the Group monitors capital on the basis of ndash the debt-to-adjusted capital ratio
bull This ratio is calculated as net debt divide adjusted capital
ExampleExample
Example disclosure
HowHow
bull Net debt is calculated as ndash Total debt (as shown in the
balance sheet)ndash Less cash amp cash equivalents
bull Net debt is calculated as ndash Total debt (as shown in the
balance sheet)ndash Less cash amp cash equivalents
bull Adjusted capital ndash comprises all components of
equity (ie share capital share premium minority interest retained earnings and revaluation reserve) ndash other than amounts
recognised in equity relating to cash flow hedges and
ndash includes some forms of subordinated debt
bull Adjusted capital ndash comprises all components of
equity (ie share capital share premium minority interest retained earnings and revaluation reserve) ndash other than amounts
recognised in equity relating to cash flow hedges and
ndash includes some forms of subordinated debt
55
copy 2005-07 Nelson 109
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowing
bull To comply with the capital disclosures the entity discloses thefollowingb) summary quantitative data about what it manages as capital
Some entities regard some financial liabilities (eg some forms of subordinated debt) as part of capitalOther entities regard capital as excluding some components of equity (eg components arising from cash flow hedges)
c) any changes in (a) and (b) from the previous period
copy 2005-07 Nelson 110
Capital Disclosures
Example disclosure (continued from previous example)
ExampleExample
bull During 20X4 the Grouprsquos strategy which was unchanged from 20X3 was to maintain the debt-to-adjusted capital ratio at the lower end of the range 61 to 71 in order to secure access to finance at a reasonable cost by maintaining a BB credit rating The debt-to-adjusted capital ratios at 31 December 20X4 and at 31 December 20X3 were as follows
3112X4 ($rsquoM) 3112X3 ($rsquoM) Total debt 1000 1100 Less cash and cash equivalents (90) (150)Net debt 910 950
Total equity 110 105 Add subordinated debt instruments 38 38 Less amounts recognised in equity
relating to cash flow hedges (10) (5)Adjusted capital 138 138
Debt-to-adjusted capital ratio 66 69
56
copy 2005-07 Nelson 111
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowing
bull To comply with the capital disclosures the entity discloses thefollowingd) whether during the period it complied with any externally imposed capital
requirements to which it is subjecte) when the entity has not complied with such externally imposed capital
requirements the consequences of such non-complianceThese disclosures shall be based on the information provided internally to the entityrsquos key management personnel
copy 2005-07 Nelson 112
Capital DisclosuresExampleExample
Example disclosurebull Entity A filed its quarterly regulatory capital return for
30 September 20X7 on 20 October 20X7 bull At that date Entity Arsquos regulatory capital was below
the capital requirement imposed by Regulator B by $1 million
bull As a result Entity A was required to submit a plan to the regulator indicating how it would increase its regulatory capital to the amount required
bull Entity A submitted a plan that entailed selling part of its unquoted equities portfolio with a carrying amount of $115 million in the fourth quarter of 20X7
bull In the fourth quarter of 20X7 Entity A sold its fixed interest investment portfolio for $126 million and met its regulatory capital requirement
For example SFC or banks
For example SFC or banks
57
copy 2005-07 Nelson 113
Capital DisclosuresCaseCase
bull Early adopted capital disclosure in 2005 and itsannual report states that (extract only)ndash The Grouprsquos objectives when managing capital are
bull To safeguard the Grouprsquos ability to continue as a going concern so that it continues to provide returns for shareholders and benefits for other stakeholders
bull To support the Grouprsquos stability and growth andbull To provide capital for the purpose of strengthening the
Grouprsquos risk management capability
copy 2005-07 Nelson 114
Capital DisclosuresCaseCase
ndash The Group actively and regularly reviews and manages its capital structure to ensure optimal capital structure and shareholder returns taking into consideration the future capital requirements of the Group and capital efficiency helliphellip
ndash The Group adopts a dividend policy helliphellip while retaining 10 per cent of the profit as capital of the Group for future use
ndash The Group has set aside $1500 million of retained earnings for the purpose of strengthening the risk management regime of the clearing houses and supporting their roles as central counterparties
ndash As in prior years the Group monitors capital by reviewing the level of capital that is at the disposal of the Group (ldquoadjusted capitalrdquo) Adjusted capital comprises all components of shareholdersrsquo equity other than the hedging reserve relating to cash flow hedges designated reserves and investment revaluation reserve helliphellip
bull Early adopted capital disclosure in 2005 and itsannual report states that (extract only)
58
copy 2005-07 Nelson 115
Capital Disclosures ndash Transition
bull An entity shall apply the requirements of capital disclosure for
ndash annual periods beginning on or after 1 January 2007
bull Early application is encouraged
copy 2005-07 Nelson 116
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk
59
copy 2005-07 Nelson 117
QampA SessionQampA SessionQampA Session
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk
27
copy 2005-07 Nelson 53
3 Overall Consideration
bull Gains and losses arising from a group of similar transactions are reported on a net basisndash For example
bull foreign exchange gains and losses or bull gains and losses arising on financial instruments held for trading
bull Such gains and losses are however reported separately if they are material
bull Gains and losses arising from a group of similar transactions are reported on a net basisndash For example
bull foreign exchange gains and losses or bull gains and losses arising on financial instruments held for trading
bull Such gains and losses are however reported separately if they are material
Can foreign exchange gains and losses be offset
ExampleExample
copy 2005-07 Nelson 54
3 Overall Consideration
bull Except when a IFRS permits or requires otherwise ndash comparative information shall be disclosed in
respect of the previous period for all amountsreported in the financial statements
bull When the presentation or classification of items in the financial statements is amended ndash comparative amounts shall be reclassified unless
the reclassification is impracticable
g) Comparative information
28
copy 2005-07 Nelson 55
Amended requirementsAmended requirements
3 Overall Consideration
bull When comparative amounts are reclassified an entity shall disclosea) the nature of the reclassificationb) the amount of each item or class of items that is
reclassified andc) the reason for the reclassification
g) Comparative information
bull In the pastonly the reason for and a description of the nature of materialreclassifications should be disclosedExemption for disclosure of comparative information for the reconciliation of movements in fixed assets is also removed
bull In the pastonly the reason for and a description of the nature of materialreclassifications should be disclosedExemption for disclosure of comparative information for the reconciliation of movements in fixed assets is also removed
copy 2005-07 Nelson 56
3 Overall Consideration
Melco Development Limited (新濠國際發展有限公司)Notes to the financial statements for year ended 31122005ndash Because HKAS 32 requires retrospective application comparative
figures for 2004 have been restated (see Note 2A for the financial impact)
CaseCase
29
copy 2005-07 Nelson 57
3 Overall Consideration
Galaxy Entertainment Group LimitedNotes to the financial statements (ye 31122005)ndash All changes in the accounting policies require
retrospective application except HKAS 39 and HKFRS 2 for which transitional provisions are applied
ndash As a result the 2004 comparative figures have also been restated or amended in accordance with the relevant requirements
ndash The effects of all the changes in accounting policies are summarised in notes (b) and (c) below
CaseCase
copy 2005-07 Nelson 58
bull Identification of the financial statementsbull Reporting periodbull Balance sheet
1 CurrentNon-current distinction2 Current assets3 Current liabilities4 Information to be presented on the face of the balance sheet5 Information to be presented either on the face of the balance sheet or in
the notesbull Income statement
1 Profit or loss for the period2 Information to be presented on the face of the income statement3 Information to be presented either on the face of the income statement or
in the notesbull Statement of changes in equitybull Cash flow statementbull Notes
4 Structure and Content
30
copy 2005-07 Nelson 59
Identification of Financial Statements
bull The financial statements shall be identified clearly and distinguished from other information in the same published document
bull The following information shall be displayed prominently and repeated when it is necessary for a proper understanding of the information presented
a) the name of the reporting entity or other means of identification and any change in that information from the preceding balance sheet date
b) whether the financial statements cover the individual entity or a group of entities
c) the balance sheet date or the period covered by the financial statements whichever is appropriate to that component of the financial statements
d) the presentation currency as defined in HKAS 21 The Effects of Changes in Foreign Exchange Rates and
e) the level of rounding used in presenting amounts in the financial statements
copy 2005-07 Nelson 60
Identification of Financial Statements
bull Can the units of the presentation currency be rounded to thousands or millions
bull Financial statements are often made more understandableby presenting information in thousands or millions of units of the presentation currency
bull This is acceptable as long asndash the level of rounding in presentation is disclosed and ndash material information is not omitted
bull Financial statements are often made more understandableby presenting information in thousands or millions of units of the presentation currency
bull This is acceptable as long asndash the level of rounding in presentation is disclosed and ndash material information is not omitted
ExampleExample
31
copy 2005-07 Nelson 61
Reporting Period
bull Financial statements shall be presented at least annually
bull When an entityrsquos balance sheet date changes and the annual financial statements are presented for a period longer or shorter than one year an entity shall disclose in addition to the period covered by the financial statementsa) the reason for using a longer or shorter period andb) the fact that comparative amounts for the income
statement statement of changes in equity cash flow statement and related notes are not entirely comparable
copy 2005-07 Nelson 62
Reporting Period
bull Can a set of financial statements cover 52-week instead of a year
bull Normally financial statements are consistently prepared covering a one-year period
bull However for practical reasons some entities prefer to report for example for a 52-week period
bull IAS 1 does not preclude this practice because the resulting financial statements are unlikely to be materially different from those that would be presented for one year
bull Normally financial statements are consistently prepared covering a one-year period
bull However for practical reasons some entities prefer to report for example for a 52-week period
bull IAS 1 does not preclude this practice because the resulting financial statements are unlikely to be materially different from those that would be presented for one year
ExampleExample
32
copy 2005-07 Nelson 63
CurrentNon-current Distinction
bull An entity shall presentndash current and non-current assets andndash current and non-current liabilitiesas separate classifications on the face of its balance sheet
bull Except when a presentation based on liquidity provides informationndash If that information is reliable and is more relevantndash When that exception applies all assets and liabilities shall be
presented broadly in order of liquidity
copy 2005-07 Nelson 64
CurrentNon-current Distinction
bull Whichever method of presentation is adopted for each asset and liability line item that combines amounts expected to be recovered or settled a) no more than 12 months after the balance sheet date
andb) more than 12 months after the balance sheet date(ie combines both current and non-current)
an entity shall disclose the amount expected to be recovered or settled after more than 12 months
33
copy 2005-07 Nelson 65
New requirementsNew requirements
Current Assets
bull An asset shall be classified as current when it satisfies any of the following criteriaa) it is expected to be realised in or is intended for sale or
consumption in the entityrsquos normal operating cycle b) it is held primarily for the purpose of being tradedc) it is expected to be realised within 12 months after the balance
sheet date ord) it is cash or a cash equivalent
bull unless it is restricted from being exchanged or used to settle aliability for at least 12 months after the balance sheet date
bull All other assets shall be classified as non-current
Examplesbull Deposits pledged to bank (how long)bull Fixed deposits over 1 year maturity
Examplesbull Deposits pledged to bank (how long)bull Fixed deposits over 1 year maturity
What is itWhat is it
copy 2005-07 Nelson 66
Current Assets
bull What is operating cycle
bull The operating cycle of an entity is the time between ndash the acquisition of assets for processing and ndash their realisation in cash or cash equivalents
bull When the entityrsquos normal operating cycle is not clearly identifiable ndash its duration is assumed to be 12 months
bull The operating cycle of an entity is the time between ndash the acquisition of assets for processing and ndash their realisation in cash or cash equivalents
bull When the entityrsquos normal operating cycle is not clearly identifiable ndash its duration is assumed to be 12 months
ExampleExample
34
copy 2005-07 Nelson 67
Current Assets CaseCase
copy 2005-07 Nelson 68
Current Assets
bull Can a non-current asset reclassified if it fulfil the definition of current asset later
bull Assets classified as non-current in accordancewith IAS 1 shall not be reclassified as current assetsndash until they meet the criteria to be classified as held for sale in
accordance with IFRS 5bull Assets of a class that an entity would normally regard as non-
current that are acquired exclusively with a view to resale shall notbe classified as currentndash unless they meet the criteria to be classified as held for sale in
accordance with IFRS 5
bull Assets classified as non-current in accordancewith IAS 1 shall not be reclassified as current assetsndash until they meet the criteria to be classified as held for sale in
accordance with IFRS 5bull Assets of a class that an entity would normally regard as non-
current that are acquired exclusively with a view to resale shall notbe classified as currentndash unless they meet the criteria to be classified as held for sale in
accordance with IFRS 5
No non-current assets can be classified as current unless the criteria in IFRS 5 are fulfilled mainlybull Available for immediate salebull Highly probable to make the sale
35
copy 2005-07 Nelson 69
Is it currentIs it current
Current Assets
bull In its 2005 Interim Report full set of HKFRS was adopted and the report set out thatndash Available-for-sale financial assets are non-
derivatives that are eitherbull designated in this category orbull not classified in any of the other categories (ie
loans and receivables financial assets at fair value through profit or loss and held-to-maturity investments)
CaseCase
Similar in 2005 Annual Report
Similar in 2005 Annual Report
ndash They are included in non-current assetsbull unless management intends to dispose of the
investment within 12 months of the balance sheet date
copy 2005-07 Nelson 70
New requirementsNew requirements
Current Liabilities
bull A liability shall be classified as current when it satisfies any of the following criteriaa) it is expected to be settled in the entityrsquos normal operating cycleb) it is held primarily for the purpose of being tradedc) it is due to be settled within 12 months after the balance sheet
date ord) the entity does not have an unconditional right to defer settlement
of the liability for at least 12 months after the balance sheet date
bull All other liabilities shall be classified as non-current
ImplicationImplication
36
copy 2005-07 Nelson 71
Current Liabilities Revised rules on classifying a liability as current or non-currentbull A liability held for being traded rArr currentbull A financial liability due within 12 months after the BS date rArr current
ndash even if an agreement to refinance on a long-term basis is completed after the BS date (only disclosed as non-adjusting event)
bull If an entity has discretion to refinance rArr non-currentbull If an entity without discretion to refinance rArr current
bull A non-current financial liability is payable on demand with a breach on a condition of its loan agreement on or before the BS datendash If the lender agreed not to demand payment
bull after the BS date rArr current (only disclosed as non-adjusting event)
bull by the BS date rArr non-current
ImplicationImplication
copy 2005-07 Nelson 72
Current LiabilitiesCaseCase
Note 12 to Interim Report 2006bull Breach of loan covenants
bull As at 30 June 2006 in respect of certain bank loans with an aggregate carrying amount of HK$1529806000 the Group breached certain financial covenants of the banks loans
bull Since the lenders have not agreed to waive its right to demand immediate payment as at the balance sheet date the loans have been classified as current liabilities in these financial statements at 30 June 2006
37
copy 2005-07 Nelson 73
Current Assets and LiabilitiesExampleExample
Can the following be classified as current assetsbull 3-month fixed deposits pledged to a bank to secure
a mortgage loan of 5 yearsbull 2-year fixed deposits with a bank
Can the following be classified as current assetsbull 3-month fixed deposits pledged to a bank to secure
a mortgage loan of 5 yearsbull 2-year fixed deposits with a bank
Can the following be classified as non-current liabilitiesbull 5-year term loan matured after year end but renewed
for another 5 years after year end (before the issuanceof the financial statements)
bull 2-year term loan to be matured with 12 months and theentity has a right to renew for another 2 years
Can the following be classified as non-current liabilitiesbull 5-year term loan matured after year end but renewed
for another 5 years after year end (before the issuanceof the financial statements)
bull 2-year term loan to be matured with 12 months and theentity has a right to renew for another 2 years
timestimes
times
radic
copy 2005-07 Nelson 74
Balance Sheetbull As a minimum the face of the balance sheet shall
include line items that present the following amountsa) property plant and equipmentb) investment propertyc) intangible assetsd) financial assets (excl amounts shown under (e) (h) and (I))e) investments accounted for using the equity methodf) biological assetsg) inventoriesh) trade and other receivablesi) cash and cash equivalentsj) trade and other payablesk) provisionsl) financial liabilities (excl amounts shown under (j) and (k))m) liabilities and assets for current tax as defined in HKAS 12 Income Taxesn) deferred tax liabilities and deferred tax assets as defined in HKAS 12o) minority interest presented within equity andp) issued capital and reserves attributable to equity holders of the parent
38
copy 2005-07 Nelson 75
Balance Sheetbull The face of the balance sheet shall also include line
items that present the following amountsa) The total of assets classified as held for sale and
assets included in disposal groups classified as held for sale in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations and
b) Liabilities included in disposal groups classified as held for sale in accordance with IFRS 5
copy 2005-07 Nelson 76
Balance Sheetbull Additional line items headings and subtotals shall
be presented on the face of the balance sheet when such presentation is relevant to an understanding of the entityrsquos financial position
bull When an entity presents current and non-current assets and current and non-current liabilities as separate classifications on the face of its balance sheet ndash it shall not classify deferred tax assets
(liabilities) as current assets (liabilities)
39
copy 2005-07 Nelson 77
Balance Sheet
bull The use of different measurement bases for different classes of assets suggests that their nature or function differs and therefore that they should be presented as separate line itemsndash For example different classes of property plant and
equipment can be carried atbull Cost orbull Revalued amountsin accordance with IAS 16 PPE
In the past it use ldquomay needrdquoIn the past it use ldquomay needrdquo
copy 2005-07 Nelson 78
Balance Sheet
Galaxy Entertainment Group LimitedConsolidated balance sheet as at 31122005
CaseCase
40
copy 2005-07 Nelson 79
Balance Sheet
Melco Development Limited (新濠國際發展有限公司)Consolidated balance sheet as at 31122005
CaseCase
copy 2005-07 Nelson 80
Income Statement Minimum requirements on the face of the income statementbull As a minimum the face of the income statement shall include line items
that present the following amounts for the perioda) revenueb) finance costsc) share of the profit or loss of associates and joint ventures accounted
for using the equity methodd) pre-tax gain or loss recognised on the disposal of assets or
settlement of liabilities attributable to discontinuing operationse) tax expense andf) profit or loss
41
copy 2005-07 Nelson 81
Income Statement bull The following items shall be disclosed on the face of the income
statement as allocations of profit or loss for the perioda) Profit or loss attributable to minority interest andb) Profit or loss attributable to equity holders of the parent
A similar requirement has been added for the statement of changes in equity and such allocated amounts are not to be presented as items of income or expense
copy 2005-07 Nelson 82
Income Statement
Melco Dev LtdConsolidated income statementas at 31122005
CaseCase
42
copy 2005-07 Nelson 83
Income Statement bull Not require to disclose the results of operating
activities as a line item on the face of the incomestatement
bull An entity shall not present any items of income and expense as extraordinary items either onthe face of the income statements or in the notes
Entities canrsquot use itEntities canrsquot use it
Entities can still show itEntities can still show it
copy 2005-07 Nelson 84
Income Statement Either on the face of the income statement or in the notesbull An entity shall present an analysis of expenses using a classification
based on eitherbull the nature of expenses orbull their function within the entity
whichever provides information that is reliable and more relevant
bull Entities classifying expenses by function shall disclose additional information on the nature of expenses includingbull depreciation and amortisation expense and bull employee benefits expense
43
copy 2005-07 Nelson 85
Income StatementCaseCase
Nature or FunctionNature or Nature or FunctionFunction
copy 2005-07 Nelson 86
Statement of Changes in Equity bull An entity shall present a statement of changes in equity showing on the
face of the statementa) profit or loss for the period b) each item of income and expense for the period that as required by
IFRSs is recognised directly in equity and the total of these itemsc) total income and expense for the period (calculated as the sum of (a) and
(b)) showing separately the total amounts attributablebull to equity holders of the parent andbull to minority interest and
d) for each component of equity the effects of changes in accounting policies and corrections of errors recognised in accordance with IAS 8
Any ChangeAny Change
A revised requirementbull A statement of changes in equity that comprises only these items
shall be titled a statement of recognised income and expenses
A revised requirementbull A statement of changes in equity that comprises only these items
shall be titled a statement of recognised income and expenses
44
copy 2005-07 Nelson 87
Statement of Changes in Equity bull An entity shall also present either on the face of the
statement of changes in equity or in the notesa) the amounts of transactions with equity holders acting in
their capacity as equity holders showing separately distributions to equity holders
b) the balance of retained earnings (ie accumulated profit or loss) at the beginning of the period and at the balance sheet date and the changes during the period and
c) a reconciliation between the carrying amount of each class of contributed equity and each reserve at the beginning and the end of the period separately disclosing each change
copy 2005-07 Nelson 88
Statement of Changes in Equity
Consolidated SCE as at 31122005
CaseCase
45
copy 2005-07 Nelson 89
Notes Structure (an entity is required to disclose the following)
bull The notes shalla) present information about the basis of preparation of the financial statements
and the specific accounting policies usedb) disclose the information required by HKFRSs that is not presented on the
face of the balance sheet income statement statement of changes in equity or cash flow statement and
c) provide additional information that is not presented on the face of the balance sheet income statement statement of changes in equity or cash flow statement but is relevant to an understanding of any of them
bull Notes shall as far as practicable be presented in a systematic manner bull Each item on the face of the balance sheet income statement statement
of changes in equity and cash flow statement shall be cross-referencedto any related information in the notes
copy 2005-07 Nelson 90
Notes Disclosures (an entity is required to disclose the following)
bull Disclosure of accounting policiesAn entity shall disclose in the summary of significant accounting policiesa) the measurement basis (or bases) used in preparing the financial
statements andb) the other accounting policies used that are relevant to an understanding of
the financial statements
46
copy 2005-07 Nelson 91
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)ndash The financial statements have been prepared in
accordance with Hong Kong Financial Reporting Standards (lsquolsquoHKFRSrsquorsquo) issued by the Hong Kong Institute of Certified Public Accountants bull under the historical cost convention as modified by the
revaluation of investment properties available-for-sale financial assets derivative financial instruments and other investments which are carried at fair values helliphellip
ndash The principal accounting policies applied in the preparation of these financial statements are set out below These policies have been consistently applied to all the years presented except for those stated in note 2(a) above
copy 2005-07 Nelson 92
Notes Disclosures (an entity is required to disclose the following)
bull Disclosure of accounting policiesndash The judgements apart from those involving estimations management has
madebull in the process of applying the entityrsquos accounting policies that have the
most significant effect on the amounts recognised in the financial statements (in the summary of significant accounting policies or other notes)
Examples ndash Management makes judgements in determininga) whether financial assets are held-to-maturity investmentsb) when substantially all the significant risks and rewards of
ownership of financial assets and lease assets are transferred to other entities
c) whether in substance particular sales of goods are financing arrangements and therefore do not give rise to revenue and
d) whether the substance of the relationship between the entity and a special purpose entity indicates that the special purpose entity is controlled by the entity
Examples ndash Management makes judgements in determininga) whether financial assets are held-to-maturity investmentsb) when substantially all the significant risks and rewards of
ownership of financial assets and lease assets are transferred to other entities
c) whether in substance particular sales of goods are financing arrangements and therefore do not give rise to revenue and
d) whether the substance of the relationship between the entity and a special purpose entity indicates that the special purpose entity is controlled by the entity
47
copy 2005-07 Nelson 93
Notes Disclosures (an entity is required to disclose the following)
bull Key sources of estimation uncertaintyndash Information about the key assumptions concerning the future and
other key sources of estimation uncertainty at the balance sheet datebull that have a significant risk of causing a material adjustment to the
carrying amounts of assets and liabilities within the next financial yearndash In respect of those assets and liabilities the notes shall include details of
a) their nature andb) their carrying amount as at the balance sheet date
Examples ndash in the absence of recently observed market prices used to measure the following assets and liabilities future-oriented estimates are necessary to measurebull the recoverable amount of classes of PPEbull the effect of technological obsolescence on inventories
Estimates involve assumptions about such items asbull the risk adjustment to cash flows or discount rates usedbull future changes in salaries and in prices affecting other costs
Examples ndash in the absence of recently observed market prices used to measure the following assets and liabilities future-oriented estimates are necessary to measurebull the recoverable amount of classes of PPEbull the effect of technological obsolescence on inventories
Estimates involve assumptions about such items asbull the risk adjustment to cash flows or discount rates usedbull future changes in salaries and in prices affecting other costs
copy 2005-07 Nelson 94
Notes
Esprit Holdings LimitedEsprit Holdings Limitedbull Critical Accounting Estimates and Judgements
ndash Estimates and judgements are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonableunder the circumstances
ndash Critical accounting estimates and assumptionsbull The Group makes estimates and assumptions concerning
the future The resulting accounting estimates will by definition seldom equal the related actual results
bull The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below helliphellip (including (1) useful life and impairment of trademarks and (2) income taxes)
CaseCase
48
copy 2005-07 Nelson 95
Notes
Melco Development Limited (新濠國際發展有限公司)Notes to the financial statements for the year ended 31122005ndash The key assumptions concerning the future and other key sources
of estimation uncertainty at the balance sheet date that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below helliphellip(The issues discussed includebull Allowances for inventories bull Estimated impairment of goodwill Income taxes)
CaseCase
copy 2005-07 Nelson 96
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)ndash Estimates and judgements used in preparing the
financial statements are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonable under the circumstances
ndash The Group makes estimates and assumptionsconcerning the future
ndash The resulting accounting estimates will by definition seldom equal the related actual results
ndash The estimates and assumptions that have a significant effect on the carrying amounts of assets and liabilities are discussed below hellip (including impairment of goodwill impairment of gaming
licence Useful lives of property plant and equipment fair value of investment properties hellip)
49
copy 2005-07 Nelson 97
Notes Disclosures (an entity is required to disclose the following)
bull Other disclosuresAn entity shall disclose in the notesa) the amount of dividends proposed or declared before the
financial statements were authorised for issue but not recognised as a distribution to equity holders during the period and the related amount per share(HK incorporated companies are required to show the aggregate amount which is recommended for distribution by way of dividend under a separate heading(s) in their balance sheet (HK Co Ord 10th Sch para 9(1)(e)) and
b) the amount of any cumulative preference dividends not recognised
copy 2005-07 Nelson 98
Notes Disclosures (an entity is required to disclose the following)
An entity shall disclose the following if not disclosedelsewhere in information published with the financial statementsa) the domicile and legal form of the entity
its country of incorporation andthe address of its registered office(or principal place of business if different from the registered office)
b) a description of the nature of the entityrsquos operations and its principal activities and
c) the name of the parent and the ultimate parent of the group
ldquoshall discloserdquo now instead of ldquoencouraged to discloserdquo
ldquoshall discloserdquo now instead of ldquoencouraged to discloserdquo
bull Other disclosures
Any specialAny special
50
copy 2005-07 Nelson 99
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)bull The principal activities of Galaxy Entertainment Group
Ltd (the lsquolsquoCompanyrsquorsquo) (formerly known as K WahConstruction Materials Ltd) and its subsidiaries (together the lsquolsquoGrouprsquorsquo) are tondash operate in casino games of chance or games of other forms
in Macau (and) manufacture sale and distribution of construction materials in HK Macau and Mainland China
bull The Company is ndash a limited liability company incorporated in Hong Kong and ndash has its listing on the Main Board of The Stock Exchange of
Hong Kong Limitedbull The address of its registered office and its principal place
of business is Room 1606 16th Floor Hutchison House 10 Harcourt Road Central HK
copy 2005-07 Nelson 100
Effective Date
bull An entity shall apply IAS 1 for annual periods beginning on or after 1 Jan 2005
ndash Earlier application is encouragedndash If an entity applies IAS 1 for an earlier period it shall
disclose this factbull For the amendments relating to the Statement of
Changes in Equityndash An entity shall apply it for annual periods beginning on
or after 1 Jan 2006ndash If an entity applies the amendments to IAS 19
Employee Benefits ndash Actuarial Gains and Losses Group Plans and Disclosures for an earlier period that amendment shall be applied for that earlier period
51
copy 2005-07 Nelson 101
Todayrsquos Agenda
Capital Disclosures (Amendments to IAS 1)
Capital Disclosures (Amendments to IAS 1)
copy 2005-07 Nelson 102
Capital Disclosures ndash For 2007
52
copy 2005-07 Nelson 103
Capital Disclosures
What is capital Is it helliphellip
CapitalCapital AssetsAssets LiabilitiesLiabilities= ndash
bull IAS 1BC47 considers ldquowhether an entity can have a view of capital that differs from what IFRSs define as equityrdquo
bull It further clarifies that although for the purposes of this disclosure capital would often equate with equity as defined in IFRSsndash it might also include or exclude some components
bull It also noted that the capital disclosure in IAS 1 is intended to give entities the opportunity to describendash how they view the components of capital they manage if this is
different from what IFRSs define as equity helliphellip
copy 2005-07 Nelson 104
EquityEquityEquity AssetsAssets LiabilitiesLiabilities= ndash
Capital Disclosures
Based on the Framework amp IFRSs the accounting equation should be
CapitalCapital AssetsAssets LiabilitiesLiabilities= ndash
bull An entityrsquos capital may be part of its equity plus part of its liabilities depending on how it manage ldquoits capitalrdquo helliphellip
53
copy 2005-07 Nelson 105
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowinga) qualitative information about its objectives policies and processes for
managing capital including (but not limited to)i) a description of what it manages as capitalii) when an entity is subject to externally imposed capital requirements
the nature of those requirements and how those requirements are incorporated into the management of capital and
iii) how it is meeting its objectives for managing capital
bull To comply with the capital disclosures the entity discloses thefollowinga) qualitative information about its objectives policies and processes for
managing capital including (but not limited to)i) a description of what it manages as capitalii) when an entity is subject to externally imposed capital requirements
the nature of those requirements and how those requirements are incorporated into the management of capital and
iii) how it is meeting its objectives for managing capital
copy 2005-07 Nelson 106
Capital Disclosures
Example disclosurebull The Grouprsquos objectives when managing capital are
ndash to safeguard the entityrsquos ability to continue as a going concern
bull so that it can continue to provide returns for shareholders and benefits for other stakeholders and
ndash to provide an adequate return to shareholders by pricing products and services commensurately with the level of risk
bull The Group sets the amount of capital in proportion to risk
ExampleExample
ObjectivesObjectives
54
copy 2005-07 Nelson 107
Capital Disclosures
bull The Group manages the capital structure and makes adjustments to it in the light ofndash changes in economic conditions and ndash the risk characteristics of the underlying assets
bull In order to maintain or adjust the capital structure the Group mayndash adjust the amount of dividends paid to shareholders ndash return capital to shareholders ndash issue new shares or ndash sell assets to reduce debt
ExampleExample
Example disclosure
HowHow
copy 2005-07 Nelson 108
Capital Disclosures
bull Consistently with others in the industry the Group monitors capital on the basis of ndash the debt-to-adjusted capital ratio
bull This ratio is calculated as net debt divide adjusted capital
ExampleExample
Example disclosure
HowHow
bull Net debt is calculated as ndash Total debt (as shown in the
balance sheet)ndash Less cash amp cash equivalents
bull Net debt is calculated as ndash Total debt (as shown in the
balance sheet)ndash Less cash amp cash equivalents
bull Adjusted capital ndash comprises all components of
equity (ie share capital share premium minority interest retained earnings and revaluation reserve) ndash other than amounts
recognised in equity relating to cash flow hedges and
ndash includes some forms of subordinated debt
bull Adjusted capital ndash comprises all components of
equity (ie share capital share premium minority interest retained earnings and revaluation reserve) ndash other than amounts
recognised in equity relating to cash flow hedges and
ndash includes some forms of subordinated debt
55
copy 2005-07 Nelson 109
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowing
bull To comply with the capital disclosures the entity discloses thefollowingb) summary quantitative data about what it manages as capital
Some entities regard some financial liabilities (eg some forms of subordinated debt) as part of capitalOther entities regard capital as excluding some components of equity (eg components arising from cash flow hedges)
c) any changes in (a) and (b) from the previous period
copy 2005-07 Nelson 110
Capital Disclosures
Example disclosure (continued from previous example)
ExampleExample
bull During 20X4 the Grouprsquos strategy which was unchanged from 20X3 was to maintain the debt-to-adjusted capital ratio at the lower end of the range 61 to 71 in order to secure access to finance at a reasonable cost by maintaining a BB credit rating The debt-to-adjusted capital ratios at 31 December 20X4 and at 31 December 20X3 were as follows
3112X4 ($rsquoM) 3112X3 ($rsquoM) Total debt 1000 1100 Less cash and cash equivalents (90) (150)Net debt 910 950
Total equity 110 105 Add subordinated debt instruments 38 38 Less amounts recognised in equity
relating to cash flow hedges (10) (5)Adjusted capital 138 138
Debt-to-adjusted capital ratio 66 69
56
copy 2005-07 Nelson 111
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowing
bull To comply with the capital disclosures the entity discloses thefollowingd) whether during the period it complied with any externally imposed capital
requirements to which it is subjecte) when the entity has not complied with such externally imposed capital
requirements the consequences of such non-complianceThese disclosures shall be based on the information provided internally to the entityrsquos key management personnel
copy 2005-07 Nelson 112
Capital DisclosuresExampleExample
Example disclosurebull Entity A filed its quarterly regulatory capital return for
30 September 20X7 on 20 October 20X7 bull At that date Entity Arsquos regulatory capital was below
the capital requirement imposed by Regulator B by $1 million
bull As a result Entity A was required to submit a plan to the regulator indicating how it would increase its regulatory capital to the amount required
bull Entity A submitted a plan that entailed selling part of its unquoted equities portfolio with a carrying amount of $115 million in the fourth quarter of 20X7
bull In the fourth quarter of 20X7 Entity A sold its fixed interest investment portfolio for $126 million and met its regulatory capital requirement
For example SFC or banks
For example SFC or banks
57
copy 2005-07 Nelson 113
Capital DisclosuresCaseCase
bull Early adopted capital disclosure in 2005 and itsannual report states that (extract only)ndash The Grouprsquos objectives when managing capital are
bull To safeguard the Grouprsquos ability to continue as a going concern so that it continues to provide returns for shareholders and benefits for other stakeholders
bull To support the Grouprsquos stability and growth andbull To provide capital for the purpose of strengthening the
Grouprsquos risk management capability
copy 2005-07 Nelson 114
Capital DisclosuresCaseCase
ndash The Group actively and regularly reviews and manages its capital structure to ensure optimal capital structure and shareholder returns taking into consideration the future capital requirements of the Group and capital efficiency helliphellip
ndash The Group adopts a dividend policy helliphellip while retaining 10 per cent of the profit as capital of the Group for future use
ndash The Group has set aside $1500 million of retained earnings for the purpose of strengthening the risk management regime of the clearing houses and supporting their roles as central counterparties
ndash As in prior years the Group monitors capital by reviewing the level of capital that is at the disposal of the Group (ldquoadjusted capitalrdquo) Adjusted capital comprises all components of shareholdersrsquo equity other than the hedging reserve relating to cash flow hedges designated reserves and investment revaluation reserve helliphellip
bull Early adopted capital disclosure in 2005 and itsannual report states that (extract only)
58
copy 2005-07 Nelson 115
Capital Disclosures ndash Transition
bull An entity shall apply the requirements of capital disclosure for
ndash annual periods beginning on or after 1 January 2007
bull Early application is encouraged
copy 2005-07 Nelson 116
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk
59
copy 2005-07 Nelson 117
QampA SessionQampA SessionQampA Session
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk
28
copy 2005-07 Nelson 55
Amended requirementsAmended requirements
3 Overall Consideration
bull When comparative amounts are reclassified an entity shall disclosea) the nature of the reclassificationb) the amount of each item or class of items that is
reclassified andc) the reason for the reclassification
g) Comparative information
bull In the pastonly the reason for and a description of the nature of materialreclassifications should be disclosedExemption for disclosure of comparative information for the reconciliation of movements in fixed assets is also removed
bull In the pastonly the reason for and a description of the nature of materialreclassifications should be disclosedExemption for disclosure of comparative information for the reconciliation of movements in fixed assets is also removed
copy 2005-07 Nelson 56
3 Overall Consideration
Melco Development Limited (新濠國際發展有限公司)Notes to the financial statements for year ended 31122005ndash Because HKAS 32 requires retrospective application comparative
figures for 2004 have been restated (see Note 2A for the financial impact)
CaseCase
29
copy 2005-07 Nelson 57
3 Overall Consideration
Galaxy Entertainment Group LimitedNotes to the financial statements (ye 31122005)ndash All changes in the accounting policies require
retrospective application except HKAS 39 and HKFRS 2 for which transitional provisions are applied
ndash As a result the 2004 comparative figures have also been restated or amended in accordance with the relevant requirements
ndash The effects of all the changes in accounting policies are summarised in notes (b) and (c) below
CaseCase
copy 2005-07 Nelson 58
bull Identification of the financial statementsbull Reporting periodbull Balance sheet
1 CurrentNon-current distinction2 Current assets3 Current liabilities4 Information to be presented on the face of the balance sheet5 Information to be presented either on the face of the balance sheet or in
the notesbull Income statement
1 Profit or loss for the period2 Information to be presented on the face of the income statement3 Information to be presented either on the face of the income statement or
in the notesbull Statement of changes in equitybull Cash flow statementbull Notes
4 Structure and Content
30
copy 2005-07 Nelson 59
Identification of Financial Statements
bull The financial statements shall be identified clearly and distinguished from other information in the same published document
bull The following information shall be displayed prominently and repeated when it is necessary for a proper understanding of the information presented
a) the name of the reporting entity or other means of identification and any change in that information from the preceding balance sheet date
b) whether the financial statements cover the individual entity or a group of entities
c) the balance sheet date or the period covered by the financial statements whichever is appropriate to that component of the financial statements
d) the presentation currency as defined in HKAS 21 The Effects of Changes in Foreign Exchange Rates and
e) the level of rounding used in presenting amounts in the financial statements
copy 2005-07 Nelson 60
Identification of Financial Statements
bull Can the units of the presentation currency be rounded to thousands or millions
bull Financial statements are often made more understandableby presenting information in thousands or millions of units of the presentation currency
bull This is acceptable as long asndash the level of rounding in presentation is disclosed and ndash material information is not omitted
bull Financial statements are often made more understandableby presenting information in thousands or millions of units of the presentation currency
bull This is acceptable as long asndash the level of rounding in presentation is disclosed and ndash material information is not omitted
ExampleExample
31
copy 2005-07 Nelson 61
Reporting Period
bull Financial statements shall be presented at least annually
bull When an entityrsquos balance sheet date changes and the annual financial statements are presented for a period longer or shorter than one year an entity shall disclose in addition to the period covered by the financial statementsa) the reason for using a longer or shorter period andb) the fact that comparative amounts for the income
statement statement of changes in equity cash flow statement and related notes are not entirely comparable
copy 2005-07 Nelson 62
Reporting Period
bull Can a set of financial statements cover 52-week instead of a year
bull Normally financial statements are consistently prepared covering a one-year period
bull However for practical reasons some entities prefer to report for example for a 52-week period
bull IAS 1 does not preclude this practice because the resulting financial statements are unlikely to be materially different from those that would be presented for one year
bull Normally financial statements are consistently prepared covering a one-year period
bull However for practical reasons some entities prefer to report for example for a 52-week period
bull IAS 1 does not preclude this practice because the resulting financial statements are unlikely to be materially different from those that would be presented for one year
ExampleExample
32
copy 2005-07 Nelson 63
CurrentNon-current Distinction
bull An entity shall presentndash current and non-current assets andndash current and non-current liabilitiesas separate classifications on the face of its balance sheet
bull Except when a presentation based on liquidity provides informationndash If that information is reliable and is more relevantndash When that exception applies all assets and liabilities shall be
presented broadly in order of liquidity
copy 2005-07 Nelson 64
CurrentNon-current Distinction
bull Whichever method of presentation is adopted for each asset and liability line item that combines amounts expected to be recovered or settled a) no more than 12 months after the balance sheet date
andb) more than 12 months after the balance sheet date(ie combines both current and non-current)
an entity shall disclose the amount expected to be recovered or settled after more than 12 months
33
copy 2005-07 Nelson 65
New requirementsNew requirements
Current Assets
bull An asset shall be classified as current when it satisfies any of the following criteriaa) it is expected to be realised in or is intended for sale or
consumption in the entityrsquos normal operating cycle b) it is held primarily for the purpose of being tradedc) it is expected to be realised within 12 months after the balance
sheet date ord) it is cash or a cash equivalent
bull unless it is restricted from being exchanged or used to settle aliability for at least 12 months after the balance sheet date
bull All other assets shall be classified as non-current
Examplesbull Deposits pledged to bank (how long)bull Fixed deposits over 1 year maturity
Examplesbull Deposits pledged to bank (how long)bull Fixed deposits over 1 year maturity
What is itWhat is it
copy 2005-07 Nelson 66
Current Assets
bull What is operating cycle
bull The operating cycle of an entity is the time between ndash the acquisition of assets for processing and ndash their realisation in cash or cash equivalents
bull When the entityrsquos normal operating cycle is not clearly identifiable ndash its duration is assumed to be 12 months
bull The operating cycle of an entity is the time between ndash the acquisition of assets for processing and ndash their realisation in cash or cash equivalents
bull When the entityrsquos normal operating cycle is not clearly identifiable ndash its duration is assumed to be 12 months
ExampleExample
34
copy 2005-07 Nelson 67
Current Assets CaseCase
copy 2005-07 Nelson 68
Current Assets
bull Can a non-current asset reclassified if it fulfil the definition of current asset later
bull Assets classified as non-current in accordancewith IAS 1 shall not be reclassified as current assetsndash until they meet the criteria to be classified as held for sale in
accordance with IFRS 5bull Assets of a class that an entity would normally regard as non-
current that are acquired exclusively with a view to resale shall notbe classified as currentndash unless they meet the criteria to be classified as held for sale in
accordance with IFRS 5
bull Assets classified as non-current in accordancewith IAS 1 shall not be reclassified as current assetsndash until they meet the criteria to be classified as held for sale in
accordance with IFRS 5bull Assets of a class that an entity would normally regard as non-
current that are acquired exclusively with a view to resale shall notbe classified as currentndash unless they meet the criteria to be classified as held for sale in
accordance with IFRS 5
No non-current assets can be classified as current unless the criteria in IFRS 5 are fulfilled mainlybull Available for immediate salebull Highly probable to make the sale
35
copy 2005-07 Nelson 69
Is it currentIs it current
Current Assets
bull In its 2005 Interim Report full set of HKFRS was adopted and the report set out thatndash Available-for-sale financial assets are non-
derivatives that are eitherbull designated in this category orbull not classified in any of the other categories (ie
loans and receivables financial assets at fair value through profit or loss and held-to-maturity investments)
CaseCase
Similar in 2005 Annual Report
Similar in 2005 Annual Report
ndash They are included in non-current assetsbull unless management intends to dispose of the
investment within 12 months of the balance sheet date
copy 2005-07 Nelson 70
New requirementsNew requirements
Current Liabilities
bull A liability shall be classified as current when it satisfies any of the following criteriaa) it is expected to be settled in the entityrsquos normal operating cycleb) it is held primarily for the purpose of being tradedc) it is due to be settled within 12 months after the balance sheet
date ord) the entity does not have an unconditional right to defer settlement
of the liability for at least 12 months after the balance sheet date
bull All other liabilities shall be classified as non-current
ImplicationImplication
36
copy 2005-07 Nelson 71
Current Liabilities Revised rules on classifying a liability as current or non-currentbull A liability held for being traded rArr currentbull A financial liability due within 12 months after the BS date rArr current
ndash even if an agreement to refinance on a long-term basis is completed after the BS date (only disclosed as non-adjusting event)
bull If an entity has discretion to refinance rArr non-currentbull If an entity without discretion to refinance rArr current
bull A non-current financial liability is payable on demand with a breach on a condition of its loan agreement on or before the BS datendash If the lender agreed not to demand payment
bull after the BS date rArr current (only disclosed as non-adjusting event)
bull by the BS date rArr non-current
ImplicationImplication
copy 2005-07 Nelson 72
Current LiabilitiesCaseCase
Note 12 to Interim Report 2006bull Breach of loan covenants
bull As at 30 June 2006 in respect of certain bank loans with an aggregate carrying amount of HK$1529806000 the Group breached certain financial covenants of the banks loans
bull Since the lenders have not agreed to waive its right to demand immediate payment as at the balance sheet date the loans have been classified as current liabilities in these financial statements at 30 June 2006
37
copy 2005-07 Nelson 73
Current Assets and LiabilitiesExampleExample
Can the following be classified as current assetsbull 3-month fixed deposits pledged to a bank to secure
a mortgage loan of 5 yearsbull 2-year fixed deposits with a bank
Can the following be classified as current assetsbull 3-month fixed deposits pledged to a bank to secure
a mortgage loan of 5 yearsbull 2-year fixed deposits with a bank
Can the following be classified as non-current liabilitiesbull 5-year term loan matured after year end but renewed
for another 5 years after year end (before the issuanceof the financial statements)
bull 2-year term loan to be matured with 12 months and theentity has a right to renew for another 2 years
Can the following be classified as non-current liabilitiesbull 5-year term loan matured after year end but renewed
for another 5 years after year end (before the issuanceof the financial statements)
bull 2-year term loan to be matured with 12 months and theentity has a right to renew for another 2 years
timestimes
times
radic
copy 2005-07 Nelson 74
Balance Sheetbull As a minimum the face of the balance sheet shall
include line items that present the following amountsa) property plant and equipmentb) investment propertyc) intangible assetsd) financial assets (excl amounts shown under (e) (h) and (I))e) investments accounted for using the equity methodf) biological assetsg) inventoriesh) trade and other receivablesi) cash and cash equivalentsj) trade and other payablesk) provisionsl) financial liabilities (excl amounts shown under (j) and (k))m) liabilities and assets for current tax as defined in HKAS 12 Income Taxesn) deferred tax liabilities and deferred tax assets as defined in HKAS 12o) minority interest presented within equity andp) issued capital and reserves attributable to equity holders of the parent
38
copy 2005-07 Nelson 75
Balance Sheetbull The face of the balance sheet shall also include line
items that present the following amountsa) The total of assets classified as held for sale and
assets included in disposal groups classified as held for sale in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations and
b) Liabilities included in disposal groups classified as held for sale in accordance with IFRS 5
copy 2005-07 Nelson 76
Balance Sheetbull Additional line items headings and subtotals shall
be presented on the face of the balance sheet when such presentation is relevant to an understanding of the entityrsquos financial position
bull When an entity presents current and non-current assets and current and non-current liabilities as separate classifications on the face of its balance sheet ndash it shall not classify deferred tax assets
(liabilities) as current assets (liabilities)
39
copy 2005-07 Nelson 77
Balance Sheet
bull The use of different measurement bases for different classes of assets suggests that their nature or function differs and therefore that they should be presented as separate line itemsndash For example different classes of property plant and
equipment can be carried atbull Cost orbull Revalued amountsin accordance with IAS 16 PPE
In the past it use ldquomay needrdquoIn the past it use ldquomay needrdquo
copy 2005-07 Nelson 78
Balance Sheet
Galaxy Entertainment Group LimitedConsolidated balance sheet as at 31122005
CaseCase
40
copy 2005-07 Nelson 79
Balance Sheet
Melco Development Limited (新濠國際發展有限公司)Consolidated balance sheet as at 31122005
CaseCase
copy 2005-07 Nelson 80
Income Statement Minimum requirements on the face of the income statementbull As a minimum the face of the income statement shall include line items
that present the following amounts for the perioda) revenueb) finance costsc) share of the profit or loss of associates and joint ventures accounted
for using the equity methodd) pre-tax gain or loss recognised on the disposal of assets or
settlement of liabilities attributable to discontinuing operationse) tax expense andf) profit or loss
41
copy 2005-07 Nelson 81
Income Statement bull The following items shall be disclosed on the face of the income
statement as allocations of profit or loss for the perioda) Profit or loss attributable to minority interest andb) Profit or loss attributable to equity holders of the parent
A similar requirement has been added for the statement of changes in equity and such allocated amounts are not to be presented as items of income or expense
copy 2005-07 Nelson 82
Income Statement
Melco Dev LtdConsolidated income statementas at 31122005
CaseCase
42
copy 2005-07 Nelson 83
Income Statement bull Not require to disclose the results of operating
activities as a line item on the face of the incomestatement
bull An entity shall not present any items of income and expense as extraordinary items either onthe face of the income statements or in the notes
Entities canrsquot use itEntities canrsquot use it
Entities can still show itEntities can still show it
copy 2005-07 Nelson 84
Income Statement Either on the face of the income statement or in the notesbull An entity shall present an analysis of expenses using a classification
based on eitherbull the nature of expenses orbull their function within the entity
whichever provides information that is reliable and more relevant
bull Entities classifying expenses by function shall disclose additional information on the nature of expenses includingbull depreciation and amortisation expense and bull employee benefits expense
43
copy 2005-07 Nelson 85
Income StatementCaseCase
Nature or FunctionNature or Nature or FunctionFunction
copy 2005-07 Nelson 86
Statement of Changes in Equity bull An entity shall present a statement of changes in equity showing on the
face of the statementa) profit or loss for the period b) each item of income and expense for the period that as required by
IFRSs is recognised directly in equity and the total of these itemsc) total income and expense for the period (calculated as the sum of (a) and
(b)) showing separately the total amounts attributablebull to equity holders of the parent andbull to minority interest and
d) for each component of equity the effects of changes in accounting policies and corrections of errors recognised in accordance with IAS 8
Any ChangeAny Change
A revised requirementbull A statement of changes in equity that comprises only these items
shall be titled a statement of recognised income and expenses
A revised requirementbull A statement of changes in equity that comprises only these items
shall be titled a statement of recognised income and expenses
44
copy 2005-07 Nelson 87
Statement of Changes in Equity bull An entity shall also present either on the face of the
statement of changes in equity or in the notesa) the amounts of transactions with equity holders acting in
their capacity as equity holders showing separately distributions to equity holders
b) the balance of retained earnings (ie accumulated profit or loss) at the beginning of the period and at the balance sheet date and the changes during the period and
c) a reconciliation between the carrying amount of each class of contributed equity and each reserve at the beginning and the end of the period separately disclosing each change
copy 2005-07 Nelson 88
Statement of Changes in Equity
Consolidated SCE as at 31122005
CaseCase
45
copy 2005-07 Nelson 89
Notes Structure (an entity is required to disclose the following)
bull The notes shalla) present information about the basis of preparation of the financial statements
and the specific accounting policies usedb) disclose the information required by HKFRSs that is not presented on the
face of the balance sheet income statement statement of changes in equity or cash flow statement and
c) provide additional information that is not presented on the face of the balance sheet income statement statement of changes in equity or cash flow statement but is relevant to an understanding of any of them
bull Notes shall as far as practicable be presented in a systematic manner bull Each item on the face of the balance sheet income statement statement
of changes in equity and cash flow statement shall be cross-referencedto any related information in the notes
copy 2005-07 Nelson 90
Notes Disclosures (an entity is required to disclose the following)
bull Disclosure of accounting policiesAn entity shall disclose in the summary of significant accounting policiesa) the measurement basis (or bases) used in preparing the financial
statements andb) the other accounting policies used that are relevant to an understanding of
the financial statements
46
copy 2005-07 Nelson 91
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)ndash The financial statements have been prepared in
accordance with Hong Kong Financial Reporting Standards (lsquolsquoHKFRSrsquorsquo) issued by the Hong Kong Institute of Certified Public Accountants bull under the historical cost convention as modified by the
revaluation of investment properties available-for-sale financial assets derivative financial instruments and other investments which are carried at fair values helliphellip
ndash The principal accounting policies applied in the preparation of these financial statements are set out below These policies have been consistently applied to all the years presented except for those stated in note 2(a) above
copy 2005-07 Nelson 92
Notes Disclosures (an entity is required to disclose the following)
bull Disclosure of accounting policiesndash The judgements apart from those involving estimations management has
madebull in the process of applying the entityrsquos accounting policies that have the
most significant effect on the amounts recognised in the financial statements (in the summary of significant accounting policies or other notes)
Examples ndash Management makes judgements in determininga) whether financial assets are held-to-maturity investmentsb) when substantially all the significant risks and rewards of
ownership of financial assets and lease assets are transferred to other entities
c) whether in substance particular sales of goods are financing arrangements and therefore do not give rise to revenue and
d) whether the substance of the relationship between the entity and a special purpose entity indicates that the special purpose entity is controlled by the entity
Examples ndash Management makes judgements in determininga) whether financial assets are held-to-maturity investmentsb) when substantially all the significant risks and rewards of
ownership of financial assets and lease assets are transferred to other entities
c) whether in substance particular sales of goods are financing arrangements and therefore do not give rise to revenue and
d) whether the substance of the relationship between the entity and a special purpose entity indicates that the special purpose entity is controlled by the entity
47
copy 2005-07 Nelson 93
Notes Disclosures (an entity is required to disclose the following)
bull Key sources of estimation uncertaintyndash Information about the key assumptions concerning the future and
other key sources of estimation uncertainty at the balance sheet datebull that have a significant risk of causing a material adjustment to the
carrying amounts of assets and liabilities within the next financial yearndash In respect of those assets and liabilities the notes shall include details of
a) their nature andb) their carrying amount as at the balance sheet date
Examples ndash in the absence of recently observed market prices used to measure the following assets and liabilities future-oriented estimates are necessary to measurebull the recoverable amount of classes of PPEbull the effect of technological obsolescence on inventories
Estimates involve assumptions about such items asbull the risk adjustment to cash flows or discount rates usedbull future changes in salaries and in prices affecting other costs
Examples ndash in the absence of recently observed market prices used to measure the following assets and liabilities future-oriented estimates are necessary to measurebull the recoverable amount of classes of PPEbull the effect of technological obsolescence on inventories
Estimates involve assumptions about such items asbull the risk adjustment to cash flows or discount rates usedbull future changes in salaries and in prices affecting other costs
copy 2005-07 Nelson 94
Notes
Esprit Holdings LimitedEsprit Holdings Limitedbull Critical Accounting Estimates and Judgements
ndash Estimates and judgements are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonableunder the circumstances
ndash Critical accounting estimates and assumptionsbull The Group makes estimates and assumptions concerning
the future The resulting accounting estimates will by definition seldom equal the related actual results
bull The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below helliphellip (including (1) useful life and impairment of trademarks and (2) income taxes)
CaseCase
48
copy 2005-07 Nelson 95
Notes
Melco Development Limited (新濠國際發展有限公司)Notes to the financial statements for the year ended 31122005ndash The key assumptions concerning the future and other key sources
of estimation uncertainty at the balance sheet date that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below helliphellip(The issues discussed includebull Allowances for inventories bull Estimated impairment of goodwill Income taxes)
CaseCase
copy 2005-07 Nelson 96
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)ndash Estimates and judgements used in preparing the
financial statements are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonable under the circumstances
ndash The Group makes estimates and assumptionsconcerning the future
ndash The resulting accounting estimates will by definition seldom equal the related actual results
ndash The estimates and assumptions that have a significant effect on the carrying amounts of assets and liabilities are discussed below hellip (including impairment of goodwill impairment of gaming
licence Useful lives of property plant and equipment fair value of investment properties hellip)
49
copy 2005-07 Nelson 97
Notes Disclosures (an entity is required to disclose the following)
bull Other disclosuresAn entity shall disclose in the notesa) the amount of dividends proposed or declared before the
financial statements were authorised for issue but not recognised as a distribution to equity holders during the period and the related amount per share(HK incorporated companies are required to show the aggregate amount which is recommended for distribution by way of dividend under a separate heading(s) in their balance sheet (HK Co Ord 10th Sch para 9(1)(e)) and
b) the amount of any cumulative preference dividends not recognised
copy 2005-07 Nelson 98
Notes Disclosures (an entity is required to disclose the following)
An entity shall disclose the following if not disclosedelsewhere in information published with the financial statementsa) the domicile and legal form of the entity
its country of incorporation andthe address of its registered office(or principal place of business if different from the registered office)
b) a description of the nature of the entityrsquos operations and its principal activities and
c) the name of the parent and the ultimate parent of the group
ldquoshall discloserdquo now instead of ldquoencouraged to discloserdquo
ldquoshall discloserdquo now instead of ldquoencouraged to discloserdquo
bull Other disclosures
Any specialAny special
50
copy 2005-07 Nelson 99
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)bull The principal activities of Galaxy Entertainment Group
Ltd (the lsquolsquoCompanyrsquorsquo) (formerly known as K WahConstruction Materials Ltd) and its subsidiaries (together the lsquolsquoGrouprsquorsquo) are tondash operate in casino games of chance or games of other forms
in Macau (and) manufacture sale and distribution of construction materials in HK Macau and Mainland China
bull The Company is ndash a limited liability company incorporated in Hong Kong and ndash has its listing on the Main Board of The Stock Exchange of
Hong Kong Limitedbull The address of its registered office and its principal place
of business is Room 1606 16th Floor Hutchison House 10 Harcourt Road Central HK
copy 2005-07 Nelson 100
Effective Date
bull An entity shall apply IAS 1 for annual periods beginning on or after 1 Jan 2005
ndash Earlier application is encouragedndash If an entity applies IAS 1 for an earlier period it shall
disclose this factbull For the amendments relating to the Statement of
Changes in Equityndash An entity shall apply it for annual periods beginning on
or after 1 Jan 2006ndash If an entity applies the amendments to IAS 19
Employee Benefits ndash Actuarial Gains and Losses Group Plans and Disclosures for an earlier period that amendment shall be applied for that earlier period
51
copy 2005-07 Nelson 101
Todayrsquos Agenda
Capital Disclosures (Amendments to IAS 1)
Capital Disclosures (Amendments to IAS 1)
copy 2005-07 Nelson 102
Capital Disclosures ndash For 2007
52
copy 2005-07 Nelson 103
Capital Disclosures
What is capital Is it helliphellip
CapitalCapital AssetsAssets LiabilitiesLiabilities= ndash
bull IAS 1BC47 considers ldquowhether an entity can have a view of capital that differs from what IFRSs define as equityrdquo
bull It further clarifies that although for the purposes of this disclosure capital would often equate with equity as defined in IFRSsndash it might also include or exclude some components
bull It also noted that the capital disclosure in IAS 1 is intended to give entities the opportunity to describendash how they view the components of capital they manage if this is
different from what IFRSs define as equity helliphellip
copy 2005-07 Nelson 104
EquityEquityEquity AssetsAssets LiabilitiesLiabilities= ndash
Capital Disclosures
Based on the Framework amp IFRSs the accounting equation should be
CapitalCapital AssetsAssets LiabilitiesLiabilities= ndash
bull An entityrsquos capital may be part of its equity plus part of its liabilities depending on how it manage ldquoits capitalrdquo helliphellip
53
copy 2005-07 Nelson 105
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowinga) qualitative information about its objectives policies and processes for
managing capital including (but not limited to)i) a description of what it manages as capitalii) when an entity is subject to externally imposed capital requirements
the nature of those requirements and how those requirements are incorporated into the management of capital and
iii) how it is meeting its objectives for managing capital
bull To comply with the capital disclosures the entity discloses thefollowinga) qualitative information about its objectives policies and processes for
managing capital including (but not limited to)i) a description of what it manages as capitalii) when an entity is subject to externally imposed capital requirements
the nature of those requirements and how those requirements are incorporated into the management of capital and
iii) how it is meeting its objectives for managing capital
copy 2005-07 Nelson 106
Capital Disclosures
Example disclosurebull The Grouprsquos objectives when managing capital are
ndash to safeguard the entityrsquos ability to continue as a going concern
bull so that it can continue to provide returns for shareholders and benefits for other stakeholders and
ndash to provide an adequate return to shareholders by pricing products and services commensurately with the level of risk
bull The Group sets the amount of capital in proportion to risk
ExampleExample
ObjectivesObjectives
54
copy 2005-07 Nelson 107
Capital Disclosures
bull The Group manages the capital structure and makes adjustments to it in the light ofndash changes in economic conditions and ndash the risk characteristics of the underlying assets
bull In order to maintain or adjust the capital structure the Group mayndash adjust the amount of dividends paid to shareholders ndash return capital to shareholders ndash issue new shares or ndash sell assets to reduce debt
ExampleExample
Example disclosure
HowHow
copy 2005-07 Nelson 108
Capital Disclosures
bull Consistently with others in the industry the Group monitors capital on the basis of ndash the debt-to-adjusted capital ratio
bull This ratio is calculated as net debt divide adjusted capital
ExampleExample
Example disclosure
HowHow
bull Net debt is calculated as ndash Total debt (as shown in the
balance sheet)ndash Less cash amp cash equivalents
bull Net debt is calculated as ndash Total debt (as shown in the
balance sheet)ndash Less cash amp cash equivalents
bull Adjusted capital ndash comprises all components of
equity (ie share capital share premium minority interest retained earnings and revaluation reserve) ndash other than amounts
recognised in equity relating to cash flow hedges and
ndash includes some forms of subordinated debt
bull Adjusted capital ndash comprises all components of
equity (ie share capital share premium minority interest retained earnings and revaluation reserve) ndash other than amounts
recognised in equity relating to cash flow hedges and
ndash includes some forms of subordinated debt
55
copy 2005-07 Nelson 109
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowing
bull To comply with the capital disclosures the entity discloses thefollowingb) summary quantitative data about what it manages as capital
Some entities regard some financial liabilities (eg some forms of subordinated debt) as part of capitalOther entities regard capital as excluding some components of equity (eg components arising from cash flow hedges)
c) any changes in (a) and (b) from the previous period
copy 2005-07 Nelson 110
Capital Disclosures
Example disclosure (continued from previous example)
ExampleExample
bull During 20X4 the Grouprsquos strategy which was unchanged from 20X3 was to maintain the debt-to-adjusted capital ratio at the lower end of the range 61 to 71 in order to secure access to finance at a reasonable cost by maintaining a BB credit rating The debt-to-adjusted capital ratios at 31 December 20X4 and at 31 December 20X3 were as follows
3112X4 ($rsquoM) 3112X3 ($rsquoM) Total debt 1000 1100 Less cash and cash equivalents (90) (150)Net debt 910 950
Total equity 110 105 Add subordinated debt instruments 38 38 Less amounts recognised in equity
relating to cash flow hedges (10) (5)Adjusted capital 138 138
Debt-to-adjusted capital ratio 66 69
56
copy 2005-07 Nelson 111
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowing
bull To comply with the capital disclosures the entity discloses thefollowingd) whether during the period it complied with any externally imposed capital
requirements to which it is subjecte) when the entity has not complied with such externally imposed capital
requirements the consequences of such non-complianceThese disclosures shall be based on the information provided internally to the entityrsquos key management personnel
copy 2005-07 Nelson 112
Capital DisclosuresExampleExample
Example disclosurebull Entity A filed its quarterly regulatory capital return for
30 September 20X7 on 20 October 20X7 bull At that date Entity Arsquos regulatory capital was below
the capital requirement imposed by Regulator B by $1 million
bull As a result Entity A was required to submit a plan to the regulator indicating how it would increase its regulatory capital to the amount required
bull Entity A submitted a plan that entailed selling part of its unquoted equities portfolio with a carrying amount of $115 million in the fourth quarter of 20X7
bull In the fourth quarter of 20X7 Entity A sold its fixed interest investment portfolio for $126 million and met its regulatory capital requirement
For example SFC or banks
For example SFC or banks
57
copy 2005-07 Nelson 113
Capital DisclosuresCaseCase
bull Early adopted capital disclosure in 2005 and itsannual report states that (extract only)ndash The Grouprsquos objectives when managing capital are
bull To safeguard the Grouprsquos ability to continue as a going concern so that it continues to provide returns for shareholders and benefits for other stakeholders
bull To support the Grouprsquos stability and growth andbull To provide capital for the purpose of strengthening the
Grouprsquos risk management capability
copy 2005-07 Nelson 114
Capital DisclosuresCaseCase
ndash The Group actively and regularly reviews and manages its capital structure to ensure optimal capital structure and shareholder returns taking into consideration the future capital requirements of the Group and capital efficiency helliphellip
ndash The Group adopts a dividend policy helliphellip while retaining 10 per cent of the profit as capital of the Group for future use
ndash The Group has set aside $1500 million of retained earnings for the purpose of strengthening the risk management regime of the clearing houses and supporting their roles as central counterparties
ndash As in prior years the Group monitors capital by reviewing the level of capital that is at the disposal of the Group (ldquoadjusted capitalrdquo) Adjusted capital comprises all components of shareholdersrsquo equity other than the hedging reserve relating to cash flow hedges designated reserves and investment revaluation reserve helliphellip
bull Early adopted capital disclosure in 2005 and itsannual report states that (extract only)
58
copy 2005-07 Nelson 115
Capital Disclosures ndash Transition
bull An entity shall apply the requirements of capital disclosure for
ndash annual periods beginning on or after 1 January 2007
bull Early application is encouraged
copy 2005-07 Nelson 116
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk
59
copy 2005-07 Nelson 117
QampA SessionQampA SessionQampA Session
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk
29
copy 2005-07 Nelson 57
3 Overall Consideration
Galaxy Entertainment Group LimitedNotes to the financial statements (ye 31122005)ndash All changes in the accounting policies require
retrospective application except HKAS 39 and HKFRS 2 for which transitional provisions are applied
ndash As a result the 2004 comparative figures have also been restated or amended in accordance with the relevant requirements
ndash The effects of all the changes in accounting policies are summarised in notes (b) and (c) below
CaseCase
copy 2005-07 Nelson 58
bull Identification of the financial statementsbull Reporting periodbull Balance sheet
1 CurrentNon-current distinction2 Current assets3 Current liabilities4 Information to be presented on the face of the balance sheet5 Information to be presented either on the face of the balance sheet or in
the notesbull Income statement
1 Profit or loss for the period2 Information to be presented on the face of the income statement3 Information to be presented either on the face of the income statement or
in the notesbull Statement of changes in equitybull Cash flow statementbull Notes
4 Structure and Content
30
copy 2005-07 Nelson 59
Identification of Financial Statements
bull The financial statements shall be identified clearly and distinguished from other information in the same published document
bull The following information shall be displayed prominently and repeated when it is necessary for a proper understanding of the information presented
a) the name of the reporting entity or other means of identification and any change in that information from the preceding balance sheet date
b) whether the financial statements cover the individual entity or a group of entities
c) the balance sheet date or the period covered by the financial statements whichever is appropriate to that component of the financial statements
d) the presentation currency as defined in HKAS 21 The Effects of Changes in Foreign Exchange Rates and
e) the level of rounding used in presenting amounts in the financial statements
copy 2005-07 Nelson 60
Identification of Financial Statements
bull Can the units of the presentation currency be rounded to thousands or millions
bull Financial statements are often made more understandableby presenting information in thousands or millions of units of the presentation currency
bull This is acceptable as long asndash the level of rounding in presentation is disclosed and ndash material information is not omitted
bull Financial statements are often made more understandableby presenting information in thousands or millions of units of the presentation currency
bull This is acceptable as long asndash the level of rounding in presentation is disclosed and ndash material information is not omitted
ExampleExample
31
copy 2005-07 Nelson 61
Reporting Period
bull Financial statements shall be presented at least annually
bull When an entityrsquos balance sheet date changes and the annual financial statements are presented for a period longer or shorter than one year an entity shall disclose in addition to the period covered by the financial statementsa) the reason for using a longer or shorter period andb) the fact that comparative amounts for the income
statement statement of changes in equity cash flow statement and related notes are not entirely comparable
copy 2005-07 Nelson 62
Reporting Period
bull Can a set of financial statements cover 52-week instead of a year
bull Normally financial statements are consistently prepared covering a one-year period
bull However for practical reasons some entities prefer to report for example for a 52-week period
bull IAS 1 does not preclude this practice because the resulting financial statements are unlikely to be materially different from those that would be presented for one year
bull Normally financial statements are consistently prepared covering a one-year period
bull However for practical reasons some entities prefer to report for example for a 52-week period
bull IAS 1 does not preclude this practice because the resulting financial statements are unlikely to be materially different from those that would be presented for one year
ExampleExample
32
copy 2005-07 Nelson 63
CurrentNon-current Distinction
bull An entity shall presentndash current and non-current assets andndash current and non-current liabilitiesas separate classifications on the face of its balance sheet
bull Except when a presentation based on liquidity provides informationndash If that information is reliable and is more relevantndash When that exception applies all assets and liabilities shall be
presented broadly in order of liquidity
copy 2005-07 Nelson 64
CurrentNon-current Distinction
bull Whichever method of presentation is adopted for each asset and liability line item that combines amounts expected to be recovered or settled a) no more than 12 months after the balance sheet date
andb) more than 12 months after the balance sheet date(ie combines both current and non-current)
an entity shall disclose the amount expected to be recovered or settled after more than 12 months
33
copy 2005-07 Nelson 65
New requirementsNew requirements
Current Assets
bull An asset shall be classified as current when it satisfies any of the following criteriaa) it is expected to be realised in or is intended for sale or
consumption in the entityrsquos normal operating cycle b) it is held primarily for the purpose of being tradedc) it is expected to be realised within 12 months after the balance
sheet date ord) it is cash or a cash equivalent
bull unless it is restricted from being exchanged or used to settle aliability for at least 12 months after the balance sheet date
bull All other assets shall be classified as non-current
Examplesbull Deposits pledged to bank (how long)bull Fixed deposits over 1 year maturity
Examplesbull Deposits pledged to bank (how long)bull Fixed deposits over 1 year maturity
What is itWhat is it
copy 2005-07 Nelson 66
Current Assets
bull What is operating cycle
bull The operating cycle of an entity is the time between ndash the acquisition of assets for processing and ndash their realisation in cash or cash equivalents
bull When the entityrsquos normal operating cycle is not clearly identifiable ndash its duration is assumed to be 12 months
bull The operating cycle of an entity is the time between ndash the acquisition of assets for processing and ndash their realisation in cash or cash equivalents
bull When the entityrsquos normal operating cycle is not clearly identifiable ndash its duration is assumed to be 12 months
ExampleExample
34
copy 2005-07 Nelson 67
Current Assets CaseCase
copy 2005-07 Nelson 68
Current Assets
bull Can a non-current asset reclassified if it fulfil the definition of current asset later
bull Assets classified as non-current in accordancewith IAS 1 shall not be reclassified as current assetsndash until they meet the criteria to be classified as held for sale in
accordance with IFRS 5bull Assets of a class that an entity would normally regard as non-
current that are acquired exclusively with a view to resale shall notbe classified as currentndash unless they meet the criteria to be classified as held for sale in
accordance with IFRS 5
bull Assets classified as non-current in accordancewith IAS 1 shall not be reclassified as current assetsndash until they meet the criteria to be classified as held for sale in
accordance with IFRS 5bull Assets of a class that an entity would normally regard as non-
current that are acquired exclusively with a view to resale shall notbe classified as currentndash unless they meet the criteria to be classified as held for sale in
accordance with IFRS 5
No non-current assets can be classified as current unless the criteria in IFRS 5 are fulfilled mainlybull Available for immediate salebull Highly probable to make the sale
35
copy 2005-07 Nelson 69
Is it currentIs it current
Current Assets
bull In its 2005 Interim Report full set of HKFRS was adopted and the report set out thatndash Available-for-sale financial assets are non-
derivatives that are eitherbull designated in this category orbull not classified in any of the other categories (ie
loans and receivables financial assets at fair value through profit or loss and held-to-maturity investments)
CaseCase
Similar in 2005 Annual Report
Similar in 2005 Annual Report
ndash They are included in non-current assetsbull unless management intends to dispose of the
investment within 12 months of the balance sheet date
copy 2005-07 Nelson 70
New requirementsNew requirements
Current Liabilities
bull A liability shall be classified as current when it satisfies any of the following criteriaa) it is expected to be settled in the entityrsquos normal operating cycleb) it is held primarily for the purpose of being tradedc) it is due to be settled within 12 months after the balance sheet
date ord) the entity does not have an unconditional right to defer settlement
of the liability for at least 12 months after the balance sheet date
bull All other liabilities shall be classified as non-current
ImplicationImplication
36
copy 2005-07 Nelson 71
Current Liabilities Revised rules on classifying a liability as current or non-currentbull A liability held for being traded rArr currentbull A financial liability due within 12 months after the BS date rArr current
ndash even if an agreement to refinance on a long-term basis is completed after the BS date (only disclosed as non-adjusting event)
bull If an entity has discretion to refinance rArr non-currentbull If an entity without discretion to refinance rArr current
bull A non-current financial liability is payable on demand with a breach on a condition of its loan agreement on or before the BS datendash If the lender agreed not to demand payment
bull after the BS date rArr current (only disclosed as non-adjusting event)
bull by the BS date rArr non-current
ImplicationImplication
copy 2005-07 Nelson 72
Current LiabilitiesCaseCase
Note 12 to Interim Report 2006bull Breach of loan covenants
bull As at 30 June 2006 in respect of certain bank loans with an aggregate carrying amount of HK$1529806000 the Group breached certain financial covenants of the banks loans
bull Since the lenders have not agreed to waive its right to demand immediate payment as at the balance sheet date the loans have been classified as current liabilities in these financial statements at 30 June 2006
37
copy 2005-07 Nelson 73
Current Assets and LiabilitiesExampleExample
Can the following be classified as current assetsbull 3-month fixed deposits pledged to a bank to secure
a mortgage loan of 5 yearsbull 2-year fixed deposits with a bank
Can the following be classified as current assetsbull 3-month fixed deposits pledged to a bank to secure
a mortgage loan of 5 yearsbull 2-year fixed deposits with a bank
Can the following be classified as non-current liabilitiesbull 5-year term loan matured after year end but renewed
for another 5 years after year end (before the issuanceof the financial statements)
bull 2-year term loan to be matured with 12 months and theentity has a right to renew for another 2 years
Can the following be classified as non-current liabilitiesbull 5-year term loan matured after year end but renewed
for another 5 years after year end (before the issuanceof the financial statements)
bull 2-year term loan to be matured with 12 months and theentity has a right to renew for another 2 years
timestimes
times
radic
copy 2005-07 Nelson 74
Balance Sheetbull As a minimum the face of the balance sheet shall
include line items that present the following amountsa) property plant and equipmentb) investment propertyc) intangible assetsd) financial assets (excl amounts shown under (e) (h) and (I))e) investments accounted for using the equity methodf) biological assetsg) inventoriesh) trade and other receivablesi) cash and cash equivalentsj) trade and other payablesk) provisionsl) financial liabilities (excl amounts shown under (j) and (k))m) liabilities and assets for current tax as defined in HKAS 12 Income Taxesn) deferred tax liabilities and deferred tax assets as defined in HKAS 12o) minority interest presented within equity andp) issued capital and reserves attributable to equity holders of the parent
38
copy 2005-07 Nelson 75
Balance Sheetbull The face of the balance sheet shall also include line
items that present the following amountsa) The total of assets classified as held for sale and
assets included in disposal groups classified as held for sale in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations and
b) Liabilities included in disposal groups classified as held for sale in accordance with IFRS 5
copy 2005-07 Nelson 76
Balance Sheetbull Additional line items headings and subtotals shall
be presented on the face of the balance sheet when such presentation is relevant to an understanding of the entityrsquos financial position
bull When an entity presents current and non-current assets and current and non-current liabilities as separate classifications on the face of its balance sheet ndash it shall not classify deferred tax assets
(liabilities) as current assets (liabilities)
39
copy 2005-07 Nelson 77
Balance Sheet
bull The use of different measurement bases for different classes of assets suggests that their nature or function differs and therefore that they should be presented as separate line itemsndash For example different classes of property plant and
equipment can be carried atbull Cost orbull Revalued amountsin accordance with IAS 16 PPE
In the past it use ldquomay needrdquoIn the past it use ldquomay needrdquo
copy 2005-07 Nelson 78
Balance Sheet
Galaxy Entertainment Group LimitedConsolidated balance sheet as at 31122005
CaseCase
40
copy 2005-07 Nelson 79
Balance Sheet
Melco Development Limited (新濠國際發展有限公司)Consolidated balance sheet as at 31122005
CaseCase
copy 2005-07 Nelson 80
Income Statement Minimum requirements on the face of the income statementbull As a minimum the face of the income statement shall include line items
that present the following amounts for the perioda) revenueb) finance costsc) share of the profit or loss of associates and joint ventures accounted
for using the equity methodd) pre-tax gain or loss recognised on the disposal of assets or
settlement of liabilities attributable to discontinuing operationse) tax expense andf) profit or loss
41
copy 2005-07 Nelson 81
Income Statement bull The following items shall be disclosed on the face of the income
statement as allocations of profit or loss for the perioda) Profit or loss attributable to minority interest andb) Profit or loss attributable to equity holders of the parent
A similar requirement has been added for the statement of changes in equity and such allocated amounts are not to be presented as items of income or expense
copy 2005-07 Nelson 82
Income Statement
Melco Dev LtdConsolidated income statementas at 31122005
CaseCase
42
copy 2005-07 Nelson 83
Income Statement bull Not require to disclose the results of operating
activities as a line item on the face of the incomestatement
bull An entity shall not present any items of income and expense as extraordinary items either onthe face of the income statements or in the notes
Entities canrsquot use itEntities canrsquot use it
Entities can still show itEntities can still show it
copy 2005-07 Nelson 84
Income Statement Either on the face of the income statement or in the notesbull An entity shall present an analysis of expenses using a classification
based on eitherbull the nature of expenses orbull their function within the entity
whichever provides information that is reliable and more relevant
bull Entities classifying expenses by function shall disclose additional information on the nature of expenses includingbull depreciation and amortisation expense and bull employee benefits expense
43
copy 2005-07 Nelson 85
Income StatementCaseCase
Nature or FunctionNature or Nature or FunctionFunction
copy 2005-07 Nelson 86
Statement of Changes in Equity bull An entity shall present a statement of changes in equity showing on the
face of the statementa) profit or loss for the period b) each item of income and expense for the period that as required by
IFRSs is recognised directly in equity and the total of these itemsc) total income and expense for the period (calculated as the sum of (a) and
(b)) showing separately the total amounts attributablebull to equity holders of the parent andbull to minority interest and
d) for each component of equity the effects of changes in accounting policies and corrections of errors recognised in accordance with IAS 8
Any ChangeAny Change
A revised requirementbull A statement of changes in equity that comprises only these items
shall be titled a statement of recognised income and expenses
A revised requirementbull A statement of changes in equity that comprises only these items
shall be titled a statement of recognised income and expenses
44
copy 2005-07 Nelson 87
Statement of Changes in Equity bull An entity shall also present either on the face of the
statement of changes in equity or in the notesa) the amounts of transactions with equity holders acting in
their capacity as equity holders showing separately distributions to equity holders
b) the balance of retained earnings (ie accumulated profit or loss) at the beginning of the period and at the balance sheet date and the changes during the period and
c) a reconciliation between the carrying amount of each class of contributed equity and each reserve at the beginning and the end of the period separately disclosing each change
copy 2005-07 Nelson 88
Statement of Changes in Equity
Consolidated SCE as at 31122005
CaseCase
45
copy 2005-07 Nelson 89
Notes Structure (an entity is required to disclose the following)
bull The notes shalla) present information about the basis of preparation of the financial statements
and the specific accounting policies usedb) disclose the information required by HKFRSs that is not presented on the
face of the balance sheet income statement statement of changes in equity or cash flow statement and
c) provide additional information that is not presented on the face of the balance sheet income statement statement of changes in equity or cash flow statement but is relevant to an understanding of any of them
bull Notes shall as far as practicable be presented in a systematic manner bull Each item on the face of the balance sheet income statement statement
of changes in equity and cash flow statement shall be cross-referencedto any related information in the notes
copy 2005-07 Nelson 90
Notes Disclosures (an entity is required to disclose the following)
bull Disclosure of accounting policiesAn entity shall disclose in the summary of significant accounting policiesa) the measurement basis (or bases) used in preparing the financial
statements andb) the other accounting policies used that are relevant to an understanding of
the financial statements
46
copy 2005-07 Nelson 91
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)ndash The financial statements have been prepared in
accordance with Hong Kong Financial Reporting Standards (lsquolsquoHKFRSrsquorsquo) issued by the Hong Kong Institute of Certified Public Accountants bull under the historical cost convention as modified by the
revaluation of investment properties available-for-sale financial assets derivative financial instruments and other investments which are carried at fair values helliphellip
ndash The principal accounting policies applied in the preparation of these financial statements are set out below These policies have been consistently applied to all the years presented except for those stated in note 2(a) above
copy 2005-07 Nelson 92
Notes Disclosures (an entity is required to disclose the following)
bull Disclosure of accounting policiesndash The judgements apart from those involving estimations management has
madebull in the process of applying the entityrsquos accounting policies that have the
most significant effect on the amounts recognised in the financial statements (in the summary of significant accounting policies or other notes)
Examples ndash Management makes judgements in determininga) whether financial assets are held-to-maturity investmentsb) when substantially all the significant risks and rewards of
ownership of financial assets and lease assets are transferred to other entities
c) whether in substance particular sales of goods are financing arrangements and therefore do not give rise to revenue and
d) whether the substance of the relationship between the entity and a special purpose entity indicates that the special purpose entity is controlled by the entity
Examples ndash Management makes judgements in determininga) whether financial assets are held-to-maturity investmentsb) when substantially all the significant risks and rewards of
ownership of financial assets and lease assets are transferred to other entities
c) whether in substance particular sales of goods are financing arrangements and therefore do not give rise to revenue and
d) whether the substance of the relationship between the entity and a special purpose entity indicates that the special purpose entity is controlled by the entity
47
copy 2005-07 Nelson 93
Notes Disclosures (an entity is required to disclose the following)
bull Key sources of estimation uncertaintyndash Information about the key assumptions concerning the future and
other key sources of estimation uncertainty at the balance sheet datebull that have a significant risk of causing a material adjustment to the
carrying amounts of assets and liabilities within the next financial yearndash In respect of those assets and liabilities the notes shall include details of
a) their nature andb) their carrying amount as at the balance sheet date
Examples ndash in the absence of recently observed market prices used to measure the following assets and liabilities future-oriented estimates are necessary to measurebull the recoverable amount of classes of PPEbull the effect of technological obsolescence on inventories
Estimates involve assumptions about such items asbull the risk adjustment to cash flows or discount rates usedbull future changes in salaries and in prices affecting other costs
Examples ndash in the absence of recently observed market prices used to measure the following assets and liabilities future-oriented estimates are necessary to measurebull the recoverable amount of classes of PPEbull the effect of technological obsolescence on inventories
Estimates involve assumptions about such items asbull the risk adjustment to cash flows or discount rates usedbull future changes in salaries and in prices affecting other costs
copy 2005-07 Nelson 94
Notes
Esprit Holdings LimitedEsprit Holdings Limitedbull Critical Accounting Estimates and Judgements
ndash Estimates and judgements are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonableunder the circumstances
ndash Critical accounting estimates and assumptionsbull The Group makes estimates and assumptions concerning
the future The resulting accounting estimates will by definition seldom equal the related actual results
bull The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below helliphellip (including (1) useful life and impairment of trademarks and (2) income taxes)
CaseCase
48
copy 2005-07 Nelson 95
Notes
Melco Development Limited (新濠國際發展有限公司)Notes to the financial statements for the year ended 31122005ndash The key assumptions concerning the future and other key sources
of estimation uncertainty at the balance sheet date that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below helliphellip(The issues discussed includebull Allowances for inventories bull Estimated impairment of goodwill Income taxes)
CaseCase
copy 2005-07 Nelson 96
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)ndash Estimates and judgements used in preparing the
financial statements are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonable under the circumstances
ndash The Group makes estimates and assumptionsconcerning the future
ndash The resulting accounting estimates will by definition seldom equal the related actual results
ndash The estimates and assumptions that have a significant effect on the carrying amounts of assets and liabilities are discussed below hellip (including impairment of goodwill impairment of gaming
licence Useful lives of property plant and equipment fair value of investment properties hellip)
49
copy 2005-07 Nelson 97
Notes Disclosures (an entity is required to disclose the following)
bull Other disclosuresAn entity shall disclose in the notesa) the amount of dividends proposed or declared before the
financial statements were authorised for issue but not recognised as a distribution to equity holders during the period and the related amount per share(HK incorporated companies are required to show the aggregate amount which is recommended for distribution by way of dividend under a separate heading(s) in their balance sheet (HK Co Ord 10th Sch para 9(1)(e)) and
b) the amount of any cumulative preference dividends not recognised
copy 2005-07 Nelson 98
Notes Disclosures (an entity is required to disclose the following)
An entity shall disclose the following if not disclosedelsewhere in information published with the financial statementsa) the domicile and legal form of the entity
its country of incorporation andthe address of its registered office(or principal place of business if different from the registered office)
b) a description of the nature of the entityrsquos operations and its principal activities and
c) the name of the parent and the ultimate parent of the group
ldquoshall discloserdquo now instead of ldquoencouraged to discloserdquo
ldquoshall discloserdquo now instead of ldquoencouraged to discloserdquo
bull Other disclosures
Any specialAny special
50
copy 2005-07 Nelson 99
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)bull The principal activities of Galaxy Entertainment Group
Ltd (the lsquolsquoCompanyrsquorsquo) (formerly known as K WahConstruction Materials Ltd) and its subsidiaries (together the lsquolsquoGrouprsquorsquo) are tondash operate in casino games of chance or games of other forms
in Macau (and) manufacture sale and distribution of construction materials in HK Macau and Mainland China
bull The Company is ndash a limited liability company incorporated in Hong Kong and ndash has its listing on the Main Board of The Stock Exchange of
Hong Kong Limitedbull The address of its registered office and its principal place
of business is Room 1606 16th Floor Hutchison House 10 Harcourt Road Central HK
copy 2005-07 Nelson 100
Effective Date
bull An entity shall apply IAS 1 for annual periods beginning on or after 1 Jan 2005
ndash Earlier application is encouragedndash If an entity applies IAS 1 for an earlier period it shall
disclose this factbull For the amendments relating to the Statement of
Changes in Equityndash An entity shall apply it for annual periods beginning on
or after 1 Jan 2006ndash If an entity applies the amendments to IAS 19
Employee Benefits ndash Actuarial Gains and Losses Group Plans and Disclosures for an earlier period that amendment shall be applied for that earlier period
51
copy 2005-07 Nelson 101
Todayrsquos Agenda
Capital Disclosures (Amendments to IAS 1)
Capital Disclosures (Amendments to IAS 1)
copy 2005-07 Nelson 102
Capital Disclosures ndash For 2007
52
copy 2005-07 Nelson 103
Capital Disclosures
What is capital Is it helliphellip
CapitalCapital AssetsAssets LiabilitiesLiabilities= ndash
bull IAS 1BC47 considers ldquowhether an entity can have a view of capital that differs from what IFRSs define as equityrdquo
bull It further clarifies that although for the purposes of this disclosure capital would often equate with equity as defined in IFRSsndash it might also include or exclude some components
bull It also noted that the capital disclosure in IAS 1 is intended to give entities the opportunity to describendash how they view the components of capital they manage if this is
different from what IFRSs define as equity helliphellip
copy 2005-07 Nelson 104
EquityEquityEquity AssetsAssets LiabilitiesLiabilities= ndash
Capital Disclosures
Based on the Framework amp IFRSs the accounting equation should be
CapitalCapital AssetsAssets LiabilitiesLiabilities= ndash
bull An entityrsquos capital may be part of its equity plus part of its liabilities depending on how it manage ldquoits capitalrdquo helliphellip
53
copy 2005-07 Nelson 105
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowinga) qualitative information about its objectives policies and processes for
managing capital including (but not limited to)i) a description of what it manages as capitalii) when an entity is subject to externally imposed capital requirements
the nature of those requirements and how those requirements are incorporated into the management of capital and
iii) how it is meeting its objectives for managing capital
bull To comply with the capital disclosures the entity discloses thefollowinga) qualitative information about its objectives policies and processes for
managing capital including (but not limited to)i) a description of what it manages as capitalii) when an entity is subject to externally imposed capital requirements
the nature of those requirements and how those requirements are incorporated into the management of capital and
iii) how it is meeting its objectives for managing capital
copy 2005-07 Nelson 106
Capital Disclosures
Example disclosurebull The Grouprsquos objectives when managing capital are
ndash to safeguard the entityrsquos ability to continue as a going concern
bull so that it can continue to provide returns for shareholders and benefits for other stakeholders and
ndash to provide an adequate return to shareholders by pricing products and services commensurately with the level of risk
bull The Group sets the amount of capital in proportion to risk
ExampleExample
ObjectivesObjectives
54
copy 2005-07 Nelson 107
Capital Disclosures
bull The Group manages the capital structure and makes adjustments to it in the light ofndash changes in economic conditions and ndash the risk characteristics of the underlying assets
bull In order to maintain or adjust the capital structure the Group mayndash adjust the amount of dividends paid to shareholders ndash return capital to shareholders ndash issue new shares or ndash sell assets to reduce debt
ExampleExample
Example disclosure
HowHow
copy 2005-07 Nelson 108
Capital Disclosures
bull Consistently with others in the industry the Group monitors capital on the basis of ndash the debt-to-adjusted capital ratio
bull This ratio is calculated as net debt divide adjusted capital
ExampleExample
Example disclosure
HowHow
bull Net debt is calculated as ndash Total debt (as shown in the
balance sheet)ndash Less cash amp cash equivalents
bull Net debt is calculated as ndash Total debt (as shown in the
balance sheet)ndash Less cash amp cash equivalents
bull Adjusted capital ndash comprises all components of
equity (ie share capital share premium minority interest retained earnings and revaluation reserve) ndash other than amounts
recognised in equity relating to cash flow hedges and
ndash includes some forms of subordinated debt
bull Adjusted capital ndash comprises all components of
equity (ie share capital share premium minority interest retained earnings and revaluation reserve) ndash other than amounts
recognised in equity relating to cash flow hedges and
ndash includes some forms of subordinated debt
55
copy 2005-07 Nelson 109
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowing
bull To comply with the capital disclosures the entity discloses thefollowingb) summary quantitative data about what it manages as capital
Some entities regard some financial liabilities (eg some forms of subordinated debt) as part of capitalOther entities regard capital as excluding some components of equity (eg components arising from cash flow hedges)
c) any changes in (a) and (b) from the previous period
copy 2005-07 Nelson 110
Capital Disclosures
Example disclosure (continued from previous example)
ExampleExample
bull During 20X4 the Grouprsquos strategy which was unchanged from 20X3 was to maintain the debt-to-adjusted capital ratio at the lower end of the range 61 to 71 in order to secure access to finance at a reasonable cost by maintaining a BB credit rating The debt-to-adjusted capital ratios at 31 December 20X4 and at 31 December 20X3 were as follows
3112X4 ($rsquoM) 3112X3 ($rsquoM) Total debt 1000 1100 Less cash and cash equivalents (90) (150)Net debt 910 950
Total equity 110 105 Add subordinated debt instruments 38 38 Less amounts recognised in equity
relating to cash flow hedges (10) (5)Adjusted capital 138 138
Debt-to-adjusted capital ratio 66 69
56
copy 2005-07 Nelson 111
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowing
bull To comply with the capital disclosures the entity discloses thefollowingd) whether during the period it complied with any externally imposed capital
requirements to which it is subjecte) when the entity has not complied with such externally imposed capital
requirements the consequences of such non-complianceThese disclosures shall be based on the information provided internally to the entityrsquos key management personnel
copy 2005-07 Nelson 112
Capital DisclosuresExampleExample
Example disclosurebull Entity A filed its quarterly regulatory capital return for
30 September 20X7 on 20 October 20X7 bull At that date Entity Arsquos regulatory capital was below
the capital requirement imposed by Regulator B by $1 million
bull As a result Entity A was required to submit a plan to the regulator indicating how it would increase its regulatory capital to the amount required
bull Entity A submitted a plan that entailed selling part of its unquoted equities portfolio with a carrying amount of $115 million in the fourth quarter of 20X7
bull In the fourth quarter of 20X7 Entity A sold its fixed interest investment portfolio for $126 million and met its regulatory capital requirement
For example SFC or banks
For example SFC or banks
57
copy 2005-07 Nelson 113
Capital DisclosuresCaseCase
bull Early adopted capital disclosure in 2005 and itsannual report states that (extract only)ndash The Grouprsquos objectives when managing capital are
bull To safeguard the Grouprsquos ability to continue as a going concern so that it continues to provide returns for shareholders and benefits for other stakeholders
bull To support the Grouprsquos stability and growth andbull To provide capital for the purpose of strengthening the
Grouprsquos risk management capability
copy 2005-07 Nelson 114
Capital DisclosuresCaseCase
ndash The Group actively and regularly reviews and manages its capital structure to ensure optimal capital structure and shareholder returns taking into consideration the future capital requirements of the Group and capital efficiency helliphellip
ndash The Group adopts a dividend policy helliphellip while retaining 10 per cent of the profit as capital of the Group for future use
ndash The Group has set aside $1500 million of retained earnings for the purpose of strengthening the risk management regime of the clearing houses and supporting their roles as central counterparties
ndash As in prior years the Group monitors capital by reviewing the level of capital that is at the disposal of the Group (ldquoadjusted capitalrdquo) Adjusted capital comprises all components of shareholdersrsquo equity other than the hedging reserve relating to cash flow hedges designated reserves and investment revaluation reserve helliphellip
bull Early adopted capital disclosure in 2005 and itsannual report states that (extract only)
58
copy 2005-07 Nelson 115
Capital Disclosures ndash Transition
bull An entity shall apply the requirements of capital disclosure for
ndash annual periods beginning on or after 1 January 2007
bull Early application is encouraged
copy 2005-07 Nelson 116
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk
59
copy 2005-07 Nelson 117
QampA SessionQampA SessionQampA Session
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk
30
copy 2005-07 Nelson 59
Identification of Financial Statements
bull The financial statements shall be identified clearly and distinguished from other information in the same published document
bull The following information shall be displayed prominently and repeated when it is necessary for a proper understanding of the information presented
a) the name of the reporting entity or other means of identification and any change in that information from the preceding balance sheet date
b) whether the financial statements cover the individual entity or a group of entities
c) the balance sheet date or the period covered by the financial statements whichever is appropriate to that component of the financial statements
d) the presentation currency as defined in HKAS 21 The Effects of Changes in Foreign Exchange Rates and
e) the level of rounding used in presenting amounts in the financial statements
copy 2005-07 Nelson 60
Identification of Financial Statements
bull Can the units of the presentation currency be rounded to thousands or millions
bull Financial statements are often made more understandableby presenting information in thousands or millions of units of the presentation currency
bull This is acceptable as long asndash the level of rounding in presentation is disclosed and ndash material information is not omitted
bull Financial statements are often made more understandableby presenting information in thousands or millions of units of the presentation currency
bull This is acceptable as long asndash the level of rounding in presentation is disclosed and ndash material information is not omitted
ExampleExample
31
copy 2005-07 Nelson 61
Reporting Period
bull Financial statements shall be presented at least annually
bull When an entityrsquos balance sheet date changes and the annual financial statements are presented for a period longer or shorter than one year an entity shall disclose in addition to the period covered by the financial statementsa) the reason for using a longer or shorter period andb) the fact that comparative amounts for the income
statement statement of changes in equity cash flow statement and related notes are not entirely comparable
copy 2005-07 Nelson 62
Reporting Period
bull Can a set of financial statements cover 52-week instead of a year
bull Normally financial statements are consistently prepared covering a one-year period
bull However for practical reasons some entities prefer to report for example for a 52-week period
bull IAS 1 does not preclude this practice because the resulting financial statements are unlikely to be materially different from those that would be presented for one year
bull Normally financial statements are consistently prepared covering a one-year period
bull However for practical reasons some entities prefer to report for example for a 52-week period
bull IAS 1 does not preclude this practice because the resulting financial statements are unlikely to be materially different from those that would be presented for one year
ExampleExample
32
copy 2005-07 Nelson 63
CurrentNon-current Distinction
bull An entity shall presentndash current and non-current assets andndash current and non-current liabilitiesas separate classifications on the face of its balance sheet
bull Except when a presentation based on liquidity provides informationndash If that information is reliable and is more relevantndash When that exception applies all assets and liabilities shall be
presented broadly in order of liquidity
copy 2005-07 Nelson 64
CurrentNon-current Distinction
bull Whichever method of presentation is adopted for each asset and liability line item that combines amounts expected to be recovered or settled a) no more than 12 months after the balance sheet date
andb) more than 12 months after the balance sheet date(ie combines both current and non-current)
an entity shall disclose the amount expected to be recovered or settled after more than 12 months
33
copy 2005-07 Nelson 65
New requirementsNew requirements
Current Assets
bull An asset shall be classified as current when it satisfies any of the following criteriaa) it is expected to be realised in or is intended for sale or
consumption in the entityrsquos normal operating cycle b) it is held primarily for the purpose of being tradedc) it is expected to be realised within 12 months after the balance
sheet date ord) it is cash or a cash equivalent
bull unless it is restricted from being exchanged or used to settle aliability for at least 12 months after the balance sheet date
bull All other assets shall be classified as non-current
Examplesbull Deposits pledged to bank (how long)bull Fixed deposits over 1 year maturity
Examplesbull Deposits pledged to bank (how long)bull Fixed deposits over 1 year maturity
What is itWhat is it
copy 2005-07 Nelson 66
Current Assets
bull What is operating cycle
bull The operating cycle of an entity is the time between ndash the acquisition of assets for processing and ndash their realisation in cash or cash equivalents
bull When the entityrsquos normal operating cycle is not clearly identifiable ndash its duration is assumed to be 12 months
bull The operating cycle of an entity is the time between ndash the acquisition of assets for processing and ndash their realisation in cash or cash equivalents
bull When the entityrsquos normal operating cycle is not clearly identifiable ndash its duration is assumed to be 12 months
ExampleExample
34
copy 2005-07 Nelson 67
Current Assets CaseCase
copy 2005-07 Nelson 68
Current Assets
bull Can a non-current asset reclassified if it fulfil the definition of current asset later
bull Assets classified as non-current in accordancewith IAS 1 shall not be reclassified as current assetsndash until they meet the criteria to be classified as held for sale in
accordance with IFRS 5bull Assets of a class that an entity would normally regard as non-
current that are acquired exclusively with a view to resale shall notbe classified as currentndash unless they meet the criteria to be classified as held for sale in
accordance with IFRS 5
bull Assets classified as non-current in accordancewith IAS 1 shall not be reclassified as current assetsndash until they meet the criteria to be classified as held for sale in
accordance with IFRS 5bull Assets of a class that an entity would normally regard as non-
current that are acquired exclusively with a view to resale shall notbe classified as currentndash unless they meet the criteria to be classified as held for sale in
accordance with IFRS 5
No non-current assets can be classified as current unless the criteria in IFRS 5 are fulfilled mainlybull Available for immediate salebull Highly probable to make the sale
35
copy 2005-07 Nelson 69
Is it currentIs it current
Current Assets
bull In its 2005 Interim Report full set of HKFRS was adopted and the report set out thatndash Available-for-sale financial assets are non-
derivatives that are eitherbull designated in this category orbull not classified in any of the other categories (ie
loans and receivables financial assets at fair value through profit or loss and held-to-maturity investments)
CaseCase
Similar in 2005 Annual Report
Similar in 2005 Annual Report
ndash They are included in non-current assetsbull unless management intends to dispose of the
investment within 12 months of the balance sheet date
copy 2005-07 Nelson 70
New requirementsNew requirements
Current Liabilities
bull A liability shall be classified as current when it satisfies any of the following criteriaa) it is expected to be settled in the entityrsquos normal operating cycleb) it is held primarily for the purpose of being tradedc) it is due to be settled within 12 months after the balance sheet
date ord) the entity does not have an unconditional right to defer settlement
of the liability for at least 12 months after the balance sheet date
bull All other liabilities shall be classified as non-current
ImplicationImplication
36
copy 2005-07 Nelson 71
Current Liabilities Revised rules on classifying a liability as current or non-currentbull A liability held for being traded rArr currentbull A financial liability due within 12 months after the BS date rArr current
ndash even if an agreement to refinance on a long-term basis is completed after the BS date (only disclosed as non-adjusting event)
bull If an entity has discretion to refinance rArr non-currentbull If an entity without discretion to refinance rArr current
bull A non-current financial liability is payable on demand with a breach on a condition of its loan agreement on or before the BS datendash If the lender agreed not to demand payment
bull after the BS date rArr current (only disclosed as non-adjusting event)
bull by the BS date rArr non-current
ImplicationImplication
copy 2005-07 Nelson 72
Current LiabilitiesCaseCase
Note 12 to Interim Report 2006bull Breach of loan covenants
bull As at 30 June 2006 in respect of certain bank loans with an aggregate carrying amount of HK$1529806000 the Group breached certain financial covenants of the banks loans
bull Since the lenders have not agreed to waive its right to demand immediate payment as at the balance sheet date the loans have been classified as current liabilities in these financial statements at 30 June 2006
37
copy 2005-07 Nelson 73
Current Assets and LiabilitiesExampleExample
Can the following be classified as current assetsbull 3-month fixed deposits pledged to a bank to secure
a mortgage loan of 5 yearsbull 2-year fixed deposits with a bank
Can the following be classified as current assetsbull 3-month fixed deposits pledged to a bank to secure
a mortgage loan of 5 yearsbull 2-year fixed deposits with a bank
Can the following be classified as non-current liabilitiesbull 5-year term loan matured after year end but renewed
for another 5 years after year end (before the issuanceof the financial statements)
bull 2-year term loan to be matured with 12 months and theentity has a right to renew for another 2 years
Can the following be classified as non-current liabilitiesbull 5-year term loan matured after year end but renewed
for another 5 years after year end (before the issuanceof the financial statements)
bull 2-year term loan to be matured with 12 months and theentity has a right to renew for another 2 years
timestimes
times
radic
copy 2005-07 Nelson 74
Balance Sheetbull As a minimum the face of the balance sheet shall
include line items that present the following amountsa) property plant and equipmentb) investment propertyc) intangible assetsd) financial assets (excl amounts shown under (e) (h) and (I))e) investments accounted for using the equity methodf) biological assetsg) inventoriesh) trade and other receivablesi) cash and cash equivalentsj) trade and other payablesk) provisionsl) financial liabilities (excl amounts shown under (j) and (k))m) liabilities and assets for current tax as defined in HKAS 12 Income Taxesn) deferred tax liabilities and deferred tax assets as defined in HKAS 12o) minority interest presented within equity andp) issued capital and reserves attributable to equity holders of the parent
38
copy 2005-07 Nelson 75
Balance Sheetbull The face of the balance sheet shall also include line
items that present the following amountsa) The total of assets classified as held for sale and
assets included in disposal groups classified as held for sale in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations and
b) Liabilities included in disposal groups classified as held for sale in accordance with IFRS 5
copy 2005-07 Nelson 76
Balance Sheetbull Additional line items headings and subtotals shall
be presented on the face of the balance sheet when such presentation is relevant to an understanding of the entityrsquos financial position
bull When an entity presents current and non-current assets and current and non-current liabilities as separate classifications on the face of its balance sheet ndash it shall not classify deferred tax assets
(liabilities) as current assets (liabilities)
39
copy 2005-07 Nelson 77
Balance Sheet
bull The use of different measurement bases for different classes of assets suggests that their nature or function differs and therefore that they should be presented as separate line itemsndash For example different classes of property plant and
equipment can be carried atbull Cost orbull Revalued amountsin accordance with IAS 16 PPE
In the past it use ldquomay needrdquoIn the past it use ldquomay needrdquo
copy 2005-07 Nelson 78
Balance Sheet
Galaxy Entertainment Group LimitedConsolidated balance sheet as at 31122005
CaseCase
40
copy 2005-07 Nelson 79
Balance Sheet
Melco Development Limited (新濠國際發展有限公司)Consolidated balance sheet as at 31122005
CaseCase
copy 2005-07 Nelson 80
Income Statement Minimum requirements on the face of the income statementbull As a minimum the face of the income statement shall include line items
that present the following amounts for the perioda) revenueb) finance costsc) share of the profit or loss of associates and joint ventures accounted
for using the equity methodd) pre-tax gain or loss recognised on the disposal of assets or
settlement of liabilities attributable to discontinuing operationse) tax expense andf) profit or loss
41
copy 2005-07 Nelson 81
Income Statement bull The following items shall be disclosed on the face of the income
statement as allocations of profit or loss for the perioda) Profit or loss attributable to minority interest andb) Profit or loss attributable to equity holders of the parent
A similar requirement has been added for the statement of changes in equity and such allocated amounts are not to be presented as items of income or expense
copy 2005-07 Nelson 82
Income Statement
Melco Dev LtdConsolidated income statementas at 31122005
CaseCase
42
copy 2005-07 Nelson 83
Income Statement bull Not require to disclose the results of operating
activities as a line item on the face of the incomestatement
bull An entity shall not present any items of income and expense as extraordinary items either onthe face of the income statements or in the notes
Entities canrsquot use itEntities canrsquot use it
Entities can still show itEntities can still show it
copy 2005-07 Nelson 84
Income Statement Either on the face of the income statement or in the notesbull An entity shall present an analysis of expenses using a classification
based on eitherbull the nature of expenses orbull their function within the entity
whichever provides information that is reliable and more relevant
bull Entities classifying expenses by function shall disclose additional information on the nature of expenses includingbull depreciation and amortisation expense and bull employee benefits expense
43
copy 2005-07 Nelson 85
Income StatementCaseCase
Nature or FunctionNature or Nature or FunctionFunction
copy 2005-07 Nelson 86
Statement of Changes in Equity bull An entity shall present a statement of changes in equity showing on the
face of the statementa) profit or loss for the period b) each item of income and expense for the period that as required by
IFRSs is recognised directly in equity and the total of these itemsc) total income and expense for the period (calculated as the sum of (a) and
(b)) showing separately the total amounts attributablebull to equity holders of the parent andbull to minority interest and
d) for each component of equity the effects of changes in accounting policies and corrections of errors recognised in accordance with IAS 8
Any ChangeAny Change
A revised requirementbull A statement of changes in equity that comprises only these items
shall be titled a statement of recognised income and expenses
A revised requirementbull A statement of changes in equity that comprises only these items
shall be titled a statement of recognised income and expenses
44
copy 2005-07 Nelson 87
Statement of Changes in Equity bull An entity shall also present either on the face of the
statement of changes in equity or in the notesa) the amounts of transactions with equity holders acting in
their capacity as equity holders showing separately distributions to equity holders
b) the balance of retained earnings (ie accumulated profit or loss) at the beginning of the period and at the balance sheet date and the changes during the period and
c) a reconciliation between the carrying amount of each class of contributed equity and each reserve at the beginning and the end of the period separately disclosing each change
copy 2005-07 Nelson 88
Statement of Changes in Equity
Consolidated SCE as at 31122005
CaseCase
45
copy 2005-07 Nelson 89
Notes Structure (an entity is required to disclose the following)
bull The notes shalla) present information about the basis of preparation of the financial statements
and the specific accounting policies usedb) disclose the information required by HKFRSs that is not presented on the
face of the balance sheet income statement statement of changes in equity or cash flow statement and
c) provide additional information that is not presented on the face of the balance sheet income statement statement of changes in equity or cash flow statement but is relevant to an understanding of any of them
bull Notes shall as far as practicable be presented in a systematic manner bull Each item on the face of the balance sheet income statement statement
of changes in equity and cash flow statement shall be cross-referencedto any related information in the notes
copy 2005-07 Nelson 90
Notes Disclosures (an entity is required to disclose the following)
bull Disclosure of accounting policiesAn entity shall disclose in the summary of significant accounting policiesa) the measurement basis (or bases) used in preparing the financial
statements andb) the other accounting policies used that are relevant to an understanding of
the financial statements
46
copy 2005-07 Nelson 91
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)ndash The financial statements have been prepared in
accordance with Hong Kong Financial Reporting Standards (lsquolsquoHKFRSrsquorsquo) issued by the Hong Kong Institute of Certified Public Accountants bull under the historical cost convention as modified by the
revaluation of investment properties available-for-sale financial assets derivative financial instruments and other investments which are carried at fair values helliphellip
ndash The principal accounting policies applied in the preparation of these financial statements are set out below These policies have been consistently applied to all the years presented except for those stated in note 2(a) above
copy 2005-07 Nelson 92
Notes Disclosures (an entity is required to disclose the following)
bull Disclosure of accounting policiesndash The judgements apart from those involving estimations management has
madebull in the process of applying the entityrsquos accounting policies that have the
most significant effect on the amounts recognised in the financial statements (in the summary of significant accounting policies or other notes)
Examples ndash Management makes judgements in determininga) whether financial assets are held-to-maturity investmentsb) when substantially all the significant risks and rewards of
ownership of financial assets and lease assets are transferred to other entities
c) whether in substance particular sales of goods are financing arrangements and therefore do not give rise to revenue and
d) whether the substance of the relationship between the entity and a special purpose entity indicates that the special purpose entity is controlled by the entity
Examples ndash Management makes judgements in determininga) whether financial assets are held-to-maturity investmentsb) when substantially all the significant risks and rewards of
ownership of financial assets and lease assets are transferred to other entities
c) whether in substance particular sales of goods are financing arrangements and therefore do not give rise to revenue and
d) whether the substance of the relationship between the entity and a special purpose entity indicates that the special purpose entity is controlled by the entity
47
copy 2005-07 Nelson 93
Notes Disclosures (an entity is required to disclose the following)
bull Key sources of estimation uncertaintyndash Information about the key assumptions concerning the future and
other key sources of estimation uncertainty at the balance sheet datebull that have a significant risk of causing a material adjustment to the
carrying amounts of assets and liabilities within the next financial yearndash In respect of those assets and liabilities the notes shall include details of
a) their nature andb) their carrying amount as at the balance sheet date
Examples ndash in the absence of recently observed market prices used to measure the following assets and liabilities future-oriented estimates are necessary to measurebull the recoverable amount of classes of PPEbull the effect of technological obsolescence on inventories
Estimates involve assumptions about such items asbull the risk adjustment to cash flows or discount rates usedbull future changes in salaries and in prices affecting other costs
Examples ndash in the absence of recently observed market prices used to measure the following assets and liabilities future-oriented estimates are necessary to measurebull the recoverable amount of classes of PPEbull the effect of technological obsolescence on inventories
Estimates involve assumptions about such items asbull the risk adjustment to cash flows or discount rates usedbull future changes in salaries and in prices affecting other costs
copy 2005-07 Nelson 94
Notes
Esprit Holdings LimitedEsprit Holdings Limitedbull Critical Accounting Estimates and Judgements
ndash Estimates and judgements are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonableunder the circumstances
ndash Critical accounting estimates and assumptionsbull The Group makes estimates and assumptions concerning
the future The resulting accounting estimates will by definition seldom equal the related actual results
bull The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below helliphellip (including (1) useful life and impairment of trademarks and (2) income taxes)
CaseCase
48
copy 2005-07 Nelson 95
Notes
Melco Development Limited (新濠國際發展有限公司)Notes to the financial statements for the year ended 31122005ndash The key assumptions concerning the future and other key sources
of estimation uncertainty at the balance sheet date that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below helliphellip(The issues discussed includebull Allowances for inventories bull Estimated impairment of goodwill Income taxes)
CaseCase
copy 2005-07 Nelson 96
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)ndash Estimates and judgements used in preparing the
financial statements are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonable under the circumstances
ndash The Group makes estimates and assumptionsconcerning the future
ndash The resulting accounting estimates will by definition seldom equal the related actual results
ndash The estimates and assumptions that have a significant effect on the carrying amounts of assets and liabilities are discussed below hellip (including impairment of goodwill impairment of gaming
licence Useful lives of property plant and equipment fair value of investment properties hellip)
49
copy 2005-07 Nelson 97
Notes Disclosures (an entity is required to disclose the following)
bull Other disclosuresAn entity shall disclose in the notesa) the amount of dividends proposed or declared before the
financial statements were authorised for issue but not recognised as a distribution to equity holders during the period and the related amount per share(HK incorporated companies are required to show the aggregate amount which is recommended for distribution by way of dividend under a separate heading(s) in their balance sheet (HK Co Ord 10th Sch para 9(1)(e)) and
b) the amount of any cumulative preference dividends not recognised
copy 2005-07 Nelson 98
Notes Disclosures (an entity is required to disclose the following)
An entity shall disclose the following if not disclosedelsewhere in information published with the financial statementsa) the domicile and legal form of the entity
its country of incorporation andthe address of its registered office(or principal place of business if different from the registered office)
b) a description of the nature of the entityrsquos operations and its principal activities and
c) the name of the parent and the ultimate parent of the group
ldquoshall discloserdquo now instead of ldquoencouraged to discloserdquo
ldquoshall discloserdquo now instead of ldquoencouraged to discloserdquo
bull Other disclosures
Any specialAny special
50
copy 2005-07 Nelson 99
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)bull The principal activities of Galaxy Entertainment Group
Ltd (the lsquolsquoCompanyrsquorsquo) (formerly known as K WahConstruction Materials Ltd) and its subsidiaries (together the lsquolsquoGrouprsquorsquo) are tondash operate in casino games of chance or games of other forms
in Macau (and) manufacture sale and distribution of construction materials in HK Macau and Mainland China
bull The Company is ndash a limited liability company incorporated in Hong Kong and ndash has its listing on the Main Board of The Stock Exchange of
Hong Kong Limitedbull The address of its registered office and its principal place
of business is Room 1606 16th Floor Hutchison House 10 Harcourt Road Central HK
copy 2005-07 Nelson 100
Effective Date
bull An entity shall apply IAS 1 for annual periods beginning on or after 1 Jan 2005
ndash Earlier application is encouragedndash If an entity applies IAS 1 for an earlier period it shall
disclose this factbull For the amendments relating to the Statement of
Changes in Equityndash An entity shall apply it for annual periods beginning on
or after 1 Jan 2006ndash If an entity applies the amendments to IAS 19
Employee Benefits ndash Actuarial Gains and Losses Group Plans and Disclosures for an earlier period that amendment shall be applied for that earlier period
51
copy 2005-07 Nelson 101
Todayrsquos Agenda
Capital Disclosures (Amendments to IAS 1)
Capital Disclosures (Amendments to IAS 1)
copy 2005-07 Nelson 102
Capital Disclosures ndash For 2007
52
copy 2005-07 Nelson 103
Capital Disclosures
What is capital Is it helliphellip
CapitalCapital AssetsAssets LiabilitiesLiabilities= ndash
bull IAS 1BC47 considers ldquowhether an entity can have a view of capital that differs from what IFRSs define as equityrdquo
bull It further clarifies that although for the purposes of this disclosure capital would often equate with equity as defined in IFRSsndash it might also include or exclude some components
bull It also noted that the capital disclosure in IAS 1 is intended to give entities the opportunity to describendash how they view the components of capital they manage if this is
different from what IFRSs define as equity helliphellip
copy 2005-07 Nelson 104
EquityEquityEquity AssetsAssets LiabilitiesLiabilities= ndash
Capital Disclosures
Based on the Framework amp IFRSs the accounting equation should be
CapitalCapital AssetsAssets LiabilitiesLiabilities= ndash
bull An entityrsquos capital may be part of its equity plus part of its liabilities depending on how it manage ldquoits capitalrdquo helliphellip
53
copy 2005-07 Nelson 105
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowinga) qualitative information about its objectives policies and processes for
managing capital including (but not limited to)i) a description of what it manages as capitalii) when an entity is subject to externally imposed capital requirements
the nature of those requirements and how those requirements are incorporated into the management of capital and
iii) how it is meeting its objectives for managing capital
bull To comply with the capital disclosures the entity discloses thefollowinga) qualitative information about its objectives policies and processes for
managing capital including (but not limited to)i) a description of what it manages as capitalii) when an entity is subject to externally imposed capital requirements
the nature of those requirements and how those requirements are incorporated into the management of capital and
iii) how it is meeting its objectives for managing capital
copy 2005-07 Nelson 106
Capital Disclosures
Example disclosurebull The Grouprsquos objectives when managing capital are
ndash to safeguard the entityrsquos ability to continue as a going concern
bull so that it can continue to provide returns for shareholders and benefits for other stakeholders and
ndash to provide an adequate return to shareholders by pricing products and services commensurately with the level of risk
bull The Group sets the amount of capital in proportion to risk
ExampleExample
ObjectivesObjectives
54
copy 2005-07 Nelson 107
Capital Disclosures
bull The Group manages the capital structure and makes adjustments to it in the light ofndash changes in economic conditions and ndash the risk characteristics of the underlying assets
bull In order to maintain or adjust the capital structure the Group mayndash adjust the amount of dividends paid to shareholders ndash return capital to shareholders ndash issue new shares or ndash sell assets to reduce debt
ExampleExample
Example disclosure
HowHow
copy 2005-07 Nelson 108
Capital Disclosures
bull Consistently with others in the industry the Group monitors capital on the basis of ndash the debt-to-adjusted capital ratio
bull This ratio is calculated as net debt divide adjusted capital
ExampleExample
Example disclosure
HowHow
bull Net debt is calculated as ndash Total debt (as shown in the
balance sheet)ndash Less cash amp cash equivalents
bull Net debt is calculated as ndash Total debt (as shown in the
balance sheet)ndash Less cash amp cash equivalents
bull Adjusted capital ndash comprises all components of
equity (ie share capital share premium minority interest retained earnings and revaluation reserve) ndash other than amounts
recognised in equity relating to cash flow hedges and
ndash includes some forms of subordinated debt
bull Adjusted capital ndash comprises all components of
equity (ie share capital share premium minority interest retained earnings and revaluation reserve) ndash other than amounts
recognised in equity relating to cash flow hedges and
ndash includes some forms of subordinated debt
55
copy 2005-07 Nelson 109
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowing
bull To comply with the capital disclosures the entity discloses thefollowingb) summary quantitative data about what it manages as capital
Some entities regard some financial liabilities (eg some forms of subordinated debt) as part of capitalOther entities regard capital as excluding some components of equity (eg components arising from cash flow hedges)
c) any changes in (a) and (b) from the previous period
copy 2005-07 Nelson 110
Capital Disclosures
Example disclosure (continued from previous example)
ExampleExample
bull During 20X4 the Grouprsquos strategy which was unchanged from 20X3 was to maintain the debt-to-adjusted capital ratio at the lower end of the range 61 to 71 in order to secure access to finance at a reasonable cost by maintaining a BB credit rating The debt-to-adjusted capital ratios at 31 December 20X4 and at 31 December 20X3 were as follows
3112X4 ($rsquoM) 3112X3 ($rsquoM) Total debt 1000 1100 Less cash and cash equivalents (90) (150)Net debt 910 950
Total equity 110 105 Add subordinated debt instruments 38 38 Less amounts recognised in equity
relating to cash flow hedges (10) (5)Adjusted capital 138 138
Debt-to-adjusted capital ratio 66 69
56
copy 2005-07 Nelson 111
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowing
bull To comply with the capital disclosures the entity discloses thefollowingd) whether during the period it complied with any externally imposed capital
requirements to which it is subjecte) when the entity has not complied with such externally imposed capital
requirements the consequences of such non-complianceThese disclosures shall be based on the information provided internally to the entityrsquos key management personnel
copy 2005-07 Nelson 112
Capital DisclosuresExampleExample
Example disclosurebull Entity A filed its quarterly regulatory capital return for
30 September 20X7 on 20 October 20X7 bull At that date Entity Arsquos regulatory capital was below
the capital requirement imposed by Regulator B by $1 million
bull As a result Entity A was required to submit a plan to the regulator indicating how it would increase its regulatory capital to the amount required
bull Entity A submitted a plan that entailed selling part of its unquoted equities portfolio with a carrying amount of $115 million in the fourth quarter of 20X7
bull In the fourth quarter of 20X7 Entity A sold its fixed interest investment portfolio for $126 million and met its regulatory capital requirement
For example SFC or banks
For example SFC or banks
57
copy 2005-07 Nelson 113
Capital DisclosuresCaseCase
bull Early adopted capital disclosure in 2005 and itsannual report states that (extract only)ndash The Grouprsquos objectives when managing capital are
bull To safeguard the Grouprsquos ability to continue as a going concern so that it continues to provide returns for shareholders and benefits for other stakeholders
bull To support the Grouprsquos stability and growth andbull To provide capital for the purpose of strengthening the
Grouprsquos risk management capability
copy 2005-07 Nelson 114
Capital DisclosuresCaseCase
ndash The Group actively and regularly reviews and manages its capital structure to ensure optimal capital structure and shareholder returns taking into consideration the future capital requirements of the Group and capital efficiency helliphellip
ndash The Group adopts a dividend policy helliphellip while retaining 10 per cent of the profit as capital of the Group for future use
ndash The Group has set aside $1500 million of retained earnings for the purpose of strengthening the risk management regime of the clearing houses and supporting their roles as central counterparties
ndash As in prior years the Group monitors capital by reviewing the level of capital that is at the disposal of the Group (ldquoadjusted capitalrdquo) Adjusted capital comprises all components of shareholdersrsquo equity other than the hedging reserve relating to cash flow hedges designated reserves and investment revaluation reserve helliphellip
bull Early adopted capital disclosure in 2005 and itsannual report states that (extract only)
58
copy 2005-07 Nelson 115
Capital Disclosures ndash Transition
bull An entity shall apply the requirements of capital disclosure for
ndash annual periods beginning on or after 1 January 2007
bull Early application is encouraged
copy 2005-07 Nelson 116
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk
59
copy 2005-07 Nelson 117
QampA SessionQampA SessionQampA Session
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk
31
copy 2005-07 Nelson 61
Reporting Period
bull Financial statements shall be presented at least annually
bull When an entityrsquos balance sheet date changes and the annual financial statements are presented for a period longer or shorter than one year an entity shall disclose in addition to the period covered by the financial statementsa) the reason for using a longer or shorter period andb) the fact that comparative amounts for the income
statement statement of changes in equity cash flow statement and related notes are not entirely comparable
copy 2005-07 Nelson 62
Reporting Period
bull Can a set of financial statements cover 52-week instead of a year
bull Normally financial statements are consistently prepared covering a one-year period
bull However for practical reasons some entities prefer to report for example for a 52-week period
bull IAS 1 does not preclude this practice because the resulting financial statements are unlikely to be materially different from those that would be presented for one year
bull Normally financial statements are consistently prepared covering a one-year period
bull However for practical reasons some entities prefer to report for example for a 52-week period
bull IAS 1 does not preclude this practice because the resulting financial statements are unlikely to be materially different from those that would be presented for one year
ExampleExample
32
copy 2005-07 Nelson 63
CurrentNon-current Distinction
bull An entity shall presentndash current and non-current assets andndash current and non-current liabilitiesas separate classifications on the face of its balance sheet
bull Except when a presentation based on liquidity provides informationndash If that information is reliable and is more relevantndash When that exception applies all assets and liabilities shall be
presented broadly in order of liquidity
copy 2005-07 Nelson 64
CurrentNon-current Distinction
bull Whichever method of presentation is adopted for each asset and liability line item that combines amounts expected to be recovered or settled a) no more than 12 months after the balance sheet date
andb) more than 12 months after the balance sheet date(ie combines both current and non-current)
an entity shall disclose the amount expected to be recovered or settled after more than 12 months
33
copy 2005-07 Nelson 65
New requirementsNew requirements
Current Assets
bull An asset shall be classified as current when it satisfies any of the following criteriaa) it is expected to be realised in or is intended for sale or
consumption in the entityrsquos normal operating cycle b) it is held primarily for the purpose of being tradedc) it is expected to be realised within 12 months after the balance
sheet date ord) it is cash or a cash equivalent
bull unless it is restricted from being exchanged or used to settle aliability for at least 12 months after the balance sheet date
bull All other assets shall be classified as non-current
Examplesbull Deposits pledged to bank (how long)bull Fixed deposits over 1 year maturity
Examplesbull Deposits pledged to bank (how long)bull Fixed deposits over 1 year maturity
What is itWhat is it
copy 2005-07 Nelson 66
Current Assets
bull What is operating cycle
bull The operating cycle of an entity is the time between ndash the acquisition of assets for processing and ndash their realisation in cash or cash equivalents
bull When the entityrsquos normal operating cycle is not clearly identifiable ndash its duration is assumed to be 12 months
bull The operating cycle of an entity is the time between ndash the acquisition of assets for processing and ndash their realisation in cash or cash equivalents
bull When the entityrsquos normal operating cycle is not clearly identifiable ndash its duration is assumed to be 12 months
ExampleExample
34
copy 2005-07 Nelson 67
Current Assets CaseCase
copy 2005-07 Nelson 68
Current Assets
bull Can a non-current asset reclassified if it fulfil the definition of current asset later
bull Assets classified as non-current in accordancewith IAS 1 shall not be reclassified as current assetsndash until they meet the criteria to be classified as held for sale in
accordance with IFRS 5bull Assets of a class that an entity would normally regard as non-
current that are acquired exclusively with a view to resale shall notbe classified as currentndash unless they meet the criteria to be classified as held for sale in
accordance with IFRS 5
bull Assets classified as non-current in accordancewith IAS 1 shall not be reclassified as current assetsndash until they meet the criteria to be classified as held for sale in
accordance with IFRS 5bull Assets of a class that an entity would normally regard as non-
current that are acquired exclusively with a view to resale shall notbe classified as currentndash unless they meet the criteria to be classified as held for sale in
accordance with IFRS 5
No non-current assets can be classified as current unless the criteria in IFRS 5 are fulfilled mainlybull Available for immediate salebull Highly probable to make the sale
35
copy 2005-07 Nelson 69
Is it currentIs it current
Current Assets
bull In its 2005 Interim Report full set of HKFRS was adopted and the report set out thatndash Available-for-sale financial assets are non-
derivatives that are eitherbull designated in this category orbull not classified in any of the other categories (ie
loans and receivables financial assets at fair value through profit or loss and held-to-maturity investments)
CaseCase
Similar in 2005 Annual Report
Similar in 2005 Annual Report
ndash They are included in non-current assetsbull unless management intends to dispose of the
investment within 12 months of the balance sheet date
copy 2005-07 Nelson 70
New requirementsNew requirements
Current Liabilities
bull A liability shall be classified as current when it satisfies any of the following criteriaa) it is expected to be settled in the entityrsquos normal operating cycleb) it is held primarily for the purpose of being tradedc) it is due to be settled within 12 months after the balance sheet
date ord) the entity does not have an unconditional right to defer settlement
of the liability for at least 12 months after the balance sheet date
bull All other liabilities shall be classified as non-current
ImplicationImplication
36
copy 2005-07 Nelson 71
Current Liabilities Revised rules on classifying a liability as current or non-currentbull A liability held for being traded rArr currentbull A financial liability due within 12 months after the BS date rArr current
ndash even if an agreement to refinance on a long-term basis is completed after the BS date (only disclosed as non-adjusting event)
bull If an entity has discretion to refinance rArr non-currentbull If an entity without discretion to refinance rArr current
bull A non-current financial liability is payable on demand with a breach on a condition of its loan agreement on or before the BS datendash If the lender agreed not to demand payment
bull after the BS date rArr current (only disclosed as non-adjusting event)
bull by the BS date rArr non-current
ImplicationImplication
copy 2005-07 Nelson 72
Current LiabilitiesCaseCase
Note 12 to Interim Report 2006bull Breach of loan covenants
bull As at 30 June 2006 in respect of certain bank loans with an aggregate carrying amount of HK$1529806000 the Group breached certain financial covenants of the banks loans
bull Since the lenders have not agreed to waive its right to demand immediate payment as at the balance sheet date the loans have been classified as current liabilities in these financial statements at 30 June 2006
37
copy 2005-07 Nelson 73
Current Assets and LiabilitiesExampleExample
Can the following be classified as current assetsbull 3-month fixed deposits pledged to a bank to secure
a mortgage loan of 5 yearsbull 2-year fixed deposits with a bank
Can the following be classified as current assetsbull 3-month fixed deposits pledged to a bank to secure
a mortgage loan of 5 yearsbull 2-year fixed deposits with a bank
Can the following be classified as non-current liabilitiesbull 5-year term loan matured after year end but renewed
for another 5 years after year end (before the issuanceof the financial statements)
bull 2-year term loan to be matured with 12 months and theentity has a right to renew for another 2 years
Can the following be classified as non-current liabilitiesbull 5-year term loan matured after year end but renewed
for another 5 years after year end (before the issuanceof the financial statements)
bull 2-year term loan to be matured with 12 months and theentity has a right to renew for another 2 years
timestimes
times
radic
copy 2005-07 Nelson 74
Balance Sheetbull As a minimum the face of the balance sheet shall
include line items that present the following amountsa) property plant and equipmentb) investment propertyc) intangible assetsd) financial assets (excl amounts shown under (e) (h) and (I))e) investments accounted for using the equity methodf) biological assetsg) inventoriesh) trade and other receivablesi) cash and cash equivalentsj) trade and other payablesk) provisionsl) financial liabilities (excl amounts shown under (j) and (k))m) liabilities and assets for current tax as defined in HKAS 12 Income Taxesn) deferred tax liabilities and deferred tax assets as defined in HKAS 12o) minority interest presented within equity andp) issued capital and reserves attributable to equity holders of the parent
38
copy 2005-07 Nelson 75
Balance Sheetbull The face of the balance sheet shall also include line
items that present the following amountsa) The total of assets classified as held for sale and
assets included in disposal groups classified as held for sale in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations and
b) Liabilities included in disposal groups classified as held for sale in accordance with IFRS 5
copy 2005-07 Nelson 76
Balance Sheetbull Additional line items headings and subtotals shall
be presented on the face of the balance sheet when such presentation is relevant to an understanding of the entityrsquos financial position
bull When an entity presents current and non-current assets and current and non-current liabilities as separate classifications on the face of its balance sheet ndash it shall not classify deferred tax assets
(liabilities) as current assets (liabilities)
39
copy 2005-07 Nelson 77
Balance Sheet
bull The use of different measurement bases for different classes of assets suggests that their nature or function differs and therefore that they should be presented as separate line itemsndash For example different classes of property plant and
equipment can be carried atbull Cost orbull Revalued amountsin accordance with IAS 16 PPE
In the past it use ldquomay needrdquoIn the past it use ldquomay needrdquo
copy 2005-07 Nelson 78
Balance Sheet
Galaxy Entertainment Group LimitedConsolidated balance sheet as at 31122005
CaseCase
40
copy 2005-07 Nelson 79
Balance Sheet
Melco Development Limited (新濠國際發展有限公司)Consolidated balance sheet as at 31122005
CaseCase
copy 2005-07 Nelson 80
Income Statement Minimum requirements on the face of the income statementbull As a minimum the face of the income statement shall include line items
that present the following amounts for the perioda) revenueb) finance costsc) share of the profit or loss of associates and joint ventures accounted
for using the equity methodd) pre-tax gain or loss recognised on the disposal of assets or
settlement of liabilities attributable to discontinuing operationse) tax expense andf) profit or loss
41
copy 2005-07 Nelson 81
Income Statement bull The following items shall be disclosed on the face of the income
statement as allocations of profit or loss for the perioda) Profit or loss attributable to minority interest andb) Profit or loss attributable to equity holders of the parent
A similar requirement has been added for the statement of changes in equity and such allocated amounts are not to be presented as items of income or expense
copy 2005-07 Nelson 82
Income Statement
Melco Dev LtdConsolidated income statementas at 31122005
CaseCase
42
copy 2005-07 Nelson 83
Income Statement bull Not require to disclose the results of operating
activities as a line item on the face of the incomestatement
bull An entity shall not present any items of income and expense as extraordinary items either onthe face of the income statements or in the notes
Entities canrsquot use itEntities canrsquot use it
Entities can still show itEntities can still show it
copy 2005-07 Nelson 84
Income Statement Either on the face of the income statement or in the notesbull An entity shall present an analysis of expenses using a classification
based on eitherbull the nature of expenses orbull their function within the entity
whichever provides information that is reliable and more relevant
bull Entities classifying expenses by function shall disclose additional information on the nature of expenses includingbull depreciation and amortisation expense and bull employee benefits expense
43
copy 2005-07 Nelson 85
Income StatementCaseCase
Nature or FunctionNature or Nature or FunctionFunction
copy 2005-07 Nelson 86
Statement of Changes in Equity bull An entity shall present a statement of changes in equity showing on the
face of the statementa) profit or loss for the period b) each item of income and expense for the period that as required by
IFRSs is recognised directly in equity and the total of these itemsc) total income and expense for the period (calculated as the sum of (a) and
(b)) showing separately the total amounts attributablebull to equity holders of the parent andbull to minority interest and
d) for each component of equity the effects of changes in accounting policies and corrections of errors recognised in accordance with IAS 8
Any ChangeAny Change
A revised requirementbull A statement of changes in equity that comprises only these items
shall be titled a statement of recognised income and expenses
A revised requirementbull A statement of changes in equity that comprises only these items
shall be titled a statement of recognised income and expenses
44
copy 2005-07 Nelson 87
Statement of Changes in Equity bull An entity shall also present either on the face of the
statement of changes in equity or in the notesa) the amounts of transactions with equity holders acting in
their capacity as equity holders showing separately distributions to equity holders
b) the balance of retained earnings (ie accumulated profit or loss) at the beginning of the period and at the balance sheet date and the changes during the period and
c) a reconciliation between the carrying amount of each class of contributed equity and each reserve at the beginning and the end of the period separately disclosing each change
copy 2005-07 Nelson 88
Statement of Changes in Equity
Consolidated SCE as at 31122005
CaseCase
45
copy 2005-07 Nelson 89
Notes Structure (an entity is required to disclose the following)
bull The notes shalla) present information about the basis of preparation of the financial statements
and the specific accounting policies usedb) disclose the information required by HKFRSs that is not presented on the
face of the balance sheet income statement statement of changes in equity or cash flow statement and
c) provide additional information that is not presented on the face of the balance sheet income statement statement of changes in equity or cash flow statement but is relevant to an understanding of any of them
bull Notes shall as far as practicable be presented in a systematic manner bull Each item on the face of the balance sheet income statement statement
of changes in equity and cash flow statement shall be cross-referencedto any related information in the notes
copy 2005-07 Nelson 90
Notes Disclosures (an entity is required to disclose the following)
bull Disclosure of accounting policiesAn entity shall disclose in the summary of significant accounting policiesa) the measurement basis (or bases) used in preparing the financial
statements andb) the other accounting policies used that are relevant to an understanding of
the financial statements
46
copy 2005-07 Nelson 91
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)ndash The financial statements have been prepared in
accordance with Hong Kong Financial Reporting Standards (lsquolsquoHKFRSrsquorsquo) issued by the Hong Kong Institute of Certified Public Accountants bull under the historical cost convention as modified by the
revaluation of investment properties available-for-sale financial assets derivative financial instruments and other investments which are carried at fair values helliphellip
ndash The principal accounting policies applied in the preparation of these financial statements are set out below These policies have been consistently applied to all the years presented except for those stated in note 2(a) above
copy 2005-07 Nelson 92
Notes Disclosures (an entity is required to disclose the following)
bull Disclosure of accounting policiesndash The judgements apart from those involving estimations management has
madebull in the process of applying the entityrsquos accounting policies that have the
most significant effect on the amounts recognised in the financial statements (in the summary of significant accounting policies or other notes)
Examples ndash Management makes judgements in determininga) whether financial assets are held-to-maturity investmentsb) when substantially all the significant risks and rewards of
ownership of financial assets and lease assets are transferred to other entities
c) whether in substance particular sales of goods are financing arrangements and therefore do not give rise to revenue and
d) whether the substance of the relationship between the entity and a special purpose entity indicates that the special purpose entity is controlled by the entity
Examples ndash Management makes judgements in determininga) whether financial assets are held-to-maturity investmentsb) when substantially all the significant risks and rewards of
ownership of financial assets and lease assets are transferred to other entities
c) whether in substance particular sales of goods are financing arrangements and therefore do not give rise to revenue and
d) whether the substance of the relationship between the entity and a special purpose entity indicates that the special purpose entity is controlled by the entity
47
copy 2005-07 Nelson 93
Notes Disclosures (an entity is required to disclose the following)
bull Key sources of estimation uncertaintyndash Information about the key assumptions concerning the future and
other key sources of estimation uncertainty at the balance sheet datebull that have a significant risk of causing a material adjustment to the
carrying amounts of assets and liabilities within the next financial yearndash In respect of those assets and liabilities the notes shall include details of
a) their nature andb) their carrying amount as at the balance sheet date
Examples ndash in the absence of recently observed market prices used to measure the following assets and liabilities future-oriented estimates are necessary to measurebull the recoverable amount of classes of PPEbull the effect of technological obsolescence on inventories
Estimates involve assumptions about such items asbull the risk adjustment to cash flows or discount rates usedbull future changes in salaries and in prices affecting other costs
Examples ndash in the absence of recently observed market prices used to measure the following assets and liabilities future-oriented estimates are necessary to measurebull the recoverable amount of classes of PPEbull the effect of technological obsolescence on inventories
Estimates involve assumptions about such items asbull the risk adjustment to cash flows or discount rates usedbull future changes in salaries and in prices affecting other costs
copy 2005-07 Nelson 94
Notes
Esprit Holdings LimitedEsprit Holdings Limitedbull Critical Accounting Estimates and Judgements
ndash Estimates and judgements are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonableunder the circumstances
ndash Critical accounting estimates and assumptionsbull The Group makes estimates and assumptions concerning
the future The resulting accounting estimates will by definition seldom equal the related actual results
bull The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below helliphellip (including (1) useful life and impairment of trademarks and (2) income taxes)
CaseCase
48
copy 2005-07 Nelson 95
Notes
Melco Development Limited (新濠國際發展有限公司)Notes to the financial statements for the year ended 31122005ndash The key assumptions concerning the future and other key sources
of estimation uncertainty at the balance sheet date that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below helliphellip(The issues discussed includebull Allowances for inventories bull Estimated impairment of goodwill Income taxes)
CaseCase
copy 2005-07 Nelson 96
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)ndash Estimates and judgements used in preparing the
financial statements are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonable under the circumstances
ndash The Group makes estimates and assumptionsconcerning the future
ndash The resulting accounting estimates will by definition seldom equal the related actual results
ndash The estimates and assumptions that have a significant effect on the carrying amounts of assets and liabilities are discussed below hellip (including impairment of goodwill impairment of gaming
licence Useful lives of property plant and equipment fair value of investment properties hellip)
49
copy 2005-07 Nelson 97
Notes Disclosures (an entity is required to disclose the following)
bull Other disclosuresAn entity shall disclose in the notesa) the amount of dividends proposed or declared before the
financial statements were authorised for issue but not recognised as a distribution to equity holders during the period and the related amount per share(HK incorporated companies are required to show the aggregate amount which is recommended for distribution by way of dividend under a separate heading(s) in their balance sheet (HK Co Ord 10th Sch para 9(1)(e)) and
b) the amount of any cumulative preference dividends not recognised
copy 2005-07 Nelson 98
Notes Disclosures (an entity is required to disclose the following)
An entity shall disclose the following if not disclosedelsewhere in information published with the financial statementsa) the domicile and legal form of the entity
its country of incorporation andthe address of its registered office(or principal place of business if different from the registered office)
b) a description of the nature of the entityrsquos operations and its principal activities and
c) the name of the parent and the ultimate parent of the group
ldquoshall discloserdquo now instead of ldquoencouraged to discloserdquo
ldquoshall discloserdquo now instead of ldquoencouraged to discloserdquo
bull Other disclosures
Any specialAny special
50
copy 2005-07 Nelson 99
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)bull The principal activities of Galaxy Entertainment Group
Ltd (the lsquolsquoCompanyrsquorsquo) (formerly known as K WahConstruction Materials Ltd) and its subsidiaries (together the lsquolsquoGrouprsquorsquo) are tondash operate in casino games of chance or games of other forms
in Macau (and) manufacture sale and distribution of construction materials in HK Macau and Mainland China
bull The Company is ndash a limited liability company incorporated in Hong Kong and ndash has its listing on the Main Board of The Stock Exchange of
Hong Kong Limitedbull The address of its registered office and its principal place
of business is Room 1606 16th Floor Hutchison House 10 Harcourt Road Central HK
copy 2005-07 Nelson 100
Effective Date
bull An entity shall apply IAS 1 for annual periods beginning on or after 1 Jan 2005
ndash Earlier application is encouragedndash If an entity applies IAS 1 for an earlier period it shall
disclose this factbull For the amendments relating to the Statement of
Changes in Equityndash An entity shall apply it for annual periods beginning on
or after 1 Jan 2006ndash If an entity applies the amendments to IAS 19
Employee Benefits ndash Actuarial Gains and Losses Group Plans and Disclosures for an earlier period that amendment shall be applied for that earlier period
51
copy 2005-07 Nelson 101
Todayrsquos Agenda
Capital Disclosures (Amendments to IAS 1)
Capital Disclosures (Amendments to IAS 1)
copy 2005-07 Nelson 102
Capital Disclosures ndash For 2007
52
copy 2005-07 Nelson 103
Capital Disclosures
What is capital Is it helliphellip
CapitalCapital AssetsAssets LiabilitiesLiabilities= ndash
bull IAS 1BC47 considers ldquowhether an entity can have a view of capital that differs from what IFRSs define as equityrdquo
bull It further clarifies that although for the purposes of this disclosure capital would often equate with equity as defined in IFRSsndash it might also include or exclude some components
bull It also noted that the capital disclosure in IAS 1 is intended to give entities the opportunity to describendash how they view the components of capital they manage if this is
different from what IFRSs define as equity helliphellip
copy 2005-07 Nelson 104
EquityEquityEquity AssetsAssets LiabilitiesLiabilities= ndash
Capital Disclosures
Based on the Framework amp IFRSs the accounting equation should be
CapitalCapital AssetsAssets LiabilitiesLiabilities= ndash
bull An entityrsquos capital may be part of its equity plus part of its liabilities depending on how it manage ldquoits capitalrdquo helliphellip
53
copy 2005-07 Nelson 105
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowinga) qualitative information about its objectives policies and processes for
managing capital including (but not limited to)i) a description of what it manages as capitalii) when an entity is subject to externally imposed capital requirements
the nature of those requirements and how those requirements are incorporated into the management of capital and
iii) how it is meeting its objectives for managing capital
bull To comply with the capital disclosures the entity discloses thefollowinga) qualitative information about its objectives policies and processes for
managing capital including (but not limited to)i) a description of what it manages as capitalii) when an entity is subject to externally imposed capital requirements
the nature of those requirements and how those requirements are incorporated into the management of capital and
iii) how it is meeting its objectives for managing capital
copy 2005-07 Nelson 106
Capital Disclosures
Example disclosurebull The Grouprsquos objectives when managing capital are
ndash to safeguard the entityrsquos ability to continue as a going concern
bull so that it can continue to provide returns for shareholders and benefits for other stakeholders and
ndash to provide an adequate return to shareholders by pricing products and services commensurately with the level of risk
bull The Group sets the amount of capital in proportion to risk
ExampleExample
ObjectivesObjectives
54
copy 2005-07 Nelson 107
Capital Disclosures
bull The Group manages the capital structure and makes adjustments to it in the light ofndash changes in economic conditions and ndash the risk characteristics of the underlying assets
bull In order to maintain or adjust the capital structure the Group mayndash adjust the amount of dividends paid to shareholders ndash return capital to shareholders ndash issue new shares or ndash sell assets to reduce debt
ExampleExample
Example disclosure
HowHow
copy 2005-07 Nelson 108
Capital Disclosures
bull Consistently with others in the industry the Group monitors capital on the basis of ndash the debt-to-adjusted capital ratio
bull This ratio is calculated as net debt divide adjusted capital
ExampleExample
Example disclosure
HowHow
bull Net debt is calculated as ndash Total debt (as shown in the
balance sheet)ndash Less cash amp cash equivalents
bull Net debt is calculated as ndash Total debt (as shown in the
balance sheet)ndash Less cash amp cash equivalents
bull Adjusted capital ndash comprises all components of
equity (ie share capital share premium minority interest retained earnings and revaluation reserve) ndash other than amounts
recognised in equity relating to cash flow hedges and
ndash includes some forms of subordinated debt
bull Adjusted capital ndash comprises all components of
equity (ie share capital share premium minority interest retained earnings and revaluation reserve) ndash other than amounts
recognised in equity relating to cash flow hedges and
ndash includes some forms of subordinated debt
55
copy 2005-07 Nelson 109
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowing
bull To comply with the capital disclosures the entity discloses thefollowingb) summary quantitative data about what it manages as capital
Some entities regard some financial liabilities (eg some forms of subordinated debt) as part of capitalOther entities regard capital as excluding some components of equity (eg components arising from cash flow hedges)
c) any changes in (a) and (b) from the previous period
copy 2005-07 Nelson 110
Capital Disclosures
Example disclosure (continued from previous example)
ExampleExample
bull During 20X4 the Grouprsquos strategy which was unchanged from 20X3 was to maintain the debt-to-adjusted capital ratio at the lower end of the range 61 to 71 in order to secure access to finance at a reasonable cost by maintaining a BB credit rating The debt-to-adjusted capital ratios at 31 December 20X4 and at 31 December 20X3 were as follows
3112X4 ($rsquoM) 3112X3 ($rsquoM) Total debt 1000 1100 Less cash and cash equivalents (90) (150)Net debt 910 950
Total equity 110 105 Add subordinated debt instruments 38 38 Less amounts recognised in equity
relating to cash flow hedges (10) (5)Adjusted capital 138 138
Debt-to-adjusted capital ratio 66 69
56
copy 2005-07 Nelson 111
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowing
bull To comply with the capital disclosures the entity discloses thefollowingd) whether during the period it complied with any externally imposed capital
requirements to which it is subjecte) when the entity has not complied with such externally imposed capital
requirements the consequences of such non-complianceThese disclosures shall be based on the information provided internally to the entityrsquos key management personnel
copy 2005-07 Nelson 112
Capital DisclosuresExampleExample
Example disclosurebull Entity A filed its quarterly regulatory capital return for
30 September 20X7 on 20 October 20X7 bull At that date Entity Arsquos regulatory capital was below
the capital requirement imposed by Regulator B by $1 million
bull As a result Entity A was required to submit a plan to the regulator indicating how it would increase its regulatory capital to the amount required
bull Entity A submitted a plan that entailed selling part of its unquoted equities portfolio with a carrying amount of $115 million in the fourth quarter of 20X7
bull In the fourth quarter of 20X7 Entity A sold its fixed interest investment portfolio for $126 million and met its regulatory capital requirement
For example SFC or banks
For example SFC or banks
57
copy 2005-07 Nelson 113
Capital DisclosuresCaseCase
bull Early adopted capital disclosure in 2005 and itsannual report states that (extract only)ndash The Grouprsquos objectives when managing capital are
bull To safeguard the Grouprsquos ability to continue as a going concern so that it continues to provide returns for shareholders and benefits for other stakeholders
bull To support the Grouprsquos stability and growth andbull To provide capital for the purpose of strengthening the
Grouprsquos risk management capability
copy 2005-07 Nelson 114
Capital DisclosuresCaseCase
ndash The Group actively and regularly reviews and manages its capital structure to ensure optimal capital structure and shareholder returns taking into consideration the future capital requirements of the Group and capital efficiency helliphellip
ndash The Group adopts a dividend policy helliphellip while retaining 10 per cent of the profit as capital of the Group for future use
ndash The Group has set aside $1500 million of retained earnings for the purpose of strengthening the risk management regime of the clearing houses and supporting their roles as central counterparties
ndash As in prior years the Group monitors capital by reviewing the level of capital that is at the disposal of the Group (ldquoadjusted capitalrdquo) Adjusted capital comprises all components of shareholdersrsquo equity other than the hedging reserve relating to cash flow hedges designated reserves and investment revaluation reserve helliphellip
bull Early adopted capital disclosure in 2005 and itsannual report states that (extract only)
58
copy 2005-07 Nelson 115
Capital Disclosures ndash Transition
bull An entity shall apply the requirements of capital disclosure for
ndash annual periods beginning on or after 1 January 2007
bull Early application is encouraged
copy 2005-07 Nelson 116
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk
59
copy 2005-07 Nelson 117
QampA SessionQampA SessionQampA Session
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk
32
copy 2005-07 Nelson 63
CurrentNon-current Distinction
bull An entity shall presentndash current and non-current assets andndash current and non-current liabilitiesas separate classifications on the face of its balance sheet
bull Except when a presentation based on liquidity provides informationndash If that information is reliable and is more relevantndash When that exception applies all assets and liabilities shall be
presented broadly in order of liquidity
copy 2005-07 Nelson 64
CurrentNon-current Distinction
bull Whichever method of presentation is adopted for each asset and liability line item that combines amounts expected to be recovered or settled a) no more than 12 months after the balance sheet date
andb) more than 12 months after the balance sheet date(ie combines both current and non-current)
an entity shall disclose the amount expected to be recovered or settled after more than 12 months
33
copy 2005-07 Nelson 65
New requirementsNew requirements
Current Assets
bull An asset shall be classified as current when it satisfies any of the following criteriaa) it is expected to be realised in or is intended for sale or
consumption in the entityrsquos normal operating cycle b) it is held primarily for the purpose of being tradedc) it is expected to be realised within 12 months after the balance
sheet date ord) it is cash or a cash equivalent
bull unless it is restricted from being exchanged or used to settle aliability for at least 12 months after the balance sheet date
bull All other assets shall be classified as non-current
Examplesbull Deposits pledged to bank (how long)bull Fixed deposits over 1 year maturity
Examplesbull Deposits pledged to bank (how long)bull Fixed deposits over 1 year maturity
What is itWhat is it
copy 2005-07 Nelson 66
Current Assets
bull What is operating cycle
bull The operating cycle of an entity is the time between ndash the acquisition of assets for processing and ndash their realisation in cash or cash equivalents
bull When the entityrsquos normal operating cycle is not clearly identifiable ndash its duration is assumed to be 12 months
bull The operating cycle of an entity is the time between ndash the acquisition of assets for processing and ndash their realisation in cash or cash equivalents
bull When the entityrsquos normal operating cycle is not clearly identifiable ndash its duration is assumed to be 12 months
ExampleExample
34
copy 2005-07 Nelson 67
Current Assets CaseCase
copy 2005-07 Nelson 68
Current Assets
bull Can a non-current asset reclassified if it fulfil the definition of current asset later
bull Assets classified as non-current in accordancewith IAS 1 shall not be reclassified as current assetsndash until they meet the criteria to be classified as held for sale in
accordance with IFRS 5bull Assets of a class that an entity would normally regard as non-
current that are acquired exclusively with a view to resale shall notbe classified as currentndash unless they meet the criteria to be classified as held for sale in
accordance with IFRS 5
bull Assets classified as non-current in accordancewith IAS 1 shall not be reclassified as current assetsndash until they meet the criteria to be classified as held for sale in
accordance with IFRS 5bull Assets of a class that an entity would normally regard as non-
current that are acquired exclusively with a view to resale shall notbe classified as currentndash unless they meet the criteria to be classified as held for sale in
accordance with IFRS 5
No non-current assets can be classified as current unless the criteria in IFRS 5 are fulfilled mainlybull Available for immediate salebull Highly probable to make the sale
35
copy 2005-07 Nelson 69
Is it currentIs it current
Current Assets
bull In its 2005 Interim Report full set of HKFRS was adopted and the report set out thatndash Available-for-sale financial assets are non-
derivatives that are eitherbull designated in this category orbull not classified in any of the other categories (ie
loans and receivables financial assets at fair value through profit or loss and held-to-maturity investments)
CaseCase
Similar in 2005 Annual Report
Similar in 2005 Annual Report
ndash They are included in non-current assetsbull unless management intends to dispose of the
investment within 12 months of the balance sheet date
copy 2005-07 Nelson 70
New requirementsNew requirements
Current Liabilities
bull A liability shall be classified as current when it satisfies any of the following criteriaa) it is expected to be settled in the entityrsquos normal operating cycleb) it is held primarily for the purpose of being tradedc) it is due to be settled within 12 months after the balance sheet
date ord) the entity does not have an unconditional right to defer settlement
of the liability for at least 12 months after the balance sheet date
bull All other liabilities shall be classified as non-current
ImplicationImplication
36
copy 2005-07 Nelson 71
Current Liabilities Revised rules on classifying a liability as current or non-currentbull A liability held for being traded rArr currentbull A financial liability due within 12 months after the BS date rArr current
ndash even if an agreement to refinance on a long-term basis is completed after the BS date (only disclosed as non-adjusting event)
bull If an entity has discretion to refinance rArr non-currentbull If an entity without discretion to refinance rArr current
bull A non-current financial liability is payable on demand with a breach on a condition of its loan agreement on or before the BS datendash If the lender agreed not to demand payment
bull after the BS date rArr current (only disclosed as non-adjusting event)
bull by the BS date rArr non-current
ImplicationImplication
copy 2005-07 Nelson 72
Current LiabilitiesCaseCase
Note 12 to Interim Report 2006bull Breach of loan covenants
bull As at 30 June 2006 in respect of certain bank loans with an aggregate carrying amount of HK$1529806000 the Group breached certain financial covenants of the banks loans
bull Since the lenders have not agreed to waive its right to demand immediate payment as at the balance sheet date the loans have been classified as current liabilities in these financial statements at 30 June 2006
37
copy 2005-07 Nelson 73
Current Assets and LiabilitiesExampleExample
Can the following be classified as current assetsbull 3-month fixed deposits pledged to a bank to secure
a mortgage loan of 5 yearsbull 2-year fixed deposits with a bank
Can the following be classified as current assetsbull 3-month fixed deposits pledged to a bank to secure
a mortgage loan of 5 yearsbull 2-year fixed deposits with a bank
Can the following be classified as non-current liabilitiesbull 5-year term loan matured after year end but renewed
for another 5 years after year end (before the issuanceof the financial statements)
bull 2-year term loan to be matured with 12 months and theentity has a right to renew for another 2 years
Can the following be classified as non-current liabilitiesbull 5-year term loan matured after year end but renewed
for another 5 years after year end (before the issuanceof the financial statements)
bull 2-year term loan to be matured with 12 months and theentity has a right to renew for another 2 years
timestimes
times
radic
copy 2005-07 Nelson 74
Balance Sheetbull As a minimum the face of the balance sheet shall
include line items that present the following amountsa) property plant and equipmentb) investment propertyc) intangible assetsd) financial assets (excl amounts shown under (e) (h) and (I))e) investments accounted for using the equity methodf) biological assetsg) inventoriesh) trade and other receivablesi) cash and cash equivalentsj) trade and other payablesk) provisionsl) financial liabilities (excl amounts shown under (j) and (k))m) liabilities and assets for current tax as defined in HKAS 12 Income Taxesn) deferred tax liabilities and deferred tax assets as defined in HKAS 12o) minority interest presented within equity andp) issued capital and reserves attributable to equity holders of the parent
38
copy 2005-07 Nelson 75
Balance Sheetbull The face of the balance sheet shall also include line
items that present the following amountsa) The total of assets classified as held for sale and
assets included in disposal groups classified as held for sale in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations and
b) Liabilities included in disposal groups classified as held for sale in accordance with IFRS 5
copy 2005-07 Nelson 76
Balance Sheetbull Additional line items headings and subtotals shall
be presented on the face of the balance sheet when such presentation is relevant to an understanding of the entityrsquos financial position
bull When an entity presents current and non-current assets and current and non-current liabilities as separate classifications on the face of its balance sheet ndash it shall not classify deferred tax assets
(liabilities) as current assets (liabilities)
39
copy 2005-07 Nelson 77
Balance Sheet
bull The use of different measurement bases for different classes of assets suggests that their nature or function differs and therefore that they should be presented as separate line itemsndash For example different classes of property plant and
equipment can be carried atbull Cost orbull Revalued amountsin accordance with IAS 16 PPE
In the past it use ldquomay needrdquoIn the past it use ldquomay needrdquo
copy 2005-07 Nelson 78
Balance Sheet
Galaxy Entertainment Group LimitedConsolidated balance sheet as at 31122005
CaseCase
40
copy 2005-07 Nelson 79
Balance Sheet
Melco Development Limited (新濠國際發展有限公司)Consolidated balance sheet as at 31122005
CaseCase
copy 2005-07 Nelson 80
Income Statement Minimum requirements on the face of the income statementbull As a minimum the face of the income statement shall include line items
that present the following amounts for the perioda) revenueb) finance costsc) share of the profit or loss of associates and joint ventures accounted
for using the equity methodd) pre-tax gain or loss recognised on the disposal of assets or
settlement of liabilities attributable to discontinuing operationse) tax expense andf) profit or loss
41
copy 2005-07 Nelson 81
Income Statement bull The following items shall be disclosed on the face of the income
statement as allocations of profit or loss for the perioda) Profit or loss attributable to minority interest andb) Profit or loss attributable to equity holders of the parent
A similar requirement has been added for the statement of changes in equity and such allocated amounts are not to be presented as items of income or expense
copy 2005-07 Nelson 82
Income Statement
Melco Dev LtdConsolidated income statementas at 31122005
CaseCase
42
copy 2005-07 Nelson 83
Income Statement bull Not require to disclose the results of operating
activities as a line item on the face of the incomestatement
bull An entity shall not present any items of income and expense as extraordinary items either onthe face of the income statements or in the notes
Entities canrsquot use itEntities canrsquot use it
Entities can still show itEntities can still show it
copy 2005-07 Nelson 84
Income Statement Either on the face of the income statement or in the notesbull An entity shall present an analysis of expenses using a classification
based on eitherbull the nature of expenses orbull their function within the entity
whichever provides information that is reliable and more relevant
bull Entities classifying expenses by function shall disclose additional information on the nature of expenses includingbull depreciation and amortisation expense and bull employee benefits expense
43
copy 2005-07 Nelson 85
Income StatementCaseCase
Nature or FunctionNature or Nature or FunctionFunction
copy 2005-07 Nelson 86
Statement of Changes in Equity bull An entity shall present a statement of changes in equity showing on the
face of the statementa) profit or loss for the period b) each item of income and expense for the period that as required by
IFRSs is recognised directly in equity and the total of these itemsc) total income and expense for the period (calculated as the sum of (a) and
(b)) showing separately the total amounts attributablebull to equity holders of the parent andbull to minority interest and
d) for each component of equity the effects of changes in accounting policies and corrections of errors recognised in accordance with IAS 8
Any ChangeAny Change
A revised requirementbull A statement of changes in equity that comprises only these items
shall be titled a statement of recognised income and expenses
A revised requirementbull A statement of changes in equity that comprises only these items
shall be titled a statement of recognised income and expenses
44
copy 2005-07 Nelson 87
Statement of Changes in Equity bull An entity shall also present either on the face of the
statement of changes in equity or in the notesa) the amounts of transactions with equity holders acting in
their capacity as equity holders showing separately distributions to equity holders
b) the balance of retained earnings (ie accumulated profit or loss) at the beginning of the period and at the balance sheet date and the changes during the period and
c) a reconciliation between the carrying amount of each class of contributed equity and each reserve at the beginning and the end of the period separately disclosing each change
copy 2005-07 Nelson 88
Statement of Changes in Equity
Consolidated SCE as at 31122005
CaseCase
45
copy 2005-07 Nelson 89
Notes Structure (an entity is required to disclose the following)
bull The notes shalla) present information about the basis of preparation of the financial statements
and the specific accounting policies usedb) disclose the information required by HKFRSs that is not presented on the
face of the balance sheet income statement statement of changes in equity or cash flow statement and
c) provide additional information that is not presented on the face of the balance sheet income statement statement of changes in equity or cash flow statement but is relevant to an understanding of any of them
bull Notes shall as far as practicable be presented in a systematic manner bull Each item on the face of the balance sheet income statement statement
of changes in equity and cash flow statement shall be cross-referencedto any related information in the notes
copy 2005-07 Nelson 90
Notes Disclosures (an entity is required to disclose the following)
bull Disclosure of accounting policiesAn entity shall disclose in the summary of significant accounting policiesa) the measurement basis (or bases) used in preparing the financial
statements andb) the other accounting policies used that are relevant to an understanding of
the financial statements
46
copy 2005-07 Nelson 91
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)ndash The financial statements have been prepared in
accordance with Hong Kong Financial Reporting Standards (lsquolsquoHKFRSrsquorsquo) issued by the Hong Kong Institute of Certified Public Accountants bull under the historical cost convention as modified by the
revaluation of investment properties available-for-sale financial assets derivative financial instruments and other investments which are carried at fair values helliphellip
ndash The principal accounting policies applied in the preparation of these financial statements are set out below These policies have been consistently applied to all the years presented except for those stated in note 2(a) above
copy 2005-07 Nelson 92
Notes Disclosures (an entity is required to disclose the following)
bull Disclosure of accounting policiesndash The judgements apart from those involving estimations management has
madebull in the process of applying the entityrsquos accounting policies that have the
most significant effect on the amounts recognised in the financial statements (in the summary of significant accounting policies or other notes)
Examples ndash Management makes judgements in determininga) whether financial assets are held-to-maturity investmentsb) when substantially all the significant risks and rewards of
ownership of financial assets and lease assets are transferred to other entities
c) whether in substance particular sales of goods are financing arrangements and therefore do not give rise to revenue and
d) whether the substance of the relationship between the entity and a special purpose entity indicates that the special purpose entity is controlled by the entity
Examples ndash Management makes judgements in determininga) whether financial assets are held-to-maturity investmentsb) when substantially all the significant risks and rewards of
ownership of financial assets and lease assets are transferred to other entities
c) whether in substance particular sales of goods are financing arrangements and therefore do not give rise to revenue and
d) whether the substance of the relationship between the entity and a special purpose entity indicates that the special purpose entity is controlled by the entity
47
copy 2005-07 Nelson 93
Notes Disclosures (an entity is required to disclose the following)
bull Key sources of estimation uncertaintyndash Information about the key assumptions concerning the future and
other key sources of estimation uncertainty at the balance sheet datebull that have a significant risk of causing a material adjustment to the
carrying amounts of assets and liabilities within the next financial yearndash In respect of those assets and liabilities the notes shall include details of
a) their nature andb) their carrying amount as at the balance sheet date
Examples ndash in the absence of recently observed market prices used to measure the following assets and liabilities future-oriented estimates are necessary to measurebull the recoverable amount of classes of PPEbull the effect of technological obsolescence on inventories
Estimates involve assumptions about such items asbull the risk adjustment to cash flows or discount rates usedbull future changes in salaries and in prices affecting other costs
Examples ndash in the absence of recently observed market prices used to measure the following assets and liabilities future-oriented estimates are necessary to measurebull the recoverable amount of classes of PPEbull the effect of technological obsolescence on inventories
Estimates involve assumptions about such items asbull the risk adjustment to cash flows or discount rates usedbull future changes in salaries and in prices affecting other costs
copy 2005-07 Nelson 94
Notes
Esprit Holdings LimitedEsprit Holdings Limitedbull Critical Accounting Estimates and Judgements
ndash Estimates and judgements are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonableunder the circumstances
ndash Critical accounting estimates and assumptionsbull The Group makes estimates and assumptions concerning
the future The resulting accounting estimates will by definition seldom equal the related actual results
bull The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below helliphellip (including (1) useful life and impairment of trademarks and (2) income taxes)
CaseCase
48
copy 2005-07 Nelson 95
Notes
Melco Development Limited (新濠國際發展有限公司)Notes to the financial statements for the year ended 31122005ndash The key assumptions concerning the future and other key sources
of estimation uncertainty at the balance sheet date that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below helliphellip(The issues discussed includebull Allowances for inventories bull Estimated impairment of goodwill Income taxes)
CaseCase
copy 2005-07 Nelson 96
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)ndash Estimates and judgements used in preparing the
financial statements are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonable under the circumstances
ndash The Group makes estimates and assumptionsconcerning the future
ndash The resulting accounting estimates will by definition seldom equal the related actual results
ndash The estimates and assumptions that have a significant effect on the carrying amounts of assets and liabilities are discussed below hellip (including impairment of goodwill impairment of gaming
licence Useful lives of property plant and equipment fair value of investment properties hellip)
49
copy 2005-07 Nelson 97
Notes Disclosures (an entity is required to disclose the following)
bull Other disclosuresAn entity shall disclose in the notesa) the amount of dividends proposed or declared before the
financial statements were authorised for issue but not recognised as a distribution to equity holders during the period and the related amount per share(HK incorporated companies are required to show the aggregate amount which is recommended for distribution by way of dividend under a separate heading(s) in their balance sheet (HK Co Ord 10th Sch para 9(1)(e)) and
b) the amount of any cumulative preference dividends not recognised
copy 2005-07 Nelson 98
Notes Disclosures (an entity is required to disclose the following)
An entity shall disclose the following if not disclosedelsewhere in information published with the financial statementsa) the domicile and legal form of the entity
its country of incorporation andthe address of its registered office(or principal place of business if different from the registered office)
b) a description of the nature of the entityrsquos operations and its principal activities and
c) the name of the parent and the ultimate parent of the group
ldquoshall discloserdquo now instead of ldquoencouraged to discloserdquo
ldquoshall discloserdquo now instead of ldquoencouraged to discloserdquo
bull Other disclosures
Any specialAny special
50
copy 2005-07 Nelson 99
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)bull The principal activities of Galaxy Entertainment Group
Ltd (the lsquolsquoCompanyrsquorsquo) (formerly known as K WahConstruction Materials Ltd) and its subsidiaries (together the lsquolsquoGrouprsquorsquo) are tondash operate in casino games of chance or games of other forms
in Macau (and) manufacture sale and distribution of construction materials in HK Macau and Mainland China
bull The Company is ndash a limited liability company incorporated in Hong Kong and ndash has its listing on the Main Board of The Stock Exchange of
Hong Kong Limitedbull The address of its registered office and its principal place
of business is Room 1606 16th Floor Hutchison House 10 Harcourt Road Central HK
copy 2005-07 Nelson 100
Effective Date
bull An entity shall apply IAS 1 for annual periods beginning on or after 1 Jan 2005
ndash Earlier application is encouragedndash If an entity applies IAS 1 for an earlier period it shall
disclose this factbull For the amendments relating to the Statement of
Changes in Equityndash An entity shall apply it for annual periods beginning on
or after 1 Jan 2006ndash If an entity applies the amendments to IAS 19
Employee Benefits ndash Actuarial Gains and Losses Group Plans and Disclosures for an earlier period that amendment shall be applied for that earlier period
51
copy 2005-07 Nelson 101
Todayrsquos Agenda
Capital Disclosures (Amendments to IAS 1)
Capital Disclosures (Amendments to IAS 1)
copy 2005-07 Nelson 102
Capital Disclosures ndash For 2007
52
copy 2005-07 Nelson 103
Capital Disclosures
What is capital Is it helliphellip
CapitalCapital AssetsAssets LiabilitiesLiabilities= ndash
bull IAS 1BC47 considers ldquowhether an entity can have a view of capital that differs from what IFRSs define as equityrdquo
bull It further clarifies that although for the purposes of this disclosure capital would often equate with equity as defined in IFRSsndash it might also include or exclude some components
bull It also noted that the capital disclosure in IAS 1 is intended to give entities the opportunity to describendash how they view the components of capital they manage if this is
different from what IFRSs define as equity helliphellip
copy 2005-07 Nelson 104
EquityEquityEquity AssetsAssets LiabilitiesLiabilities= ndash
Capital Disclosures
Based on the Framework amp IFRSs the accounting equation should be
CapitalCapital AssetsAssets LiabilitiesLiabilities= ndash
bull An entityrsquos capital may be part of its equity plus part of its liabilities depending on how it manage ldquoits capitalrdquo helliphellip
53
copy 2005-07 Nelson 105
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowinga) qualitative information about its objectives policies and processes for
managing capital including (but not limited to)i) a description of what it manages as capitalii) when an entity is subject to externally imposed capital requirements
the nature of those requirements and how those requirements are incorporated into the management of capital and
iii) how it is meeting its objectives for managing capital
bull To comply with the capital disclosures the entity discloses thefollowinga) qualitative information about its objectives policies and processes for
managing capital including (but not limited to)i) a description of what it manages as capitalii) when an entity is subject to externally imposed capital requirements
the nature of those requirements and how those requirements are incorporated into the management of capital and
iii) how it is meeting its objectives for managing capital
copy 2005-07 Nelson 106
Capital Disclosures
Example disclosurebull The Grouprsquos objectives when managing capital are
ndash to safeguard the entityrsquos ability to continue as a going concern
bull so that it can continue to provide returns for shareholders and benefits for other stakeholders and
ndash to provide an adequate return to shareholders by pricing products and services commensurately with the level of risk
bull The Group sets the amount of capital in proportion to risk
ExampleExample
ObjectivesObjectives
54
copy 2005-07 Nelson 107
Capital Disclosures
bull The Group manages the capital structure and makes adjustments to it in the light ofndash changes in economic conditions and ndash the risk characteristics of the underlying assets
bull In order to maintain or adjust the capital structure the Group mayndash adjust the amount of dividends paid to shareholders ndash return capital to shareholders ndash issue new shares or ndash sell assets to reduce debt
ExampleExample
Example disclosure
HowHow
copy 2005-07 Nelson 108
Capital Disclosures
bull Consistently with others in the industry the Group monitors capital on the basis of ndash the debt-to-adjusted capital ratio
bull This ratio is calculated as net debt divide adjusted capital
ExampleExample
Example disclosure
HowHow
bull Net debt is calculated as ndash Total debt (as shown in the
balance sheet)ndash Less cash amp cash equivalents
bull Net debt is calculated as ndash Total debt (as shown in the
balance sheet)ndash Less cash amp cash equivalents
bull Adjusted capital ndash comprises all components of
equity (ie share capital share premium minority interest retained earnings and revaluation reserve) ndash other than amounts
recognised in equity relating to cash flow hedges and
ndash includes some forms of subordinated debt
bull Adjusted capital ndash comprises all components of
equity (ie share capital share premium minority interest retained earnings and revaluation reserve) ndash other than amounts
recognised in equity relating to cash flow hedges and
ndash includes some forms of subordinated debt
55
copy 2005-07 Nelson 109
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowing
bull To comply with the capital disclosures the entity discloses thefollowingb) summary quantitative data about what it manages as capital
Some entities regard some financial liabilities (eg some forms of subordinated debt) as part of capitalOther entities regard capital as excluding some components of equity (eg components arising from cash flow hedges)
c) any changes in (a) and (b) from the previous period
copy 2005-07 Nelson 110
Capital Disclosures
Example disclosure (continued from previous example)
ExampleExample
bull During 20X4 the Grouprsquos strategy which was unchanged from 20X3 was to maintain the debt-to-adjusted capital ratio at the lower end of the range 61 to 71 in order to secure access to finance at a reasonable cost by maintaining a BB credit rating The debt-to-adjusted capital ratios at 31 December 20X4 and at 31 December 20X3 were as follows
3112X4 ($rsquoM) 3112X3 ($rsquoM) Total debt 1000 1100 Less cash and cash equivalents (90) (150)Net debt 910 950
Total equity 110 105 Add subordinated debt instruments 38 38 Less amounts recognised in equity
relating to cash flow hedges (10) (5)Adjusted capital 138 138
Debt-to-adjusted capital ratio 66 69
56
copy 2005-07 Nelson 111
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowing
bull To comply with the capital disclosures the entity discloses thefollowingd) whether during the period it complied with any externally imposed capital
requirements to which it is subjecte) when the entity has not complied with such externally imposed capital
requirements the consequences of such non-complianceThese disclosures shall be based on the information provided internally to the entityrsquos key management personnel
copy 2005-07 Nelson 112
Capital DisclosuresExampleExample
Example disclosurebull Entity A filed its quarterly regulatory capital return for
30 September 20X7 on 20 October 20X7 bull At that date Entity Arsquos regulatory capital was below
the capital requirement imposed by Regulator B by $1 million
bull As a result Entity A was required to submit a plan to the regulator indicating how it would increase its regulatory capital to the amount required
bull Entity A submitted a plan that entailed selling part of its unquoted equities portfolio with a carrying amount of $115 million in the fourth quarter of 20X7
bull In the fourth quarter of 20X7 Entity A sold its fixed interest investment portfolio for $126 million and met its regulatory capital requirement
For example SFC or banks
For example SFC or banks
57
copy 2005-07 Nelson 113
Capital DisclosuresCaseCase
bull Early adopted capital disclosure in 2005 and itsannual report states that (extract only)ndash The Grouprsquos objectives when managing capital are
bull To safeguard the Grouprsquos ability to continue as a going concern so that it continues to provide returns for shareholders and benefits for other stakeholders
bull To support the Grouprsquos stability and growth andbull To provide capital for the purpose of strengthening the
Grouprsquos risk management capability
copy 2005-07 Nelson 114
Capital DisclosuresCaseCase
ndash The Group actively and regularly reviews and manages its capital structure to ensure optimal capital structure and shareholder returns taking into consideration the future capital requirements of the Group and capital efficiency helliphellip
ndash The Group adopts a dividend policy helliphellip while retaining 10 per cent of the profit as capital of the Group for future use
ndash The Group has set aside $1500 million of retained earnings for the purpose of strengthening the risk management regime of the clearing houses and supporting their roles as central counterparties
ndash As in prior years the Group monitors capital by reviewing the level of capital that is at the disposal of the Group (ldquoadjusted capitalrdquo) Adjusted capital comprises all components of shareholdersrsquo equity other than the hedging reserve relating to cash flow hedges designated reserves and investment revaluation reserve helliphellip
bull Early adopted capital disclosure in 2005 and itsannual report states that (extract only)
58
copy 2005-07 Nelson 115
Capital Disclosures ndash Transition
bull An entity shall apply the requirements of capital disclosure for
ndash annual periods beginning on or after 1 January 2007
bull Early application is encouraged
copy 2005-07 Nelson 116
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk
59
copy 2005-07 Nelson 117
QampA SessionQampA SessionQampA Session
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk
33
copy 2005-07 Nelson 65
New requirementsNew requirements
Current Assets
bull An asset shall be classified as current when it satisfies any of the following criteriaa) it is expected to be realised in or is intended for sale or
consumption in the entityrsquos normal operating cycle b) it is held primarily for the purpose of being tradedc) it is expected to be realised within 12 months after the balance
sheet date ord) it is cash or a cash equivalent
bull unless it is restricted from being exchanged or used to settle aliability for at least 12 months after the balance sheet date
bull All other assets shall be classified as non-current
Examplesbull Deposits pledged to bank (how long)bull Fixed deposits over 1 year maturity
Examplesbull Deposits pledged to bank (how long)bull Fixed deposits over 1 year maturity
What is itWhat is it
copy 2005-07 Nelson 66
Current Assets
bull What is operating cycle
bull The operating cycle of an entity is the time between ndash the acquisition of assets for processing and ndash their realisation in cash or cash equivalents
bull When the entityrsquos normal operating cycle is not clearly identifiable ndash its duration is assumed to be 12 months
bull The operating cycle of an entity is the time between ndash the acquisition of assets for processing and ndash their realisation in cash or cash equivalents
bull When the entityrsquos normal operating cycle is not clearly identifiable ndash its duration is assumed to be 12 months
ExampleExample
34
copy 2005-07 Nelson 67
Current Assets CaseCase
copy 2005-07 Nelson 68
Current Assets
bull Can a non-current asset reclassified if it fulfil the definition of current asset later
bull Assets classified as non-current in accordancewith IAS 1 shall not be reclassified as current assetsndash until they meet the criteria to be classified as held for sale in
accordance with IFRS 5bull Assets of a class that an entity would normally regard as non-
current that are acquired exclusively with a view to resale shall notbe classified as currentndash unless they meet the criteria to be classified as held for sale in
accordance with IFRS 5
bull Assets classified as non-current in accordancewith IAS 1 shall not be reclassified as current assetsndash until they meet the criteria to be classified as held for sale in
accordance with IFRS 5bull Assets of a class that an entity would normally regard as non-
current that are acquired exclusively with a view to resale shall notbe classified as currentndash unless they meet the criteria to be classified as held for sale in
accordance with IFRS 5
No non-current assets can be classified as current unless the criteria in IFRS 5 are fulfilled mainlybull Available for immediate salebull Highly probable to make the sale
35
copy 2005-07 Nelson 69
Is it currentIs it current
Current Assets
bull In its 2005 Interim Report full set of HKFRS was adopted and the report set out thatndash Available-for-sale financial assets are non-
derivatives that are eitherbull designated in this category orbull not classified in any of the other categories (ie
loans and receivables financial assets at fair value through profit or loss and held-to-maturity investments)
CaseCase
Similar in 2005 Annual Report
Similar in 2005 Annual Report
ndash They are included in non-current assetsbull unless management intends to dispose of the
investment within 12 months of the balance sheet date
copy 2005-07 Nelson 70
New requirementsNew requirements
Current Liabilities
bull A liability shall be classified as current when it satisfies any of the following criteriaa) it is expected to be settled in the entityrsquos normal operating cycleb) it is held primarily for the purpose of being tradedc) it is due to be settled within 12 months after the balance sheet
date ord) the entity does not have an unconditional right to defer settlement
of the liability for at least 12 months after the balance sheet date
bull All other liabilities shall be classified as non-current
ImplicationImplication
36
copy 2005-07 Nelson 71
Current Liabilities Revised rules on classifying a liability as current or non-currentbull A liability held for being traded rArr currentbull A financial liability due within 12 months after the BS date rArr current
ndash even if an agreement to refinance on a long-term basis is completed after the BS date (only disclosed as non-adjusting event)
bull If an entity has discretion to refinance rArr non-currentbull If an entity without discretion to refinance rArr current
bull A non-current financial liability is payable on demand with a breach on a condition of its loan agreement on or before the BS datendash If the lender agreed not to demand payment
bull after the BS date rArr current (only disclosed as non-adjusting event)
bull by the BS date rArr non-current
ImplicationImplication
copy 2005-07 Nelson 72
Current LiabilitiesCaseCase
Note 12 to Interim Report 2006bull Breach of loan covenants
bull As at 30 June 2006 in respect of certain bank loans with an aggregate carrying amount of HK$1529806000 the Group breached certain financial covenants of the banks loans
bull Since the lenders have not agreed to waive its right to demand immediate payment as at the balance sheet date the loans have been classified as current liabilities in these financial statements at 30 June 2006
37
copy 2005-07 Nelson 73
Current Assets and LiabilitiesExampleExample
Can the following be classified as current assetsbull 3-month fixed deposits pledged to a bank to secure
a mortgage loan of 5 yearsbull 2-year fixed deposits with a bank
Can the following be classified as current assetsbull 3-month fixed deposits pledged to a bank to secure
a mortgage loan of 5 yearsbull 2-year fixed deposits with a bank
Can the following be classified as non-current liabilitiesbull 5-year term loan matured after year end but renewed
for another 5 years after year end (before the issuanceof the financial statements)
bull 2-year term loan to be matured with 12 months and theentity has a right to renew for another 2 years
Can the following be classified as non-current liabilitiesbull 5-year term loan matured after year end but renewed
for another 5 years after year end (before the issuanceof the financial statements)
bull 2-year term loan to be matured with 12 months and theentity has a right to renew for another 2 years
timestimes
times
radic
copy 2005-07 Nelson 74
Balance Sheetbull As a minimum the face of the balance sheet shall
include line items that present the following amountsa) property plant and equipmentb) investment propertyc) intangible assetsd) financial assets (excl amounts shown under (e) (h) and (I))e) investments accounted for using the equity methodf) biological assetsg) inventoriesh) trade and other receivablesi) cash and cash equivalentsj) trade and other payablesk) provisionsl) financial liabilities (excl amounts shown under (j) and (k))m) liabilities and assets for current tax as defined in HKAS 12 Income Taxesn) deferred tax liabilities and deferred tax assets as defined in HKAS 12o) minority interest presented within equity andp) issued capital and reserves attributable to equity holders of the parent
38
copy 2005-07 Nelson 75
Balance Sheetbull The face of the balance sheet shall also include line
items that present the following amountsa) The total of assets classified as held for sale and
assets included in disposal groups classified as held for sale in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations and
b) Liabilities included in disposal groups classified as held for sale in accordance with IFRS 5
copy 2005-07 Nelson 76
Balance Sheetbull Additional line items headings and subtotals shall
be presented on the face of the balance sheet when such presentation is relevant to an understanding of the entityrsquos financial position
bull When an entity presents current and non-current assets and current and non-current liabilities as separate classifications on the face of its balance sheet ndash it shall not classify deferred tax assets
(liabilities) as current assets (liabilities)
39
copy 2005-07 Nelson 77
Balance Sheet
bull The use of different measurement bases for different classes of assets suggests that their nature or function differs and therefore that they should be presented as separate line itemsndash For example different classes of property plant and
equipment can be carried atbull Cost orbull Revalued amountsin accordance with IAS 16 PPE
In the past it use ldquomay needrdquoIn the past it use ldquomay needrdquo
copy 2005-07 Nelson 78
Balance Sheet
Galaxy Entertainment Group LimitedConsolidated balance sheet as at 31122005
CaseCase
40
copy 2005-07 Nelson 79
Balance Sheet
Melco Development Limited (新濠國際發展有限公司)Consolidated balance sheet as at 31122005
CaseCase
copy 2005-07 Nelson 80
Income Statement Minimum requirements on the face of the income statementbull As a minimum the face of the income statement shall include line items
that present the following amounts for the perioda) revenueb) finance costsc) share of the profit or loss of associates and joint ventures accounted
for using the equity methodd) pre-tax gain or loss recognised on the disposal of assets or
settlement of liabilities attributable to discontinuing operationse) tax expense andf) profit or loss
41
copy 2005-07 Nelson 81
Income Statement bull The following items shall be disclosed on the face of the income
statement as allocations of profit or loss for the perioda) Profit or loss attributable to minority interest andb) Profit or loss attributable to equity holders of the parent
A similar requirement has been added for the statement of changes in equity and such allocated amounts are not to be presented as items of income or expense
copy 2005-07 Nelson 82
Income Statement
Melco Dev LtdConsolidated income statementas at 31122005
CaseCase
42
copy 2005-07 Nelson 83
Income Statement bull Not require to disclose the results of operating
activities as a line item on the face of the incomestatement
bull An entity shall not present any items of income and expense as extraordinary items either onthe face of the income statements or in the notes
Entities canrsquot use itEntities canrsquot use it
Entities can still show itEntities can still show it
copy 2005-07 Nelson 84
Income Statement Either on the face of the income statement or in the notesbull An entity shall present an analysis of expenses using a classification
based on eitherbull the nature of expenses orbull their function within the entity
whichever provides information that is reliable and more relevant
bull Entities classifying expenses by function shall disclose additional information on the nature of expenses includingbull depreciation and amortisation expense and bull employee benefits expense
43
copy 2005-07 Nelson 85
Income StatementCaseCase
Nature or FunctionNature or Nature or FunctionFunction
copy 2005-07 Nelson 86
Statement of Changes in Equity bull An entity shall present a statement of changes in equity showing on the
face of the statementa) profit or loss for the period b) each item of income and expense for the period that as required by
IFRSs is recognised directly in equity and the total of these itemsc) total income and expense for the period (calculated as the sum of (a) and
(b)) showing separately the total amounts attributablebull to equity holders of the parent andbull to minority interest and
d) for each component of equity the effects of changes in accounting policies and corrections of errors recognised in accordance with IAS 8
Any ChangeAny Change
A revised requirementbull A statement of changes in equity that comprises only these items
shall be titled a statement of recognised income and expenses
A revised requirementbull A statement of changes in equity that comprises only these items
shall be titled a statement of recognised income and expenses
44
copy 2005-07 Nelson 87
Statement of Changes in Equity bull An entity shall also present either on the face of the
statement of changes in equity or in the notesa) the amounts of transactions with equity holders acting in
their capacity as equity holders showing separately distributions to equity holders
b) the balance of retained earnings (ie accumulated profit or loss) at the beginning of the period and at the balance sheet date and the changes during the period and
c) a reconciliation between the carrying amount of each class of contributed equity and each reserve at the beginning and the end of the period separately disclosing each change
copy 2005-07 Nelson 88
Statement of Changes in Equity
Consolidated SCE as at 31122005
CaseCase
45
copy 2005-07 Nelson 89
Notes Structure (an entity is required to disclose the following)
bull The notes shalla) present information about the basis of preparation of the financial statements
and the specific accounting policies usedb) disclose the information required by HKFRSs that is not presented on the
face of the balance sheet income statement statement of changes in equity or cash flow statement and
c) provide additional information that is not presented on the face of the balance sheet income statement statement of changes in equity or cash flow statement but is relevant to an understanding of any of them
bull Notes shall as far as practicable be presented in a systematic manner bull Each item on the face of the balance sheet income statement statement
of changes in equity and cash flow statement shall be cross-referencedto any related information in the notes
copy 2005-07 Nelson 90
Notes Disclosures (an entity is required to disclose the following)
bull Disclosure of accounting policiesAn entity shall disclose in the summary of significant accounting policiesa) the measurement basis (or bases) used in preparing the financial
statements andb) the other accounting policies used that are relevant to an understanding of
the financial statements
46
copy 2005-07 Nelson 91
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)ndash The financial statements have been prepared in
accordance with Hong Kong Financial Reporting Standards (lsquolsquoHKFRSrsquorsquo) issued by the Hong Kong Institute of Certified Public Accountants bull under the historical cost convention as modified by the
revaluation of investment properties available-for-sale financial assets derivative financial instruments and other investments which are carried at fair values helliphellip
ndash The principal accounting policies applied in the preparation of these financial statements are set out below These policies have been consistently applied to all the years presented except for those stated in note 2(a) above
copy 2005-07 Nelson 92
Notes Disclosures (an entity is required to disclose the following)
bull Disclosure of accounting policiesndash The judgements apart from those involving estimations management has
madebull in the process of applying the entityrsquos accounting policies that have the
most significant effect on the amounts recognised in the financial statements (in the summary of significant accounting policies or other notes)
Examples ndash Management makes judgements in determininga) whether financial assets are held-to-maturity investmentsb) when substantially all the significant risks and rewards of
ownership of financial assets and lease assets are transferred to other entities
c) whether in substance particular sales of goods are financing arrangements and therefore do not give rise to revenue and
d) whether the substance of the relationship between the entity and a special purpose entity indicates that the special purpose entity is controlled by the entity
Examples ndash Management makes judgements in determininga) whether financial assets are held-to-maturity investmentsb) when substantially all the significant risks and rewards of
ownership of financial assets and lease assets are transferred to other entities
c) whether in substance particular sales of goods are financing arrangements and therefore do not give rise to revenue and
d) whether the substance of the relationship between the entity and a special purpose entity indicates that the special purpose entity is controlled by the entity
47
copy 2005-07 Nelson 93
Notes Disclosures (an entity is required to disclose the following)
bull Key sources of estimation uncertaintyndash Information about the key assumptions concerning the future and
other key sources of estimation uncertainty at the balance sheet datebull that have a significant risk of causing a material adjustment to the
carrying amounts of assets and liabilities within the next financial yearndash In respect of those assets and liabilities the notes shall include details of
a) their nature andb) their carrying amount as at the balance sheet date
Examples ndash in the absence of recently observed market prices used to measure the following assets and liabilities future-oriented estimates are necessary to measurebull the recoverable amount of classes of PPEbull the effect of technological obsolescence on inventories
Estimates involve assumptions about such items asbull the risk adjustment to cash flows or discount rates usedbull future changes in salaries and in prices affecting other costs
Examples ndash in the absence of recently observed market prices used to measure the following assets and liabilities future-oriented estimates are necessary to measurebull the recoverable amount of classes of PPEbull the effect of technological obsolescence on inventories
Estimates involve assumptions about such items asbull the risk adjustment to cash flows or discount rates usedbull future changes in salaries and in prices affecting other costs
copy 2005-07 Nelson 94
Notes
Esprit Holdings LimitedEsprit Holdings Limitedbull Critical Accounting Estimates and Judgements
ndash Estimates and judgements are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonableunder the circumstances
ndash Critical accounting estimates and assumptionsbull The Group makes estimates and assumptions concerning
the future The resulting accounting estimates will by definition seldom equal the related actual results
bull The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below helliphellip (including (1) useful life and impairment of trademarks and (2) income taxes)
CaseCase
48
copy 2005-07 Nelson 95
Notes
Melco Development Limited (新濠國際發展有限公司)Notes to the financial statements for the year ended 31122005ndash The key assumptions concerning the future and other key sources
of estimation uncertainty at the balance sheet date that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below helliphellip(The issues discussed includebull Allowances for inventories bull Estimated impairment of goodwill Income taxes)
CaseCase
copy 2005-07 Nelson 96
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)ndash Estimates and judgements used in preparing the
financial statements are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonable under the circumstances
ndash The Group makes estimates and assumptionsconcerning the future
ndash The resulting accounting estimates will by definition seldom equal the related actual results
ndash The estimates and assumptions that have a significant effect on the carrying amounts of assets and liabilities are discussed below hellip (including impairment of goodwill impairment of gaming
licence Useful lives of property plant and equipment fair value of investment properties hellip)
49
copy 2005-07 Nelson 97
Notes Disclosures (an entity is required to disclose the following)
bull Other disclosuresAn entity shall disclose in the notesa) the amount of dividends proposed or declared before the
financial statements were authorised for issue but not recognised as a distribution to equity holders during the period and the related amount per share(HK incorporated companies are required to show the aggregate amount which is recommended for distribution by way of dividend under a separate heading(s) in their balance sheet (HK Co Ord 10th Sch para 9(1)(e)) and
b) the amount of any cumulative preference dividends not recognised
copy 2005-07 Nelson 98
Notes Disclosures (an entity is required to disclose the following)
An entity shall disclose the following if not disclosedelsewhere in information published with the financial statementsa) the domicile and legal form of the entity
its country of incorporation andthe address of its registered office(or principal place of business if different from the registered office)
b) a description of the nature of the entityrsquos operations and its principal activities and
c) the name of the parent and the ultimate parent of the group
ldquoshall discloserdquo now instead of ldquoencouraged to discloserdquo
ldquoshall discloserdquo now instead of ldquoencouraged to discloserdquo
bull Other disclosures
Any specialAny special
50
copy 2005-07 Nelson 99
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)bull The principal activities of Galaxy Entertainment Group
Ltd (the lsquolsquoCompanyrsquorsquo) (formerly known as K WahConstruction Materials Ltd) and its subsidiaries (together the lsquolsquoGrouprsquorsquo) are tondash operate in casino games of chance or games of other forms
in Macau (and) manufacture sale and distribution of construction materials in HK Macau and Mainland China
bull The Company is ndash a limited liability company incorporated in Hong Kong and ndash has its listing on the Main Board of The Stock Exchange of
Hong Kong Limitedbull The address of its registered office and its principal place
of business is Room 1606 16th Floor Hutchison House 10 Harcourt Road Central HK
copy 2005-07 Nelson 100
Effective Date
bull An entity shall apply IAS 1 for annual periods beginning on or after 1 Jan 2005
ndash Earlier application is encouragedndash If an entity applies IAS 1 for an earlier period it shall
disclose this factbull For the amendments relating to the Statement of
Changes in Equityndash An entity shall apply it for annual periods beginning on
or after 1 Jan 2006ndash If an entity applies the amendments to IAS 19
Employee Benefits ndash Actuarial Gains and Losses Group Plans and Disclosures for an earlier period that amendment shall be applied for that earlier period
51
copy 2005-07 Nelson 101
Todayrsquos Agenda
Capital Disclosures (Amendments to IAS 1)
Capital Disclosures (Amendments to IAS 1)
copy 2005-07 Nelson 102
Capital Disclosures ndash For 2007
52
copy 2005-07 Nelson 103
Capital Disclosures
What is capital Is it helliphellip
CapitalCapital AssetsAssets LiabilitiesLiabilities= ndash
bull IAS 1BC47 considers ldquowhether an entity can have a view of capital that differs from what IFRSs define as equityrdquo
bull It further clarifies that although for the purposes of this disclosure capital would often equate with equity as defined in IFRSsndash it might also include or exclude some components
bull It also noted that the capital disclosure in IAS 1 is intended to give entities the opportunity to describendash how they view the components of capital they manage if this is
different from what IFRSs define as equity helliphellip
copy 2005-07 Nelson 104
EquityEquityEquity AssetsAssets LiabilitiesLiabilities= ndash
Capital Disclosures
Based on the Framework amp IFRSs the accounting equation should be
CapitalCapital AssetsAssets LiabilitiesLiabilities= ndash
bull An entityrsquos capital may be part of its equity plus part of its liabilities depending on how it manage ldquoits capitalrdquo helliphellip
53
copy 2005-07 Nelson 105
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowinga) qualitative information about its objectives policies and processes for
managing capital including (but not limited to)i) a description of what it manages as capitalii) when an entity is subject to externally imposed capital requirements
the nature of those requirements and how those requirements are incorporated into the management of capital and
iii) how it is meeting its objectives for managing capital
bull To comply with the capital disclosures the entity discloses thefollowinga) qualitative information about its objectives policies and processes for
managing capital including (but not limited to)i) a description of what it manages as capitalii) when an entity is subject to externally imposed capital requirements
the nature of those requirements and how those requirements are incorporated into the management of capital and
iii) how it is meeting its objectives for managing capital
copy 2005-07 Nelson 106
Capital Disclosures
Example disclosurebull The Grouprsquos objectives when managing capital are
ndash to safeguard the entityrsquos ability to continue as a going concern
bull so that it can continue to provide returns for shareholders and benefits for other stakeholders and
ndash to provide an adequate return to shareholders by pricing products and services commensurately with the level of risk
bull The Group sets the amount of capital in proportion to risk
ExampleExample
ObjectivesObjectives
54
copy 2005-07 Nelson 107
Capital Disclosures
bull The Group manages the capital structure and makes adjustments to it in the light ofndash changes in economic conditions and ndash the risk characteristics of the underlying assets
bull In order to maintain or adjust the capital structure the Group mayndash adjust the amount of dividends paid to shareholders ndash return capital to shareholders ndash issue new shares or ndash sell assets to reduce debt
ExampleExample
Example disclosure
HowHow
copy 2005-07 Nelson 108
Capital Disclosures
bull Consistently with others in the industry the Group monitors capital on the basis of ndash the debt-to-adjusted capital ratio
bull This ratio is calculated as net debt divide adjusted capital
ExampleExample
Example disclosure
HowHow
bull Net debt is calculated as ndash Total debt (as shown in the
balance sheet)ndash Less cash amp cash equivalents
bull Net debt is calculated as ndash Total debt (as shown in the
balance sheet)ndash Less cash amp cash equivalents
bull Adjusted capital ndash comprises all components of
equity (ie share capital share premium minority interest retained earnings and revaluation reserve) ndash other than amounts
recognised in equity relating to cash flow hedges and
ndash includes some forms of subordinated debt
bull Adjusted capital ndash comprises all components of
equity (ie share capital share premium minority interest retained earnings and revaluation reserve) ndash other than amounts
recognised in equity relating to cash flow hedges and
ndash includes some forms of subordinated debt
55
copy 2005-07 Nelson 109
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowing
bull To comply with the capital disclosures the entity discloses thefollowingb) summary quantitative data about what it manages as capital
Some entities regard some financial liabilities (eg some forms of subordinated debt) as part of capitalOther entities regard capital as excluding some components of equity (eg components arising from cash flow hedges)
c) any changes in (a) and (b) from the previous period
copy 2005-07 Nelson 110
Capital Disclosures
Example disclosure (continued from previous example)
ExampleExample
bull During 20X4 the Grouprsquos strategy which was unchanged from 20X3 was to maintain the debt-to-adjusted capital ratio at the lower end of the range 61 to 71 in order to secure access to finance at a reasonable cost by maintaining a BB credit rating The debt-to-adjusted capital ratios at 31 December 20X4 and at 31 December 20X3 were as follows
3112X4 ($rsquoM) 3112X3 ($rsquoM) Total debt 1000 1100 Less cash and cash equivalents (90) (150)Net debt 910 950
Total equity 110 105 Add subordinated debt instruments 38 38 Less amounts recognised in equity
relating to cash flow hedges (10) (5)Adjusted capital 138 138
Debt-to-adjusted capital ratio 66 69
56
copy 2005-07 Nelson 111
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowing
bull To comply with the capital disclosures the entity discloses thefollowingd) whether during the period it complied with any externally imposed capital
requirements to which it is subjecte) when the entity has not complied with such externally imposed capital
requirements the consequences of such non-complianceThese disclosures shall be based on the information provided internally to the entityrsquos key management personnel
copy 2005-07 Nelson 112
Capital DisclosuresExampleExample
Example disclosurebull Entity A filed its quarterly regulatory capital return for
30 September 20X7 on 20 October 20X7 bull At that date Entity Arsquos regulatory capital was below
the capital requirement imposed by Regulator B by $1 million
bull As a result Entity A was required to submit a plan to the regulator indicating how it would increase its regulatory capital to the amount required
bull Entity A submitted a plan that entailed selling part of its unquoted equities portfolio with a carrying amount of $115 million in the fourth quarter of 20X7
bull In the fourth quarter of 20X7 Entity A sold its fixed interest investment portfolio for $126 million and met its regulatory capital requirement
For example SFC or banks
For example SFC or banks
57
copy 2005-07 Nelson 113
Capital DisclosuresCaseCase
bull Early adopted capital disclosure in 2005 and itsannual report states that (extract only)ndash The Grouprsquos objectives when managing capital are
bull To safeguard the Grouprsquos ability to continue as a going concern so that it continues to provide returns for shareholders and benefits for other stakeholders
bull To support the Grouprsquos stability and growth andbull To provide capital for the purpose of strengthening the
Grouprsquos risk management capability
copy 2005-07 Nelson 114
Capital DisclosuresCaseCase
ndash The Group actively and regularly reviews and manages its capital structure to ensure optimal capital structure and shareholder returns taking into consideration the future capital requirements of the Group and capital efficiency helliphellip
ndash The Group adopts a dividend policy helliphellip while retaining 10 per cent of the profit as capital of the Group for future use
ndash The Group has set aside $1500 million of retained earnings for the purpose of strengthening the risk management regime of the clearing houses and supporting their roles as central counterparties
ndash As in prior years the Group monitors capital by reviewing the level of capital that is at the disposal of the Group (ldquoadjusted capitalrdquo) Adjusted capital comprises all components of shareholdersrsquo equity other than the hedging reserve relating to cash flow hedges designated reserves and investment revaluation reserve helliphellip
bull Early adopted capital disclosure in 2005 and itsannual report states that (extract only)
58
copy 2005-07 Nelson 115
Capital Disclosures ndash Transition
bull An entity shall apply the requirements of capital disclosure for
ndash annual periods beginning on or after 1 January 2007
bull Early application is encouraged
copy 2005-07 Nelson 116
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk
59
copy 2005-07 Nelson 117
QampA SessionQampA SessionQampA Session
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk
34
copy 2005-07 Nelson 67
Current Assets CaseCase
copy 2005-07 Nelson 68
Current Assets
bull Can a non-current asset reclassified if it fulfil the definition of current asset later
bull Assets classified as non-current in accordancewith IAS 1 shall not be reclassified as current assetsndash until they meet the criteria to be classified as held for sale in
accordance with IFRS 5bull Assets of a class that an entity would normally regard as non-
current that are acquired exclusively with a view to resale shall notbe classified as currentndash unless they meet the criteria to be classified as held for sale in
accordance with IFRS 5
bull Assets classified as non-current in accordancewith IAS 1 shall not be reclassified as current assetsndash until they meet the criteria to be classified as held for sale in
accordance with IFRS 5bull Assets of a class that an entity would normally regard as non-
current that are acquired exclusively with a view to resale shall notbe classified as currentndash unless they meet the criteria to be classified as held for sale in
accordance with IFRS 5
No non-current assets can be classified as current unless the criteria in IFRS 5 are fulfilled mainlybull Available for immediate salebull Highly probable to make the sale
35
copy 2005-07 Nelson 69
Is it currentIs it current
Current Assets
bull In its 2005 Interim Report full set of HKFRS was adopted and the report set out thatndash Available-for-sale financial assets are non-
derivatives that are eitherbull designated in this category orbull not classified in any of the other categories (ie
loans and receivables financial assets at fair value through profit or loss and held-to-maturity investments)
CaseCase
Similar in 2005 Annual Report
Similar in 2005 Annual Report
ndash They are included in non-current assetsbull unless management intends to dispose of the
investment within 12 months of the balance sheet date
copy 2005-07 Nelson 70
New requirementsNew requirements
Current Liabilities
bull A liability shall be classified as current when it satisfies any of the following criteriaa) it is expected to be settled in the entityrsquos normal operating cycleb) it is held primarily for the purpose of being tradedc) it is due to be settled within 12 months after the balance sheet
date ord) the entity does not have an unconditional right to defer settlement
of the liability for at least 12 months after the balance sheet date
bull All other liabilities shall be classified as non-current
ImplicationImplication
36
copy 2005-07 Nelson 71
Current Liabilities Revised rules on classifying a liability as current or non-currentbull A liability held for being traded rArr currentbull A financial liability due within 12 months after the BS date rArr current
ndash even if an agreement to refinance on a long-term basis is completed after the BS date (only disclosed as non-adjusting event)
bull If an entity has discretion to refinance rArr non-currentbull If an entity without discretion to refinance rArr current
bull A non-current financial liability is payable on demand with a breach on a condition of its loan agreement on or before the BS datendash If the lender agreed not to demand payment
bull after the BS date rArr current (only disclosed as non-adjusting event)
bull by the BS date rArr non-current
ImplicationImplication
copy 2005-07 Nelson 72
Current LiabilitiesCaseCase
Note 12 to Interim Report 2006bull Breach of loan covenants
bull As at 30 June 2006 in respect of certain bank loans with an aggregate carrying amount of HK$1529806000 the Group breached certain financial covenants of the banks loans
bull Since the lenders have not agreed to waive its right to demand immediate payment as at the balance sheet date the loans have been classified as current liabilities in these financial statements at 30 June 2006
37
copy 2005-07 Nelson 73
Current Assets and LiabilitiesExampleExample
Can the following be classified as current assetsbull 3-month fixed deposits pledged to a bank to secure
a mortgage loan of 5 yearsbull 2-year fixed deposits with a bank
Can the following be classified as current assetsbull 3-month fixed deposits pledged to a bank to secure
a mortgage loan of 5 yearsbull 2-year fixed deposits with a bank
Can the following be classified as non-current liabilitiesbull 5-year term loan matured after year end but renewed
for another 5 years after year end (before the issuanceof the financial statements)
bull 2-year term loan to be matured with 12 months and theentity has a right to renew for another 2 years
Can the following be classified as non-current liabilitiesbull 5-year term loan matured after year end but renewed
for another 5 years after year end (before the issuanceof the financial statements)
bull 2-year term loan to be matured with 12 months and theentity has a right to renew for another 2 years
timestimes
times
radic
copy 2005-07 Nelson 74
Balance Sheetbull As a minimum the face of the balance sheet shall
include line items that present the following amountsa) property plant and equipmentb) investment propertyc) intangible assetsd) financial assets (excl amounts shown under (e) (h) and (I))e) investments accounted for using the equity methodf) biological assetsg) inventoriesh) trade and other receivablesi) cash and cash equivalentsj) trade and other payablesk) provisionsl) financial liabilities (excl amounts shown under (j) and (k))m) liabilities and assets for current tax as defined in HKAS 12 Income Taxesn) deferred tax liabilities and deferred tax assets as defined in HKAS 12o) minority interest presented within equity andp) issued capital and reserves attributable to equity holders of the parent
38
copy 2005-07 Nelson 75
Balance Sheetbull The face of the balance sheet shall also include line
items that present the following amountsa) The total of assets classified as held for sale and
assets included in disposal groups classified as held for sale in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations and
b) Liabilities included in disposal groups classified as held for sale in accordance with IFRS 5
copy 2005-07 Nelson 76
Balance Sheetbull Additional line items headings and subtotals shall
be presented on the face of the balance sheet when such presentation is relevant to an understanding of the entityrsquos financial position
bull When an entity presents current and non-current assets and current and non-current liabilities as separate classifications on the face of its balance sheet ndash it shall not classify deferred tax assets
(liabilities) as current assets (liabilities)
39
copy 2005-07 Nelson 77
Balance Sheet
bull The use of different measurement bases for different classes of assets suggests that their nature or function differs and therefore that they should be presented as separate line itemsndash For example different classes of property plant and
equipment can be carried atbull Cost orbull Revalued amountsin accordance with IAS 16 PPE
In the past it use ldquomay needrdquoIn the past it use ldquomay needrdquo
copy 2005-07 Nelson 78
Balance Sheet
Galaxy Entertainment Group LimitedConsolidated balance sheet as at 31122005
CaseCase
40
copy 2005-07 Nelson 79
Balance Sheet
Melco Development Limited (新濠國際發展有限公司)Consolidated balance sheet as at 31122005
CaseCase
copy 2005-07 Nelson 80
Income Statement Minimum requirements on the face of the income statementbull As a minimum the face of the income statement shall include line items
that present the following amounts for the perioda) revenueb) finance costsc) share of the profit or loss of associates and joint ventures accounted
for using the equity methodd) pre-tax gain or loss recognised on the disposal of assets or
settlement of liabilities attributable to discontinuing operationse) tax expense andf) profit or loss
41
copy 2005-07 Nelson 81
Income Statement bull The following items shall be disclosed on the face of the income
statement as allocations of profit or loss for the perioda) Profit or loss attributable to minority interest andb) Profit or loss attributable to equity holders of the parent
A similar requirement has been added for the statement of changes in equity and such allocated amounts are not to be presented as items of income or expense
copy 2005-07 Nelson 82
Income Statement
Melco Dev LtdConsolidated income statementas at 31122005
CaseCase
42
copy 2005-07 Nelson 83
Income Statement bull Not require to disclose the results of operating
activities as a line item on the face of the incomestatement
bull An entity shall not present any items of income and expense as extraordinary items either onthe face of the income statements or in the notes
Entities canrsquot use itEntities canrsquot use it
Entities can still show itEntities can still show it
copy 2005-07 Nelson 84
Income Statement Either on the face of the income statement or in the notesbull An entity shall present an analysis of expenses using a classification
based on eitherbull the nature of expenses orbull their function within the entity
whichever provides information that is reliable and more relevant
bull Entities classifying expenses by function shall disclose additional information on the nature of expenses includingbull depreciation and amortisation expense and bull employee benefits expense
43
copy 2005-07 Nelson 85
Income StatementCaseCase
Nature or FunctionNature or Nature or FunctionFunction
copy 2005-07 Nelson 86
Statement of Changes in Equity bull An entity shall present a statement of changes in equity showing on the
face of the statementa) profit or loss for the period b) each item of income and expense for the period that as required by
IFRSs is recognised directly in equity and the total of these itemsc) total income and expense for the period (calculated as the sum of (a) and
(b)) showing separately the total amounts attributablebull to equity holders of the parent andbull to minority interest and
d) for each component of equity the effects of changes in accounting policies and corrections of errors recognised in accordance with IAS 8
Any ChangeAny Change
A revised requirementbull A statement of changes in equity that comprises only these items
shall be titled a statement of recognised income and expenses
A revised requirementbull A statement of changes in equity that comprises only these items
shall be titled a statement of recognised income and expenses
44
copy 2005-07 Nelson 87
Statement of Changes in Equity bull An entity shall also present either on the face of the
statement of changes in equity or in the notesa) the amounts of transactions with equity holders acting in
their capacity as equity holders showing separately distributions to equity holders
b) the balance of retained earnings (ie accumulated profit or loss) at the beginning of the period and at the balance sheet date and the changes during the period and
c) a reconciliation between the carrying amount of each class of contributed equity and each reserve at the beginning and the end of the period separately disclosing each change
copy 2005-07 Nelson 88
Statement of Changes in Equity
Consolidated SCE as at 31122005
CaseCase
45
copy 2005-07 Nelson 89
Notes Structure (an entity is required to disclose the following)
bull The notes shalla) present information about the basis of preparation of the financial statements
and the specific accounting policies usedb) disclose the information required by HKFRSs that is not presented on the
face of the balance sheet income statement statement of changes in equity or cash flow statement and
c) provide additional information that is not presented on the face of the balance sheet income statement statement of changes in equity or cash flow statement but is relevant to an understanding of any of them
bull Notes shall as far as practicable be presented in a systematic manner bull Each item on the face of the balance sheet income statement statement
of changes in equity and cash flow statement shall be cross-referencedto any related information in the notes
copy 2005-07 Nelson 90
Notes Disclosures (an entity is required to disclose the following)
bull Disclosure of accounting policiesAn entity shall disclose in the summary of significant accounting policiesa) the measurement basis (or bases) used in preparing the financial
statements andb) the other accounting policies used that are relevant to an understanding of
the financial statements
46
copy 2005-07 Nelson 91
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)ndash The financial statements have been prepared in
accordance with Hong Kong Financial Reporting Standards (lsquolsquoHKFRSrsquorsquo) issued by the Hong Kong Institute of Certified Public Accountants bull under the historical cost convention as modified by the
revaluation of investment properties available-for-sale financial assets derivative financial instruments and other investments which are carried at fair values helliphellip
ndash The principal accounting policies applied in the preparation of these financial statements are set out below These policies have been consistently applied to all the years presented except for those stated in note 2(a) above
copy 2005-07 Nelson 92
Notes Disclosures (an entity is required to disclose the following)
bull Disclosure of accounting policiesndash The judgements apart from those involving estimations management has
madebull in the process of applying the entityrsquos accounting policies that have the
most significant effect on the amounts recognised in the financial statements (in the summary of significant accounting policies or other notes)
Examples ndash Management makes judgements in determininga) whether financial assets are held-to-maturity investmentsb) when substantially all the significant risks and rewards of
ownership of financial assets and lease assets are transferred to other entities
c) whether in substance particular sales of goods are financing arrangements and therefore do not give rise to revenue and
d) whether the substance of the relationship between the entity and a special purpose entity indicates that the special purpose entity is controlled by the entity
Examples ndash Management makes judgements in determininga) whether financial assets are held-to-maturity investmentsb) when substantially all the significant risks and rewards of
ownership of financial assets and lease assets are transferred to other entities
c) whether in substance particular sales of goods are financing arrangements and therefore do not give rise to revenue and
d) whether the substance of the relationship between the entity and a special purpose entity indicates that the special purpose entity is controlled by the entity
47
copy 2005-07 Nelson 93
Notes Disclosures (an entity is required to disclose the following)
bull Key sources of estimation uncertaintyndash Information about the key assumptions concerning the future and
other key sources of estimation uncertainty at the balance sheet datebull that have a significant risk of causing a material adjustment to the
carrying amounts of assets and liabilities within the next financial yearndash In respect of those assets and liabilities the notes shall include details of
a) their nature andb) their carrying amount as at the balance sheet date
Examples ndash in the absence of recently observed market prices used to measure the following assets and liabilities future-oriented estimates are necessary to measurebull the recoverable amount of classes of PPEbull the effect of technological obsolescence on inventories
Estimates involve assumptions about such items asbull the risk adjustment to cash flows or discount rates usedbull future changes in salaries and in prices affecting other costs
Examples ndash in the absence of recently observed market prices used to measure the following assets and liabilities future-oriented estimates are necessary to measurebull the recoverable amount of classes of PPEbull the effect of technological obsolescence on inventories
Estimates involve assumptions about such items asbull the risk adjustment to cash flows or discount rates usedbull future changes in salaries and in prices affecting other costs
copy 2005-07 Nelson 94
Notes
Esprit Holdings LimitedEsprit Holdings Limitedbull Critical Accounting Estimates and Judgements
ndash Estimates and judgements are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonableunder the circumstances
ndash Critical accounting estimates and assumptionsbull The Group makes estimates and assumptions concerning
the future The resulting accounting estimates will by definition seldom equal the related actual results
bull The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below helliphellip (including (1) useful life and impairment of trademarks and (2) income taxes)
CaseCase
48
copy 2005-07 Nelson 95
Notes
Melco Development Limited (新濠國際發展有限公司)Notes to the financial statements for the year ended 31122005ndash The key assumptions concerning the future and other key sources
of estimation uncertainty at the balance sheet date that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below helliphellip(The issues discussed includebull Allowances for inventories bull Estimated impairment of goodwill Income taxes)
CaseCase
copy 2005-07 Nelson 96
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)ndash Estimates and judgements used in preparing the
financial statements are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonable under the circumstances
ndash The Group makes estimates and assumptionsconcerning the future
ndash The resulting accounting estimates will by definition seldom equal the related actual results
ndash The estimates and assumptions that have a significant effect on the carrying amounts of assets and liabilities are discussed below hellip (including impairment of goodwill impairment of gaming
licence Useful lives of property plant and equipment fair value of investment properties hellip)
49
copy 2005-07 Nelson 97
Notes Disclosures (an entity is required to disclose the following)
bull Other disclosuresAn entity shall disclose in the notesa) the amount of dividends proposed or declared before the
financial statements were authorised for issue but not recognised as a distribution to equity holders during the period and the related amount per share(HK incorporated companies are required to show the aggregate amount which is recommended for distribution by way of dividend under a separate heading(s) in their balance sheet (HK Co Ord 10th Sch para 9(1)(e)) and
b) the amount of any cumulative preference dividends not recognised
copy 2005-07 Nelson 98
Notes Disclosures (an entity is required to disclose the following)
An entity shall disclose the following if not disclosedelsewhere in information published with the financial statementsa) the domicile and legal form of the entity
its country of incorporation andthe address of its registered office(or principal place of business if different from the registered office)
b) a description of the nature of the entityrsquos operations and its principal activities and
c) the name of the parent and the ultimate parent of the group
ldquoshall discloserdquo now instead of ldquoencouraged to discloserdquo
ldquoshall discloserdquo now instead of ldquoencouraged to discloserdquo
bull Other disclosures
Any specialAny special
50
copy 2005-07 Nelson 99
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)bull The principal activities of Galaxy Entertainment Group
Ltd (the lsquolsquoCompanyrsquorsquo) (formerly known as K WahConstruction Materials Ltd) and its subsidiaries (together the lsquolsquoGrouprsquorsquo) are tondash operate in casino games of chance or games of other forms
in Macau (and) manufacture sale and distribution of construction materials in HK Macau and Mainland China
bull The Company is ndash a limited liability company incorporated in Hong Kong and ndash has its listing on the Main Board of The Stock Exchange of
Hong Kong Limitedbull The address of its registered office and its principal place
of business is Room 1606 16th Floor Hutchison House 10 Harcourt Road Central HK
copy 2005-07 Nelson 100
Effective Date
bull An entity shall apply IAS 1 for annual periods beginning on or after 1 Jan 2005
ndash Earlier application is encouragedndash If an entity applies IAS 1 for an earlier period it shall
disclose this factbull For the amendments relating to the Statement of
Changes in Equityndash An entity shall apply it for annual periods beginning on
or after 1 Jan 2006ndash If an entity applies the amendments to IAS 19
Employee Benefits ndash Actuarial Gains and Losses Group Plans and Disclosures for an earlier period that amendment shall be applied for that earlier period
51
copy 2005-07 Nelson 101
Todayrsquos Agenda
Capital Disclosures (Amendments to IAS 1)
Capital Disclosures (Amendments to IAS 1)
copy 2005-07 Nelson 102
Capital Disclosures ndash For 2007
52
copy 2005-07 Nelson 103
Capital Disclosures
What is capital Is it helliphellip
CapitalCapital AssetsAssets LiabilitiesLiabilities= ndash
bull IAS 1BC47 considers ldquowhether an entity can have a view of capital that differs from what IFRSs define as equityrdquo
bull It further clarifies that although for the purposes of this disclosure capital would often equate with equity as defined in IFRSsndash it might also include or exclude some components
bull It also noted that the capital disclosure in IAS 1 is intended to give entities the opportunity to describendash how they view the components of capital they manage if this is
different from what IFRSs define as equity helliphellip
copy 2005-07 Nelson 104
EquityEquityEquity AssetsAssets LiabilitiesLiabilities= ndash
Capital Disclosures
Based on the Framework amp IFRSs the accounting equation should be
CapitalCapital AssetsAssets LiabilitiesLiabilities= ndash
bull An entityrsquos capital may be part of its equity plus part of its liabilities depending on how it manage ldquoits capitalrdquo helliphellip
53
copy 2005-07 Nelson 105
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowinga) qualitative information about its objectives policies and processes for
managing capital including (but not limited to)i) a description of what it manages as capitalii) when an entity is subject to externally imposed capital requirements
the nature of those requirements and how those requirements are incorporated into the management of capital and
iii) how it is meeting its objectives for managing capital
bull To comply with the capital disclosures the entity discloses thefollowinga) qualitative information about its objectives policies and processes for
managing capital including (but not limited to)i) a description of what it manages as capitalii) when an entity is subject to externally imposed capital requirements
the nature of those requirements and how those requirements are incorporated into the management of capital and
iii) how it is meeting its objectives for managing capital
copy 2005-07 Nelson 106
Capital Disclosures
Example disclosurebull The Grouprsquos objectives when managing capital are
ndash to safeguard the entityrsquos ability to continue as a going concern
bull so that it can continue to provide returns for shareholders and benefits for other stakeholders and
ndash to provide an adequate return to shareholders by pricing products and services commensurately with the level of risk
bull The Group sets the amount of capital in proportion to risk
ExampleExample
ObjectivesObjectives
54
copy 2005-07 Nelson 107
Capital Disclosures
bull The Group manages the capital structure and makes adjustments to it in the light ofndash changes in economic conditions and ndash the risk characteristics of the underlying assets
bull In order to maintain or adjust the capital structure the Group mayndash adjust the amount of dividends paid to shareholders ndash return capital to shareholders ndash issue new shares or ndash sell assets to reduce debt
ExampleExample
Example disclosure
HowHow
copy 2005-07 Nelson 108
Capital Disclosures
bull Consistently with others in the industry the Group monitors capital on the basis of ndash the debt-to-adjusted capital ratio
bull This ratio is calculated as net debt divide adjusted capital
ExampleExample
Example disclosure
HowHow
bull Net debt is calculated as ndash Total debt (as shown in the
balance sheet)ndash Less cash amp cash equivalents
bull Net debt is calculated as ndash Total debt (as shown in the
balance sheet)ndash Less cash amp cash equivalents
bull Adjusted capital ndash comprises all components of
equity (ie share capital share premium minority interest retained earnings and revaluation reserve) ndash other than amounts
recognised in equity relating to cash flow hedges and
ndash includes some forms of subordinated debt
bull Adjusted capital ndash comprises all components of
equity (ie share capital share premium minority interest retained earnings and revaluation reserve) ndash other than amounts
recognised in equity relating to cash flow hedges and
ndash includes some forms of subordinated debt
55
copy 2005-07 Nelson 109
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowing
bull To comply with the capital disclosures the entity discloses thefollowingb) summary quantitative data about what it manages as capital
Some entities regard some financial liabilities (eg some forms of subordinated debt) as part of capitalOther entities regard capital as excluding some components of equity (eg components arising from cash flow hedges)
c) any changes in (a) and (b) from the previous period
copy 2005-07 Nelson 110
Capital Disclosures
Example disclosure (continued from previous example)
ExampleExample
bull During 20X4 the Grouprsquos strategy which was unchanged from 20X3 was to maintain the debt-to-adjusted capital ratio at the lower end of the range 61 to 71 in order to secure access to finance at a reasonable cost by maintaining a BB credit rating The debt-to-adjusted capital ratios at 31 December 20X4 and at 31 December 20X3 were as follows
3112X4 ($rsquoM) 3112X3 ($rsquoM) Total debt 1000 1100 Less cash and cash equivalents (90) (150)Net debt 910 950
Total equity 110 105 Add subordinated debt instruments 38 38 Less amounts recognised in equity
relating to cash flow hedges (10) (5)Adjusted capital 138 138
Debt-to-adjusted capital ratio 66 69
56
copy 2005-07 Nelson 111
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowing
bull To comply with the capital disclosures the entity discloses thefollowingd) whether during the period it complied with any externally imposed capital
requirements to which it is subjecte) when the entity has not complied with such externally imposed capital
requirements the consequences of such non-complianceThese disclosures shall be based on the information provided internally to the entityrsquos key management personnel
copy 2005-07 Nelson 112
Capital DisclosuresExampleExample
Example disclosurebull Entity A filed its quarterly regulatory capital return for
30 September 20X7 on 20 October 20X7 bull At that date Entity Arsquos regulatory capital was below
the capital requirement imposed by Regulator B by $1 million
bull As a result Entity A was required to submit a plan to the regulator indicating how it would increase its regulatory capital to the amount required
bull Entity A submitted a plan that entailed selling part of its unquoted equities portfolio with a carrying amount of $115 million in the fourth quarter of 20X7
bull In the fourth quarter of 20X7 Entity A sold its fixed interest investment portfolio for $126 million and met its regulatory capital requirement
For example SFC or banks
For example SFC or banks
57
copy 2005-07 Nelson 113
Capital DisclosuresCaseCase
bull Early adopted capital disclosure in 2005 and itsannual report states that (extract only)ndash The Grouprsquos objectives when managing capital are
bull To safeguard the Grouprsquos ability to continue as a going concern so that it continues to provide returns for shareholders and benefits for other stakeholders
bull To support the Grouprsquos stability and growth andbull To provide capital for the purpose of strengthening the
Grouprsquos risk management capability
copy 2005-07 Nelson 114
Capital DisclosuresCaseCase
ndash The Group actively and regularly reviews and manages its capital structure to ensure optimal capital structure and shareholder returns taking into consideration the future capital requirements of the Group and capital efficiency helliphellip
ndash The Group adopts a dividend policy helliphellip while retaining 10 per cent of the profit as capital of the Group for future use
ndash The Group has set aside $1500 million of retained earnings for the purpose of strengthening the risk management regime of the clearing houses and supporting their roles as central counterparties
ndash As in prior years the Group monitors capital by reviewing the level of capital that is at the disposal of the Group (ldquoadjusted capitalrdquo) Adjusted capital comprises all components of shareholdersrsquo equity other than the hedging reserve relating to cash flow hedges designated reserves and investment revaluation reserve helliphellip
bull Early adopted capital disclosure in 2005 and itsannual report states that (extract only)
58
copy 2005-07 Nelson 115
Capital Disclosures ndash Transition
bull An entity shall apply the requirements of capital disclosure for
ndash annual periods beginning on or after 1 January 2007
bull Early application is encouraged
copy 2005-07 Nelson 116
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk
59
copy 2005-07 Nelson 117
QampA SessionQampA SessionQampA Session
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk
35
copy 2005-07 Nelson 69
Is it currentIs it current
Current Assets
bull In its 2005 Interim Report full set of HKFRS was adopted and the report set out thatndash Available-for-sale financial assets are non-
derivatives that are eitherbull designated in this category orbull not classified in any of the other categories (ie
loans and receivables financial assets at fair value through profit or loss and held-to-maturity investments)
CaseCase
Similar in 2005 Annual Report
Similar in 2005 Annual Report
ndash They are included in non-current assetsbull unless management intends to dispose of the
investment within 12 months of the balance sheet date
copy 2005-07 Nelson 70
New requirementsNew requirements
Current Liabilities
bull A liability shall be classified as current when it satisfies any of the following criteriaa) it is expected to be settled in the entityrsquos normal operating cycleb) it is held primarily for the purpose of being tradedc) it is due to be settled within 12 months after the balance sheet
date ord) the entity does not have an unconditional right to defer settlement
of the liability for at least 12 months after the balance sheet date
bull All other liabilities shall be classified as non-current
ImplicationImplication
36
copy 2005-07 Nelson 71
Current Liabilities Revised rules on classifying a liability as current or non-currentbull A liability held for being traded rArr currentbull A financial liability due within 12 months after the BS date rArr current
ndash even if an agreement to refinance on a long-term basis is completed after the BS date (only disclosed as non-adjusting event)
bull If an entity has discretion to refinance rArr non-currentbull If an entity without discretion to refinance rArr current
bull A non-current financial liability is payable on demand with a breach on a condition of its loan agreement on or before the BS datendash If the lender agreed not to demand payment
bull after the BS date rArr current (only disclosed as non-adjusting event)
bull by the BS date rArr non-current
ImplicationImplication
copy 2005-07 Nelson 72
Current LiabilitiesCaseCase
Note 12 to Interim Report 2006bull Breach of loan covenants
bull As at 30 June 2006 in respect of certain bank loans with an aggregate carrying amount of HK$1529806000 the Group breached certain financial covenants of the banks loans
bull Since the lenders have not agreed to waive its right to demand immediate payment as at the balance sheet date the loans have been classified as current liabilities in these financial statements at 30 June 2006
37
copy 2005-07 Nelson 73
Current Assets and LiabilitiesExampleExample
Can the following be classified as current assetsbull 3-month fixed deposits pledged to a bank to secure
a mortgage loan of 5 yearsbull 2-year fixed deposits with a bank
Can the following be classified as current assetsbull 3-month fixed deposits pledged to a bank to secure
a mortgage loan of 5 yearsbull 2-year fixed deposits with a bank
Can the following be classified as non-current liabilitiesbull 5-year term loan matured after year end but renewed
for another 5 years after year end (before the issuanceof the financial statements)
bull 2-year term loan to be matured with 12 months and theentity has a right to renew for another 2 years
Can the following be classified as non-current liabilitiesbull 5-year term loan matured after year end but renewed
for another 5 years after year end (before the issuanceof the financial statements)
bull 2-year term loan to be matured with 12 months and theentity has a right to renew for another 2 years
timestimes
times
radic
copy 2005-07 Nelson 74
Balance Sheetbull As a minimum the face of the balance sheet shall
include line items that present the following amountsa) property plant and equipmentb) investment propertyc) intangible assetsd) financial assets (excl amounts shown under (e) (h) and (I))e) investments accounted for using the equity methodf) biological assetsg) inventoriesh) trade and other receivablesi) cash and cash equivalentsj) trade and other payablesk) provisionsl) financial liabilities (excl amounts shown under (j) and (k))m) liabilities and assets for current tax as defined in HKAS 12 Income Taxesn) deferred tax liabilities and deferred tax assets as defined in HKAS 12o) minority interest presented within equity andp) issued capital and reserves attributable to equity holders of the parent
38
copy 2005-07 Nelson 75
Balance Sheetbull The face of the balance sheet shall also include line
items that present the following amountsa) The total of assets classified as held for sale and
assets included in disposal groups classified as held for sale in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations and
b) Liabilities included in disposal groups classified as held for sale in accordance with IFRS 5
copy 2005-07 Nelson 76
Balance Sheetbull Additional line items headings and subtotals shall
be presented on the face of the balance sheet when such presentation is relevant to an understanding of the entityrsquos financial position
bull When an entity presents current and non-current assets and current and non-current liabilities as separate classifications on the face of its balance sheet ndash it shall not classify deferred tax assets
(liabilities) as current assets (liabilities)
39
copy 2005-07 Nelson 77
Balance Sheet
bull The use of different measurement bases for different classes of assets suggests that their nature or function differs and therefore that they should be presented as separate line itemsndash For example different classes of property plant and
equipment can be carried atbull Cost orbull Revalued amountsin accordance with IAS 16 PPE
In the past it use ldquomay needrdquoIn the past it use ldquomay needrdquo
copy 2005-07 Nelson 78
Balance Sheet
Galaxy Entertainment Group LimitedConsolidated balance sheet as at 31122005
CaseCase
40
copy 2005-07 Nelson 79
Balance Sheet
Melco Development Limited (新濠國際發展有限公司)Consolidated balance sheet as at 31122005
CaseCase
copy 2005-07 Nelson 80
Income Statement Minimum requirements on the face of the income statementbull As a minimum the face of the income statement shall include line items
that present the following amounts for the perioda) revenueb) finance costsc) share of the profit or loss of associates and joint ventures accounted
for using the equity methodd) pre-tax gain or loss recognised on the disposal of assets or
settlement of liabilities attributable to discontinuing operationse) tax expense andf) profit or loss
41
copy 2005-07 Nelson 81
Income Statement bull The following items shall be disclosed on the face of the income
statement as allocations of profit or loss for the perioda) Profit or loss attributable to minority interest andb) Profit or loss attributable to equity holders of the parent
A similar requirement has been added for the statement of changes in equity and such allocated amounts are not to be presented as items of income or expense
copy 2005-07 Nelson 82
Income Statement
Melco Dev LtdConsolidated income statementas at 31122005
CaseCase
42
copy 2005-07 Nelson 83
Income Statement bull Not require to disclose the results of operating
activities as a line item on the face of the incomestatement
bull An entity shall not present any items of income and expense as extraordinary items either onthe face of the income statements or in the notes
Entities canrsquot use itEntities canrsquot use it
Entities can still show itEntities can still show it
copy 2005-07 Nelson 84
Income Statement Either on the face of the income statement or in the notesbull An entity shall present an analysis of expenses using a classification
based on eitherbull the nature of expenses orbull their function within the entity
whichever provides information that is reliable and more relevant
bull Entities classifying expenses by function shall disclose additional information on the nature of expenses includingbull depreciation and amortisation expense and bull employee benefits expense
43
copy 2005-07 Nelson 85
Income StatementCaseCase
Nature or FunctionNature or Nature or FunctionFunction
copy 2005-07 Nelson 86
Statement of Changes in Equity bull An entity shall present a statement of changes in equity showing on the
face of the statementa) profit or loss for the period b) each item of income and expense for the period that as required by
IFRSs is recognised directly in equity and the total of these itemsc) total income and expense for the period (calculated as the sum of (a) and
(b)) showing separately the total amounts attributablebull to equity holders of the parent andbull to minority interest and
d) for each component of equity the effects of changes in accounting policies and corrections of errors recognised in accordance with IAS 8
Any ChangeAny Change
A revised requirementbull A statement of changes in equity that comprises only these items
shall be titled a statement of recognised income and expenses
A revised requirementbull A statement of changes in equity that comprises only these items
shall be titled a statement of recognised income and expenses
44
copy 2005-07 Nelson 87
Statement of Changes in Equity bull An entity shall also present either on the face of the
statement of changes in equity or in the notesa) the amounts of transactions with equity holders acting in
their capacity as equity holders showing separately distributions to equity holders
b) the balance of retained earnings (ie accumulated profit or loss) at the beginning of the period and at the balance sheet date and the changes during the period and
c) a reconciliation between the carrying amount of each class of contributed equity and each reserve at the beginning and the end of the period separately disclosing each change
copy 2005-07 Nelson 88
Statement of Changes in Equity
Consolidated SCE as at 31122005
CaseCase
45
copy 2005-07 Nelson 89
Notes Structure (an entity is required to disclose the following)
bull The notes shalla) present information about the basis of preparation of the financial statements
and the specific accounting policies usedb) disclose the information required by HKFRSs that is not presented on the
face of the balance sheet income statement statement of changes in equity or cash flow statement and
c) provide additional information that is not presented on the face of the balance sheet income statement statement of changes in equity or cash flow statement but is relevant to an understanding of any of them
bull Notes shall as far as practicable be presented in a systematic manner bull Each item on the face of the balance sheet income statement statement
of changes in equity and cash flow statement shall be cross-referencedto any related information in the notes
copy 2005-07 Nelson 90
Notes Disclosures (an entity is required to disclose the following)
bull Disclosure of accounting policiesAn entity shall disclose in the summary of significant accounting policiesa) the measurement basis (or bases) used in preparing the financial
statements andb) the other accounting policies used that are relevant to an understanding of
the financial statements
46
copy 2005-07 Nelson 91
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)ndash The financial statements have been prepared in
accordance with Hong Kong Financial Reporting Standards (lsquolsquoHKFRSrsquorsquo) issued by the Hong Kong Institute of Certified Public Accountants bull under the historical cost convention as modified by the
revaluation of investment properties available-for-sale financial assets derivative financial instruments and other investments which are carried at fair values helliphellip
ndash The principal accounting policies applied in the preparation of these financial statements are set out below These policies have been consistently applied to all the years presented except for those stated in note 2(a) above
copy 2005-07 Nelson 92
Notes Disclosures (an entity is required to disclose the following)
bull Disclosure of accounting policiesndash The judgements apart from those involving estimations management has
madebull in the process of applying the entityrsquos accounting policies that have the
most significant effect on the amounts recognised in the financial statements (in the summary of significant accounting policies or other notes)
Examples ndash Management makes judgements in determininga) whether financial assets are held-to-maturity investmentsb) when substantially all the significant risks and rewards of
ownership of financial assets and lease assets are transferred to other entities
c) whether in substance particular sales of goods are financing arrangements and therefore do not give rise to revenue and
d) whether the substance of the relationship between the entity and a special purpose entity indicates that the special purpose entity is controlled by the entity
Examples ndash Management makes judgements in determininga) whether financial assets are held-to-maturity investmentsb) when substantially all the significant risks and rewards of
ownership of financial assets and lease assets are transferred to other entities
c) whether in substance particular sales of goods are financing arrangements and therefore do not give rise to revenue and
d) whether the substance of the relationship between the entity and a special purpose entity indicates that the special purpose entity is controlled by the entity
47
copy 2005-07 Nelson 93
Notes Disclosures (an entity is required to disclose the following)
bull Key sources of estimation uncertaintyndash Information about the key assumptions concerning the future and
other key sources of estimation uncertainty at the balance sheet datebull that have a significant risk of causing a material adjustment to the
carrying amounts of assets and liabilities within the next financial yearndash In respect of those assets and liabilities the notes shall include details of
a) their nature andb) their carrying amount as at the balance sheet date
Examples ndash in the absence of recently observed market prices used to measure the following assets and liabilities future-oriented estimates are necessary to measurebull the recoverable amount of classes of PPEbull the effect of technological obsolescence on inventories
Estimates involve assumptions about such items asbull the risk adjustment to cash flows or discount rates usedbull future changes in salaries and in prices affecting other costs
Examples ndash in the absence of recently observed market prices used to measure the following assets and liabilities future-oriented estimates are necessary to measurebull the recoverable amount of classes of PPEbull the effect of technological obsolescence on inventories
Estimates involve assumptions about such items asbull the risk adjustment to cash flows or discount rates usedbull future changes in salaries and in prices affecting other costs
copy 2005-07 Nelson 94
Notes
Esprit Holdings LimitedEsprit Holdings Limitedbull Critical Accounting Estimates and Judgements
ndash Estimates and judgements are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonableunder the circumstances
ndash Critical accounting estimates and assumptionsbull The Group makes estimates and assumptions concerning
the future The resulting accounting estimates will by definition seldom equal the related actual results
bull The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below helliphellip (including (1) useful life and impairment of trademarks and (2) income taxes)
CaseCase
48
copy 2005-07 Nelson 95
Notes
Melco Development Limited (新濠國際發展有限公司)Notes to the financial statements for the year ended 31122005ndash The key assumptions concerning the future and other key sources
of estimation uncertainty at the balance sheet date that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below helliphellip(The issues discussed includebull Allowances for inventories bull Estimated impairment of goodwill Income taxes)
CaseCase
copy 2005-07 Nelson 96
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)ndash Estimates and judgements used in preparing the
financial statements are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonable under the circumstances
ndash The Group makes estimates and assumptionsconcerning the future
ndash The resulting accounting estimates will by definition seldom equal the related actual results
ndash The estimates and assumptions that have a significant effect on the carrying amounts of assets and liabilities are discussed below hellip (including impairment of goodwill impairment of gaming
licence Useful lives of property plant and equipment fair value of investment properties hellip)
49
copy 2005-07 Nelson 97
Notes Disclosures (an entity is required to disclose the following)
bull Other disclosuresAn entity shall disclose in the notesa) the amount of dividends proposed or declared before the
financial statements were authorised for issue but not recognised as a distribution to equity holders during the period and the related amount per share(HK incorporated companies are required to show the aggregate amount which is recommended for distribution by way of dividend under a separate heading(s) in their balance sheet (HK Co Ord 10th Sch para 9(1)(e)) and
b) the amount of any cumulative preference dividends not recognised
copy 2005-07 Nelson 98
Notes Disclosures (an entity is required to disclose the following)
An entity shall disclose the following if not disclosedelsewhere in information published with the financial statementsa) the domicile and legal form of the entity
its country of incorporation andthe address of its registered office(or principal place of business if different from the registered office)
b) a description of the nature of the entityrsquos operations and its principal activities and
c) the name of the parent and the ultimate parent of the group
ldquoshall discloserdquo now instead of ldquoencouraged to discloserdquo
ldquoshall discloserdquo now instead of ldquoencouraged to discloserdquo
bull Other disclosures
Any specialAny special
50
copy 2005-07 Nelson 99
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)bull The principal activities of Galaxy Entertainment Group
Ltd (the lsquolsquoCompanyrsquorsquo) (formerly known as K WahConstruction Materials Ltd) and its subsidiaries (together the lsquolsquoGrouprsquorsquo) are tondash operate in casino games of chance or games of other forms
in Macau (and) manufacture sale and distribution of construction materials in HK Macau and Mainland China
bull The Company is ndash a limited liability company incorporated in Hong Kong and ndash has its listing on the Main Board of The Stock Exchange of
Hong Kong Limitedbull The address of its registered office and its principal place
of business is Room 1606 16th Floor Hutchison House 10 Harcourt Road Central HK
copy 2005-07 Nelson 100
Effective Date
bull An entity shall apply IAS 1 for annual periods beginning on or after 1 Jan 2005
ndash Earlier application is encouragedndash If an entity applies IAS 1 for an earlier period it shall
disclose this factbull For the amendments relating to the Statement of
Changes in Equityndash An entity shall apply it for annual periods beginning on
or after 1 Jan 2006ndash If an entity applies the amendments to IAS 19
Employee Benefits ndash Actuarial Gains and Losses Group Plans and Disclosures for an earlier period that amendment shall be applied for that earlier period
51
copy 2005-07 Nelson 101
Todayrsquos Agenda
Capital Disclosures (Amendments to IAS 1)
Capital Disclosures (Amendments to IAS 1)
copy 2005-07 Nelson 102
Capital Disclosures ndash For 2007
52
copy 2005-07 Nelson 103
Capital Disclosures
What is capital Is it helliphellip
CapitalCapital AssetsAssets LiabilitiesLiabilities= ndash
bull IAS 1BC47 considers ldquowhether an entity can have a view of capital that differs from what IFRSs define as equityrdquo
bull It further clarifies that although for the purposes of this disclosure capital would often equate with equity as defined in IFRSsndash it might also include or exclude some components
bull It also noted that the capital disclosure in IAS 1 is intended to give entities the opportunity to describendash how they view the components of capital they manage if this is
different from what IFRSs define as equity helliphellip
copy 2005-07 Nelson 104
EquityEquityEquity AssetsAssets LiabilitiesLiabilities= ndash
Capital Disclosures
Based on the Framework amp IFRSs the accounting equation should be
CapitalCapital AssetsAssets LiabilitiesLiabilities= ndash
bull An entityrsquos capital may be part of its equity plus part of its liabilities depending on how it manage ldquoits capitalrdquo helliphellip
53
copy 2005-07 Nelson 105
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowinga) qualitative information about its objectives policies and processes for
managing capital including (but not limited to)i) a description of what it manages as capitalii) when an entity is subject to externally imposed capital requirements
the nature of those requirements and how those requirements are incorporated into the management of capital and
iii) how it is meeting its objectives for managing capital
bull To comply with the capital disclosures the entity discloses thefollowinga) qualitative information about its objectives policies and processes for
managing capital including (but not limited to)i) a description of what it manages as capitalii) when an entity is subject to externally imposed capital requirements
the nature of those requirements and how those requirements are incorporated into the management of capital and
iii) how it is meeting its objectives for managing capital
copy 2005-07 Nelson 106
Capital Disclosures
Example disclosurebull The Grouprsquos objectives when managing capital are
ndash to safeguard the entityrsquos ability to continue as a going concern
bull so that it can continue to provide returns for shareholders and benefits for other stakeholders and
ndash to provide an adequate return to shareholders by pricing products and services commensurately with the level of risk
bull The Group sets the amount of capital in proportion to risk
ExampleExample
ObjectivesObjectives
54
copy 2005-07 Nelson 107
Capital Disclosures
bull The Group manages the capital structure and makes adjustments to it in the light ofndash changes in economic conditions and ndash the risk characteristics of the underlying assets
bull In order to maintain or adjust the capital structure the Group mayndash adjust the amount of dividends paid to shareholders ndash return capital to shareholders ndash issue new shares or ndash sell assets to reduce debt
ExampleExample
Example disclosure
HowHow
copy 2005-07 Nelson 108
Capital Disclosures
bull Consistently with others in the industry the Group monitors capital on the basis of ndash the debt-to-adjusted capital ratio
bull This ratio is calculated as net debt divide adjusted capital
ExampleExample
Example disclosure
HowHow
bull Net debt is calculated as ndash Total debt (as shown in the
balance sheet)ndash Less cash amp cash equivalents
bull Net debt is calculated as ndash Total debt (as shown in the
balance sheet)ndash Less cash amp cash equivalents
bull Adjusted capital ndash comprises all components of
equity (ie share capital share premium minority interest retained earnings and revaluation reserve) ndash other than amounts
recognised in equity relating to cash flow hedges and
ndash includes some forms of subordinated debt
bull Adjusted capital ndash comprises all components of
equity (ie share capital share premium minority interest retained earnings and revaluation reserve) ndash other than amounts
recognised in equity relating to cash flow hedges and
ndash includes some forms of subordinated debt
55
copy 2005-07 Nelson 109
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowing
bull To comply with the capital disclosures the entity discloses thefollowingb) summary quantitative data about what it manages as capital
Some entities regard some financial liabilities (eg some forms of subordinated debt) as part of capitalOther entities regard capital as excluding some components of equity (eg components arising from cash flow hedges)
c) any changes in (a) and (b) from the previous period
copy 2005-07 Nelson 110
Capital Disclosures
Example disclosure (continued from previous example)
ExampleExample
bull During 20X4 the Grouprsquos strategy which was unchanged from 20X3 was to maintain the debt-to-adjusted capital ratio at the lower end of the range 61 to 71 in order to secure access to finance at a reasonable cost by maintaining a BB credit rating The debt-to-adjusted capital ratios at 31 December 20X4 and at 31 December 20X3 were as follows
3112X4 ($rsquoM) 3112X3 ($rsquoM) Total debt 1000 1100 Less cash and cash equivalents (90) (150)Net debt 910 950
Total equity 110 105 Add subordinated debt instruments 38 38 Less amounts recognised in equity
relating to cash flow hedges (10) (5)Adjusted capital 138 138
Debt-to-adjusted capital ratio 66 69
56
copy 2005-07 Nelson 111
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowing
bull To comply with the capital disclosures the entity discloses thefollowingd) whether during the period it complied with any externally imposed capital
requirements to which it is subjecte) when the entity has not complied with such externally imposed capital
requirements the consequences of such non-complianceThese disclosures shall be based on the information provided internally to the entityrsquos key management personnel
copy 2005-07 Nelson 112
Capital DisclosuresExampleExample
Example disclosurebull Entity A filed its quarterly regulatory capital return for
30 September 20X7 on 20 October 20X7 bull At that date Entity Arsquos regulatory capital was below
the capital requirement imposed by Regulator B by $1 million
bull As a result Entity A was required to submit a plan to the regulator indicating how it would increase its regulatory capital to the amount required
bull Entity A submitted a plan that entailed selling part of its unquoted equities portfolio with a carrying amount of $115 million in the fourth quarter of 20X7
bull In the fourth quarter of 20X7 Entity A sold its fixed interest investment portfolio for $126 million and met its regulatory capital requirement
For example SFC or banks
For example SFC or banks
57
copy 2005-07 Nelson 113
Capital DisclosuresCaseCase
bull Early adopted capital disclosure in 2005 and itsannual report states that (extract only)ndash The Grouprsquos objectives when managing capital are
bull To safeguard the Grouprsquos ability to continue as a going concern so that it continues to provide returns for shareholders and benefits for other stakeholders
bull To support the Grouprsquos stability and growth andbull To provide capital for the purpose of strengthening the
Grouprsquos risk management capability
copy 2005-07 Nelson 114
Capital DisclosuresCaseCase
ndash The Group actively and regularly reviews and manages its capital structure to ensure optimal capital structure and shareholder returns taking into consideration the future capital requirements of the Group and capital efficiency helliphellip
ndash The Group adopts a dividend policy helliphellip while retaining 10 per cent of the profit as capital of the Group for future use
ndash The Group has set aside $1500 million of retained earnings for the purpose of strengthening the risk management regime of the clearing houses and supporting their roles as central counterparties
ndash As in prior years the Group monitors capital by reviewing the level of capital that is at the disposal of the Group (ldquoadjusted capitalrdquo) Adjusted capital comprises all components of shareholdersrsquo equity other than the hedging reserve relating to cash flow hedges designated reserves and investment revaluation reserve helliphellip
bull Early adopted capital disclosure in 2005 and itsannual report states that (extract only)
58
copy 2005-07 Nelson 115
Capital Disclosures ndash Transition
bull An entity shall apply the requirements of capital disclosure for
ndash annual periods beginning on or after 1 January 2007
bull Early application is encouraged
copy 2005-07 Nelson 116
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk
59
copy 2005-07 Nelson 117
QampA SessionQampA SessionQampA Session
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk
36
copy 2005-07 Nelson 71
Current Liabilities Revised rules on classifying a liability as current or non-currentbull A liability held for being traded rArr currentbull A financial liability due within 12 months after the BS date rArr current
ndash even if an agreement to refinance on a long-term basis is completed after the BS date (only disclosed as non-adjusting event)
bull If an entity has discretion to refinance rArr non-currentbull If an entity without discretion to refinance rArr current
bull A non-current financial liability is payable on demand with a breach on a condition of its loan agreement on or before the BS datendash If the lender agreed not to demand payment
bull after the BS date rArr current (only disclosed as non-adjusting event)
bull by the BS date rArr non-current
ImplicationImplication
copy 2005-07 Nelson 72
Current LiabilitiesCaseCase
Note 12 to Interim Report 2006bull Breach of loan covenants
bull As at 30 June 2006 in respect of certain bank loans with an aggregate carrying amount of HK$1529806000 the Group breached certain financial covenants of the banks loans
bull Since the lenders have not agreed to waive its right to demand immediate payment as at the balance sheet date the loans have been classified as current liabilities in these financial statements at 30 June 2006
37
copy 2005-07 Nelson 73
Current Assets and LiabilitiesExampleExample
Can the following be classified as current assetsbull 3-month fixed deposits pledged to a bank to secure
a mortgage loan of 5 yearsbull 2-year fixed deposits with a bank
Can the following be classified as current assetsbull 3-month fixed deposits pledged to a bank to secure
a mortgage loan of 5 yearsbull 2-year fixed deposits with a bank
Can the following be classified as non-current liabilitiesbull 5-year term loan matured after year end but renewed
for another 5 years after year end (before the issuanceof the financial statements)
bull 2-year term loan to be matured with 12 months and theentity has a right to renew for another 2 years
Can the following be classified as non-current liabilitiesbull 5-year term loan matured after year end but renewed
for another 5 years after year end (before the issuanceof the financial statements)
bull 2-year term loan to be matured with 12 months and theentity has a right to renew for another 2 years
timestimes
times
radic
copy 2005-07 Nelson 74
Balance Sheetbull As a minimum the face of the balance sheet shall
include line items that present the following amountsa) property plant and equipmentb) investment propertyc) intangible assetsd) financial assets (excl amounts shown under (e) (h) and (I))e) investments accounted for using the equity methodf) biological assetsg) inventoriesh) trade and other receivablesi) cash and cash equivalentsj) trade and other payablesk) provisionsl) financial liabilities (excl amounts shown under (j) and (k))m) liabilities and assets for current tax as defined in HKAS 12 Income Taxesn) deferred tax liabilities and deferred tax assets as defined in HKAS 12o) minority interest presented within equity andp) issued capital and reserves attributable to equity holders of the parent
38
copy 2005-07 Nelson 75
Balance Sheetbull The face of the balance sheet shall also include line
items that present the following amountsa) The total of assets classified as held for sale and
assets included in disposal groups classified as held for sale in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations and
b) Liabilities included in disposal groups classified as held for sale in accordance with IFRS 5
copy 2005-07 Nelson 76
Balance Sheetbull Additional line items headings and subtotals shall
be presented on the face of the balance sheet when such presentation is relevant to an understanding of the entityrsquos financial position
bull When an entity presents current and non-current assets and current and non-current liabilities as separate classifications on the face of its balance sheet ndash it shall not classify deferred tax assets
(liabilities) as current assets (liabilities)
39
copy 2005-07 Nelson 77
Balance Sheet
bull The use of different measurement bases for different classes of assets suggests that their nature or function differs and therefore that they should be presented as separate line itemsndash For example different classes of property plant and
equipment can be carried atbull Cost orbull Revalued amountsin accordance with IAS 16 PPE
In the past it use ldquomay needrdquoIn the past it use ldquomay needrdquo
copy 2005-07 Nelson 78
Balance Sheet
Galaxy Entertainment Group LimitedConsolidated balance sheet as at 31122005
CaseCase
40
copy 2005-07 Nelson 79
Balance Sheet
Melco Development Limited (新濠國際發展有限公司)Consolidated balance sheet as at 31122005
CaseCase
copy 2005-07 Nelson 80
Income Statement Minimum requirements on the face of the income statementbull As a minimum the face of the income statement shall include line items
that present the following amounts for the perioda) revenueb) finance costsc) share of the profit or loss of associates and joint ventures accounted
for using the equity methodd) pre-tax gain or loss recognised on the disposal of assets or
settlement of liabilities attributable to discontinuing operationse) tax expense andf) profit or loss
41
copy 2005-07 Nelson 81
Income Statement bull The following items shall be disclosed on the face of the income
statement as allocations of profit or loss for the perioda) Profit or loss attributable to minority interest andb) Profit or loss attributable to equity holders of the parent
A similar requirement has been added for the statement of changes in equity and such allocated amounts are not to be presented as items of income or expense
copy 2005-07 Nelson 82
Income Statement
Melco Dev LtdConsolidated income statementas at 31122005
CaseCase
42
copy 2005-07 Nelson 83
Income Statement bull Not require to disclose the results of operating
activities as a line item on the face of the incomestatement
bull An entity shall not present any items of income and expense as extraordinary items either onthe face of the income statements or in the notes
Entities canrsquot use itEntities canrsquot use it
Entities can still show itEntities can still show it
copy 2005-07 Nelson 84
Income Statement Either on the face of the income statement or in the notesbull An entity shall present an analysis of expenses using a classification
based on eitherbull the nature of expenses orbull their function within the entity
whichever provides information that is reliable and more relevant
bull Entities classifying expenses by function shall disclose additional information on the nature of expenses includingbull depreciation and amortisation expense and bull employee benefits expense
43
copy 2005-07 Nelson 85
Income StatementCaseCase
Nature or FunctionNature or Nature or FunctionFunction
copy 2005-07 Nelson 86
Statement of Changes in Equity bull An entity shall present a statement of changes in equity showing on the
face of the statementa) profit or loss for the period b) each item of income and expense for the period that as required by
IFRSs is recognised directly in equity and the total of these itemsc) total income and expense for the period (calculated as the sum of (a) and
(b)) showing separately the total amounts attributablebull to equity holders of the parent andbull to minority interest and
d) for each component of equity the effects of changes in accounting policies and corrections of errors recognised in accordance with IAS 8
Any ChangeAny Change
A revised requirementbull A statement of changes in equity that comprises only these items
shall be titled a statement of recognised income and expenses
A revised requirementbull A statement of changes in equity that comprises only these items
shall be titled a statement of recognised income and expenses
44
copy 2005-07 Nelson 87
Statement of Changes in Equity bull An entity shall also present either on the face of the
statement of changes in equity or in the notesa) the amounts of transactions with equity holders acting in
their capacity as equity holders showing separately distributions to equity holders
b) the balance of retained earnings (ie accumulated profit or loss) at the beginning of the period and at the balance sheet date and the changes during the period and
c) a reconciliation between the carrying amount of each class of contributed equity and each reserve at the beginning and the end of the period separately disclosing each change
copy 2005-07 Nelson 88
Statement of Changes in Equity
Consolidated SCE as at 31122005
CaseCase
45
copy 2005-07 Nelson 89
Notes Structure (an entity is required to disclose the following)
bull The notes shalla) present information about the basis of preparation of the financial statements
and the specific accounting policies usedb) disclose the information required by HKFRSs that is not presented on the
face of the balance sheet income statement statement of changes in equity or cash flow statement and
c) provide additional information that is not presented on the face of the balance sheet income statement statement of changes in equity or cash flow statement but is relevant to an understanding of any of them
bull Notes shall as far as practicable be presented in a systematic manner bull Each item on the face of the balance sheet income statement statement
of changes in equity and cash flow statement shall be cross-referencedto any related information in the notes
copy 2005-07 Nelson 90
Notes Disclosures (an entity is required to disclose the following)
bull Disclosure of accounting policiesAn entity shall disclose in the summary of significant accounting policiesa) the measurement basis (or bases) used in preparing the financial
statements andb) the other accounting policies used that are relevant to an understanding of
the financial statements
46
copy 2005-07 Nelson 91
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)ndash The financial statements have been prepared in
accordance with Hong Kong Financial Reporting Standards (lsquolsquoHKFRSrsquorsquo) issued by the Hong Kong Institute of Certified Public Accountants bull under the historical cost convention as modified by the
revaluation of investment properties available-for-sale financial assets derivative financial instruments and other investments which are carried at fair values helliphellip
ndash The principal accounting policies applied in the preparation of these financial statements are set out below These policies have been consistently applied to all the years presented except for those stated in note 2(a) above
copy 2005-07 Nelson 92
Notes Disclosures (an entity is required to disclose the following)
bull Disclosure of accounting policiesndash The judgements apart from those involving estimations management has
madebull in the process of applying the entityrsquos accounting policies that have the
most significant effect on the amounts recognised in the financial statements (in the summary of significant accounting policies or other notes)
Examples ndash Management makes judgements in determininga) whether financial assets are held-to-maturity investmentsb) when substantially all the significant risks and rewards of
ownership of financial assets and lease assets are transferred to other entities
c) whether in substance particular sales of goods are financing arrangements and therefore do not give rise to revenue and
d) whether the substance of the relationship between the entity and a special purpose entity indicates that the special purpose entity is controlled by the entity
Examples ndash Management makes judgements in determininga) whether financial assets are held-to-maturity investmentsb) when substantially all the significant risks and rewards of
ownership of financial assets and lease assets are transferred to other entities
c) whether in substance particular sales of goods are financing arrangements and therefore do not give rise to revenue and
d) whether the substance of the relationship between the entity and a special purpose entity indicates that the special purpose entity is controlled by the entity
47
copy 2005-07 Nelson 93
Notes Disclosures (an entity is required to disclose the following)
bull Key sources of estimation uncertaintyndash Information about the key assumptions concerning the future and
other key sources of estimation uncertainty at the balance sheet datebull that have a significant risk of causing a material adjustment to the
carrying amounts of assets and liabilities within the next financial yearndash In respect of those assets and liabilities the notes shall include details of
a) their nature andb) their carrying amount as at the balance sheet date
Examples ndash in the absence of recently observed market prices used to measure the following assets and liabilities future-oriented estimates are necessary to measurebull the recoverable amount of classes of PPEbull the effect of technological obsolescence on inventories
Estimates involve assumptions about such items asbull the risk adjustment to cash flows or discount rates usedbull future changes in salaries and in prices affecting other costs
Examples ndash in the absence of recently observed market prices used to measure the following assets and liabilities future-oriented estimates are necessary to measurebull the recoverable amount of classes of PPEbull the effect of technological obsolescence on inventories
Estimates involve assumptions about such items asbull the risk adjustment to cash flows or discount rates usedbull future changes in salaries and in prices affecting other costs
copy 2005-07 Nelson 94
Notes
Esprit Holdings LimitedEsprit Holdings Limitedbull Critical Accounting Estimates and Judgements
ndash Estimates and judgements are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonableunder the circumstances
ndash Critical accounting estimates and assumptionsbull The Group makes estimates and assumptions concerning
the future The resulting accounting estimates will by definition seldom equal the related actual results
bull The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below helliphellip (including (1) useful life and impairment of trademarks and (2) income taxes)
CaseCase
48
copy 2005-07 Nelson 95
Notes
Melco Development Limited (新濠國際發展有限公司)Notes to the financial statements for the year ended 31122005ndash The key assumptions concerning the future and other key sources
of estimation uncertainty at the balance sheet date that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below helliphellip(The issues discussed includebull Allowances for inventories bull Estimated impairment of goodwill Income taxes)
CaseCase
copy 2005-07 Nelson 96
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)ndash Estimates and judgements used in preparing the
financial statements are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonable under the circumstances
ndash The Group makes estimates and assumptionsconcerning the future
ndash The resulting accounting estimates will by definition seldom equal the related actual results
ndash The estimates and assumptions that have a significant effect on the carrying amounts of assets and liabilities are discussed below hellip (including impairment of goodwill impairment of gaming
licence Useful lives of property plant and equipment fair value of investment properties hellip)
49
copy 2005-07 Nelson 97
Notes Disclosures (an entity is required to disclose the following)
bull Other disclosuresAn entity shall disclose in the notesa) the amount of dividends proposed or declared before the
financial statements were authorised for issue but not recognised as a distribution to equity holders during the period and the related amount per share(HK incorporated companies are required to show the aggregate amount which is recommended for distribution by way of dividend under a separate heading(s) in their balance sheet (HK Co Ord 10th Sch para 9(1)(e)) and
b) the amount of any cumulative preference dividends not recognised
copy 2005-07 Nelson 98
Notes Disclosures (an entity is required to disclose the following)
An entity shall disclose the following if not disclosedelsewhere in information published with the financial statementsa) the domicile and legal form of the entity
its country of incorporation andthe address of its registered office(or principal place of business if different from the registered office)
b) a description of the nature of the entityrsquos operations and its principal activities and
c) the name of the parent and the ultimate parent of the group
ldquoshall discloserdquo now instead of ldquoencouraged to discloserdquo
ldquoshall discloserdquo now instead of ldquoencouraged to discloserdquo
bull Other disclosures
Any specialAny special
50
copy 2005-07 Nelson 99
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)bull The principal activities of Galaxy Entertainment Group
Ltd (the lsquolsquoCompanyrsquorsquo) (formerly known as K WahConstruction Materials Ltd) and its subsidiaries (together the lsquolsquoGrouprsquorsquo) are tondash operate in casino games of chance or games of other forms
in Macau (and) manufacture sale and distribution of construction materials in HK Macau and Mainland China
bull The Company is ndash a limited liability company incorporated in Hong Kong and ndash has its listing on the Main Board of The Stock Exchange of
Hong Kong Limitedbull The address of its registered office and its principal place
of business is Room 1606 16th Floor Hutchison House 10 Harcourt Road Central HK
copy 2005-07 Nelson 100
Effective Date
bull An entity shall apply IAS 1 for annual periods beginning on or after 1 Jan 2005
ndash Earlier application is encouragedndash If an entity applies IAS 1 for an earlier period it shall
disclose this factbull For the amendments relating to the Statement of
Changes in Equityndash An entity shall apply it for annual periods beginning on
or after 1 Jan 2006ndash If an entity applies the amendments to IAS 19
Employee Benefits ndash Actuarial Gains and Losses Group Plans and Disclosures for an earlier period that amendment shall be applied for that earlier period
51
copy 2005-07 Nelson 101
Todayrsquos Agenda
Capital Disclosures (Amendments to IAS 1)
Capital Disclosures (Amendments to IAS 1)
copy 2005-07 Nelson 102
Capital Disclosures ndash For 2007
52
copy 2005-07 Nelson 103
Capital Disclosures
What is capital Is it helliphellip
CapitalCapital AssetsAssets LiabilitiesLiabilities= ndash
bull IAS 1BC47 considers ldquowhether an entity can have a view of capital that differs from what IFRSs define as equityrdquo
bull It further clarifies that although for the purposes of this disclosure capital would often equate with equity as defined in IFRSsndash it might also include or exclude some components
bull It also noted that the capital disclosure in IAS 1 is intended to give entities the opportunity to describendash how they view the components of capital they manage if this is
different from what IFRSs define as equity helliphellip
copy 2005-07 Nelson 104
EquityEquityEquity AssetsAssets LiabilitiesLiabilities= ndash
Capital Disclosures
Based on the Framework amp IFRSs the accounting equation should be
CapitalCapital AssetsAssets LiabilitiesLiabilities= ndash
bull An entityrsquos capital may be part of its equity plus part of its liabilities depending on how it manage ldquoits capitalrdquo helliphellip
53
copy 2005-07 Nelson 105
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowinga) qualitative information about its objectives policies and processes for
managing capital including (but not limited to)i) a description of what it manages as capitalii) when an entity is subject to externally imposed capital requirements
the nature of those requirements and how those requirements are incorporated into the management of capital and
iii) how it is meeting its objectives for managing capital
bull To comply with the capital disclosures the entity discloses thefollowinga) qualitative information about its objectives policies and processes for
managing capital including (but not limited to)i) a description of what it manages as capitalii) when an entity is subject to externally imposed capital requirements
the nature of those requirements and how those requirements are incorporated into the management of capital and
iii) how it is meeting its objectives for managing capital
copy 2005-07 Nelson 106
Capital Disclosures
Example disclosurebull The Grouprsquos objectives when managing capital are
ndash to safeguard the entityrsquos ability to continue as a going concern
bull so that it can continue to provide returns for shareholders and benefits for other stakeholders and
ndash to provide an adequate return to shareholders by pricing products and services commensurately with the level of risk
bull The Group sets the amount of capital in proportion to risk
ExampleExample
ObjectivesObjectives
54
copy 2005-07 Nelson 107
Capital Disclosures
bull The Group manages the capital structure and makes adjustments to it in the light ofndash changes in economic conditions and ndash the risk characteristics of the underlying assets
bull In order to maintain or adjust the capital structure the Group mayndash adjust the amount of dividends paid to shareholders ndash return capital to shareholders ndash issue new shares or ndash sell assets to reduce debt
ExampleExample
Example disclosure
HowHow
copy 2005-07 Nelson 108
Capital Disclosures
bull Consistently with others in the industry the Group monitors capital on the basis of ndash the debt-to-adjusted capital ratio
bull This ratio is calculated as net debt divide adjusted capital
ExampleExample
Example disclosure
HowHow
bull Net debt is calculated as ndash Total debt (as shown in the
balance sheet)ndash Less cash amp cash equivalents
bull Net debt is calculated as ndash Total debt (as shown in the
balance sheet)ndash Less cash amp cash equivalents
bull Adjusted capital ndash comprises all components of
equity (ie share capital share premium minority interest retained earnings and revaluation reserve) ndash other than amounts
recognised in equity relating to cash flow hedges and
ndash includes some forms of subordinated debt
bull Adjusted capital ndash comprises all components of
equity (ie share capital share premium minority interest retained earnings and revaluation reserve) ndash other than amounts
recognised in equity relating to cash flow hedges and
ndash includes some forms of subordinated debt
55
copy 2005-07 Nelson 109
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowing
bull To comply with the capital disclosures the entity discloses thefollowingb) summary quantitative data about what it manages as capital
Some entities regard some financial liabilities (eg some forms of subordinated debt) as part of capitalOther entities regard capital as excluding some components of equity (eg components arising from cash flow hedges)
c) any changes in (a) and (b) from the previous period
copy 2005-07 Nelson 110
Capital Disclosures
Example disclosure (continued from previous example)
ExampleExample
bull During 20X4 the Grouprsquos strategy which was unchanged from 20X3 was to maintain the debt-to-adjusted capital ratio at the lower end of the range 61 to 71 in order to secure access to finance at a reasonable cost by maintaining a BB credit rating The debt-to-adjusted capital ratios at 31 December 20X4 and at 31 December 20X3 were as follows
3112X4 ($rsquoM) 3112X3 ($rsquoM) Total debt 1000 1100 Less cash and cash equivalents (90) (150)Net debt 910 950
Total equity 110 105 Add subordinated debt instruments 38 38 Less amounts recognised in equity
relating to cash flow hedges (10) (5)Adjusted capital 138 138
Debt-to-adjusted capital ratio 66 69
56
copy 2005-07 Nelson 111
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowing
bull To comply with the capital disclosures the entity discloses thefollowingd) whether during the period it complied with any externally imposed capital
requirements to which it is subjecte) when the entity has not complied with such externally imposed capital
requirements the consequences of such non-complianceThese disclosures shall be based on the information provided internally to the entityrsquos key management personnel
copy 2005-07 Nelson 112
Capital DisclosuresExampleExample
Example disclosurebull Entity A filed its quarterly regulatory capital return for
30 September 20X7 on 20 October 20X7 bull At that date Entity Arsquos regulatory capital was below
the capital requirement imposed by Regulator B by $1 million
bull As a result Entity A was required to submit a plan to the regulator indicating how it would increase its regulatory capital to the amount required
bull Entity A submitted a plan that entailed selling part of its unquoted equities portfolio with a carrying amount of $115 million in the fourth quarter of 20X7
bull In the fourth quarter of 20X7 Entity A sold its fixed interest investment portfolio for $126 million and met its regulatory capital requirement
For example SFC or banks
For example SFC or banks
57
copy 2005-07 Nelson 113
Capital DisclosuresCaseCase
bull Early adopted capital disclosure in 2005 and itsannual report states that (extract only)ndash The Grouprsquos objectives when managing capital are
bull To safeguard the Grouprsquos ability to continue as a going concern so that it continues to provide returns for shareholders and benefits for other stakeholders
bull To support the Grouprsquos stability and growth andbull To provide capital for the purpose of strengthening the
Grouprsquos risk management capability
copy 2005-07 Nelson 114
Capital DisclosuresCaseCase
ndash The Group actively and regularly reviews and manages its capital structure to ensure optimal capital structure and shareholder returns taking into consideration the future capital requirements of the Group and capital efficiency helliphellip
ndash The Group adopts a dividend policy helliphellip while retaining 10 per cent of the profit as capital of the Group for future use
ndash The Group has set aside $1500 million of retained earnings for the purpose of strengthening the risk management regime of the clearing houses and supporting their roles as central counterparties
ndash As in prior years the Group monitors capital by reviewing the level of capital that is at the disposal of the Group (ldquoadjusted capitalrdquo) Adjusted capital comprises all components of shareholdersrsquo equity other than the hedging reserve relating to cash flow hedges designated reserves and investment revaluation reserve helliphellip
bull Early adopted capital disclosure in 2005 and itsannual report states that (extract only)
58
copy 2005-07 Nelson 115
Capital Disclosures ndash Transition
bull An entity shall apply the requirements of capital disclosure for
ndash annual periods beginning on or after 1 January 2007
bull Early application is encouraged
copy 2005-07 Nelson 116
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk
59
copy 2005-07 Nelson 117
QampA SessionQampA SessionQampA Session
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk
37
copy 2005-07 Nelson 73
Current Assets and LiabilitiesExampleExample
Can the following be classified as current assetsbull 3-month fixed deposits pledged to a bank to secure
a mortgage loan of 5 yearsbull 2-year fixed deposits with a bank
Can the following be classified as current assetsbull 3-month fixed deposits pledged to a bank to secure
a mortgage loan of 5 yearsbull 2-year fixed deposits with a bank
Can the following be classified as non-current liabilitiesbull 5-year term loan matured after year end but renewed
for another 5 years after year end (before the issuanceof the financial statements)
bull 2-year term loan to be matured with 12 months and theentity has a right to renew for another 2 years
Can the following be classified as non-current liabilitiesbull 5-year term loan matured after year end but renewed
for another 5 years after year end (before the issuanceof the financial statements)
bull 2-year term loan to be matured with 12 months and theentity has a right to renew for another 2 years
timestimes
times
radic
copy 2005-07 Nelson 74
Balance Sheetbull As a minimum the face of the balance sheet shall
include line items that present the following amountsa) property plant and equipmentb) investment propertyc) intangible assetsd) financial assets (excl amounts shown under (e) (h) and (I))e) investments accounted for using the equity methodf) biological assetsg) inventoriesh) trade and other receivablesi) cash and cash equivalentsj) trade and other payablesk) provisionsl) financial liabilities (excl amounts shown under (j) and (k))m) liabilities and assets for current tax as defined in HKAS 12 Income Taxesn) deferred tax liabilities and deferred tax assets as defined in HKAS 12o) minority interest presented within equity andp) issued capital and reserves attributable to equity holders of the parent
38
copy 2005-07 Nelson 75
Balance Sheetbull The face of the balance sheet shall also include line
items that present the following amountsa) The total of assets classified as held for sale and
assets included in disposal groups classified as held for sale in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations and
b) Liabilities included in disposal groups classified as held for sale in accordance with IFRS 5
copy 2005-07 Nelson 76
Balance Sheetbull Additional line items headings and subtotals shall
be presented on the face of the balance sheet when such presentation is relevant to an understanding of the entityrsquos financial position
bull When an entity presents current and non-current assets and current and non-current liabilities as separate classifications on the face of its balance sheet ndash it shall not classify deferred tax assets
(liabilities) as current assets (liabilities)
39
copy 2005-07 Nelson 77
Balance Sheet
bull The use of different measurement bases for different classes of assets suggests that their nature or function differs and therefore that they should be presented as separate line itemsndash For example different classes of property plant and
equipment can be carried atbull Cost orbull Revalued amountsin accordance with IAS 16 PPE
In the past it use ldquomay needrdquoIn the past it use ldquomay needrdquo
copy 2005-07 Nelson 78
Balance Sheet
Galaxy Entertainment Group LimitedConsolidated balance sheet as at 31122005
CaseCase
40
copy 2005-07 Nelson 79
Balance Sheet
Melco Development Limited (新濠國際發展有限公司)Consolidated balance sheet as at 31122005
CaseCase
copy 2005-07 Nelson 80
Income Statement Minimum requirements on the face of the income statementbull As a minimum the face of the income statement shall include line items
that present the following amounts for the perioda) revenueb) finance costsc) share of the profit or loss of associates and joint ventures accounted
for using the equity methodd) pre-tax gain or loss recognised on the disposal of assets or
settlement of liabilities attributable to discontinuing operationse) tax expense andf) profit or loss
41
copy 2005-07 Nelson 81
Income Statement bull The following items shall be disclosed on the face of the income
statement as allocations of profit or loss for the perioda) Profit or loss attributable to minority interest andb) Profit or loss attributable to equity holders of the parent
A similar requirement has been added for the statement of changes in equity and such allocated amounts are not to be presented as items of income or expense
copy 2005-07 Nelson 82
Income Statement
Melco Dev LtdConsolidated income statementas at 31122005
CaseCase
42
copy 2005-07 Nelson 83
Income Statement bull Not require to disclose the results of operating
activities as a line item on the face of the incomestatement
bull An entity shall not present any items of income and expense as extraordinary items either onthe face of the income statements or in the notes
Entities canrsquot use itEntities canrsquot use it
Entities can still show itEntities can still show it
copy 2005-07 Nelson 84
Income Statement Either on the face of the income statement or in the notesbull An entity shall present an analysis of expenses using a classification
based on eitherbull the nature of expenses orbull their function within the entity
whichever provides information that is reliable and more relevant
bull Entities classifying expenses by function shall disclose additional information on the nature of expenses includingbull depreciation and amortisation expense and bull employee benefits expense
43
copy 2005-07 Nelson 85
Income StatementCaseCase
Nature or FunctionNature or Nature or FunctionFunction
copy 2005-07 Nelson 86
Statement of Changes in Equity bull An entity shall present a statement of changes in equity showing on the
face of the statementa) profit or loss for the period b) each item of income and expense for the period that as required by
IFRSs is recognised directly in equity and the total of these itemsc) total income and expense for the period (calculated as the sum of (a) and
(b)) showing separately the total amounts attributablebull to equity holders of the parent andbull to minority interest and
d) for each component of equity the effects of changes in accounting policies and corrections of errors recognised in accordance with IAS 8
Any ChangeAny Change
A revised requirementbull A statement of changes in equity that comprises only these items
shall be titled a statement of recognised income and expenses
A revised requirementbull A statement of changes in equity that comprises only these items
shall be titled a statement of recognised income and expenses
44
copy 2005-07 Nelson 87
Statement of Changes in Equity bull An entity shall also present either on the face of the
statement of changes in equity or in the notesa) the amounts of transactions with equity holders acting in
their capacity as equity holders showing separately distributions to equity holders
b) the balance of retained earnings (ie accumulated profit or loss) at the beginning of the period and at the balance sheet date and the changes during the period and
c) a reconciliation between the carrying amount of each class of contributed equity and each reserve at the beginning and the end of the period separately disclosing each change
copy 2005-07 Nelson 88
Statement of Changes in Equity
Consolidated SCE as at 31122005
CaseCase
45
copy 2005-07 Nelson 89
Notes Structure (an entity is required to disclose the following)
bull The notes shalla) present information about the basis of preparation of the financial statements
and the specific accounting policies usedb) disclose the information required by HKFRSs that is not presented on the
face of the balance sheet income statement statement of changes in equity or cash flow statement and
c) provide additional information that is not presented on the face of the balance sheet income statement statement of changes in equity or cash flow statement but is relevant to an understanding of any of them
bull Notes shall as far as practicable be presented in a systematic manner bull Each item on the face of the balance sheet income statement statement
of changes in equity and cash flow statement shall be cross-referencedto any related information in the notes
copy 2005-07 Nelson 90
Notes Disclosures (an entity is required to disclose the following)
bull Disclosure of accounting policiesAn entity shall disclose in the summary of significant accounting policiesa) the measurement basis (or bases) used in preparing the financial
statements andb) the other accounting policies used that are relevant to an understanding of
the financial statements
46
copy 2005-07 Nelson 91
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)ndash The financial statements have been prepared in
accordance with Hong Kong Financial Reporting Standards (lsquolsquoHKFRSrsquorsquo) issued by the Hong Kong Institute of Certified Public Accountants bull under the historical cost convention as modified by the
revaluation of investment properties available-for-sale financial assets derivative financial instruments and other investments which are carried at fair values helliphellip
ndash The principal accounting policies applied in the preparation of these financial statements are set out below These policies have been consistently applied to all the years presented except for those stated in note 2(a) above
copy 2005-07 Nelson 92
Notes Disclosures (an entity is required to disclose the following)
bull Disclosure of accounting policiesndash The judgements apart from those involving estimations management has
madebull in the process of applying the entityrsquos accounting policies that have the
most significant effect on the amounts recognised in the financial statements (in the summary of significant accounting policies or other notes)
Examples ndash Management makes judgements in determininga) whether financial assets are held-to-maturity investmentsb) when substantially all the significant risks and rewards of
ownership of financial assets and lease assets are transferred to other entities
c) whether in substance particular sales of goods are financing arrangements and therefore do not give rise to revenue and
d) whether the substance of the relationship between the entity and a special purpose entity indicates that the special purpose entity is controlled by the entity
Examples ndash Management makes judgements in determininga) whether financial assets are held-to-maturity investmentsb) when substantially all the significant risks and rewards of
ownership of financial assets and lease assets are transferred to other entities
c) whether in substance particular sales of goods are financing arrangements and therefore do not give rise to revenue and
d) whether the substance of the relationship between the entity and a special purpose entity indicates that the special purpose entity is controlled by the entity
47
copy 2005-07 Nelson 93
Notes Disclosures (an entity is required to disclose the following)
bull Key sources of estimation uncertaintyndash Information about the key assumptions concerning the future and
other key sources of estimation uncertainty at the balance sheet datebull that have a significant risk of causing a material adjustment to the
carrying amounts of assets and liabilities within the next financial yearndash In respect of those assets and liabilities the notes shall include details of
a) their nature andb) their carrying amount as at the balance sheet date
Examples ndash in the absence of recently observed market prices used to measure the following assets and liabilities future-oriented estimates are necessary to measurebull the recoverable amount of classes of PPEbull the effect of technological obsolescence on inventories
Estimates involve assumptions about such items asbull the risk adjustment to cash flows or discount rates usedbull future changes in salaries and in prices affecting other costs
Examples ndash in the absence of recently observed market prices used to measure the following assets and liabilities future-oriented estimates are necessary to measurebull the recoverable amount of classes of PPEbull the effect of technological obsolescence on inventories
Estimates involve assumptions about such items asbull the risk adjustment to cash flows or discount rates usedbull future changes in salaries and in prices affecting other costs
copy 2005-07 Nelson 94
Notes
Esprit Holdings LimitedEsprit Holdings Limitedbull Critical Accounting Estimates and Judgements
ndash Estimates and judgements are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonableunder the circumstances
ndash Critical accounting estimates and assumptionsbull The Group makes estimates and assumptions concerning
the future The resulting accounting estimates will by definition seldom equal the related actual results
bull The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below helliphellip (including (1) useful life and impairment of trademarks and (2) income taxes)
CaseCase
48
copy 2005-07 Nelson 95
Notes
Melco Development Limited (新濠國際發展有限公司)Notes to the financial statements for the year ended 31122005ndash The key assumptions concerning the future and other key sources
of estimation uncertainty at the balance sheet date that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below helliphellip(The issues discussed includebull Allowances for inventories bull Estimated impairment of goodwill Income taxes)
CaseCase
copy 2005-07 Nelson 96
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)ndash Estimates and judgements used in preparing the
financial statements are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonable under the circumstances
ndash The Group makes estimates and assumptionsconcerning the future
ndash The resulting accounting estimates will by definition seldom equal the related actual results
ndash The estimates and assumptions that have a significant effect on the carrying amounts of assets and liabilities are discussed below hellip (including impairment of goodwill impairment of gaming
licence Useful lives of property plant and equipment fair value of investment properties hellip)
49
copy 2005-07 Nelson 97
Notes Disclosures (an entity is required to disclose the following)
bull Other disclosuresAn entity shall disclose in the notesa) the amount of dividends proposed or declared before the
financial statements were authorised for issue but not recognised as a distribution to equity holders during the period and the related amount per share(HK incorporated companies are required to show the aggregate amount which is recommended for distribution by way of dividend under a separate heading(s) in their balance sheet (HK Co Ord 10th Sch para 9(1)(e)) and
b) the amount of any cumulative preference dividends not recognised
copy 2005-07 Nelson 98
Notes Disclosures (an entity is required to disclose the following)
An entity shall disclose the following if not disclosedelsewhere in information published with the financial statementsa) the domicile and legal form of the entity
its country of incorporation andthe address of its registered office(or principal place of business if different from the registered office)
b) a description of the nature of the entityrsquos operations and its principal activities and
c) the name of the parent and the ultimate parent of the group
ldquoshall discloserdquo now instead of ldquoencouraged to discloserdquo
ldquoshall discloserdquo now instead of ldquoencouraged to discloserdquo
bull Other disclosures
Any specialAny special
50
copy 2005-07 Nelson 99
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)bull The principal activities of Galaxy Entertainment Group
Ltd (the lsquolsquoCompanyrsquorsquo) (formerly known as K WahConstruction Materials Ltd) and its subsidiaries (together the lsquolsquoGrouprsquorsquo) are tondash operate in casino games of chance or games of other forms
in Macau (and) manufacture sale and distribution of construction materials in HK Macau and Mainland China
bull The Company is ndash a limited liability company incorporated in Hong Kong and ndash has its listing on the Main Board of The Stock Exchange of
Hong Kong Limitedbull The address of its registered office and its principal place
of business is Room 1606 16th Floor Hutchison House 10 Harcourt Road Central HK
copy 2005-07 Nelson 100
Effective Date
bull An entity shall apply IAS 1 for annual periods beginning on or after 1 Jan 2005
ndash Earlier application is encouragedndash If an entity applies IAS 1 for an earlier period it shall
disclose this factbull For the amendments relating to the Statement of
Changes in Equityndash An entity shall apply it for annual periods beginning on
or after 1 Jan 2006ndash If an entity applies the amendments to IAS 19
Employee Benefits ndash Actuarial Gains and Losses Group Plans and Disclosures for an earlier period that amendment shall be applied for that earlier period
51
copy 2005-07 Nelson 101
Todayrsquos Agenda
Capital Disclosures (Amendments to IAS 1)
Capital Disclosures (Amendments to IAS 1)
copy 2005-07 Nelson 102
Capital Disclosures ndash For 2007
52
copy 2005-07 Nelson 103
Capital Disclosures
What is capital Is it helliphellip
CapitalCapital AssetsAssets LiabilitiesLiabilities= ndash
bull IAS 1BC47 considers ldquowhether an entity can have a view of capital that differs from what IFRSs define as equityrdquo
bull It further clarifies that although for the purposes of this disclosure capital would often equate with equity as defined in IFRSsndash it might also include or exclude some components
bull It also noted that the capital disclosure in IAS 1 is intended to give entities the opportunity to describendash how they view the components of capital they manage if this is
different from what IFRSs define as equity helliphellip
copy 2005-07 Nelson 104
EquityEquityEquity AssetsAssets LiabilitiesLiabilities= ndash
Capital Disclosures
Based on the Framework amp IFRSs the accounting equation should be
CapitalCapital AssetsAssets LiabilitiesLiabilities= ndash
bull An entityrsquos capital may be part of its equity plus part of its liabilities depending on how it manage ldquoits capitalrdquo helliphellip
53
copy 2005-07 Nelson 105
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowinga) qualitative information about its objectives policies and processes for
managing capital including (but not limited to)i) a description of what it manages as capitalii) when an entity is subject to externally imposed capital requirements
the nature of those requirements and how those requirements are incorporated into the management of capital and
iii) how it is meeting its objectives for managing capital
bull To comply with the capital disclosures the entity discloses thefollowinga) qualitative information about its objectives policies and processes for
managing capital including (but not limited to)i) a description of what it manages as capitalii) when an entity is subject to externally imposed capital requirements
the nature of those requirements and how those requirements are incorporated into the management of capital and
iii) how it is meeting its objectives for managing capital
copy 2005-07 Nelson 106
Capital Disclosures
Example disclosurebull The Grouprsquos objectives when managing capital are
ndash to safeguard the entityrsquos ability to continue as a going concern
bull so that it can continue to provide returns for shareholders and benefits for other stakeholders and
ndash to provide an adequate return to shareholders by pricing products and services commensurately with the level of risk
bull The Group sets the amount of capital in proportion to risk
ExampleExample
ObjectivesObjectives
54
copy 2005-07 Nelson 107
Capital Disclosures
bull The Group manages the capital structure and makes adjustments to it in the light ofndash changes in economic conditions and ndash the risk characteristics of the underlying assets
bull In order to maintain or adjust the capital structure the Group mayndash adjust the amount of dividends paid to shareholders ndash return capital to shareholders ndash issue new shares or ndash sell assets to reduce debt
ExampleExample
Example disclosure
HowHow
copy 2005-07 Nelson 108
Capital Disclosures
bull Consistently with others in the industry the Group monitors capital on the basis of ndash the debt-to-adjusted capital ratio
bull This ratio is calculated as net debt divide adjusted capital
ExampleExample
Example disclosure
HowHow
bull Net debt is calculated as ndash Total debt (as shown in the
balance sheet)ndash Less cash amp cash equivalents
bull Net debt is calculated as ndash Total debt (as shown in the
balance sheet)ndash Less cash amp cash equivalents
bull Adjusted capital ndash comprises all components of
equity (ie share capital share premium minority interest retained earnings and revaluation reserve) ndash other than amounts
recognised in equity relating to cash flow hedges and
ndash includes some forms of subordinated debt
bull Adjusted capital ndash comprises all components of
equity (ie share capital share premium minority interest retained earnings and revaluation reserve) ndash other than amounts
recognised in equity relating to cash flow hedges and
ndash includes some forms of subordinated debt
55
copy 2005-07 Nelson 109
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowing
bull To comply with the capital disclosures the entity discloses thefollowingb) summary quantitative data about what it manages as capital
Some entities regard some financial liabilities (eg some forms of subordinated debt) as part of capitalOther entities regard capital as excluding some components of equity (eg components arising from cash flow hedges)
c) any changes in (a) and (b) from the previous period
copy 2005-07 Nelson 110
Capital Disclosures
Example disclosure (continued from previous example)
ExampleExample
bull During 20X4 the Grouprsquos strategy which was unchanged from 20X3 was to maintain the debt-to-adjusted capital ratio at the lower end of the range 61 to 71 in order to secure access to finance at a reasonable cost by maintaining a BB credit rating The debt-to-adjusted capital ratios at 31 December 20X4 and at 31 December 20X3 were as follows
3112X4 ($rsquoM) 3112X3 ($rsquoM) Total debt 1000 1100 Less cash and cash equivalents (90) (150)Net debt 910 950
Total equity 110 105 Add subordinated debt instruments 38 38 Less amounts recognised in equity
relating to cash flow hedges (10) (5)Adjusted capital 138 138
Debt-to-adjusted capital ratio 66 69
56
copy 2005-07 Nelson 111
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowing
bull To comply with the capital disclosures the entity discloses thefollowingd) whether during the period it complied with any externally imposed capital
requirements to which it is subjecte) when the entity has not complied with such externally imposed capital
requirements the consequences of such non-complianceThese disclosures shall be based on the information provided internally to the entityrsquos key management personnel
copy 2005-07 Nelson 112
Capital DisclosuresExampleExample
Example disclosurebull Entity A filed its quarterly regulatory capital return for
30 September 20X7 on 20 October 20X7 bull At that date Entity Arsquos regulatory capital was below
the capital requirement imposed by Regulator B by $1 million
bull As a result Entity A was required to submit a plan to the regulator indicating how it would increase its regulatory capital to the amount required
bull Entity A submitted a plan that entailed selling part of its unquoted equities portfolio with a carrying amount of $115 million in the fourth quarter of 20X7
bull In the fourth quarter of 20X7 Entity A sold its fixed interest investment portfolio for $126 million and met its regulatory capital requirement
For example SFC or banks
For example SFC or banks
57
copy 2005-07 Nelson 113
Capital DisclosuresCaseCase
bull Early adopted capital disclosure in 2005 and itsannual report states that (extract only)ndash The Grouprsquos objectives when managing capital are
bull To safeguard the Grouprsquos ability to continue as a going concern so that it continues to provide returns for shareholders and benefits for other stakeholders
bull To support the Grouprsquos stability and growth andbull To provide capital for the purpose of strengthening the
Grouprsquos risk management capability
copy 2005-07 Nelson 114
Capital DisclosuresCaseCase
ndash The Group actively and regularly reviews and manages its capital structure to ensure optimal capital structure and shareholder returns taking into consideration the future capital requirements of the Group and capital efficiency helliphellip
ndash The Group adopts a dividend policy helliphellip while retaining 10 per cent of the profit as capital of the Group for future use
ndash The Group has set aside $1500 million of retained earnings for the purpose of strengthening the risk management regime of the clearing houses and supporting their roles as central counterparties
ndash As in prior years the Group monitors capital by reviewing the level of capital that is at the disposal of the Group (ldquoadjusted capitalrdquo) Adjusted capital comprises all components of shareholdersrsquo equity other than the hedging reserve relating to cash flow hedges designated reserves and investment revaluation reserve helliphellip
bull Early adopted capital disclosure in 2005 and itsannual report states that (extract only)
58
copy 2005-07 Nelson 115
Capital Disclosures ndash Transition
bull An entity shall apply the requirements of capital disclosure for
ndash annual periods beginning on or after 1 January 2007
bull Early application is encouraged
copy 2005-07 Nelson 116
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk
59
copy 2005-07 Nelson 117
QampA SessionQampA SessionQampA Session
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk
38
copy 2005-07 Nelson 75
Balance Sheetbull The face of the balance sheet shall also include line
items that present the following amountsa) The total of assets classified as held for sale and
assets included in disposal groups classified as held for sale in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations and
b) Liabilities included in disposal groups classified as held for sale in accordance with IFRS 5
copy 2005-07 Nelson 76
Balance Sheetbull Additional line items headings and subtotals shall
be presented on the face of the balance sheet when such presentation is relevant to an understanding of the entityrsquos financial position
bull When an entity presents current and non-current assets and current and non-current liabilities as separate classifications on the face of its balance sheet ndash it shall not classify deferred tax assets
(liabilities) as current assets (liabilities)
39
copy 2005-07 Nelson 77
Balance Sheet
bull The use of different measurement bases for different classes of assets suggests that their nature or function differs and therefore that they should be presented as separate line itemsndash For example different classes of property plant and
equipment can be carried atbull Cost orbull Revalued amountsin accordance with IAS 16 PPE
In the past it use ldquomay needrdquoIn the past it use ldquomay needrdquo
copy 2005-07 Nelson 78
Balance Sheet
Galaxy Entertainment Group LimitedConsolidated balance sheet as at 31122005
CaseCase
40
copy 2005-07 Nelson 79
Balance Sheet
Melco Development Limited (新濠國際發展有限公司)Consolidated balance sheet as at 31122005
CaseCase
copy 2005-07 Nelson 80
Income Statement Minimum requirements on the face of the income statementbull As a minimum the face of the income statement shall include line items
that present the following amounts for the perioda) revenueb) finance costsc) share of the profit or loss of associates and joint ventures accounted
for using the equity methodd) pre-tax gain or loss recognised on the disposal of assets or
settlement of liabilities attributable to discontinuing operationse) tax expense andf) profit or loss
41
copy 2005-07 Nelson 81
Income Statement bull The following items shall be disclosed on the face of the income
statement as allocations of profit or loss for the perioda) Profit or loss attributable to minority interest andb) Profit or loss attributable to equity holders of the parent
A similar requirement has been added for the statement of changes in equity and such allocated amounts are not to be presented as items of income or expense
copy 2005-07 Nelson 82
Income Statement
Melco Dev LtdConsolidated income statementas at 31122005
CaseCase
42
copy 2005-07 Nelson 83
Income Statement bull Not require to disclose the results of operating
activities as a line item on the face of the incomestatement
bull An entity shall not present any items of income and expense as extraordinary items either onthe face of the income statements or in the notes
Entities canrsquot use itEntities canrsquot use it
Entities can still show itEntities can still show it
copy 2005-07 Nelson 84
Income Statement Either on the face of the income statement or in the notesbull An entity shall present an analysis of expenses using a classification
based on eitherbull the nature of expenses orbull their function within the entity
whichever provides information that is reliable and more relevant
bull Entities classifying expenses by function shall disclose additional information on the nature of expenses includingbull depreciation and amortisation expense and bull employee benefits expense
43
copy 2005-07 Nelson 85
Income StatementCaseCase
Nature or FunctionNature or Nature or FunctionFunction
copy 2005-07 Nelson 86
Statement of Changes in Equity bull An entity shall present a statement of changes in equity showing on the
face of the statementa) profit or loss for the period b) each item of income and expense for the period that as required by
IFRSs is recognised directly in equity and the total of these itemsc) total income and expense for the period (calculated as the sum of (a) and
(b)) showing separately the total amounts attributablebull to equity holders of the parent andbull to minority interest and
d) for each component of equity the effects of changes in accounting policies and corrections of errors recognised in accordance with IAS 8
Any ChangeAny Change
A revised requirementbull A statement of changes in equity that comprises only these items
shall be titled a statement of recognised income and expenses
A revised requirementbull A statement of changes in equity that comprises only these items
shall be titled a statement of recognised income and expenses
44
copy 2005-07 Nelson 87
Statement of Changes in Equity bull An entity shall also present either on the face of the
statement of changes in equity or in the notesa) the amounts of transactions with equity holders acting in
their capacity as equity holders showing separately distributions to equity holders
b) the balance of retained earnings (ie accumulated profit or loss) at the beginning of the period and at the balance sheet date and the changes during the period and
c) a reconciliation between the carrying amount of each class of contributed equity and each reserve at the beginning and the end of the period separately disclosing each change
copy 2005-07 Nelson 88
Statement of Changes in Equity
Consolidated SCE as at 31122005
CaseCase
45
copy 2005-07 Nelson 89
Notes Structure (an entity is required to disclose the following)
bull The notes shalla) present information about the basis of preparation of the financial statements
and the specific accounting policies usedb) disclose the information required by HKFRSs that is not presented on the
face of the balance sheet income statement statement of changes in equity or cash flow statement and
c) provide additional information that is not presented on the face of the balance sheet income statement statement of changes in equity or cash flow statement but is relevant to an understanding of any of them
bull Notes shall as far as practicable be presented in a systematic manner bull Each item on the face of the balance sheet income statement statement
of changes in equity and cash flow statement shall be cross-referencedto any related information in the notes
copy 2005-07 Nelson 90
Notes Disclosures (an entity is required to disclose the following)
bull Disclosure of accounting policiesAn entity shall disclose in the summary of significant accounting policiesa) the measurement basis (or bases) used in preparing the financial
statements andb) the other accounting policies used that are relevant to an understanding of
the financial statements
46
copy 2005-07 Nelson 91
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)ndash The financial statements have been prepared in
accordance with Hong Kong Financial Reporting Standards (lsquolsquoHKFRSrsquorsquo) issued by the Hong Kong Institute of Certified Public Accountants bull under the historical cost convention as modified by the
revaluation of investment properties available-for-sale financial assets derivative financial instruments and other investments which are carried at fair values helliphellip
ndash The principal accounting policies applied in the preparation of these financial statements are set out below These policies have been consistently applied to all the years presented except for those stated in note 2(a) above
copy 2005-07 Nelson 92
Notes Disclosures (an entity is required to disclose the following)
bull Disclosure of accounting policiesndash The judgements apart from those involving estimations management has
madebull in the process of applying the entityrsquos accounting policies that have the
most significant effect on the amounts recognised in the financial statements (in the summary of significant accounting policies or other notes)
Examples ndash Management makes judgements in determininga) whether financial assets are held-to-maturity investmentsb) when substantially all the significant risks and rewards of
ownership of financial assets and lease assets are transferred to other entities
c) whether in substance particular sales of goods are financing arrangements and therefore do not give rise to revenue and
d) whether the substance of the relationship between the entity and a special purpose entity indicates that the special purpose entity is controlled by the entity
Examples ndash Management makes judgements in determininga) whether financial assets are held-to-maturity investmentsb) when substantially all the significant risks and rewards of
ownership of financial assets and lease assets are transferred to other entities
c) whether in substance particular sales of goods are financing arrangements and therefore do not give rise to revenue and
d) whether the substance of the relationship between the entity and a special purpose entity indicates that the special purpose entity is controlled by the entity
47
copy 2005-07 Nelson 93
Notes Disclosures (an entity is required to disclose the following)
bull Key sources of estimation uncertaintyndash Information about the key assumptions concerning the future and
other key sources of estimation uncertainty at the balance sheet datebull that have a significant risk of causing a material adjustment to the
carrying amounts of assets and liabilities within the next financial yearndash In respect of those assets and liabilities the notes shall include details of
a) their nature andb) their carrying amount as at the balance sheet date
Examples ndash in the absence of recently observed market prices used to measure the following assets and liabilities future-oriented estimates are necessary to measurebull the recoverable amount of classes of PPEbull the effect of technological obsolescence on inventories
Estimates involve assumptions about such items asbull the risk adjustment to cash flows or discount rates usedbull future changes in salaries and in prices affecting other costs
Examples ndash in the absence of recently observed market prices used to measure the following assets and liabilities future-oriented estimates are necessary to measurebull the recoverable amount of classes of PPEbull the effect of technological obsolescence on inventories
Estimates involve assumptions about such items asbull the risk adjustment to cash flows or discount rates usedbull future changes in salaries and in prices affecting other costs
copy 2005-07 Nelson 94
Notes
Esprit Holdings LimitedEsprit Holdings Limitedbull Critical Accounting Estimates and Judgements
ndash Estimates and judgements are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonableunder the circumstances
ndash Critical accounting estimates and assumptionsbull The Group makes estimates and assumptions concerning
the future The resulting accounting estimates will by definition seldom equal the related actual results
bull The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below helliphellip (including (1) useful life and impairment of trademarks and (2) income taxes)
CaseCase
48
copy 2005-07 Nelson 95
Notes
Melco Development Limited (新濠國際發展有限公司)Notes to the financial statements for the year ended 31122005ndash The key assumptions concerning the future and other key sources
of estimation uncertainty at the balance sheet date that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below helliphellip(The issues discussed includebull Allowances for inventories bull Estimated impairment of goodwill Income taxes)
CaseCase
copy 2005-07 Nelson 96
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)ndash Estimates and judgements used in preparing the
financial statements are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonable under the circumstances
ndash The Group makes estimates and assumptionsconcerning the future
ndash The resulting accounting estimates will by definition seldom equal the related actual results
ndash The estimates and assumptions that have a significant effect on the carrying amounts of assets and liabilities are discussed below hellip (including impairment of goodwill impairment of gaming
licence Useful lives of property plant and equipment fair value of investment properties hellip)
49
copy 2005-07 Nelson 97
Notes Disclosures (an entity is required to disclose the following)
bull Other disclosuresAn entity shall disclose in the notesa) the amount of dividends proposed or declared before the
financial statements were authorised for issue but not recognised as a distribution to equity holders during the period and the related amount per share(HK incorporated companies are required to show the aggregate amount which is recommended for distribution by way of dividend under a separate heading(s) in their balance sheet (HK Co Ord 10th Sch para 9(1)(e)) and
b) the amount of any cumulative preference dividends not recognised
copy 2005-07 Nelson 98
Notes Disclosures (an entity is required to disclose the following)
An entity shall disclose the following if not disclosedelsewhere in information published with the financial statementsa) the domicile and legal form of the entity
its country of incorporation andthe address of its registered office(or principal place of business if different from the registered office)
b) a description of the nature of the entityrsquos operations and its principal activities and
c) the name of the parent and the ultimate parent of the group
ldquoshall discloserdquo now instead of ldquoencouraged to discloserdquo
ldquoshall discloserdquo now instead of ldquoencouraged to discloserdquo
bull Other disclosures
Any specialAny special
50
copy 2005-07 Nelson 99
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)bull The principal activities of Galaxy Entertainment Group
Ltd (the lsquolsquoCompanyrsquorsquo) (formerly known as K WahConstruction Materials Ltd) and its subsidiaries (together the lsquolsquoGrouprsquorsquo) are tondash operate in casino games of chance or games of other forms
in Macau (and) manufacture sale and distribution of construction materials in HK Macau and Mainland China
bull The Company is ndash a limited liability company incorporated in Hong Kong and ndash has its listing on the Main Board of The Stock Exchange of
Hong Kong Limitedbull The address of its registered office and its principal place
of business is Room 1606 16th Floor Hutchison House 10 Harcourt Road Central HK
copy 2005-07 Nelson 100
Effective Date
bull An entity shall apply IAS 1 for annual periods beginning on or after 1 Jan 2005
ndash Earlier application is encouragedndash If an entity applies IAS 1 for an earlier period it shall
disclose this factbull For the amendments relating to the Statement of
Changes in Equityndash An entity shall apply it for annual periods beginning on
or after 1 Jan 2006ndash If an entity applies the amendments to IAS 19
Employee Benefits ndash Actuarial Gains and Losses Group Plans and Disclosures for an earlier period that amendment shall be applied for that earlier period
51
copy 2005-07 Nelson 101
Todayrsquos Agenda
Capital Disclosures (Amendments to IAS 1)
Capital Disclosures (Amendments to IAS 1)
copy 2005-07 Nelson 102
Capital Disclosures ndash For 2007
52
copy 2005-07 Nelson 103
Capital Disclosures
What is capital Is it helliphellip
CapitalCapital AssetsAssets LiabilitiesLiabilities= ndash
bull IAS 1BC47 considers ldquowhether an entity can have a view of capital that differs from what IFRSs define as equityrdquo
bull It further clarifies that although for the purposes of this disclosure capital would often equate with equity as defined in IFRSsndash it might also include or exclude some components
bull It also noted that the capital disclosure in IAS 1 is intended to give entities the opportunity to describendash how they view the components of capital they manage if this is
different from what IFRSs define as equity helliphellip
copy 2005-07 Nelson 104
EquityEquityEquity AssetsAssets LiabilitiesLiabilities= ndash
Capital Disclosures
Based on the Framework amp IFRSs the accounting equation should be
CapitalCapital AssetsAssets LiabilitiesLiabilities= ndash
bull An entityrsquos capital may be part of its equity plus part of its liabilities depending on how it manage ldquoits capitalrdquo helliphellip
53
copy 2005-07 Nelson 105
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowinga) qualitative information about its objectives policies and processes for
managing capital including (but not limited to)i) a description of what it manages as capitalii) when an entity is subject to externally imposed capital requirements
the nature of those requirements and how those requirements are incorporated into the management of capital and
iii) how it is meeting its objectives for managing capital
bull To comply with the capital disclosures the entity discloses thefollowinga) qualitative information about its objectives policies and processes for
managing capital including (but not limited to)i) a description of what it manages as capitalii) when an entity is subject to externally imposed capital requirements
the nature of those requirements and how those requirements are incorporated into the management of capital and
iii) how it is meeting its objectives for managing capital
copy 2005-07 Nelson 106
Capital Disclosures
Example disclosurebull The Grouprsquos objectives when managing capital are
ndash to safeguard the entityrsquos ability to continue as a going concern
bull so that it can continue to provide returns for shareholders and benefits for other stakeholders and
ndash to provide an adequate return to shareholders by pricing products and services commensurately with the level of risk
bull The Group sets the amount of capital in proportion to risk
ExampleExample
ObjectivesObjectives
54
copy 2005-07 Nelson 107
Capital Disclosures
bull The Group manages the capital structure and makes adjustments to it in the light ofndash changes in economic conditions and ndash the risk characteristics of the underlying assets
bull In order to maintain or adjust the capital structure the Group mayndash adjust the amount of dividends paid to shareholders ndash return capital to shareholders ndash issue new shares or ndash sell assets to reduce debt
ExampleExample
Example disclosure
HowHow
copy 2005-07 Nelson 108
Capital Disclosures
bull Consistently with others in the industry the Group monitors capital on the basis of ndash the debt-to-adjusted capital ratio
bull This ratio is calculated as net debt divide adjusted capital
ExampleExample
Example disclosure
HowHow
bull Net debt is calculated as ndash Total debt (as shown in the
balance sheet)ndash Less cash amp cash equivalents
bull Net debt is calculated as ndash Total debt (as shown in the
balance sheet)ndash Less cash amp cash equivalents
bull Adjusted capital ndash comprises all components of
equity (ie share capital share premium minority interest retained earnings and revaluation reserve) ndash other than amounts
recognised in equity relating to cash flow hedges and
ndash includes some forms of subordinated debt
bull Adjusted capital ndash comprises all components of
equity (ie share capital share premium minority interest retained earnings and revaluation reserve) ndash other than amounts
recognised in equity relating to cash flow hedges and
ndash includes some forms of subordinated debt
55
copy 2005-07 Nelson 109
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowing
bull To comply with the capital disclosures the entity discloses thefollowingb) summary quantitative data about what it manages as capital
Some entities regard some financial liabilities (eg some forms of subordinated debt) as part of capitalOther entities regard capital as excluding some components of equity (eg components arising from cash flow hedges)
c) any changes in (a) and (b) from the previous period
copy 2005-07 Nelson 110
Capital Disclosures
Example disclosure (continued from previous example)
ExampleExample
bull During 20X4 the Grouprsquos strategy which was unchanged from 20X3 was to maintain the debt-to-adjusted capital ratio at the lower end of the range 61 to 71 in order to secure access to finance at a reasonable cost by maintaining a BB credit rating The debt-to-adjusted capital ratios at 31 December 20X4 and at 31 December 20X3 were as follows
3112X4 ($rsquoM) 3112X3 ($rsquoM) Total debt 1000 1100 Less cash and cash equivalents (90) (150)Net debt 910 950
Total equity 110 105 Add subordinated debt instruments 38 38 Less amounts recognised in equity
relating to cash flow hedges (10) (5)Adjusted capital 138 138
Debt-to-adjusted capital ratio 66 69
56
copy 2005-07 Nelson 111
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowing
bull To comply with the capital disclosures the entity discloses thefollowingd) whether during the period it complied with any externally imposed capital
requirements to which it is subjecte) when the entity has not complied with such externally imposed capital
requirements the consequences of such non-complianceThese disclosures shall be based on the information provided internally to the entityrsquos key management personnel
copy 2005-07 Nelson 112
Capital DisclosuresExampleExample
Example disclosurebull Entity A filed its quarterly regulatory capital return for
30 September 20X7 on 20 October 20X7 bull At that date Entity Arsquos regulatory capital was below
the capital requirement imposed by Regulator B by $1 million
bull As a result Entity A was required to submit a plan to the regulator indicating how it would increase its regulatory capital to the amount required
bull Entity A submitted a plan that entailed selling part of its unquoted equities portfolio with a carrying amount of $115 million in the fourth quarter of 20X7
bull In the fourth quarter of 20X7 Entity A sold its fixed interest investment portfolio for $126 million and met its regulatory capital requirement
For example SFC or banks
For example SFC or banks
57
copy 2005-07 Nelson 113
Capital DisclosuresCaseCase
bull Early adopted capital disclosure in 2005 and itsannual report states that (extract only)ndash The Grouprsquos objectives when managing capital are
bull To safeguard the Grouprsquos ability to continue as a going concern so that it continues to provide returns for shareholders and benefits for other stakeholders
bull To support the Grouprsquos stability and growth andbull To provide capital for the purpose of strengthening the
Grouprsquos risk management capability
copy 2005-07 Nelson 114
Capital DisclosuresCaseCase
ndash The Group actively and regularly reviews and manages its capital structure to ensure optimal capital structure and shareholder returns taking into consideration the future capital requirements of the Group and capital efficiency helliphellip
ndash The Group adopts a dividend policy helliphellip while retaining 10 per cent of the profit as capital of the Group for future use
ndash The Group has set aside $1500 million of retained earnings for the purpose of strengthening the risk management regime of the clearing houses and supporting their roles as central counterparties
ndash As in prior years the Group monitors capital by reviewing the level of capital that is at the disposal of the Group (ldquoadjusted capitalrdquo) Adjusted capital comprises all components of shareholdersrsquo equity other than the hedging reserve relating to cash flow hedges designated reserves and investment revaluation reserve helliphellip
bull Early adopted capital disclosure in 2005 and itsannual report states that (extract only)
58
copy 2005-07 Nelson 115
Capital Disclosures ndash Transition
bull An entity shall apply the requirements of capital disclosure for
ndash annual periods beginning on or after 1 January 2007
bull Early application is encouraged
copy 2005-07 Nelson 116
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk
59
copy 2005-07 Nelson 117
QampA SessionQampA SessionQampA Session
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk
39
copy 2005-07 Nelson 77
Balance Sheet
bull The use of different measurement bases for different classes of assets suggests that their nature or function differs and therefore that they should be presented as separate line itemsndash For example different classes of property plant and
equipment can be carried atbull Cost orbull Revalued amountsin accordance with IAS 16 PPE
In the past it use ldquomay needrdquoIn the past it use ldquomay needrdquo
copy 2005-07 Nelson 78
Balance Sheet
Galaxy Entertainment Group LimitedConsolidated balance sheet as at 31122005
CaseCase
40
copy 2005-07 Nelson 79
Balance Sheet
Melco Development Limited (新濠國際發展有限公司)Consolidated balance sheet as at 31122005
CaseCase
copy 2005-07 Nelson 80
Income Statement Minimum requirements on the face of the income statementbull As a minimum the face of the income statement shall include line items
that present the following amounts for the perioda) revenueb) finance costsc) share of the profit or loss of associates and joint ventures accounted
for using the equity methodd) pre-tax gain or loss recognised on the disposal of assets or
settlement of liabilities attributable to discontinuing operationse) tax expense andf) profit or loss
41
copy 2005-07 Nelson 81
Income Statement bull The following items shall be disclosed on the face of the income
statement as allocations of profit or loss for the perioda) Profit or loss attributable to minority interest andb) Profit or loss attributable to equity holders of the parent
A similar requirement has been added for the statement of changes in equity and such allocated amounts are not to be presented as items of income or expense
copy 2005-07 Nelson 82
Income Statement
Melco Dev LtdConsolidated income statementas at 31122005
CaseCase
42
copy 2005-07 Nelson 83
Income Statement bull Not require to disclose the results of operating
activities as a line item on the face of the incomestatement
bull An entity shall not present any items of income and expense as extraordinary items either onthe face of the income statements or in the notes
Entities canrsquot use itEntities canrsquot use it
Entities can still show itEntities can still show it
copy 2005-07 Nelson 84
Income Statement Either on the face of the income statement or in the notesbull An entity shall present an analysis of expenses using a classification
based on eitherbull the nature of expenses orbull their function within the entity
whichever provides information that is reliable and more relevant
bull Entities classifying expenses by function shall disclose additional information on the nature of expenses includingbull depreciation and amortisation expense and bull employee benefits expense
43
copy 2005-07 Nelson 85
Income StatementCaseCase
Nature or FunctionNature or Nature or FunctionFunction
copy 2005-07 Nelson 86
Statement of Changes in Equity bull An entity shall present a statement of changes in equity showing on the
face of the statementa) profit or loss for the period b) each item of income and expense for the period that as required by
IFRSs is recognised directly in equity and the total of these itemsc) total income and expense for the period (calculated as the sum of (a) and
(b)) showing separately the total amounts attributablebull to equity holders of the parent andbull to minority interest and
d) for each component of equity the effects of changes in accounting policies and corrections of errors recognised in accordance with IAS 8
Any ChangeAny Change
A revised requirementbull A statement of changes in equity that comprises only these items
shall be titled a statement of recognised income and expenses
A revised requirementbull A statement of changes in equity that comprises only these items
shall be titled a statement of recognised income and expenses
44
copy 2005-07 Nelson 87
Statement of Changes in Equity bull An entity shall also present either on the face of the
statement of changes in equity or in the notesa) the amounts of transactions with equity holders acting in
their capacity as equity holders showing separately distributions to equity holders
b) the balance of retained earnings (ie accumulated profit or loss) at the beginning of the period and at the balance sheet date and the changes during the period and
c) a reconciliation between the carrying amount of each class of contributed equity and each reserve at the beginning and the end of the period separately disclosing each change
copy 2005-07 Nelson 88
Statement of Changes in Equity
Consolidated SCE as at 31122005
CaseCase
45
copy 2005-07 Nelson 89
Notes Structure (an entity is required to disclose the following)
bull The notes shalla) present information about the basis of preparation of the financial statements
and the specific accounting policies usedb) disclose the information required by HKFRSs that is not presented on the
face of the balance sheet income statement statement of changes in equity or cash flow statement and
c) provide additional information that is not presented on the face of the balance sheet income statement statement of changes in equity or cash flow statement but is relevant to an understanding of any of them
bull Notes shall as far as practicable be presented in a systematic manner bull Each item on the face of the balance sheet income statement statement
of changes in equity and cash flow statement shall be cross-referencedto any related information in the notes
copy 2005-07 Nelson 90
Notes Disclosures (an entity is required to disclose the following)
bull Disclosure of accounting policiesAn entity shall disclose in the summary of significant accounting policiesa) the measurement basis (or bases) used in preparing the financial
statements andb) the other accounting policies used that are relevant to an understanding of
the financial statements
46
copy 2005-07 Nelson 91
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)ndash The financial statements have been prepared in
accordance with Hong Kong Financial Reporting Standards (lsquolsquoHKFRSrsquorsquo) issued by the Hong Kong Institute of Certified Public Accountants bull under the historical cost convention as modified by the
revaluation of investment properties available-for-sale financial assets derivative financial instruments and other investments which are carried at fair values helliphellip
ndash The principal accounting policies applied in the preparation of these financial statements are set out below These policies have been consistently applied to all the years presented except for those stated in note 2(a) above
copy 2005-07 Nelson 92
Notes Disclosures (an entity is required to disclose the following)
bull Disclosure of accounting policiesndash The judgements apart from those involving estimations management has
madebull in the process of applying the entityrsquos accounting policies that have the
most significant effect on the amounts recognised in the financial statements (in the summary of significant accounting policies or other notes)
Examples ndash Management makes judgements in determininga) whether financial assets are held-to-maturity investmentsb) when substantially all the significant risks and rewards of
ownership of financial assets and lease assets are transferred to other entities
c) whether in substance particular sales of goods are financing arrangements and therefore do not give rise to revenue and
d) whether the substance of the relationship between the entity and a special purpose entity indicates that the special purpose entity is controlled by the entity
Examples ndash Management makes judgements in determininga) whether financial assets are held-to-maturity investmentsb) when substantially all the significant risks and rewards of
ownership of financial assets and lease assets are transferred to other entities
c) whether in substance particular sales of goods are financing arrangements and therefore do not give rise to revenue and
d) whether the substance of the relationship between the entity and a special purpose entity indicates that the special purpose entity is controlled by the entity
47
copy 2005-07 Nelson 93
Notes Disclosures (an entity is required to disclose the following)
bull Key sources of estimation uncertaintyndash Information about the key assumptions concerning the future and
other key sources of estimation uncertainty at the balance sheet datebull that have a significant risk of causing a material adjustment to the
carrying amounts of assets and liabilities within the next financial yearndash In respect of those assets and liabilities the notes shall include details of
a) their nature andb) their carrying amount as at the balance sheet date
Examples ndash in the absence of recently observed market prices used to measure the following assets and liabilities future-oriented estimates are necessary to measurebull the recoverable amount of classes of PPEbull the effect of technological obsolescence on inventories
Estimates involve assumptions about such items asbull the risk adjustment to cash flows or discount rates usedbull future changes in salaries and in prices affecting other costs
Examples ndash in the absence of recently observed market prices used to measure the following assets and liabilities future-oriented estimates are necessary to measurebull the recoverable amount of classes of PPEbull the effect of technological obsolescence on inventories
Estimates involve assumptions about such items asbull the risk adjustment to cash flows or discount rates usedbull future changes in salaries and in prices affecting other costs
copy 2005-07 Nelson 94
Notes
Esprit Holdings LimitedEsprit Holdings Limitedbull Critical Accounting Estimates and Judgements
ndash Estimates and judgements are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonableunder the circumstances
ndash Critical accounting estimates and assumptionsbull The Group makes estimates and assumptions concerning
the future The resulting accounting estimates will by definition seldom equal the related actual results
bull The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below helliphellip (including (1) useful life and impairment of trademarks and (2) income taxes)
CaseCase
48
copy 2005-07 Nelson 95
Notes
Melco Development Limited (新濠國際發展有限公司)Notes to the financial statements for the year ended 31122005ndash The key assumptions concerning the future and other key sources
of estimation uncertainty at the balance sheet date that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below helliphellip(The issues discussed includebull Allowances for inventories bull Estimated impairment of goodwill Income taxes)
CaseCase
copy 2005-07 Nelson 96
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)ndash Estimates and judgements used in preparing the
financial statements are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonable under the circumstances
ndash The Group makes estimates and assumptionsconcerning the future
ndash The resulting accounting estimates will by definition seldom equal the related actual results
ndash The estimates and assumptions that have a significant effect on the carrying amounts of assets and liabilities are discussed below hellip (including impairment of goodwill impairment of gaming
licence Useful lives of property plant and equipment fair value of investment properties hellip)
49
copy 2005-07 Nelson 97
Notes Disclosures (an entity is required to disclose the following)
bull Other disclosuresAn entity shall disclose in the notesa) the amount of dividends proposed or declared before the
financial statements were authorised for issue but not recognised as a distribution to equity holders during the period and the related amount per share(HK incorporated companies are required to show the aggregate amount which is recommended for distribution by way of dividend under a separate heading(s) in their balance sheet (HK Co Ord 10th Sch para 9(1)(e)) and
b) the amount of any cumulative preference dividends not recognised
copy 2005-07 Nelson 98
Notes Disclosures (an entity is required to disclose the following)
An entity shall disclose the following if not disclosedelsewhere in information published with the financial statementsa) the domicile and legal form of the entity
its country of incorporation andthe address of its registered office(or principal place of business if different from the registered office)
b) a description of the nature of the entityrsquos operations and its principal activities and
c) the name of the parent and the ultimate parent of the group
ldquoshall discloserdquo now instead of ldquoencouraged to discloserdquo
ldquoshall discloserdquo now instead of ldquoencouraged to discloserdquo
bull Other disclosures
Any specialAny special
50
copy 2005-07 Nelson 99
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)bull The principal activities of Galaxy Entertainment Group
Ltd (the lsquolsquoCompanyrsquorsquo) (formerly known as K WahConstruction Materials Ltd) and its subsidiaries (together the lsquolsquoGrouprsquorsquo) are tondash operate in casino games of chance or games of other forms
in Macau (and) manufacture sale and distribution of construction materials in HK Macau and Mainland China
bull The Company is ndash a limited liability company incorporated in Hong Kong and ndash has its listing on the Main Board of The Stock Exchange of
Hong Kong Limitedbull The address of its registered office and its principal place
of business is Room 1606 16th Floor Hutchison House 10 Harcourt Road Central HK
copy 2005-07 Nelson 100
Effective Date
bull An entity shall apply IAS 1 for annual periods beginning on or after 1 Jan 2005
ndash Earlier application is encouragedndash If an entity applies IAS 1 for an earlier period it shall
disclose this factbull For the amendments relating to the Statement of
Changes in Equityndash An entity shall apply it for annual periods beginning on
or after 1 Jan 2006ndash If an entity applies the amendments to IAS 19
Employee Benefits ndash Actuarial Gains and Losses Group Plans and Disclosures for an earlier period that amendment shall be applied for that earlier period
51
copy 2005-07 Nelson 101
Todayrsquos Agenda
Capital Disclosures (Amendments to IAS 1)
Capital Disclosures (Amendments to IAS 1)
copy 2005-07 Nelson 102
Capital Disclosures ndash For 2007
52
copy 2005-07 Nelson 103
Capital Disclosures
What is capital Is it helliphellip
CapitalCapital AssetsAssets LiabilitiesLiabilities= ndash
bull IAS 1BC47 considers ldquowhether an entity can have a view of capital that differs from what IFRSs define as equityrdquo
bull It further clarifies that although for the purposes of this disclosure capital would often equate with equity as defined in IFRSsndash it might also include or exclude some components
bull It also noted that the capital disclosure in IAS 1 is intended to give entities the opportunity to describendash how they view the components of capital they manage if this is
different from what IFRSs define as equity helliphellip
copy 2005-07 Nelson 104
EquityEquityEquity AssetsAssets LiabilitiesLiabilities= ndash
Capital Disclosures
Based on the Framework amp IFRSs the accounting equation should be
CapitalCapital AssetsAssets LiabilitiesLiabilities= ndash
bull An entityrsquos capital may be part of its equity plus part of its liabilities depending on how it manage ldquoits capitalrdquo helliphellip
53
copy 2005-07 Nelson 105
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowinga) qualitative information about its objectives policies and processes for
managing capital including (but not limited to)i) a description of what it manages as capitalii) when an entity is subject to externally imposed capital requirements
the nature of those requirements and how those requirements are incorporated into the management of capital and
iii) how it is meeting its objectives for managing capital
bull To comply with the capital disclosures the entity discloses thefollowinga) qualitative information about its objectives policies and processes for
managing capital including (but not limited to)i) a description of what it manages as capitalii) when an entity is subject to externally imposed capital requirements
the nature of those requirements and how those requirements are incorporated into the management of capital and
iii) how it is meeting its objectives for managing capital
copy 2005-07 Nelson 106
Capital Disclosures
Example disclosurebull The Grouprsquos objectives when managing capital are
ndash to safeguard the entityrsquos ability to continue as a going concern
bull so that it can continue to provide returns for shareholders and benefits for other stakeholders and
ndash to provide an adequate return to shareholders by pricing products and services commensurately with the level of risk
bull The Group sets the amount of capital in proportion to risk
ExampleExample
ObjectivesObjectives
54
copy 2005-07 Nelson 107
Capital Disclosures
bull The Group manages the capital structure and makes adjustments to it in the light ofndash changes in economic conditions and ndash the risk characteristics of the underlying assets
bull In order to maintain or adjust the capital structure the Group mayndash adjust the amount of dividends paid to shareholders ndash return capital to shareholders ndash issue new shares or ndash sell assets to reduce debt
ExampleExample
Example disclosure
HowHow
copy 2005-07 Nelson 108
Capital Disclosures
bull Consistently with others in the industry the Group monitors capital on the basis of ndash the debt-to-adjusted capital ratio
bull This ratio is calculated as net debt divide adjusted capital
ExampleExample
Example disclosure
HowHow
bull Net debt is calculated as ndash Total debt (as shown in the
balance sheet)ndash Less cash amp cash equivalents
bull Net debt is calculated as ndash Total debt (as shown in the
balance sheet)ndash Less cash amp cash equivalents
bull Adjusted capital ndash comprises all components of
equity (ie share capital share premium minority interest retained earnings and revaluation reserve) ndash other than amounts
recognised in equity relating to cash flow hedges and
ndash includes some forms of subordinated debt
bull Adjusted capital ndash comprises all components of
equity (ie share capital share premium minority interest retained earnings and revaluation reserve) ndash other than amounts
recognised in equity relating to cash flow hedges and
ndash includes some forms of subordinated debt
55
copy 2005-07 Nelson 109
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowing
bull To comply with the capital disclosures the entity discloses thefollowingb) summary quantitative data about what it manages as capital
Some entities regard some financial liabilities (eg some forms of subordinated debt) as part of capitalOther entities regard capital as excluding some components of equity (eg components arising from cash flow hedges)
c) any changes in (a) and (b) from the previous period
copy 2005-07 Nelson 110
Capital Disclosures
Example disclosure (continued from previous example)
ExampleExample
bull During 20X4 the Grouprsquos strategy which was unchanged from 20X3 was to maintain the debt-to-adjusted capital ratio at the lower end of the range 61 to 71 in order to secure access to finance at a reasonable cost by maintaining a BB credit rating The debt-to-adjusted capital ratios at 31 December 20X4 and at 31 December 20X3 were as follows
3112X4 ($rsquoM) 3112X3 ($rsquoM) Total debt 1000 1100 Less cash and cash equivalents (90) (150)Net debt 910 950
Total equity 110 105 Add subordinated debt instruments 38 38 Less amounts recognised in equity
relating to cash flow hedges (10) (5)Adjusted capital 138 138
Debt-to-adjusted capital ratio 66 69
56
copy 2005-07 Nelson 111
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowing
bull To comply with the capital disclosures the entity discloses thefollowingd) whether during the period it complied with any externally imposed capital
requirements to which it is subjecte) when the entity has not complied with such externally imposed capital
requirements the consequences of such non-complianceThese disclosures shall be based on the information provided internally to the entityrsquos key management personnel
copy 2005-07 Nelson 112
Capital DisclosuresExampleExample
Example disclosurebull Entity A filed its quarterly regulatory capital return for
30 September 20X7 on 20 October 20X7 bull At that date Entity Arsquos regulatory capital was below
the capital requirement imposed by Regulator B by $1 million
bull As a result Entity A was required to submit a plan to the regulator indicating how it would increase its regulatory capital to the amount required
bull Entity A submitted a plan that entailed selling part of its unquoted equities portfolio with a carrying amount of $115 million in the fourth quarter of 20X7
bull In the fourth quarter of 20X7 Entity A sold its fixed interest investment portfolio for $126 million and met its regulatory capital requirement
For example SFC or banks
For example SFC or banks
57
copy 2005-07 Nelson 113
Capital DisclosuresCaseCase
bull Early adopted capital disclosure in 2005 and itsannual report states that (extract only)ndash The Grouprsquos objectives when managing capital are
bull To safeguard the Grouprsquos ability to continue as a going concern so that it continues to provide returns for shareholders and benefits for other stakeholders
bull To support the Grouprsquos stability and growth andbull To provide capital for the purpose of strengthening the
Grouprsquos risk management capability
copy 2005-07 Nelson 114
Capital DisclosuresCaseCase
ndash The Group actively and regularly reviews and manages its capital structure to ensure optimal capital structure and shareholder returns taking into consideration the future capital requirements of the Group and capital efficiency helliphellip
ndash The Group adopts a dividend policy helliphellip while retaining 10 per cent of the profit as capital of the Group for future use
ndash The Group has set aside $1500 million of retained earnings for the purpose of strengthening the risk management regime of the clearing houses and supporting their roles as central counterparties
ndash As in prior years the Group monitors capital by reviewing the level of capital that is at the disposal of the Group (ldquoadjusted capitalrdquo) Adjusted capital comprises all components of shareholdersrsquo equity other than the hedging reserve relating to cash flow hedges designated reserves and investment revaluation reserve helliphellip
bull Early adopted capital disclosure in 2005 and itsannual report states that (extract only)
58
copy 2005-07 Nelson 115
Capital Disclosures ndash Transition
bull An entity shall apply the requirements of capital disclosure for
ndash annual periods beginning on or after 1 January 2007
bull Early application is encouraged
copy 2005-07 Nelson 116
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk
59
copy 2005-07 Nelson 117
QampA SessionQampA SessionQampA Session
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk
40
copy 2005-07 Nelson 79
Balance Sheet
Melco Development Limited (新濠國際發展有限公司)Consolidated balance sheet as at 31122005
CaseCase
copy 2005-07 Nelson 80
Income Statement Minimum requirements on the face of the income statementbull As a minimum the face of the income statement shall include line items
that present the following amounts for the perioda) revenueb) finance costsc) share of the profit or loss of associates and joint ventures accounted
for using the equity methodd) pre-tax gain or loss recognised on the disposal of assets or
settlement of liabilities attributable to discontinuing operationse) tax expense andf) profit or loss
41
copy 2005-07 Nelson 81
Income Statement bull The following items shall be disclosed on the face of the income
statement as allocations of profit or loss for the perioda) Profit or loss attributable to minority interest andb) Profit or loss attributable to equity holders of the parent
A similar requirement has been added for the statement of changes in equity and such allocated amounts are not to be presented as items of income or expense
copy 2005-07 Nelson 82
Income Statement
Melco Dev LtdConsolidated income statementas at 31122005
CaseCase
42
copy 2005-07 Nelson 83
Income Statement bull Not require to disclose the results of operating
activities as a line item on the face of the incomestatement
bull An entity shall not present any items of income and expense as extraordinary items either onthe face of the income statements or in the notes
Entities canrsquot use itEntities canrsquot use it
Entities can still show itEntities can still show it
copy 2005-07 Nelson 84
Income Statement Either on the face of the income statement or in the notesbull An entity shall present an analysis of expenses using a classification
based on eitherbull the nature of expenses orbull their function within the entity
whichever provides information that is reliable and more relevant
bull Entities classifying expenses by function shall disclose additional information on the nature of expenses includingbull depreciation and amortisation expense and bull employee benefits expense
43
copy 2005-07 Nelson 85
Income StatementCaseCase
Nature or FunctionNature or Nature or FunctionFunction
copy 2005-07 Nelson 86
Statement of Changes in Equity bull An entity shall present a statement of changes in equity showing on the
face of the statementa) profit or loss for the period b) each item of income and expense for the period that as required by
IFRSs is recognised directly in equity and the total of these itemsc) total income and expense for the period (calculated as the sum of (a) and
(b)) showing separately the total amounts attributablebull to equity holders of the parent andbull to minority interest and
d) for each component of equity the effects of changes in accounting policies and corrections of errors recognised in accordance with IAS 8
Any ChangeAny Change
A revised requirementbull A statement of changes in equity that comprises only these items
shall be titled a statement of recognised income and expenses
A revised requirementbull A statement of changes in equity that comprises only these items
shall be titled a statement of recognised income and expenses
44
copy 2005-07 Nelson 87
Statement of Changes in Equity bull An entity shall also present either on the face of the
statement of changes in equity or in the notesa) the amounts of transactions with equity holders acting in
their capacity as equity holders showing separately distributions to equity holders
b) the balance of retained earnings (ie accumulated profit or loss) at the beginning of the period and at the balance sheet date and the changes during the period and
c) a reconciliation between the carrying amount of each class of contributed equity and each reserve at the beginning and the end of the period separately disclosing each change
copy 2005-07 Nelson 88
Statement of Changes in Equity
Consolidated SCE as at 31122005
CaseCase
45
copy 2005-07 Nelson 89
Notes Structure (an entity is required to disclose the following)
bull The notes shalla) present information about the basis of preparation of the financial statements
and the specific accounting policies usedb) disclose the information required by HKFRSs that is not presented on the
face of the balance sheet income statement statement of changes in equity or cash flow statement and
c) provide additional information that is not presented on the face of the balance sheet income statement statement of changes in equity or cash flow statement but is relevant to an understanding of any of them
bull Notes shall as far as practicable be presented in a systematic manner bull Each item on the face of the balance sheet income statement statement
of changes in equity and cash flow statement shall be cross-referencedto any related information in the notes
copy 2005-07 Nelson 90
Notes Disclosures (an entity is required to disclose the following)
bull Disclosure of accounting policiesAn entity shall disclose in the summary of significant accounting policiesa) the measurement basis (or bases) used in preparing the financial
statements andb) the other accounting policies used that are relevant to an understanding of
the financial statements
46
copy 2005-07 Nelson 91
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)ndash The financial statements have been prepared in
accordance with Hong Kong Financial Reporting Standards (lsquolsquoHKFRSrsquorsquo) issued by the Hong Kong Institute of Certified Public Accountants bull under the historical cost convention as modified by the
revaluation of investment properties available-for-sale financial assets derivative financial instruments and other investments which are carried at fair values helliphellip
ndash The principal accounting policies applied in the preparation of these financial statements are set out below These policies have been consistently applied to all the years presented except for those stated in note 2(a) above
copy 2005-07 Nelson 92
Notes Disclosures (an entity is required to disclose the following)
bull Disclosure of accounting policiesndash The judgements apart from those involving estimations management has
madebull in the process of applying the entityrsquos accounting policies that have the
most significant effect on the amounts recognised in the financial statements (in the summary of significant accounting policies or other notes)
Examples ndash Management makes judgements in determininga) whether financial assets are held-to-maturity investmentsb) when substantially all the significant risks and rewards of
ownership of financial assets and lease assets are transferred to other entities
c) whether in substance particular sales of goods are financing arrangements and therefore do not give rise to revenue and
d) whether the substance of the relationship between the entity and a special purpose entity indicates that the special purpose entity is controlled by the entity
Examples ndash Management makes judgements in determininga) whether financial assets are held-to-maturity investmentsb) when substantially all the significant risks and rewards of
ownership of financial assets and lease assets are transferred to other entities
c) whether in substance particular sales of goods are financing arrangements and therefore do not give rise to revenue and
d) whether the substance of the relationship between the entity and a special purpose entity indicates that the special purpose entity is controlled by the entity
47
copy 2005-07 Nelson 93
Notes Disclosures (an entity is required to disclose the following)
bull Key sources of estimation uncertaintyndash Information about the key assumptions concerning the future and
other key sources of estimation uncertainty at the balance sheet datebull that have a significant risk of causing a material adjustment to the
carrying amounts of assets and liabilities within the next financial yearndash In respect of those assets and liabilities the notes shall include details of
a) their nature andb) their carrying amount as at the balance sheet date
Examples ndash in the absence of recently observed market prices used to measure the following assets and liabilities future-oriented estimates are necessary to measurebull the recoverable amount of classes of PPEbull the effect of technological obsolescence on inventories
Estimates involve assumptions about such items asbull the risk adjustment to cash flows or discount rates usedbull future changes in salaries and in prices affecting other costs
Examples ndash in the absence of recently observed market prices used to measure the following assets and liabilities future-oriented estimates are necessary to measurebull the recoverable amount of classes of PPEbull the effect of technological obsolescence on inventories
Estimates involve assumptions about such items asbull the risk adjustment to cash flows or discount rates usedbull future changes in salaries and in prices affecting other costs
copy 2005-07 Nelson 94
Notes
Esprit Holdings LimitedEsprit Holdings Limitedbull Critical Accounting Estimates and Judgements
ndash Estimates and judgements are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonableunder the circumstances
ndash Critical accounting estimates and assumptionsbull The Group makes estimates and assumptions concerning
the future The resulting accounting estimates will by definition seldom equal the related actual results
bull The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below helliphellip (including (1) useful life and impairment of trademarks and (2) income taxes)
CaseCase
48
copy 2005-07 Nelson 95
Notes
Melco Development Limited (新濠國際發展有限公司)Notes to the financial statements for the year ended 31122005ndash The key assumptions concerning the future and other key sources
of estimation uncertainty at the balance sheet date that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below helliphellip(The issues discussed includebull Allowances for inventories bull Estimated impairment of goodwill Income taxes)
CaseCase
copy 2005-07 Nelson 96
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)ndash Estimates and judgements used in preparing the
financial statements are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonable under the circumstances
ndash The Group makes estimates and assumptionsconcerning the future
ndash The resulting accounting estimates will by definition seldom equal the related actual results
ndash The estimates and assumptions that have a significant effect on the carrying amounts of assets and liabilities are discussed below hellip (including impairment of goodwill impairment of gaming
licence Useful lives of property plant and equipment fair value of investment properties hellip)
49
copy 2005-07 Nelson 97
Notes Disclosures (an entity is required to disclose the following)
bull Other disclosuresAn entity shall disclose in the notesa) the amount of dividends proposed or declared before the
financial statements were authorised for issue but not recognised as a distribution to equity holders during the period and the related amount per share(HK incorporated companies are required to show the aggregate amount which is recommended for distribution by way of dividend under a separate heading(s) in their balance sheet (HK Co Ord 10th Sch para 9(1)(e)) and
b) the amount of any cumulative preference dividends not recognised
copy 2005-07 Nelson 98
Notes Disclosures (an entity is required to disclose the following)
An entity shall disclose the following if not disclosedelsewhere in information published with the financial statementsa) the domicile and legal form of the entity
its country of incorporation andthe address of its registered office(or principal place of business if different from the registered office)
b) a description of the nature of the entityrsquos operations and its principal activities and
c) the name of the parent and the ultimate parent of the group
ldquoshall discloserdquo now instead of ldquoencouraged to discloserdquo
ldquoshall discloserdquo now instead of ldquoencouraged to discloserdquo
bull Other disclosures
Any specialAny special
50
copy 2005-07 Nelson 99
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)bull The principal activities of Galaxy Entertainment Group
Ltd (the lsquolsquoCompanyrsquorsquo) (formerly known as K WahConstruction Materials Ltd) and its subsidiaries (together the lsquolsquoGrouprsquorsquo) are tondash operate in casino games of chance or games of other forms
in Macau (and) manufacture sale and distribution of construction materials in HK Macau and Mainland China
bull The Company is ndash a limited liability company incorporated in Hong Kong and ndash has its listing on the Main Board of The Stock Exchange of
Hong Kong Limitedbull The address of its registered office and its principal place
of business is Room 1606 16th Floor Hutchison House 10 Harcourt Road Central HK
copy 2005-07 Nelson 100
Effective Date
bull An entity shall apply IAS 1 for annual periods beginning on or after 1 Jan 2005
ndash Earlier application is encouragedndash If an entity applies IAS 1 for an earlier period it shall
disclose this factbull For the amendments relating to the Statement of
Changes in Equityndash An entity shall apply it for annual periods beginning on
or after 1 Jan 2006ndash If an entity applies the amendments to IAS 19
Employee Benefits ndash Actuarial Gains and Losses Group Plans and Disclosures for an earlier period that amendment shall be applied for that earlier period
51
copy 2005-07 Nelson 101
Todayrsquos Agenda
Capital Disclosures (Amendments to IAS 1)
Capital Disclosures (Amendments to IAS 1)
copy 2005-07 Nelson 102
Capital Disclosures ndash For 2007
52
copy 2005-07 Nelson 103
Capital Disclosures
What is capital Is it helliphellip
CapitalCapital AssetsAssets LiabilitiesLiabilities= ndash
bull IAS 1BC47 considers ldquowhether an entity can have a view of capital that differs from what IFRSs define as equityrdquo
bull It further clarifies that although for the purposes of this disclosure capital would often equate with equity as defined in IFRSsndash it might also include or exclude some components
bull It also noted that the capital disclosure in IAS 1 is intended to give entities the opportunity to describendash how they view the components of capital they manage if this is
different from what IFRSs define as equity helliphellip
copy 2005-07 Nelson 104
EquityEquityEquity AssetsAssets LiabilitiesLiabilities= ndash
Capital Disclosures
Based on the Framework amp IFRSs the accounting equation should be
CapitalCapital AssetsAssets LiabilitiesLiabilities= ndash
bull An entityrsquos capital may be part of its equity plus part of its liabilities depending on how it manage ldquoits capitalrdquo helliphellip
53
copy 2005-07 Nelson 105
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowinga) qualitative information about its objectives policies and processes for
managing capital including (but not limited to)i) a description of what it manages as capitalii) when an entity is subject to externally imposed capital requirements
the nature of those requirements and how those requirements are incorporated into the management of capital and
iii) how it is meeting its objectives for managing capital
bull To comply with the capital disclosures the entity discloses thefollowinga) qualitative information about its objectives policies and processes for
managing capital including (but not limited to)i) a description of what it manages as capitalii) when an entity is subject to externally imposed capital requirements
the nature of those requirements and how those requirements are incorporated into the management of capital and
iii) how it is meeting its objectives for managing capital
copy 2005-07 Nelson 106
Capital Disclosures
Example disclosurebull The Grouprsquos objectives when managing capital are
ndash to safeguard the entityrsquos ability to continue as a going concern
bull so that it can continue to provide returns for shareholders and benefits for other stakeholders and
ndash to provide an adequate return to shareholders by pricing products and services commensurately with the level of risk
bull The Group sets the amount of capital in proportion to risk
ExampleExample
ObjectivesObjectives
54
copy 2005-07 Nelson 107
Capital Disclosures
bull The Group manages the capital structure and makes adjustments to it in the light ofndash changes in economic conditions and ndash the risk characteristics of the underlying assets
bull In order to maintain or adjust the capital structure the Group mayndash adjust the amount of dividends paid to shareholders ndash return capital to shareholders ndash issue new shares or ndash sell assets to reduce debt
ExampleExample
Example disclosure
HowHow
copy 2005-07 Nelson 108
Capital Disclosures
bull Consistently with others in the industry the Group monitors capital on the basis of ndash the debt-to-adjusted capital ratio
bull This ratio is calculated as net debt divide adjusted capital
ExampleExample
Example disclosure
HowHow
bull Net debt is calculated as ndash Total debt (as shown in the
balance sheet)ndash Less cash amp cash equivalents
bull Net debt is calculated as ndash Total debt (as shown in the
balance sheet)ndash Less cash amp cash equivalents
bull Adjusted capital ndash comprises all components of
equity (ie share capital share premium minority interest retained earnings and revaluation reserve) ndash other than amounts
recognised in equity relating to cash flow hedges and
ndash includes some forms of subordinated debt
bull Adjusted capital ndash comprises all components of
equity (ie share capital share premium minority interest retained earnings and revaluation reserve) ndash other than amounts
recognised in equity relating to cash flow hedges and
ndash includes some forms of subordinated debt
55
copy 2005-07 Nelson 109
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowing
bull To comply with the capital disclosures the entity discloses thefollowingb) summary quantitative data about what it manages as capital
Some entities regard some financial liabilities (eg some forms of subordinated debt) as part of capitalOther entities regard capital as excluding some components of equity (eg components arising from cash flow hedges)
c) any changes in (a) and (b) from the previous period
copy 2005-07 Nelson 110
Capital Disclosures
Example disclosure (continued from previous example)
ExampleExample
bull During 20X4 the Grouprsquos strategy which was unchanged from 20X3 was to maintain the debt-to-adjusted capital ratio at the lower end of the range 61 to 71 in order to secure access to finance at a reasonable cost by maintaining a BB credit rating The debt-to-adjusted capital ratios at 31 December 20X4 and at 31 December 20X3 were as follows
3112X4 ($rsquoM) 3112X3 ($rsquoM) Total debt 1000 1100 Less cash and cash equivalents (90) (150)Net debt 910 950
Total equity 110 105 Add subordinated debt instruments 38 38 Less amounts recognised in equity
relating to cash flow hedges (10) (5)Adjusted capital 138 138
Debt-to-adjusted capital ratio 66 69
56
copy 2005-07 Nelson 111
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowing
bull To comply with the capital disclosures the entity discloses thefollowingd) whether during the period it complied with any externally imposed capital
requirements to which it is subjecte) when the entity has not complied with such externally imposed capital
requirements the consequences of such non-complianceThese disclosures shall be based on the information provided internally to the entityrsquos key management personnel
copy 2005-07 Nelson 112
Capital DisclosuresExampleExample
Example disclosurebull Entity A filed its quarterly regulatory capital return for
30 September 20X7 on 20 October 20X7 bull At that date Entity Arsquos regulatory capital was below
the capital requirement imposed by Regulator B by $1 million
bull As a result Entity A was required to submit a plan to the regulator indicating how it would increase its regulatory capital to the amount required
bull Entity A submitted a plan that entailed selling part of its unquoted equities portfolio with a carrying amount of $115 million in the fourth quarter of 20X7
bull In the fourth quarter of 20X7 Entity A sold its fixed interest investment portfolio for $126 million and met its regulatory capital requirement
For example SFC or banks
For example SFC or banks
57
copy 2005-07 Nelson 113
Capital DisclosuresCaseCase
bull Early adopted capital disclosure in 2005 and itsannual report states that (extract only)ndash The Grouprsquos objectives when managing capital are
bull To safeguard the Grouprsquos ability to continue as a going concern so that it continues to provide returns for shareholders and benefits for other stakeholders
bull To support the Grouprsquos stability and growth andbull To provide capital for the purpose of strengthening the
Grouprsquos risk management capability
copy 2005-07 Nelson 114
Capital DisclosuresCaseCase
ndash The Group actively and regularly reviews and manages its capital structure to ensure optimal capital structure and shareholder returns taking into consideration the future capital requirements of the Group and capital efficiency helliphellip
ndash The Group adopts a dividend policy helliphellip while retaining 10 per cent of the profit as capital of the Group for future use
ndash The Group has set aside $1500 million of retained earnings for the purpose of strengthening the risk management regime of the clearing houses and supporting their roles as central counterparties
ndash As in prior years the Group monitors capital by reviewing the level of capital that is at the disposal of the Group (ldquoadjusted capitalrdquo) Adjusted capital comprises all components of shareholdersrsquo equity other than the hedging reserve relating to cash flow hedges designated reserves and investment revaluation reserve helliphellip
bull Early adopted capital disclosure in 2005 and itsannual report states that (extract only)
58
copy 2005-07 Nelson 115
Capital Disclosures ndash Transition
bull An entity shall apply the requirements of capital disclosure for
ndash annual periods beginning on or after 1 January 2007
bull Early application is encouraged
copy 2005-07 Nelson 116
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk
59
copy 2005-07 Nelson 117
QampA SessionQampA SessionQampA Session
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk
41
copy 2005-07 Nelson 81
Income Statement bull The following items shall be disclosed on the face of the income
statement as allocations of profit or loss for the perioda) Profit or loss attributable to minority interest andb) Profit or loss attributable to equity holders of the parent
A similar requirement has been added for the statement of changes in equity and such allocated amounts are not to be presented as items of income or expense
copy 2005-07 Nelson 82
Income Statement
Melco Dev LtdConsolidated income statementas at 31122005
CaseCase
42
copy 2005-07 Nelson 83
Income Statement bull Not require to disclose the results of operating
activities as a line item on the face of the incomestatement
bull An entity shall not present any items of income and expense as extraordinary items either onthe face of the income statements or in the notes
Entities canrsquot use itEntities canrsquot use it
Entities can still show itEntities can still show it
copy 2005-07 Nelson 84
Income Statement Either on the face of the income statement or in the notesbull An entity shall present an analysis of expenses using a classification
based on eitherbull the nature of expenses orbull their function within the entity
whichever provides information that is reliable and more relevant
bull Entities classifying expenses by function shall disclose additional information on the nature of expenses includingbull depreciation and amortisation expense and bull employee benefits expense
43
copy 2005-07 Nelson 85
Income StatementCaseCase
Nature or FunctionNature or Nature or FunctionFunction
copy 2005-07 Nelson 86
Statement of Changes in Equity bull An entity shall present a statement of changes in equity showing on the
face of the statementa) profit or loss for the period b) each item of income and expense for the period that as required by
IFRSs is recognised directly in equity and the total of these itemsc) total income and expense for the period (calculated as the sum of (a) and
(b)) showing separately the total amounts attributablebull to equity holders of the parent andbull to minority interest and
d) for each component of equity the effects of changes in accounting policies and corrections of errors recognised in accordance with IAS 8
Any ChangeAny Change
A revised requirementbull A statement of changes in equity that comprises only these items
shall be titled a statement of recognised income and expenses
A revised requirementbull A statement of changes in equity that comprises only these items
shall be titled a statement of recognised income and expenses
44
copy 2005-07 Nelson 87
Statement of Changes in Equity bull An entity shall also present either on the face of the
statement of changes in equity or in the notesa) the amounts of transactions with equity holders acting in
their capacity as equity holders showing separately distributions to equity holders
b) the balance of retained earnings (ie accumulated profit or loss) at the beginning of the period and at the balance sheet date and the changes during the period and
c) a reconciliation between the carrying amount of each class of contributed equity and each reserve at the beginning and the end of the period separately disclosing each change
copy 2005-07 Nelson 88
Statement of Changes in Equity
Consolidated SCE as at 31122005
CaseCase
45
copy 2005-07 Nelson 89
Notes Structure (an entity is required to disclose the following)
bull The notes shalla) present information about the basis of preparation of the financial statements
and the specific accounting policies usedb) disclose the information required by HKFRSs that is not presented on the
face of the balance sheet income statement statement of changes in equity or cash flow statement and
c) provide additional information that is not presented on the face of the balance sheet income statement statement of changes in equity or cash flow statement but is relevant to an understanding of any of them
bull Notes shall as far as practicable be presented in a systematic manner bull Each item on the face of the balance sheet income statement statement
of changes in equity and cash flow statement shall be cross-referencedto any related information in the notes
copy 2005-07 Nelson 90
Notes Disclosures (an entity is required to disclose the following)
bull Disclosure of accounting policiesAn entity shall disclose in the summary of significant accounting policiesa) the measurement basis (or bases) used in preparing the financial
statements andb) the other accounting policies used that are relevant to an understanding of
the financial statements
46
copy 2005-07 Nelson 91
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)ndash The financial statements have been prepared in
accordance with Hong Kong Financial Reporting Standards (lsquolsquoHKFRSrsquorsquo) issued by the Hong Kong Institute of Certified Public Accountants bull under the historical cost convention as modified by the
revaluation of investment properties available-for-sale financial assets derivative financial instruments and other investments which are carried at fair values helliphellip
ndash The principal accounting policies applied in the preparation of these financial statements are set out below These policies have been consistently applied to all the years presented except for those stated in note 2(a) above
copy 2005-07 Nelson 92
Notes Disclosures (an entity is required to disclose the following)
bull Disclosure of accounting policiesndash The judgements apart from those involving estimations management has
madebull in the process of applying the entityrsquos accounting policies that have the
most significant effect on the amounts recognised in the financial statements (in the summary of significant accounting policies or other notes)
Examples ndash Management makes judgements in determininga) whether financial assets are held-to-maturity investmentsb) when substantially all the significant risks and rewards of
ownership of financial assets and lease assets are transferred to other entities
c) whether in substance particular sales of goods are financing arrangements and therefore do not give rise to revenue and
d) whether the substance of the relationship between the entity and a special purpose entity indicates that the special purpose entity is controlled by the entity
Examples ndash Management makes judgements in determininga) whether financial assets are held-to-maturity investmentsb) when substantially all the significant risks and rewards of
ownership of financial assets and lease assets are transferred to other entities
c) whether in substance particular sales of goods are financing arrangements and therefore do not give rise to revenue and
d) whether the substance of the relationship between the entity and a special purpose entity indicates that the special purpose entity is controlled by the entity
47
copy 2005-07 Nelson 93
Notes Disclosures (an entity is required to disclose the following)
bull Key sources of estimation uncertaintyndash Information about the key assumptions concerning the future and
other key sources of estimation uncertainty at the balance sheet datebull that have a significant risk of causing a material adjustment to the
carrying amounts of assets and liabilities within the next financial yearndash In respect of those assets and liabilities the notes shall include details of
a) their nature andb) their carrying amount as at the balance sheet date
Examples ndash in the absence of recently observed market prices used to measure the following assets and liabilities future-oriented estimates are necessary to measurebull the recoverable amount of classes of PPEbull the effect of technological obsolescence on inventories
Estimates involve assumptions about such items asbull the risk adjustment to cash flows or discount rates usedbull future changes in salaries and in prices affecting other costs
Examples ndash in the absence of recently observed market prices used to measure the following assets and liabilities future-oriented estimates are necessary to measurebull the recoverable amount of classes of PPEbull the effect of technological obsolescence on inventories
Estimates involve assumptions about such items asbull the risk adjustment to cash flows or discount rates usedbull future changes in salaries and in prices affecting other costs
copy 2005-07 Nelson 94
Notes
Esprit Holdings LimitedEsprit Holdings Limitedbull Critical Accounting Estimates and Judgements
ndash Estimates and judgements are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonableunder the circumstances
ndash Critical accounting estimates and assumptionsbull The Group makes estimates and assumptions concerning
the future The resulting accounting estimates will by definition seldom equal the related actual results
bull The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below helliphellip (including (1) useful life and impairment of trademarks and (2) income taxes)
CaseCase
48
copy 2005-07 Nelson 95
Notes
Melco Development Limited (新濠國際發展有限公司)Notes to the financial statements for the year ended 31122005ndash The key assumptions concerning the future and other key sources
of estimation uncertainty at the balance sheet date that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below helliphellip(The issues discussed includebull Allowances for inventories bull Estimated impairment of goodwill Income taxes)
CaseCase
copy 2005-07 Nelson 96
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)ndash Estimates and judgements used in preparing the
financial statements are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonable under the circumstances
ndash The Group makes estimates and assumptionsconcerning the future
ndash The resulting accounting estimates will by definition seldom equal the related actual results
ndash The estimates and assumptions that have a significant effect on the carrying amounts of assets and liabilities are discussed below hellip (including impairment of goodwill impairment of gaming
licence Useful lives of property plant and equipment fair value of investment properties hellip)
49
copy 2005-07 Nelson 97
Notes Disclosures (an entity is required to disclose the following)
bull Other disclosuresAn entity shall disclose in the notesa) the amount of dividends proposed or declared before the
financial statements were authorised for issue but not recognised as a distribution to equity holders during the period and the related amount per share(HK incorporated companies are required to show the aggregate amount which is recommended for distribution by way of dividend under a separate heading(s) in their balance sheet (HK Co Ord 10th Sch para 9(1)(e)) and
b) the amount of any cumulative preference dividends not recognised
copy 2005-07 Nelson 98
Notes Disclosures (an entity is required to disclose the following)
An entity shall disclose the following if not disclosedelsewhere in information published with the financial statementsa) the domicile and legal form of the entity
its country of incorporation andthe address of its registered office(or principal place of business if different from the registered office)
b) a description of the nature of the entityrsquos operations and its principal activities and
c) the name of the parent and the ultimate parent of the group
ldquoshall discloserdquo now instead of ldquoencouraged to discloserdquo
ldquoshall discloserdquo now instead of ldquoencouraged to discloserdquo
bull Other disclosures
Any specialAny special
50
copy 2005-07 Nelson 99
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)bull The principal activities of Galaxy Entertainment Group
Ltd (the lsquolsquoCompanyrsquorsquo) (formerly known as K WahConstruction Materials Ltd) and its subsidiaries (together the lsquolsquoGrouprsquorsquo) are tondash operate in casino games of chance or games of other forms
in Macau (and) manufacture sale and distribution of construction materials in HK Macau and Mainland China
bull The Company is ndash a limited liability company incorporated in Hong Kong and ndash has its listing on the Main Board of The Stock Exchange of
Hong Kong Limitedbull The address of its registered office and its principal place
of business is Room 1606 16th Floor Hutchison House 10 Harcourt Road Central HK
copy 2005-07 Nelson 100
Effective Date
bull An entity shall apply IAS 1 for annual periods beginning on or after 1 Jan 2005
ndash Earlier application is encouragedndash If an entity applies IAS 1 for an earlier period it shall
disclose this factbull For the amendments relating to the Statement of
Changes in Equityndash An entity shall apply it for annual periods beginning on
or after 1 Jan 2006ndash If an entity applies the amendments to IAS 19
Employee Benefits ndash Actuarial Gains and Losses Group Plans and Disclosures for an earlier period that amendment shall be applied for that earlier period
51
copy 2005-07 Nelson 101
Todayrsquos Agenda
Capital Disclosures (Amendments to IAS 1)
Capital Disclosures (Amendments to IAS 1)
copy 2005-07 Nelson 102
Capital Disclosures ndash For 2007
52
copy 2005-07 Nelson 103
Capital Disclosures
What is capital Is it helliphellip
CapitalCapital AssetsAssets LiabilitiesLiabilities= ndash
bull IAS 1BC47 considers ldquowhether an entity can have a view of capital that differs from what IFRSs define as equityrdquo
bull It further clarifies that although for the purposes of this disclosure capital would often equate with equity as defined in IFRSsndash it might also include or exclude some components
bull It also noted that the capital disclosure in IAS 1 is intended to give entities the opportunity to describendash how they view the components of capital they manage if this is
different from what IFRSs define as equity helliphellip
copy 2005-07 Nelson 104
EquityEquityEquity AssetsAssets LiabilitiesLiabilities= ndash
Capital Disclosures
Based on the Framework amp IFRSs the accounting equation should be
CapitalCapital AssetsAssets LiabilitiesLiabilities= ndash
bull An entityrsquos capital may be part of its equity plus part of its liabilities depending on how it manage ldquoits capitalrdquo helliphellip
53
copy 2005-07 Nelson 105
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowinga) qualitative information about its objectives policies and processes for
managing capital including (but not limited to)i) a description of what it manages as capitalii) when an entity is subject to externally imposed capital requirements
the nature of those requirements and how those requirements are incorporated into the management of capital and
iii) how it is meeting its objectives for managing capital
bull To comply with the capital disclosures the entity discloses thefollowinga) qualitative information about its objectives policies and processes for
managing capital including (but not limited to)i) a description of what it manages as capitalii) when an entity is subject to externally imposed capital requirements
the nature of those requirements and how those requirements are incorporated into the management of capital and
iii) how it is meeting its objectives for managing capital
copy 2005-07 Nelson 106
Capital Disclosures
Example disclosurebull The Grouprsquos objectives when managing capital are
ndash to safeguard the entityrsquos ability to continue as a going concern
bull so that it can continue to provide returns for shareholders and benefits for other stakeholders and
ndash to provide an adequate return to shareholders by pricing products and services commensurately with the level of risk
bull The Group sets the amount of capital in proportion to risk
ExampleExample
ObjectivesObjectives
54
copy 2005-07 Nelson 107
Capital Disclosures
bull The Group manages the capital structure and makes adjustments to it in the light ofndash changes in economic conditions and ndash the risk characteristics of the underlying assets
bull In order to maintain or adjust the capital structure the Group mayndash adjust the amount of dividends paid to shareholders ndash return capital to shareholders ndash issue new shares or ndash sell assets to reduce debt
ExampleExample
Example disclosure
HowHow
copy 2005-07 Nelson 108
Capital Disclosures
bull Consistently with others in the industry the Group monitors capital on the basis of ndash the debt-to-adjusted capital ratio
bull This ratio is calculated as net debt divide adjusted capital
ExampleExample
Example disclosure
HowHow
bull Net debt is calculated as ndash Total debt (as shown in the
balance sheet)ndash Less cash amp cash equivalents
bull Net debt is calculated as ndash Total debt (as shown in the
balance sheet)ndash Less cash amp cash equivalents
bull Adjusted capital ndash comprises all components of
equity (ie share capital share premium minority interest retained earnings and revaluation reserve) ndash other than amounts
recognised in equity relating to cash flow hedges and
ndash includes some forms of subordinated debt
bull Adjusted capital ndash comprises all components of
equity (ie share capital share premium minority interest retained earnings and revaluation reserve) ndash other than amounts
recognised in equity relating to cash flow hedges and
ndash includes some forms of subordinated debt
55
copy 2005-07 Nelson 109
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowing
bull To comply with the capital disclosures the entity discloses thefollowingb) summary quantitative data about what it manages as capital
Some entities regard some financial liabilities (eg some forms of subordinated debt) as part of capitalOther entities regard capital as excluding some components of equity (eg components arising from cash flow hedges)
c) any changes in (a) and (b) from the previous period
copy 2005-07 Nelson 110
Capital Disclosures
Example disclosure (continued from previous example)
ExampleExample
bull During 20X4 the Grouprsquos strategy which was unchanged from 20X3 was to maintain the debt-to-adjusted capital ratio at the lower end of the range 61 to 71 in order to secure access to finance at a reasonable cost by maintaining a BB credit rating The debt-to-adjusted capital ratios at 31 December 20X4 and at 31 December 20X3 were as follows
3112X4 ($rsquoM) 3112X3 ($rsquoM) Total debt 1000 1100 Less cash and cash equivalents (90) (150)Net debt 910 950
Total equity 110 105 Add subordinated debt instruments 38 38 Less amounts recognised in equity
relating to cash flow hedges (10) (5)Adjusted capital 138 138
Debt-to-adjusted capital ratio 66 69
56
copy 2005-07 Nelson 111
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowing
bull To comply with the capital disclosures the entity discloses thefollowingd) whether during the period it complied with any externally imposed capital
requirements to which it is subjecte) when the entity has not complied with such externally imposed capital
requirements the consequences of such non-complianceThese disclosures shall be based on the information provided internally to the entityrsquos key management personnel
copy 2005-07 Nelson 112
Capital DisclosuresExampleExample
Example disclosurebull Entity A filed its quarterly regulatory capital return for
30 September 20X7 on 20 October 20X7 bull At that date Entity Arsquos regulatory capital was below
the capital requirement imposed by Regulator B by $1 million
bull As a result Entity A was required to submit a plan to the regulator indicating how it would increase its regulatory capital to the amount required
bull Entity A submitted a plan that entailed selling part of its unquoted equities portfolio with a carrying amount of $115 million in the fourth quarter of 20X7
bull In the fourth quarter of 20X7 Entity A sold its fixed interest investment portfolio for $126 million and met its regulatory capital requirement
For example SFC or banks
For example SFC or banks
57
copy 2005-07 Nelson 113
Capital DisclosuresCaseCase
bull Early adopted capital disclosure in 2005 and itsannual report states that (extract only)ndash The Grouprsquos objectives when managing capital are
bull To safeguard the Grouprsquos ability to continue as a going concern so that it continues to provide returns for shareholders and benefits for other stakeholders
bull To support the Grouprsquos stability and growth andbull To provide capital for the purpose of strengthening the
Grouprsquos risk management capability
copy 2005-07 Nelson 114
Capital DisclosuresCaseCase
ndash The Group actively and regularly reviews and manages its capital structure to ensure optimal capital structure and shareholder returns taking into consideration the future capital requirements of the Group and capital efficiency helliphellip
ndash The Group adopts a dividend policy helliphellip while retaining 10 per cent of the profit as capital of the Group for future use
ndash The Group has set aside $1500 million of retained earnings for the purpose of strengthening the risk management regime of the clearing houses and supporting their roles as central counterparties
ndash As in prior years the Group monitors capital by reviewing the level of capital that is at the disposal of the Group (ldquoadjusted capitalrdquo) Adjusted capital comprises all components of shareholdersrsquo equity other than the hedging reserve relating to cash flow hedges designated reserves and investment revaluation reserve helliphellip
bull Early adopted capital disclosure in 2005 and itsannual report states that (extract only)
58
copy 2005-07 Nelson 115
Capital Disclosures ndash Transition
bull An entity shall apply the requirements of capital disclosure for
ndash annual periods beginning on or after 1 January 2007
bull Early application is encouraged
copy 2005-07 Nelson 116
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk
59
copy 2005-07 Nelson 117
QampA SessionQampA SessionQampA Session
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk
42
copy 2005-07 Nelson 83
Income Statement bull Not require to disclose the results of operating
activities as a line item on the face of the incomestatement
bull An entity shall not present any items of income and expense as extraordinary items either onthe face of the income statements or in the notes
Entities canrsquot use itEntities canrsquot use it
Entities can still show itEntities can still show it
copy 2005-07 Nelson 84
Income Statement Either on the face of the income statement or in the notesbull An entity shall present an analysis of expenses using a classification
based on eitherbull the nature of expenses orbull their function within the entity
whichever provides information that is reliable and more relevant
bull Entities classifying expenses by function shall disclose additional information on the nature of expenses includingbull depreciation and amortisation expense and bull employee benefits expense
43
copy 2005-07 Nelson 85
Income StatementCaseCase
Nature or FunctionNature or Nature or FunctionFunction
copy 2005-07 Nelson 86
Statement of Changes in Equity bull An entity shall present a statement of changes in equity showing on the
face of the statementa) profit or loss for the period b) each item of income and expense for the period that as required by
IFRSs is recognised directly in equity and the total of these itemsc) total income and expense for the period (calculated as the sum of (a) and
(b)) showing separately the total amounts attributablebull to equity holders of the parent andbull to minority interest and
d) for each component of equity the effects of changes in accounting policies and corrections of errors recognised in accordance with IAS 8
Any ChangeAny Change
A revised requirementbull A statement of changes in equity that comprises only these items
shall be titled a statement of recognised income and expenses
A revised requirementbull A statement of changes in equity that comprises only these items
shall be titled a statement of recognised income and expenses
44
copy 2005-07 Nelson 87
Statement of Changes in Equity bull An entity shall also present either on the face of the
statement of changes in equity or in the notesa) the amounts of transactions with equity holders acting in
their capacity as equity holders showing separately distributions to equity holders
b) the balance of retained earnings (ie accumulated profit or loss) at the beginning of the period and at the balance sheet date and the changes during the period and
c) a reconciliation between the carrying amount of each class of contributed equity and each reserve at the beginning and the end of the period separately disclosing each change
copy 2005-07 Nelson 88
Statement of Changes in Equity
Consolidated SCE as at 31122005
CaseCase
45
copy 2005-07 Nelson 89
Notes Structure (an entity is required to disclose the following)
bull The notes shalla) present information about the basis of preparation of the financial statements
and the specific accounting policies usedb) disclose the information required by HKFRSs that is not presented on the
face of the balance sheet income statement statement of changes in equity or cash flow statement and
c) provide additional information that is not presented on the face of the balance sheet income statement statement of changes in equity or cash flow statement but is relevant to an understanding of any of them
bull Notes shall as far as practicable be presented in a systematic manner bull Each item on the face of the balance sheet income statement statement
of changes in equity and cash flow statement shall be cross-referencedto any related information in the notes
copy 2005-07 Nelson 90
Notes Disclosures (an entity is required to disclose the following)
bull Disclosure of accounting policiesAn entity shall disclose in the summary of significant accounting policiesa) the measurement basis (or bases) used in preparing the financial
statements andb) the other accounting policies used that are relevant to an understanding of
the financial statements
46
copy 2005-07 Nelson 91
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)ndash The financial statements have been prepared in
accordance with Hong Kong Financial Reporting Standards (lsquolsquoHKFRSrsquorsquo) issued by the Hong Kong Institute of Certified Public Accountants bull under the historical cost convention as modified by the
revaluation of investment properties available-for-sale financial assets derivative financial instruments and other investments which are carried at fair values helliphellip
ndash The principal accounting policies applied in the preparation of these financial statements are set out below These policies have been consistently applied to all the years presented except for those stated in note 2(a) above
copy 2005-07 Nelson 92
Notes Disclosures (an entity is required to disclose the following)
bull Disclosure of accounting policiesndash The judgements apart from those involving estimations management has
madebull in the process of applying the entityrsquos accounting policies that have the
most significant effect on the amounts recognised in the financial statements (in the summary of significant accounting policies or other notes)
Examples ndash Management makes judgements in determininga) whether financial assets are held-to-maturity investmentsb) when substantially all the significant risks and rewards of
ownership of financial assets and lease assets are transferred to other entities
c) whether in substance particular sales of goods are financing arrangements and therefore do not give rise to revenue and
d) whether the substance of the relationship between the entity and a special purpose entity indicates that the special purpose entity is controlled by the entity
Examples ndash Management makes judgements in determininga) whether financial assets are held-to-maturity investmentsb) when substantially all the significant risks and rewards of
ownership of financial assets and lease assets are transferred to other entities
c) whether in substance particular sales of goods are financing arrangements and therefore do not give rise to revenue and
d) whether the substance of the relationship between the entity and a special purpose entity indicates that the special purpose entity is controlled by the entity
47
copy 2005-07 Nelson 93
Notes Disclosures (an entity is required to disclose the following)
bull Key sources of estimation uncertaintyndash Information about the key assumptions concerning the future and
other key sources of estimation uncertainty at the balance sheet datebull that have a significant risk of causing a material adjustment to the
carrying amounts of assets and liabilities within the next financial yearndash In respect of those assets and liabilities the notes shall include details of
a) their nature andb) their carrying amount as at the balance sheet date
Examples ndash in the absence of recently observed market prices used to measure the following assets and liabilities future-oriented estimates are necessary to measurebull the recoverable amount of classes of PPEbull the effect of technological obsolescence on inventories
Estimates involve assumptions about such items asbull the risk adjustment to cash flows or discount rates usedbull future changes in salaries and in prices affecting other costs
Examples ndash in the absence of recently observed market prices used to measure the following assets and liabilities future-oriented estimates are necessary to measurebull the recoverable amount of classes of PPEbull the effect of technological obsolescence on inventories
Estimates involve assumptions about such items asbull the risk adjustment to cash flows or discount rates usedbull future changes in salaries and in prices affecting other costs
copy 2005-07 Nelson 94
Notes
Esprit Holdings LimitedEsprit Holdings Limitedbull Critical Accounting Estimates and Judgements
ndash Estimates and judgements are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonableunder the circumstances
ndash Critical accounting estimates and assumptionsbull The Group makes estimates and assumptions concerning
the future The resulting accounting estimates will by definition seldom equal the related actual results
bull The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below helliphellip (including (1) useful life and impairment of trademarks and (2) income taxes)
CaseCase
48
copy 2005-07 Nelson 95
Notes
Melco Development Limited (新濠國際發展有限公司)Notes to the financial statements for the year ended 31122005ndash The key assumptions concerning the future and other key sources
of estimation uncertainty at the balance sheet date that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below helliphellip(The issues discussed includebull Allowances for inventories bull Estimated impairment of goodwill Income taxes)
CaseCase
copy 2005-07 Nelson 96
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)ndash Estimates and judgements used in preparing the
financial statements are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonable under the circumstances
ndash The Group makes estimates and assumptionsconcerning the future
ndash The resulting accounting estimates will by definition seldom equal the related actual results
ndash The estimates and assumptions that have a significant effect on the carrying amounts of assets and liabilities are discussed below hellip (including impairment of goodwill impairment of gaming
licence Useful lives of property plant and equipment fair value of investment properties hellip)
49
copy 2005-07 Nelson 97
Notes Disclosures (an entity is required to disclose the following)
bull Other disclosuresAn entity shall disclose in the notesa) the amount of dividends proposed or declared before the
financial statements were authorised for issue but not recognised as a distribution to equity holders during the period and the related amount per share(HK incorporated companies are required to show the aggregate amount which is recommended for distribution by way of dividend under a separate heading(s) in their balance sheet (HK Co Ord 10th Sch para 9(1)(e)) and
b) the amount of any cumulative preference dividends not recognised
copy 2005-07 Nelson 98
Notes Disclosures (an entity is required to disclose the following)
An entity shall disclose the following if not disclosedelsewhere in information published with the financial statementsa) the domicile and legal form of the entity
its country of incorporation andthe address of its registered office(or principal place of business if different from the registered office)
b) a description of the nature of the entityrsquos operations and its principal activities and
c) the name of the parent and the ultimate parent of the group
ldquoshall discloserdquo now instead of ldquoencouraged to discloserdquo
ldquoshall discloserdquo now instead of ldquoencouraged to discloserdquo
bull Other disclosures
Any specialAny special
50
copy 2005-07 Nelson 99
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)bull The principal activities of Galaxy Entertainment Group
Ltd (the lsquolsquoCompanyrsquorsquo) (formerly known as K WahConstruction Materials Ltd) and its subsidiaries (together the lsquolsquoGrouprsquorsquo) are tondash operate in casino games of chance or games of other forms
in Macau (and) manufacture sale and distribution of construction materials in HK Macau and Mainland China
bull The Company is ndash a limited liability company incorporated in Hong Kong and ndash has its listing on the Main Board of The Stock Exchange of
Hong Kong Limitedbull The address of its registered office and its principal place
of business is Room 1606 16th Floor Hutchison House 10 Harcourt Road Central HK
copy 2005-07 Nelson 100
Effective Date
bull An entity shall apply IAS 1 for annual periods beginning on or after 1 Jan 2005
ndash Earlier application is encouragedndash If an entity applies IAS 1 for an earlier period it shall
disclose this factbull For the amendments relating to the Statement of
Changes in Equityndash An entity shall apply it for annual periods beginning on
or after 1 Jan 2006ndash If an entity applies the amendments to IAS 19
Employee Benefits ndash Actuarial Gains and Losses Group Plans and Disclosures for an earlier period that amendment shall be applied for that earlier period
51
copy 2005-07 Nelson 101
Todayrsquos Agenda
Capital Disclosures (Amendments to IAS 1)
Capital Disclosures (Amendments to IAS 1)
copy 2005-07 Nelson 102
Capital Disclosures ndash For 2007
52
copy 2005-07 Nelson 103
Capital Disclosures
What is capital Is it helliphellip
CapitalCapital AssetsAssets LiabilitiesLiabilities= ndash
bull IAS 1BC47 considers ldquowhether an entity can have a view of capital that differs from what IFRSs define as equityrdquo
bull It further clarifies that although for the purposes of this disclosure capital would often equate with equity as defined in IFRSsndash it might also include or exclude some components
bull It also noted that the capital disclosure in IAS 1 is intended to give entities the opportunity to describendash how they view the components of capital they manage if this is
different from what IFRSs define as equity helliphellip
copy 2005-07 Nelson 104
EquityEquityEquity AssetsAssets LiabilitiesLiabilities= ndash
Capital Disclosures
Based on the Framework amp IFRSs the accounting equation should be
CapitalCapital AssetsAssets LiabilitiesLiabilities= ndash
bull An entityrsquos capital may be part of its equity plus part of its liabilities depending on how it manage ldquoits capitalrdquo helliphellip
53
copy 2005-07 Nelson 105
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowinga) qualitative information about its objectives policies and processes for
managing capital including (but not limited to)i) a description of what it manages as capitalii) when an entity is subject to externally imposed capital requirements
the nature of those requirements and how those requirements are incorporated into the management of capital and
iii) how it is meeting its objectives for managing capital
bull To comply with the capital disclosures the entity discloses thefollowinga) qualitative information about its objectives policies and processes for
managing capital including (but not limited to)i) a description of what it manages as capitalii) when an entity is subject to externally imposed capital requirements
the nature of those requirements and how those requirements are incorporated into the management of capital and
iii) how it is meeting its objectives for managing capital
copy 2005-07 Nelson 106
Capital Disclosures
Example disclosurebull The Grouprsquos objectives when managing capital are
ndash to safeguard the entityrsquos ability to continue as a going concern
bull so that it can continue to provide returns for shareholders and benefits for other stakeholders and
ndash to provide an adequate return to shareholders by pricing products and services commensurately with the level of risk
bull The Group sets the amount of capital in proportion to risk
ExampleExample
ObjectivesObjectives
54
copy 2005-07 Nelson 107
Capital Disclosures
bull The Group manages the capital structure and makes adjustments to it in the light ofndash changes in economic conditions and ndash the risk characteristics of the underlying assets
bull In order to maintain or adjust the capital structure the Group mayndash adjust the amount of dividends paid to shareholders ndash return capital to shareholders ndash issue new shares or ndash sell assets to reduce debt
ExampleExample
Example disclosure
HowHow
copy 2005-07 Nelson 108
Capital Disclosures
bull Consistently with others in the industry the Group monitors capital on the basis of ndash the debt-to-adjusted capital ratio
bull This ratio is calculated as net debt divide adjusted capital
ExampleExample
Example disclosure
HowHow
bull Net debt is calculated as ndash Total debt (as shown in the
balance sheet)ndash Less cash amp cash equivalents
bull Net debt is calculated as ndash Total debt (as shown in the
balance sheet)ndash Less cash amp cash equivalents
bull Adjusted capital ndash comprises all components of
equity (ie share capital share premium minority interest retained earnings and revaluation reserve) ndash other than amounts
recognised in equity relating to cash flow hedges and
ndash includes some forms of subordinated debt
bull Adjusted capital ndash comprises all components of
equity (ie share capital share premium minority interest retained earnings and revaluation reserve) ndash other than amounts
recognised in equity relating to cash flow hedges and
ndash includes some forms of subordinated debt
55
copy 2005-07 Nelson 109
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowing
bull To comply with the capital disclosures the entity discloses thefollowingb) summary quantitative data about what it manages as capital
Some entities regard some financial liabilities (eg some forms of subordinated debt) as part of capitalOther entities regard capital as excluding some components of equity (eg components arising from cash flow hedges)
c) any changes in (a) and (b) from the previous period
copy 2005-07 Nelson 110
Capital Disclosures
Example disclosure (continued from previous example)
ExampleExample
bull During 20X4 the Grouprsquos strategy which was unchanged from 20X3 was to maintain the debt-to-adjusted capital ratio at the lower end of the range 61 to 71 in order to secure access to finance at a reasonable cost by maintaining a BB credit rating The debt-to-adjusted capital ratios at 31 December 20X4 and at 31 December 20X3 were as follows
3112X4 ($rsquoM) 3112X3 ($rsquoM) Total debt 1000 1100 Less cash and cash equivalents (90) (150)Net debt 910 950
Total equity 110 105 Add subordinated debt instruments 38 38 Less amounts recognised in equity
relating to cash flow hedges (10) (5)Adjusted capital 138 138
Debt-to-adjusted capital ratio 66 69
56
copy 2005-07 Nelson 111
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowing
bull To comply with the capital disclosures the entity discloses thefollowingd) whether during the period it complied with any externally imposed capital
requirements to which it is subjecte) when the entity has not complied with such externally imposed capital
requirements the consequences of such non-complianceThese disclosures shall be based on the information provided internally to the entityrsquos key management personnel
copy 2005-07 Nelson 112
Capital DisclosuresExampleExample
Example disclosurebull Entity A filed its quarterly regulatory capital return for
30 September 20X7 on 20 October 20X7 bull At that date Entity Arsquos regulatory capital was below
the capital requirement imposed by Regulator B by $1 million
bull As a result Entity A was required to submit a plan to the regulator indicating how it would increase its regulatory capital to the amount required
bull Entity A submitted a plan that entailed selling part of its unquoted equities portfolio with a carrying amount of $115 million in the fourth quarter of 20X7
bull In the fourth quarter of 20X7 Entity A sold its fixed interest investment portfolio for $126 million and met its regulatory capital requirement
For example SFC or banks
For example SFC or banks
57
copy 2005-07 Nelson 113
Capital DisclosuresCaseCase
bull Early adopted capital disclosure in 2005 and itsannual report states that (extract only)ndash The Grouprsquos objectives when managing capital are
bull To safeguard the Grouprsquos ability to continue as a going concern so that it continues to provide returns for shareholders and benefits for other stakeholders
bull To support the Grouprsquos stability and growth andbull To provide capital for the purpose of strengthening the
Grouprsquos risk management capability
copy 2005-07 Nelson 114
Capital DisclosuresCaseCase
ndash The Group actively and regularly reviews and manages its capital structure to ensure optimal capital structure and shareholder returns taking into consideration the future capital requirements of the Group and capital efficiency helliphellip
ndash The Group adopts a dividend policy helliphellip while retaining 10 per cent of the profit as capital of the Group for future use
ndash The Group has set aside $1500 million of retained earnings for the purpose of strengthening the risk management regime of the clearing houses and supporting their roles as central counterparties
ndash As in prior years the Group monitors capital by reviewing the level of capital that is at the disposal of the Group (ldquoadjusted capitalrdquo) Adjusted capital comprises all components of shareholdersrsquo equity other than the hedging reserve relating to cash flow hedges designated reserves and investment revaluation reserve helliphellip
bull Early adopted capital disclosure in 2005 and itsannual report states that (extract only)
58
copy 2005-07 Nelson 115
Capital Disclosures ndash Transition
bull An entity shall apply the requirements of capital disclosure for
ndash annual periods beginning on or after 1 January 2007
bull Early application is encouraged
copy 2005-07 Nelson 116
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk
59
copy 2005-07 Nelson 117
QampA SessionQampA SessionQampA Session
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk
43
copy 2005-07 Nelson 85
Income StatementCaseCase
Nature or FunctionNature or Nature or FunctionFunction
copy 2005-07 Nelson 86
Statement of Changes in Equity bull An entity shall present a statement of changes in equity showing on the
face of the statementa) profit or loss for the period b) each item of income and expense for the period that as required by
IFRSs is recognised directly in equity and the total of these itemsc) total income and expense for the period (calculated as the sum of (a) and
(b)) showing separately the total amounts attributablebull to equity holders of the parent andbull to minority interest and
d) for each component of equity the effects of changes in accounting policies and corrections of errors recognised in accordance with IAS 8
Any ChangeAny Change
A revised requirementbull A statement of changes in equity that comprises only these items
shall be titled a statement of recognised income and expenses
A revised requirementbull A statement of changes in equity that comprises only these items
shall be titled a statement of recognised income and expenses
44
copy 2005-07 Nelson 87
Statement of Changes in Equity bull An entity shall also present either on the face of the
statement of changes in equity or in the notesa) the amounts of transactions with equity holders acting in
their capacity as equity holders showing separately distributions to equity holders
b) the balance of retained earnings (ie accumulated profit or loss) at the beginning of the period and at the balance sheet date and the changes during the period and
c) a reconciliation between the carrying amount of each class of contributed equity and each reserve at the beginning and the end of the period separately disclosing each change
copy 2005-07 Nelson 88
Statement of Changes in Equity
Consolidated SCE as at 31122005
CaseCase
45
copy 2005-07 Nelson 89
Notes Structure (an entity is required to disclose the following)
bull The notes shalla) present information about the basis of preparation of the financial statements
and the specific accounting policies usedb) disclose the information required by HKFRSs that is not presented on the
face of the balance sheet income statement statement of changes in equity or cash flow statement and
c) provide additional information that is not presented on the face of the balance sheet income statement statement of changes in equity or cash flow statement but is relevant to an understanding of any of them
bull Notes shall as far as practicable be presented in a systematic manner bull Each item on the face of the balance sheet income statement statement
of changes in equity and cash flow statement shall be cross-referencedto any related information in the notes
copy 2005-07 Nelson 90
Notes Disclosures (an entity is required to disclose the following)
bull Disclosure of accounting policiesAn entity shall disclose in the summary of significant accounting policiesa) the measurement basis (or bases) used in preparing the financial
statements andb) the other accounting policies used that are relevant to an understanding of
the financial statements
46
copy 2005-07 Nelson 91
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)ndash The financial statements have been prepared in
accordance with Hong Kong Financial Reporting Standards (lsquolsquoHKFRSrsquorsquo) issued by the Hong Kong Institute of Certified Public Accountants bull under the historical cost convention as modified by the
revaluation of investment properties available-for-sale financial assets derivative financial instruments and other investments which are carried at fair values helliphellip
ndash The principal accounting policies applied in the preparation of these financial statements are set out below These policies have been consistently applied to all the years presented except for those stated in note 2(a) above
copy 2005-07 Nelson 92
Notes Disclosures (an entity is required to disclose the following)
bull Disclosure of accounting policiesndash The judgements apart from those involving estimations management has
madebull in the process of applying the entityrsquos accounting policies that have the
most significant effect on the amounts recognised in the financial statements (in the summary of significant accounting policies or other notes)
Examples ndash Management makes judgements in determininga) whether financial assets are held-to-maturity investmentsb) when substantially all the significant risks and rewards of
ownership of financial assets and lease assets are transferred to other entities
c) whether in substance particular sales of goods are financing arrangements and therefore do not give rise to revenue and
d) whether the substance of the relationship between the entity and a special purpose entity indicates that the special purpose entity is controlled by the entity
Examples ndash Management makes judgements in determininga) whether financial assets are held-to-maturity investmentsb) when substantially all the significant risks and rewards of
ownership of financial assets and lease assets are transferred to other entities
c) whether in substance particular sales of goods are financing arrangements and therefore do not give rise to revenue and
d) whether the substance of the relationship between the entity and a special purpose entity indicates that the special purpose entity is controlled by the entity
47
copy 2005-07 Nelson 93
Notes Disclosures (an entity is required to disclose the following)
bull Key sources of estimation uncertaintyndash Information about the key assumptions concerning the future and
other key sources of estimation uncertainty at the balance sheet datebull that have a significant risk of causing a material adjustment to the
carrying amounts of assets and liabilities within the next financial yearndash In respect of those assets and liabilities the notes shall include details of
a) their nature andb) their carrying amount as at the balance sheet date
Examples ndash in the absence of recently observed market prices used to measure the following assets and liabilities future-oriented estimates are necessary to measurebull the recoverable amount of classes of PPEbull the effect of technological obsolescence on inventories
Estimates involve assumptions about such items asbull the risk adjustment to cash flows or discount rates usedbull future changes in salaries and in prices affecting other costs
Examples ndash in the absence of recently observed market prices used to measure the following assets and liabilities future-oriented estimates are necessary to measurebull the recoverable amount of classes of PPEbull the effect of technological obsolescence on inventories
Estimates involve assumptions about such items asbull the risk adjustment to cash flows or discount rates usedbull future changes in salaries and in prices affecting other costs
copy 2005-07 Nelson 94
Notes
Esprit Holdings LimitedEsprit Holdings Limitedbull Critical Accounting Estimates and Judgements
ndash Estimates and judgements are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonableunder the circumstances
ndash Critical accounting estimates and assumptionsbull The Group makes estimates and assumptions concerning
the future The resulting accounting estimates will by definition seldom equal the related actual results
bull The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below helliphellip (including (1) useful life and impairment of trademarks and (2) income taxes)
CaseCase
48
copy 2005-07 Nelson 95
Notes
Melco Development Limited (新濠國際發展有限公司)Notes to the financial statements for the year ended 31122005ndash The key assumptions concerning the future and other key sources
of estimation uncertainty at the balance sheet date that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below helliphellip(The issues discussed includebull Allowances for inventories bull Estimated impairment of goodwill Income taxes)
CaseCase
copy 2005-07 Nelson 96
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)ndash Estimates and judgements used in preparing the
financial statements are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonable under the circumstances
ndash The Group makes estimates and assumptionsconcerning the future
ndash The resulting accounting estimates will by definition seldom equal the related actual results
ndash The estimates and assumptions that have a significant effect on the carrying amounts of assets and liabilities are discussed below hellip (including impairment of goodwill impairment of gaming
licence Useful lives of property plant and equipment fair value of investment properties hellip)
49
copy 2005-07 Nelson 97
Notes Disclosures (an entity is required to disclose the following)
bull Other disclosuresAn entity shall disclose in the notesa) the amount of dividends proposed or declared before the
financial statements were authorised for issue but not recognised as a distribution to equity holders during the period and the related amount per share(HK incorporated companies are required to show the aggregate amount which is recommended for distribution by way of dividend under a separate heading(s) in their balance sheet (HK Co Ord 10th Sch para 9(1)(e)) and
b) the amount of any cumulative preference dividends not recognised
copy 2005-07 Nelson 98
Notes Disclosures (an entity is required to disclose the following)
An entity shall disclose the following if not disclosedelsewhere in information published with the financial statementsa) the domicile and legal form of the entity
its country of incorporation andthe address of its registered office(or principal place of business if different from the registered office)
b) a description of the nature of the entityrsquos operations and its principal activities and
c) the name of the parent and the ultimate parent of the group
ldquoshall discloserdquo now instead of ldquoencouraged to discloserdquo
ldquoshall discloserdquo now instead of ldquoencouraged to discloserdquo
bull Other disclosures
Any specialAny special
50
copy 2005-07 Nelson 99
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)bull The principal activities of Galaxy Entertainment Group
Ltd (the lsquolsquoCompanyrsquorsquo) (formerly known as K WahConstruction Materials Ltd) and its subsidiaries (together the lsquolsquoGrouprsquorsquo) are tondash operate in casino games of chance or games of other forms
in Macau (and) manufacture sale and distribution of construction materials in HK Macau and Mainland China
bull The Company is ndash a limited liability company incorporated in Hong Kong and ndash has its listing on the Main Board of The Stock Exchange of
Hong Kong Limitedbull The address of its registered office and its principal place
of business is Room 1606 16th Floor Hutchison House 10 Harcourt Road Central HK
copy 2005-07 Nelson 100
Effective Date
bull An entity shall apply IAS 1 for annual periods beginning on or after 1 Jan 2005
ndash Earlier application is encouragedndash If an entity applies IAS 1 for an earlier period it shall
disclose this factbull For the amendments relating to the Statement of
Changes in Equityndash An entity shall apply it for annual periods beginning on
or after 1 Jan 2006ndash If an entity applies the amendments to IAS 19
Employee Benefits ndash Actuarial Gains and Losses Group Plans and Disclosures for an earlier period that amendment shall be applied for that earlier period
51
copy 2005-07 Nelson 101
Todayrsquos Agenda
Capital Disclosures (Amendments to IAS 1)
Capital Disclosures (Amendments to IAS 1)
copy 2005-07 Nelson 102
Capital Disclosures ndash For 2007
52
copy 2005-07 Nelson 103
Capital Disclosures
What is capital Is it helliphellip
CapitalCapital AssetsAssets LiabilitiesLiabilities= ndash
bull IAS 1BC47 considers ldquowhether an entity can have a view of capital that differs from what IFRSs define as equityrdquo
bull It further clarifies that although for the purposes of this disclosure capital would often equate with equity as defined in IFRSsndash it might also include or exclude some components
bull It also noted that the capital disclosure in IAS 1 is intended to give entities the opportunity to describendash how they view the components of capital they manage if this is
different from what IFRSs define as equity helliphellip
copy 2005-07 Nelson 104
EquityEquityEquity AssetsAssets LiabilitiesLiabilities= ndash
Capital Disclosures
Based on the Framework amp IFRSs the accounting equation should be
CapitalCapital AssetsAssets LiabilitiesLiabilities= ndash
bull An entityrsquos capital may be part of its equity plus part of its liabilities depending on how it manage ldquoits capitalrdquo helliphellip
53
copy 2005-07 Nelson 105
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowinga) qualitative information about its objectives policies and processes for
managing capital including (but not limited to)i) a description of what it manages as capitalii) when an entity is subject to externally imposed capital requirements
the nature of those requirements and how those requirements are incorporated into the management of capital and
iii) how it is meeting its objectives for managing capital
bull To comply with the capital disclosures the entity discloses thefollowinga) qualitative information about its objectives policies and processes for
managing capital including (but not limited to)i) a description of what it manages as capitalii) when an entity is subject to externally imposed capital requirements
the nature of those requirements and how those requirements are incorporated into the management of capital and
iii) how it is meeting its objectives for managing capital
copy 2005-07 Nelson 106
Capital Disclosures
Example disclosurebull The Grouprsquos objectives when managing capital are
ndash to safeguard the entityrsquos ability to continue as a going concern
bull so that it can continue to provide returns for shareholders and benefits for other stakeholders and
ndash to provide an adequate return to shareholders by pricing products and services commensurately with the level of risk
bull The Group sets the amount of capital in proportion to risk
ExampleExample
ObjectivesObjectives
54
copy 2005-07 Nelson 107
Capital Disclosures
bull The Group manages the capital structure and makes adjustments to it in the light ofndash changes in economic conditions and ndash the risk characteristics of the underlying assets
bull In order to maintain or adjust the capital structure the Group mayndash adjust the amount of dividends paid to shareholders ndash return capital to shareholders ndash issue new shares or ndash sell assets to reduce debt
ExampleExample
Example disclosure
HowHow
copy 2005-07 Nelson 108
Capital Disclosures
bull Consistently with others in the industry the Group monitors capital on the basis of ndash the debt-to-adjusted capital ratio
bull This ratio is calculated as net debt divide adjusted capital
ExampleExample
Example disclosure
HowHow
bull Net debt is calculated as ndash Total debt (as shown in the
balance sheet)ndash Less cash amp cash equivalents
bull Net debt is calculated as ndash Total debt (as shown in the
balance sheet)ndash Less cash amp cash equivalents
bull Adjusted capital ndash comprises all components of
equity (ie share capital share premium minority interest retained earnings and revaluation reserve) ndash other than amounts
recognised in equity relating to cash flow hedges and
ndash includes some forms of subordinated debt
bull Adjusted capital ndash comprises all components of
equity (ie share capital share premium minority interest retained earnings and revaluation reserve) ndash other than amounts
recognised in equity relating to cash flow hedges and
ndash includes some forms of subordinated debt
55
copy 2005-07 Nelson 109
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowing
bull To comply with the capital disclosures the entity discloses thefollowingb) summary quantitative data about what it manages as capital
Some entities regard some financial liabilities (eg some forms of subordinated debt) as part of capitalOther entities regard capital as excluding some components of equity (eg components arising from cash flow hedges)
c) any changes in (a) and (b) from the previous period
copy 2005-07 Nelson 110
Capital Disclosures
Example disclosure (continued from previous example)
ExampleExample
bull During 20X4 the Grouprsquos strategy which was unchanged from 20X3 was to maintain the debt-to-adjusted capital ratio at the lower end of the range 61 to 71 in order to secure access to finance at a reasonable cost by maintaining a BB credit rating The debt-to-adjusted capital ratios at 31 December 20X4 and at 31 December 20X3 were as follows
3112X4 ($rsquoM) 3112X3 ($rsquoM) Total debt 1000 1100 Less cash and cash equivalents (90) (150)Net debt 910 950
Total equity 110 105 Add subordinated debt instruments 38 38 Less amounts recognised in equity
relating to cash flow hedges (10) (5)Adjusted capital 138 138
Debt-to-adjusted capital ratio 66 69
56
copy 2005-07 Nelson 111
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowing
bull To comply with the capital disclosures the entity discloses thefollowingd) whether during the period it complied with any externally imposed capital
requirements to which it is subjecte) when the entity has not complied with such externally imposed capital
requirements the consequences of such non-complianceThese disclosures shall be based on the information provided internally to the entityrsquos key management personnel
copy 2005-07 Nelson 112
Capital DisclosuresExampleExample
Example disclosurebull Entity A filed its quarterly regulatory capital return for
30 September 20X7 on 20 October 20X7 bull At that date Entity Arsquos regulatory capital was below
the capital requirement imposed by Regulator B by $1 million
bull As a result Entity A was required to submit a plan to the regulator indicating how it would increase its regulatory capital to the amount required
bull Entity A submitted a plan that entailed selling part of its unquoted equities portfolio with a carrying amount of $115 million in the fourth quarter of 20X7
bull In the fourth quarter of 20X7 Entity A sold its fixed interest investment portfolio for $126 million and met its regulatory capital requirement
For example SFC or banks
For example SFC or banks
57
copy 2005-07 Nelson 113
Capital DisclosuresCaseCase
bull Early adopted capital disclosure in 2005 and itsannual report states that (extract only)ndash The Grouprsquos objectives when managing capital are
bull To safeguard the Grouprsquos ability to continue as a going concern so that it continues to provide returns for shareholders and benefits for other stakeholders
bull To support the Grouprsquos stability and growth andbull To provide capital for the purpose of strengthening the
Grouprsquos risk management capability
copy 2005-07 Nelson 114
Capital DisclosuresCaseCase
ndash The Group actively and regularly reviews and manages its capital structure to ensure optimal capital structure and shareholder returns taking into consideration the future capital requirements of the Group and capital efficiency helliphellip
ndash The Group adopts a dividend policy helliphellip while retaining 10 per cent of the profit as capital of the Group for future use
ndash The Group has set aside $1500 million of retained earnings for the purpose of strengthening the risk management regime of the clearing houses and supporting their roles as central counterparties
ndash As in prior years the Group monitors capital by reviewing the level of capital that is at the disposal of the Group (ldquoadjusted capitalrdquo) Adjusted capital comprises all components of shareholdersrsquo equity other than the hedging reserve relating to cash flow hedges designated reserves and investment revaluation reserve helliphellip
bull Early adopted capital disclosure in 2005 and itsannual report states that (extract only)
58
copy 2005-07 Nelson 115
Capital Disclosures ndash Transition
bull An entity shall apply the requirements of capital disclosure for
ndash annual periods beginning on or after 1 January 2007
bull Early application is encouraged
copy 2005-07 Nelson 116
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk
59
copy 2005-07 Nelson 117
QampA SessionQampA SessionQampA Session
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk
44
copy 2005-07 Nelson 87
Statement of Changes in Equity bull An entity shall also present either on the face of the
statement of changes in equity or in the notesa) the amounts of transactions with equity holders acting in
their capacity as equity holders showing separately distributions to equity holders
b) the balance of retained earnings (ie accumulated profit or loss) at the beginning of the period and at the balance sheet date and the changes during the period and
c) a reconciliation between the carrying amount of each class of contributed equity and each reserve at the beginning and the end of the period separately disclosing each change
copy 2005-07 Nelson 88
Statement of Changes in Equity
Consolidated SCE as at 31122005
CaseCase
45
copy 2005-07 Nelson 89
Notes Structure (an entity is required to disclose the following)
bull The notes shalla) present information about the basis of preparation of the financial statements
and the specific accounting policies usedb) disclose the information required by HKFRSs that is not presented on the
face of the balance sheet income statement statement of changes in equity or cash flow statement and
c) provide additional information that is not presented on the face of the balance sheet income statement statement of changes in equity or cash flow statement but is relevant to an understanding of any of them
bull Notes shall as far as practicable be presented in a systematic manner bull Each item on the face of the balance sheet income statement statement
of changes in equity and cash flow statement shall be cross-referencedto any related information in the notes
copy 2005-07 Nelson 90
Notes Disclosures (an entity is required to disclose the following)
bull Disclosure of accounting policiesAn entity shall disclose in the summary of significant accounting policiesa) the measurement basis (or bases) used in preparing the financial
statements andb) the other accounting policies used that are relevant to an understanding of
the financial statements
46
copy 2005-07 Nelson 91
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)ndash The financial statements have been prepared in
accordance with Hong Kong Financial Reporting Standards (lsquolsquoHKFRSrsquorsquo) issued by the Hong Kong Institute of Certified Public Accountants bull under the historical cost convention as modified by the
revaluation of investment properties available-for-sale financial assets derivative financial instruments and other investments which are carried at fair values helliphellip
ndash The principal accounting policies applied in the preparation of these financial statements are set out below These policies have been consistently applied to all the years presented except for those stated in note 2(a) above
copy 2005-07 Nelson 92
Notes Disclosures (an entity is required to disclose the following)
bull Disclosure of accounting policiesndash The judgements apart from those involving estimations management has
madebull in the process of applying the entityrsquos accounting policies that have the
most significant effect on the amounts recognised in the financial statements (in the summary of significant accounting policies or other notes)
Examples ndash Management makes judgements in determininga) whether financial assets are held-to-maturity investmentsb) when substantially all the significant risks and rewards of
ownership of financial assets and lease assets are transferred to other entities
c) whether in substance particular sales of goods are financing arrangements and therefore do not give rise to revenue and
d) whether the substance of the relationship between the entity and a special purpose entity indicates that the special purpose entity is controlled by the entity
Examples ndash Management makes judgements in determininga) whether financial assets are held-to-maturity investmentsb) when substantially all the significant risks and rewards of
ownership of financial assets and lease assets are transferred to other entities
c) whether in substance particular sales of goods are financing arrangements and therefore do not give rise to revenue and
d) whether the substance of the relationship between the entity and a special purpose entity indicates that the special purpose entity is controlled by the entity
47
copy 2005-07 Nelson 93
Notes Disclosures (an entity is required to disclose the following)
bull Key sources of estimation uncertaintyndash Information about the key assumptions concerning the future and
other key sources of estimation uncertainty at the balance sheet datebull that have a significant risk of causing a material adjustment to the
carrying amounts of assets and liabilities within the next financial yearndash In respect of those assets and liabilities the notes shall include details of
a) their nature andb) their carrying amount as at the balance sheet date
Examples ndash in the absence of recently observed market prices used to measure the following assets and liabilities future-oriented estimates are necessary to measurebull the recoverable amount of classes of PPEbull the effect of technological obsolescence on inventories
Estimates involve assumptions about such items asbull the risk adjustment to cash flows or discount rates usedbull future changes in salaries and in prices affecting other costs
Examples ndash in the absence of recently observed market prices used to measure the following assets and liabilities future-oriented estimates are necessary to measurebull the recoverable amount of classes of PPEbull the effect of technological obsolescence on inventories
Estimates involve assumptions about such items asbull the risk adjustment to cash flows or discount rates usedbull future changes in salaries and in prices affecting other costs
copy 2005-07 Nelson 94
Notes
Esprit Holdings LimitedEsprit Holdings Limitedbull Critical Accounting Estimates and Judgements
ndash Estimates and judgements are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonableunder the circumstances
ndash Critical accounting estimates and assumptionsbull The Group makes estimates and assumptions concerning
the future The resulting accounting estimates will by definition seldom equal the related actual results
bull The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below helliphellip (including (1) useful life and impairment of trademarks and (2) income taxes)
CaseCase
48
copy 2005-07 Nelson 95
Notes
Melco Development Limited (新濠國際發展有限公司)Notes to the financial statements for the year ended 31122005ndash The key assumptions concerning the future and other key sources
of estimation uncertainty at the balance sheet date that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below helliphellip(The issues discussed includebull Allowances for inventories bull Estimated impairment of goodwill Income taxes)
CaseCase
copy 2005-07 Nelson 96
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)ndash Estimates and judgements used in preparing the
financial statements are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonable under the circumstances
ndash The Group makes estimates and assumptionsconcerning the future
ndash The resulting accounting estimates will by definition seldom equal the related actual results
ndash The estimates and assumptions that have a significant effect on the carrying amounts of assets and liabilities are discussed below hellip (including impairment of goodwill impairment of gaming
licence Useful lives of property plant and equipment fair value of investment properties hellip)
49
copy 2005-07 Nelson 97
Notes Disclosures (an entity is required to disclose the following)
bull Other disclosuresAn entity shall disclose in the notesa) the amount of dividends proposed or declared before the
financial statements were authorised for issue but not recognised as a distribution to equity holders during the period and the related amount per share(HK incorporated companies are required to show the aggregate amount which is recommended for distribution by way of dividend under a separate heading(s) in their balance sheet (HK Co Ord 10th Sch para 9(1)(e)) and
b) the amount of any cumulative preference dividends not recognised
copy 2005-07 Nelson 98
Notes Disclosures (an entity is required to disclose the following)
An entity shall disclose the following if not disclosedelsewhere in information published with the financial statementsa) the domicile and legal form of the entity
its country of incorporation andthe address of its registered office(or principal place of business if different from the registered office)
b) a description of the nature of the entityrsquos operations and its principal activities and
c) the name of the parent and the ultimate parent of the group
ldquoshall discloserdquo now instead of ldquoencouraged to discloserdquo
ldquoshall discloserdquo now instead of ldquoencouraged to discloserdquo
bull Other disclosures
Any specialAny special
50
copy 2005-07 Nelson 99
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)bull The principal activities of Galaxy Entertainment Group
Ltd (the lsquolsquoCompanyrsquorsquo) (formerly known as K WahConstruction Materials Ltd) and its subsidiaries (together the lsquolsquoGrouprsquorsquo) are tondash operate in casino games of chance or games of other forms
in Macau (and) manufacture sale and distribution of construction materials in HK Macau and Mainland China
bull The Company is ndash a limited liability company incorporated in Hong Kong and ndash has its listing on the Main Board of The Stock Exchange of
Hong Kong Limitedbull The address of its registered office and its principal place
of business is Room 1606 16th Floor Hutchison House 10 Harcourt Road Central HK
copy 2005-07 Nelson 100
Effective Date
bull An entity shall apply IAS 1 for annual periods beginning on or after 1 Jan 2005
ndash Earlier application is encouragedndash If an entity applies IAS 1 for an earlier period it shall
disclose this factbull For the amendments relating to the Statement of
Changes in Equityndash An entity shall apply it for annual periods beginning on
or after 1 Jan 2006ndash If an entity applies the amendments to IAS 19
Employee Benefits ndash Actuarial Gains and Losses Group Plans and Disclosures for an earlier period that amendment shall be applied for that earlier period
51
copy 2005-07 Nelson 101
Todayrsquos Agenda
Capital Disclosures (Amendments to IAS 1)
Capital Disclosures (Amendments to IAS 1)
copy 2005-07 Nelson 102
Capital Disclosures ndash For 2007
52
copy 2005-07 Nelson 103
Capital Disclosures
What is capital Is it helliphellip
CapitalCapital AssetsAssets LiabilitiesLiabilities= ndash
bull IAS 1BC47 considers ldquowhether an entity can have a view of capital that differs from what IFRSs define as equityrdquo
bull It further clarifies that although for the purposes of this disclosure capital would often equate with equity as defined in IFRSsndash it might also include or exclude some components
bull It also noted that the capital disclosure in IAS 1 is intended to give entities the opportunity to describendash how they view the components of capital they manage if this is
different from what IFRSs define as equity helliphellip
copy 2005-07 Nelson 104
EquityEquityEquity AssetsAssets LiabilitiesLiabilities= ndash
Capital Disclosures
Based on the Framework amp IFRSs the accounting equation should be
CapitalCapital AssetsAssets LiabilitiesLiabilities= ndash
bull An entityrsquos capital may be part of its equity plus part of its liabilities depending on how it manage ldquoits capitalrdquo helliphellip
53
copy 2005-07 Nelson 105
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowinga) qualitative information about its objectives policies and processes for
managing capital including (but not limited to)i) a description of what it manages as capitalii) when an entity is subject to externally imposed capital requirements
the nature of those requirements and how those requirements are incorporated into the management of capital and
iii) how it is meeting its objectives for managing capital
bull To comply with the capital disclosures the entity discloses thefollowinga) qualitative information about its objectives policies and processes for
managing capital including (but not limited to)i) a description of what it manages as capitalii) when an entity is subject to externally imposed capital requirements
the nature of those requirements and how those requirements are incorporated into the management of capital and
iii) how it is meeting its objectives for managing capital
copy 2005-07 Nelson 106
Capital Disclosures
Example disclosurebull The Grouprsquos objectives when managing capital are
ndash to safeguard the entityrsquos ability to continue as a going concern
bull so that it can continue to provide returns for shareholders and benefits for other stakeholders and
ndash to provide an adequate return to shareholders by pricing products and services commensurately with the level of risk
bull The Group sets the amount of capital in proportion to risk
ExampleExample
ObjectivesObjectives
54
copy 2005-07 Nelson 107
Capital Disclosures
bull The Group manages the capital structure and makes adjustments to it in the light ofndash changes in economic conditions and ndash the risk characteristics of the underlying assets
bull In order to maintain or adjust the capital structure the Group mayndash adjust the amount of dividends paid to shareholders ndash return capital to shareholders ndash issue new shares or ndash sell assets to reduce debt
ExampleExample
Example disclosure
HowHow
copy 2005-07 Nelson 108
Capital Disclosures
bull Consistently with others in the industry the Group monitors capital on the basis of ndash the debt-to-adjusted capital ratio
bull This ratio is calculated as net debt divide adjusted capital
ExampleExample
Example disclosure
HowHow
bull Net debt is calculated as ndash Total debt (as shown in the
balance sheet)ndash Less cash amp cash equivalents
bull Net debt is calculated as ndash Total debt (as shown in the
balance sheet)ndash Less cash amp cash equivalents
bull Adjusted capital ndash comprises all components of
equity (ie share capital share premium minority interest retained earnings and revaluation reserve) ndash other than amounts
recognised in equity relating to cash flow hedges and
ndash includes some forms of subordinated debt
bull Adjusted capital ndash comprises all components of
equity (ie share capital share premium minority interest retained earnings and revaluation reserve) ndash other than amounts
recognised in equity relating to cash flow hedges and
ndash includes some forms of subordinated debt
55
copy 2005-07 Nelson 109
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowing
bull To comply with the capital disclosures the entity discloses thefollowingb) summary quantitative data about what it manages as capital
Some entities regard some financial liabilities (eg some forms of subordinated debt) as part of capitalOther entities regard capital as excluding some components of equity (eg components arising from cash flow hedges)
c) any changes in (a) and (b) from the previous period
copy 2005-07 Nelson 110
Capital Disclosures
Example disclosure (continued from previous example)
ExampleExample
bull During 20X4 the Grouprsquos strategy which was unchanged from 20X3 was to maintain the debt-to-adjusted capital ratio at the lower end of the range 61 to 71 in order to secure access to finance at a reasonable cost by maintaining a BB credit rating The debt-to-adjusted capital ratios at 31 December 20X4 and at 31 December 20X3 were as follows
3112X4 ($rsquoM) 3112X3 ($rsquoM) Total debt 1000 1100 Less cash and cash equivalents (90) (150)Net debt 910 950
Total equity 110 105 Add subordinated debt instruments 38 38 Less amounts recognised in equity
relating to cash flow hedges (10) (5)Adjusted capital 138 138
Debt-to-adjusted capital ratio 66 69
56
copy 2005-07 Nelson 111
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowing
bull To comply with the capital disclosures the entity discloses thefollowingd) whether during the period it complied with any externally imposed capital
requirements to which it is subjecte) when the entity has not complied with such externally imposed capital
requirements the consequences of such non-complianceThese disclosures shall be based on the information provided internally to the entityrsquos key management personnel
copy 2005-07 Nelson 112
Capital DisclosuresExampleExample
Example disclosurebull Entity A filed its quarterly regulatory capital return for
30 September 20X7 on 20 October 20X7 bull At that date Entity Arsquos regulatory capital was below
the capital requirement imposed by Regulator B by $1 million
bull As a result Entity A was required to submit a plan to the regulator indicating how it would increase its regulatory capital to the amount required
bull Entity A submitted a plan that entailed selling part of its unquoted equities portfolio with a carrying amount of $115 million in the fourth quarter of 20X7
bull In the fourth quarter of 20X7 Entity A sold its fixed interest investment portfolio for $126 million and met its regulatory capital requirement
For example SFC or banks
For example SFC or banks
57
copy 2005-07 Nelson 113
Capital DisclosuresCaseCase
bull Early adopted capital disclosure in 2005 and itsannual report states that (extract only)ndash The Grouprsquos objectives when managing capital are
bull To safeguard the Grouprsquos ability to continue as a going concern so that it continues to provide returns for shareholders and benefits for other stakeholders
bull To support the Grouprsquos stability and growth andbull To provide capital for the purpose of strengthening the
Grouprsquos risk management capability
copy 2005-07 Nelson 114
Capital DisclosuresCaseCase
ndash The Group actively and regularly reviews and manages its capital structure to ensure optimal capital structure and shareholder returns taking into consideration the future capital requirements of the Group and capital efficiency helliphellip
ndash The Group adopts a dividend policy helliphellip while retaining 10 per cent of the profit as capital of the Group for future use
ndash The Group has set aside $1500 million of retained earnings for the purpose of strengthening the risk management regime of the clearing houses and supporting their roles as central counterparties
ndash As in prior years the Group monitors capital by reviewing the level of capital that is at the disposal of the Group (ldquoadjusted capitalrdquo) Adjusted capital comprises all components of shareholdersrsquo equity other than the hedging reserve relating to cash flow hedges designated reserves and investment revaluation reserve helliphellip
bull Early adopted capital disclosure in 2005 and itsannual report states that (extract only)
58
copy 2005-07 Nelson 115
Capital Disclosures ndash Transition
bull An entity shall apply the requirements of capital disclosure for
ndash annual periods beginning on or after 1 January 2007
bull Early application is encouraged
copy 2005-07 Nelson 116
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk
59
copy 2005-07 Nelson 117
QampA SessionQampA SessionQampA Session
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk
45
copy 2005-07 Nelson 89
Notes Structure (an entity is required to disclose the following)
bull The notes shalla) present information about the basis of preparation of the financial statements
and the specific accounting policies usedb) disclose the information required by HKFRSs that is not presented on the
face of the balance sheet income statement statement of changes in equity or cash flow statement and
c) provide additional information that is not presented on the face of the balance sheet income statement statement of changes in equity or cash flow statement but is relevant to an understanding of any of them
bull Notes shall as far as practicable be presented in a systematic manner bull Each item on the face of the balance sheet income statement statement
of changes in equity and cash flow statement shall be cross-referencedto any related information in the notes
copy 2005-07 Nelson 90
Notes Disclosures (an entity is required to disclose the following)
bull Disclosure of accounting policiesAn entity shall disclose in the summary of significant accounting policiesa) the measurement basis (or bases) used in preparing the financial
statements andb) the other accounting policies used that are relevant to an understanding of
the financial statements
46
copy 2005-07 Nelson 91
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)ndash The financial statements have been prepared in
accordance with Hong Kong Financial Reporting Standards (lsquolsquoHKFRSrsquorsquo) issued by the Hong Kong Institute of Certified Public Accountants bull under the historical cost convention as modified by the
revaluation of investment properties available-for-sale financial assets derivative financial instruments and other investments which are carried at fair values helliphellip
ndash The principal accounting policies applied in the preparation of these financial statements are set out below These policies have been consistently applied to all the years presented except for those stated in note 2(a) above
copy 2005-07 Nelson 92
Notes Disclosures (an entity is required to disclose the following)
bull Disclosure of accounting policiesndash The judgements apart from those involving estimations management has
madebull in the process of applying the entityrsquos accounting policies that have the
most significant effect on the amounts recognised in the financial statements (in the summary of significant accounting policies or other notes)
Examples ndash Management makes judgements in determininga) whether financial assets are held-to-maturity investmentsb) when substantially all the significant risks and rewards of
ownership of financial assets and lease assets are transferred to other entities
c) whether in substance particular sales of goods are financing arrangements and therefore do not give rise to revenue and
d) whether the substance of the relationship between the entity and a special purpose entity indicates that the special purpose entity is controlled by the entity
Examples ndash Management makes judgements in determininga) whether financial assets are held-to-maturity investmentsb) when substantially all the significant risks and rewards of
ownership of financial assets and lease assets are transferred to other entities
c) whether in substance particular sales of goods are financing arrangements and therefore do not give rise to revenue and
d) whether the substance of the relationship between the entity and a special purpose entity indicates that the special purpose entity is controlled by the entity
47
copy 2005-07 Nelson 93
Notes Disclosures (an entity is required to disclose the following)
bull Key sources of estimation uncertaintyndash Information about the key assumptions concerning the future and
other key sources of estimation uncertainty at the balance sheet datebull that have a significant risk of causing a material adjustment to the
carrying amounts of assets and liabilities within the next financial yearndash In respect of those assets and liabilities the notes shall include details of
a) their nature andb) their carrying amount as at the balance sheet date
Examples ndash in the absence of recently observed market prices used to measure the following assets and liabilities future-oriented estimates are necessary to measurebull the recoverable amount of classes of PPEbull the effect of technological obsolescence on inventories
Estimates involve assumptions about such items asbull the risk adjustment to cash flows or discount rates usedbull future changes in salaries and in prices affecting other costs
Examples ndash in the absence of recently observed market prices used to measure the following assets and liabilities future-oriented estimates are necessary to measurebull the recoverable amount of classes of PPEbull the effect of technological obsolescence on inventories
Estimates involve assumptions about such items asbull the risk adjustment to cash flows or discount rates usedbull future changes in salaries and in prices affecting other costs
copy 2005-07 Nelson 94
Notes
Esprit Holdings LimitedEsprit Holdings Limitedbull Critical Accounting Estimates and Judgements
ndash Estimates and judgements are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonableunder the circumstances
ndash Critical accounting estimates and assumptionsbull The Group makes estimates and assumptions concerning
the future The resulting accounting estimates will by definition seldom equal the related actual results
bull The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below helliphellip (including (1) useful life and impairment of trademarks and (2) income taxes)
CaseCase
48
copy 2005-07 Nelson 95
Notes
Melco Development Limited (新濠國際發展有限公司)Notes to the financial statements for the year ended 31122005ndash The key assumptions concerning the future and other key sources
of estimation uncertainty at the balance sheet date that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below helliphellip(The issues discussed includebull Allowances for inventories bull Estimated impairment of goodwill Income taxes)
CaseCase
copy 2005-07 Nelson 96
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)ndash Estimates and judgements used in preparing the
financial statements are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonable under the circumstances
ndash The Group makes estimates and assumptionsconcerning the future
ndash The resulting accounting estimates will by definition seldom equal the related actual results
ndash The estimates and assumptions that have a significant effect on the carrying amounts of assets and liabilities are discussed below hellip (including impairment of goodwill impairment of gaming
licence Useful lives of property plant and equipment fair value of investment properties hellip)
49
copy 2005-07 Nelson 97
Notes Disclosures (an entity is required to disclose the following)
bull Other disclosuresAn entity shall disclose in the notesa) the amount of dividends proposed or declared before the
financial statements were authorised for issue but not recognised as a distribution to equity holders during the period and the related amount per share(HK incorporated companies are required to show the aggregate amount which is recommended for distribution by way of dividend under a separate heading(s) in their balance sheet (HK Co Ord 10th Sch para 9(1)(e)) and
b) the amount of any cumulative preference dividends not recognised
copy 2005-07 Nelson 98
Notes Disclosures (an entity is required to disclose the following)
An entity shall disclose the following if not disclosedelsewhere in information published with the financial statementsa) the domicile and legal form of the entity
its country of incorporation andthe address of its registered office(or principal place of business if different from the registered office)
b) a description of the nature of the entityrsquos operations and its principal activities and
c) the name of the parent and the ultimate parent of the group
ldquoshall discloserdquo now instead of ldquoencouraged to discloserdquo
ldquoshall discloserdquo now instead of ldquoencouraged to discloserdquo
bull Other disclosures
Any specialAny special
50
copy 2005-07 Nelson 99
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)bull The principal activities of Galaxy Entertainment Group
Ltd (the lsquolsquoCompanyrsquorsquo) (formerly known as K WahConstruction Materials Ltd) and its subsidiaries (together the lsquolsquoGrouprsquorsquo) are tondash operate in casino games of chance or games of other forms
in Macau (and) manufacture sale and distribution of construction materials in HK Macau and Mainland China
bull The Company is ndash a limited liability company incorporated in Hong Kong and ndash has its listing on the Main Board of The Stock Exchange of
Hong Kong Limitedbull The address of its registered office and its principal place
of business is Room 1606 16th Floor Hutchison House 10 Harcourt Road Central HK
copy 2005-07 Nelson 100
Effective Date
bull An entity shall apply IAS 1 for annual periods beginning on or after 1 Jan 2005
ndash Earlier application is encouragedndash If an entity applies IAS 1 for an earlier period it shall
disclose this factbull For the amendments relating to the Statement of
Changes in Equityndash An entity shall apply it for annual periods beginning on
or after 1 Jan 2006ndash If an entity applies the amendments to IAS 19
Employee Benefits ndash Actuarial Gains and Losses Group Plans and Disclosures for an earlier period that amendment shall be applied for that earlier period
51
copy 2005-07 Nelson 101
Todayrsquos Agenda
Capital Disclosures (Amendments to IAS 1)
Capital Disclosures (Amendments to IAS 1)
copy 2005-07 Nelson 102
Capital Disclosures ndash For 2007
52
copy 2005-07 Nelson 103
Capital Disclosures
What is capital Is it helliphellip
CapitalCapital AssetsAssets LiabilitiesLiabilities= ndash
bull IAS 1BC47 considers ldquowhether an entity can have a view of capital that differs from what IFRSs define as equityrdquo
bull It further clarifies that although for the purposes of this disclosure capital would often equate with equity as defined in IFRSsndash it might also include or exclude some components
bull It also noted that the capital disclosure in IAS 1 is intended to give entities the opportunity to describendash how they view the components of capital they manage if this is
different from what IFRSs define as equity helliphellip
copy 2005-07 Nelson 104
EquityEquityEquity AssetsAssets LiabilitiesLiabilities= ndash
Capital Disclosures
Based on the Framework amp IFRSs the accounting equation should be
CapitalCapital AssetsAssets LiabilitiesLiabilities= ndash
bull An entityrsquos capital may be part of its equity plus part of its liabilities depending on how it manage ldquoits capitalrdquo helliphellip
53
copy 2005-07 Nelson 105
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowinga) qualitative information about its objectives policies and processes for
managing capital including (but not limited to)i) a description of what it manages as capitalii) when an entity is subject to externally imposed capital requirements
the nature of those requirements and how those requirements are incorporated into the management of capital and
iii) how it is meeting its objectives for managing capital
bull To comply with the capital disclosures the entity discloses thefollowinga) qualitative information about its objectives policies and processes for
managing capital including (but not limited to)i) a description of what it manages as capitalii) when an entity is subject to externally imposed capital requirements
the nature of those requirements and how those requirements are incorporated into the management of capital and
iii) how it is meeting its objectives for managing capital
copy 2005-07 Nelson 106
Capital Disclosures
Example disclosurebull The Grouprsquos objectives when managing capital are
ndash to safeguard the entityrsquos ability to continue as a going concern
bull so that it can continue to provide returns for shareholders and benefits for other stakeholders and
ndash to provide an adequate return to shareholders by pricing products and services commensurately with the level of risk
bull The Group sets the amount of capital in proportion to risk
ExampleExample
ObjectivesObjectives
54
copy 2005-07 Nelson 107
Capital Disclosures
bull The Group manages the capital structure and makes adjustments to it in the light ofndash changes in economic conditions and ndash the risk characteristics of the underlying assets
bull In order to maintain or adjust the capital structure the Group mayndash adjust the amount of dividends paid to shareholders ndash return capital to shareholders ndash issue new shares or ndash sell assets to reduce debt
ExampleExample
Example disclosure
HowHow
copy 2005-07 Nelson 108
Capital Disclosures
bull Consistently with others in the industry the Group monitors capital on the basis of ndash the debt-to-adjusted capital ratio
bull This ratio is calculated as net debt divide adjusted capital
ExampleExample
Example disclosure
HowHow
bull Net debt is calculated as ndash Total debt (as shown in the
balance sheet)ndash Less cash amp cash equivalents
bull Net debt is calculated as ndash Total debt (as shown in the
balance sheet)ndash Less cash amp cash equivalents
bull Adjusted capital ndash comprises all components of
equity (ie share capital share premium minority interest retained earnings and revaluation reserve) ndash other than amounts
recognised in equity relating to cash flow hedges and
ndash includes some forms of subordinated debt
bull Adjusted capital ndash comprises all components of
equity (ie share capital share premium minority interest retained earnings and revaluation reserve) ndash other than amounts
recognised in equity relating to cash flow hedges and
ndash includes some forms of subordinated debt
55
copy 2005-07 Nelson 109
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowing
bull To comply with the capital disclosures the entity discloses thefollowingb) summary quantitative data about what it manages as capital
Some entities regard some financial liabilities (eg some forms of subordinated debt) as part of capitalOther entities regard capital as excluding some components of equity (eg components arising from cash flow hedges)
c) any changes in (a) and (b) from the previous period
copy 2005-07 Nelson 110
Capital Disclosures
Example disclosure (continued from previous example)
ExampleExample
bull During 20X4 the Grouprsquos strategy which was unchanged from 20X3 was to maintain the debt-to-adjusted capital ratio at the lower end of the range 61 to 71 in order to secure access to finance at a reasonable cost by maintaining a BB credit rating The debt-to-adjusted capital ratios at 31 December 20X4 and at 31 December 20X3 were as follows
3112X4 ($rsquoM) 3112X3 ($rsquoM) Total debt 1000 1100 Less cash and cash equivalents (90) (150)Net debt 910 950
Total equity 110 105 Add subordinated debt instruments 38 38 Less amounts recognised in equity
relating to cash flow hedges (10) (5)Adjusted capital 138 138
Debt-to-adjusted capital ratio 66 69
56
copy 2005-07 Nelson 111
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowing
bull To comply with the capital disclosures the entity discloses thefollowingd) whether during the period it complied with any externally imposed capital
requirements to which it is subjecte) when the entity has not complied with such externally imposed capital
requirements the consequences of such non-complianceThese disclosures shall be based on the information provided internally to the entityrsquos key management personnel
copy 2005-07 Nelson 112
Capital DisclosuresExampleExample
Example disclosurebull Entity A filed its quarterly regulatory capital return for
30 September 20X7 on 20 October 20X7 bull At that date Entity Arsquos regulatory capital was below
the capital requirement imposed by Regulator B by $1 million
bull As a result Entity A was required to submit a plan to the regulator indicating how it would increase its regulatory capital to the amount required
bull Entity A submitted a plan that entailed selling part of its unquoted equities portfolio with a carrying amount of $115 million in the fourth quarter of 20X7
bull In the fourth quarter of 20X7 Entity A sold its fixed interest investment portfolio for $126 million and met its regulatory capital requirement
For example SFC or banks
For example SFC or banks
57
copy 2005-07 Nelson 113
Capital DisclosuresCaseCase
bull Early adopted capital disclosure in 2005 and itsannual report states that (extract only)ndash The Grouprsquos objectives when managing capital are
bull To safeguard the Grouprsquos ability to continue as a going concern so that it continues to provide returns for shareholders and benefits for other stakeholders
bull To support the Grouprsquos stability and growth andbull To provide capital for the purpose of strengthening the
Grouprsquos risk management capability
copy 2005-07 Nelson 114
Capital DisclosuresCaseCase
ndash The Group actively and regularly reviews and manages its capital structure to ensure optimal capital structure and shareholder returns taking into consideration the future capital requirements of the Group and capital efficiency helliphellip
ndash The Group adopts a dividend policy helliphellip while retaining 10 per cent of the profit as capital of the Group for future use
ndash The Group has set aside $1500 million of retained earnings for the purpose of strengthening the risk management regime of the clearing houses and supporting their roles as central counterparties
ndash As in prior years the Group monitors capital by reviewing the level of capital that is at the disposal of the Group (ldquoadjusted capitalrdquo) Adjusted capital comprises all components of shareholdersrsquo equity other than the hedging reserve relating to cash flow hedges designated reserves and investment revaluation reserve helliphellip
bull Early adopted capital disclosure in 2005 and itsannual report states that (extract only)
58
copy 2005-07 Nelson 115
Capital Disclosures ndash Transition
bull An entity shall apply the requirements of capital disclosure for
ndash annual periods beginning on or after 1 January 2007
bull Early application is encouraged
copy 2005-07 Nelson 116
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk
59
copy 2005-07 Nelson 117
QampA SessionQampA SessionQampA Session
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk
46
copy 2005-07 Nelson 91
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)ndash The financial statements have been prepared in
accordance with Hong Kong Financial Reporting Standards (lsquolsquoHKFRSrsquorsquo) issued by the Hong Kong Institute of Certified Public Accountants bull under the historical cost convention as modified by the
revaluation of investment properties available-for-sale financial assets derivative financial instruments and other investments which are carried at fair values helliphellip
ndash The principal accounting policies applied in the preparation of these financial statements are set out below These policies have been consistently applied to all the years presented except for those stated in note 2(a) above
copy 2005-07 Nelson 92
Notes Disclosures (an entity is required to disclose the following)
bull Disclosure of accounting policiesndash The judgements apart from those involving estimations management has
madebull in the process of applying the entityrsquos accounting policies that have the
most significant effect on the amounts recognised in the financial statements (in the summary of significant accounting policies or other notes)
Examples ndash Management makes judgements in determininga) whether financial assets are held-to-maturity investmentsb) when substantially all the significant risks and rewards of
ownership of financial assets and lease assets are transferred to other entities
c) whether in substance particular sales of goods are financing arrangements and therefore do not give rise to revenue and
d) whether the substance of the relationship between the entity and a special purpose entity indicates that the special purpose entity is controlled by the entity
Examples ndash Management makes judgements in determininga) whether financial assets are held-to-maturity investmentsb) when substantially all the significant risks and rewards of
ownership of financial assets and lease assets are transferred to other entities
c) whether in substance particular sales of goods are financing arrangements and therefore do not give rise to revenue and
d) whether the substance of the relationship between the entity and a special purpose entity indicates that the special purpose entity is controlled by the entity
47
copy 2005-07 Nelson 93
Notes Disclosures (an entity is required to disclose the following)
bull Key sources of estimation uncertaintyndash Information about the key assumptions concerning the future and
other key sources of estimation uncertainty at the balance sheet datebull that have a significant risk of causing a material adjustment to the
carrying amounts of assets and liabilities within the next financial yearndash In respect of those assets and liabilities the notes shall include details of
a) their nature andb) their carrying amount as at the balance sheet date
Examples ndash in the absence of recently observed market prices used to measure the following assets and liabilities future-oriented estimates are necessary to measurebull the recoverable amount of classes of PPEbull the effect of technological obsolescence on inventories
Estimates involve assumptions about such items asbull the risk adjustment to cash flows or discount rates usedbull future changes in salaries and in prices affecting other costs
Examples ndash in the absence of recently observed market prices used to measure the following assets and liabilities future-oriented estimates are necessary to measurebull the recoverable amount of classes of PPEbull the effect of technological obsolescence on inventories
Estimates involve assumptions about such items asbull the risk adjustment to cash flows or discount rates usedbull future changes in salaries and in prices affecting other costs
copy 2005-07 Nelson 94
Notes
Esprit Holdings LimitedEsprit Holdings Limitedbull Critical Accounting Estimates and Judgements
ndash Estimates and judgements are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonableunder the circumstances
ndash Critical accounting estimates and assumptionsbull The Group makes estimates and assumptions concerning
the future The resulting accounting estimates will by definition seldom equal the related actual results
bull The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below helliphellip (including (1) useful life and impairment of trademarks and (2) income taxes)
CaseCase
48
copy 2005-07 Nelson 95
Notes
Melco Development Limited (新濠國際發展有限公司)Notes to the financial statements for the year ended 31122005ndash The key assumptions concerning the future and other key sources
of estimation uncertainty at the balance sheet date that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below helliphellip(The issues discussed includebull Allowances for inventories bull Estimated impairment of goodwill Income taxes)
CaseCase
copy 2005-07 Nelson 96
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)ndash Estimates and judgements used in preparing the
financial statements are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonable under the circumstances
ndash The Group makes estimates and assumptionsconcerning the future
ndash The resulting accounting estimates will by definition seldom equal the related actual results
ndash The estimates and assumptions that have a significant effect on the carrying amounts of assets and liabilities are discussed below hellip (including impairment of goodwill impairment of gaming
licence Useful lives of property plant and equipment fair value of investment properties hellip)
49
copy 2005-07 Nelson 97
Notes Disclosures (an entity is required to disclose the following)
bull Other disclosuresAn entity shall disclose in the notesa) the amount of dividends proposed or declared before the
financial statements were authorised for issue but not recognised as a distribution to equity holders during the period and the related amount per share(HK incorporated companies are required to show the aggregate amount which is recommended for distribution by way of dividend under a separate heading(s) in their balance sheet (HK Co Ord 10th Sch para 9(1)(e)) and
b) the amount of any cumulative preference dividends not recognised
copy 2005-07 Nelson 98
Notes Disclosures (an entity is required to disclose the following)
An entity shall disclose the following if not disclosedelsewhere in information published with the financial statementsa) the domicile and legal form of the entity
its country of incorporation andthe address of its registered office(or principal place of business if different from the registered office)
b) a description of the nature of the entityrsquos operations and its principal activities and
c) the name of the parent and the ultimate parent of the group
ldquoshall discloserdquo now instead of ldquoencouraged to discloserdquo
ldquoshall discloserdquo now instead of ldquoencouraged to discloserdquo
bull Other disclosures
Any specialAny special
50
copy 2005-07 Nelson 99
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)bull The principal activities of Galaxy Entertainment Group
Ltd (the lsquolsquoCompanyrsquorsquo) (formerly known as K WahConstruction Materials Ltd) and its subsidiaries (together the lsquolsquoGrouprsquorsquo) are tondash operate in casino games of chance or games of other forms
in Macau (and) manufacture sale and distribution of construction materials in HK Macau and Mainland China
bull The Company is ndash a limited liability company incorporated in Hong Kong and ndash has its listing on the Main Board of The Stock Exchange of
Hong Kong Limitedbull The address of its registered office and its principal place
of business is Room 1606 16th Floor Hutchison House 10 Harcourt Road Central HK
copy 2005-07 Nelson 100
Effective Date
bull An entity shall apply IAS 1 for annual periods beginning on or after 1 Jan 2005
ndash Earlier application is encouragedndash If an entity applies IAS 1 for an earlier period it shall
disclose this factbull For the amendments relating to the Statement of
Changes in Equityndash An entity shall apply it for annual periods beginning on
or after 1 Jan 2006ndash If an entity applies the amendments to IAS 19
Employee Benefits ndash Actuarial Gains and Losses Group Plans and Disclosures for an earlier period that amendment shall be applied for that earlier period
51
copy 2005-07 Nelson 101
Todayrsquos Agenda
Capital Disclosures (Amendments to IAS 1)
Capital Disclosures (Amendments to IAS 1)
copy 2005-07 Nelson 102
Capital Disclosures ndash For 2007
52
copy 2005-07 Nelson 103
Capital Disclosures
What is capital Is it helliphellip
CapitalCapital AssetsAssets LiabilitiesLiabilities= ndash
bull IAS 1BC47 considers ldquowhether an entity can have a view of capital that differs from what IFRSs define as equityrdquo
bull It further clarifies that although for the purposes of this disclosure capital would often equate with equity as defined in IFRSsndash it might also include or exclude some components
bull It also noted that the capital disclosure in IAS 1 is intended to give entities the opportunity to describendash how they view the components of capital they manage if this is
different from what IFRSs define as equity helliphellip
copy 2005-07 Nelson 104
EquityEquityEquity AssetsAssets LiabilitiesLiabilities= ndash
Capital Disclosures
Based on the Framework amp IFRSs the accounting equation should be
CapitalCapital AssetsAssets LiabilitiesLiabilities= ndash
bull An entityrsquos capital may be part of its equity plus part of its liabilities depending on how it manage ldquoits capitalrdquo helliphellip
53
copy 2005-07 Nelson 105
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowinga) qualitative information about its objectives policies and processes for
managing capital including (but not limited to)i) a description of what it manages as capitalii) when an entity is subject to externally imposed capital requirements
the nature of those requirements and how those requirements are incorporated into the management of capital and
iii) how it is meeting its objectives for managing capital
bull To comply with the capital disclosures the entity discloses thefollowinga) qualitative information about its objectives policies and processes for
managing capital including (but not limited to)i) a description of what it manages as capitalii) when an entity is subject to externally imposed capital requirements
the nature of those requirements and how those requirements are incorporated into the management of capital and
iii) how it is meeting its objectives for managing capital
copy 2005-07 Nelson 106
Capital Disclosures
Example disclosurebull The Grouprsquos objectives when managing capital are
ndash to safeguard the entityrsquos ability to continue as a going concern
bull so that it can continue to provide returns for shareholders and benefits for other stakeholders and
ndash to provide an adequate return to shareholders by pricing products and services commensurately with the level of risk
bull The Group sets the amount of capital in proportion to risk
ExampleExample
ObjectivesObjectives
54
copy 2005-07 Nelson 107
Capital Disclosures
bull The Group manages the capital structure and makes adjustments to it in the light ofndash changes in economic conditions and ndash the risk characteristics of the underlying assets
bull In order to maintain or adjust the capital structure the Group mayndash adjust the amount of dividends paid to shareholders ndash return capital to shareholders ndash issue new shares or ndash sell assets to reduce debt
ExampleExample
Example disclosure
HowHow
copy 2005-07 Nelson 108
Capital Disclosures
bull Consistently with others in the industry the Group monitors capital on the basis of ndash the debt-to-adjusted capital ratio
bull This ratio is calculated as net debt divide adjusted capital
ExampleExample
Example disclosure
HowHow
bull Net debt is calculated as ndash Total debt (as shown in the
balance sheet)ndash Less cash amp cash equivalents
bull Net debt is calculated as ndash Total debt (as shown in the
balance sheet)ndash Less cash amp cash equivalents
bull Adjusted capital ndash comprises all components of
equity (ie share capital share premium minority interest retained earnings and revaluation reserve) ndash other than amounts
recognised in equity relating to cash flow hedges and
ndash includes some forms of subordinated debt
bull Adjusted capital ndash comprises all components of
equity (ie share capital share premium minority interest retained earnings and revaluation reserve) ndash other than amounts
recognised in equity relating to cash flow hedges and
ndash includes some forms of subordinated debt
55
copy 2005-07 Nelson 109
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowing
bull To comply with the capital disclosures the entity discloses thefollowingb) summary quantitative data about what it manages as capital
Some entities regard some financial liabilities (eg some forms of subordinated debt) as part of capitalOther entities regard capital as excluding some components of equity (eg components arising from cash flow hedges)
c) any changes in (a) and (b) from the previous period
copy 2005-07 Nelson 110
Capital Disclosures
Example disclosure (continued from previous example)
ExampleExample
bull During 20X4 the Grouprsquos strategy which was unchanged from 20X3 was to maintain the debt-to-adjusted capital ratio at the lower end of the range 61 to 71 in order to secure access to finance at a reasonable cost by maintaining a BB credit rating The debt-to-adjusted capital ratios at 31 December 20X4 and at 31 December 20X3 were as follows
3112X4 ($rsquoM) 3112X3 ($rsquoM) Total debt 1000 1100 Less cash and cash equivalents (90) (150)Net debt 910 950
Total equity 110 105 Add subordinated debt instruments 38 38 Less amounts recognised in equity
relating to cash flow hedges (10) (5)Adjusted capital 138 138
Debt-to-adjusted capital ratio 66 69
56
copy 2005-07 Nelson 111
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowing
bull To comply with the capital disclosures the entity discloses thefollowingd) whether during the period it complied with any externally imposed capital
requirements to which it is subjecte) when the entity has not complied with such externally imposed capital
requirements the consequences of such non-complianceThese disclosures shall be based on the information provided internally to the entityrsquos key management personnel
copy 2005-07 Nelson 112
Capital DisclosuresExampleExample
Example disclosurebull Entity A filed its quarterly regulatory capital return for
30 September 20X7 on 20 October 20X7 bull At that date Entity Arsquos regulatory capital was below
the capital requirement imposed by Regulator B by $1 million
bull As a result Entity A was required to submit a plan to the regulator indicating how it would increase its regulatory capital to the amount required
bull Entity A submitted a plan that entailed selling part of its unquoted equities portfolio with a carrying amount of $115 million in the fourth quarter of 20X7
bull In the fourth quarter of 20X7 Entity A sold its fixed interest investment portfolio for $126 million and met its regulatory capital requirement
For example SFC or banks
For example SFC or banks
57
copy 2005-07 Nelson 113
Capital DisclosuresCaseCase
bull Early adopted capital disclosure in 2005 and itsannual report states that (extract only)ndash The Grouprsquos objectives when managing capital are
bull To safeguard the Grouprsquos ability to continue as a going concern so that it continues to provide returns for shareholders and benefits for other stakeholders
bull To support the Grouprsquos stability and growth andbull To provide capital for the purpose of strengthening the
Grouprsquos risk management capability
copy 2005-07 Nelson 114
Capital DisclosuresCaseCase
ndash The Group actively and regularly reviews and manages its capital structure to ensure optimal capital structure and shareholder returns taking into consideration the future capital requirements of the Group and capital efficiency helliphellip
ndash The Group adopts a dividend policy helliphellip while retaining 10 per cent of the profit as capital of the Group for future use
ndash The Group has set aside $1500 million of retained earnings for the purpose of strengthening the risk management regime of the clearing houses and supporting their roles as central counterparties
ndash As in prior years the Group monitors capital by reviewing the level of capital that is at the disposal of the Group (ldquoadjusted capitalrdquo) Adjusted capital comprises all components of shareholdersrsquo equity other than the hedging reserve relating to cash flow hedges designated reserves and investment revaluation reserve helliphellip
bull Early adopted capital disclosure in 2005 and itsannual report states that (extract only)
58
copy 2005-07 Nelson 115
Capital Disclosures ndash Transition
bull An entity shall apply the requirements of capital disclosure for
ndash annual periods beginning on or after 1 January 2007
bull Early application is encouraged
copy 2005-07 Nelson 116
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk
59
copy 2005-07 Nelson 117
QampA SessionQampA SessionQampA Session
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk
47
copy 2005-07 Nelson 93
Notes Disclosures (an entity is required to disclose the following)
bull Key sources of estimation uncertaintyndash Information about the key assumptions concerning the future and
other key sources of estimation uncertainty at the balance sheet datebull that have a significant risk of causing a material adjustment to the
carrying amounts of assets and liabilities within the next financial yearndash In respect of those assets and liabilities the notes shall include details of
a) their nature andb) their carrying amount as at the balance sheet date
Examples ndash in the absence of recently observed market prices used to measure the following assets and liabilities future-oriented estimates are necessary to measurebull the recoverable amount of classes of PPEbull the effect of technological obsolescence on inventories
Estimates involve assumptions about such items asbull the risk adjustment to cash flows or discount rates usedbull future changes in salaries and in prices affecting other costs
Examples ndash in the absence of recently observed market prices used to measure the following assets and liabilities future-oriented estimates are necessary to measurebull the recoverable amount of classes of PPEbull the effect of technological obsolescence on inventories
Estimates involve assumptions about such items asbull the risk adjustment to cash flows or discount rates usedbull future changes in salaries and in prices affecting other costs
copy 2005-07 Nelson 94
Notes
Esprit Holdings LimitedEsprit Holdings Limitedbull Critical Accounting Estimates and Judgements
ndash Estimates and judgements are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonableunder the circumstances
ndash Critical accounting estimates and assumptionsbull The Group makes estimates and assumptions concerning
the future The resulting accounting estimates will by definition seldom equal the related actual results
bull The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below helliphellip (including (1) useful life and impairment of trademarks and (2) income taxes)
CaseCase
48
copy 2005-07 Nelson 95
Notes
Melco Development Limited (新濠國際發展有限公司)Notes to the financial statements for the year ended 31122005ndash The key assumptions concerning the future and other key sources
of estimation uncertainty at the balance sheet date that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below helliphellip(The issues discussed includebull Allowances for inventories bull Estimated impairment of goodwill Income taxes)
CaseCase
copy 2005-07 Nelson 96
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)ndash Estimates and judgements used in preparing the
financial statements are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonable under the circumstances
ndash The Group makes estimates and assumptionsconcerning the future
ndash The resulting accounting estimates will by definition seldom equal the related actual results
ndash The estimates and assumptions that have a significant effect on the carrying amounts of assets and liabilities are discussed below hellip (including impairment of goodwill impairment of gaming
licence Useful lives of property plant and equipment fair value of investment properties hellip)
49
copy 2005-07 Nelson 97
Notes Disclosures (an entity is required to disclose the following)
bull Other disclosuresAn entity shall disclose in the notesa) the amount of dividends proposed or declared before the
financial statements were authorised for issue but not recognised as a distribution to equity holders during the period and the related amount per share(HK incorporated companies are required to show the aggregate amount which is recommended for distribution by way of dividend under a separate heading(s) in their balance sheet (HK Co Ord 10th Sch para 9(1)(e)) and
b) the amount of any cumulative preference dividends not recognised
copy 2005-07 Nelson 98
Notes Disclosures (an entity is required to disclose the following)
An entity shall disclose the following if not disclosedelsewhere in information published with the financial statementsa) the domicile and legal form of the entity
its country of incorporation andthe address of its registered office(or principal place of business if different from the registered office)
b) a description of the nature of the entityrsquos operations and its principal activities and
c) the name of the parent and the ultimate parent of the group
ldquoshall discloserdquo now instead of ldquoencouraged to discloserdquo
ldquoshall discloserdquo now instead of ldquoencouraged to discloserdquo
bull Other disclosures
Any specialAny special
50
copy 2005-07 Nelson 99
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)bull The principal activities of Galaxy Entertainment Group
Ltd (the lsquolsquoCompanyrsquorsquo) (formerly known as K WahConstruction Materials Ltd) and its subsidiaries (together the lsquolsquoGrouprsquorsquo) are tondash operate in casino games of chance or games of other forms
in Macau (and) manufacture sale and distribution of construction materials in HK Macau and Mainland China
bull The Company is ndash a limited liability company incorporated in Hong Kong and ndash has its listing on the Main Board of The Stock Exchange of
Hong Kong Limitedbull The address of its registered office and its principal place
of business is Room 1606 16th Floor Hutchison House 10 Harcourt Road Central HK
copy 2005-07 Nelson 100
Effective Date
bull An entity shall apply IAS 1 for annual periods beginning on or after 1 Jan 2005
ndash Earlier application is encouragedndash If an entity applies IAS 1 for an earlier period it shall
disclose this factbull For the amendments relating to the Statement of
Changes in Equityndash An entity shall apply it for annual periods beginning on
or after 1 Jan 2006ndash If an entity applies the amendments to IAS 19
Employee Benefits ndash Actuarial Gains and Losses Group Plans and Disclosures for an earlier period that amendment shall be applied for that earlier period
51
copy 2005-07 Nelson 101
Todayrsquos Agenda
Capital Disclosures (Amendments to IAS 1)
Capital Disclosures (Amendments to IAS 1)
copy 2005-07 Nelson 102
Capital Disclosures ndash For 2007
52
copy 2005-07 Nelson 103
Capital Disclosures
What is capital Is it helliphellip
CapitalCapital AssetsAssets LiabilitiesLiabilities= ndash
bull IAS 1BC47 considers ldquowhether an entity can have a view of capital that differs from what IFRSs define as equityrdquo
bull It further clarifies that although for the purposes of this disclosure capital would often equate with equity as defined in IFRSsndash it might also include or exclude some components
bull It also noted that the capital disclosure in IAS 1 is intended to give entities the opportunity to describendash how they view the components of capital they manage if this is
different from what IFRSs define as equity helliphellip
copy 2005-07 Nelson 104
EquityEquityEquity AssetsAssets LiabilitiesLiabilities= ndash
Capital Disclosures
Based on the Framework amp IFRSs the accounting equation should be
CapitalCapital AssetsAssets LiabilitiesLiabilities= ndash
bull An entityrsquos capital may be part of its equity plus part of its liabilities depending on how it manage ldquoits capitalrdquo helliphellip
53
copy 2005-07 Nelson 105
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowinga) qualitative information about its objectives policies and processes for
managing capital including (but not limited to)i) a description of what it manages as capitalii) when an entity is subject to externally imposed capital requirements
the nature of those requirements and how those requirements are incorporated into the management of capital and
iii) how it is meeting its objectives for managing capital
bull To comply with the capital disclosures the entity discloses thefollowinga) qualitative information about its objectives policies and processes for
managing capital including (but not limited to)i) a description of what it manages as capitalii) when an entity is subject to externally imposed capital requirements
the nature of those requirements and how those requirements are incorporated into the management of capital and
iii) how it is meeting its objectives for managing capital
copy 2005-07 Nelson 106
Capital Disclosures
Example disclosurebull The Grouprsquos objectives when managing capital are
ndash to safeguard the entityrsquos ability to continue as a going concern
bull so that it can continue to provide returns for shareholders and benefits for other stakeholders and
ndash to provide an adequate return to shareholders by pricing products and services commensurately with the level of risk
bull The Group sets the amount of capital in proportion to risk
ExampleExample
ObjectivesObjectives
54
copy 2005-07 Nelson 107
Capital Disclosures
bull The Group manages the capital structure and makes adjustments to it in the light ofndash changes in economic conditions and ndash the risk characteristics of the underlying assets
bull In order to maintain or adjust the capital structure the Group mayndash adjust the amount of dividends paid to shareholders ndash return capital to shareholders ndash issue new shares or ndash sell assets to reduce debt
ExampleExample
Example disclosure
HowHow
copy 2005-07 Nelson 108
Capital Disclosures
bull Consistently with others in the industry the Group monitors capital on the basis of ndash the debt-to-adjusted capital ratio
bull This ratio is calculated as net debt divide adjusted capital
ExampleExample
Example disclosure
HowHow
bull Net debt is calculated as ndash Total debt (as shown in the
balance sheet)ndash Less cash amp cash equivalents
bull Net debt is calculated as ndash Total debt (as shown in the
balance sheet)ndash Less cash amp cash equivalents
bull Adjusted capital ndash comprises all components of
equity (ie share capital share premium minority interest retained earnings and revaluation reserve) ndash other than amounts
recognised in equity relating to cash flow hedges and
ndash includes some forms of subordinated debt
bull Adjusted capital ndash comprises all components of
equity (ie share capital share premium minority interest retained earnings and revaluation reserve) ndash other than amounts
recognised in equity relating to cash flow hedges and
ndash includes some forms of subordinated debt
55
copy 2005-07 Nelson 109
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowing
bull To comply with the capital disclosures the entity discloses thefollowingb) summary quantitative data about what it manages as capital
Some entities regard some financial liabilities (eg some forms of subordinated debt) as part of capitalOther entities regard capital as excluding some components of equity (eg components arising from cash flow hedges)
c) any changes in (a) and (b) from the previous period
copy 2005-07 Nelson 110
Capital Disclosures
Example disclosure (continued from previous example)
ExampleExample
bull During 20X4 the Grouprsquos strategy which was unchanged from 20X3 was to maintain the debt-to-adjusted capital ratio at the lower end of the range 61 to 71 in order to secure access to finance at a reasonable cost by maintaining a BB credit rating The debt-to-adjusted capital ratios at 31 December 20X4 and at 31 December 20X3 were as follows
3112X4 ($rsquoM) 3112X3 ($rsquoM) Total debt 1000 1100 Less cash and cash equivalents (90) (150)Net debt 910 950
Total equity 110 105 Add subordinated debt instruments 38 38 Less amounts recognised in equity
relating to cash flow hedges (10) (5)Adjusted capital 138 138
Debt-to-adjusted capital ratio 66 69
56
copy 2005-07 Nelson 111
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowing
bull To comply with the capital disclosures the entity discloses thefollowingd) whether during the period it complied with any externally imposed capital
requirements to which it is subjecte) when the entity has not complied with such externally imposed capital
requirements the consequences of such non-complianceThese disclosures shall be based on the information provided internally to the entityrsquos key management personnel
copy 2005-07 Nelson 112
Capital DisclosuresExampleExample
Example disclosurebull Entity A filed its quarterly regulatory capital return for
30 September 20X7 on 20 October 20X7 bull At that date Entity Arsquos regulatory capital was below
the capital requirement imposed by Regulator B by $1 million
bull As a result Entity A was required to submit a plan to the regulator indicating how it would increase its regulatory capital to the amount required
bull Entity A submitted a plan that entailed selling part of its unquoted equities portfolio with a carrying amount of $115 million in the fourth quarter of 20X7
bull In the fourth quarter of 20X7 Entity A sold its fixed interest investment portfolio for $126 million and met its regulatory capital requirement
For example SFC or banks
For example SFC or banks
57
copy 2005-07 Nelson 113
Capital DisclosuresCaseCase
bull Early adopted capital disclosure in 2005 and itsannual report states that (extract only)ndash The Grouprsquos objectives when managing capital are
bull To safeguard the Grouprsquos ability to continue as a going concern so that it continues to provide returns for shareholders and benefits for other stakeholders
bull To support the Grouprsquos stability and growth andbull To provide capital for the purpose of strengthening the
Grouprsquos risk management capability
copy 2005-07 Nelson 114
Capital DisclosuresCaseCase
ndash The Group actively and regularly reviews and manages its capital structure to ensure optimal capital structure and shareholder returns taking into consideration the future capital requirements of the Group and capital efficiency helliphellip
ndash The Group adopts a dividend policy helliphellip while retaining 10 per cent of the profit as capital of the Group for future use
ndash The Group has set aside $1500 million of retained earnings for the purpose of strengthening the risk management regime of the clearing houses and supporting their roles as central counterparties
ndash As in prior years the Group monitors capital by reviewing the level of capital that is at the disposal of the Group (ldquoadjusted capitalrdquo) Adjusted capital comprises all components of shareholdersrsquo equity other than the hedging reserve relating to cash flow hedges designated reserves and investment revaluation reserve helliphellip
bull Early adopted capital disclosure in 2005 and itsannual report states that (extract only)
58
copy 2005-07 Nelson 115
Capital Disclosures ndash Transition
bull An entity shall apply the requirements of capital disclosure for
ndash annual periods beginning on or after 1 January 2007
bull Early application is encouraged
copy 2005-07 Nelson 116
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk
59
copy 2005-07 Nelson 117
QampA SessionQampA SessionQampA Session
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk
48
copy 2005-07 Nelson 95
Notes
Melco Development Limited (新濠國際發展有限公司)Notes to the financial statements for the year ended 31122005ndash The key assumptions concerning the future and other key sources
of estimation uncertainty at the balance sheet date that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below helliphellip(The issues discussed includebull Allowances for inventories bull Estimated impairment of goodwill Income taxes)
CaseCase
copy 2005-07 Nelson 96
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)ndash Estimates and judgements used in preparing the
financial statements are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonable under the circumstances
ndash The Group makes estimates and assumptionsconcerning the future
ndash The resulting accounting estimates will by definition seldom equal the related actual results
ndash The estimates and assumptions that have a significant effect on the carrying amounts of assets and liabilities are discussed below hellip (including impairment of goodwill impairment of gaming
licence Useful lives of property plant and equipment fair value of investment properties hellip)
49
copy 2005-07 Nelson 97
Notes Disclosures (an entity is required to disclose the following)
bull Other disclosuresAn entity shall disclose in the notesa) the amount of dividends proposed or declared before the
financial statements were authorised for issue but not recognised as a distribution to equity holders during the period and the related amount per share(HK incorporated companies are required to show the aggregate amount which is recommended for distribution by way of dividend under a separate heading(s) in their balance sheet (HK Co Ord 10th Sch para 9(1)(e)) and
b) the amount of any cumulative preference dividends not recognised
copy 2005-07 Nelson 98
Notes Disclosures (an entity is required to disclose the following)
An entity shall disclose the following if not disclosedelsewhere in information published with the financial statementsa) the domicile and legal form of the entity
its country of incorporation andthe address of its registered office(or principal place of business if different from the registered office)
b) a description of the nature of the entityrsquos operations and its principal activities and
c) the name of the parent and the ultimate parent of the group
ldquoshall discloserdquo now instead of ldquoencouraged to discloserdquo
ldquoshall discloserdquo now instead of ldquoencouraged to discloserdquo
bull Other disclosures
Any specialAny special
50
copy 2005-07 Nelson 99
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)bull The principal activities of Galaxy Entertainment Group
Ltd (the lsquolsquoCompanyrsquorsquo) (formerly known as K WahConstruction Materials Ltd) and its subsidiaries (together the lsquolsquoGrouprsquorsquo) are tondash operate in casino games of chance or games of other forms
in Macau (and) manufacture sale and distribution of construction materials in HK Macau and Mainland China
bull The Company is ndash a limited liability company incorporated in Hong Kong and ndash has its listing on the Main Board of The Stock Exchange of
Hong Kong Limitedbull The address of its registered office and its principal place
of business is Room 1606 16th Floor Hutchison House 10 Harcourt Road Central HK
copy 2005-07 Nelson 100
Effective Date
bull An entity shall apply IAS 1 for annual periods beginning on or after 1 Jan 2005
ndash Earlier application is encouragedndash If an entity applies IAS 1 for an earlier period it shall
disclose this factbull For the amendments relating to the Statement of
Changes in Equityndash An entity shall apply it for annual periods beginning on
or after 1 Jan 2006ndash If an entity applies the amendments to IAS 19
Employee Benefits ndash Actuarial Gains and Losses Group Plans and Disclosures for an earlier period that amendment shall be applied for that earlier period
51
copy 2005-07 Nelson 101
Todayrsquos Agenda
Capital Disclosures (Amendments to IAS 1)
Capital Disclosures (Amendments to IAS 1)
copy 2005-07 Nelson 102
Capital Disclosures ndash For 2007
52
copy 2005-07 Nelson 103
Capital Disclosures
What is capital Is it helliphellip
CapitalCapital AssetsAssets LiabilitiesLiabilities= ndash
bull IAS 1BC47 considers ldquowhether an entity can have a view of capital that differs from what IFRSs define as equityrdquo
bull It further clarifies that although for the purposes of this disclosure capital would often equate with equity as defined in IFRSsndash it might also include or exclude some components
bull It also noted that the capital disclosure in IAS 1 is intended to give entities the opportunity to describendash how they view the components of capital they manage if this is
different from what IFRSs define as equity helliphellip
copy 2005-07 Nelson 104
EquityEquityEquity AssetsAssets LiabilitiesLiabilities= ndash
Capital Disclosures
Based on the Framework amp IFRSs the accounting equation should be
CapitalCapital AssetsAssets LiabilitiesLiabilities= ndash
bull An entityrsquos capital may be part of its equity plus part of its liabilities depending on how it manage ldquoits capitalrdquo helliphellip
53
copy 2005-07 Nelson 105
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowinga) qualitative information about its objectives policies and processes for
managing capital including (but not limited to)i) a description of what it manages as capitalii) when an entity is subject to externally imposed capital requirements
the nature of those requirements and how those requirements are incorporated into the management of capital and
iii) how it is meeting its objectives for managing capital
bull To comply with the capital disclosures the entity discloses thefollowinga) qualitative information about its objectives policies and processes for
managing capital including (but not limited to)i) a description of what it manages as capitalii) when an entity is subject to externally imposed capital requirements
the nature of those requirements and how those requirements are incorporated into the management of capital and
iii) how it is meeting its objectives for managing capital
copy 2005-07 Nelson 106
Capital Disclosures
Example disclosurebull The Grouprsquos objectives when managing capital are
ndash to safeguard the entityrsquos ability to continue as a going concern
bull so that it can continue to provide returns for shareholders and benefits for other stakeholders and
ndash to provide an adequate return to shareholders by pricing products and services commensurately with the level of risk
bull The Group sets the amount of capital in proportion to risk
ExampleExample
ObjectivesObjectives
54
copy 2005-07 Nelson 107
Capital Disclosures
bull The Group manages the capital structure and makes adjustments to it in the light ofndash changes in economic conditions and ndash the risk characteristics of the underlying assets
bull In order to maintain or adjust the capital structure the Group mayndash adjust the amount of dividends paid to shareholders ndash return capital to shareholders ndash issue new shares or ndash sell assets to reduce debt
ExampleExample
Example disclosure
HowHow
copy 2005-07 Nelson 108
Capital Disclosures
bull Consistently with others in the industry the Group monitors capital on the basis of ndash the debt-to-adjusted capital ratio
bull This ratio is calculated as net debt divide adjusted capital
ExampleExample
Example disclosure
HowHow
bull Net debt is calculated as ndash Total debt (as shown in the
balance sheet)ndash Less cash amp cash equivalents
bull Net debt is calculated as ndash Total debt (as shown in the
balance sheet)ndash Less cash amp cash equivalents
bull Adjusted capital ndash comprises all components of
equity (ie share capital share premium minority interest retained earnings and revaluation reserve) ndash other than amounts
recognised in equity relating to cash flow hedges and
ndash includes some forms of subordinated debt
bull Adjusted capital ndash comprises all components of
equity (ie share capital share premium minority interest retained earnings and revaluation reserve) ndash other than amounts
recognised in equity relating to cash flow hedges and
ndash includes some forms of subordinated debt
55
copy 2005-07 Nelson 109
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowing
bull To comply with the capital disclosures the entity discloses thefollowingb) summary quantitative data about what it manages as capital
Some entities regard some financial liabilities (eg some forms of subordinated debt) as part of capitalOther entities regard capital as excluding some components of equity (eg components arising from cash flow hedges)
c) any changes in (a) and (b) from the previous period
copy 2005-07 Nelson 110
Capital Disclosures
Example disclosure (continued from previous example)
ExampleExample
bull During 20X4 the Grouprsquos strategy which was unchanged from 20X3 was to maintain the debt-to-adjusted capital ratio at the lower end of the range 61 to 71 in order to secure access to finance at a reasonable cost by maintaining a BB credit rating The debt-to-adjusted capital ratios at 31 December 20X4 and at 31 December 20X3 were as follows
3112X4 ($rsquoM) 3112X3 ($rsquoM) Total debt 1000 1100 Less cash and cash equivalents (90) (150)Net debt 910 950
Total equity 110 105 Add subordinated debt instruments 38 38 Less amounts recognised in equity
relating to cash flow hedges (10) (5)Adjusted capital 138 138
Debt-to-adjusted capital ratio 66 69
56
copy 2005-07 Nelson 111
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowing
bull To comply with the capital disclosures the entity discloses thefollowingd) whether during the period it complied with any externally imposed capital
requirements to which it is subjecte) when the entity has not complied with such externally imposed capital
requirements the consequences of such non-complianceThese disclosures shall be based on the information provided internally to the entityrsquos key management personnel
copy 2005-07 Nelson 112
Capital DisclosuresExampleExample
Example disclosurebull Entity A filed its quarterly regulatory capital return for
30 September 20X7 on 20 October 20X7 bull At that date Entity Arsquos regulatory capital was below
the capital requirement imposed by Regulator B by $1 million
bull As a result Entity A was required to submit a plan to the regulator indicating how it would increase its regulatory capital to the amount required
bull Entity A submitted a plan that entailed selling part of its unquoted equities portfolio with a carrying amount of $115 million in the fourth quarter of 20X7
bull In the fourth quarter of 20X7 Entity A sold its fixed interest investment portfolio for $126 million and met its regulatory capital requirement
For example SFC or banks
For example SFC or banks
57
copy 2005-07 Nelson 113
Capital DisclosuresCaseCase
bull Early adopted capital disclosure in 2005 and itsannual report states that (extract only)ndash The Grouprsquos objectives when managing capital are
bull To safeguard the Grouprsquos ability to continue as a going concern so that it continues to provide returns for shareholders and benefits for other stakeholders
bull To support the Grouprsquos stability and growth andbull To provide capital for the purpose of strengthening the
Grouprsquos risk management capability
copy 2005-07 Nelson 114
Capital DisclosuresCaseCase
ndash The Group actively and regularly reviews and manages its capital structure to ensure optimal capital structure and shareholder returns taking into consideration the future capital requirements of the Group and capital efficiency helliphellip
ndash The Group adopts a dividend policy helliphellip while retaining 10 per cent of the profit as capital of the Group for future use
ndash The Group has set aside $1500 million of retained earnings for the purpose of strengthening the risk management regime of the clearing houses and supporting their roles as central counterparties
ndash As in prior years the Group monitors capital by reviewing the level of capital that is at the disposal of the Group (ldquoadjusted capitalrdquo) Adjusted capital comprises all components of shareholdersrsquo equity other than the hedging reserve relating to cash flow hedges designated reserves and investment revaluation reserve helliphellip
bull Early adopted capital disclosure in 2005 and itsannual report states that (extract only)
58
copy 2005-07 Nelson 115
Capital Disclosures ndash Transition
bull An entity shall apply the requirements of capital disclosure for
ndash annual periods beginning on or after 1 January 2007
bull Early application is encouraged
copy 2005-07 Nelson 116
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk
59
copy 2005-07 Nelson 117
QampA SessionQampA SessionQampA Session
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk
49
copy 2005-07 Nelson 97
Notes Disclosures (an entity is required to disclose the following)
bull Other disclosuresAn entity shall disclose in the notesa) the amount of dividends proposed or declared before the
financial statements were authorised for issue but not recognised as a distribution to equity holders during the period and the related amount per share(HK incorporated companies are required to show the aggregate amount which is recommended for distribution by way of dividend under a separate heading(s) in their balance sheet (HK Co Ord 10th Sch para 9(1)(e)) and
b) the amount of any cumulative preference dividends not recognised
copy 2005-07 Nelson 98
Notes Disclosures (an entity is required to disclose the following)
An entity shall disclose the following if not disclosedelsewhere in information published with the financial statementsa) the domicile and legal form of the entity
its country of incorporation andthe address of its registered office(or principal place of business if different from the registered office)
b) a description of the nature of the entityrsquos operations and its principal activities and
c) the name of the parent and the ultimate parent of the group
ldquoshall discloserdquo now instead of ldquoencouraged to discloserdquo
ldquoshall discloserdquo now instead of ldquoencouraged to discloserdquo
bull Other disclosures
Any specialAny special
50
copy 2005-07 Nelson 99
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)bull The principal activities of Galaxy Entertainment Group
Ltd (the lsquolsquoCompanyrsquorsquo) (formerly known as K WahConstruction Materials Ltd) and its subsidiaries (together the lsquolsquoGrouprsquorsquo) are tondash operate in casino games of chance or games of other forms
in Macau (and) manufacture sale and distribution of construction materials in HK Macau and Mainland China
bull The Company is ndash a limited liability company incorporated in Hong Kong and ndash has its listing on the Main Board of The Stock Exchange of
Hong Kong Limitedbull The address of its registered office and its principal place
of business is Room 1606 16th Floor Hutchison House 10 Harcourt Road Central HK
copy 2005-07 Nelson 100
Effective Date
bull An entity shall apply IAS 1 for annual periods beginning on or after 1 Jan 2005
ndash Earlier application is encouragedndash If an entity applies IAS 1 for an earlier period it shall
disclose this factbull For the amendments relating to the Statement of
Changes in Equityndash An entity shall apply it for annual periods beginning on
or after 1 Jan 2006ndash If an entity applies the amendments to IAS 19
Employee Benefits ndash Actuarial Gains and Losses Group Plans and Disclosures for an earlier period that amendment shall be applied for that earlier period
51
copy 2005-07 Nelson 101
Todayrsquos Agenda
Capital Disclosures (Amendments to IAS 1)
Capital Disclosures (Amendments to IAS 1)
copy 2005-07 Nelson 102
Capital Disclosures ndash For 2007
52
copy 2005-07 Nelson 103
Capital Disclosures
What is capital Is it helliphellip
CapitalCapital AssetsAssets LiabilitiesLiabilities= ndash
bull IAS 1BC47 considers ldquowhether an entity can have a view of capital that differs from what IFRSs define as equityrdquo
bull It further clarifies that although for the purposes of this disclosure capital would often equate with equity as defined in IFRSsndash it might also include or exclude some components
bull It also noted that the capital disclosure in IAS 1 is intended to give entities the opportunity to describendash how they view the components of capital they manage if this is
different from what IFRSs define as equity helliphellip
copy 2005-07 Nelson 104
EquityEquityEquity AssetsAssets LiabilitiesLiabilities= ndash
Capital Disclosures
Based on the Framework amp IFRSs the accounting equation should be
CapitalCapital AssetsAssets LiabilitiesLiabilities= ndash
bull An entityrsquos capital may be part of its equity plus part of its liabilities depending on how it manage ldquoits capitalrdquo helliphellip
53
copy 2005-07 Nelson 105
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowinga) qualitative information about its objectives policies and processes for
managing capital including (but not limited to)i) a description of what it manages as capitalii) when an entity is subject to externally imposed capital requirements
the nature of those requirements and how those requirements are incorporated into the management of capital and
iii) how it is meeting its objectives for managing capital
bull To comply with the capital disclosures the entity discloses thefollowinga) qualitative information about its objectives policies and processes for
managing capital including (but not limited to)i) a description of what it manages as capitalii) when an entity is subject to externally imposed capital requirements
the nature of those requirements and how those requirements are incorporated into the management of capital and
iii) how it is meeting its objectives for managing capital
copy 2005-07 Nelson 106
Capital Disclosures
Example disclosurebull The Grouprsquos objectives when managing capital are
ndash to safeguard the entityrsquos ability to continue as a going concern
bull so that it can continue to provide returns for shareholders and benefits for other stakeholders and
ndash to provide an adequate return to shareholders by pricing products and services commensurately with the level of risk
bull The Group sets the amount of capital in proportion to risk
ExampleExample
ObjectivesObjectives
54
copy 2005-07 Nelson 107
Capital Disclosures
bull The Group manages the capital structure and makes adjustments to it in the light ofndash changes in economic conditions and ndash the risk characteristics of the underlying assets
bull In order to maintain or adjust the capital structure the Group mayndash adjust the amount of dividends paid to shareholders ndash return capital to shareholders ndash issue new shares or ndash sell assets to reduce debt
ExampleExample
Example disclosure
HowHow
copy 2005-07 Nelson 108
Capital Disclosures
bull Consistently with others in the industry the Group monitors capital on the basis of ndash the debt-to-adjusted capital ratio
bull This ratio is calculated as net debt divide adjusted capital
ExampleExample
Example disclosure
HowHow
bull Net debt is calculated as ndash Total debt (as shown in the
balance sheet)ndash Less cash amp cash equivalents
bull Net debt is calculated as ndash Total debt (as shown in the
balance sheet)ndash Less cash amp cash equivalents
bull Adjusted capital ndash comprises all components of
equity (ie share capital share premium minority interest retained earnings and revaluation reserve) ndash other than amounts
recognised in equity relating to cash flow hedges and
ndash includes some forms of subordinated debt
bull Adjusted capital ndash comprises all components of
equity (ie share capital share premium minority interest retained earnings and revaluation reserve) ndash other than amounts
recognised in equity relating to cash flow hedges and
ndash includes some forms of subordinated debt
55
copy 2005-07 Nelson 109
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowing
bull To comply with the capital disclosures the entity discloses thefollowingb) summary quantitative data about what it manages as capital
Some entities regard some financial liabilities (eg some forms of subordinated debt) as part of capitalOther entities regard capital as excluding some components of equity (eg components arising from cash flow hedges)
c) any changes in (a) and (b) from the previous period
copy 2005-07 Nelson 110
Capital Disclosures
Example disclosure (continued from previous example)
ExampleExample
bull During 20X4 the Grouprsquos strategy which was unchanged from 20X3 was to maintain the debt-to-adjusted capital ratio at the lower end of the range 61 to 71 in order to secure access to finance at a reasonable cost by maintaining a BB credit rating The debt-to-adjusted capital ratios at 31 December 20X4 and at 31 December 20X3 were as follows
3112X4 ($rsquoM) 3112X3 ($rsquoM) Total debt 1000 1100 Less cash and cash equivalents (90) (150)Net debt 910 950
Total equity 110 105 Add subordinated debt instruments 38 38 Less amounts recognised in equity
relating to cash flow hedges (10) (5)Adjusted capital 138 138
Debt-to-adjusted capital ratio 66 69
56
copy 2005-07 Nelson 111
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowing
bull To comply with the capital disclosures the entity discloses thefollowingd) whether during the period it complied with any externally imposed capital
requirements to which it is subjecte) when the entity has not complied with such externally imposed capital
requirements the consequences of such non-complianceThese disclosures shall be based on the information provided internally to the entityrsquos key management personnel
copy 2005-07 Nelson 112
Capital DisclosuresExampleExample
Example disclosurebull Entity A filed its quarterly regulatory capital return for
30 September 20X7 on 20 October 20X7 bull At that date Entity Arsquos regulatory capital was below
the capital requirement imposed by Regulator B by $1 million
bull As a result Entity A was required to submit a plan to the regulator indicating how it would increase its regulatory capital to the amount required
bull Entity A submitted a plan that entailed selling part of its unquoted equities portfolio with a carrying amount of $115 million in the fourth quarter of 20X7
bull In the fourth quarter of 20X7 Entity A sold its fixed interest investment portfolio for $126 million and met its regulatory capital requirement
For example SFC or banks
For example SFC or banks
57
copy 2005-07 Nelson 113
Capital DisclosuresCaseCase
bull Early adopted capital disclosure in 2005 and itsannual report states that (extract only)ndash The Grouprsquos objectives when managing capital are
bull To safeguard the Grouprsquos ability to continue as a going concern so that it continues to provide returns for shareholders and benefits for other stakeholders
bull To support the Grouprsquos stability and growth andbull To provide capital for the purpose of strengthening the
Grouprsquos risk management capability
copy 2005-07 Nelson 114
Capital DisclosuresCaseCase
ndash The Group actively and regularly reviews and manages its capital structure to ensure optimal capital structure and shareholder returns taking into consideration the future capital requirements of the Group and capital efficiency helliphellip
ndash The Group adopts a dividend policy helliphellip while retaining 10 per cent of the profit as capital of the Group for future use
ndash The Group has set aside $1500 million of retained earnings for the purpose of strengthening the risk management regime of the clearing houses and supporting their roles as central counterparties
ndash As in prior years the Group monitors capital by reviewing the level of capital that is at the disposal of the Group (ldquoadjusted capitalrdquo) Adjusted capital comprises all components of shareholdersrsquo equity other than the hedging reserve relating to cash flow hedges designated reserves and investment revaluation reserve helliphellip
bull Early adopted capital disclosure in 2005 and itsannual report states that (extract only)
58
copy 2005-07 Nelson 115
Capital Disclosures ndash Transition
bull An entity shall apply the requirements of capital disclosure for
ndash annual periods beginning on or after 1 January 2007
bull Early application is encouraged
copy 2005-07 Nelson 116
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk
59
copy 2005-07 Nelson 117
QampA SessionQampA SessionQampA Session
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk
50
copy 2005-07 Nelson 99
NotesCaseCase
Galaxy Entertainment Group LimitedNotes to the financial statement (ye 31122005)bull The principal activities of Galaxy Entertainment Group
Ltd (the lsquolsquoCompanyrsquorsquo) (formerly known as K WahConstruction Materials Ltd) and its subsidiaries (together the lsquolsquoGrouprsquorsquo) are tondash operate in casino games of chance or games of other forms
in Macau (and) manufacture sale and distribution of construction materials in HK Macau and Mainland China
bull The Company is ndash a limited liability company incorporated in Hong Kong and ndash has its listing on the Main Board of The Stock Exchange of
Hong Kong Limitedbull The address of its registered office and its principal place
of business is Room 1606 16th Floor Hutchison House 10 Harcourt Road Central HK
copy 2005-07 Nelson 100
Effective Date
bull An entity shall apply IAS 1 for annual periods beginning on or after 1 Jan 2005
ndash Earlier application is encouragedndash If an entity applies IAS 1 for an earlier period it shall
disclose this factbull For the amendments relating to the Statement of
Changes in Equityndash An entity shall apply it for annual periods beginning on
or after 1 Jan 2006ndash If an entity applies the amendments to IAS 19
Employee Benefits ndash Actuarial Gains and Losses Group Plans and Disclosures for an earlier period that amendment shall be applied for that earlier period
51
copy 2005-07 Nelson 101
Todayrsquos Agenda
Capital Disclosures (Amendments to IAS 1)
Capital Disclosures (Amendments to IAS 1)
copy 2005-07 Nelson 102
Capital Disclosures ndash For 2007
52
copy 2005-07 Nelson 103
Capital Disclosures
What is capital Is it helliphellip
CapitalCapital AssetsAssets LiabilitiesLiabilities= ndash
bull IAS 1BC47 considers ldquowhether an entity can have a view of capital that differs from what IFRSs define as equityrdquo
bull It further clarifies that although for the purposes of this disclosure capital would often equate with equity as defined in IFRSsndash it might also include or exclude some components
bull It also noted that the capital disclosure in IAS 1 is intended to give entities the opportunity to describendash how they view the components of capital they manage if this is
different from what IFRSs define as equity helliphellip
copy 2005-07 Nelson 104
EquityEquityEquity AssetsAssets LiabilitiesLiabilities= ndash
Capital Disclosures
Based on the Framework amp IFRSs the accounting equation should be
CapitalCapital AssetsAssets LiabilitiesLiabilities= ndash
bull An entityrsquos capital may be part of its equity plus part of its liabilities depending on how it manage ldquoits capitalrdquo helliphellip
53
copy 2005-07 Nelson 105
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowinga) qualitative information about its objectives policies and processes for
managing capital including (but not limited to)i) a description of what it manages as capitalii) when an entity is subject to externally imposed capital requirements
the nature of those requirements and how those requirements are incorporated into the management of capital and
iii) how it is meeting its objectives for managing capital
bull To comply with the capital disclosures the entity discloses thefollowinga) qualitative information about its objectives policies and processes for
managing capital including (but not limited to)i) a description of what it manages as capitalii) when an entity is subject to externally imposed capital requirements
the nature of those requirements and how those requirements are incorporated into the management of capital and
iii) how it is meeting its objectives for managing capital
copy 2005-07 Nelson 106
Capital Disclosures
Example disclosurebull The Grouprsquos objectives when managing capital are
ndash to safeguard the entityrsquos ability to continue as a going concern
bull so that it can continue to provide returns for shareholders and benefits for other stakeholders and
ndash to provide an adequate return to shareholders by pricing products and services commensurately with the level of risk
bull The Group sets the amount of capital in proportion to risk
ExampleExample
ObjectivesObjectives
54
copy 2005-07 Nelson 107
Capital Disclosures
bull The Group manages the capital structure and makes adjustments to it in the light ofndash changes in economic conditions and ndash the risk characteristics of the underlying assets
bull In order to maintain or adjust the capital structure the Group mayndash adjust the amount of dividends paid to shareholders ndash return capital to shareholders ndash issue new shares or ndash sell assets to reduce debt
ExampleExample
Example disclosure
HowHow
copy 2005-07 Nelson 108
Capital Disclosures
bull Consistently with others in the industry the Group monitors capital on the basis of ndash the debt-to-adjusted capital ratio
bull This ratio is calculated as net debt divide adjusted capital
ExampleExample
Example disclosure
HowHow
bull Net debt is calculated as ndash Total debt (as shown in the
balance sheet)ndash Less cash amp cash equivalents
bull Net debt is calculated as ndash Total debt (as shown in the
balance sheet)ndash Less cash amp cash equivalents
bull Adjusted capital ndash comprises all components of
equity (ie share capital share premium minority interest retained earnings and revaluation reserve) ndash other than amounts
recognised in equity relating to cash flow hedges and
ndash includes some forms of subordinated debt
bull Adjusted capital ndash comprises all components of
equity (ie share capital share premium minority interest retained earnings and revaluation reserve) ndash other than amounts
recognised in equity relating to cash flow hedges and
ndash includes some forms of subordinated debt
55
copy 2005-07 Nelson 109
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowing
bull To comply with the capital disclosures the entity discloses thefollowingb) summary quantitative data about what it manages as capital
Some entities regard some financial liabilities (eg some forms of subordinated debt) as part of capitalOther entities regard capital as excluding some components of equity (eg components arising from cash flow hedges)
c) any changes in (a) and (b) from the previous period
copy 2005-07 Nelson 110
Capital Disclosures
Example disclosure (continued from previous example)
ExampleExample
bull During 20X4 the Grouprsquos strategy which was unchanged from 20X3 was to maintain the debt-to-adjusted capital ratio at the lower end of the range 61 to 71 in order to secure access to finance at a reasonable cost by maintaining a BB credit rating The debt-to-adjusted capital ratios at 31 December 20X4 and at 31 December 20X3 were as follows
3112X4 ($rsquoM) 3112X3 ($rsquoM) Total debt 1000 1100 Less cash and cash equivalents (90) (150)Net debt 910 950
Total equity 110 105 Add subordinated debt instruments 38 38 Less amounts recognised in equity
relating to cash flow hedges (10) (5)Adjusted capital 138 138
Debt-to-adjusted capital ratio 66 69
56
copy 2005-07 Nelson 111
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowing
bull To comply with the capital disclosures the entity discloses thefollowingd) whether during the period it complied with any externally imposed capital
requirements to which it is subjecte) when the entity has not complied with such externally imposed capital
requirements the consequences of such non-complianceThese disclosures shall be based on the information provided internally to the entityrsquos key management personnel
copy 2005-07 Nelson 112
Capital DisclosuresExampleExample
Example disclosurebull Entity A filed its quarterly regulatory capital return for
30 September 20X7 on 20 October 20X7 bull At that date Entity Arsquos regulatory capital was below
the capital requirement imposed by Regulator B by $1 million
bull As a result Entity A was required to submit a plan to the regulator indicating how it would increase its regulatory capital to the amount required
bull Entity A submitted a plan that entailed selling part of its unquoted equities portfolio with a carrying amount of $115 million in the fourth quarter of 20X7
bull In the fourth quarter of 20X7 Entity A sold its fixed interest investment portfolio for $126 million and met its regulatory capital requirement
For example SFC or banks
For example SFC or banks
57
copy 2005-07 Nelson 113
Capital DisclosuresCaseCase
bull Early adopted capital disclosure in 2005 and itsannual report states that (extract only)ndash The Grouprsquos objectives when managing capital are
bull To safeguard the Grouprsquos ability to continue as a going concern so that it continues to provide returns for shareholders and benefits for other stakeholders
bull To support the Grouprsquos stability and growth andbull To provide capital for the purpose of strengthening the
Grouprsquos risk management capability
copy 2005-07 Nelson 114
Capital DisclosuresCaseCase
ndash The Group actively and regularly reviews and manages its capital structure to ensure optimal capital structure and shareholder returns taking into consideration the future capital requirements of the Group and capital efficiency helliphellip
ndash The Group adopts a dividend policy helliphellip while retaining 10 per cent of the profit as capital of the Group for future use
ndash The Group has set aside $1500 million of retained earnings for the purpose of strengthening the risk management regime of the clearing houses and supporting their roles as central counterparties
ndash As in prior years the Group monitors capital by reviewing the level of capital that is at the disposal of the Group (ldquoadjusted capitalrdquo) Adjusted capital comprises all components of shareholdersrsquo equity other than the hedging reserve relating to cash flow hedges designated reserves and investment revaluation reserve helliphellip
bull Early adopted capital disclosure in 2005 and itsannual report states that (extract only)
58
copy 2005-07 Nelson 115
Capital Disclosures ndash Transition
bull An entity shall apply the requirements of capital disclosure for
ndash annual periods beginning on or after 1 January 2007
bull Early application is encouraged
copy 2005-07 Nelson 116
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk
59
copy 2005-07 Nelson 117
QampA SessionQampA SessionQampA Session
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk
51
copy 2005-07 Nelson 101
Todayrsquos Agenda
Capital Disclosures (Amendments to IAS 1)
Capital Disclosures (Amendments to IAS 1)
copy 2005-07 Nelson 102
Capital Disclosures ndash For 2007
52
copy 2005-07 Nelson 103
Capital Disclosures
What is capital Is it helliphellip
CapitalCapital AssetsAssets LiabilitiesLiabilities= ndash
bull IAS 1BC47 considers ldquowhether an entity can have a view of capital that differs from what IFRSs define as equityrdquo
bull It further clarifies that although for the purposes of this disclosure capital would often equate with equity as defined in IFRSsndash it might also include or exclude some components
bull It also noted that the capital disclosure in IAS 1 is intended to give entities the opportunity to describendash how they view the components of capital they manage if this is
different from what IFRSs define as equity helliphellip
copy 2005-07 Nelson 104
EquityEquityEquity AssetsAssets LiabilitiesLiabilities= ndash
Capital Disclosures
Based on the Framework amp IFRSs the accounting equation should be
CapitalCapital AssetsAssets LiabilitiesLiabilities= ndash
bull An entityrsquos capital may be part of its equity plus part of its liabilities depending on how it manage ldquoits capitalrdquo helliphellip
53
copy 2005-07 Nelson 105
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowinga) qualitative information about its objectives policies and processes for
managing capital including (but not limited to)i) a description of what it manages as capitalii) when an entity is subject to externally imposed capital requirements
the nature of those requirements and how those requirements are incorporated into the management of capital and
iii) how it is meeting its objectives for managing capital
bull To comply with the capital disclosures the entity discloses thefollowinga) qualitative information about its objectives policies and processes for
managing capital including (but not limited to)i) a description of what it manages as capitalii) when an entity is subject to externally imposed capital requirements
the nature of those requirements and how those requirements are incorporated into the management of capital and
iii) how it is meeting its objectives for managing capital
copy 2005-07 Nelson 106
Capital Disclosures
Example disclosurebull The Grouprsquos objectives when managing capital are
ndash to safeguard the entityrsquos ability to continue as a going concern
bull so that it can continue to provide returns for shareholders and benefits for other stakeholders and
ndash to provide an adequate return to shareholders by pricing products and services commensurately with the level of risk
bull The Group sets the amount of capital in proportion to risk
ExampleExample
ObjectivesObjectives
54
copy 2005-07 Nelson 107
Capital Disclosures
bull The Group manages the capital structure and makes adjustments to it in the light ofndash changes in economic conditions and ndash the risk characteristics of the underlying assets
bull In order to maintain or adjust the capital structure the Group mayndash adjust the amount of dividends paid to shareholders ndash return capital to shareholders ndash issue new shares or ndash sell assets to reduce debt
ExampleExample
Example disclosure
HowHow
copy 2005-07 Nelson 108
Capital Disclosures
bull Consistently with others in the industry the Group monitors capital on the basis of ndash the debt-to-adjusted capital ratio
bull This ratio is calculated as net debt divide adjusted capital
ExampleExample
Example disclosure
HowHow
bull Net debt is calculated as ndash Total debt (as shown in the
balance sheet)ndash Less cash amp cash equivalents
bull Net debt is calculated as ndash Total debt (as shown in the
balance sheet)ndash Less cash amp cash equivalents
bull Adjusted capital ndash comprises all components of
equity (ie share capital share premium minority interest retained earnings and revaluation reserve) ndash other than amounts
recognised in equity relating to cash flow hedges and
ndash includes some forms of subordinated debt
bull Adjusted capital ndash comprises all components of
equity (ie share capital share premium minority interest retained earnings and revaluation reserve) ndash other than amounts
recognised in equity relating to cash flow hedges and
ndash includes some forms of subordinated debt
55
copy 2005-07 Nelson 109
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowing
bull To comply with the capital disclosures the entity discloses thefollowingb) summary quantitative data about what it manages as capital
Some entities regard some financial liabilities (eg some forms of subordinated debt) as part of capitalOther entities regard capital as excluding some components of equity (eg components arising from cash flow hedges)
c) any changes in (a) and (b) from the previous period
copy 2005-07 Nelson 110
Capital Disclosures
Example disclosure (continued from previous example)
ExampleExample
bull During 20X4 the Grouprsquos strategy which was unchanged from 20X3 was to maintain the debt-to-adjusted capital ratio at the lower end of the range 61 to 71 in order to secure access to finance at a reasonable cost by maintaining a BB credit rating The debt-to-adjusted capital ratios at 31 December 20X4 and at 31 December 20X3 were as follows
3112X4 ($rsquoM) 3112X3 ($rsquoM) Total debt 1000 1100 Less cash and cash equivalents (90) (150)Net debt 910 950
Total equity 110 105 Add subordinated debt instruments 38 38 Less amounts recognised in equity
relating to cash flow hedges (10) (5)Adjusted capital 138 138
Debt-to-adjusted capital ratio 66 69
56
copy 2005-07 Nelson 111
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowing
bull To comply with the capital disclosures the entity discloses thefollowingd) whether during the period it complied with any externally imposed capital
requirements to which it is subjecte) when the entity has not complied with such externally imposed capital
requirements the consequences of such non-complianceThese disclosures shall be based on the information provided internally to the entityrsquos key management personnel
copy 2005-07 Nelson 112
Capital DisclosuresExampleExample
Example disclosurebull Entity A filed its quarterly regulatory capital return for
30 September 20X7 on 20 October 20X7 bull At that date Entity Arsquos regulatory capital was below
the capital requirement imposed by Regulator B by $1 million
bull As a result Entity A was required to submit a plan to the regulator indicating how it would increase its regulatory capital to the amount required
bull Entity A submitted a plan that entailed selling part of its unquoted equities portfolio with a carrying amount of $115 million in the fourth quarter of 20X7
bull In the fourth quarter of 20X7 Entity A sold its fixed interest investment portfolio for $126 million and met its regulatory capital requirement
For example SFC or banks
For example SFC or banks
57
copy 2005-07 Nelson 113
Capital DisclosuresCaseCase
bull Early adopted capital disclosure in 2005 and itsannual report states that (extract only)ndash The Grouprsquos objectives when managing capital are
bull To safeguard the Grouprsquos ability to continue as a going concern so that it continues to provide returns for shareholders and benefits for other stakeholders
bull To support the Grouprsquos stability and growth andbull To provide capital for the purpose of strengthening the
Grouprsquos risk management capability
copy 2005-07 Nelson 114
Capital DisclosuresCaseCase
ndash The Group actively and regularly reviews and manages its capital structure to ensure optimal capital structure and shareholder returns taking into consideration the future capital requirements of the Group and capital efficiency helliphellip
ndash The Group adopts a dividend policy helliphellip while retaining 10 per cent of the profit as capital of the Group for future use
ndash The Group has set aside $1500 million of retained earnings for the purpose of strengthening the risk management regime of the clearing houses and supporting their roles as central counterparties
ndash As in prior years the Group monitors capital by reviewing the level of capital that is at the disposal of the Group (ldquoadjusted capitalrdquo) Adjusted capital comprises all components of shareholdersrsquo equity other than the hedging reserve relating to cash flow hedges designated reserves and investment revaluation reserve helliphellip
bull Early adopted capital disclosure in 2005 and itsannual report states that (extract only)
58
copy 2005-07 Nelson 115
Capital Disclosures ndash Transition
bull An entity shall apply the requirements of capital disclosure for
ndash annual periods beginning on or after 1 January 2007
bull Early application is encouraged
copy 2005-07 Nelson 116
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk
59
copy 2005-07 Nelson 117
QampA SessionQampA SessionQampA Session
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk
52
copy 2005-07 Nelson 103
Capital Disclosures
What is capital Is it helliphellip
CapitalCapital AssetsAssets LiabilitiesLiabilities= ndash
bull IAS 1BC47 considers ldquowhether an entity can have a view of capital that differs from what IFRSs define as equityrdquo
bull It further clarifies that although for the purposes of this disclosure capital would often equate with equity as defined in IFRSsndash it might also include or exclude some components
bull It also noted that the capital disclosure in IAS 1 is intended to give entities the opportunity to describendash how they view the components of capital they manage if this is
different from what IFRSs define as equity helliphellip
copy 2005-07 Nelson 104
EquityEquityEquity AssetsAssets LiabilitiesLiabilities= ndash
Capital Disclosures
Based on the Framework amp IFRSs the accounting equation should be
CapitalCapital AssetsAssets LiabilitiesLiabilities= ndash
bull An entityrsquos capital may be part of its equity plus part of its liabilities depending on how it manage ldquoits capitalrdquo helliphellip
53
copy 2005-07 Nelson 105
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowinga) qualitative information about its objectives policies and processes for
managing capital including (but not limited to)i) a description of what it manages as capitalii) when an entity is subject to externally imposed capital requirements
the nature of those requirements and how those requirements are incorporated into the management of capital and
iii) how it is meeting its objectives for managing capital
bull To comply with the capital disclosures the entity discloses thefollowinga) qualitative information about its objectives policies and processes for
managing capital including (but not limited to)i) a description of what it manages as capitalii) when an entity is subject to externally imposed capital requirements
the nature of those requirements and how those requirements are incorporated into the management of capital and
iii) how it is meeting its objectives for managing capital
copy 2005-07 Nelson 106
Capital Disclosures
Example disclosurebull The Grouprsquos objectives when managing capital are
ndash to safeguard the entityrsquos ability to continue as a going concern
bull so that it can continue to provide returns for shareholders and benefits for other stakeholders and
ndash to provide an adequate return to shareholders by pricing products and services commensurately with the level of risk
bull The Group sets the amount of capital in proportion to risk
ExampleExample
ObjectivesObjectives
54
copy 2005-07 Nelson 107
Capital Disclosures
bull The Group manages the capital structure and makes adjustments to it in the light ofndash changes in economic conditions and ndash the risk characteristics of the underlying assets
bull In order to maintain or adjust the capital structure the Group mayndash adjust the amount of dividends paid to shareholders ndash return capital to shareholders ndash issue new shares or ndash sell assets to reduce debt
ExampleExample
Example disclosure
HowHow
copy 2005-07 Nelson 108
Capital Disclosures
bull Consistently with others in the industry the Group monitors capital on the basis of ndash the debt-to-adjusted capital ratio
bull This ratio is calculated as net debt divide adjusted capital
ExampleExample
Example disclosure
HowHow
bull Net debt is calculated as ndash Total debt (as shown in the
balance sheet)ndash Less cash amp cash equivalents
bull Net debt is calculated as ndash Total debt (as shown in the
balance sheet)ndash Less cash amp cash equivalents
bull Adjusted capital ndash comprises all components of
equity (ie share capital share premium minority interest retained earnings and revaluation reserve) ndash other than amounts
recognised in equity relating to cash flow hedges and
ndash includes some forms of subordinated debt
bull Adjusted capital ndash comprises all components of
equity (ie share capital share premium minority interest retained earnings and revaluation reserve) ndash other than amounts
recognised in equity relating to cash flow hedges and
ndash includes some forms of subordinated debt
55
copy 2005-07 Nelson 109
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowing
bull To comply with the capital disclosures the entity discloses thefollowingb) summary quantitative data about what it manages as capital
Some entities regard some financial liabilities (eg some forms of subordinated debt) as part of capitalOther entities regard capital as excluding some components of equity (eg components arising from cash flow hedges)
c) any changes in (a) and (b) from the previous period
copy 2005-07 Nelson 110
Capital Disclosures
Example disclosure (continued from previous example)
ExampleExample
bull During 20X4 the Grouprsquos strategy which was unchanged from 20X3 was to maintain the debt-to-adjusted capital ratio at the lower end of the range 61 to 71 in order to secure access to finance at a reasonable cost by maintaining a BB credit rating The debt-to-adjusted capital ratios at 31 December 20X4 and at 31 December 20X3 were as follows
3112X4 ($rsquoM) 3112X3 ($rsquoM) Total debt 1000 1100 Less cash and cash equivalents (90) (150)Net debt 910 950
Total equity 110 105 Add subordinated debt instruments 38 38 Less amounts recognised in equity
relating to cash flow hedges (10) (5)Adjusted capital 138 138
Debt-to-adjusted capital ratio 66 69
56
copy 2005-07 Nelson 111
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowing
bull To comply with the capital disclosures the entity discloses thefollowingd) whether during the period it complied with any externally imposed capital
requirements to which it is subjecte) when the entity has not complied with such externally imposed capital
requirements the consequences of such non-complianceThese disclosures shall be based on the information provided internally to the entityrsquos key management personnel
copy 2005-07 Nelson 112
Capital DisclosuresExampleExample
Example disclosurebull Entity A filed its quarterly regulatory capital return for
30 September 20X7 on 20 October 20X7 bull At that date Entity Arsquos regulatory capital was below
the capital requirement imposed by Regulator B by $1 million
bull As a result Entity A was required to submit a plan to the regulator indicating how it would increase its regulatory capital to the amount required
bull Entity A submitted a plan that entailed selling part of its unquoted equities portfolio with a carrying amount of $115 million in the fourth quarter of 20X7
bull In the fourth quarter of 20X7 Entity A sold its fixed interest investment portfolio for $126 million and met its regulatory capital requirement
For example SFC or banks
For example SFC or banks
57
copy 2005-07 Nelson 113
Capital DisclosuresCaseCase
bull Early adopted capital disclosure in 2005 and itsannual report states that (extract only)ndash The Grouprsquos objectives when managing capital are
bull To safeguard the Grouprsquos ability to continue as a going concern so that it continues to provide returns for shareholders and benefits for other stakeholders
bull To support the Grouprsquos stability and growth andbull To provide capital for the purpose of strengthening the
Grouprsquos risk management capability
copy 2005-07 Nelson 114
Capital DisclosuresCaseCase
ndash The Group actively and regularly reviews and manages its capital structure to ensure optimal capital structure and shareholder returns taking into consideration the future capital requirements of the Group and capital efficiency helliphellip
ndash The Group adopts a dividend policy helliphellip while retaining 10 per cent of the profit as capital of the Group for future use
ndash The Group has set aside $1500 million of retained earnings for the purpose of strengthening the risk management regime of the clearing houses and supporting their roles as central counterparties
ndash As in prior years the Group monitors capital by reviewing the level of capital that is at the disposal of the Group (ldquoadjusted capitalrdquo) Adjusted capital comprises all components of shareholdersrsquo equity other than the hedging reserve relating to cash flow hedges designated reserves and investment revaluation reserve helliphellip
bull Early adopted capital disclosure in 2005 and itsannual report states that (extract only)
58
copy 2005-07 Nelson 115
Capital Disclosures ndash Transition
bull An entity shall apply the requirements of capital disclosure for
ndash annual periods beginning on or after 1 January 2007
bull Early application is encouraged
copy 2005-07 Nelson 116
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk
59
copy 2005-07 Nelson 117
QampA SessionQampA SessionQampA Session
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk
53
copy 2005-07 Nelson 105
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowinga) qualitative information about its objectives policies and processes for
managing capital including (but not limited to)i) a description of what it manages as capitalii) when an entity is subject to externally imposed capital requirements
the nature of those requirements and how those requirements are incorporated into the management of capital and
iii) how it is meeting its objectives for managing capital
bull To comply with the capital disclosures the entity discloses thefollowinga) qualitative information about its objectives policies and processes for
managing capital including (but not limited to)i) a description of what it manages as capitalii) when an entity is subject to externally imposed capital requirements
the nature of those requirements and how those requirements are incorporated into the management of capital and
iii) how it is meeting its objectives for managing capital
copy 2005-07 Nelson 106
Capital Disclosures
Example disclosurebull The Grouprsquos objectives when managing capital are
ndash to safeguard the entityrsquos ability to continue as a going concern
bull so that it can continue to provide returns for shareholders and benefits for other stakeholders and
ndash to provide an adequate return to shareholders by pricing products and services commensurately with the level of risk
bull The Group sets the amount of capital in proportion to risk
ExampleExample
ObjectivesObjectives
54
copy 2005-07 Nelson 107
Capital Disclosures
bull The Group manages the capital structure and makes adjustments to it in the light ofndash changes in economic conditions and ndash the risk characteristics of the underlying assets
bull In order to maintain or adjust the capital structure the Group mayndash adjust the amount of dividends paid to shareholders ndash return capital to shareholders ndash issue new shares or ndash sell assets to reduce debt
ExampleExample
Example disclosure
HowHow
copy 2005-07 Nelson 108
Capital Disclosures
bull Consistently with others in the industry the Group monitors capital on the basis of ndash the debt-to-adjusted capital ratio
bull This ratio is calculated as net debt divide adjusted capital
ExampleExample
Example disclosure
HowHow
bull Net debt is calculated as ndash Total debt (as shown in the
balance sheet)ndash Less cash amp cash equivalents
bull Net debt is calculated as ndash Total debt (as shown in the
balance sheet)ndash Less cash amp cash equivalents
bull Adjusted capital ndash comprises all components of
equity (ie share capital share premium minority interest retained earnings and revaluation reserve) ndash other than amounts
recognised in equity relating to cash flow hedges and
ndash includes some forms of subordinated debt
bull Adjusted capital ndash comprises all components of
equity (ie share capital share premium minority interest retained earnings and revaluation reserve) ndash other than amounts
recognised in equity relating to cash flow hedges and
ndash includes some forms of subordinated debt
55
copy 2005-07 Nelson 109
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowing
bull To comply with the capital disclosures the entity discloses thefollowingb) summary quantitative data about what it manages as capital
Some entities regard some financial liabilities (eg some forms of subordinated debt) as part of capitalOther entities regard capital as excluding some components of equity (eg components arising from cash flow hedges)
c) any changes in (a) and (b) from the previous period
copy 2005-07 Nelson 110
Capital Disclosures
Example disclosure (continued from previous example)
ExampleExample
bull During 20X4 the Grouprsquos strategy which was unchanged from 20X3 was to maintain the debt-to-adjusted capital ratio at the lower end of the range 61 to 71 in order to secure access to finance at a reasonable cost by maintaining a BB credit rating The debt-to-adjusted capital ratios at 31 December 20X4 and at 31 December 20X3 were as follows
3112X4 ($rsquoM) 3112X3 ($rsquoM) Total debt 1000 1100 Less cash and cash equivalents (90) (150)Net debt 910 950
Total equity 110 105 Add subordinated debt instruments 38 38 Less amounts recognised in equity
relating to cash flow hedges (10) (5)Adjusted capital 138 138
Debt-to-adjusted capital ratio 66 69
56
copy 2005-07 Nelson 111
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowing
bull To comply with the capital disclosures the entity discloses thefollowingd) whether during the period it complied with any externally imposed capital
requirements to which it is subjecte) when the entity has not complied with such externally imposed capital
requirements the consequences of such non-complianceThese disclosures shall be based on the information provided internally to the entityrsquos key management personnel
copy 2005-07 Nelson 112
Capital DisclosuresExampleExample
Example disclosurebull Entity A filed its quarterly regulatory capital return for
30 September 20X7 on 20 October 20X7 bull At that date Entity Arsquos regulatory capital was below
the capital requirement imposed by Regulator B by $1 million
bull As a result Entity A was required to submit a plan to the regulator indicating how it would increase its regulatory capital to the amount required
bull Entity A submitted a plan that entailed selling part of its unquoted equities portfolio with a carrying amount of $115 million in the fourth quarter of 20X7
bull In the fourth quarter of 20X7 Entity A sold its fixed interest investment portfolio for $126 million and met its regulatory capital requirement
For example SFC or banks
For example SFC or banks
57
copy 2005-07 Nelson 113
Capital DisclosuresCaseCase
bull Early adopted capital disclosure in 2005 and itsannual report states that (extract only)ndash The Grouprsquos objectives when managing capital are
bull To safeguard the Grouprsquos ability to continue as a going concern so that it continues to provide returns for shareholders and benefits for other stakeholders
bull To support the Grouprsquos stability and growth andbull To provide capital for the purpose of strengthening the
Grouprsquos risk management capability
copy 2005-07 Nelson 114
Capital DisclosuresCaseCase
ndash The Group actively and regularly reviews and manages its capital structure to ensure optimal capital structure and shareholder returns taking into consideration the future capital requirements of the Group and capital efficiency helliphellip
ndash The Group adopts a dividend policy helliphellip while retaining 10 per cent of the profit as capital of the Group for future use
ndash The Group has set aside $1500 million of retained earnings for the purpose of strengthening the risk management regime of the clearing houses and supporting their roles as central counterparties
ndash As in prior years the Group monitors capital by reviewing the level of capital that is at the disposal of the Group (ldquoadjusted capitalrdquo) Adjusted capital comprises all components of shareholdersrsquo equity other than the hedging reserve relating to cash flow hedges designated reserves and investment revaluation reserve helliphellip
bull Early adopted capital disclosure in 2005 and itsannual report states that (extract only)
58
copy 2005-07 Nelson 115
Capital Disclosures ndash Transition
bull An entity shall apply the requirements of capital disclosure for
ndash annual periods beginning on or after 1 January 2007
bull Early application is encouraged
copy 2005-07 Nelson 116
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk
59
copy 2005-07 Nelson 117
QampA SessionQampA SessionQampA Session
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk
54
copy 2005-07 Nelson 107
Capital Disclosures
bull The Group manages the capital structure and makes adjustments to it in the light ofndash changes in economic conditions and ndash the risk characteristics of the underlying assets
bull In order to maintain or adjust the capital structure the Group mayndash adjust the amount of dividends paid to shareholders ndash return capital to shareholders ndash issue new shares or ndash sell assets to reduce debt
ExampleExample
Example disclosure
HowHow
copy 2005-07 Nelson 108
Capital Disclosures
bull Consistently with others in the industry the Group monitors capital on the basis of ndash the debt-to-adjusted capital ratio
bull This ratio is calculated as net debt divide adjusted capital
ExampleExample
Example disclosure
HowHow
bull Net debt is calculated as ndash Total debt (as shown in the
balance sheet)ndash Less cash amp cash equivalents
bull Net debt is calculated as ndash Total debt (as shown in the
balance sheet)ndash Less cash amp cash equivalents
bull Adjusted capital ndash comprises all components of
equity (ie share capital share premium minority interest retained earnings and revaluation reserve) ndash other than amounts
recognised in equity relating to cash flow hedges and
ndash includes some forms of subordinated debt
bull Adjusted capital ndash comprises all components of
equity (ie share capital share premium minority interest retained earnings and revaluation reserve) ndash other than amounts
recognised in equity relating to cash flow hedges and
ndash includes some forms of subordinated debt
55
copy 2005-07 Nelson 109
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowing
bull To comply with the capital disclosures the entity discloses thefollowingb) summary quantitative data about what it manages as capital
Some entities regard some financial liabilities (eg some forms of subordinated debt) as part of capitalOther entities regard capital as excluding some components of equity (eg components arising from cash flow hedges)
c) any changes in (a) and (b) from the previous period
copy 2005-07 Nelson 110
Capital Disclosures
Example disclosure (continued from previous example)
ExampleExample
bull During 20X4 the Grouprsquos strategy which was unchanged from 20X3 was to maintain the debt-to-adjusted capital ratio at the lower end of the range 61 to 71 in order to secure access to finance at a reasonable cost by maintaining a BB credit rating The debt-to-adjusted capital ratios at 31 December 20X4 and at 31 December 20X3 were as follows
3112X4 ($rsquoM) 3112X3 ($rsquoM) Total debt 1000 1100 Less cash and cash equivalents (90) (150)Net debt 910 950
Total equity 110 105 Add subordinated debt instruments 38 38 Less amounts recognised in equity
relating to cash flow hedges (10) (5)Adjusted capital 138 138
Debt-to-adjusted capital ratio 66 69
56
copy 2005-07 Nelson 111
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowing
bull To comply with the capital disclosures the entity discloses thefollowingd) whether during the period it complied with any externally imposed capital
requirements to which it is subjecte) when the entity has not complied with such externally imposed capital
requirements the consequences of such non-complianceThese disclosures shall be based on the information provided internally to the entityrsquos key management personnel
copy 2005-07 Nelson 112
Capital DisclosuresExampleExample
Example disclosurebull Entity A filed its quarterly regulatory capital return for
30 September 20X7 on 20 October 20X7 bull At that date Entity Arsquos regulatory capital was below
the capital requirement imposed by Regulator B by $1 million
bull As a result Entity A was required to submit a plan to the regulator indicating how it would increase its regulatory capital to the amount required
bull Entity A submitted a plan that entailed selling part of its unquoted equities portfolio with a carrying amount of $115 million in the fourth quarter of 20X7
bull In the fourth quarter of 20X7 Entity A sold its fixed interest investment portfolio for $126 million and met its regulatory capital requirement
For example SFC or banks
For example SFC or banks
57
copy 2005-07 Nelson 113
Capital DisclosuresCaseCase
bull Early adopted capital disclosure in 2005 and itsannual report states that (extract only)ndash The Grouprsquos objectives when managing capital are
bull To safeguard the Grouprsquos ability to continue as a going concern so that it continues to provide returns for shareholders and benefits for other stakeholders
bull To support the Grouprsquos stability and growth andbull To provide capital for the purpose of strengthening the
Grouprsquos risk management capability
copy 2005-07 Nelson 114
Capital DisclosuresCaseCase
ndash The Group actively and regularly reviews and manages its capital structure to ensure optimal capital structure and shareholder returns taking into consideration the future capital requirements of the Group and capital efficiency helliphellip
ndash The Group adopts a dividend policy helliphellip while retaining 10 per cent of the profit as capital of the Group for future use
ndash The Group has set aside $1500 million of retained earnings for the purpose of strengthening the risk management regime of the clearing houses and supporting their roles as central counterparties
ndash As in prior years the Group monitors capital by reviewing the level of capital that is at the disposal of the Group (ldquoadjusted capitalrdquo) Adjusted capital comprises all components of shareholdersrsquo equity other than the hedging reserve relating to cash flow hedges designated reserves and investment revaluation reserve helliphellip
bull Early adopted capital disclosure in 2005 and itsannual report states that (extract only)
58
copy 2005-07 Nelson 115
Capital Disclosures ndash Transition
bull An entity shall apply the requirements of capital disclosure for
ndash annual periods beginning on or after 1 January 2007
bull Early application is encouraged
copy 2005-07 Nelson 116
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk
59
copy 2005-07 Nelson 117
QampA SessionQampA SessionQampA Session
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk
55
copy 2005-07 Nelson 109
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowing
bull To comply with the capital disclosures the entity discloses thefollowingb) summary quantitative data about what it manages as capital
Some entities regard some financial liabilities (eg some forms of subordinated debt) as part of capitalOther entities regard capital as excluding some components of equity (eg components arising from cash flow hedges)
c) any changes in (a) and (b) from the previous period
copy 2005-07 Nelson 110
Capital Disclosures
Example disclosure (continued from previous example)
ExampleExample
bull During 20X4 the Grouprsquos strategy which was unchanged from 20X3 was to maintain the debt-to-adjusted capital ratio at the lower end of the range 61 to 71 in order to secure access to finance at a reasonable cost by maintaining a BB credit rating The debt-to-adjusted capital ratios at 31 December 20X4 and at 31 December 20X3 were as follows
3112X4 ($rsquoM) 3112X3 ($rsquoM) Total debt 1000 1100 Less cash and cash equivalents (90) (150)Net debt 910 950
Total equity 110 105 Add subordinated debt instruments 38 38 Less amounts recognised in equity
relating to cash flow hedges (10) (5)Adjusted capital 138 138
Debt-to-adjusted capital ratio 66 69
56
copy 2005-07 Nelson 111
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowing
bull To comply with the capital disclosures the entity discloses thefollowingd) whether during the period it complied with any externally imposed capital
requirements to which it is subjecte) when the entity has not complied with such externally imposed capital
requirements the consequences of such non-complianceThese disclosures shall be based on the information provided internally to the entityrsquos key management personnel
copy 2005-07 Nelson 112
Capital DisclosuresExampleExample
Example disclosurebull Entity A filed its quarterly regulatory capital return for
30 September 20X7 on 20 October 20X7 bull At that date Entity Arsquos regulatory capital was below
the capital requirement imposed by Regulator B by $1 million
bull As a result Entity A was required to submit a plan to the regulator indicating how it would increase its regulatory capital to the amount required
bull Entity A submitted a plan that entailed selling part of its unquoted equities portfolio with a carrying amount of $115 million in the fourth quarter of 20X7
bull In the fourth quarter of 20X7 Entity A sold its fixed interest investment portfolio for $126 million and met its regulatory capital requirement
For example SFC or banks
For example SFC or banks
57
copy 2005-07 Nelson 113
Capital DisclosuresCaseCase
bull Early adopted capital disclosure in 2005 and itsannual report states that (extract only)ndash The Grouprsquos objectives when managing capital are
bull To safeguard the Grouprsquos ability to continue as a going concern so that it continues to provide returns for shareholders and benefits for other stakeholders
bull To support the Grouprsquos stability and growth andbull To provide capital for the purpose of strengthening the
Grouprsquos risk management capability
copy 2005-07 Nelson 114
Capital DisclosuresCaseCase
ndash The Group actively and regularly reviews and manages its capital structure to ensure optimal capital structure and shareholder returns taking into consideration the future capital requirements of the Group and capital efficiency helliphellip
ndash The Group adopts a dividend policy helliphellip while retaining 10 per cent of the profit as capital of the Group for future use
ndash The Group has set aside $1500 million of retained earnings for the purpose of strengthening the risk management regime of the clearing houses and supporting their roles as central counterparties
ndash As in prior years the Group monitors capital by reviewing the level of capital that is at the disposal of the Group (ldquoadjusted capitalrdquo) Adjusted capital comprises all components of shareholdersrsquo equity other than the hedging reserve relating to cash flow hedges designated reserves and investment revaluation reserve helliphellip
bull Early adopted capital disclosure in 2005 and itsannual report states that (extract only)
58
copy 2005-07 Nelson 115
Capital Disclosures ndash Transition
bull An entity shall apply the requirements of capital disclosure for
ndash annual periods beginning on or after 1 January 2007
bull Early application is encouraged
copy 2005-07 Nelson 116
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk
59
copy 2005-07 Nelson 117
QampA SessionQampA SessionQampA Session
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk
56
copy 2005-07 Nelson 111
Capital Disclosures
bull An entity shall disclose information that enables users of its financial statements to evaluatendash the entityrsquos objectives policies and processes for managing capital
bull To comply with the capital disclosures the entity discloses thefollowing
bull To comply with the capital disclosures the entity discloses thefollowingd) whether during the period it complied with any externally imposed capital
requirements to which it is subjecte) when the entity has not complied with such externally imposed capital
requirements the consequences of such non-complianceThese disclosures shall be based on the information provided internally to the entityrsquos key management personnel
copy 2005-07 Nelson 112
Capital DisclosuresExampleExample
Example disclosurebull Entity A filed its quarterly regulatory capital return for
30 September 20X7 on 20 October 20X7 bull At that date Entity Arsquos regulatory capital was below
the capital requirement imposed by Regulator B by $1 million
bull As a result Entity A was required to submit a plan to the regulator indicating how it would increase its regulatory capital to the amount required
bull Entity A submitted a plan that entailed selling part of its unquoted equities portfolio with a carrying amount of $115 million in the fourth quarter of 20X7
bull In the fourth quarter of 20X7 Entity A sold its fixed interest investment portfolio for $126 million and met its regulatory capital requirement
For example SFC or banks
For example SFC or banks
57
copy 2005-07 Nelson 113
Capital DisclosuresCaseCase
bull Early adopted capital disclosure in 2005 and itsannual report states that (extract only)ndash The Grouprsquos objectives when managing capital are
bull To safeguard the Grouprsquos ability to continue as a going concern so that it continues to provide returns for shareholders and benefits for other stakeholders
bull To support the Grouprsquos stability and growth andbull To provide capital for the purpose of strengthening the
Grouprsquos risk management capability
copy 2005-07 Nelson 114
Capital DisclosuresCaseCase
ndash The Group actively and regularly reviews and manages its capital structure to ensure optimal capital structure and shareholder returns taking into consideration the future capital requirements of the Group and capital efficiency helliphellip
ndash The Group adopts a dividend policy helliphellip while retaining 10 per cent of the profit as capital of the Group for future use
ndash The Group has set aside $1500 million of retained earnings for the purpose of strengthening the risk management regime of the clearing houses and supporting their roles as central counterparties
ndash As in prior years the Group monitors capital by reviewing the level of capital that is at the disposal of the Group (ldquoadjusted capitalrdquo) Adjusted capital comprises all components of shareholdersrsquo equity other than the hedging reserve relating to cash flow hedges designated reserves and investment revaluation reserve helliphellip
bull Early adopted capital disclosure in 2005 and itsannual report states that (extract only)
58
copy 2005-07 Nelson 115
Capital Disclosures ndash Transition
bull An entity shall apply the requirements of capital disclosure for
ndash annual periods beginning on or after 1 January 2007
bull Early application is encouraged
copy 2005-07 Nelson 116
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk
59
copy 2005-07 Nelson 117
QampA SessionQampA SessionQampA Session
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk
57
copy 2005-07 Nelson 113
Capital DisclosuresCaseCase
bull Early adopted capital disclosure in 2005 and itsannual report states that (extract only)ndash The Grouprsquos objectives when managing capital are
bull To safeguard the Grouprsquos ability to continue as a going concern so that it continues to provide returns for shareholders and benefits for other stakeholders
bull To support the Grouprsquos stability and growth andbull To provide capital for the purpose of strengthening the
Grouprsquos risk management capability
copy 2005-07 Nelson 114
Capital DisclosuresCaseCase
ndash The Group actively and regularly reviews and manages its capital structure to ensure optimal capital structure and shareholder returns taking into consideration the future capital requirements of the Group and capital efficiency helliphellip
ndash The Group adopts a dividend policy helliphellip while retaining 10 per cent of the profit as capital of the Group for future use
ndash The Group has set aside $1500 million of retained earnings for the purpose of strengthening the risk management regime of the clearing houses and supporting their roles as central counterparties
ndash As in prior years the Group monitors capital by reviewing the level of capital that is at the disposal of the Group (ldquoadjusted capitalrdquo) Adjusted capital comprises all components of shareholdersrsquo equity other than the hedging reserve relating to cash flow hedges designated reserves and investment revaluation reserve helliphellip
bull Early adopted capital disclosure in 2005 and itsannual report states that (extract only)
58
copy 2005-07 Nelson 115
Capital Disclosures ndash Transition
bull An entity shall apply the requirements of capital disclosure for
ndash annual periods beginning on or after 1 January 2007
bull Early application is encouraged
copy 2005-07 Nelson 116
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk
59
copy 2005-07 Nelson 117
QampA SessionQampA SessionQampA Session
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk
58
copy 2005-07 Nelson 115
Capital Disclosures ndash Transition
bull An entity shall apply the requirements of capital disclosure for
ndash annual periods beginning on or after 1 January 2007
bull Early application is encouraged
copy 2005-07 Nelson 116
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk
59
copy 2005-07 Nelson 117
QampA SessionQampA SessionQampA Session
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk
59
copy 2005-07 Nelson 117
QampA SessionQampA SessionQampA Session
Framework and IAS 1March 2007
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwnelsoncpacomhk