Assignment financial markets(FM), Assignment international financial reporting(IFR)
Stacy444
Sample2.pdf
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Contents
1. INTRODUCTION................................................................................................ 2
2. THE CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING ... 2
3. ACCOUNTING FOR TANGIBLE ASSETS .................................................... 3
4. ACCOUNTING FOR INTANGIBLE ASSETS ................................................ 6
5. ACCOUNTING FOR LEASES .......................................................................... 9
6. CONCLUSION .................................................................................................. 12
7. REFERENCES ................................................................................................... 13
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1. Introduction
Hong Kong has become an important international financial center in the world and is
one of the fastest growing export-oriented economy in the Asia-Pacific region.
Therefore, this report will discuss about the conceptual framework for financial
reporting in Hong Kong. It will also use the financial data of Cathay Pacific Airways
Limited in Hong Kong to present the accounting requirement for tangible and intangible
assets. Finally, it was also discussing about accounting requirements for leasing of CLP
Power Hong Kong and CAPCO’s power stations in Hong Kong.
2. The conceptual framework for financial reporting
The financial statement is prepared and submitted by external users around the world.
It may be due to various economic, legal environments and social, as well as different
countries thinking about the needs of different users of financial statements when
developing national requirements (Peasnell, 1982).
The objectives of the Conceptual Framework in Hong Kong are to assist the Council of
Hong Kong Institute of Certified Public Accountants (HKICPA) to develop future
Hong Kong Financial Reporting Standards (HKFRSs) and assist the HKFRS to prepare
financial statements. It also helps the auditors to ensure that whether financial
statements are in compliance with HKFRSs and provides information about its
approach to the formulation of HKFRSs and Accounting Guidelines for who interest in
the work of the Council (HKICPA, 2004).
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HKICPA has authorized the Financial Reporting Standards Committee to develop
financial reporting standards (HKFRS) to realize the integration with International
Financial Reporting Standards (IFRS) issued by the International Accounting Standards
Board (IASB) (HKICPA, 2004).
2.1 There are some comparisons between HKAS and IASB that will discuss the
differences in transactional provisions, as follow:
2.1.1 Accounting for Government Grants and Disclosure of Government Assistance
IAS 20 has transitional clause that allows an entity to come into force only after the
date of entry into force of this standard and apply only to grants or partial grants to
receivables or payables. In HKAS 20, there is no transitional clause like that.
2.1.2 Borrowing Costs
HKAS 23 has an additional transitional clause that allows expenses of entities with all
borrow costs to apply the new policy. The additional transitional clause of IAS 23 is
that permits borrowing costs of entities to capitalize borrowing costs prospectively.
2.1.3 Provision, Contingent Liabilities and Contingent Assets
IAS 37 has an additional transitional clause that allows an entity to not adjust the
opening balance of retained earnings for the earliest period provided and redefine the
comparison information for the first accepted period of IAS 37.
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2.1.4 Financial Instruments: Recognition and Measurement
IAS 39 usually requires retroactive applications but HKAS 39 does not allow
retrospective applications except in certain limited circumstances. As a result, the
transitional clause of HKAS 39 is distinct from IAS 39.
3. Accounting for tangible assets
Fixed assets also known as plant, property and equipment that are tangible assets held
by entities for the production or supply of goods and services, leased to others or for
management purposes (Campello & Giambina, 2011). The tangible assets include land
and buildings, machinery, ships, aircraft, motor vehicles, furniture and fixtures, office
equipment and bearer plants. In Property, Plant and Equipment, there is no difference
between HKAS 16 and IAS 16 (HKICPA, 2004).
The tangible fixed asset life cycle begins when the company acquires the asset and ends
when the company disposes of the asset. The life cycle includes depreciation
adjustments, repairs performed and asset upgrades on the asset. Different accounting
issues arise throughout the life of the asset, requiring the accountant to make decisions
regarding financial reporting or asset value (Almeida & Campello, 2007).
First, the companies acquire assets through various methods. Each method of
acquisition raises different accounting issues. Some companies build their own assets-
purchasing materials and using internal employees (Campello & Giambina, 2011). This
method raises the accounting issue of what portion of employee wages the company
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should include in the cost of this asset. Some companies purchase new equipment from
manufacturers. This method requires the accountant to determine what vendor costs
belong in the cost of the asset.
Second, asset value falls according to asset life cycle progresses. The company
confirms the value of the decline by depreciation. Depreciation requests company to
evaluate useful life of assets of the company and residual value of the asset.
Depreciation also raises the issue of using depreciation methods (Campello &
Giambina, 2011).
Third, most fixed assets require periodic maintenance and occasional repairs (Almeida
& Campello, 2007). Sometimes companies will make more elaborate repairs, which
increase the value of the asset and need to be capitalized. Whenever the company
performs work on the asset, the company faces the issue of whether to capitalize or
expense the work. If the company capitalizes the cost, it needs to determine whether
the work changes the estimated life of the asset and the revised value of the asset.
Finally, when a company discontinues using a fixed asset, it needs to dispose of that
asset. The company can donate the asset, sell the asset or trade it in for a newer model.
When a company donates the asset, it needs to determine what value to use on its tax
return for the donated asset.
In GAAP, there are some methods can use to calculate tangible fixed assets. Cathay
Pacific Airways Limited records the value of tangible fixed assets at the date of
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purchase. It used cash to buy a new van for HK$200,000. To record the purchase, asset
account van is debited for HK$200,000 and credited with cash for HK$200,000. The
account of van should be listed on balance sheet as a fixed asset.
In Cathay Pacific Airways Limited, the revaluation of fixed assets is determined and
recorded at the end of the fiscal year. The van was taken to a car shop and paint the
“CATHAY” logo on the van. The cost of the paint job is HK$1,000. The value of the
van will vary and the van account should be debited with cash for HK$1,000, to increase
the value of the van to HK$201,000, and cash credited with cash for HK$1,000.
Cathay Pacific Airways Limited calculates and records periodic depreciation for the
fixed asset. GAAP requires regular depreciation of fixed assets. It assumes that Cathay
Pacific Airways Limited wants to devalue the van over the entire lifecycle and chooses
the straight-line depreciation method. The expected useful life of van is seven years. It
takes the value of van is HK$201,000, minus the residual value of van of HK$50,000
and divide by seven years; the annual depreciation is HK$21,571. At the end of each
fiscal year until useful life of van is over and depreciation is deducted and accumulated
depreciation is included in HK $ 21,571.
Cathay Pacific Airways Limited also records the sale of fixed asset. When the asset is
sold, its value must be adjusted based on depreciation of the sale date. The carrying
amount of the goods is calculated by the balance in accumulated depreciation minus
the balance of the asset. Depending on whether the book value of assets or the sales
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price is large, a loss or gain can be realized at the time of sale. Cathay Pacific Airways
Limited decides to sell the van six months after purchase. The latest depreciation
expense is HK$10,786. The book value of van is HK$190,214. If the van is sold for
HK$201,000, a gain of HK$10,786 is realized on the sale. To record the sale, debited
with cash for HK$201,000 and accumulated depreciation for HK$10,786; van in
credited with cash for HK$201,000 and gain on sale of van for HK$10,786.
4. Accounting for intangible assets
Intangible assets are identifiable non-monetary assets, resources controlled by entities
of past events and future economic benefits are expected to flow to entities (Lev, 2001).
Traditional intangible assets including that are goodwill, closing costs, research and
development expenditures, rights, patents, service contracts, on-compete agreements,
computer software, customer lists, franchise agreements, customer relationships,
copyrights, internet domain names, licensing and royalty agreements, technologies and
trademarks. In Intangible Assets, there is no difference between HKAS 38 and IAS 38
(HKICPA, 2004).
The nominal amount involved and the complexity of accounting treatment made a
challenge for accounting intangible assets (Herve & Anne 1999). The Hong Kong
Institute of Certified Public Accountants (HKICPA) provides guidance on how to
calculate intangible assets in a variety of circumstances.
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In Hong Kong, the first issue related to accounting intangible assets is to identify them.
Intangible assets are not physical assets that can be readily recognized (Lev, 2001). In
some cases, the view may be conflict, and it looks seem that the party seems to be
intangible to seem responsible for the other party. In addition, the speed and complexity
of the development of emerging technologies to maintain intangible assets are also a
challenge.
For a long time, Hong Kong Accounting Standards also toward fair value accounting
(HKICPA, 2004). This requests evaluation of intangible assets that are generally hard
to valuate. In fact, it often cannot confirm the value because of the inability to repay
the holding of assets. Intangible assets are usually highly illiquid, and are almost
immediately priced and sold compared to commodities such as gold or stocks (Herve
& Anne 1999).
Another issue is to determine comparability, such as a business combination (Lev,
2001). It must report the assets of all target companies at the fair value of the updated
balance sheet including intangible assets when a company acquires a target company.
However, acceptable valuation methods often require the use of market data as the basis
for analysis and comparison. Intangible assets due to the complexity of the nature,
which may be extreme problems in the case. In addition, there is seldom provided the
source of market data to the public.
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The main objectives of accounting standards in Hong Kong are to promote reunification,
make a wide range of diversified companies to easy regulation, to enhance reliability
and compare financial performance. Accounting industry is a specific industry in Hong
Kong. This further challenges for uniformity when they increase the intangible assets
on top. Depreciation and other concepts are based on a standard economic deterioration
rate, but these indicators for the estimation of intangible assets are extremely important.
Even in seemingly comparable intangible assets such as trade names, it is difficult to
accurately compare key indicators (HKICPA, 2004).
The accounting treatment of intangible assets in Hong Kong is to calculate that how
many they purchased of intangible assets. Intangible assets are measured at the fair
value of other individuals or companies. Fair trading is conducted between unrelated
entities that exchange equal value between the parties.
It also determines the amount of intangible assets developed internally. Only certain
costs associated with internally developed intangible assets can be recorded on the
balance sheet, such as the cost of trademark design, legal costs for the successful
defense of the asset in court, the cost of registration or consultation, and other direct
costs associated with the establishment of the asset.
Another accounting treatment in Hong Kong is to calculate the amount of goodwill.
The asset represents an excess surplus when goodwill is not inseparable from the
company that owns the company. When the company to buy assets or equity access to
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goodwill, it is more than the net assets of the fair value or total liabilities minus the
excess price of the total assets.
Hong Kong companies are amortized intangible assets each year. Amortization is
calculated based on the recorded cost of the asset divided by its estimated economic
life, and the result is collected over the entire life cycle of the asset. Patent is amortized
within a shorter period of estimated life or remaining legal life.
5. Accounting for leases
Leases approved by Hong Kong Institute of Certified Public Accountants that discussed
and agreed with the IAS 17 conclusion basis of IASB. As such, HKAS 17 does not
differ materially from IAS 17. The HKICPA issued the HKAS 17 to conflicts and
alternatives in the HKFRSs, reduce or eliminate the redundancies, to response some
integration issues and make other improvements (HKICPA, 2004).
The purpose of HKAS 17 is to provide the lessee and lessor with appropriate accounting
policies and disclosures applicable to leasing. Lease refers that the lessor transfers an
agreement to the lessee. The right to use assets within an agreed time is to exchange
payments or a series of payments (Abdel, 1981). The definition of a lease includes a
contract for the leasing of assets which include clauses that give the hirer the option to
acquire the ownership of the asset when the agreed condition is reached (Imhoff, Lipe
& Wright, 1991).
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The leasing classification is made at the beginning of the lease. In HKAS 17, the leasing
classification is based on the extent to which the incidental risk and remuneration of
the leased asset ownership are related to the lessor or the lessee (HKICPA, 2004). If all
risks associated with all risks and ownership are substantially transferred, the lease will
be classified as a finance lease (Beattie, Goodacre & Thomson, 2000). If all risks and
incentives are not transferred to ownership (Crosby, 2003), the leases will be classified
as operating leases. We will use the following illustrative examples to divide the lease
into operating or finance leases to discuss the tax and accounting consequences of the
lessee and the lessor.
CLP Power Hong Kong actually the lessee has signed a contract to purchase the full
output from the CAPCO’s power stations actually the lessor. Using the concept of
leasing accounting, this arrangement is similar to financial leasing of the CAPCO
power generation facilities. As a result, these facilities are recorded in the balance sheet
of CLP Power Hong Kong as part of the lease of fixed assets and have corresponding
financial leasing obligations. In the other way, CAPCO is considered a financier of the
arrangement.
In Hong Kong, the power paid by CLP to CAPCO is divided into three parts that are
the repayment of the outstanding financial leasing obligations, the interest expense of
the outstanding lease obligation, and payment for the use of the land on which the
facilities stand and services that stem from the lease as "operating leases and leases
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service payments " appear on their income statement (Beattie, Goodacre & Thomson,
2000).
Their Indian subsidiary GPEC is the lessor of the joint control entity of Hong Kong,
Taiwan and Southeast Asia as a power producer and sells all of its output to the
purchaser of electricity in a prescribed quantity. Their leasing accounts reflect the
situation of CLP Power Hong Kong. As a lessor, the financial leasing receivables are
recorded as fixed assets in the balance sheet. The amount received under the electricity
purchase agreement is no longer used as a sales record, split into receipt of finance lease
interest income, repayments for finance leases receivable and lease service income. The
balances seen in the financial statements are related to the GPEC, while the balances
associated with CAPCO and other jointly controlled entities are less, since they are
listed on the balance sheet as "the interests of the jointly controlled entities" and "share
of results of the jointly controlled entities" in the income statement.
HKFRS 16, Leases began a new era of lease accounting. It entered into force on or after
1 January 2019. Following the entry into force of HKFRS 16 that will be superseded
HKAS 17 lease (HKICPA, 2016).
First, the HKFRS 16 will affect the balance sheet and balance sheet-related ratios, such
as the debt/equity ratio. In addition, it will also affect the income statement because an
entity must now confirm the lease liability and depreciation interest expense on the
"right to use". As a result, the lease contract was previously listed as an operating lease
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and the total amount at the beginning of the lease term would be greater than HKAS 17
(HKICPA, 2016).
The new standard will also change the cash flow statement. The rental costs previously
classified as operating lease contracts are no longer classified as operating cash flows.
Only the rental payment part that reflects the interest on the lease obligation can be
classified as operating cash flow. The cash portion of the financing activity is divided
into financing activities. Leases of low-value assets, payments for short-term lease and
variable lease payments not included in the measurement of the lease obligation remain
presented within operating activities (HKICPA, 2016).
HKFRS 16 states that the contract includes a lease and the contract conveys the right
to use the identified asset for a period of time in exchange for consideration when there
is an identified asset. It can be explicitly or implicitly identified the assets. The asset is
specified in the contract if it is explicit, the asset is not mentioned in the contract when
it is implicit, but the supplier can only utilize the specific assets to fulfill the contract.
In both cases, there may be identifying assets (HKICPA, 2016).
6. Conclusion
In conclusion, this report shows that overall HKFRS better represents the financial
status of the company for users through ideal yet rigorous requirements. It also shows
that the standard in the conceptual framework for financial reporting has many
differences between Hong Kong and international accounting standards. After that,
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there are numerous issues of tangible and intangible assets that link to the companies
in Hong Kong. Moreover, this report also discussed leases in HKAS 17 and the HKFRS
16.
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