Educational Publication: Financial reporting considerations for closing out 2023

STANDARDSETTINGFinancial reportingconsiderations for closing outFEBRUARY 2024CONTENTSIntroductionI.Topical issues

1.The lingering impact of economic challenges and uncertainties onfinancial reporting

2.Accounting implication of the abolition of Mandatory Provident Fund(MPF) – Long Service Payment (LSP) offsetting mechanism in HongKong

3.Climate-related matters on financial reporting and connectivityII.New and amended Hong Kong Financial Reporting Standards (HKFRSs)

mandatorily effective on 1 January 2023III. Amendments to HKFRSs effective on 1 January 2024 and thereafterAppendix – New and revised HKFRSs as well as Agenda Decisions issuedby the IFRS Interpretations Committee (IC)

IntroductionEvery year, we publish a publication to highlight key financial reporting reminders and topicalissues that we consider are relevant and helpful for preparers in the preparation of their annualHKFRSs financial statements with a December year-end. Those discussions may also beapplicable to future reporting periods.In this year’s publication, the first section focuses on the topical issues that are expected tobe relevant to most entities in Hong Kong. The second section provides an overview of thenew and amended HKFRSs which are mandatorily effective for annual periods beginning onor after 1 January 2023. The third section highlights the key amendments to HKFRSs that areeffective on 1 January 2024 and thereafter.This publication is not intended to be comprehensive nor does it necessarily cover all thepotential issues relevant to an entity’s financial statements. Entities should exercise judgementand refer to HKFRSs in the HKICPA’s Members’ Handbook for further reference asappropriate in light of their own facts and circumstances.I.Topical issuesThe financial reporting issues encountered by entities are influenced by various factors. Thosefactors include the external macroeconomic environment and circumstances specific to theentities, such as their business nature and financial strength. Entities should continuallyevaluate the impact of recurring issues and identify new issues as they arise. This sectionhighlights three topical issues for entities reporting in Hong Kong to consider when preparingtheir December 2023 financial statements. Among these issues, the ‘Accounting implicationof the abolition of MPF-LSP offsetting mechanism in Hong Kong’ is a new topic discussed thisyear, whereas the other two are recurring issues with updated commentary.

1.The lingering impact of economic challenges and uncertainties on financialreportingSome entities have managed to recover from the impact of COVID-191, but they continue toface various economic challenges and uncertainties that emerged over the past two years. Inour 2023 publication, we extensively discussed the impact of higher inflation, rising interestrates and other macroeconomic and geopolitical uncertainties on the following aspects offinancial reporting relevant to Hong Kong entities:

Impairment of non-financial assets applying HKAS 36 Impairment of AssetsThe expected credit loss (ECL) assessment under HKFRS 9 Financial InstrumentsLeases applying HKFRS 16 LeasesRevenue recognition applying HKFRS 15 Revenue from Contracts with CustomersEvents after the reporting date applying HKAS 10 Events after the Reporting PeriodOther considerations: recognition of deferred tax assets, going concern assessment,estimation uncertainty and judgement appliedConsidering the persistent effects brought by the macroeconomic and geopoliticaluncertainties, we believe that many of the abovementioned areas remain relevant for financialreporting in 2023. Specifically, the high interest rate and inflationary pressure have substantialimpact on those aspects of financial reporting that involve forecasting future cash flowprojections and estimating present value. This impact is particularly notable in the assessmentof impairment for non-financial assets under HKAS 36, financial assets under HKFRS 9 andfair value measurement under HKFRS 13 Fair Value Measurement. Entities arerecommended to refer to the 2023 publication for more details.Apart from the areas mentioned above, entities should consider any other impacts brought bythe economic challenges and assess them accordingly. For example, macroeconomicdownturns and uncertainties may worsen an entity’s ability to meet covenants in long-termloan arrangements. As required by HKAS 1 Presentation of Financial Statements, if an entity1 Please refer to our prior publications on discussions of COVID-19-related financial impact (2023: Financial reportingconsiderations for closing out 2022, 2022: Financial reporting considerations for closing out 2021; 2021: Alert Issue 37, 2020:

Alert Issue 33).breaches a loan covenant on or before the reporting period with the effect that the loanbecomes payable on demand, it classifies the loan as current, even if the lender agreed, afterthe reporting period and before the authorization of the financial statements for issue, not todemand payment as a consequence of the breach. The entity classifies the loan as currentbecause, at the end of the reporting period, it does not have an unconditional right to defer itssettlement for at least 12 months after that date2.

2.Accounting implication of the abolition of MPF-LSP offsetting mechanism in HongKongIn June 2022, the Government of the HKSAR gazetted the Employment and RetirementSchemes Legislation (Offsetting Arrangement) (Amendment) Ordinance 2022 (theAmendment Ordinance) to abolish the use of the accrued benefits of employers' mandatorycontributions under the Mandatory Provident Fund (MPF) System to offset severance payment(SP) and LSP (hereafter referred to as the ‘Abolition’). The Government has announced thatthe Abolition will take effect on 1 May 2025 (‘the transition date’)3. The Amendment Ordinancehas two main effects:

(i)

The accrued benefits derived from an employer’s mandatory MPF contributions cannotbe used to offset post-transition LSP or SP after the transition date; and(ii)

The last month’s salary immediately preceding the transition date (instead of the date oftermination of employment) is used to calculate the portion of LSP or SP in respect ofthe employment period before the transition date.Before the Abolition, most entities in Hong Kong do not report a LSP liability on their statementof financial position. This is because they consider that the full amount of accrued benefitsrelated to employer’s MPF contributions that is expected to be available could offset the LSPliability upon payment, and the resulting net liability has been immaterial for their financialstatements. The Abolition is likely to have a widespread impact on financial reporting of most,if not all, entities in Hong Kong as the accounting for the employer’s obligations under LSPcould become material following the Abolition. The extent and pervasiveness of the impactdepend on the facts and circumstances of the entities such as the composition, salary andstaff turnover of their workforce. Financial statements of entities with a significant employeebase in Hong Kong are expected to be significantly impacted by the Abolition.In view of the complexity of the accounting issues and the pervasive impact arising from theAbolition, the HKICPA issued a financial reporting alert in February 2023 followed by acomprehensive educational guidance in July 2023 which provides detailed guidance andillustrative examples on the accounting implication of the Abolition. In particular, the publication2 See HKAS 1.74 & 75 for the relevant requirements. An amendment to HKAS 1 (effective from 1 January 2024) has been maderegarding the right to defer settlement. For more information of this amendment, please refer to Section III.1 of this publication.3 See also the webpage of the Labour Department for information.discusses two acceptable approaches to account for the offsetting mechanism and the impactof the Abolition. The two approaches are:

Approach 1Account for the amount expected to be offset as a deemed employeecontribution towards his LSP benefits in terms of HKAS 19.93(a)

Approach 2Account for the employer MPF contributions and the offsetting mechanismas a funding mechanism for the LSP obligationThe educational guidance provides new information to help entities assess their situation andaccount for the impact arising from the Abolition. The explanatory material in the guidancemay provide additional insights that might change an entity’s understanding of the principlesand requirements in HKFRSs, and because of this, an entity might determine that it needs tochange its related accounting policy.In determining the accounting policy, the following are some key reminders and points forconsideration:

(i)

The two approaches characterize the nature of the employer’s right to accrued benefitsarising from its MPF contributions differently, resulting in different outcomes in therecognition, measurement, presentation and disclosures in the financial statements. Inparticular, the two approaches could result in a different extent and/or direction of changeto the LSP liability before and after the enactment of the Amendment Ordinance.Therefore, entities are strongly advised to refer to the educational guidance to fullyunderstand the bases of the two approaches and their effects on the financial statements.In addition, when deciding on the accounting policy, entities must keep in mind that avoluntary change in accounting policy is permitted only if the change results in thefinancial statements providing reliable and more relevant information about the effectsof the offsetting mechanism and the Abolition 4 . The change shall be appliedretrospectively in accordance with HKAS 8 Accounting Policies, Changes in AccountingEstimates and Errors, subject to impracticability constraint5.(ii)

Entities are expected to determine their accounting policy and implement the necessarypolicy change on a timely basis, subject to having sufficient time to do so6. Determininghow much time is sufficient to implement the change is a matter of judgement thatdepends on an entity’s particular facts and circumstances7.4 See HKAS 8.14(b).5 See HKAS 8.50-53.6 By analogy to the time allowed for entities to implement changes resulting from agenda decisions published by the IFRS IC(paragraph 8.6 of the IASB and IFRS IC Due Process Handbook).7 According to the article ‘Agenda decisions – time is of the essence’, Sue Lloyd, the former Vice-Chair of the IASB, thinks that,as a rule of thumb, it is fair to say that we had in mind a matter of months rather than years in considering the effects of IFRS ICagenda decisions and implementing the accounting policy changes arising from the IFRS IC agenda decisions.(iii)

Regardless of which accounting policy is adopted, entities should provide cleardisclosures of their accounting policy and disclosures in their December 2023 andsubsequent financial statements to the extent material 8. These include disclosuresrelating to MPF and LSP as required by HKAS 19.53-54 and 135-152, a description ofthe plan amendment as required by HKAS 19.139(c) and information set out in HKAS

8.29 if the entity has changed its related accounting policy.(iv) Given the complexity of the matter, entities are strongly encouraged to take action nowto assess the impact of the Abolition on financial reporting and develop animplementation plan for the change in accounting policy if necessary. It may be beneficialfor entities to engage with auditors or consult accounting advisors to determine anacceptable approach. Furthermore, entities should evaluate their internal capabilities orconsider consulting a professional valuer to assist in measuring the LSP liability, whichis subject to actuarial assumptions and estimations.

3.Climate-related matters on financial reporting and connectivityClimate-related risks have become an increasingly important topic in recent years. We havediscussed climate-related reporting in our 2022 and 2023 publications. As highlighted in our2022 publication, climate risks will affect entities to varying degrees in coming years. It iscrucial to rigorously assess how climate risks, together with other similar uncertainties, mayimpact operations and financial performance, regardless of whether the entity activelymanages climate risks. The following are some reminders on climate reporting from twoperspectives, financial reporting and connectivity.(i)

Financial reporting perspectivea.The assessment of materiality of the impact of climate risks on financial reporting shouldbe based on both quantitative and qualitative factors 9. Consequently, entities thatpreviously determined the impact of climate risks on their financial statements was notquantitatively material, would need to conduct their assessment qualitatively, whichcould result in a different conclusion thereafter.b.There is currently no single explicit standard on climate-related matters in HKFRSs. Inour prior publications, we recommended readers to refer to the two educational materialspublished by the IASB in November 2020 and November 2019, to determine how toincorporate climate-related matters into their financial statements. An updated versionwas published by the IASB in July 2023 in light of the developments including theissuance of IFRS Sustainability Disclosure Standards in June 2023 (see below for moreinformation). The updated version is aimed at helping companies, by considering theISSB’s Standards and the educational materials together, better identify matters8 Refer to Section II of this publication for information on the disclosure requirements of material accounting policy information asrequired by the Amendments to HKAS 1, which became effective on 1 January 2023.9 See HKFRS Practice Statement 2 Making Materiality Judgements for the relevant guidance.including climate change, that affect the financial statements and apply the applicablefinancial reporting standards.c.For various reasons, different governments worldwide are implementing differentmeasures to promote energy efficiency and reduce carbon emissions. In July 2022, theIFRS IC published an agenda decision titled ‘Negative Low Emission Vehicle Credits –IAS 37 Provisions, Contingent Liabilities and Contingent Assets’ to address a questionof whether particular measures to encourage reduction in vehicle carbon emissions giverise to obligation that meets the definition of a liability in IAS 37.In the fact pattern submitted, an entity has produced or imported vehicles with averagefuel emissions exceeding the government target, resulting in the entity receiving negativeemission credits. The measures require the entity to eliminate the negative credits byobtaining and surrendering positive credits. Failure to do so may result in the governmentimposing sanctions on the entity, such as restricting its access to the market in the future.The question is whether the entity has a liability in such situation. The IFRS IC noted thatdetermining whether the entity has a liability requires consideration of: 1) whether settlingan obligation to eliminate negative credits would result in an outflow of resourcesembodying economic benefits; 2) which event creates a present obligation to eliminatenegative credits; and 3) whether the entity has no realistic alternative to settling theobligation. Once such an obligation is identified, the entity should apply relevantrequirements in IAS 37 to measure the liability.We anticipate that similar fact patterns are likely to emerge in the future, as governmentsworldwide are placing emphasis on addressing climate-related risks. Entities shouldassess the potential impact of this agenda decision on their financial statements, if theyencounter similar circumstances as described in the submission to the IFRS IC.d.Emerging issues are arising associated with climate-related initiatives. For instance,some entities are transitioning towards acquiring electricity from renewable energyresources through various types of power purchase agreements (PPAs). Entities needto carefully determine the appropriate accounting treatment for such arrangementsbased on specific fact patterns, particularly those discussed by the IFRS IC in its June2023 meeting in response to a submission relating to the application of the ‘own-use’exception in IFRS 9.2.4 to physically delivery contracts for the purchase of renewableenergy. At that meeting, the IFRS IC considered that the principles and requirements inIFRS 9 do not provide an adequate basis for an entity to determine the requiredaccounting for some physical PPAs in a consistent way, and referred the matter to theIASB for further consideration. In its December 2023 meeting, the IASB decided toexplore narrow-scope standard setting for PPAs and plans to publish an exposure drafton the PPA project in April 202410.10 Refer to the IASB project page for the development of this project.(ii)

Connectivity perspectiveEnsuring connectivity between information on climate-related matters disclosed in the financialstatements and non-financial reporting, such as sustainability reports, is crucial. Whiledisclosures should be transparent and entity-specific, they should also be consistent with otherinformation provided elsewhere, including sustainability reporting as mentioned.Update on the development of professional standards related to sustainability and reportingof climate-related risks and other uncertainties(i)

In June 2023, the ISSB published its first two IFRS Sustainability Disclosure Standards,namely IFRS S1 General Requirements for Disclosure of Sustainability-related FinancialInformation and IFRS S2 Climate-related Disclosures. These standards are subject tolocal adoption. As the statutory standard setter for the Sustainability DisclosureStandards concerning the practice of accounting, the HKICPA is working closely with theGreen and Sustainable Finance Cross-Agency Steering Group11 to assess the suitabilityof IFRS Sustainability Disclosure Standards for use in Hong Kong. Entities should stayinformed about the progress of the development of Hong Kong sustainability standards.(ii)

In 2023, the IASB added a narrow-scope maintenance project Climate-related and OtherUncertainties in the Financial Statements to its work plan to consider whether and howentities can provide better information about the effects of climate-related and otheruncertainties in their financial statements. This project and the work of the ISSBcomplement each other and illustrate how the work of the two boards is connected12.The project will not create a new IFRS Accounting Standard on climate. The IASBplanned to decide its project direction in April 2024.11 This Steering Group was established in May 2020, which is co-chaired by the Hong Kong Monetary Authority and the Securitiesand Futures Commission. Other members include the Accounting and Financial Reporting Council, the Environment and EcologyBureau, the Financial Services and the Treasury Bureau, Hong Kong Exchanges and Clearing Limited, the Insurance Authorityand the Mandatory Provident Fund Schemes Authority. The Steering Group aims to co-ordinate the management of climate andenvironmental risks to the financial sector, accelerate the growth of green and sustainable finance in Hong Kong and support theGovernment’s climate strategies.12 A webcast was released in July 2023, jointly presented by Linda Mezon-Hutter, Vice-Chair of the IASB and Sue Lloyd, Vice-Chair of the ISSB. They discussed the progress made in facilitating connection between financial statements and sustainability-related financial disclosures and share examples of connected and complementary work between the two boards.II. New and amended HKFRSs mandatorily effective on 1January 2023Among the new and amended HKFRSs that are mandatorily effective for annual periodsbeginning on or after 1 January 2023, HKFRS 17 Insurance Contracts is the only major newstandard whereas the others are amendments to existing HKFRSs and a practice statement.The table below provides an overview of the key aspects of the new and amendedrequirements and corresponding considerations. We hope this table can facilitate entities toassess the relevance or extent of the impact of these standards with regard to their owncircumstances.HKFRSs andpractice statementKey aspectsKey matters for consideration (notexhaustive)

New StandardHKFRS 17 InsuranceContracts andconsequentialamendmentsReplace HKFRS 4 InsuranceContracts, by introducing new andcomprehensive requirements onaccounting for insurancecontracts.Apply to all types of insurancecontracts13 (i.e. life, non-life, directinsurance, reinsurance),regardless of the types of entitieswhich issue them, and investmentcontracts with discretionaryparticipation features. A fewexceptions apply.Establish new principles anddetailed requirements forrecognition, measurement,presentation and disclosures,including:

i) Set out three measurementmodels. The default model isgeneral measurement model(GMM), supplemented by- simplified approach mainlyfor short-term contracts(optional premium allocationapproach)

HKFRS 17 applies not only toinsurers but also to other entities,provided that their issuedcontracts meet the definition ofinsurance contracts under HKFRS1715 and do not fall into thespecified scope exclusions inHKFRS 17.7, which would requirethem to use another HKFRS.Entities, including non-insurers,should understand HKFRS 17 toidentify and account for anycontracts falling within its scope.Non-insurers should not assumethat HKFRS 17 does not apply tothem. Entities should proactivelyreview their contracts andconsider whether they fall withinthe scope of HKFRS 17, takinginto account any exceptionsavailable.Various types of contracts issuedby non-insurers may potentiallyfall within the scope of HKFRS 17(e.g. financial guarantees,performance guarantees, fixed feemaintenance contracts dependingon facts and circumstances).13 See HKFRS 17.3 & 4.15 Any contracts that transfers a non-financial risk from one party to another may meet the definition of an insurance contract ifsuch risk is assessed to be significant. See Appendix A of HKFRS 7 for the definition of insurance contract. HKFRS 17.B17-B23for further guidance on assessment of whether the insurance risk is significant.HKFRSs andpractice statementKey aspectsKey matters for consideration (notexhaustive)

- specific modifications forcontracts with directparticipation features(variable fee approach)

ii) Measure groups of contractsbased on estimates of presentvalue of future cash flows thatare expected to arise when theentity fulfils the contracts, arisk adjustment for non-financial risk and CSM14.iii) Recognize insurance revenuein each reporting period whichrepresents changes inliabilities for remainingcoverage that relate toservices for which the entityexpects to receiveconsideration and an allocationof premiums relating torecovery of insuranceacquisition cash flow.iv) Exclude the investmentcomponents in insurancerevenue and insurance serviceexpenses.v) Require extensive disclosuresof recognized amounts frominsurance contracts and thenature and extent of risksarising from the contracts.The introduction of newmeasurement models in HKFRS17 may also have varying effectson profit, equity and keyperformance indicators.Consequently, affected entitiesshould also consider any impacton their data, information systems,processes and controls forfinancial reporting.To enhance entities’understanding of HKFRS 17 andits application, the HKICPA hasissued various publications since

2018.Among them, we highlyrecommend entities refer to thefollowing two educationalpublications issued in 2023, whichillustrate the journal entries indifferent scenarios applying themodels specified in HKFRS 17.They are useful reference forgaining initial understanding ofHKFRS 17:

 HKFRS 17 InsuranceContracts – Journal Entries HKFRS 17 InsuranceContracts – Journal Entries onReinsurance Contracts HeldAmended Standards and Practice StatementAmendments toHKAS 1 Presentationof FinancialStatements andHKFRS PracticeStatement 2 MakingMaterialityJudgements –Require entities to disclose their‘material accounting policyinformation’ instead of ‘significantaccounting policies’.Add guidance on applying theconcept of materiality toaccounting policy disclosures.Diagram 1 in HKFRS PracticeThe amendments are helpful inparticular the introduction of the‘four-step materiality process’ withindicators of when accountingpolicy information would bematerial to users.Entities should revisit theiraccounting policy disclosures and14 GMM in HKFRS 17 is also known as the ‘building block approach’ as it is developed using four building blocks for measuring agroup of insurance contracts. Diagram 2 in HKFRS 17 Insurance Contracts – Journal Entries explains the nature of these fourbuilding blocks on initial recognition of insurance contract liability. They are: 1) expected future cash flows, 2) time value of money,3) risk adjustment and 4) contractual service margin (CSM).HKFRSs andpractice statementKey aspectsKey matters for consideration (notexhaustive)

Disclosure ofAccounting PoliciesStatement 2 demonstrates theapplication of the ‘four-stepmateriality process’.Provide examples of the situationswhere standardized informationsummarizing or duplicating therequirements of HKFRS may beconsidered material accountingpolicy information.focus on those that are materialbased on the amendedrequirements. Judgement may beneeded in determining whether anaccounting policy is material. Bothqualitative and quantitative factorsshould be considered in theassessment.Information disclosed should berelevant, entity-specific and notboilerplate. Accounting policydisclosure that is not material canbe removed. The amended HKAS1 is explicit that if an entitydiscloses immaterial accountingpolicy information, suchinformation shall not obscurematerial accounting policyinformation.Amendments toHKAS 8 AccountingPolicies, Changes inAccounting Estimatesand Errors –Definition ofAccounting EstimatesReplace the definition of ‘achange in accounting estimates’with a definition of ‘accountingestimates’16.Clarify the distinction of changesin accounting estimates, changesin accounting policies andcorrection of errors with examplesto explain how to apply thedefinition of ‘accountingestimates’.Clarify that the effects of a changein an input or in a measurementtechnique used to develop anaccounting estimate are changesin accounting estimates unlessthey result from correction of priorperiod errors.The amendments requireprospective application from theeffective date. Entities shouldunderstand the requirements ofthe amendments to appropriatelydetermine whether the changesoccurring from the effective dateare to be treated as changes inaccounting estimates, accountingpolicies or correction of errors.Amendments toHKAS 12 IncomeTaxes – DeferredTax related to Assetsand Liabilities arisingNarrow the scope of the initialrecognition exemption such that itno longer applies to transactionsthat give rise to equal taxable anddeductible temporary differencesBefore the amendments, it wasunclear whether HKAS 12required the recognition ofdeferred taxes for the temporarydifferences or whether initialrecognition exemption applied to16 Under the new definition, accounting estimates are ‘monetary amounts in financial statements that are subject to measurementuncertainty’ [HKAS 8.5].HKFRSs andpractice statementKey aspectsKey matters for consideration (notexhaustive)

from a SingleTransactionon initial recognition, e.g. leasesand decommissioning obligations.Apply the initial recognitionexemption only if the recognitionof a lease asset and lease liability(or decommissioning liability anddecommissioning assetcomponent) gives rise to taxableand deductible temporarydifferences that are not equal.When the resulting deferred taxassets and liabilities are notequal, the difference betweendeferred tax asset and liabilityshall be recognized in profit orloss.Add an illustrative example toexplain how the amendments areapplied.transactions which hadsimultaneous recognition of anasset and a liability. It had beenan accounting policy choice forentities to determine whether torecognize deferred tax assets andliabilities.Entities that had not previouslyrecognized deferred tax assetsand liabilities before theamendments should assess andquantify the impact, and makeretrospective adjustments. Theamendments apply to transactionsthat occur on or after thebeginning of the earliestcomparative period presented.Amendments toHKAS 12 IncomeTaxes – InternationalTax Reform – PillarTwo Model Rules,17Clarify that HKAS 12 applies toincome taxes arising from tax lawenacted or substantively enactedto implement the Pillar Two modelrules published by Organisationfor Economic Co-operation andDevelopment (OECD), includingtax law that implements qualifieddomestic minimum top-up taxes.Introduce a mandatory temporaryexception in HKAS 12 fromrecognizing and disclosingdeferred tax assets and liabilitiesrelated to Pillar Two incometaxes.Introduce new disclosurerequirements18, including theexposure to Pillar Two incometaxes and the current taxexpense/income related to PillarNotwithstanding the temporaryexception, entities are required toprovide new disclosures requiredby the amendments.In periods in which Pillar Twolegislation is enacted orsubstantively enacted but not yetin effect, entities shall discloseknown or reasonably estimableinformation, both qualitatively andquantitatively, to assist users inunderstanding the entity’sexposure to Pillar Two incometaxes at the end of the reportingperiod19.As the HKSAR Government plansto launch the global minimum taxand domestic minimum top-up taxin Hong Kong in 2025 after getting17 The temporary exception to the requirements in HKAS 12 for accounting for deferred taxes related to Pillar Two income taxesare required to be applied immediately upon the issuance of the amendments. New disclosures as set out in the amendmentsshall be provided for annual reporting periods beginning on or after 1 January 2023.18 See HKAS 12.88A-D.19 See HKAS 12.88C and 88D for details.HKFRSs andpractice statementKey aspectsKey matters for consideration (notexhaustive)

Two income taxes, and known orreasonably estimable informationthat helps users understand theentity’s exposure to Pillar Twoincome taxes arising from PillarTwo legislation.the Legislative Council’s approvalon its legislative proposal in thesecond half of 2024 20, entities arerequired to take action now toassess the impact of Pillar Twomodel rules given the complexityof those rules.Entities with overseas operationsshould also closely monitor thedevelopment of the Pillar TwoModel Rules in their respectivejurisdictions and assess theirimpact promptly to avoid anypotential issues.In addition to the specified provisions of relevant standards such as transitional disclosureswhen applying HKFRS 17, entities are reminded to provide the required disclosures on initialapplication of a new and amended HKFRS under HKAS 821. While the extent of disclosuresis determined based on materiality, entities should ensure that the disclosures are entity-specific, clear and sufficient granular to help financial statement users understand the impactof adopting the standards.Entities should present a third statement of financial position as at the beginning of thepreceding period in addition to the minimum comparative financial statements required inHKAS 1.38A, if retrospective application of a new accounting policy has a material effect onthe statement of financial position at the transition date 22. This is particularly relevant toinsurance companies as it is widely expected that HKFRS 17 would have a material impacton their financial statements when it is first applied in 2023.20 The Pillar Two model rules, which set forth a global minimum tax rate of 15%, apply to constituent entities that are members ofa multinational enterprise group with annual revenue of EUR 750 million or more in the consolidated financial statements of theultimate parent entity in at least two of the last four years.As announced in the 2023/2024 budget in February 2023, Hong Kong plans to implement the 15% global minimum tax on in-scope multinational enterprise groups and the domestic minimum top-up tax in Hong Kong starting from 2025 onwards. On 21December 2023, the HKSAR Government published its consultation paper on the implementation of the global minimum tax andthe domestic minimum top-up tax in Hong Kong, with consultation period of 3 months, ending on 20 March 2024. The HKSARGovernment aims to develop the legislative proposal for submission to the Legislative Council in the second half of 2024.21 See HKAS 8.28 for details.22 See HKAS 1.40A.III. Amendments to HKFRSs effective on 1 January 2024and thereafterFor the new and amended HKFRSs that have been issued but are not yet effective, entitiesshould analyze their impacts based on their own circumstances and disclose the requiredinformation in accordance with HKAS 823 in their December 2023 financial statements. Wehighlight below three issued amendments that may be particularly relevant to entities reportingin Hong Kong.

1.Amendments to HKAS 1 Presentation of Financial Statements – Classification ofLiabilities as Current or Non-current, Non-current Liabilities with CovenantsThe IASB issued amendments to IAS 1 – Classification of Liabilities as Current or Non-currentin January 2020, which were partially further amended by Non-current Liabilities withCovenants amendments issued in October 2022. The HKICPA issued the equivalentamendments to HKAS 1 in August 2020 (‘2020 Amendments’) and December 2022 (‘2022Amendments’). The 2020 Amendments clarify certain aspects of how entities classify liabilitiesas current or non-current. The 2022 Amendments clarify how conditions with which an entitymust comply in a loan arrangement affect the loan classification as current or non-current.Both amendments are effective for annual reporting periods beginning on or after 1 January2024, with early adoption permitted. They are to be applied as a package retrospectivelyaccording to HKAS 8.Both amendments affect only the classification of liabilities as current or non-current in thestatement of financial position and certain note disclosures. There is no impact on therecognition or measurement of these liabilities. However, they may result in a change in theclassification of an entity’s liability, either from current to non-current or vice versa. Thischange could potentially impact entities’ compliance with loan covenants.The classification of liabilities conveys important information to financial statement users aboutan entity’s working capital, solvency and liquidity. We highlight below the key requirements ofthe Amendments to assist entities in assessing their impact:

Highlights of the AmendmentsImplications and relevant considerationsA. A right to defer settlement for at least 12 monthsThe word ‘unconditional’ has been removedfrom HKAS 1.69 so that this paragraph nolonger refers to an ‘unconditional’ right to defersettlement. Instead, an entity’s right to defersettlement of a liability for least 12 months afterthe reporting date must have substance24 andmust exist at the reporting date.As discussed in Section I.1 above,macroeconomic challenges can affect anentity’s ability to meet covenantrequirements. Consequently, there could bean impact on the assessment of the entity’sright to defer settlement and the relevant23 See HKAS 8.30-31.24 Terms that have no substance are disregarded. Please refer to paragraph 4.61 of Conceptual Framework for FinancialReporting for guidance on evaluating whether the term has ‘no substance’.Highlights of the AmendmentsImplications and relevant considerationsClassification of a liability is unaffected by:

- management’s intentions or expectationsabout whether the entity will exercise its rightto defer settlement.- events after the reporting date (e.g. thereceipt of a waiver or a breach of covenant).The right to defer settlement may be subject toan entity complying with conditions (loancovenants). Only loan covenants with which anentity must comply on or before the reportingdate affect the classification of a liability ascurrent or non-current.Loan covenants with which an entity mustcomply after the reporting date do not affect theclassification of a liability at the reporting date.However, disclosures about the futurecovenants are required. See Part C below.classification of liability as current or non-current.It is the presence of the right to defersettlement that determines the classification.Management’s intentions or expectationsregarding whether the entity will exercise itsright to defer settlement or opt for earlysettlement is irrelevant for the liabilityclassification purposes.Entities should reassess the appropriatenessof their liability classification if they previouslyconsidered management’s intentions todetermine the classification.B. Settlement by way of own equity instruments‘Settlement’ refers to a transfer to thecounterparty that results in the extinguishment ofa liability. It could be of cash, or other economicresources (e.g. goods or services), or theentity’s own equity instruments, unless theamended HKAS 1.76B applies.The Amendments clarify how an entity classifiesa liability that can be settled in its own equityinstruments, typically convertible debt. When aliability has terms that could, at the option of thecounterparty, result in its settlement by thetransfer of the entity’s own equity instruments(conversion options), these conversion optionsdo not affect the classification of such a liabilityas current or non-current if the conversion optionis accounted for as equity under HKAS 32.In other cases (i.e. conversion option recognizedas a liability under HKAS 32), those optionsaffect the current or non-current classification ofthe host liability of the convertible debt.The Amendments clarify that the transfer ofthe entity’s own equity instruments is a formof settlement. This clarification might result ina significant change for entities that currentlyclassify the host liability of a convertible bondas current or non-current solely based on thedate of required cash payment and any earlyredemption options, without taking intoaccount the conversion options. This isbecause the exercise of such options neitherhas any cash flow effect nor affects theliquidity position of the issuers.Accordingly, the classification of certainliabilities may change from non-current tocurrent as a result of the Amendments.C. DisclosuresAn entity shall disclose information25 in the notesto enable financial statement users tounderstand the risk of non-current liabilitiesbecoming repayable within 12 months after theUnder the Amendments, entities are nowrequired to provide new disclosures forliabilities subject to covenants, even if theliabilities are classified as non-current at the25 See HKAS 1 (amended).76ZA for details of the required disclosures.Highlights of the AmendmentsImplications and relevant considerationsreporting date, when its right to defer settlementis subject to the entity’s compliance with futurecovenants within 12 months after the reportingdate.reporting date, as there are risks that theycould become repayable early.Overall, the Amendments may change the classification of certain loan arrangements and, asa result, may require restating the comparative figures in the 2024 financial statements.Therefore, it is important for entities to take actions now, which include reviewing the existingclassification of their loan arrangements and assessing if the Amendments will change theirclassification. If it is assessed that certain non-current liabilities will be reclassified as current,entities may want to consider renegotiating covenants or other terms of the agreements withbanks or other financial institutions. For more understanding of the Amendments, entities mayrefer to an educational publication issued by the HKICPA in June 2023. The publicationprovides examples that illustrate the application of the Amendments in classifying somecommon loan arrangements26 in Hong Kong.

2.Amendments to HKFRS 16 Leases – Lease Liability in a Sale and LeasebackA sale and leaseback transaction is a transaction in which the owner of an asset sells theasset and leases that asset back from the buyer for a period of time. The following simplifieddiagram demonstrates a sale and leaseback transaction from the perspective of seller-lessee:

In June 2020, the IFRS IC discussed a submission about a sale and leaseback transactionwith variable lease payments. The IFRS IC concluded that the principles and requirements inIFRS 16 provide an adequate basis for an entity, at the date of transaction, to determine the26 The term ‘loan arrangement’ is not defined in the HKFRS. Entities should exercise judgement to determine what constitutes aloan arrangement within the context of the revised HKAS 1.accounting for the sale and leaseback transaction described in the submission. However,improvements could be made to IFRS 16 as it does not include specific subsequentmeasurement requirements for sale and leaseback transactions. Particularly, it was unclearhow to subsequently account for the liability arising from a leaseback when the leasepayments include payments that do not meet the definition of ‘lease payments’ in IFRS 1627,such as payments include variable lease payments that do not depend on an index or rate asdescribed in the submission. Accordingly, the IASB issued amendments to IFRS 16 inSeptember 2022 to address the issue of subsequent measurement of lease liability. Theequivalent Amendments to HKFRS 16 were issued by the HKICPA in November 2022.Highlights of the AmendmentsImplicationsA lease liability shall be recognized at the dateof the sale and leaseback transaction, even ifall of the lease payments are variable, andregardless of whether they depend on anindex or rate.HKFRS 16.102A requires a seller-lessee tosubsequently measure the lease liabilityarising from a leaseback in a way that it doesnot recognize any amount of the gain or lossthat relates to the ROU it retains.The Amendments only affect the seller-lessee’s accounting for a sale and leasebacktransaction that satisfies the requirements ofHKFRS 15. There is no change to the buyer-lessor accounting.Sale and leaseback transactions where someor all the lease payments are variable leasepayments that do not depend on an index orrate (and are not in-substance fixed payments)

may be most likely impacted.The Amendments can prevent a seller-lesseefrom recognizing a gain on the ROU it retainssolely due to a remeasurement (e.g. followinga lease modification or change in the leaseterm) if it had applied the subsequentmeasurement requirements for lease liabilitiesunrelated to a sale and leaseback transaction.This could have been the case, particularly ina leaseback that includes variable leasepayments that do not depend on an index orrate, as these payments are excluded from‘lease payments’ as defined in Appendix A ofHKFRS 1628.A new Illustrative Example 25 is added todemonstrate the application of the amendedHKFRS 16.29-46 and 102A in a sale andleaseback with variable lease payments.Example 25 incorporates the exampleincluded in the IFRS IC’s June 2020 agendadecision on initial lease liability measurement.Example 25 illustrates two approaches thatcan meet the requirements in HKFRS 16.102AThe inclusion of the example in the IFRS IC’sJune 2020 agenda decision should not affectthe current practice of initial measurement ofsale and leaseback transactions, as entitiesshould have already applied the agendadecision before the effective date of theAmendments.A seller-lessee may adopt either approachesin the Example, provided that the approaches27 See HKFRS 16.26-28 for the requirements of initial measurement of lease liability. HKFRS 16.27 sets out the lease paymentsthat should be included in the measurement of the lease liability at the commencement date.28 HKFRS 16 (amended).BC267ZA.Highlights of the AmendmentsImplicationsfor subsequent measurement of lease liabilitythat entail the following:

-Increase the carrying amount of leaseliability to reflect interest on the leaseliability;

-Reduce the carrying amount of leaseliability with an amount of ‘lease payments’that was determined at thecommencement date of the lease; and-Recognize in profit or loss as a variablelease payment, the difference between thepayments made for the lease and thelease payments that reduce the carryingamount of the lease liability.meet the subsequent measurementrequirements.The following are some important reminders for the affected entities:

(i)

The Amendments require retrospective application to sale and leaseback transactions(that include variable lease payments) entered into on or after the initial application dateof HKFRS 16 (i.e. 1 January 2019 for December year-end financial statements). Entitiesshould examine their sale and leaseback transactions entered into after 2019, reassesstheir current accounting and determine if restatement of comparatives is necessary.(ii)

Although the Amendments do not require additional disclosures except for the earlyadoption disclosures, entities should disclose material accounting policy informationrelated to the initial and subsequent measurement of ‘lease payments’ and ‘revised leasepayments’ for sale and leaseback transactions, as seller-lessee can adopt differentapproaches as long as the requirements are met.(iii)

Entities should disclose quantitative and qualitative information specific to their sale andleaseback transactions as required by HKFRS 16 29, to help users understand theimplications of these transactions, e.g. reasons for entering them, the prevalence, thekey terms and conditions, the payments that are not included in the lease liabilitymeasurement and the cash flow effects of the transactions in the reporting period.

3.Amendments to HKAS 7 Statement of Cash Flows and HKFRS 7 FinancialInstruments: Disclosures – Supplier Finance ArrangementsSupplier finance arrangements (SFA) are often referred to as supply chain finance, payablesfinance and reverse factoring arrangements. In May 2023, the IASB issued amendments toIAS 7 and IFRS 7, which were originated from an IFRS IC agenda decision in 2020 addressingthe presentation of liabilities and the associated cash flows arising from SFA as well as the29 HKFRS 16.51, 59, B48 and B52.required disclosures30. The IASB recognized that the existing disclosure requirements in IFRSAccounting Standards may not fully meet user information needs and hence amended IAS 7and IFRS 7. The HKICPA issued the equivalents amendments to HKAS 7 and HKFRS 7 inJuly 2023. The Amendments, which are effective on 1 January 2024, introduce the followingkey changes:

Two additional disclosure objectives in HKAS 731:

Disclose information of SFAs that enables financial statements users to

1.assess how SFAs affect an entity’s liabilities and cash flows; and

2.understand the effect of SFAs on an entity’s exposure to liquidity risk.Amendments to HKAS 7Characteristics of SFAs32Clarify the characteristics of SFAs.Explain that arrangements that are solely credit enhancements for the entity or instruments used bythe entity to settle directly with a supplier the amounts owed are not SFAs.Disclosures33Add specific disclosure requirements to provide information on the impact of SFAs on liabilities andcash flows, including:

i)

the terms and conditions of SFA,ii) at the beginning and end of the reporting period,- the carrying amounts of SFA financial liabilities and their related line items presented,- the carrying amount of related financial liabilities and the line items presented, for whichsuppliers have received payment from finance providers,- the range of payment due dates for both financial liabilities owed to the finance providers andcomparable trade payables that are not part of those arrangements, andiii) the type and effect of non-cash changes in the carrying amounts of SFA financial liabilities.Disclose aggregate information about SFAs unless individual arrangements have dissimilar termsand conditions.Amendments to HKFRS 7Liquidity risk disclosures34Include SFAs as an example of other factors for consideration in disclosing the quantitative liquidityrisk disclosures required by HKFRS 7.Transition35 (Amendments to HKAS 7 & HKFRS 7)

Provide certain transition reliefs in the first year of application: e.g. no comparative disclosure isrequired.30 Please refer to our discussions of the main points of this agenda decision in P.12-13 of our 2022 publication.31 See HKAS 7.44F for details.32 See HKAS 7.44G for details.33 See HKAS 7.44H for details.34 See HKFRS 7.B11F, IG18A.35 See HKAS 7.63, HKFRS 7.44JJ.SFAs have gained increasing popularity as a financing option worldwide. The Amendmentsare particularly crucial for entities extensively using SFAs in their operations. Given the shortimplementation period of the Amendments, the following are some suggested steps thatentities should take now:

(i)

Entities should firstly identify and prepare a complete list of SFAs. It is important to notethat the Amendments do not explicitly define a SFA but set out its characteristics.Judgement may be required to determine if financing arrangements meet thosecharacteristics and, hence fall within the scope of the Amendments.(ii)

Entities should consider how they can effectively collect the required SFA information tomeet the new disclosure requirements while ensuring accuracy and completeness,particularly when some of them is not readily available. There may be a need to engagein discussions with finance providers to obtain their legal permission for accessingrelevant information, such as the amounts that finance providers have settled payments,and introduce new processes and controls in financial reporting systems for capturingand recording the information.Appendix – New and revised HKFRSs as well as AgendaDecisions issued by the IFRS ICThe following new and amended standards and practice statement became effective as of 1January 2023:

StandardsDescriptionAmendments to HKAS 1 Presentation ofFinancial Statements and HKFRS PracticeStatement 2 Making Materiality Judgements –Disclosure of Accounting PoliciesThe amendments to HKAS 1 require companiesto disclose their material accounting policyinformation rather than their significantaccounting policies. The amendments toHKFRS Practice Statement 2 provide guidanceon how to apply the concept of materiality toaccounting policy disclosures.Amendments to HKAS 8 Accounting Policies,Changes in Accounting Estimates and Errors –Definition of Accounting EstimatesThe amendments clarify how companies shoulddistinguish changes in accounting policies fromchanges in accounting estimates. Thatdistinction is important because changes inaccounting estimates are applied prospectivelyonly to future transactions and other futureevents, but changes in accounting policies aregenerally applied retrospectively to pasttransactions and other past events.Amendments to HKAS 12 Income Taxes –Deferred Tax related to Assets and Liabilitiesarising from a Single TransactionThe amendments narrow the scope of therecognition exemption in HKAS 12.15 andHKAS 12.24 so that it no longer applies totransactions that, on initial recognition, give riseto equal taxable and deductible temporarydifferences.Amendments to HKAS 12 Income Taxes –International Tax Reform – Pillar Two ModelRules36The amendments provide entities withtemporary relief from accounting for deferredtaxes arising from the OECD’s Pillar Two modelrules. The amendments also introduce targeteddisclosure requirements to help investorsunderstand an entity’s exposure to income taxesarising from the rules.HKFRS 17 Insurance Contracts and thefollowing amendmentsAmendments to HKFRS 17 InsuranceContractsThis new standard, which superseded HKFRS 4Insurance Contracts, was initially issued in 2018with an effective date of 1 January 2021.36 Entities are required to apply the temporary exception to account for deferred taxes related to Pillar Two income taxesimmediately upon the issuance of the Amendments, and to provide the new disclosures as set out in the Amendments for annualreporting periods beginning on or after 1 January 2023.StandardsDescriptionInitial Application of HKFRS 17 and HKFRS9 – Comparative InformationAmendments to HKFRS 17, issued in 2020,were designed to:

reduce costs by simplifying somerequirements in the standard;

make financial performance easier toexplain; andease transition by deferring the effectivedate of the standard to 1 January 2023 andby providing additional relief to reduce theeffort required when applying HKFRS 17 forthe first time.Amendment on ‘Initial Application of HKFRS 17and HKFRS 9 – Comparative information’ is atransition option relating to comparativeinformation about financial assets presented oninitial application of HKFRS 17. The amendmentaims at helping entities to avoid temporaryaccounting mismatches between financialassets and insurance contract liabilities, andtherefore improve the usefulness of comparativeinformation for financial statement users.The following amended standards and interpretation have been issued but are not yet effectiveas of 1 January 2023. They are available for early adoption.Effective from annualperiods beginning on orafter:

Amended Standards and Interpretation1 January 202437Amendments to HKAS 1 Presentation of Financial Statements –Classification of Liabilities as Current or Non-current1 January 202437Amendments to HKAS 1 Presentation of Financial Statements –Non-current Liabilities with Covenants1 January 2024Amendments to HKFRS 16 Leases – Lease Liability in a Sale andLeasebackShould only be applied whenan entity applies theAmendments to HKAS 1 asreferred to in the above as apackageHong Kong Interpretation 5 (Revised) Presentation of FinancialStatements – Classification by the Borrower of a Term Loan thatContains a Repayment on Demand Clause37 Both amendments are to be applied as a package.Effective from annualperiods beginning on orafter:

Amended Standards and Interpretation1 January 2024Amendments to HKAS 7 Statement of Cash Flows and HKFRS 7Financial Instruments: Disclosures – Supplier FinanceArrangements1 January 2025Amendments to HKAS 21 The Effects of Changes in ForeignExchange Rates – Lack of ExchangeabilityA date to be determined bythe IASBAmendments to HKFRS 10 Consolidated Financial Statementsand HKAS 28 Investments in Associates and Joint Ventures –Sale or Contribution of Assets between an Investor and itsAssociate or Joint VentureThe following agenda decisions were published by the IFRS IC in 2023:

IFRS IC UpdateAgenda DecisionsApril 2023Definition of a Lease – Substitution Rights – IFRS 16 LeasesOctober 2023Guarantee over a Derivative Contract – IFRS 9 FinancialInstrumentsHomes and Home Loans Provided to EmployeesPremiums Receivable from an Intermediary – IFRS 17Insurance Contracts and IFRS 9 Financial InstrumentsAbout the Standard Setting DepartmentThe Hong Kong Institute of Certified Public Accountants (HKICPA) is the only body authorizedby law to set and promulgate standards relating to financial reporting, auditing, ethics andsustainability disclosures for professional accountants in Hong Kong. The due processdocuments of the Standard Setting Department (SSD) explain the processes and proceduresfor developing local standards and adopting international standards.To find out more about how SSD contributes to international standard-setting, please visit:

https://www.hkicpa.org.hk/en/Standards-setting/Standards/How-we-set-standards-and-contribute-to-international-standardsTo access SSD’s latest publications and webcasts, please visit:

https://www.hkicpa.org.hk/en/Standards-setting/Standards/Whats-News/2024Connect with us on social media:

HKICPA SSD@hkicpa.officialThis publication is developed by the SSD of the HKICPA and is for general reference only.The HKICPA, its staff, Council and its committees do not accept any responsibility or liabilityin respect of the publication or any consequence that may arise from any person acting orrefraining from acting as a result of any materials in the publication. Members of the HKICPAand other users of this publication should also read the full HKFRS Standard, as found in theHKICPA Members’ Handbook for further reference and seek professional advice wherenecessary when applying the references contained in this publication. The SSD welcomesyour comments on this publication. They can be sent to commentletters@hkicpa.org.hk.2232_20240229AuthorCarrie LauAssociate Director,Standard Setting,HKICPAHong Kong Institute of Certified Public Accountants37th Floor, Wu Chung House213 Queen’s Road East, Wanchai, Hong KongTel: (852) 2287 7228Fax: (852) 2865 6603Email: hkicpa@hkicpa.org.hkWebsite: www.hkicpa.org.hkThe author thanks members of the Financial Reporting Standards Committee of the HKICPA for theirinput in reviewing this publication.